Move to safer investments

[Chuckanut]

I bought a new car in late 2019. Had I waited about 4 more months, after Covid caused shutdowns, I could have bought the same car (in a newer model) for less. Or a used car for far less thanks to the rental car companies dumping zillions of cars on the used car market.

OTOH, had I waited about 30 months, I could have bought the same car (in a much newer model) for at least $6000 more. Chip and other shortages crimped the supply of new cars very badly. And we all know what has happened to used car prices - to the moon!.

IMHO, the stock market is similar. Things come out of nowhere and seem to drive it up or down, sometimes in the opposite way one would expect. My hat is off to the better man who can consistent figure it out.

[finnski1]

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Originally Posted by Chuckanut I bought a new car in late 2019. Had I waited about 4 more months, after Covid caused shutdowns, I could have bought the same car (in a newer model) for less. Or a used car for far less thanks to the rental car companies dumping zillions of cars on the used car market. OTOH, had I waited about 30 months, I could have bought the same car (in a much newer model) for at least $6000 more. Chip and other shortages crimped the supply of new cars very badly. And we all know what has happened to used car prices - to the moon!. IMHO, the stock market is similar. Things come out of nowhere and seem to drive it up or down, sometimes in the opposite way one would expect. My hat is off to the better man who can consistent figure it out.

I agree.on the stock picking.
Similar car story. We bought a late model Subaru Outback Limited with only 48000 miles on it on Dec 28th 2020. Bargained hard and got a very good deal of $15k. Those same models lately have been listed at $20-24k. Pure luck on my part. Not even sure I would buy the same model year right now.

[Love This Community]

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Originally Posted by 24601NoMore No prob. The major concern is a big dollar value drop in the equities part of our portfolio that takes 5-10 years to recover from. Even at 25% exposure, that'd be brutal. Can we pay the bills? Sure. But watching that much of your net worth evaporate is not something I ever want to do again after living through 2008 and other similar downdrafts. We had a pretty brutal decade in 2000-2009. Equities essentially went NOWHERE for the entire decade. Ending value on 12/31/09 was actually lower than on 1/1/00. Not interested in doing that again. Markets do not always "come back" quickly. Ten years (to me) is not "quickly". And it's happened multiple times in the past. My general observation FWIW is that many here tend to downplay risk, or take on more risk than necessary simply to get "more" (vs "enough"). I read a LOT of "but, it 'always' comes back quick!" No, it doesn't. And we should be honest with ourselves as to how much psychological pain and suffering we can each tolerate during such times. I'm someone who doesn't want to be "down" a big, six figure chunk of money for 5-10 years. Others may have a need to in order to meet their goals, or be fine with being "underwater" for 5+ years. But for me..no thanks. I'll happily take my 3+% (reasonably) guaranteed income and be perfectly happy with that, as doing so gets me & DW through end of life no problem. ETA - I should have probably also added that investment strategy can and often does change IN retirement vs. during the accumulation phase. If you're not already retried and need to accumulate more to meet your financial goals, the discussion is much different..

I am in the accumulation phase and heavy into stocks >90% with 8- month emergency fund. Provided, one has the ability to handle downturns, staying fully invested helps in the long run IMO. I did not sell during 2008 and the recent dip. Agree my paper losses in 2008 were in low 5 figures and 2022 were in low 6 figures. It’ll be interesting to see how I’ll be able to handle a high 6 figure paper losses over a sustained period of time. As long as I have money coming in during earning years, I think I can ride it out.

[cyber888]

Sure, those economic conditions you cited are all true for - now, but:

(1) The Stock Market is not the Economy. And we know this because the Stock Market ran up when the economy was on a stand-still during the pandemic.
(2) Companies are still hiring and jobs are all around
(3) You can be wrong on the assuming the CPI and PPI will continue at 8%, because people begins substituting for cheaper products. That's how competitive markets work. My shampoo went up 50%, but I found a better and equally great product cheaper by 50%. Prime rib went up by 20%, but T-Bone remains about the same - so switching has been easy.
(4) Gas prices may go lower - remember that oil prices are based on market futures, not the actual production cost. They were artificially pumped during the Bush era gulf war and down after.

