Going All Cash in 401k

[joeea]

I do agree with Jeffery that taxes are needed to address the national debt. However, history has shown that LBJ had refused to raise taxes to pay for the Vietnam War. The results: Interest and inflation reached double digit. Are you old enough to remember that?

I'm old enough to remember that LBJ was president from 1963 to 1969.

I'm also old enough to remember that inflation didn't hit double digits until 1974.

Finally, I'm old enough to remember which President was actually in office at that time.

 

[joeea]

- Certain presidential candidates are lying to the public.

LOL! I know one for certain, but I'm not going to say who it is.

- A possibility exist of no candidate getting enough electoral votes which means Congress will decide who will be become president and VP.

LOL! Sure, there's always been "a possibility". There's also a "possibility" that this is a rather nonsensical thing to say at this time.

I know which possibility is more distinct.

Generally, if you are going to have a recession it is best to have a mild one.

Sounds like a plan!

However, I am not sure that the next recession will be a mild one but that is my opinion.

Are you sure that you are not sure?

It does not matter since I doing this for entertainment.

I know I'm getting a chuckle out of it right now.

This is why I am looking at property assets rather than stock market assets.

I'm sure that property assets are completely safe no matter what.

Thanks for the laughs.

 

[Running_Man]

Another quote from the article you linked:



Oh c'mon. So if this was the case, surely Morgan Stanley has people who can implement it, and I can buy into their mutual fund, and do better than the market.

Where are these funds?

-ERD50

Stanford has been utilizing private investment picking since the STANFORD MANAGEMENT COMPANY was founded in 1991. At present they have a portfolio of 28.7 Billion dollars. Their task is to outperform passive indexes, over 26 years ending in 2017 they outperformed passive investing by 4.7% annually.

The University’s approach to absolute return is based on security-specific microeconomic analysis. Our partners perform exhaustive quantitative and qualitative research on equity and fixed income instruments to identify undervalued and overvalued assets that can be owned long or sold short. When coupled with disciplined portfolio management, long and short positions can drive returns that are independent from broader market movements.

I keep hearing if anyone did this there would be a published paper, Stanford publishes this every single year.

What is interesting is that since 2019 college endowment funds, which all employ the same basic strategy have outperformed passive investing by 1.7% per year for 26 years. Why they have not posted a paper on how to invest this way is pretty self evident I believe. The difference in results over the 26 years for Stanford for each $100 invested is $581 dollars at the end of 26 years if they had invested passively for each $100 and $1,775 for each $100 for they way they actually invested with individual active management. The average actively invested college endowment fund earned $875 for each $100 invested- $616 billion dollars is invested this way as of the end of 2018.

https://smc.stanford.edu/assets/Report_from_SMC_2017.pdf

 

[pb4uski]

.... A possibility exist of no candidate getting enough electoral votes which means Congress will decide who will be become president and VP. ....

I'm pretty sure that could only happen if a third party candidate were to win some electoral votes.... and that is mathematically possible but very unlikely.... probably less than a 1/2% probability.

 

[NW-Bound]

I'm not sure what you are pointing to as 'silly'?

No, I was not saying anybody here is silly.

I was referring to the argument that if somebody cannot beat the S&P every year, then he is no good. I have seen it used quite a bit to show that indexing is the way to go. Indexing has some merits, but it cannot be proven by the above argument.

 

[pb4uski]

Stanford has been utilizing private investment picking since the STANFORD MANAGEMENT COMPANY was founded in 1991. At present they have a portfolio of 28.7 Billion dollars. Their task is to outperform passive indexes, over 26 years ending in 2017 they outperformed passive investing by 4.7% annually. ...

A bit of a nit, but I think the 70/30 data doesn't look right so the 4.7% isn't either.

70/30 mix of Vanguard 500 Index/Total Bond grew from $100 to $880 from June 1991 to July 2017... the graph on page 16 suggests a 70/30 portfolio after fees would only be $584... they must be assuming some very hefty fees!

The $880 is close to the $900 for their benchmark of the Cambridge Associates U.S. Colleges and Universities Median. The $880 is 8.8% vs Stanford's 11.7% is only a 2.9% advantage... not a 4.7% advantage

A 2.9% advantage is still an impressive result, but they have access to some investments that most of us don't... like private equity.


https://www.portfoliovisualizer.com...allocation2_1=30&total1=100&total2=0&total3=0

I had to use the S&P 500 because Total Stock doesn't go back that far.

