I've avoided market timing but...

[EvrClrx311]

Love this discussion, and appreciate all of the wisdom and insight. I don't have any experience on bond funds and indexes. I'm with Vanguard though so there are a lot of options. For someone in my shoes (35, looking to FIRE at 50) which bond(s) would be good to look at?

As I understand it... TIPS are good in an era where inflation has been low but is anticipating a rise (seems likely to me we have been below average on inflation for a while 2-2.5... and wouldn't surprise me if they next couple decades make up for that?)

It seems that long term bonds have been performing best because rates are so low. But they may suffer once rates rise?Short terms bonds give up growth, but are good against inflation?

I'm just starting to read up on this. For as much market research I've done for the last 12 years I've read almost nothing about bonds and bond strategies.

 

[nash031]

I'm midway through my accumulation phase (12 years in, ~15 years to go). I'd say I'm entering a period where my balance is starting to grow large enough ($370K) that maybe I want to get away from 100% equity, but in my long term plan I wasn't really going to worry about bonds till I was within 10 years of my projected FIRE date. At least that was (is) the plan I've laid out for myself.

15 years left, I'd still be at closer to 100% personally. I'm at 85/15, possibly two years from pulling the plug, and may stay there for all time (I have a significant pension coming, which makes this or even higher viable). I could see going to 90/10, but if you do it, stay there. Otherwise, you'll drive yourself crazy trying to figure out when to buy the 10 back in.

 

[Dawg52]

When I was in my 20's and 30's I was close to 100% equities. In my 40's I pulled in my horns and followed the 100 rule. I'm in my early 60's now and even more conservative. I've certainly left money on the table but I do sleep well. We're all different....many can sleep well with a high equity allocation.

 

[audreyh1]

Love this discussion, and appreciate all of the wisdom and insight. I don't have any experience on bond funds and indexes. I'm with Vanguard though so there are a lot of options. For someone in my shoes (35, looking to FIRE at 50) which bond(s) would be good to look at?

As I understand it... TIPS are good in an era where inflation has been low but is anticipating a rise (seems likely to me we have been below average on inflation for a while 2-2.5... and wouldn't surprise me if they next couple decades make up for that?)

It seems that long term bonds have been performing best because rates are so low. But they may suffer once rates rise?Short terms bonds give up growth, but are good against inflation?

I'm just starting to read up on this. For as much market research I've done for the last 12 years I've read almost nothing about bonds and bond strategies.

Just use a low-cost intermediate bond fund index fund. No need to go for some specific bond asset class. You already have equities to beat inflation - don't worry about bonds keeping up with inflation. They are there to reduce the volatility of the portfolio, and usually go up when stocks go down, and then you can rebalance.

 

[GoodWishes]

OP,
If you are in a high tax bracket, you might want to look into municipal bonds.

As many have pointed out, everyone is different and here are our thoughts.

Our kids are in their 20s with good job/income, 100% equity and stay the course. With their first correction, they will learn their risk tolerance level.

We didn't really have bonds until our early 40s. When we retired at our early 50s, we sold some equity to have more cash. Last we looked which has been a while so the equity percent is higher now, we were at 50% equity, 30% bonds, 10% real estate, 10% cash. We sleep well.

 

[harley]

To tell you the truth, I don't think it's all that hard to market time pulling money out of the market. I've successfully done it once (although mostly by accident), and have been pretty sure I should be doing it a couple of other times, although I didn't. It's fairly easy to tell when the market is overly exuberant, and if you pull your money out you may miss some additional run up, but you'll most likely miss a big drop. Or not. It's easy to tell you should pull your money out, but sometimes the market just keeps going.


But, assume you pulled it out and the market dropped big time. Congratulations! You're a genius. But now comes the hard part. When do you get back in? That's the one that cost me a fortune the one time that I did get my money out before the drop. If the market continues down, you don't get back in so you don't lose money. If it stabilizes low you don't get back in because it could drop some more. If it goes up rapidly you don't get back in because you missed the run up, but you'll get back in on the next drop. Then eventually, when it's up as high as it was when you pulled your money out, you get back in because otherwise you'll have lost money in the whole thing. Don't ask me how I know. But don't do it.

 

[USGrant1962]

I was 100% equities for almost all of my accumulation years. With less than 5 years to ER I started adding bonds, and in the last few of years I've furiously shifted to 55/45, and I ERed this year. I was fully in equities in the crashes of '87, '00 and '08. Now, with the good fortune of the long bull we've been enjoying, I've ERed this year and targeted a more conventional 60/40. IMHO, taking ER this year was DMT on my part.

