Market Correction in Retirement

[heeyy_joe]

Damn Magic 8 Ball is broken. So I keep at least two years cash.

 

[pb4uski]

Perhaps Ms./Mr. FedEx Courier was speaking hyperbolically ...

Do you mean hypothetically?

 

[REWahoo]

Do you mean hypothetically?

I thought he was asking if the OP was throwing us a curve...

 

[FedExCourier]

I read with interest the past posts that were given in this thread. The good news is that you survived it and seemingly well....you all are still here and posting. Do you ride the market downturns out or do you have plans in place to pull a percentage of your investment out of harms way when the market drops a certain amount?
Since I'm working right now and putting money in my 401k every month I have always ridden the downturns out as I dollar cost average in with each paycheck. But in retirement I will only be rebalancing my stock/bond portfolio each year.

 

[REWahoo]

Do you ride the market downturns out or do you have plans in place to pull a percentage of your investment out of harms way when the market drops a certain amount?

Ride and rebalance seemed to have been the rallying cry for many of us who weathered the roller coaster ride(s). It helps to have a sufficient amount set aside in cash or short term bonds to fund expenses for a couple of years (or more). This prevents having to sell equities during any 'market unpleasantness'.

The age old problem of "pull[ing] a percentage of your investment out of harms way when the market drops" is figuring out the other side of market timing - when to reinvest.

 

[jollystomper]

It helps to have a sufficient amount set aside in cash or short term bonds to fund expenses for a couple of years (or more). This prevents having to sell equities during any 'market unpleasantness'..

+1. This is our plan. We will have enough in cash to cover projected withdrawals for 7 years, to keep from being forced to sell in a down market. I'm willing to accept the low interest on cash for peace of mind.

 

[walkinwood]

Ride and rebalance seemed to have been the rallying cry for many of us who weathered the roller coaster ride(s).

+1

I had trouble (nerves couldn't handle it) re-balancing all the way in 2008/09, but did do some re-balancing. And, I switched mutual funds to realize tax losses. Hopefully, I'll be more disciplined the next time around.

 

[Animorph]

Ride and rebalance seemed to have been the rallying cry for many of us who weathered the roller coaster ride(s). It helps to have a sufficient amount set aside in cash or short term bonds to fund expenses for a couple of years (or more). This prevents having to sell equities during any 'market unpleasantness'.

The age old problem of "pull[ing] a percentage of your investment out of harms way when the market drops" is figuring out the other side of market timing - when to reinvest.

+1. You sell when the market is down 20% and there it goes back up again.

I had extra cash I was able to reinvest in 2008 and 2009. The sell side of that process was raising cash just before retirement, just for that reason.

 

[Lsbcal]

I read with interest the past posts that were given in this thread. The good news is that you survived it and seemingly well....you all are still here and posting. Do you ride the market downturns out or do you have plans in place to pull a percentage of your investment out of harms way when the market drops a certain amount?
Since I'm working right now and putting money in my 401k every month I have always ridden the downturns out as I dollar cost average in with each paycheck. But in retirement I will only be rebalancing my stock/bond portfolio each year.

This is going to rub some readers the wrong way . A few will think I should be run off the web . I went through several downturns in my 40+ years of investing. One was the Oct 19, 1987 Monday crash. The worst in retirement was the 2008 drop.

Now I've done a lot of research and analysis since 2008. I've convinced myself that really bad business declines can be roughly predicted. Even the crash of 1987 has a pretty easy explanation. I won't go into algorithm's here but will say a few things for the mildly curious.

The 1987 crash was preceded by an extreme difference between bond yields and stock PE's. We are not likely to see that for at least a decade as bond's have such low real yields. The 2008 decline was preceded by (importantly) a negative sloping yield curve. There was a Fed paper that discussed recessions and the yield curve slope so I'm not the first to notice this phenomena. But it will not pinpoint even the month exactly when things go to pot.

If I come across a situation that predicts a decline, I'll probably post. But I could be wrong and I'm sure many will tell me I'm a bad market timer type. Oh well, I'm just an independent type and enjoy sometimes being a bit different. It is nice that there are some posters here who will at least consider some very modest timing information. I do think that for the majority of investors, buy-hold is the way to go. Mine is buy-hold most of the time.

 

[haha]

I think it is possible to take a tidy sum out of markets knowing nothing more complex than if it is cheap consider it; if it is not cheap, pass.

You will miss most or all of the moon rockets, but almost never get skunked. Kind of like the difference between a baseball player who hits some homers, rarely gets a walk and whiffs pretty often, and a guy like the late Tony Gwynn or Pete Rose, who seemed almost to own a lease on the bases.