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Originally Posted by 24601NoMore Here's why I think "this time is different" with a bunch of new signs we have not seen in recent history: - CPI ~8% (previously 2'ish or lower %) - this reduces Consumer consumption, which is ~70% of the US economy. Lower consumer consumption lowers corporate profits and in turn, equity valuations - PPI even higher than CPI - Producers currently absorbing a lot of those costs..will lower corporate profits. - Oil at $100 - $130/barrel (recently). This will further damage the US economy in 22 and likely beyond as the cost of oil is in just about EVERYTHING and affects far more than just the cost of gas at the pump - Fed plan to raise FFR 8X (to 2-3%, per public statements). One Fed Governor just yesterday publicly said he is aiming for 3+% by EOY. Lots of public statements last few days by different Fed Governors talking about at least a 50 bps increase at the May meeting, and likely at the following meeting. That'd be two, 50 bps raises, back to back, followed by additional 25-50 bps raises through end of year winding up at 2 - 3% overall. - QE ending - Yield curve inverting (2s/10s flipped briefly yesterday..many other curves already inverted) - typically a very clear recessionary indicator - Cost of debt (due to FFR and Yield curve increases) will further lower corporate profits - Equity valuations continue to be at crazy levels compared to historical averages, even post 22 YTD drop - GDP forecasts coming WAY down (Atlanta Fed forecast ZERO percent Q1 growth, for instance just a few weeks back. They've now increased it to...zero point 9 percent) - Exogenous, geopolitical events - markets hate uncertainty as we all know.. We haven't had ANY of those signs or conditions in the recent past (aside from different geopolitical dust-ups, albeit not to the level we have with Russia/Ukraine and that putting the whole world on the edge of WW3). In fact, we haven't seen CPI and PPI numbers like this since the 70s. So unfortunately, the market conditions we're facing in 22 are likely the most challenging of any of our lifetimes. Bond markets have already been crushed due to rising yields. Any of the factors I mention above could hit equity markets pretty hard and already started to do so in Jan-early March. In fact, I think it was JPMC that forecast a max of 4,700'ish by end of year, which is obviously less than a couple percent north of here. I've heard others (eg B of A) forecast that it's very likely the S&P will be south of 4K at some point this year. I haven't heard an EOY forecast from them, but lots of folks are saying S&P 3,600 from a TA perspective is pretty darn possible. FWIW.. I suppose we all have to make our own assessments of economic realities and invest accordingly. But it does appear the US economy is in for some pretty rough sledding for at least the next 12 months and likely much longer if we do slip into recession as many indicators are now suggesting is likely.. ETA - regarding your comment on why active fund managers can't consistently outperform passive..they're managing a lot more $$$ than individual investors, and "have" to maintain certain AAs per the prospectus. We as individuals don't face those same challenges and constraints. It's a lot easier to do risk management on a typical retiree portfolio than on one that has hundreds of millions of dollars, or even billions of dollars invested.

[Magus]

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Originally Posted by cyber888 (3) You can be wrong on the assuming the CPI and PPI will continue at 8%, because people begins substituting for cheaper products.

CPI & PPI already reflect this (substitutions) now. In fact, inflation today when you use the same methodology as 1981 is actually about the same as 1981. CPI assumes a lot of substitutions today, it uses OER instead of actual rent surveys (bogus) and adjusts for quality significantly more today than in 1981 (ie increased laptop or tv performance). If you adjust CPI for OER alone, inflation is over 11%, remove substitutions and performance adjustments and its roughly 14% today. This methodology needless to say is significantly more controversial in a high inflationary environment than a low one (especially the OER) although its obvious why politicians of all stripes prefer this one. We've had a few changes to the calculations in the last 50 years and all have made inflation look lower than they previously did, which is one of the reasons why looking at current and prior inflation isn't really accurate.

[Bergamo]