 

[2177V]

Thanks for the reply with info, some interesting things to think about...

LBJ left office in 1969, big inflation was in the 80's, I'm not sure that's the cause/effect? Regardless, a buy & hold still did well over most time frames.

-ERD50

"A buy and hold will do well over most time frames" is something that I do agree but with a caveat: Your time horizon must be long enough.

Remember each investor have different time horizons. For example, what if you are going to retire soon such as SoReadytoRetire? What if you are going to need the money now to buy real estate like I am? This is why SoReadytoReady brought this 100% cash issue to our attention.

Higher risk is normally addressed by AA of your portfolio.

Normally a young person starts out with 100% stock. As he approach retirement, does he stick with 100% stock in his portfolio? The only way he can avoid selling his original stock is to buy bonds as he age. However, do he get the recommended AA when he does that? What if he ended up with a 70% stock / 30% bond at age 50 and he then decide 50%/50% is a better AA? This means he has to abandon 20% of his buy and hold stock in order to get there. Time horizons can changed and a typical example is when the investor is laid off and has to retire sooner than planned.

Adjusting your AA portfolio based on age risk and time horizons should be an acceptable practice to most people.

Adjusting your AA portfolio based on higher market risk is only acceptable to some people and while unacceptable to others.

There are pros and cons to this specific issue and in my opinion, this should be at the discretion of the investor. As I stated previously, I do not follow the herd and I think independently. I will do what is best for me.

Going back to SoReadyToRetire, I think 100% cash is too conservative even for me who is in an Asset Preservation mode. 25% stock and the rest in ST bonds and Cash is best for me. However, I am ready to bail at the 20% decline bear market announcement and when overseas markets are panicking, huge layoffs are occurring, businesses are failing, and/or the socialists are taking over.

 

[samclem]

Show us a system that would actually work, even with the benefit of hindsight.

Does this count?
Pfau, Wade D., Long-Term Investors and Valuation-Based Asset Allocation (November 1, 2011). http://dx.doi.org/10.2139/ssrn.2544636
The abstract:

Valuation-based market timing demonstrates strong potential to improve risk-adjusted returns for conservative long-term investors. Such timing strategies based on the cyclically-adjusted price-earnings ratio provide comparable returns as a 100 percent stocks buy-and-hold strategy but with substantially less risk. Meanwhile, market timing provides comparable risks and the same average asset allocation as a 50/50 fixed allocation strategy, but with much higher returns. Also, it is important to consider less extreme timing strategies as well, as defining market timing as either all stocks or all cash does not provide a hedge against the possibility that valuations may depart from their historical averages for extended periods. Finally, comparing the strategies over shorter rolling sub-periods reveals that a valuation-based market timing approach fairly consistently provides risk-adjusted returns superior to a fixed asset allocation strategy

 

[NW-Bound]

... a valuation-based market timing approach fairly consistently provides risk-adjusted returns superior to a fixed asset allocation strategy...

Ah hah! Is that the same as Tactical AA?

 

[samclem]

Show us a system that would actually work, even with the benefit of hindsight.

Does this count? Market timing based on CAPE ratios. A few different flavor are offered (all in/all out, or more moderate shifting of allocations based on equity valuations).
Pfau, Wade D., Long-Term Investors and Valuation-Based Asset Allocation (November 1, 2011).
https://mpra.ub.uni-muenchen.de/35006/2/MPRA_paper_35006.pdf


The abstract:

Valuation-based market timing demonstrates strong potential to improve risk-adjusted returns for conservative long-term investors. Such timing strategies based on the cyclically-adjusted price-earnings ratio provide comparable returns as a 100 percent stocks buy-and-hold strategy but with substantially less risk. Meanwhile, market timing provides comparable risks and the same average asset allocation as a 50/50 fixed allocation strategy, but with much higher returns. Also, it is important to consider less extreme timing strategies as well, as defining market timing as either all stocks or all cash does not provide a hedge against the possibility that valuations may depart from their historical averages for extended periods. Finally, comparing the strategies over shorter rolling sub-periods reveals that a valuation-based market timing approach fairly consistently provides risk-adjusted returns superior to a fixed asset allocation strategy

 

[NW-Bound]

... a valuation-based market timing approach fairly consistently provides risk-adjusted returns superior to a fixed asset allocation strategy...

Ah hah! Is that the same as Tactical Allocation?

 

[samclem]

Ah hah! Is that the same as Tactical Allocation?

