Staying the course?

[free4now]

This hasn't shaken my buy and hold approach, but in order to make it feel like I'm doing something I'm going to hold recent rebalancing proceeds in cash rather than reinvesting immediately. Probably not really necessary on a functional level, more of a psychological trick to keep my brain from racing around thinking "shouldn't we be doing something".

 

[haha]

Should one necesarily "stay the course"?

Since conditions are not static, why should investments plans be? I see the idea that anything you do will be emotionally driven and counterproductive, so do nothing. But what successful enterprise operates that way?

The recent credit stress has shown that firms that can proactively adapt to new circumstances like Goldman and Morgan Stanley survive, while more inflexible ones disappear either into bankruptcy or the grasp of a better firm.

If we were doctors would we keep right on with our treatment plan as the patients temperature rose?

Ha

 

[cute fuzzy bunny]

Maybe a better analogy would work Ha. When you're running a business you can have pretty good control over quality, set a strategy and then run it. When you're investing in businesses that dont even tell you the truth about what they're doing half the time, its a little harder.

On the other hand, the agile, mobile, hostile approach to buying beaten up stuff when its on sale and dumping it when it costs too much can add a whole lot of advantage.

But freaking out and selling your investments when we're at a market bottom because you dont know whats going to happen? Not a good idea.

 

[haha]

Maybe a better analogy would work Ha. When you're running a business you can have pretty good control over quality, set a strategy and then run it. When you're investing in businesses that dont even tell you the truth about what they're doing half the time, its a little harder.

On the other hand, the agile, mobile, hostile approach to buying beaten up stuff when its on sale and dumping it when it costs too much can add a whole lot of advantage.

But freaking out and selling your investments when we're at a market bottom because you dont know whats going to happen? Not a good idea.

Agree. Never a good idea to freak out.

But tax loss capture and switch strategies may be helpful.

There may even be situations where a pure capital preservation strategy would be smart at a time like this. Say you retired 5 or 6 years ago and are not really employable in the current economy. Say you had $2.5 m last October, enough to fund your retirement quite well. Say you are now down to $2m, still enough to stay retired, but very vulnerable to another 20 % loss. We know that another 20% would not be off the charts at all. Should we perhaps do some equity selling in favor of some 5% CDs?

I don't think the answer is not a no-brainer.

Ha

 

[cute fuzzy bunny]

On the other hand, if you slide some assets into cash and we have a 20% rebound, you'd be pretty pissed.

 

[haha]

On the other hand, if you slide some assets into cash and we have a 20% rebound, you'd be pretty pissed.

Maybe. But whether you would feel bad or not isn't really the question if you are attempting to be rational. The situation I described is not balanced. A further 20% loss might immediately wreck the retirement. A simialr gain would be nice but is not absolutely necessary.

Remember, this is all hypothetical.

Ha

 

[cute fuzzy bunny]

Hypothetically and rationally speaking, I cant guess whether we're facing a 20% downdraft or a 20% rebound. I cant even weight the likelihood of one vs the other.

People might see the bailout very favorably and we could see a 100-150 point rise in the s&p 500 in the next 2 weeks. But then reality might sink back in.

I do think that the next 3 years wont be 2003-2005. But I dont know if they'll be like 2005-2008 either, or worse.

If we did get a 15-20% pop, I'd probably slide myself to a little more of a conservative perspective. If we dropped another 15-20% I'd probably buy more select equities.

But standing right here, right now, I cant see anything actionable other than maybe dumping a few obvious long term losers and holding a little more cash.

 

[free4now]

I do think it makes sense to question your strategy when new information comes in. If this really was the death of capitalism and risk premiums for equities were drastically slashed for unfixable systemic reasons, then I might change my investments to cash or an annuity and go back to work.

Although this crisis is surprising now, it's definitely not unprecedented in terms of confirmed devastation. The great depression was certainly worse than what has happened here so far. And I had planned for surviving the great depression in my retirement planning by using firecalc. Maybe this crisis will be worse after it plays out but betting on that would be awfully cynical.

The "agile mobile hostile" approach that works for small businesses isn't really relevant here because my investment strategy is not that mobile. Development of my current investment approach was based on many years of financial research, most of it done by others (e.g. trinity study, John P Greaney, this board, etc). I don't have that kind of support to make an agile mobile hostile pullout now. It will be years before the financial planning research accommodates this new information that the crisis revealed, and it may very well come out that the best plan is to do as always before. I'm sticking with my well-researched plan instead of trying something untested based on gut.

