Market correction anxiety

[imoldernu]

Google search says movie The Ballad of Buster Scruggs

now available on Netflix

*I was not paid for this ad placement

It is actually from the movie "The Balad of Buster Scruggs"!

Oh well, nice try...

Anyway, check out "The Brig Somers" .Phillip Spencer (Chi Psi founder) was hanged at the mast along with two others for mutiny. Spencer was the son of John Spencer who was US Secretary of War at the time.

The story was picked up by Herman Melville, who wrote Billy Budd, based on the mutiny. In 1962, the film... (IMDB) "Billy Budd" starred Robert Ryan, Peter Ustinov and Melvyn Douglas.

And now, back to our sponsor...

Awaiting Monday market opening.

 

[OldShooter]

Like I stated previously 50%/50% portfoilio as a baseline is the way to go. ...

Just for interesting discussion, consider two 70 YO widows in good health. Both ladies had parents that lived into their 90s. Both have Social Security but it is at best marginal compared to modest way they would like to live. Both have a planning horizon of 25 years.

• Widow #1 has approximately $200K to supplement SS for the next 25 years.
• Widow #2 has approximately $10M, the vast majority of which will end up in her estate for the benefit of charities, heirs, etc. She would like to maximize her estate.

Is 50/50 "the way to go" for both of them?

 

[street]

^ NO

 

[NW-Bound]

This is probably a dumb, newbie question but how do you sell bonds during a bear market if you're invested in VG Wellington and/or Wellesley?

Well, in some sense you are selling bonds -- assuming the funds are rebalancing to their target allocations. But as a practical matter, if you hold only blended funds (including target date funds) you don't have the option of selling only bonds while you wait out the equity recovery...

This means you want to do the balancing yourself at your discretion, according to your own criteria and frequency.

This means you want to do your own market timing instead of relying on the balanced fund manager. You may do better, or you may do worse.

 

[OldShooter]

This means you want to do the balancing yourself at your discretion, according to your own criteria and frequency. ...

Well, I think that what @vchan2177 is suggesting is more like a bucket strategy. "You should sell your bonds to meet your retirement expenses to allow time for the market to recover." This is less aggressive than a rebalancing strategy where one sells bonds and buys equities in a down market to maintain an AA.

This means you want to do your own market timing instead of relying on the balanced fund manager. You may do better, or you may do worse.

If the fund manager is timing, he is not doing his job. He should be immediately rebalancing as necessary to maintain the AA range stated in the prospectus. If the range is wide, I suppose there could be some timing considerations but that is not what IMO he is being paid to do.

Re an individual following @vchan2177's advice I guess you could call it market timing but it is a pretty mild sort, just living from the fixed income side of the AA when investor believes that equities are down.

 

[copyright1997reloaded]

It's a long term game

As Old Shooter mentioned, stock prices are seemingly a random walk with a slight upward bias. While I don't agree with that entirely (because I firmly believe there are human psychological aspects which influence price action), I wholeheartedly agree with the slight upward bias part.

Understanding why this is so is fundamentally important and seeing this has influenced my outlook on many things. In the long run, the standard of living is a function of efficiency (productivity). One only has to look back a 150 years or so, and compare what percentage of labor was used for farming, that is to provide the very basics of food to eat and to be in some sort of shelter from the elements.

It is because of productivity (and I would say because of capitalism) that a much higher proportion of the worlds population is living above poverty today vs. 50 or 100 or 150 or 200 or .. years ago. Is it perfect - by no means so, but the "slight upward bias" is there. This is reflected in profitability that corporations are able to achieve, and the fundamental reason why they will be successful over a long period of time. Could that change because of war, government policy, or a giant asteroid? Sure. But I'm still willing to bet *some* of my deferred spending (aka wealth) that the upward bias will continue.

The Efficient Market Hypothesis (EMH) states that financial assets reflect all available information, and as a result it is impossible to beat the market on a risk adjusted basis over a long period of time. I'm not so sure of this, because humans have been shown to have incorrect (in terms of best economic outcome) assessments of information. It is just how our brain works. As a result, I think that instead of processing the probabilities correctly as new information occurs, we instead tend to have psychological responses that result in overshooting both on the upside (euphoria) and downside (doom), and this is shown in market conditions.