But, my IPS (which I'm still drafting) has me doing "AGE IN EQUITIES" up to 65/35 as an amalgamation of my studies of the following:

• Kitces' and Pfau's work on rising glide path in retirement (which also shows that 60/40 is really good)
• McClung's work showing 55/45 as an optimum starting point, with a sell bonds first mechanic, i.e., a rising glide path (I'm 55)
• A number of folks I respect suggesting even more conservative than 60/40 is optimal (Ferri and others), but I'm not comfortable at less than 50% equities for a long retirement
• My own evaluation of valuations, suggesting that less than 60/40 is appropriate, e.g., CAPE (the DMT factor)
• My own experimentation in FIRECalc which shows little/no difference in downside results between 35/65 and 65/35, so why not take the upside?

So my plan it to do Age in Equities from 55 to 65, then freeze at 65/35 when SS is in sight (re 65/35, if it's good enough for Wellington it's good enough for me). It is a little bit of market timing and a little bit of SORR mitigation. So yes, I'm doing a little bit of macro market timing but only because I'm in the red zone of ER at the tail end of a huge bull run.

YMMV.

 

[VanWinkle]

If you have been through 2000-2002 and 2008-2009 with a substantial amount invested at 100% equity and did not sell out your equities, you are likely good for the next downturn. If you had a lot less invested then than now, I would consider re-evaluating you Asset Allocation. Losing 50% of 1,000,000 feels a lot different than losing 50% of 100,000. I would adjust to a point that I could sleep well and still be on track for FI at the time I planned.

Good luck with your decision,

VW

 

[audreyh1]

I was 100% equities for almost all of my accumulation years. With less than 5 years to ER I started adding bonds, and in the last few of years I've furiously shifted to 55/45, and I ERed this year. I was fully in equities in the crashes of '87, '00 and '08. Now, with the good fortune of the long bull we've been enjoying, I've ERed this year and targeted a more conventional 60/40. IMHO, taking ER this year was DMT on my part.

But, my IPS (which I'm still drafting) has me doing "AGE IN EQUITIES" up to 65/35 as an amalgamation of my studies of the following:

• Kitces' and Pfau's work on rising glide path in retirement (which also shows that 60/40 is really good)
• McClung's work showing 55/45 as an optimum starting point, with a sell bonds first mechanic, i.e., a rising glide path (I'm 55)
• A number of folks I respect suggesting even more conservative than 60/40 is optimal (Ferri and others), but I'm not comfortable at less than 50% equities for a long retirement
• My own evaluation of valuations, suggesting that less than 60/40 is appropriate, e.g., CAPE (the DMT factor)
• My own experimentation in FIRECalc which shows little/no difference in downside results between 35/65 and 65/35, so why not take the upside?

So my plan it to do Age in Equities from 55 to 65, then freeze at 65/35 when SS is in sight (re 65/35, if it's good enough for Wellington it's good enough for me). It is a little bit of market timing and a little bit of SORR mitigation. So yes, I'm doing a little bit of macro market timing but only because I'm in the red zone of ER at the tail end of a huge bull run.

YMMV.

I’m officially going to the dark side......

Starting Jan, I’m shifting to a sliding stocks/fixed income AA ratio based on CAPE10. It won’t vary much, sliding between 50/50 and 60/40 with “neutral” at 55/45. The variation will also occur slowly because CAPE10 is a 10 year average.

Been working on this new plan all year. It was motivated by having an additional chunk to roll into my retirement portfolio from some legacy company stock that I finally sold. Decided I was ready to be a bit more conservative with CAPE10 so high. My target AA at the beginning of this year was 53/47, so it’s not a huge change now. But when stocks eventually drop it will also let me invest a bit more aggressively - even if it takes years to get there.

So you can call me a dirty old lady now.

In case anyone wonders the CAPE10 range I’m using is for 50/50 CAPE10 >= 25, 60/40 for CAPE10 <= 18. It’s not a large swing. This range was picked based on the last 25 years. Based on this history, most of the time the portfolio will be at 50/50 or slightly above, with rare forays into somewhat higher equity allocations after a large market change.

I’m not comfortable dropping below 50% equities, but also not comfortable going above 60% equities so this range matches my comfort zone. I’m 58 and have been retired for over 18 years. DH is 62. No pensions or SS, completely dependent on investments fo income.

I think this will help me stay invested with the bigger pile, maybe with slightly reduced anxiety. It also helps me deal with the current market valuation which really bugs me.

 

[DrRoy]

If you are planning to make a permanent shift in your AA as part of a long term plan, then this is a good time to start. However, NO MARKET TIMING under any circumstances.

 

[DEC-1982]

The current market rapid upswing does look like a "melt-up" or the last hurrah before the downturn arrives. The last two bear markets have been quite unpleasant; whether the next one is similar in depth is anybody's guess.

