Going All Cash in 401k

[MrEd]

Miscellaneous thoughts t think about-Part II

Paper wealth is not real wealth. Until you sell, you have made nothing.

It is typical of long bull markets that holders fall in love with their holdings and consider capital gains as money in the bank (without actually cashing out and putting cash profits in the bank).

Profit is fact; everything else is commentary

Just remember, Wall Street will never tell you to sell

I prefer to leave the party early, in the knowledge that I can walk away with ease.

it’s not about how much you make in the boom times, it’s about how much cash savings you keep and what your burn rate from expenses looks like. Liquidity is everything. Lesson for life.

What were we thinking?” people will ask. The answer of course: most weren’t thinking, they were just hoping they could gamble, win, keep playing and somehow keep the proceeds without ever cashing out. Suffice to say, the odds aren’t favorable.

Don’t worry about what other people think; most of them are broke.

The key is never risking it all because you don’t want to replay the game.

Risk is often silent. By its nature, the existence of risk is not realized until it is too late

Hope is not a strategy.

The best course is for individuals to proactively control and limit risk exposure before loss cycles hit so that we don’t lose money and have liquid cash to buy investment assets once they retrace to good value. At that point income yields are two and three times higher than those collected near cycle highs, and we don’t waste years just trying to make back losses

 

[ERD50]

I already have enough in my retirement accounts to support an inflation adjusted spending rate to cover expenses and a generous "play" allowance. I'm one year from retirement - not because I need to keep working, but because I'm enjoying what I'm doing and I want to see the project I'm working on through to completion. I shifted everything out of the stock market into guaranteed return investments. It only gets about 3%, but that's enough for me. ....

And that's fine if you have figured all fixed income can support you through inflation. Though I am curious when you say 'guaranteed return ~3%'. Is that guaranteed for as long as you might live?

.... It only gets about 3%, but that's enough for me. I have zero risk appetite right now. I can afford to forgo stronger future gains, but I cannot afford to suffer a significant downturn. Losing 30-50% of my capital would break my retirement spend plan. Eventually there will be another big downturn - maybe I'll get back in the market then.

Again, that's fine based on above, but I really doubt that it is correct that a market downturn "would break my retirement spend plan".

If you can live off fixed income accounting for decades of inflation, you also can live through a big market drop and a 50/50 AA. If you look at FIRECalc, portfolio survive-ability actually drops below about 35% allocation to stocks, and that includes the Great Depression.

So if you are good, you are good - I just don't like those "Losing 30-50% of my capital would break my retirement spend plan." type statements to stand out there unchallenged.

-ERD50

 

[ERD50]

...
Hope is not a strategy.
...

And neither is market timing.

Unless you can show us evidence of how us retired people can successfully time the market, rather than platitudes. So far, data says setting an AA and a buy & hold strategy wins.

-ERD50

 

[MrEd]

And neither is market timing

I will state this the significant market returns most of us have attained will be gone over a period of weeks / months, at some point in the near future, without cashing them in.

platitudes

No, just over 40 years of trading the markets successfully.

 

[ERD50]

And neither is market timing

I will state this the significant market returns most of us have attained will be gone over a period of weeks / months, at some point in the near future, without cashing them in.

...

With words like "significant" and "will be gone" "weeks / months, at some point in the near future", that's not much of a prediction.

How much will be gone? Gone forever? When in the future?

And how do you know when to get back in? Oh, I know, "before it goes up".

...

platitudes

No, just over 40 years of trading the markets successfully.

And unless you can transfer the knowledge of this ability to others here, along with enough history to make them feel confident in it, it is just a platitude. I can tell someone that studies show that B&H index beats ~ 85% of active funds over 5 years, and they can easily B&H a couple broad-based index funds.

Maybe you have been successful. Good for you. But what are others to do based on this?

-ERD50

 

[Marq]

Sure, if that is what you need to do to take a pause and re-think goals why not.

I did that back in mid 2007 after moving back to MI from CA and seeing the downturn in the housing market. It probably saved me over $300K but unfortunately I was only managing my 401K at the time!

Down side is if the market keeps going then what!

 

[2177V]

IMO the bear market is coming because of the national debt.