It seems that Kitces likes the Tactical Allocation label better than "market timing." Same thing, IMO. His blog entry discussing the work he and Pfau published.

 

[Dtail]

We'll disagree on this. I agree completely that the chart looks pretty good, but before we can conclude that there is skill rather than luck, we need to look inside the box. How much leverage was used and when? How much was done with short positions and when. Etc. Until we see this data (probably never) I don't think we can reach any conclusions about risk and, hence, long term stability.

Agreed, but that is the textbook story. Farmers hedging their wheat harvest, airlines hedging their fuel cost, etc.

"Hedge" funds do far more than classical hedging; some don't do classical hedging at all. To buy a hedge fund is to give the manager a blank check, which he often puts into a closed box where investors can't even see what he/she is doing. Long/short/naked calls/illiquid assets .... It might all be in there.

Edit: For example, Long Term Capital Management was called a hedge fund. If you like to read, "When Genius Failed" by Roger Lowenstein is fascinating. IIRC they looked pretty stable until their major scheme came crashing down.

I use to provide valuation support and analysis for Hedge Funds from an independent outside firm perspective and some of the stuff they were investing in was not typical at all for individual investors.
One example was betting on the weather through weather derivatives.

 

[2177V]

Thanks for the reply with info, some interesting things to think about...

LBJ left office in 1969, big inflation was in the 80's, I'm not sure that's the cause/effect? Regardless, a buy & hold still did well over most time frames.

-ERD50

Here is a link of the impact of LBJ's decision not to raise taxes.

https://wwnorton.com/college/econ/ecu7/section07/case-studies.htm

It is relevant today because if the federal government do not raise taxes to address the National Debt, then history may potentially repeat itself. This started with a JFK tax cut. We just had a Trump tax cut. I hope you can connect the dots.

It won't probably happen tomorrow. It may not happen this year or perhaps next year......but it will eventually happen if the federal government does NOT raise taxes. This is my concerns because I lived through this. It is called "experience" and my experience drives some of my decisions. This is one of the reasons why I am ready to bail when the time comes. Also note in this link that during this time, the value of real estate shot up. This is why I am looking to buy Real Estate.

 

[Dtail]

"A buy and hold will do well over most time frames" is something that I do agree but with a caveat: Your time horizon must be long enough.

Remember each investor have different time horizons. For example, what if you are going to retire soon such as SoReadytoRetire? What if you are going to need the money now to buy real estate like I am? This is why SoReadytoReady brought this 100% cash issue to our attention.

Higher risk is normally addressed by AA of your portfolio.

Normally a young person starts out with 100% stock. As he approach retirement, does he stick with 100% stock in his portfolio? The only way he can avoid selling his original stock is to buy bonds as he age. However, do he get the recommended AA when he does that? What if he ended up with a 70% stock / 30% bond at age 50 and he then decide 50%/50% is a better AA? This means he has to abandon 20% of his buy and hold stock in order to get there. Time horizons can changed and a typical example is when the investor is laid off and has to retire sooner than planned.

Adjusting your AA portfolio based on age risk and time horizons should be an acceptable practice to most people.

Adjusting your AA portfolio based on higher market risk is only acceptable to some people and while unacceptable to others.

There are pros and cons to this specific issue and in my opinion, this should be at the discretion of the investor. As I stated previously, I do not follow the herd and I think independently. I will do what is best for me.

Going back to SoReadyToRetire, I think 100% cash is too conservative even for me who is in an Asset Preservation mode. 25% stock and the rest in ST bonds and Cash is best for me. However, I am ready to bail at the 20% decline bear market announcement and when overseas markets are panicking, huge layoffs are occurring, businesses are failing, and/or the socialists are taking over.

If you are ready to bail at the 20% bear market sign, did you bail when the S&P hit 19.8% or whatever was the official drop last year?

 

[24601NoMore]

I'd like to see how the math works out over the long term on the "bail when 20% down" approach, as (obviously), you're locking in the -20%. Seems counter to the "sell high, buy low" approach.

No way in heck I'd sell when down 20% FWIW..I'll be a buyer at those levels.

 

[2177V]

If you are ready to bail at the 20% bear market sign, did you bail when the S&P hit 19.8% or whatever was the official drop last year?

No. Remember the 20% bear market announcement only trigger a subjective assessment by me of the currently market.