If your change is a "permanent/semi-permanent" asset allocation setting, it makes sense to me. I say "semi-permanent" because the target AA will likely become more conservative over time.

 

[audreyh1]

The current market rapid upswing does look like a "melt-up" or the last hurrah before the downturn arrives. The last two bear markets have been quite unpleasant; whether the next one is similar in depth is anybody's guess.

If your change is a "permanent/semi-permanent" asset allocation setting, it makes sense to me. I say "semi-permanent" because the target AA will likely become more conservative over time.

And the last two bear markets were preceded by serious melt-ups. But we have no idea how long this one might last. CAPE10 is almost 32, the highest since 1999-2000, where it exceeded 40 (breached 44 in Dec 1999). We left the 2007 peak behind a while ago.

The first of the last two bear markets was a simple one at first - mostly air coming out of dotcom/tech stocks, but it dragged on and by 2002 morphed into a more serious credit crisis when accounting misrepresentation was revealed in telecom stocks. Oh yeah and the Enron accounting scandal was revealed in late 2001.

The second was a nasty credit crisis from the start as housing loan irrregularities infecting the mortgage bond market were revealed which then caused a recession in the rest of the economy because companies found their short-term credit markets frozen and sharply pulled back on expenditures and spent the next few years getting as lean as possible.

Late 2015/2016 got really close to a bear market as oil prices collapsed. But it ultimately did not spill over into the rest of the economy. In fact consumer and non-oil businesses got a boost from lower costs, so the sell-off was very short-lived. But it was dramatic while it was happening!

 

[Senator]

Interesting.

Have you kept any long term stats on this so you see if over a period of two to three years you actually are buying at a lower total cost, than simply buying the shares on a certain day every month?

No stats, but I often hit the initial limit order. Sometimes I would buy higher later in the month, than if I would have if I just bought at the first of the month. When the lower limit hit, it always feels good.

There are statistics that say it really doesn't matter when you buy, as long as you buy.

 

[CaptTom]

It's really fascinating to hear people who analyze the market and delve deep into the mathematics coming to the same conclusion I have. It really feels like we're at the top of a peak right now, at a purely emotional level.

Stocks keep going up. I know that can't go on forever. The housing market is insane. There's local political and geo-political turmoil. One gets the feeling that a crisis in leadership is just around the corner.

I also have a (non-scientific) theory about why the oil price "collapse" didn't impact the larger markets. It's because (1) the prices were artificially high, and (2) the rest of the economy benefits from an oil price drop, especially consumers.

Anyway, keep that reasoned analysis coming. I personally am considering trying to "lock in" some of the recent gains in equities when I do my next AA review.

 

[Totoro]

Regarding oil: the only good thing a high price does is making oil companies more profitable, boosting new exploration.

It hurts everyone else, which is still the vast majority of the world.

 

[audreyh1]

It's really fascinating to hear people who analyze the market and delve deep into the mathematics coming to the same conclusion I have. It really feels like we're at the top of a peak right now, at a purely emotional level.

We are definitely in a peak. I don’t think you can say we are at the top of the peak. That is unknown. Exuberance can last far longer than anyone imagines.

There are things on the horizon that can bring it down in the near term. A huge amount of our asset inflation since 2012 can be attributed to various QE measures, and that punch bowl is being taken away. The Fed is tightening interest rates AND unwinding their balance sheet. If GDP goes up, they will be more aggressive. This is a serious headwind.

BTW - I think hiking interest rates helps unwind the dot com bubble. And came into play in by 2007 as well although it had been going on for a while. It can take a few years to have a strong effect.

Watch the flattening yield curve.

 

[target2019]

In case anyone wonders the CAPE10 range I’m using is for 50/50 CAPE10 >= 25, 60/40 for CAPE10 <= 18. It’s not a large swing. This range was picked based on the last 25 years. Based on this history, most of the time the portfolio will be at 50/50 or slightly above, with rare forays into somewhat higher equity allocations after a large market change.

What we did, is re-balance a few times this past year. CAPE10 is a secondary signal. The primary signal was of course a 53-42-5 asset allocation.

In your shoes, in a few years, I might do the same. We have two salaries and new contributions, so not comparable to your situation. All new contributions are going to balanced funds. Still, equity allocation kept growing.

To me, your plan looks like slowly shifting an allocation, which many would agree with. After the last wahoo in 2008, I spent a lot of time reading about mitigating the next one. It's your future, and only you know how to solve the personal angst.

 

[VanWinkle]

Regarding oil: the only good thing a high price does is making oil companies more profitable, boosting new exploration.

It hurts everyone else, which is still the vast majority of the world.