Remember there was a recent tax cut to stimulate the economy. What does a tax cut do? It increase the national debt which is now over 20 trillion dollars and the interest paid on this debt is close to 500 billion dollars. Read wikipedia on the National Debt per link below.

https://en.wikipedia.org/wiki/National_debt_of_the_United_States

We are currently in a bull market because of the recent tax cut which is designed to stimulate the economy. The problem occurs when the USA economy starts to slow down when the stimulus runs out of momentum. This means the tax revenues decreases which in turn escalate the National Debt even further. This is part of the business cycle for those people who took Economic 1A in college.

Currently there are only three countries with a higher ratio of "Gross Debt as a percentage of GDP" than the USA: Greece, Italy, Japan. The economies of Greece, Italy and Japan are not doing very well so there are austerity programs in place in order for those countries to recover.

For me, I am adjusting my portfolio to become conservative because my logic is based on (1) bull market not lasting forever and (2) on the National Debt getting close to Greece, Italy and Japan.

This is my opinion and I do understand that other people may disagree with my logic points but that is OK. I also predict 2021 will be a very bad year because this is after the 2020 election, the stimulus should run out of momentum by then, and the government can no longer cut taxes or lower the interest rates. The only government option left is to print money which they not going to do...in order to avoid becoming a Venezuela.

 

[MrEd]

I'll leave you with my final thought:

Stocks and bonds are very expensive by almost all metrics. See the article written within the last month or two by Mark Hulbert.

If you accept this premise it seems to me it does not make sense to stay fully invested in these instruments; one would be better off taking profits while the profits are there and wait for a pullback, my benchmark starts at -30%, and buy back in over time.

All the best.

 

[BrianB]

At the beginning of 2019 we moved from a 90/5/5 (Stock / Bond / Cash & CD) allocation to 80/5/15. This was not market timing as we won't be looking to increase our stock allocation, and I do understand that we've missed out on some gains. We are not yet taking SS but I will be 62 in one year and my wife will be 62 in two years.

We looked at it this way:
1. If good times continue then Daughter will be quite wealthy someday
2. Three years of cash at current spending rate will outlast most downturns, without having to sell anything.
3. In case of a real meltdown (i.e. 2008) we will cut discretionary spending, take SS as soon as possible, and stretch that cash to 10+ years.
4. If the SHTF we'll be "eating a steady diet of government cheese and living in a van down by the river!" (The van is gassed up, ready for camping / escape, and backed into the garage).

We sleep well at night!

 

[pb4uski]

I'll leave you with my final thought:

Stocks and bonds are very expensive by almost all metrics. See the article written within the last month or two by Mark Hulbert.

If you accept this premise it seems to me it does not make sense to stay fully invested in these instruments; one would be better off taking profits while the profits are there and wait for a pullback, my benchmark starts at -30%, and buy back in over time.

All the best.

I concede that we are due or overdue for a correction. I don't try to time the market... I'll just stay invested and ride down and back up again. It is what it is.

A 30% benchmark fo get back in seems silly given that there have only been six bear markets of 30% or more since 1956 (63 years)... you might be waiting quite a while.

 

[Running_Man]

This is an awful chart, the best days have no correlation to the ultimate result of a stock market portfolio.

Suppose a dirty market timer was thinking back in December 2000, you know the market scares me I know it dropped 9 percent this year already but I think S&P500 at 1,335 is still too high I think I'll get out of the market and put my money in 10 year US treasuries at 5.1%

You know what? On January 1, 2001 they would have missed a 5.01% gain !! with the S&P500 at 1,347 that is 5 percent he could never get back right! Hell he has to wait an entire year to earn that much.... Oh but wait just ahead in July 2002 the market gains another 5.73% and now our poor market timer has missed and will never get back those two days of almost 11% gains to his portfolio, the S&P was now at 843.

Distraught our poor market timer is frozen with his terrible bond investment and unable to get back in the market and on October 13 2008 is terrified to learn he missed a 11.58% gain in just one day to 1003 on the S&P500. Poor guy missed 23% returns on 3 days alone. That's five years of interest!!!
While sitting home crying in a frozen desolate state he is devastated when two weeks later the S&P 500 soars another 11% to 940 on the S&P500 , now our dirty market timer is down 34% on just 4 days of inaction.

The market begins to recover and on March 23 2009 our poor lousy market timer missing another 7.08% gain on the S&P500 as it soars to 822. On January 1 2011 with his bonds redeeming he decides to invest the proceeds in the S&P500 @ 1,257.

Then he finds out, hey those 5 days alone made 41% but the S&P500 with dividends invested only made 11.97% total over the entire 10 years. I sure am feeling better with my 61.6% return based on holding on to what I had. Especially since inflation averaged 23% over those years, hey I did allright.