In the end, each of us needs to assess our tolerance for risk. It is times like these where that assessment becomes 'real'. One thing is for sure, there is always increased risk to get increased return. And as I've babbled on this forums many times - asset price decline risk is only ONE of the risks we face. Even assets with guaranteed returns (such as CD's) have risks.

In my case, I have a pension (from my previous mega-corp), and am still drawing a salary (so I am not forced to withdraw assets from the market). Even with that, I have a hefty cash position, because it helps me sleep at night and because I want to have cash on hand if the market goes considerably lower.

 

[audreyh1]

Well, I think that what @vchan2177 is suggesting is more like a bucket strategy. "You should sell your bonds to meet your retirement expenses to allow time for the market to recover." This is less aggressive than a rebalancing strategy where one sells bonds and buys equities in a down market to maintain an AA.

If equities are down quite a bit, and someone needs to withdraw for annual income, they will naturally sell bonds to meet their income needs - this withdrawal is just the first step in rebalancing their portfolio. If equities are down far enough, they may need to sell even more bonds to buy equities in order to rebalance their portfolio to their target allocation.

You simply withdraw the amount you need from each asset class to meet your annual income and at the same time bring your AA back to target. And if your portfolio is still out of balance after the withdrawal, you rebalance what remains.

 

[Free bird]

How dare the market test our resolve to own risk assets. I want my double digit returns & I want them now. Chop chop

 

[NW-Bound]

If the fund manager is timing, he is not doing his job. He should be immediately rebalancing as necessary to maintain the AA range stated in the prospectus. If the range is wide, I suppose there could be some timing considerations but that is not what IMO he is being paid to do...

I will admit that I never read carefully the prospectus of any balanced fund to see what it exactly says, but it appears from your post that it is customary for balanced funds to rebalance daily to their stated objective AA.

When posters here talk about rebalancing, they also talk about a threshold of so many percents out-of-balance before they rebalance, and/or a certain interval of time before they pull the trigger.

And so, performance with rebalancing can vary quite a bit between individuals and between balanced funds, although I don't know if any certain criteria can be proven to be superior.

 

[audreyh1]

I will admit that I never read carefully the prospectus of any balanced fund to see what it exactly says, but it appears from your post that it is customary for balanced funds to rebalance daily to their stated objective AA.

When posters here talk about rebalancing, they also talk about a threshold of so many percents out-of-balance before they rebalance, and/or a certain interval of time before they pull the trigger.

And so, performance with rebalancing can vary quite a bit between individuals and between balanced funds, although I don't know if any certain criteria can be proven to be superior.

A lot of rebalancing in balanced funds occurs simply with funds flowing in and out every day according to articles talking to fund managers.

So theoretically, during a big equity drop, a withdrawing from a balanced fund means you are likely pulling from the outperforming asset class (bonds/cash). Investing in a balanced fund means you are likely adding to the underperforming asset class (equities).

If someone is still in accumulation mode with their own AA portfolio, you can mimic the balanced funds and add to the underperforming asset class each time you invest.

But in general, in a individual retiree portfolio which doesn't have constant fund flows, rebalancing daily or frequently doesn't provide that much benefit plus all that churning can cause increased taxes in a taxable account.

Historical studies have shows that 12 months between rebalancing offers better outcomes that more frequent rebalancing. And if the rebalancing causes taxable events, then 18 months is more optimal. Longer times than that didn't provide additional benefit.

 

[2177V]

Every individual is different and because of this fact.... each individual's AA is likely to be different. Family situation, other income and time horizons are MAJOR factors. I have a nest egg but it now appears that I do not need to withdraw as much as I originally planned because I worked 44 years and ended up with 2 healthy pensions and SS and these income streams meets most of my retirement expenses. I am not a FIRE but a FIRL. My wife is 20 years younger than me and she is still working which provides more income but she is not entitled to my pensions as a survivor because my 1st wife has priority. However, my wife will probably inherit my IRA nest egg after I pass away. Hence my AA has changed to reflect my wife's time horizon instead of mine. It is funny how life's events can change your AA. I am pretty sure if your doctor tells you that you only have 5 years to live, your AA is going to change significantly because your time horizon has just changed significantly.

 

[street]

^ so what would your AA be in the scenario you gave? Interesting thought I could see that number go either way. Again each person is different and lives change, and we have life changing events.

 

[2177V]

Personally, I do not like balanced funds, time horizon funds or any funds that co-mingle different asset classes. My reason is simple. I prefer to control the re-balancing to suit my investment and personal needs and not the need of the prospective and the fund manager.

