How can you trust the stock market? Read today's article

[copyright1997reloaded]

Did you happen to sell stocks when you looked at your portfolio and felt like doing this: ?

Yes, but I am too timid to make major moves (% wise). Looking at my tracking spreadsheet, my % of assets in equities hit a high of 66.6% on April 27, 2007. By December 2007 I had it down to about 60%, even though equities were higher. I can still remember being in a car with some other folks from w*rk, discussing the rising stock market and property prices, and them thinking I had lost my mind because I said I was selling some stuff.

The problem was I should have gone from 67% to 30%, not 67 to 60! During the 2008/09 debacle, the % of equities continued to go down, not because I was selling, but because stocks were going down so fast. So even though I was putting money to work, it wasn't enough to offset the beating I was taking. As of recently, I'm about at the 60% mark.

The fact that I'm not at 100% (and never have been) is also part of my being able to sleep at night. The 40% is in a variety of things...inflation adjusted debt, a bit left in Penfed 6.25% CD, and unfortunately a bunch of cash. I'm just not willing to put the cash into any type of longer term fixed instrument at this point...

 

[fanmail]

Buy it when they're crying, sell when they're yelling is a time-tested adage. Or just buy steadily at all times and not worry about selling ever. I'm too obsessed to go that route though.

 

[palomalou]

Somehow the thought of the SEC trying to regulate themselves does not fill me with confidence. They have such a splendid recent track record...

 

[haha]

+ 1. Another comforting thought is that even after the Great Depression although the Dow Jones took over 20 years to regain its prior level, it took less than a decade if one includes dividends and other factors. The Great Depression “25-Year Recovery” Myth | The Guru Investor

This is scant comfort for retired person, who is at least consuming his dividends and perhaps more, just to live.

Ha

 

[samclem]

This is scant comfort for retired person, who is at least consuming his dividends and perhaps more, just to live.

Seems to me it could be quite a comfort. Mark Hulbert's article says:

An investor who invested a lump sum in the average stock at the market’s 1929 high would have been back to a break-even by late 1936 — less than four and a half years after the mid-1932 market low.

Now, no one knows what the next downturn will look like, but this one featured a dose of deflation which, together with dividends, were important factors in restoring the value of equities. If a retiree is worried about the same thing happening again, then holding 7 years worth of cash-equivalents (approx 28% of a typical portfolio) would allow them to see the crash-and-recovery through and thereby avoid selling any stocks at a loss.

What about other downturns? From the same article:

In fact, according to a Hulbert Financial Digest study of down markets since 1900, the average recovery time is just over two years, when factors like inflation and dividends are taken into account. The longest was the recovery from the December 1974 low; it took more than eight years for the market to return to its previous peak, which was reached in late 1972.

So, 10 years of cash (or income from bond coupons, an annuity, etc) would cover the longest equity decline ("peak-to-peak") in modern US history. And, usually, it takes far less than that, just a few year's worth. Some folks might find that comforting enough that they decide on an equity allocation with enough stocks to allow them to keep up with inflation over the long term. That's a "win".

 

[haha]

Seems to me it could be quite a comfort. Mark Hulbert's article says:
Now, no one knows what the next downturn will look like, but this one featured a dose of deflation which, together with dividends, were important factors in restoring the value of equities. If a retiree is worried about the same thing happening again, then holding 7 years worth of cash-equivalents (approx 28% of a typical portfolio) would allow them to see the crash-and-recovery through and thereby avoid selling any stocks at a loss.

Super. I am glad that you are conforted. The more happy people around the better.

Ha

 

[ejman]

This is scant comfort for retired person, who is at least consuming his dividends and perhaps more, just to live.

Ha

I think that in the context of most of the people at this forum who are either ER/FI or well on their way, its quite comforting to realize that in the inmortal words of Spiro Agnew the"nattering nabobs of negativism" don't necessarily have to carry the day. A deep recession, even a depression is not the end of the world.

 

[haha]

I think that in the context of most of the people at this forum who are either ER/FI or well on their way, its quite comforting to realize that in the inmortal words of Spiro Agnew the"nattering nabobs of negativism" don't necessarily have to carry the day. A deep recession, even a depression is not the end of the world.

Love slogans, do you?

Ha

 

[audreyh1]

So, 10 years of cash (or income from bond coupons, an annuity, etc) would cover the longest equity decline ("peak-to-peak") in modern US history. And, usually, it takes far less than that, just a few year's worth. Some folks might find that comforting enough that they decide on an equity allocation with enough stocks to allow them to keep up with inflation over the long term. That's a "win".

That's part of my strategy. When things got really bad in late 2008/early 2009, and I had to rebalance and sell bonds to buy stocks, I wouldn't let my fixed income portion drop below 12 years expenses even though it limited me to 55% equity allocation at the time. That way I could rebalance and still sleep at night.

I pay a bit "fast and lose" in that I consider my entire fixed income in that "cash equivalent" crash survival category but the fact is that a good chunk of it is high quality enough to be there for withdrawals if needed during a long equity recovery.

