Market Timing or Risk Management?

[NW-Bound]

IOW, Buy & Hold + re-balancing. All market timing. They all use the same data to predict the same things. And yes, it's all a prediction game. The only difference is the ones who (claim to) buy and hold and rebalance-only, simply declare it ain't timing based on predictive methods.

Buy/holders believe that in the long run things will go up.

Rebalancers believe that when stocks/bonds move in opposite directions, they tend to reverse later.

Both are based on the belief that the future will be like the past, which itself is a prediction.

 

[luckydude]

We've had some talk lately about selling bond funds this year due to the Fed's plans to raise interest rates. Some call it market timing. I came across this interview with Bill Bengen, father of the 4% rule, and his take on that.

https://www.thinkadvisor.com/2022/0...s-4-rule-says-to-cut-stock-and-bond-holdings/

"[Investech is] recommending that you should be at about 55% of your normal allocation of stocks. So if you normally allocate a 60%/40% portfolio, you should reduce stocks to 33%.

I’m personally lower than that because I’m more conservative.

Q: Some would call InvesTech’s approach market timing. Thoughts?

This isn’t market timing but risk management. Market timing is when you try to sell everything at the top and buy everything at the bottom. No one in creation can do that reliably.....I would cut your bond allocation at least in half."

If the "pros" do it, it's called "risk management".

If us "mom-and-pop amateurs" do it, it's called "market timing".

 

[pb4uski]

Isn’t this laddering similar to what bond mutual funds do? How can you be sure this strategy will result in a higher ending balance?

It will result in a higher balance because for now the ladder will be short... say, 3, 6 and 9 month UST and then once the interest rate increases are in place the ladder will be longer... like 3, 5 and 7 year CDs or USTs.

The short ladder when rates are rising will avoid the interest rate risk losses and when rates stabilize the longer ladder will capture the benefit of the higher rates.

The key assumption is that the investment hypothesis that the Fed will increase rates is valid, but it looks pretty solid to me.

 

[Dtail]

No bond funds for me for the last 2 years. Just CD's and Stable Value for the Fixed Income portion.

 

[daylatedollarshort]

The key assumption is that the investment hypothesis that the Fed will increase rates is valid, but it looks pretty solid to me.

The Fed members told us they were going to raise rates earlier in the year - New Federal Reserve projections show six more rate hikes this year (cnbc.com).

 

[aja8888]

The Fed members told us they were going to raise rates earlier in the year - New Federal Reserve projections show six more rate hikes this year (cnbc.com).

Look up the term "Jawboning". The FED uses that to get the market and public's reactions before actually doing anything.

The can and will make changes to their previous announcements at any given time.

While they are not elected politicians, they act like them!

 

[NW-Bound]

Look up the term "Jawboning". The FED uses that to get the market and public's reactions before actually doing anything.

The can and will make changes to their previous announcements at any given time.

While they are not elected politicians, they act like them!

Eh, if you can scare people with words instead of actions, why is it a bad thing?


But I think the chance of them raising rate is higher than 50%. But then, I don't worry about it because I've got no bonds. I still find it interesting to watch to see what unfolds. It makes life interesting.

 

[daylatedollarshort]

Look up the term "Jawboning". The FED uses that to get the market and public's reactions before actually doing anything.

The can and will make changes to their previous announcements at any given time.

While they are not elected politicians, they act like them!

Possibly, but they have raised rates twice now. CPI inflation is still over 6%, federal funds rate is 1%, real interest rates on federal funds are -5%. To get inflation under control, historically the federal funds rate has to be higher than the inflation rate. After their first two increases, inflation dropped 2 points to 6.3%, but their target is 2% inflation, so they still have over a 4% spread to cover.

They Fed members are divided on how fast to tackle the current 4% spread. Some want to move quickly and others feel they can slow down since the first two increases have had some impact, but it is highly probable that the rate increases will continue in 2022 as long as we are still at 6.3% inflation or higher.

Fed minutes: May 2022 - Monetary policy may move into restrictive territory (cnbc.com) - Fed minutes point to more rate hikes that go further than the market anticipates - Last week, Powell said in a Wall Street Journal interview that it would take “clear and convincing evidence” that inflation was coming down to the Fed’s 2% target before the rate increases would stop.