It might help stockholders in the same oil companies.

 

[VanWinkle]

We are definitely in a peak. I don’t think you can say we are at the top of the peak. That is unknown. Exuberance can last far longer than anyone imagines.

There are things on the horizon that can bring it down in the near term. A huge amount of our asset inflation since 2012 can be attributed to various QE measures, and that punch bowl is being taken away. The Fed is tightening interest rates AND unwinding their balance sheet. If GDP goes up, they will be more aggressive. This is a serious headwind.

BTW - I think hiking interest rates helps unwind the dot com bubble. And came into play in by 2007 as well although it had been going on for a while. It can take a few years to have a strong effect.

Watch the flattening yield curve.

I like your plan audreyh1, but purely from an emotional standpoint. Having a plan can take the emotions out of your decisions. I really think the results will not be much different with the 10% swing in equities, but the peace of mind is priceless.

Best wishes for your success,

VW

 

[ERD50]

I’m officially going to the dark side......

I was considering the same, with a similar plan. For years now, some esteemed members of this forum have been saying that stocks are over-valued. I never disagreed with that observation, I just didn't feel it was actionable.

And in hindsight, had I reduced my exposure to equities, I would have missed the recent run ups. So label me "genius!"

But now that we've been in this range for many years, I am beginning to think this is a point where we will see a correction, or maybe just a stagnation. I could rationalize this as just an AA adjustment, with the idea I would go from my relatively aggressive 70/30 to 60/40 permanently. Does that keep me from being a "Dirty Market Timer"?

But then I run the numbers. If I go from 70/30 to 60/40, and we had a 40% drop in the market, the difference in my portfolios at that trough would be ~ 5%. That just doesn't take me from feeling like I went from "adventurous/risky" to "conservative/sleeping-well-at-night". A shift all the way from 70/30 to 50/50 would keep me ~ 7% higher at that trough, again, just not life-changing to me.

As usual, I will probably do nothing. And remain in the bright light of the "Stay the Course" crowd!

-ERD50

 

[audreyh1]

What we did, is re-balance a few times this past year. CAPE10 is a secondary signal. The primary signal was of course a 53-42-5 asset allocation.

In your shoes, in a few years, I might do the same. We have two salaries and new contributions, so not comparable to your situation. All new contributions are going to balanced funds. Still, equity allocation kept growing.

To me, your plan looks like slowly shifting an allocation, which many would agree with. After the last wahoo in 2008, I spent a lot of time reading about mitigating the next one. It's your future, and only you know how to solve the personal angst.

I retired in 1999, so have already been through two big ones. And that CAPE10 is flashing red again just like it did before those events. Changes in accounting rules since 2001 and dropping 2008 out of the average has only a very modest reducing effect. It’s still red.

Only rebalancing once a year though.

 

[audreyh1]

I like your plan audreyh1, but purely from an emotional standpoint. Having a plan can take the emotions out of your decisions. I really think the results will not be much different with the 10% swing in equities, but the peace of mind is priceless.

Best wishes for your success,

VW

The plan is really about managing emotions. How to invest and stay invested.

 

[flintnational]

Regarding oil: the only good thing a high price does is making oil companies more profitable, boosting new exploration.

It hurts everyone else, which is still the vast majority of the world.

Nothing like owning oil stocks to make you wish for higher oil prices.

 

[Pilot2013]

While I am not in the doom and gloom side of things (like about half the population currently), I am watching closely precisely because of that half jumping ship and the self-fulfilling prophecy possibility. I will adjust AA soon.

 

[nash031]

To tell you the truth, I don't think it's all that hard to market time pulling money out of the market. I've successfully done it once (although mostly by accident), and have been pretty sure I should be doing it a couple of other times, although I didn't. It's fairly easy to tell when the market is overly exuberant, and if you pull your money out you may miss some additional run up, but you'll most likely miss a big drop. Or not. It's easy to tell you should pull your money out, but sometimes the market just keeps going.


But, assume you pulled it out and the market dropped big time. Congratulations! You're a genius. But now comes the hard part. When do you get back in? That's the one that cost me a fortune the one time that I did get my money out before the drop. If the market continues down, you don't get back in so you don't lose money. If it stabilizes low you don't get back in because it could drop some more. If it goes up rapidly you don't get back in because you missed the run up, but you'll get back in on the next drop. Then eventually, when it's up as high as it was when you pulled your money out, you get back in because otherwise you'll have lost money in the whole thing. Don't ask me how I know. But don't do it.

Seems like if you’re not terribly greedy, you could get back in at 10% down and boost your returns that way. The problem is you may call a peak, get it wrong and miss out on 10% while your money sits on the sidelines. There’s no way to consistently get it right.