How are you getting ready for "next time"?

[wolfbay]

If you didn't sell equities in 2008 then I'd say you have the right asset allocation. Other than rebalancing maybe you should stick with it.

 

[Nords]

We've just had an amazing recovery from a serious market crash over the past couple of years. It may be that it's a once-in-a-generation type of event.

*Snort* I can't help noticing how those types of events seem to happen every five years...

I am wondering, though, what most people are doing at present in response to where things were then, where they are now, and where they may go. Are you going to stand pat and say you were very smart since 2008, or are you changing your tune and approach?

We actually did stand pat in 2008 after a massive tax-loss swap sale. I'll be carrying those paper losses forward into 2011's tax return as well.

One big change since 2008 is our spending reductions caused by refinancing both mortgages. That two-year recession gave us a huge impact on the next 30 years' expenses.

As ridiculous as valuations climbed in 2007, repeating the experience of a 56% drop in our ER portfolio was at least as painful the second time around. Today we're a little more aggressive to sell before asset allocations get way outside their bands, and to pile the cash up a bit higher. It remains to be seen whether, during the next recession, we'll be as eager to put that cash back to work at the bargain-basement discount stock exchange.

I've noticed that I'm struggling with an anchoring problem or the "wealth effect". The current size of our ER portfolio will be steadily whittled away by inflation, yet I tend to think of today's value as "enough" and anything much bigger as "too much". It's hard to continue to chase accumulation without being tempted to cash out or "spend it back down".

I should probably take our current "enough" number and adjust it each year for inflation to remind myself what the "new enough" should be.

 

[chinaco]

IMO - Rebalance to the target allocation after the elapsed time or threshold is crossed.

 

[rescueme]

We did nothing during the latest downturn. Since I've been retired since early '07 (DW may be this year), we set up our respective "cash buckets" (containing 3-4 years of retirement income - including taxes due) and it worked out as planned.

The last downturn is nothing more than we experienced several other times since '82 (when we started saving/investing for retirement). Was it worse than the previous downturns? Of course.

Did we sell anything on the dip? Of course not.

Just more of the same, even though we realize that it was a deeper dip than normal...

 

[Bestwifeever]

Not as a protection against "next time," but keeping enough cash to take us beyond FRA for starting SS. If the rest of the portfolio (now in psst...Wellesley, bonds, and S&P500 index) tanks and never recovers, we'll still be okay. I hope.

 

[M Paquette]

I am wondering, though, what most people are doing at present in response to where things were then, where they are now, and where they may go. Are you going to stand pat and say you were very smart since 2008, or are you changing your tune and approach?

Not much. I might have to rebalance my portfolio next year. This year was close, but I dodged that bullet. Last rebalance was February 2009. My investment plan allows for +- 25% in each allocation before I have to rebalance, and calls for me to check and rebalance once a year ([-]out of sheer laziness[/-] to keep any capital gains long-term).

I might go rent a place at Lake Tahoe for a few months.

 

[haha]

Hopefully next time the exuberance of the market will make me take notice and I'll take a chunk off the table and hold it in cash . If I have three or four years in expenses I'll let the market play out. I also have a pension and that makes the bumps somewhat easier to take .

Are you doing that now? Is a Shiller PE10 of 23.26 irrationally exuberant? In Feb 2011 it reached 23.78, is that irrationally exuberant?

Many of us have spent most of our investing lives with PE10s that by earlier standards would be considered to be bounded between normal and irrationally exuberant. October 2007, which was just prior to le deluge, reached PE10 of 27.31, or approx 15% ahead of where we are now. Was Oct 2007 irrationally exuberant? It was much lower than the prior peak in 1999. Is today, at 15% short of the Oct 2007 peak, not yet irrationally exuberant?

That is the rub with metrics like this. If you follow an AA algorithm incorporating PE10, it always wants to make you stop playing just when it is really getting to be fun.

It's like low-carb dieting. When it really cuts is when you are at a wedding or big feast of some kind and everybody is having cake and Champagne. I remember back in the lean years following the 2002 bottom someone was talking about PE 10 and irrational exuberance as a guide to when to be out of the market. Bunny-man pointed out that if one had exited the market when PE10 became higher than ever before, she would have missed most of the late 90s run-up. True enough, and that is just reality. You can't have everything, and it is always hard to know when something is too high to last, especially when it has lasted for years.

I think there is little doubt that one would be safer to be mostly out of market averages now, but we can always believe that better asset choices might spare us, and it could be true though for me it not tended to work out that way. And safer is not all we want; we also want higher returns. Nothing will goose returns quite like a bubble!