I see no reason not to believe him.

 

[Koolau]

My stock allocation is now at 48%.

In my case, I tended to lean towards risk management when initially setting up my portfolio and asset allocation years ago. Risk management now would depend on the (true or untrue) reports that I happen to hear about what the market is doing or may do in the future. I do not plan to implement that investment philosophy. Staying firm worked well for me in 2008-2009, so that is my plan.

Who knows? I might get clobbered. If so, I've got SS and my mini-pension, so I guess I'll just LBYM and wait it out. But so far, all seems fine.

Pretty much summarizes my philosophy. Only difference is my stock allocation is closer to 35%. I tried to build my risk management into my AA. YMMV

 

[aja8888]

Possibly, but they have raised rates twice now. CPI inflation is still over 6%, federal funds rate is 1%, real interest rates on federal funds are -5%. To get inflation under control, historically the federal funds rate has to be higher than the inflation rate. After their first two increases, inflation dropped 2 points to 6.3%, but their target is 2% inflation, so they still have over a 4% spread to cover.

They Fed members are divided on how fast to tackle the current 4% spread. Some want to move quickly and others feel they can slow down since the first two increases have had some impact, but it is highly probable that the rate increases will continue in 2022 as long as we are still at 6.3% inflation or higher.

Fed minutes: May 2022 - Monetary policy may move into restrictive territory (cnbc.com) - Fed minutes point to more rate hikes that go further than the market anticipates - Last week, Powell said in a Wall Street Journal interview that it would take “clear and convincing evidence” that inflation was coming down to the Fed’s 2% target before the rate increases would stop.

I see no reason not to believe him.

I sure hope they do raise rates to 7% and actually pay attention to the Taylor Rule, which they are obligated to do. I'll be the first to load up my truck with T Bills and longer Bonds.

 

[Montecfo]

One of the Fed's important tools is jawboning. If I recall they previously said no rate hikes until 2023. Obviously, they amended that, even if they believed it as the time.

The current hike cycle is the same. They have jawboned a lot. But they will stay data driven. If that means fewer rate hikes (which the market seems to believe now) or slower QT, they will be ok with that.

 

[Koolau]

Jawboning works when people believe it. YMMV

 

[aja8888]

Jawboning works when people believe it. YMMV

The U.S. population is susceptible to believing everything a politician says.

 

[Koolau]

The U.S. population is susceptible to believing everything a politician says.

Well, used to be.

 

[NW-Bound]

The U.S. population is susceptible to believing everything a politician says.

People believe in all sorts of things, not just what politicians say but also what snake oil salesmen pitch.

Not everyone believe in the same ballyhoo, thanks goodness. When they do, we are in deep gunk.

 

[target2019]

Lots of fruitful discussion above. Obviously market timing can mean different things. One thing's for sure, on another forum the mention of the phrase is a subtle way of letting you know that you've violated dogma and will go to financial ruin if the thought is not wiped from all memory.

Bogle called it tactical adjustment. I think of it that way. I have strategic plans to never touch our Asset Allocation. But there are moments in time...aren't there?

 

[ejman]

Lots of fruitful discussion above. Obviously market timing can mean different things. One thing's for sure, on another forum the mention of the phrase is a subtle way of letting you know that you've violated dogma and will go to financial ruin if the thought is not wiped from all memory.

Bogle called it tactical adjustment. I think of it that way. I have strategic plans to never touch our Asset Allocation. But there are moments in time...aren't there?

I was certain that March 2020 was a moment in time that required action as in sell - the sky is falling. Fortunately my innate laziness took over and I did nothing - Phew! dodged that bullet.

 

[Bergamo]

Not sure what to call it... but IMO it's just common sense.

The Fed has signaled that it intends to raise interest rates... probably 200bps but we'll see. If the Fed raises interest rates then the value of long bonds will decline significantly... generally 2x duration... so if duration is 6 then that would be a 12% decline and all else being equal it would take 6 years for the bond or bond fund to recover the decline in value from higher yields.

So if one was to redeemd bond funds now and invest in a short UST ladder and wait out the decline in value caused by the increase in interest rates, I think that is just smart strategy. Market timing... perhaps... but smart market timing.