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Originally Posted by Animorph If you move to safer investments, are you going to stay put after that and permanently accept your current losses? If you move to safer investments, will you want to buy back your current investments after the markets have recovered and permanently accept your current losses? If you move to safer investments, what will you do if you lose another 10%? Sell again? Ideally you would already be in your safer investments now, avoiding the past market drop and ready to buy more aggressive investments at the market bottom. Kind of already screwed up the timing of buying the safer investments. Will you be better at timing the market bottom? Are you willing to move a significant percentage of your investments based on your market timings? If not, even if the timing works out in your favor your total portfolio gain over a down/up cycle may only be a low single digit percentage. You know you should buy low and sell high. Selling now is sort of the opposite. What I do is let it ride (my base allocation is 75/25 stocks/bonds plus roughly 1 year of expenses in cash) until the market is 20% down. At that point I change my AA to 80/20, adding to my equities (buying low). If the market continues down I again shift my AA by 5 percentage points for each 5% the market drops (from the original peak). At 40% down I'm all equities and thinking about how I can shift to more aggressive equities. If I run out of cash I sell just enough of my best performing (least down) equities on a monthly basis to meet expenses. That's where I was in the 2008 recession. I'm a lot looser on the market recovery timing. Ideally I don't return my AA to normal until the market has fully recovered. But I usually hang on a little longer if the recovery looks like it will continue. All of that, while not too hard, buys something like an extra 5% portfolio gain over just holding on to your base AA the whole -40% down and back to a full recovery. Not super significant in the long run, but it's something, and something to do. I can see where simply doing nothing has its appeal. For those who don't want to fuss with it, sticking to your normal AA and rebalancing if you can stomach it will work just fine. Of course that all assumes that the market will behave something like it has in the past...

Interesting strategy. Is this all in non-taxable accounts? What do you use for FI as you make these AA adjustments?

[Koolau]

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Originally Posted by Magus CPI & PPI already reflect this (substitutions) now. In fact, inflation today when you use the same methodology as 1981 is actually about the same as 1981. CPI assumes a lot of substitutions today, it uses OER instead of actual rent surveys (bogus) and adjusts for quality significantly more today than in 1981 (ie increased laptop or tv performance). If you adjust CPI for OER alone, inflation is over 11%, remove substitutions and performance adjustments and its roughly 14% today. This methodology needless to say is significantly more controversial in a high inflationary environment than a low one (especially the OER) although its obvious why politicians of all stripes prefer this one. We've had a few changes to the calculations in the last 50 years and all have made inflation look lower than they previously did, which is one of the reasons why looking at current and prior inflation isn't really accurate.

I wonder if this isn't why so many folks doubt the official inflation numbers (as I do). Perhaps some of us refuse to substitute and OUR inflation is higher. Thanks for the numbers as they make a lot of sense.

[marko]

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Originally Posted by Midpack You would have been better off NOT selling when the '87, '00 and '09 downturns pummeled the market. It's a fools errand to think you can accurately time when to re-enter the market, most people miss most of the gains on the way up when they've sold off. Why do you believe "this time is different?" Patience has been rewarded time and time again... There are millions of people who say they lost big time in the '08-'09 crash - they're the one who sold out of equities. There are millions of people who stayed the course and have done VERY well.

+1
I've often mentioned here my "smarter than you" neighbor who smugly announced that she "sold everything" on the last Friday of February 2009.

[Magus]

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Originally Posted by Koolau I wonder if this isn't why so many folks doubt the official inflation numbers (as I do). Perhaps some of us refuse to substitute and OUR inflation is higher. Thanks for the numbers as they make a lot of sense.

Yup you bet - I was fascinated by the changes when I was getting my BS in Economics ~15 years ago, mainly that every update was designed to make inflation look lower than before. For a history of changes to the CPI calculation in BLS "economist speak", see this link here.

https://www.bls.gov/cpi/additional-r...al-changes.htm

Some of the bigger ones:

*Introduced rental equivalence concept (January 1983 for the CPI-U; January 1985 for the CPI-W)
*Implemented new sample procedures to prevent overweighting items whose prices are likely to rise (aka substitutions)
*Estimated price change for owners’ equivalent rent directly from rents (an estimate of the implicit rent owner occupants would have to pay if they were renting their homes) 1999
*Improved the handling of new models of vehicles and other goods (aka improved performance adjustments - yeah the car's price went up 3% but its performance went up 3% so its actually no inflation is the way the logic goes there)

[cyber888]

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Originally Posted by Magus CPI & PPI already reflect this (substitutions) now. In fact, inflation today when you use the same methodology as 1981 is actually about the same as 1981. CPI assumes a lot of substitutions today, it uses OER instead of actual rent surveys (bogus) and adjusts for quality significantly more today than in 1981 (ie increased laptop or tv performance). If you adjust CPI for OER alone, inflation is over 11%, remove substitutions and performance adjustments and its roughly 14% today. This methodology needless to say is significantly more controversial in a high inflationary environment than a low one (especially the OER) although its obvious why politicians of all stripes prefer this one. We've had a few changes to the calculations in the last 50 years and all have made inflation look lower than they previously did, which is one of the reasons why looking at current and prior inflation isn't really accurate.

