How do you deal with a down market day like today?

I know that conventional wisdom states that one ought not to look at and worry about one's portfolio every day. That one ought to do the proper allocation and then sit back (perhaps balance the portfolio every year to keep the allocation in tact) and stay in ti for the long term.

I am only a third in equities/mutual funds, rest in cash and can't help but look at the portfolio each day in an excel spreadsheet to see how I am doing. I get worried when the market is down and feel upbeat when it is up but don't make any moves.

Do others feel the same way? Nervous but incapacitated to make any quick changes that would be smart to do to presrve the capital.

Have you found good ways of hedging your investment so that you are still up or at least not down when the market is down?

How often do you make changes to your portfolio and what generally triggers the change?

[cute fuzzy bunny]

"What a great time to buy". "Good thing I'm not selling!"

Had this conversation with the wife tonight about how people are wired funny when it comes to the stock market. If your house lost 30% of its value, you wouldnt rush to sell. If you were smart you might try to buy another one. If your neighborhood jumped up 30% in value, you wouldnt rush out to buy another, but you might consider selling if you could get the same thing elsewhere for less.

Stick with Buffett...down markets are great times to buy and nothing to worry about unless you need to sell.

Good asset allocation into 3-5 non correlated asset classes, a reasonable withdrawal rate, and reasonable expense controls and you dont need to worry about what happens day to day, week to week or month to month. Just look in and balance your assets every year or two.

Or buy a cheap fund that does all the work for you and just cash the checks.

[Michael]

Quote:

...look at the portfolio each day...

When I was new at investing in equities I did the same thing. After a while I got calmer about the whole thing.

[sgeeeee]

Was the market down today? . . .

That happens sometimes.

[cute fuzzy bunny]

I didnt even look, but you made me do it.

Damn, I'm down fifty bucks today. That means no maternity clothes for the missus. She's going to have to wear my stuff.

[Nords]

And I read a lot. The more I learn, the less I worry.

I don't know what you've read on investing, Dante. A good start would be anything by Bernstein, either his "Four Pillars" book or his website articles at http://www.efficientfrontier.com. They're good for putting down days in a longer-term framework.

If I'm preaching to the choir, then you could branch out to other books or websites. Bud Hebeler's "Analyze Now!" website (http:/www.analyzenow.com) or Frank Armstrong (http://www.investorsolutions.com) have good advice for down days.

Otherwise you're going to have to teach yourself not to pay such close attention. Frankly, being 70% cash is way conservative for ER spending (unless you have a LOT of cash). You're pretty heavily insulated from market shocks, and I'm speaking from the perspective of being over 90% stocks in our retirement portfolio.

70% cash could also be a heckuva buying opportunity. Instead of looking at the effect on your 30% stock, you could start thinking about what you'd buy (or buy more of). Then you might find yourself eagerly anticipating a down day...

Another way to look at it would be to compare today's down to 17 Sep 01 or just about any day in July 2002 or Oct 2002. Those are the periods when I wish I was 70% cash, and buying with both hands.

Oddly enough today was flat for us. Kraft's unexpected bounce outweighed anything in my CostCo & Nortel holdings, and the rest of our stuff is still healthily above its cost basis. And once again I couldn't find KMart shares to short, so someone must be looking out for my blissful ignorance.

The market can tank and I would hardly notice,
although if the economy got really bad I would
be negatively impacted (along with everyone else).
So, I don't need to worry about the DJIA/NASDAQ
bounces. More concerned with the weather and if
the fish are biting.

John Galt

[unclemick]

What's your investment method/philosopy - estlish that and stick with it. I'm a Boglehead except Bernstein has snuck in around the edges - 10% REIT INEX in 98 but otherwise balanced index.

Watch the markets everyday - old habits die hard - get an emotional twinge when they drop - recognize it for what it is - emotion - and then do nothing, since balanced index rebalances itself.

BUT - a good drop sends me gathering petty cash and shopping the market for bargin stocks to add to my hobby portfolio(side play money). Like TH's house analogy - I don't sell my 'keeper's' but look for bargins. Periodically I sell the ones I don't love anymore. I try to keep my 'hobby' capped at 10-20% of our ER portfolios.

The Twinge is normal emotion for me, doing nothing is prudent investment(for the balanced index method). Hobby stocks take care of male hormones - to do/act/putz.