 

[NW-Bound]

Caveat: I am a Tactical-AA investor who never goes 100% one way or the other, but varies his stock AA depending on market conditions.

The above said, I will opine that buy-and-hold advocates like to point out how much one would miss if he was out of the market during the best up days. But that argument is disingenuous in hiding what happened if one also missed the largest down days.

To be fair, we need to look at what happens if a dirty market timer missed the worst 5 days, the worst 10 days, etc...

I am curious to know. Does anyone have any data?

Articles have been published about the worst days, too.

It is old, but there is this:
https://ritholtz.com/2010/09/missing-best-worst-days-of-sp500/

https://awealthofcommonsense.com/2018/10/big-down-days/

But note that best days and worst days are often close in time to each other. Note that i did not state which one would come first.

Thanks.

I found it a bit surprising that the highest up days about cancel out the worst down days. I thought that the market down days are nearly always worse than than market up days, or that fear always trumps greed.

At least the above has always been true with my own mixture of stocks. On my worst down days, I tend to lose 1.5x what I gain on the best days. Maybe only my stocks exhibit this behavior, and not the entire market. Next time, I will look more closely.

 

[ERD50]

This is an awful chart, the best days have no correlation to the ultimate result of a stock market portfolio. ... ...

I agree that these "if you missed these days in the market" charts aren't useful. Nobody would miss just those days.

...
Suppose a dirty market timer was thinking back in December 2000, you know the market scares me I know it dropped 9 percent this year already but I think S&P500 at 1,335 is still too high I think I'll get out of the market and put my money in 10 year US treasuries at 5.1% ....

Then he finds out, hey those 5 days alone made 41% but the S&P500 with dividends invested only made 11.97% total over the entire 10 years. I sure am feeling better with my 61.6% return based on holding on to what I had. Especially since inflation averaged 23% over those years, hey I did allright.

I'm not sure what point you are trying to make there. A non-market-timer would not have dumped everything in in 2000, they would have accumulated in the decades leading up. I guess you are saying bonds beat stocks over that somewhat cherry-picked 10 year period? OK, it happens. Once in a while. But 10 years is not an investing lifetime for most people.

And our B&H investor today is up ~ 210% from Dec 2000, about 2x what a bond fund returned.

-ERD50

 

[Running_Man]

I agree that these "if you missed these days in the market" charts aren't useful. Nobody would miss just those days.




I'm not sure what point you are trying to make there. A non-market-timer would not have dumped everything in in 2000, they would have accumulated in the decades leading up. I guess you are saying bonds beat stocks over that somewhat cherry-picked 10 year period? OK, it happens. Once in a while. But 10 years is not an investing lifetime for most people.

And our B&H investor today is up ~ 210% from Dec 2000, about 2x what a bond fund returned.

-ERD50

No, I am trying to point out that a chart that implies if you get out of the stock market you will never be able to catch up because you might miss the 5 best days you will miss 40% of that 210% rally is not only wrong it is intentionally misleading. You could have gotten out in 2001 a year late, gotten back in 2010 another year late and still been better having missed the best 5 days since 1996. I intentionally picked a period that began by missing by one day, one of the 5 biggest up days in the last 25 years.

And if picking the 5,10 or 15 best days is not cherry picking at it’s finest then I do not know what cherry picking is, especially since the biggest up or down days has no long term impact at all for a portfolio over the long run, and usually a big move either up or down on a single day is totally reversed in the future making a one day move of absolutely no value in controlling investment actions and should not be a source of any concern to an investor.

 

[dirtbiker]

Thanks for all the responses. Here’s the thing—all of my IRA money is in 2 funds, Fido Magellan and Fido Puritan. All of it. Those are pretty aggressive growth funds. And all my hubby’s money is in the same two.

I do understand about long-term investing, etc—I bought in 2008 instead of selling, and I knew last Fall that the market would come back eventually so hung on then too.

But now I’m at that magical point where I could retire based on what I have now, according to Firecalc. So I thought it’d be good to have a bird in the hand at this point, instead of leaving it alone, having us go to war again or something causing a stomach-turning plunge, and then having to wait anxiously for months or even years for my balance in that account to return to where it is now.

But I do see what you mean about it feeling like market timing ...

Someone earlier in this thread asked what my PS says. What is PS?