 

[Nords]

So, 10 years of cash (or income from bond coupons, an annuity, etc) would cover the longest equity decline ("peak-to-peak") in modern US history. And, usually, it takes far less than that, just a few year's worth. Some folks might find that comforting enough that they decide on an equity allocation with enough stocks to allow them to keep up with inflation over the long term. That's a "win".

*Ahem.*

Works especially well on a military pension (COLA'd annuity).

 

[samclem]

*Ahem.*

Works especially well on a military pension (COLA'd annuity).

I'm sure my objective opinion is entirely unaffected by personal circumstance. Compartmentation. Separate boxes, doncha know . . .

I'd think those without an annuity-like income stream (SS, company pension, govt pension, commercial annuity, etc) that constitutes a large part of their "must have" retirement spending amount would want a high cash allocation to allow them to weather the dips in equity prices.

 

[MichaelB]

I'm sure
I'd think those without an annuity-like income stream (SS, company pension, govt pension, commercial annuity, etc) that constitutes a large part of their "must have" retirement spending amount would want a high cash allocation to allow them to weather the dips in equity prices.

Right. If dividend and interest income covers a very high % of total budget the need for cash might not be so extreme, but otherswise a large buffer of cash or liquid / low volatility fixed income helps.

 

[boatfishandnature]

Oh, please bring on another flash crash. They don't mean anything long term and the last one was a great buying opportunity. I have a chunk of cash lined up and just waiting to go.

+ 2!
In addition, if you have a stock portfolio that has a lot of dividend-paying stocks, the dividend payout in $ is unlikely to be affected by very short-term crashes (in other words, the % yield will go up), so your dividend income will be unaffected.

 

[NW-Bound]

Do I trust the market? NEVER!

If it goes up too much, I will have to sell. And if it goes down a lot, I hope to have the courage to buy.

 

[obgyn65]

I have never trusted the stock market and will never do.

 

[pb4uski]

Do I trust the market? NEVER!

If it goes up too much, I will have to sell. And if it goes down a lot, I hope to have the courage to buy.

If you have a target AA and a disciplined approach to rebalancing, that is exactly what you will end up doing.

 

[NW-Bound]

I have attempted to do even more. When I thought the market was cheap, I upped my stock AA. When I thought the market was expensive, I cut back on stock AA.

Only recently that I found they had a name for it: Tactical Asset Allocation. Whatever... It's pretty hard to do though, and my records have been mixed.

 

[pb4uski]

Works good as long as you are a good guesser. If not, then not so good.

 

[HFWR]

I have never trusted the stock market and will never do.

Sure, lots of people see the "market" as a lottery or roulette wheel or some magic black box, but Exxon and Microsoft and P&G etc. are real companies, selling real stuff, and paying real dividends...

Super. I am glad that you are comforted. The more happy people around the better.

Ha

Which is why we have drugs and alcohol!

 

[photoguy]

I guess the question is trust the market to do what? Provide short term gains? a definite no. Provide long term appreciation? yes.

 

[cute fuzzy bunny]

Don't you fix all of these shenanigans by simply declaring that equities are intended to be a long term investment, and require a minimum 30 or 90 day holding period before you can sell them.

I haven't thought through all of the ramifications, but it seems that a simple change could eliminate all trading that isn't really beneficial for the ecosystem.

 

[HFWR]

The argument is that all this flash trading etc. provides "liquidity"...

 

[NW-Bound]

The argument is that all this flash trading etc. provides "liquidity"...

... which wet the pants of the faint-hearted.

 

[Buckeye]

And as for trusting the market, where ELSE are you going to put your $$$ for the long term gains you need to beat inflation?

+1

 

[haha]

If you look at the stock market as a place to transact business, and not something which is designed to make you rich, or tell you how much you should pay for the securities that are sold there, it is probably the most trustworthy market ever known to man. Or is Ebay better? Or Craig's List, or the local livestock auction, or your local real estate market, or Sotheby's or commodities markets?

A buyer on the NYSE can be a complete ignoramus, and still get a fair deal. Who among us has sold a listed security through a licensed member broker-dealer and not been paid in a timely fashion? Who has bought a stock and not received it?

In most buying and selling, the buyer is at a large disadvantage. He knows somewhere between nothing and very little about the item being sold, even though he may have done a large amount of research on that class of items. His ability to really find out the hidden flaws/problems/title issues/ et cetera, while not zero, is limited. But a used car seller may have put Bondo on a big rust spot and painted over it with cheap paint. I know a guy who when a medical resident did this and sold the VW van to a family. There's some real karma to deal with! I have even read recently about counterfeit Chinese gold coins- some sort of metal painted with very good gold paint. Even dealers have been taken.

People who ask questions like the OP usually have in mind some solution like annuities or unlisted REITs. Well, these markets are a very long step down from US and UK stock markets, and likely Singapore, Hong Kong and Japan also.


OTOH, if you are asking the stock market to take good care of you, and see to it that you make money, that is a lot to ask.


Ha