[ats5g]

Simplified Math of stocks'

Rate of Return = [ending price - starting price + dividends] / starting price

If we hold the dividends and ending price constant, and decrease the starting price, our rate or return goes up. If we increase our starting price, our rate of return goes down. As TH said, it's rather counter-intuitive for people.

Another way to deal with this is to use a hybrid or balanced fund that holds both stocks and bonds instead of holding the stock MF's and bond MF's alone. It is exactly the same thing, but it tricks your mind into thinking your investments are less volatile. Slicing and dicing (with large, small, value, REITs, etc) can also be more soothing to those who would freak out if only holding TSM for stocks.

Also, another good book is "Why Smart People Make Big Money Mistakes," by Belsky and Gilovich. A lot of good, easily understandable, stuff on behavioral finance.

- Alec

If I were 70% in cash, I'd look at a down market as a gift. Invest some of that cash back into the market and you'll feel better.

[db]

[quote]Good asset allocation into 3-5 non correlated asset classes, a reasonable withdrawal rate, and reasonable expense controls and you dont need to worry about what happens day to day, week to week or month to month. *Just look in and balance your assets every year or two.
\
And John Galt's "more concerned about the weather and if the fish are biting" make me wish for the recomment button of TMF boards. What good advice to someone who anguishes daily about a 30% holding in equities. And then there's Nord's sage observation that only 30% in equities may not be a safe way to protect the future value of your assets.

db

[db]

Obviously I botched the quoting.

db

[mickeyd]

Hey Dante,

Quote:

I get worried when the market is down and feel upbeat when it is up *

If you are worried about the market being up or down, you may not be a candidate for the stock market YET. What I mean by YET is that it is critical that an investor feel comfortable with the investments that he has made and to understand why HE MADE THE INVESTMENTS. If you are not comefortable with your equities, why do you own them? Were they forced upon you?

You have not referred to your age so I have no idea what your time horizon is, but a 30% equity position indicates that you may be in your 70's or 80's. *If this your age bracket and you are comefortable with a 30% equity position, so be it. *

If you are age 20-30, you will surely be lacking in assets when you are looking to retire, as you will not have accounted for inflation. *The stock market is the best way to combat inflation over the long term.

Quote:

Do others feel the same way? Nervous but incapacitated to make any quick changes that would be smart to do to presrve the capital.

*is another quote from your post.

By becoming a more informed individual investor by reading, re-reading, and asking questions, at this site and other sites, you will gain the essentual tools necessary to your personal financial education. Most of us who are invested in stocks understand what you mean by being nervous because, when we were less informed, we also had those feelings. *

Because of our expereince and self-education we understand that the market MUST decline, just as it MUST rise. Think of it this way: Does your favorite sports team win each time they play a game? Do they score a touchdown, hit a home run, make a 3-point goal each time they have a scoring opportunity? *Of course not. Do you give up and get frustrated or "incapacated" each time that they fail? Of course not. Same with the stock market.

Quote:

Hey Dante, If you are worried about the market being up or down, you may not be a candidate for the stock market YET. What I mean by YET is that it is critical that an investor feel comfortable with the investments that he has made and to understand why HE MADE THE INVESTMENTS. If you are not comefortable with your equities, why do you own them? Were they forced upon you? You have not referred to your age so I have no idea what your time horizon is, but a 30% equity position indicates that you may be in your 70's or 80's. *If this your age bracket and you are comefortable with a 30% equity position, so be it. * If you are age 20-30, you will surely be lacking in assets when you are looking to retire, as you will not have accounted for inflation. *The stock market is the best way to combat inflation over the long term. *is another quote from your post. By becoming a more informed individual investor by reading, re-reading, and asking questions, at this site and other sites, you will gain the essentual tools necessary to your personal financial education. Most of us who are invested in stocks understand what you mean by being nervous because, when we were less informed, we also had those feelings. * Because of our expereince and self-education we understand that the market MUST decline, just as it MUST rise. Think of it this way: Does your favorite sports team win each time they play a game? Do they score a touchdown, hit a home run, make a 3-point goal each time they have a scoring opportunity? *Of course not. Do you give up and get frustrated or "incapacated" each time that they fail? Of course not. Same with the stock market.

Hi MickeyD

I am 47 and am interested in retiring early. As I had stated in my prior post, my portfolio is slightly more than a $1M (and .6M in home equity) and I know that I need to get more aggressive with equities just to stay ahead of inflation.