There must be other subjective negative signs for me to bail:

Massive layoffs, panic in the overseas stock markets, people are scared to buy cars, LEI are all negative, and/or the socialists are taking over, etc. These signs indicates that the bear market will continue past 20%
[mod edit]

 

[2177V]

I'd like to see how the math works out over the long term on the "bail when 20% down" approach, as (obviously), you're locking in the -20%. Seems counter to the "sell high, buy low" approach.

No way in heck I'd sell when down 20% FWIW..I'll be a buyer at those levels.

Please read my original comment again. There is an "and" in the sentence. Bailing out when 20% down must be concurrent with other markets conditions.



If you have been through that bear market it was pretty bad all the way down to the 50% loss.



There have been other 20% losses but the fundamentals were still intact, the LEI were not all negative, no massive layoffs, no business bankrupcies, etc.



A 20% down does not mean I am going to bail in 100% of the cases.

 

[NW-Bound]

We'll disagree on this. I agree completely that the chart looks pretty good, but before we can conclude that there is skill rather than luck, we need to look inside the box. How much leverage was used and when? How much was done with short positions and when. Etc. Until we see this data (probably never) I don't think we can reach any conclusions about risk and, hence, long term stability.

Agreed, but that is the textbook story. Farmers hedging their wheat harvest, airlines hedging their fuel cost, etc.

"Hedge" funds do far more than classical hedging; some don't do classical hedging at all. To buy a hedge fund is to give the manager a blank check, which he often puts into a closed box where investors can't even see what he/she is doing. Long/short/naked calls/illiquid assets .... It might all be in there.

Edit: For example, Long Term Capital Management was called a hedge fund. If you like to read, "When Genius Failed" by Roger Lowenstein is fascinating. IIRC they looked pretty stable until their major scheme came crashing down.

Yes, of course many hedge funds do not really hedge, or do not hedge very well. We have read about some hedge funds going hog-wild on a particular stock, or try to short some stocks to death. Not much of hedging there, but lots of gambling.

And talking of long-term performance, there will always be a question about that on anything. Taleb even suggested that Buffet might just be lucky because there's not enough track record to be sure. Hah! Buffet does not have enough years left in his life for a record sufficiently long to make Taleb happy.

By the same token, we can never be sure that the US stock market is the place to be. Look how Japan faltered, and China rose to take the 2nd place in just a couple of decades. How can we ever be sure of anything?

 

[24601NoMore]

Read my reply #192

OK..did that, but still don't see how the math works out with the strategy being suggested.

Sounds like in general you're taking the "bail when all signs point to things going splat" approach, but have you actually BACKTESTED that strategy? If so, how did it work out in terms of actual returns?

 

[2177V]

OK..did that, but still don't see how the math works out with the strategy being suggested.

Sounds like in general you're taking the "bail when all signs point to things going splat" approach, but have you actually BACKTESTED that strategy? If so, how did it work out in terms of actual returns?

You can spin numbers anyway you want:

Example:
S&P500 was 861 on or about Jan 2003.
S&P500 was 1552 on or about July 2007 before the bear market.
S&P500 was 1241 (or a 20% drop) on or about Sep 2008
S&P500 was 815 on or about Feb 2009 when it reached bottom.

Remember my time horizon is now and not later. I do not intend to re-enter. This means I do not have to guess on going back in.

Based on 861 on Jan 2003, there was a total gain of 80% on July 2007
Based on 861 on Jan 2003, there was a total gain of 44% on Sep 2008
Based on 861 on Jan 2003, there was a total loss of 5% on Feb 2009

On the other hand, if you wait long enough after Feb 2009, your total gain will exceed my total gain of 44% when I bailed out. However, I do not have time to wait in my case. Your time horizon situation is likely completely different from mine. Therefore it is like comparing apples and oranges.

In the extreme example: If your doctor told you that you have 2 years to live, your time horizon has just changed. Would you change your strategy?

My time horizon is now. However, I can't cash out 100% of my portfolio due to taxes that I have to pay. Therefore I am 25%/75% while I conduct an accelerated withdrawal plan without pushing me into a higher tax bracket. I have 25% in stock because in the worst case, if I do nothing and if there is a bear market resulting in a 50% market loss then this translate into a 12.5% loss on my portfolio. 12.5% loss is my risk tolerance. However, if I bail out sooner, then my loss will be less than 12.5%.

I plan for the worst and I hope for the best. This is what this issue is all about.

I never suggested that my strategy is applicable to anyone else. If I did, then that is a mistake on my part. Time horizons and Risk tolerances changes everything.