I have S&P 500 funds, energy funds, health fund which are more sector oriented. Each of my sector fund is specific and I fully reviewed their behavior during a bull market and a bear market and during and after a crash. For example, during the 1998 crash most of the stock sectors took a beating. However, some sectors recovered faster than others. There are some sectors that took only 18 months to recover from the 1998 crash while other sectors took 3 to 5 years. There is no guarantee that the recovery times will be duplicated in a future crash, but if I had two sectors that have similar returns over the long term but one sector had quicker recovery time after the 1998 crash, I tend to use that as a tie breaker.

Also, a typical balance fund can be 60% S&P 500 stock and 40% corporate bond. I prefer to have two funds instead of a single balance fund. One S&P 500 and one corporate funds. I get nearly the same return but I have the option on how I want to re-balance during the up and down of the market. I am a control freak but that is how I manage my investments. I am not saying that I am smarter than the money manager of the balance fund.... I am just saying that I prefer more control over my investments.

 

[2177V]

I am using the bucket strategy. Each bucket as a specific time horizon and specific purpose. Very Short term bucket of less than 1 year tend to be 100% cash. 3 years bucket 25/75; 5 yrs bucket 50/50; 10 years or more bucket 75/25, etc I then add eveything up and they should be close to 50/50. In each of the bucket I have specific asset classes based on their 3 years, 5 year 10 year historical returns. As you can see, it is a complicated investment portfolio. I have an overall AA and a specific AA for each bucket. For example, I have one bucket to withdraw when I am age 85 and of course that is a long time horizon and therefore more heavy in stock than bonds.

As I stated before, I do not like to co-mingle my investments. Co-mingling makes it simple but you do lose some control. I review each bucket and how they perform and then rebalance.... mainly because one bucket had under-performed while another bucket over-performed. When a bucket underperformed, I attempt to discover why and add that to my knowledge base. You get smarter by your mistakes. When you comingle things, it is more difficult to determine why.

You heard of the saying "Never put all of your eggs in one basket"? In a sense that is what I am doing.

 

[street]

Interesting strategy and very well explained. Thanks.

 

[copyright1997reloaded]

Just a little something to insight more fear. Maybe it isn't just the stock market pricing that has peaked. Perhaps housing prices have topped out also:

After years of blaming the surging home prices in the area on a shortage of inventory for sale, the industry is suddenly faced with all kinds of inventory coming out of the woodwork, just as sales are slowing and as mortgage rates are rising, while the affordability crisis bites the market.

https://wolfstreet.com/2018/12/03/bubble-trouble-silicon-valley-san-francisco-housing-markets/

 

[davismills]

One of my favorite Buffet quotations:

“The stock market is a device for transferring money from the impatient to the patient.”

My favorite Buffet quote: "When the tide goes out, you quickly find out who was swimming naked"

 

[mamadogmamacat]

DOW down slightly , no where near (yet) the futures last night which were down 200 or so.
NASDAQ and S&P both up slightly.

For perspective, DOW has been -1.3% YTD, +0.7% for last 12 months, and +37.8% for the last 3 yrs.

Without GE and IBM, down respectively 76% and 14%, the 3 yr percentage would be significantly better i suspect
edit: DOW down almost 200 now

 

[Rianne]

"And the beat goes on"

Sonny and Cher

 

[Carpediem]

"And the beat goes on"

FIFY....."And the beat(down) goes on"

 

[OldShooter]

As Old Shooter mentioned, stock prices are seemingly a random walk with a slight upward bias. While I don't agree with that entirely (because I firmly believe there are human psychological aspects which influence price action), I wholeheartedly agree with the slight upward bias part.

Understanding why this is so is fundamentally important and seeing this has influenced my outlook on many things. In the long run, the standard of living is a function of efficiency (productivity). One only has to look back a 150 years or so, and compare what percentage of labor was used for farming, that is to provide the very basics of food to eat and to be in some sort of shelter from the elements.

It is because of productivity (and I would say because of capitalism) that a much higher proportion of the worlds population is living above poverty today vs. 50 or 100 or 150 or 200 or .. years ago. Is it perfect - by no means so, but the "slight upward bias" is there. This is reflected in profitability that corporations are able to achieve, and the fundamental reason why they will be successful over a long period of time. Could that change because of war, government policy, or a giant asteroid? Sure. But I'm still willing to bet *some* of my deferred spending (aka wealth) that the upward bias will continue.