I haven't done that much reading per se and maybe that shows. I have been schizophrenic about investment - on the one hand I have real volatile technology mutual funds and equities and on the other hand, I have money market funds that pay 2.35%.

I haven't been convinced of the asset allocation principle and feel that for the portion of my savings that are in equities and mutual funds, asset allocation is too passive and that I can do better by going in and out of funds and switching funds opportunistically.

So far it has been okay but I am (as I recently started reading the posts at this site) now realizing that I should change my strategy.

Perhaps get up to 90% in equities (or mutual funds) or look at balanced funds or index funds.

I guess I have a lot more knowledge gaining to do yet.

[charlie]

Hey Dante,

IMHO, your equity/fixed income ratio should
be about 50/50 to 70/30 at your age of 47.

To reduce your anxiety about day to day fluctuation,
I would recommend you take a hard look at Vanguard's
Target Retirement series of funds. The Target Retirement 2025 holds 48% TSM, 8% European Index,
4% Pacific Index and 40% Total Bond Market. Each
day all of the funds are rebalanced to the same ratios. The result is that you never see the daily fluctuation
of the sub-funds, only the total result.

Market timing is a loser's game and I would avoid high-tech funds/stocks like the plague. Over the long haul
you can't beat a diversified mix of low-cost index funds
rebalanced annually to a fixed equity/bond ratio.

As for checking daily, I confess that I do it as well.
I like to see how my "coffeehouse" portfolio at
60/40 stacks up against Asset Allocation, Balanced
Index, Life-Strategy Moderate, Target Retirement 2025,
STAR and Wellington...... all 60/40 balanced funds.
So far this year, you can't see any dailight between them.

I don't break a sweat when the total port goes up or
down several thousand dollars. To me, the amount is
just a yardstick. The only time it matters is at the end
of the year when I rebalance the IRA that I use for
withdrawals.

Cheers,

Charlie

[Jarhead*]

Dante6003:

I believe you said you were 47 and you had over a million in financial assets, and a home equity of $600,000.00.
You may feel like you have a lot to learn on the investment side, but sounds to me like you could give lessons on accumulation.

Quote:

Dante6003: I believe you said you were 47 and you had over a million in financial assets, and a home equity of $600,000.00. You may feel like you have a lot to learn on the investment side, but sounds to me like you could give lessons on accumulation.

Hi ex-Jarhead,

Maybe, but then LBYM and aggressive saving are easy compared to steadily building up the portfolio through organic growth in investment. As one of the members said in a post, I am losing to inflation already with my choice of being two-third in cash.

I am impressed by the forum members who just are so confident with their portfolio and their SWR and their planning. And rightfully so. But my hunch is that they are a lot more well-heeled than they let on.

ats5g recommended I read "Why Smart People Make Big Money Mistakes" by Belsky and Gilovich. I will look for it tomorrow at the local library.

[ESRBob]

Dante,
Some lines of thought/inquiry which might be helpful to you:

a) Meditate on risk -- all the risks you face and your portfolio faces. Risk averse on a given day? We've all been through it but you can come to see it as meaningless when you start to understand your true long term risks. For instance, inflation is a huge silent gnawing presence, which in 20 years, even at 3%, will erode nearly half (about 46%) of the real value of your assets. That is the real risk I am guarding against when I buy equities.

b) Make sure you have properly diversified. I now have a portfolio that looks like Bernstein's "Gap" portfolio (Page 82, Intelligent Asset Allocator) and have run some tests on it. Backtested 15 years, it produced 9% annual returns with, and this is important, 7% standard deviation. Compare that to the S&P which over the same period had a smaller return (8.5% cagr) and nearly 16% standard deviation. The SD is your only accurate measure of volatility -- risk -- and by diversifying in this way, I have more than halved the volatility while giving up nothing in expected (or more accurately, historical) return. My portfolio day-to-day moves only vaguely in step with the S&P500 -- it has been up and down approx 3% this year so far, so it moves, but it doesn't move fast. This helps me a lot to deal with a 'down day' -- I have no particular expectation of how a bad day for Nasdaq will actually affect my portfolio because I am in everything from foreign bonds and REITs to emerging mkts value, private equity and commodities. (oh yeah, and large and small US stocks, always with a value tilt)

You might love cash, but it is safely and reliably destroying the value of your portfolio (after inflation and taxes, to say nothing of withdrawals).