When you put your figures into firecalc and it told you that you were good to go, what asset allocation did you specify? Did you specify all cash earning 1%? If not, why would you change to that? If you're uncomfortable where you're at, run your numbers in firecalc with different asset allocations and see what makes you most comfortable in the long run. Temporary moves to time the market generally don't work.

In response to timing the market. Take your pick. Keep it in the market and risk watching it plunge and waiting months to years for your balance to return to where it is now. Or keep it in cash and watch the market grow while your cash pile loses value every day to inflation, while you wonder when the magical time is to get back into the market. Maybe you'll get lucky and time the market. Maybe you won't. A long term more permanent solution is a better bet IMO.

 

[Bdarr]

Three years

My position is to have about three years of retirement income in short term safe money but keep the rest invested. Will the market crash, yes, eventually. The more i have tried to predict its trajectory the more I shake my head. Markets as Buffett said is a manic depressant. The timing issue is when to get out and when to get in. We like to believe we have some special incite to the future but the reality we are flawed thus the reason is irrational. That being said the 3 year solution is a good one and finding low cost funds is essential to long term growth where you get more return and others get less as in fund managers and brokers.

 

[ERD50]

No, I am trying to point out that a chart that implies if you get out of the stock market you will never be able to catch up because you might miss the 5 best days you will miss 40% of that 210% rally is not only wrong it is intentionally misleading. You could have gotten out in 2001 a year late, gotten back in 2010 another year late and still been better having missed the best 5 days since 1996. I intentionally picked a period that began by missing by one day, one of the 5 biggest up days in the last 25 years.

And if picking the 5,10 or 15 best days is not cherry picking at it’s finest then I do not know what cherry picking is, especially since the biggest up or down days has no long term impact at all for a portfolio over the long run, and usually a big move either up or down on a single day is totally reversed in the future making a one day move of absolutely no value in controlling investment actions and should not be a source of any concern to an investor.

So you were trying to make a point against market timing?

I'm confused. But maybe it's not worth pursuing, as I think there is no merit to these "miss X days" charts anyhow. That's not real life. Either someone is a B&H, or they try to time the market by some method that is extremely unlikely to miss or hit some specific days.

-ERD50

 

[copyright1997reloaded]

IMO the bear market is coming because of the national debt.

You could make this same post/argument every day for the past 25+ years. What makes today special?

 

[copyright1997reloaded]

I'll leave you with my final thought:

Stocks and bonds are very expensive by almost all metrics. See the article written within the last month or two by Mark Hulbert.

If you accept this premise it seems to me it does not make sense to stay fully invested in these instruments; one would be better off taking profits while the profits are there and wait for a pullback, my benchmark starts at -30%, and buy back in over time.

All the best.

Don't go yet. Just be willing to see other folks ideas which are different than yours.

Mark Hulbert has been predicting a bear for quite some time. For example, on July 11, 2017 he wrote:

The bad news: This indicator’s current level has been hit only five other times over the last eight decades, and four of those came right before major stock market tops.

source: https://www.marketwatch.com/story/equity-allocation-indicator-flashes-bear-market-warning-2017-06-16

If you had listened to him then, you would have missed quite a bit of run up. Will he *eventually* be correct? Yes, eventually the market will enter a bad period. The question is when and from what level.

The bad wolf did eventually come.

 

[copyright1997reloaded]

I already have enough in my retirement accounts to support an inflation adjusted spending rate to cover expenses and a generous "play" allowance. I'm one year from retirement - not because I need to keep working, but because I'm enjoying what I'm doing and I want to see the project I'm working on through to completion. I shifted everything out of the stock market into guaranteed return investments. It only gets about 3%, but that's enough for me. I have zero risk appetite right now. I can afford to forgo stronger future gains, but I cannot afford to suffer a significant downturn. Losing 30-50% of my capital would break my retirement spend plan. Eventually there will be another big downturn - maybe I'll get back in the market then.

I will lay out an alternative approach to think about. Suppose someone has a a retirement budget that is supported by a decent pension + social security plus a reasonable return on cash/fixed. Further suppose that the cash/fixed portion makes up 40% of the persons net worth.

An alternative to your approach is to say that the 60% in equities is free to remain invested (regardless of how much a 1 day, 1 year, or even 20 year loss) might bring.