One good thing about being invested mostly in dividend paying quality companies is that they do tend to keep chugging along, and their payouts will tend to persist, even if quoted prices should suffer.

Ha

 

[donheff]

Are you doing that now? Is a Shiller PE10 of 23.26 irrationally exuberant? In Feb 2011 it reached 23.78, is that irrationally exuberant?

Many of us have spent most of our investing lives with PE10s that by earlier standards would be considered to be bounded between normal and irrationally exuberant. October 2007, which was just prior to le deluge, reached PE10 of 27.31, or approx 15% ahead of where we are now. Was Oct 2007 irrationally exuberant? It was much lower than the prior peak in 1999. Is today, at 15% short of the Oct 2007 peak, not yet irrationally exuberant?

Where do you get the current PE10? The few tables I have found are ambiguous.

 

[haha]

Where do you get the current PE10? The few tables I have found are ambiguous.

Online Data - Robert Shiller

The entire data set is available as an Excel file from a link down just a bit on this page, from its beginning to the most recent month's data.

Ha

 

[FIREd]

Tell me what the next crisis is and I'll tell you how I prepare for it.

The stock market sure looks expensive to me. The DOW is back to where it was in 2007, but the world is a different place. Higher unemployment, lower household wealth, higher sovereign debts and deficits, etc... If it wasn't for governments around the world flooding the market with cheap money, I don't think the DOW would be anywhere near 12,000 right now. What will happen when the cheap money goes away?

 

[GregLee]

What will happen when the cheap money goes away?

The cheap money is not going away --- how could it possibly? The only way of dealing with massive debts and deficits is to inflate them down to manageability. I predict that money will get cheaper and cheaper and the market will go up and up, forever.

 

[haha]

... and the market will go up and up, forever.

Someone will remind you of this post sometime down the line.

 

[Moemg]

Are you doing that now? Is a Shiller PE10 of 23.26 irrationally exuberant? In Feb 2011 it reached 23.78, is that irrationally exuberant?

.

Ha

After I thought about it I realized it wasn't the market being irrationally exuberant it was people . When we had the tech crash it was plain to see people were going nuts buying things they had no idea about . Bars had ticker tapes going and everybody was giving stock tips . In 2007 we had the same kind of craziness but it was in real estate .People were using their houses like ATM's and house flippers were everywhere . The thing that bothers me is I knew is was the same kind of craziness but I didn't pay attention like I did before the tech crash . I lost very little in the tech crash but I lost a lot in the last melt down so yes , I am going to try to be more aware maybe not of the markets( except for individual stocks I rarely check PE's ) but of people going overboard and I will stockpile some money not a lot just enough to get me through a three or four years . Thanks Ha for making me think this through .

 

[slingshot]

'switched garbage service from container rental to stickers'
I'm having trouble conceptualizing? what are stickers?

 

[Meadbh]

I'm still in the accumulation phase. I hung in there through the market crash but it really made me think how traumatic it would have been if I were depending on my investments at the time it happened. So I kept DCAing into equities until they were well on the way up, and then stopped buying equities and bought some more real estate. As a result, I now have a large cash buffer, more income generating properties, and my equity allocation has passively declined from 60% to ~35% (of a larger number) since 2008.

Lots of changes are coming up for me in 2011. When the dust settles I will pay off debt and consider buying more equities on dips. But I do like the idea of a cash buffer.

 

[novaman]

Asset allocation, asset allocation, and asset allocation.....oh- and I'm trying to ignore the news.

 

[Packman]

It's really wierd, I keep selling equities over the last year and my AA just stays the same. Must be some kind of new math, but I like it.

 

[NW-Bound]

Surely, that is better than when one keeps buying stocks and yet his AA stays the same!

I have not sold much, perhaps just around 2% worth. I am willing to ride this market up a bit longer. Currently at 70% equities.

 

[pimpmyretirement]

'switched garbage service from container rental to stickers'
I'm having trouble conceptualizing? what are stickers?

We can pay $18 a month to rent a 64 gallon container from the garbage company. Each week, whatever is in it is taken.

Alternatively, we pay $3 for a sticker that is attached to the handle of our own 32 gallon garbage can. Each week the garbage company empties the can and rips the sticker off of it.

My wife and I don't make much garbage. 32 gallons a week is plenty.