No you can't trust SWRs completely -- the future is unknowable -- but you can give it an 80% confidence. Life is full of all sorts of risks besides your portfolio dropping one day. My way of mitigating the other risks are to pay a lot of attention to my marriage, my health, my kids, my community and to keep some sort of part-time income flow in case things go crazy. A part time gig that pays you 20k a year is like having an extra 500k of assets with a 4% SWR. Something to ponder. (you have to like it enough to do it over the long term, perhaps into your social security years, to make the comparison apt).

You might also like to consider owning rental real estate, private equity or oil and gas partnerships or the like: to varying degrees, these illiquid investments can lock up capital at known rates of return that are generous compared to cash, and have the added benefit of not being marked to market, so you don't really have to think about how much they went up or down today. They are not wthout risk, however.

This brings me to my final opinion about risk: basically we cannot ER without taking on some risk. In the current market environment and indeed over the long run, you simply cannot take a withdrawal without some risk of reducing your capital in real terms. And you cannot have a completely safe return (US Treasuries) that bucks the tide of inflation and taxes and still leaves a meaningful something left over to live off. You could take a 2% real-yield TIPS fund, but you'd pay taxes on the annual principal adjustments, and the remainder would be your SWR, with no hope of outperforming (asset appreciation) on the upside.

You could buy an annuity, and your real return would be about the same as TIPS, but you would have given up your principal, and you'd need to worry about the long term creditworthiness of the annuity issuer.

If you find a way out of this box, let us all know. In short, I don't believe there is any way out, so you are stuck dealing with risk and volatility to fund a portfolio that will support you over the long term.

All you can do is learn to manage the risk, learn to win the 'head game' inside, adopt low-fee, index-like funds, portfolio rebalance on a regular system so you have a prayer of buying low and selling high, convince yourself of the trustworthiness of the long term models, implement some sort of conservative asset allocation stragegy for yourself, and when all else fails, ignore your portfolio fluctuations and go outside and play frisbee or walk on the beach or take up a new hobby or help some kids -- anything to help get through the mental anguish.

We've all been there, we know exactly what you're talking about, and there is no easy way out, but you've still got to go through it. Then one day, you come out the other side with enough scars in enough places and it will all feel easy.

bon courage...

ESRBob

[haha]

Quote:

I am losing to inflation already with my choice of being two-third in cash. <snip> I am impressed by the forum members who just are so confident with their portfolio and their SWR and their planning. And rightfully so. But my hunch is that they are a lot more well-heeled than they let on.

Dante,

IMO losing to inflation is not something to worry about in the short term. A few points a year lost to inflation for maybe several years, maybe less, could look really good compared to getting bloodied by the bear.

Bob Rodriguez, who manages FPA Capital, and has been the top performing fund manager over the past 10 years (annualized 18.6%, almost 7 points above the S&P) holds 37% cash and is raising more.

Let me pause to genuflect to those who like to talk about monkeys at keyboards writing sonnets, random walk and unknowable futures, etc. This could be chance. (haha)

One thing that I have never understood is how all the "chance geniuses" like Warren Buffet, Bob Rodriguez, Bill Ruane, Walter Schloss, Marty Whitman, the group at Tweedy Brown- all employ the same principle. They look at the market as a bazaar in which to locate and puchase value when it is there. If they can't find anything, they wait.

Also regarding inflation, I was an active investor during the 70s. Stocks added their losses to the losses from inflation. Other than hard assets, cash was king in the 70s. Not that you really made anything, but you did live to fight another day.

And living to fight another day is not a gimme. I witnessed something in a Merril Lynch office in Seattle in the summer of 1974 that made a big mark on me. I had saved some money, and wanted to get into the market at what I thought was getting to be a bargain level. (It was.) The Merrill brokers at this location had cubicles, not offices. In the space next to me I overheard a wheat farmer from Eastern WA who had sold his farm and invested in stocks in 1972. He appeared to be in his late 50s. He had lost over 50% of his retirement money, and he was crying. These guys are not metrosexuals. They are not sensitive guys who cry easily. He was in despair.

So there are times and epochs where confidence pays off. And there are times when prudence is the better course. Uneasiness about a course of action can be a hint to go slow.

Whether some people are better financed than they let on or not, it can't hurt to remember that if something doesn't seem to make sense, it probably isn't the whole story.

Mikey

[haha]

Dante,

I assume from your screen name that you are a reader of the Divine Comedy. While you are looking at books to help with investing, you could do a lot worse than to re-read the Inferno, and also have a close look at the bible.

Mikey