 

[FIREd]

My view is that in the current environment I am not going to try to be a hero. I am not going to panic either and go all cash. But I want to make sure that we have enough liquidities to make it to the other side of this thing with the least amount of damage to our long term goals and without having to liquidate our long term assets (stocks, RE, retirement accounts). If it means redirecting taxable contributions to cash for a few months instead of plowing everything in the stock market, then so be it. The market could go up from here or it could go down from here, I don't know. But if we have enough cash set aside, what the market does in the short term will matter considerably less.

 

[doxeyweb]

No change in AA or contributions.
Max'ing Roth's and 401k's.

 

[sanman12]

Stay the course

10 years away, I did move out of equities in my 401k, and into a gauranteed money market Fund in my plan(10 year avg of 4.5%) mid-septmber. I gave it alot of thought, took as much emotion out of it as I could. My rational was why take on certain risk in the current market and put 20 years of sacrafice and savings on the line. As the financial system settles down and starts to make sense of all of this, I will start DCA.
Live to fight another day

 

[jblack]

Thanks for everyone responding - interesting opinions here. Overall it sounds like a lot of us still accumulating for FIRE are sticking to their previous plans and DCA'ing into the market despite the recent downturn (like DW and me).

Another follow-up question: for those who are moving either new contributions or existing assets to cash, do you think this means your original AA was incorrect or that the risk was greater than you expected?

Since DW and I already have a emergency fund that could sustain us for 6-9 months I don't think I can justify keeping more cash without considering it market timing or adjusting my risk profile and associated AA.

Thoughts?

 

[FIREd]

I must add that I already have a fairly conservative asset allocation, about 65% stocks / 35% bonds & cash. I have had that asset allocation for years and I haven't changed it in response to the current crisis. I am very comfortable with that AA (I am 34). The problem of course is that, in order to minimize my tax bite, most of my bonds/cash are in tax-deferred accounts where they can't be touched in case of a short term liquidity problem. Our EF (in taxable accounts) can only sustain us about 1 year, which would be just fine in any garden-variety recession. But if this thing turns into a prolonged, deep recession, I think that a 1-year EF is not going to cut it if we lose our jobs in the early stage of the recession. So my problem is not one of risk mismanagement, it is one of liquidity. I will compensate for the increase in my taxable cash position by investing more of my tax-deferred money in equities for a while. Overall there will be no change to my AA but it will make my portfolio less tax efficient temporarily. Just more liquid assets that can be tapped in case of an emergency.

 

[Lusitan]

Since DW and I already have a emergency fund that could sustain us for 6-9 months I don't think I can justify keeping more cash without considering it market timing or adjusting my risk profile and associated AA.

Thoughts?

I think you're OK as you are, but I also think that it's prudent to have 12 months worth of living expenses in your emergency fund. And I wouldn't think it would be considered market timing for you to bump up your cash reserves at least to this level.

 

[Urchina]

I also think that it's prudent to have 12 months worth of living expenses in your emergency fund. And I wouldn't think it would be considered market timing for you to bump up your cash reserves at least to this level.

Agreed.

DH and I were slowly building up our e-fund and have decided to accelerate the process instead of paying off our HELOC. (So we're doing this with debt servicing money, not with DCA money). Our thought is that if this is a prolonged recession we'd rather have the liquidity, which would buy us time to figure out what to do. If it turns out to be a relatively short recession, we can take the excess cash we've saved and pay off the HELOC in a lump sum. I was originally gunning for a 6 month emergency fund; I redid our budget today to get us to 12 months' expenses ASAP. We'll ladder this in CDs and then can easily divert money from the ladder into equities/debt repayment as the CDs come due.

 

[hankster]

Staying the course here. 60/40 AA. I'm hanging on to this bungee cord. It's either gonna break or it's gonna sling me back onto the platform

BTW, I visited with an old friend today who's dying of cancer. This puts things like market downturns and investment portfolios into perspective for me.

 

[RichoRosai]

I don't even want to know how much money I've lost since dumping my life savings into an index fund earlier this year. I just try to close my eyes and roll the mouse wheel down when I go to Reuters so I don't have to see the scary headlines and red numbers...

 

[Goonie]

I don't even want to know how much money I've lost since dumping my life savings into an index fund earlier this year. I just try to close my eyes and roll the mouse wheel down when I go to Reuters so I don't have to see the scary headlines and red numbers...

Since you're relatively young (26 according to your profile info), I wouldn't worry too much about the downturn in the market unless you were, or are, planning to sell off your holdings. As long as you're in it for the long haul, the odds are pretty good that the market will rebound, as it always has in the past (I realize that "past performance is no guarantee of future results"). At this point in time, you only lose your money if you dump your equities......sure they may be worth less (not 'worthless') now than when you bought them, but you have the same amount of shares as you did before the price drop, and their value will rebound when the market rebounds......which most will agree that it's "when" not "if"....though it may take a while.