 

[OldShooter]

Example:
S&P500 was 861 on or about Jan 2003.
S&P500 was 1552 on or about July 2007 before the bear market.
S&P500 was 1241 (or a 20% drop) on or about Sep 2008
S&P500 was 815 on or about Feb 2009 when it reached bottom.

Based on 861 on Jan 2003, there was a total gain of 80% on July 2007
Based on 861 on Jan 2003, there was a total gain of 44% on Sep 2008
Based on 861 on Jan 2003, there was a total loss of 5% on Feb 2009

...

Err.... these kinds of comparison using nominal index values are at best wrong and at worst misleading. The only comparison numbers that make any sense are total return numbers All of these "total gain" numbers would be greater on a total return basis.

I'm not bothering to follow all these harangues so I don't know if the total return error supports or detracts from anyone's arguments. The point, though, is that comparing nominal index values is fallacious. It is also quite common, unfortunately. The most popular version seems to be a comparison of a fund's total return to an index's nominal performance, supporting bogus claims that the funds "beat the index.".

 

[ERD50]

I was away from the computer for a few hours, and a lot has gone on, I'll try to catch up, (vchan first)...

"A buy and hold will do well over most time frames" is something that I do agree but with a caveat: Your time horizon must be long enough.

Remember each investor have different time horizons. For example, what if you are going to retire soon such as SoReadytoRetire? What if you are going to need the money now to buy real estate like I am? This is why SoReadytoReady brought this 100% cash issue to our attention. ....

I think we are pretty much in agreement on all that.

I'm not in a position to comment on real estate versus stocks, but if we look at the general case, that you are going to pull from your portfolio in a few years, then yes, the short term volatility of the market is a concern. Probably best to start dollar cost averaging out for that purchase (whatever it may be).

For the OP, I think it makes more sense (and I think this was covered earlier) to decide on a new AA they are comfortable with, and move to that, maybe over time, maybe all at once. But I can't justify going to cash and trying to time an entry point.

... Adjusting your AA portfolio based on age risk and time horizons should be an acceptable practice to most people.

Adjusting your AA portfolio based on higher market risk is only acceptable to some people and while unacceptable to others.
...

And I think there is solid reasoning behind a more conservative AA with age. Not so much with the second move.

But maybe there is some basis for a 'value based' AA move? Hmmm, will follow up on that a bit later.

-ERD50

 

[ERD50]

....

Remember my time horizon is now and not later. I do not intend to re-enter. This means I do not have to guess on going back in. ...

I never suggested that my strategy is applicable to anyone else. If I did, then that is a mistake on my part. Time horizons and Risk tolerances changes everything.

Ahhh, OK. That's a horse of different color then. The OP (about 200 posts ago!) said "This would only be temporary." Therefore, many of the responses are framed around that.

If you are getting out permanently, just do it, based on the time frame you need the cash. That's pretty simple.

Or maybe you are trying to arbitrage, and pick the best delta between stocks and real estate? I don't have much knowledge of real estate trends /valuations, so would not be able to provide any insight there. Still seems like a guessing game to me though, so I wouldn't try to time it, but maybe not.

-ERD50

 

[2177V]

Thanks for the reply with info, some interesting things to think about...

Ahh, so it is that easy (for me)! I'll stay!

A bit more seriously, certainly one could do well by sidestepping a downturn, but those darn exit and re-entry points are a tough one to deal with.

-ERD50

One note on exit and re-entry points that you brought up. 30 years ago I had a business lunch with a older co-worker who was an active investor. He was about 25 years older than me so as a young investor, I listened to what he had to say.

He did mentioned to me that when there is a 20% decline, he would consider selling to 2 reasons: (1) Piece of mind that he is no longer in the stock market. This is because during a bear market he gets very depressed. This probably explains why he was never a passive investor. (2) When he sells, he also cut his losses in his mind.

He also stated that when the market recovered to a level close to when he sold, he would re-enter the market. He stated that the market should have already reached bottom and the market should be in the recovery phase. I recall that he depended on the LEI, PE ratios, broker's recommendations to drive some of his decision. There were other factors but I do not remember them and I now wished that I had written them down.

The money that he took out would be shifted in short term treasury bonds making about 2% annually at the time he sold and the time that he re-entered at the same sell and buy price.

I have NEVER tried this method myself so I cannot speak for him since he has passed away. At that time, I was a passive investor so I rode it out since my time horizon was 25 years plus. I did become an active investor only later but that is another story which is not related to the exit and re-entry discussion.