October 10th Market Plunge

[revhappy]

Is there some kind of stress tests that can be done on a portfolio, to check risk tolerance?

When you are working, you can use multiple of number of years of income savings as a measure. For example, a 50% fall in stocks means 4 years of income savings gone. This is okay for me, I can recover by working for 4 years more. Are there any other such measures?

 

[MichaelB]

Is there some kind of stress tests that can be done on a portfolio, to check risk tolerance?

When you are working, you can use multiple of number of years of income savings as a measure. For example, a 50% fall in stocks means 4 years of income savings gone. This is okay for me, I can recover by working for 4 years more. Are there any other such measures?

FIRECalc will show how your portfolio performs over past historical market declines.

 

[revhappy]

FIRECalc will show how your portfolio performs over past historical market declines.

Thanks!

 

[Lsbcal]

Interesting thread a lot of good responses. I always see a lot of talk on risk. My take on risk, is that there really isn't any risk, if things go south, in time it comes back. So what is the risk that we have and fear??

The risk is a 1930 scenario. True it came back but took too long for a retired person and that kind of thing takes its toll on the pschy. Agree with HadEnuff.

 

[audreyh1]

Interesting thread a lot of good responses. I always see a lot of talk on risk. My take on risk, is that there really isn't any risk, if things go south, in time it comes back. So what is the risk that we have and fear??

In time - how long is that? and what are you using to pay living expenses in the meantime?

 

[kgtest]

Well, we have not had a real bear market yet, which is defined as a 20% decline.

Could this current drop develop into one? Yes, or no?

Place your bet now, heh heh heh...

no. We will bounce back around mid November into December? Ahh heck, maybe we won't!


Housing, global trade concerns and slow wage growth are what tell me we could have a slower recovery. I am not sure what it would take to push us lower, but perhaps mid terms pokes the bear.

 

[Free bird]

People with pensions & rentals that cover expenses view the stock market completely different compared to people who actually depend on their stock & bond portfolio to cover expenses. The stock market is more of a side show to the former.

 

[samclem]

Interesting thread a lot of good responses. I always see a lot of talk on risk. My take on risk, is that there really isn't any risk, if things go south, in time it comes back. So what is the risk that we have and fear??

I strongly agree that the term "risk," as commonly used in investing, is an unfortunate shorthand that is extremely misleading. It should properly be called "price volatility." Stock prices do bounce back. But, if we we have to sell while prices are down (all at once--to pay a big bill, or over many years--to pay living expenses in retirement), then "volatility" becomes "realized loss" and it can be devastating. History is full of examples where stock prices didn't bounce back for decades, and we shouldn't assume that we'll never see a situation like the one Japan has experienced.

A very big "risk" for a retiree with a decades-long withdrawal window is inflation. When people take extreme steps to avoid "price-volatility risk", they increase the chances that their portfolio won't grow sufficiently, and this increases "inflation risk." By going with "safe" investments, they haven't truly reduced their overall "risk" at all. It's all a balancing act.

 

[HadEnuff]

I strongly agree that the term "risk," as commonly used in investing, is an unfortunate shorthand that extremely misleading. It should properly be called "price volatility." Stock prices do bounce back. But, if we we have to sell while prices are down (all at once--to pay a big bill, or over many years--to pay living expenses in retirement), then "volatility" becomes "realized loss" and it can be devastating. History is full of examples where stock prices didn't bounce back for decades, and we shouldn't assume that we'll never see a situation like the one Japan has experienced.

A very big "risk" for a retiree with a decades-long withdrawal window is inflation. When people take extreme steps to avoid "price-volatility risk", they increase the chances that their portfolio won't grow sufficiently, and this increases "inflation risk." By going with "safe" investments, they haven't truly reduced their overall "risk" at all. It's all a balancing act.

And "risk" implies that an action might not occur, such as the risk that my house may or may not catch on fire.

To say that there is a "risk" of stock prices falling is equivalent to saying there is a "risk" of dying. Both are inevitable. It's the timing that matters.

 

[HadEnuff]

People with pensions & rentals that cover expenses view the stock market completely different compared to people who actually depend on their stock & bond portfolio to cover expenses. The stock market is more of a side show to the former.

I have some close relatives who have what I call "generational" money. It is a significant sum, that has been carried down for several generations. Unfortunately for me, it came from a part of their family with which I share no bloodline.
They are smart, hardworking people who have all done well enough for themselves that they have not needed to touch this money for living expenses, again, for generations. I am quite close to the generation that are my contemporaries, and they all have told me that it has been, for quite some time, 100% invested in equities. They are not worried about the sequence of volatility. They know they won't need to touch it, they just want to keep it growing.