The Efficient Market Hypothesis (EMH) states that financial assets reflect all available information, and as a result it is impossible to beat the market on a risk adjusted basis over a long period of time. I'm not so sure of this, because humans have been shown to have incorrect (in terms of best economic outcome) assessments of information. It is just how our brain works. As a result, I think that instead of processing the probabilities correctly as new information occurs, we instead tend to have psychological responses that result in overshooting both on the upside (euphoria) and downside (doom), and this is shown in market conditions.

In the end, each of us needs to assess our tolerance for risk. It is times like these where that assessment becomes 'real'. One thing is for sure, there is always increased risk to get increased return. And as I've babbled on this forums many times - asset price decline risk is only ONE of the risks we face. Even assets with guaranteed returns (such as CD's) have risks.

In my case, I have a pension (from my previous mega-corp), and am still drawing a salary (so I am not forced to withdraw assets from the market). Even with that, I have a hefty cash position, because it helps me sleep at night and because I want to have cash on hand if the market goes considerably lower.

There have been whole books written that do not explain the "slight upward bias" as well as this post does. Bravo!

Regarding psychological effects, variously referred to as "behavioral finance" or "behavioral economics," I agree completely. I did not mention this topic just to keep my point simple but it is real. These effects can be short term, like nonsensical stock price gyrations around earning reports, or longer term like the "nifty fifty" and the tech bubble. But for a truly long-term investor I think (maybe "I hope") they eventually cancel themselves out.

We really cannot know how psychology is affecting a market or a stock, but IMO the most important reason to understand it is to understand how we ourselves behave. Had I understood things like the recency effect and the endowment effect, had I understood humans' typically asymmetric perceptions of risk, I'm sure I would have made some different and better investment decisions over the years.

For those who want to know more, here is an insightful and entertaining video featuring Eugene Fama, guru of the EMH, and Richard Thaler, the inventor of behavioral economics. (Both Nobel winners, incidentally.) Are markets efficient? | Chicago Booth Review This is 42 well-spent minutes.

To learn more, which would probably be to any investor's benefit, read "Misbehaving" by Richard Thaler and "Thinking Fast and Slow" by Daniel Kahneman (also a Nobel laureate) Do Thaler first because he kind of sets you up for Kahneman. Really, this is important stuff.

 

[Seagirt]

I think the analysis of how psychology affects the stock market is fascinating, but it's quite likely that, in the future if not yet, artificial intelligence is or will be used to try to game the system by over-riding and exploiting that human psychology. It's the next logical step in trying to outsmart everyone else.

 

[OldShooter]

I think the analysis of how psychology affects the stock market is fascinating, but it's quite likely that, in the future if not yet, artificial intelligence is or will be used to try to game the system by over-riding and exploiting that human psychology. It's the next logical step in trying to outsmart everyone else.

Certainly the next logical step but it is doomed to fail. When some human intelligence or some artificial intelligence does indeed find an algorithm or an arbitrage opportunity, others will find it too and the result of their attempts to exploit it will cause it to go away.

For example, if someone notices that a stock is always lower on the Friday close than it is on the Monday close, that can be exploited. But as other people (or computers) join the crowd, pretty soon the trick doesn't work any more. Friday prices are bid up and Monday prices go down.

So we're back to the random walk.

 

[Amethyst]

Sounds like real estate bubbles. The minute you hear someone boasting about how they flipped a property and made a bundle, you are too late to get in on it.

Certainly the next logical step but it is doomed to fail. When some human intelligence or some artificial intelligence does indeed find an algorithm or an arbitrage opportunity, others will find it too and the result of their attempts to exploit it will cause it to go away.

For example, if someone notices that a stock is always lower on the Friday close than it is on the Monday close, that can be exploited. But as other people (or computers) join the crowd, pretty soon the trick doesn't work any more. Friday prices are bid up and Monday prices go down.

So we're back to the random walk.

 

[NYEXPAT]

I think the analysis of how psychology affects the stock market is fascinating, but it's quite likely that, in the future if not yet, artificial intelligence is or will be used to try to game the system by over-riding and exploiting that human psychology. It's the next logical step in trying to outsmart everyone else.

Look at AIEQ!
I should disclose I was long AIEQ, but no longer have a position.