You say a 3% return (nominal?) is good enough, yet a 30% loss of capital would break your retirement. If your portfolio value is x:
1) 3% return on it being fixed = .03x
2) 50% loss on portfolio results in remaining portfolio of 0.7x
So AFTER a 50% loss your portfolio would have to return (nominal) a 4.28% return to continue to support your 0.03x withdraw rate. That doesn't seem to be too much of a stretch.

If we add an inflation component (against your 3% nominal) it would suggest higher asset prices but would not help your fixed.

I'd look at your assumptions a bit more...

 

[sengsational]

I already have enough in my retirement accounts to support an inflation adjusted spending rate to cover expenses and a generous "play" allowance. I'm one year from retirement - not because I need to keep working, but because I'm enjoying what I'm doing and I want to see the project I'm working on through to completion. I shifted everything out of the stock market into guaranteed return investments. It only gets about 3%, but that's enough for me. I have zero risk appetite right now. I can afford to forgo stronger future gains, but I cannot afford to suffer a significant downturn. Losing 30-50% of my capital would break my retirement spend plan. Eventually there will be another big downturn - maybe I'll get back in the market then.

Welcome to the forum. Consider posting in the Hi, I am... - Early Retirement & Financial Independence Community forum to introduce yourself; adds to a sense of community.


There are quite a few "won the game" types here that don't feel that any risk is in their self interest. Some prominent thinkers and writers too. I don't consider this timing as much a reflection on a current state and disposition towards risk. If your plan survives without getting back in, you're just selecting a conservative course.

 

[Ronstar]

I went all cash at Y2K. I thought that the date related meltdown could be real. As it turned out, I timed the all cash conversion to hit a downturn. Didn't time too well getting back in though.

My boss and I had similar 401k balances when I went all cash. He was ahead by $100k when I got back in.

I'll never do that again.

 

[bjorn2bwild]

Ray Dalio has some thoughts WRT the perils of all cash over the next few years in his latest release, Paradigm Shifts. Wordy as usual, yet worth considering if heavily weighted towards cash/cash equivalents.

That is because any single approach to investing—e.g., investing in any asset class, investing via any investment style (such as value, growth, distressed), investing in anything—will experience a time when it performs so terribly that it can ruin you. That includes investing in “cash” (i.e., short-term debt) of the sovereign that can’t default, which most everyone thinks is riskless but is not because the cash returns provided to the owner are denominated in currencies that the central bank can “print” so they can be depreciated in value when enough money is printed to hold interest rates significantly below inflation rates.

https://www.linkedin.com/pulse/paradigm-shifts-ray-dalio/?published=t

 

[IMATERP]

Thanks for all the responses. Here’s the thing—all of my IRA money is in 2 funds, Fido Magellan and Fido Puritan. All of it. Those are pretty aggressive growth funds. And all my hubby’s money is in the same two.

I do understand about long-term investing, etc—I bought in 2008 instead of selling, and I knew last Fall that the market would come back eventually so hung on then too.

But now I’m at that magical point where I could retire based on what I have now, according to Firecalc. So I thought it’d be good to have a bird in the hand at this point, instead of leaving it alone, having us go to war again or something causing a stomach-turning plunge, and then having to wait anxiously for months or even years for my balance in that account to return to where it is now.

But I do see what you mean about it feeling like market timing ...

Someone earlier in this thread asked what my PS says. What is PS?

Why don’t you just sell 30-40 percent of Magellan and Puritan and purchase a couple of CD’s (or similar) in order to have cash available for five years?

Puritan & Magellon are good funds. They employ hundreds and hundreds of people who analyze their holdings and visit company’s they invest in.

 

[NW-Bound]

This is an awful chart, the best days have no correlation to the ultimate result of a stock market portfolio...

... I think there is no merit to these "miss X days" charts anyhow. That's not real life...

Well, the above is what we can all agree on.

We cannot say that market timing will always be ruinous. Some people may get lucky.

In the really long run, buy-and-hold wins because the market trend has always been up, except for periods when it is down for a long long time. And many retirees do not have that luxury to wait. And so, they would rather have the peace of mind.

I have enough to live on, and I have SS as the trump card. And I like the excitement of the stocks going up/down. So I stay in, and I trade.

And speaking of market timing, if I sell and get back at a lower price, I call it a successful timing move. I do not have to sell at the very top, and buy back at the very bottom; it's not possible. If I can beat buy-and-hold by losing less in a bear market, I call it good.

Another problem is to gain as much as buy-and-hold in a bull market. If you are a scaredy cat and sell at every downturn, you miss out. It's really tough.