Market timing in bonds is different from stocks... its rare that it is highly likely that stocks will go down (or up)... but you can't say that for bonds right now.

Can you say more about the short UST ladder and how you would build it?

 

[pb4uski]

Can you say more about the short UST ladder and how you would build it?

Equal rungs of 3, 6, 9, 12, 15 and 18 month USTs... so if you had $500k to invest then that would be $83k per rung.

In 3 months when the first rung matures then buy a new 18 month UST.

At some point where it looks like interest rates have plateaued, use rollover money to stretch out the ladder to 5 or 10 years.

 

[npage]

Equal rungs of 3, 6, 9, 12, 15 and 18 month USTs... so if you had $500k to invest then that would be $83k per rung.

In 3 months when the first rung matures then buy a new 18 month UST.

At some point where it looks like interest rates have plateaued, use rollover money to stretch out the ladder to 5 or 10 years.

I like this and am trying to put one together now. One thing I worry and it's classic FOMO is by the time the 12, 15, and 18 especially come due the rates would be lower.

In other words, part of me may be thinking I will sit on cash for 3 to 12 months while things are crazy right now knowing there will be a peak and I then will establish a solid 5 to 10 year ladder.

Don't necessarily need the immediate return but setting up a solid 10 year ladder at the expense of a few months or 1 year may be a once in a lifetime given time horizon. I actually need the ladder to start 3 years from now and go about 8 years.

 

[Bergamo]

Equal rungs of 3, 6, 9, 12, 15 and 18 month USTs... so if you had $500k to invest then that would be $83k per rung.

In 3 months when the first rung matures then buy a new 18 month UST.

At some point where it looks like interest rates have plateaued, use rollover money to stretch out the ladder to 5 or 10 years.

So buy the 3,6 and 12 month UST at auction, and the 9,15 and 18 month in the secondary market?

And then every 3 months one would buy a new 18 month UST in the secondary market?

Why are you suggesting 18 month USTs?

I understand the reason to stretch the ladder to 5 years later on, but how does one do this? How do you move from the 18 month UST ladder to a 5 year ladder? What does that look like? It seems there would be gaps but I think I am missing something.

 

[arcyallen]

I was certain that March 2020 was a moment in time that required action as in sell - the sky is falling. Fortunately my innate laziness took over and I did nothing - Phew! dodged that bullet.

If there was EVER a time that it was "100% obvious" that the markets were about to plunge long and hard, it was March 2020. And yet, here we are. Another example of how we do not know what the markets will do in the shorter term.

 

[Katoslake]

Took a 40% stock allocation to 20% when SP500 was at 4370 ( around invasion). Have preserved 6 figure stock decline. Wanting to get back in, slowly, but Fidelity advisor plus their leadership says there’s more pain to come.
I still believe we are trending lower until midterms.
Thoughts ?

 

[ERD50]

Took a 40% stock allocation to 20% when SP500 was at 4370 ( around invasion). Have preserved 6 figure stock decline. Wanting to get back in, slowly, but Fidelity advisor plus their leadership says there’s more pain to come.
I still believe we are trending lower until midterms.
Thoughts ?

I'm a follower of the motto "Nobody Knows Nuttin" when it comes to market timing.

If I were you, since the market is lower now than when you got out, I'd get back in at the current ~ 3795 and call it a 13% "win", because it is. Why tempt fate?

-ERD50

 

[daylatedollarshort]

Took a 40% stock allocation to 20% when SP500 was at 4370 ( around invasion). Have preserved 6 figure stock decline. Wanting to get back in, slowly, but Fidelity advisor plus their leadership says there’s more pain to come.
I still believe we are trending lower until midterms.
Thoughts ?

I think there are good odds of further interest rates hikes because of how low (negative) real interest rates are now, which will mean further bond fund losses and perhaps a 40% or more stock market decline from the last peak. Our retirement expenses are covered by a TIPS ladder, SS and pensions so we don't count on gains from the stock market to fund our retirement. We keep some of the portfolio money in stocks for diversity but we are under 20% now and what we do have is in a dividend fund that hasn't gone down as much as others. I'm fine with possibly missing out on big gains as long as we avoid potential big losses. If stocks drop 40%, then we will start to dollar cost average because that seems like a good bet.