 

[NW-Bound]

What will be interesting to see is what recent investors will do, meaning the people who only got into the market in the last 10 years during this bull run.

I wonder how many have this misconception that buying index funds is very safe, that it will protect them from the risk that individual stocks have.

They may wake up and say "Oh my god, the whole market can go down, not just dot-coms or bitcoins. I've gotta sell!"

PS. During the housing mania, a fellow engineer argued with me about housing prices. He said "How can home prices go down? It's such a safe and sure investment compared to stocks".

 

[Lsbcal]

On a happier note this Hulbert article:

Devotees of the Halloween Indicator can nevertheless point to the remarkable consistency of the six-month winter period of presidential term third years. As you can see from the accompanying chart, the Dow’s average return over this period has been virtually the same regardless of whether the market was strong or weak over the preceding six-month “summer” period.

link: https://www.marketwatch.com/story/why-stock-prices-should-be-higher-in-six-months-2018-10-26

 

[jazz4cash]

P/E projections will be made by computers with AI. And they will learn to lie, and stretch the truth, if not outright cook the book. It's to be expected when the computers are programmed by humans to win.



What? You don't want your AI computer to win?

I’ll predict there will be many, many AI philosophies. Index, active, growth, value, etc -focused funds will all use algorithmic formulas to invest. Nothing will really change except maybe trading velocity.

 

[NW-Bound]

I need to find an old book that I bought at a used bookstore a while ago. If I remember correctly, the book was printed in the late 60s or early 70s. The author made fun of people using computer trading algorithms, and trying to do back testing to look for magic formulas.

Yes, the idea is as old as the computer itself. They did not call it AI then.

 

[Free bird]

Everyone says stocks always come back. I guess in the US thats been true so far. In Japan it wasn't true. At one time the second largest economy in the world. I know there's specific reasons for Japan not recovering back to 1989 levels. But it did happen. Smart hard working people in Japan so its not that. Just the idea that its a sure thing that stocks always come back just seems like a bold statement. But I have zero formal economic schooling. Just a street kid who learns as he goes.

 

[NW-Bound]

I own stocks, not because I think I will always have wonderful gains.

It's because the alternative assets are not any better, or are worse.

 

[MoneyChic]

On a happier note this Hulbert article:

link: https://www.marketwatch.com/story/why-stock-prices-should-be-higher-in-six-months-2018-10-26

Interesting, but we'll have to wait another year for this. 2018 is Trump's second year in office. So is October 2019 the time to buy?

 

[HadEnuff]

I own stocks, not because I think I will always have wonderful gains.

It's because the alternative assets are not any better, or are worse.

that remains to be seen.

 

[NW-Bound]

Yes. One uses history as a guide, and history may not repeat. But there's little else to go on.

 

[38Chevy454]

I own stocks, not because I think I will always have wonderful gains.

It's because the alternative assets are not any better, or are worse.

Agree, and therein lies the problem. Right now I do not see better alternatives than staying in stocks. I really think a lot of the recent volatility is the less risk tolerant investors bailing out. They can take the ride up, but once it gets a little bumpy down, they bail out.

 

[NYEXPAT]

Everyone says stocks always come back. I guess in the US thats been true so far. In Japan it wasn't true. At one time the second largest economy in the world. I know there's specific reasons for Japan not recovering back to 1989 levels. But it did happen. Smart hard working people in Japan so its not that. Just the idea that its a sure thing that stocks always come back just seems like a bold statement. But I have zero formal economic schooling. Just a street kid who learns as he goes.

Just look at emerging markets (EEM). They have still not recovered from the 2008 Financial Crisis!

 

[Carpediem]

I really think a lot of the recent volatility is the less risk tolerant investors bailing out. They can take the ride up, but once it gets a little bumpy down, they bail out.

That's what I've been thinking too. Let's ride out this turbulence until they've all bailed and then we can get back to a smooth flight back up.

 

[jimbee]

Yes. One uses history as a guide, and history may not repeat. But there's little else to go on.

History doesn't repeat, but it often rhymes.

 

[Lsbcal]

Interesting, but we'll have to wait another year for this. 2018 is Trump's second year in office. So is October 2019 the time to buy?

I think the 3rd Presidential year in these types of look backs are taken as annually. So 2017 is the 1st, 2018 the 2nd, and 2019 the third.

BTW, I've seen this type of study for some decades so it is not a new observation but apparently still worthy of note.

 

[lampshade]

I’m trying to put my big girl panties on and do the right thing! But I only have 50,000 in my 401(k). These stock market lows are killing me! I’m not selling or cashing anything in. I was thinking of increasing my payroll deductions to take advantage of the greater buying power. But I have to be honest, I’m scared and I really don’t have any money to lose.