Ha

 

[NW-Bound]

The age old problem of "pull[ing] a percentage of your investment out of harms way when the market drops" is figuring out the other side of market timing - when to reinvest.

If I sold, then bought back a stock at a lower price than what I sold at, I considered that timing move a success already. The repurchase did not have to be perfectly at the bottom, which was of course not possible all the time.

Looking back at my records, I have made plenty of good "buy low", but not enough "sell high", meaning I often sold too soon. And I am talking about individual stocks here, not the entire market. Stocks usually run into the overvalue range until they self-correct, and I tend to get edgy and want to "book" the gain too early. This is very common among stock investors, and yet it is so hard to fight the tendency.

 

[audreyh1]

Lots of folks who sold into the downturn in 2008, or after the downturn, couldn't bring themselves to reinvest while the market was down. They essentially locked in their losses and stood on the sidelines while the market recovered. It's very hard to get back in psychologically after you bail - especially if you did so after suffering some steep losses already.

 

[mpeirce]

Lots of folks who sold into the downturn in 2008, or after the downturn, couldn't bring themselves to reinvest while the market was down. They essentially locked in their losses and stood on the sidelines while the market recovered. It's very hard to get back in psychologically after you bail - especially if you did so after suffering some steep losses already.

I was just a wee investor back in '87 - only a few thousand dollars in the market. The max for IRAs was only $2000/year back then.

Anyway, I worked in a "bull pen" setting, where all the engineers on the project were in one room and shared telephones. Big fun (not), but we did know what was going on with everyone else.

On Black Monday I recall watching the plunge in the market with interest. A woman I sat next to called her husband and they decided that "we need to get out!" and they sold all their stock holdings.

The market actually recovered rather quickly and they stayed out of the market well past the time it took for stock prices to recover. I noticed they the only reason they lost money was that they panicked. I didn't do anything and didn't lose a penny.

This made a lasting impression on me and I've never felt the urge to sell when the market plunges since then.

 

[ejman]

I was just a wee investor back in '87 - only a few thousand dollars in the market. The max for IRAs was only $2000/year back then.

Anyway, I worked in a "bull pen" setting, where all the engineers on the project were in one room and shared telephones. Big fun (not), but we did know what was going on with everyone else.

On Black Monday I recall watching the plunge in the market with interest. A woman I sat next to called her husband and they decided that "we need to get out!" and they sold all their stock holdings.

The market actually recovered rather quickly and they stayed out of the market well past the time it took for stock prices to recover. I noticed they the only reason they lost money was that they panicked. I didn't do anything and didn't lose a penny.

This made a lasting impression on me and I've never felt the urge to sell when the market plunges since then.

Ditto for me back in 1987. I had just started seriously investing in January of that year and when the market crashed in October I was so paralyzed and numbed by fear that I did nothing. I realized when the market recovered that a very valuable lesson was given and in subsequent market crashes 2000-2002, 2008 did nothing other than following my standard rebalancing bands (which always seem to get me to sell equities way before the market top but that is another story). I must say however that the 2000-2002 crash was particularly difficult psychologically because I ER'd December of 2002.

 

[Lsbcal]

In Oct 1987 we had a 3 year old and DW had pneumonia in the hospital. I remember reading the Wall St. Journal and worrying, while waiting in the hospital on the weekend before that crash. I did sell out on Oct 20th. Exceedingly bad timing but repurchased about 1 year later at higher levels.

My take away, if you are going to sell have a strictly mechanical plan with sell and buy criteria. Do not use "feelings" in a crisis. If the markets sells off before your plan kicks in, then plan to ride it out.

BTW, one should have seen that crash coming. Not the exact timing of it but there was valuation concerns. Bond real rates were exceedingly high and SP500 PE was also high. One can look up "Fed model" in Wikipedia. Of course, I didn't have that perspective years ago. We live in a golden age with lots of available data and tools ... to get one in trouble or maybe not.

 

[Totoro]

If the markets sells off before your plan kicks in, then plan to ride it out.

That's the big one there. For good market timing you need to be (roughly) right twice.

If the market tanks, it goes fast and deep usually. If you weren't out when it started, ride it out. Conversely, if you weren't in when it boomed, don't go in.

Like Graham said, if you go and vary your allocation, always keep some % in bonds and equities. That way, you are always partly right

 

[Lsbcal]

That's the big one there. For good market timing you need to be (roughly) right twice.

If the market tanks, it goes fast and deep usually. If you weren't out when it started, ride it out. Conversely, if you weren't in when it boomed, don't go in.
...

And there is a caveat here. Suppose you were wondering what to do in December 1929. The year-to-date loss was -9% but Sept through Nov losses alone were -31%. So a big up and a big downer. You decide to stay in the market. By Sept 1930 you are up 2% from that December 1929 point. You congratulate yourself on staying the course.