Nah. There’s little inflation in my area. You’re only talking about big cities.

[milford]

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Originally Posted by cyber888 Nah. There’s little inflation in my area. You’re only talking about big cities.

I doubt that's true... most likely you mean inflation hasn't affected you that much as inflation affects everyone differently (i.e. you own your home so you are not affected by rent increases when it comes to lease renewal, you haven't done any remodeling recently as plywood has gone up as much as 50% among other supplies, you don't drive that much so the 25% increase in gas price doesn't really bother you...etc) vs. there is little inflation in your area.

[Koolau]

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Originally Posted by cyber888 Nah. There’s little inflation in my area. You’re only talking about big cities.

My first thought was you were being facetious, but perhaps it is as milford suggests.

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Originally Posted by milford I doubt that's true... most likely you mean inflation hasn't affected you that much as inflation affects everyone differently (i.e. you own your home so you are not affected by rent increases when it comes to lease renewal, you haven't done any remodeling recently as plywood has gone up as much as 50% among other supplies, you don't drive that much so the 25% increase in gas price doesn't really bother you...etc) vs. there is little inflation in your area.

We're essentially done buying consumer goods (other than replacing things that break.) So it's mostly food, gas, electricity kinds of things. I sure notice the outrageous prices, but there's no major effect on overall lifestyle. For one thing, we more or less planned on inflation eventually happening. Sorry were were right! YMMV

[target2019]

Inflation impact eventually spreads out to all communities. Whatever.

[GTFan]

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Originally Posted by cyber888 Nah. There’s little inflation in my area. You’re only talking about big cities.

If you buy food and gas, there's inflation. You might not realize it but it's there - when Aldi in my area starts jacking up prices on a lot of stuff I know it's there, and they have.

[Rianne]

I do this for a little peace of mind:

Google S&P 500 historical chart
Dow Jones historical chart

You'll get a grim graph currently. Click on "Max" and find comfort in long-term historical data. With your pointer, follow backward. It will show every day where the markets were. The dips these days are scary, but the big picture is comforting. We are considering investing in stock index funds with the bond market funds we just sold. And we'll be 65 this year.

[VanWinkle]

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Originally Posted by Rianne I do this for a little peace of mind: Google S&P 500 historical chart Dow Jones historical chart You'll get a grim graph currently. Click on "Max" and find comfort in long-term historical data. With your pointer, follow backward. It will show every day where the markets were. The dips these days are scary, but the big picture is comforting. We are considering investing in stock index funds with the bond market funds we just sold. And we'll be 65 this year.

Don't forget to stick with an asset allocation that works for you no matter what the stock market or bond market is doing. Good luck to you!!

VW

[marko]

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Originally Posted by Rianne I do this for a little peace of mind: Google S&P 500 historical chart Dow Jones historical chart You'll get a grim graph currently. Click on "Max" and find comfort in long-term historical data. With your pointer, follow backward. It will show every day where the markets were. The dips these days are scary, but the big picture is comforting. .

Someone here once said: "Paste an historical graph of the Dow on the wall and then walk to the other end of the room and look at it from 15 feet away. ". I believe that the phrase "over time" is way underused when talking about the markets.

[Koolau]

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Originally Posted by marko Someone here once said: "Paste an historical graph of the Dow on the wall and then walk to the other end of the room and look at it from 15 feet away. ". I believe that the phrase "over time" is way underused when talking about the markets.

Agreed. Of course, in mid 70's (age, not calendar date) we have a lot less 'over time' to let things recover. YMMV

[W2R]

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Originally Posted by Koolau Agreed. Of course, in mid 70's (age, not calendar date) we have a lot less 'over time' to let things recover. YMMV

Yeah, but (sadly!) we have a lot fewer years in the future that we need to worry about paying for, as well!

[Koolau]

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Originally Posted by W2R Yeah, but (sadly!) we have a lot fewer years in the future that we need to worry about paying for, as well!

Thanks (I think) for the reminder!

Yep, it's one of the few "advantages" of getting old. Heck, I'm now down to a 24 year time line on my FIRECalc and that assumes I'll live to 99!