IMHO (and it's just MHO), one would be wise to continue DCA'ing now that stocks are "on sale". Or if one has spare cash that they're looking to do something with, using it to buy some extra equities while their cheap.

Again, that's JMHO.....and that's what I prefer to do. YMMV.

 

[lucija]

Overall, we have made no changes to our allocation. I did, however, re-directed a portion of new contributions from bonds to equities.

We have about 5 months worth expenses in cash. Till now, we did not see a need for more cash on hand. Even though our jobs are unstable, we could live quite well on either of our incomes. Also, till now, we thought if things turn really grim we could also get by on credit (we have no liabilities what-so-ever at this time) in a near term by tapping into a HELOC or getting a mortgage. With the deleveraging snowball rapidly rolling downhill, I feel we should no longer assume credit will be there (cheap, easily obtainable type, anyway) when we needed it... so FIREdreamer, we share the same concern related to liquidity and we have made more or less identical portfolio changes in an attept to be more liquid.

...<snip> my problem is not one of risk mismanagement, it is one of liquidity. I will compensate for the increase in my taxable cash position by investing more of my tax-deferred money in equities for a while. Overall there will be no change to my AA but it will make my portfolio less tax efficient temporarily. Just more liquid assets that can be tapped in case of an emergency.

We just completed harvesting losses in our taxable account and rather than buying different equities in taxable, for the time being we kept 5-6 months worth of expenses in MM funds. Much like in your case, this resulted in higher equity holdings in our tax deferred accounts. Although, I do not view those MM funds as "available for spending", it's comforting to know they are there in case we really need them.

 

[haha]

Since you're relatively young (26 according to your profile info)...

This is not relatively young; it is absolutely young.

I am relatively young.

Ha

 

[RichoRosai]

Since you're relatively young (26 according to your profile info), I wouldn't worry too much about the downturn in the market unless you were, or are, planning to sell off your holdings. As long as you're in it for the long haul, the odds are pretty good that the market will rebound, as it always has in the past

Well yeah, but if I invested 100 dollars at point A before it was almost immediately decimated to, for example, 50 dollars at point B, that means the money I have 40 years from now will be half of what it would have been if I had invested that same amount at point B, right (and this is not a rhetorical question mark--I could have that all wrong)? It's not that I don't expect it to go back up before I sell it that bothers me, but rather the knowledge that my timing will have made such a massive difference in the end.

And as for continuing to buy now "while it's cheap", the fact that I know that's a good idea only compounds my gloom. I invested everything I had slowly saved over the last 10 years or so all at once, so I won't have any funds with which to buy for a good long while.

 

[CCdaCE]

Ever heard of Loss aversion?

I feel/hear your pain. The flip side is, if you would've waited to invest over time, the market might've gone up and you'd have felt like you missed the low price.

Seems like you can pick the studies you want to believe, but the market generally goes up over time; it's best to "lump sum" it into the market.

Don't correlate a good strategy with a bad outcome.

-CC

 

[Leonidas]

Well yeah, but if I invested 100 dollars at point A before it was almost immediately decimated to, for example, 50 dollars at point B, that means the money I have 40 years from now will be half of what it would have been if I had invested that same amount at point B, right (and this is not a rhetorical question mark--I could have that all wrong)? It's not that I don't expect it to go back up before I sell it that bothers me, but rather the knowledge that my timing will have made such a massive difference in the end.

This is not going to be the last time that the market comes along and knocks the hell out of you. Next time it won't be half of a hundred dollars, but maybe half a million. Your idea of waiting until the market is done making profits go *poof* is a great one. Except for one fatal flaw - when will it be done?

 

[unclemick]

This is not going to be the last time that the market comes along and knocks the hell out of you. Next time it won't be half of a hundred dollars, but maybe half a million. Your idea of waiting until the market is done making profits go *poof* is a great one. Except for one fatal flaw - when will it be done?

More than once since 1966 - with time, reinvested dividend's, and dollar cost averaging it's a wash - time and persistance and staying the course.

Then as time marches on you too can become an old phart and watch those half million swings in balanced index - thus gaining the opportunity to Pssst - Wellesley, mention SEC yield of your portfolio and tell warm and smarmy Norwegian widow stories.

Or not.

heh heh heh - Ah to Bogle or not to Bogle - that is the question. Whether it is nobler to ----.

 

[Goonie]

This is not relatively young; it is absolutely young.

I am relatively young.

Ha

Eh, I was just trying to polite.

I'm twice that, but usually pride myself in acting [-]like a 5 year old[/-] much younger than I am.