Well it was a massacre after that. By Jan 1933 you would have lost -76%. Maybe a bit less in real terms because of deflation plus a balanced portfolio with bonds would have helped.

Ancient history but worth a thought. Bogleheads would have been jumping out the windows. Not likely to happen again ... I hope.

 

[TuborgP]

We retired early on Jan 1 2008. Fortunately we had pensions and adequate cash holdings. A tad frightening then as we were and still are heavy equities. Started the first leg of 62/70 SS strategy a little over two years later. Now like other drops it is a yawn in the rear view mirror. The key for us was the pensions and staying the course.

 

[DoWright]

We retired early on Jan 1 2008. Fortunately we had pensions and adequate cash holdings. A tad frightening then as we were and still are heavy equities. Started the first leg of 62/70 SS strategy a little over two years later. Now like other drops it is a yawn in the rear view mirror. The key for us was the pensions and staying the course.

Congratulations... It's nice to hear that you were able to weather the 2008 crisis. As you mentioned, it was mainly due to the fact that you have a pension; I presume that if you had to dip into your investments, you wouldn't be as comfortable today. Many people these days don't have pensions and are forced to live off of their own 401k/IRA. So many people don't plan for their retirement and are forced to continue working. It's also nice to hear that you used the 62/70 SS strategy, way to go! Nice to hear success stories...

 

[Mo Money]

+1. This is our plan. We will have enough in cash to cover projected withdrawals for 7 years, to keep from being forced to sell in a down market. I'm willing to accept the low interest on cash for peace of mind.

+1

I have $100K sitting in a virtually no-interest account and $600K in short term bond fund at Vanguard. That's seven years of living expenses. Balance of retirement fund is in stock index ETFs and mutual funds, across several indexes at Vanguard and Schwab. I plan to just ride it out. The hard part will be resisting the temptation, after a crash, to take $500K of the bond fund and steer it into the stock index funds....

 

[kcowan]

Jut out of curiosity, I went through my records to see how many times I've experienced a drop of ~20% or more.

Thanks Andre.

Would you mind sharing what type of portfolio you held. Asset allocation?

 

[kcowan]

Do you ride the market downturns out or do you have plans in place to pull a percentage of your investment out of harms way when the market drops a certain amount?

An active asset allocation rebalancing approach would have emphasized the corrections depending on your chosen cycle: quarterly versus annually, for example.

 

[TuborgP]

Congratulations... It's nice to hear that you were able to weather the 2008 crisis. As you mentioned, it was mainly due to the fact that you have a pension; I presume that if you had to dip into your investments, you wouldn't be as comfortable today. Many people these days don't have pensions and are forced to live off of their own 401k/IRA. So many people don't plan for their retirement and are forced to continue working. It's also nice to hear that you used the 62/70 SS strategy, way to go! Nice to hear success stories...

We had a short term bucket but as you accurately note it was pension and subsequent SS that eased any pain from being severe. actually came out ahead because the real estate bubble enabled us to buy a second place on the cheap. We sold our pre retirement retirement home in March of 2007 in the DC suburbs at 95 percent peak and rented until our new home was done out of state. That home held 90 percent of value in a different market which was good. We benefited more than we were hurt because of timing and locations.

 

[youbet]

It helps to have a sufficient amount set aside in cash or short term bonds to fund expenses for a couple of years (or more). This prevents having to sell equities during any 'market unpleasantness'.

The benefit of holding a large bucket of cash to "prevent having to sell equities during any market unpleasantness" is highly overrated IMHO.

For someone who covers expenses 50% pension/SS and 50% portfolio withdrawals, it's likely that interest and divs would cover withdrawal requirements. If not and you need to sell a few bux worth of something, I've never had a time when my broadly diversified portfolio didn't have something in it that wouldn't be painful to sell during an equity downturn.

I suppose for someone whose expenses are met 100% by portfolio withdrawals and the portfolio is non-diversified and consists completely of equities all of which have taken a big hit, then it may have paid off to have been holding a bunch of cash.

It would have been mighty expensive to have been holding cash beyond investment liquidity needs these past few years. For example, look at the opportunity cost of holding $100k in 2% CD's vs holding $100k in Wellesley the past 3 years. The difference would buy a bunch of groceries during the feared downturn.

 

[Lsbcal]

I do have 1 year's money in short term investment grade bonds. In the 2008 downturn I sold FI to fund spending.

The equities were going way below the target allocation but my policy is to not rebalance until the market has a sustained advance. The algorithm is tuned to what worked in rebounding markets as far back as 1929.