 

[Nords]

We can pay $18 a month to rent a 64 gallon container from the garbage company. Each week, whatever is in it is taken.
Alternatively, we pay $3 for a sticker that is attached to the handle of our own 32 gallon garbage can. Each week the garbage company empties the can and rips the sticker off of it.
My wife and I don't make much garbage. 32 gallons a week is plenty.

Here in paradise that direct fee would result in even more littering and roadside dumping. Our trash fees are hidden in our property taxes.

Of course that means we have no incentive to minimize what we put into the waste stream, but much of it is burned at the HPOWER plant for electricity. They already generate 7% of Oahu's power and they're adding a third boiler next year.

 

[Klubbie]

I think I'm wired a bit odd. Whenever I see stocks going down I'm more happy that they're on sale than upset that it may be eating away at my principle. Or maybe if you're accumulating, that's normal?

I am in the accumulation phase and this is exactly how I feel. Turning 29 last month and just got out of grad school this past spring, so really had to kind of start over saving for retirement since most of my 20's was spent getting degrees with little or no income coming in. That said, I feel I got in at a good time.

As for how things will be for me in the future - my 401K is set at an asset allocation I am comfortable with. I will probably review to rebalance once a year, maybe twice. I will not change my 401K contribution unless it is to increase the percent of my income that I am saving in my 401K.

I will, however, keep a cash reserve on hand separate from my emergency fund that I intend to use to go into the market the next time there's a big dip. It will be a small fund, but nonetheless I am hopeful I can gain some benefits in a down market in the future. But all things considered, my assets are allocated in a way I am comfortable, and I have a savings strategy in place. That's enough to help me sleep at night.

 

[obgyn65]

Hello Steelyman - to answer your question, I have not changed my AA since 2008. I am still 100% in CDs, money market, etc. I do not own shares.

I am wondering, though, what most people are doing at present in response to where things were then, where they are now, and where they may go. Are you going to stand pat and say you were very smart since 2008, or are you changing your tune and approach?

 

[rescueme]

Someone will remind you of this post sometime down the line.

Well, the S&P is still 250+ points below its all time high set in 2007. We have a ways to go to even reach a level we've seen before, let alone advance to new highs.

There's room to run on this leg. Will the market just be able to match its former self? Who knows...

 

[Gone4Good]

I am wondering, though, what most people are doing at present in response to where things were then, where they are now, and where they may go.

My thoughts on asset allocation and 'market timing' have changed since I stopped working. I think it's safe to say that your financial goals change (or should change) once you move from the accumulation phase to the decumulation phase. Most importantly, I realized that during decumultion I have a hurdle rate of return that my portfolio must meet equal to my withdrawal rate. I can use that hurdle rate (which I didn't really have during accumulation) as a governor on the level of risk I need to take. With a larger portfolio, I can hit my hurdle rate with safer, lower return assets.

In my case, my portfolio is a third larger today than it was when I decided to quit my job. Conventional wisdom says I should simply rebalance into the same asset allocation I had then. Does that make any sense at all? I have 33% more assets today (inflation adjusted) than I did when I was confident enough in my financial plan to quit my job. Do I need to take the same level of financial risk with a 33% larger portfolio than I did with a smaller one. Of course not. So why rebalance to the same risk profile?

Incidentally, valuations are also worse today than they were a year and a half ago, which is another reason to take risk off the table. So I'm selling stocks and selling bonds and lowering my risk profile with an eye toward achieving an inflation adjusted return that more than covers my planned withdrawals. If markets continue skyward, I'll continue reducing my risk profile. If markets fall and valuations become more attractive, I may increase my risk to capitalize on the opportunity, but I won't have to.

 

[bamsphd]

Hopefully next time the exuberance of the market will make me take notice and I'll take a chunk off the table and hold it in cash.

That is what I did last month. We were thinking about buying some land, so I wanted to raise some cash. I looked at our portfolio value getting close to its pre-crash high, and decided to "adjust" our AA from 66.6% equities to 60% equities to raise the cash. The land deal did not survive due diligence. However, I'm planning to stick with the new 60% AA until stocks go back on sale.

My new personal rule is I'm allowed to lower my equity percentage if my portfolio value is up year-over-year, and I am allowed to increase my equity percentage if my portfolio value is down year-over-year. The rule is only about a month old, but I like it so far.

My wife had already quit, and I thought I was only months away from giving my notice when the last crash occurred. Unfortunately, I had let our AA sneak up past 75% equities pre-crash. I pretty much held it there for the first half of the current bull, but then dialed it back to 66.6% and now 60%. If we get a nice big crash, I think/hope I'll dial it back up to 66.6%. We will see how that works out.