Will the "Other Shoe" EVER Drop?

[Montecfo]

This bull market started on March 23, 2020, after the markets dropped 34% due to Covid. So this bull market is not old, rather, quite young. The markets "seem" overvalued at the moment, but with the light at the end of the tunnel on Covid growing by the day and the new stimulus about to jumpstart GDP growth not seen in decades, with predictions that it will last into 2024, and the possibility of infrastructure further stimulating growth, I don't see a major pullback as likely in the near term. (Famous last words[emoji857])

I was about to make the same point on bull market.

However, regarding "shoes" dropping often major pullbacks are unanticipated. See Asian financial crisis, dot com bust, pandemic, just about all the major declines happened suddenly. Such shocks are possible.

On the other hand, inflation/higher rates, which would hurt both stocks and bonds, are highly anticipated by the market, but still would do a lot of damage. Go back to the Taper Tantrum of 2013.

A major geopolitical event involving China, Iran or NKorea for example could result in a hit to the markets. These may be unanticipated right now but they are far from remote possibilities.

My strategy is just to be ready for these based on longterm strategy. A market swoon is a good time to buy equities.

And the only things more expensive right now than stocks are bonds. So i am limiting duration everywhere.

 

[jazz4cash]

This is one of the reasons why we put all of our assets under the management of a Vanguard advisor, who has them in a fairly conservative 50/50 allocation of index funds. I couldn’t panic and fiddle, even if I wanted to.

+1. OP may be well served by a low cost advisor at Vanguard or similar firm. A well planned Personal Investment Policy and the discipline to follow the policy would be very helpful. Of course an advisor isn’t a requirement but could be essential if an investor perceives shoes dropping that are really just noise. Create a plan and stick to it. Plan should include assessment of risk tolerance and an AA with enough risk-free assets to outlast a severe drop in the market.

 

[Mark1]

I feel the OP's pain. I'm converting 65K this year from expiring IRA CDs into a Roth IRA. My plan is to DCA within the Roth from cash to Total Market Index over the next year, because if I did it in one transaction the market will crash the next day.

I never worry about my AA because the day I buy 4k within my Roth, I'll sell 4K within my 401K account making it a wash.

I prefer my Roth account to be in the market more and my taxable IRA money to be more tilted towards safe money (CDs, etc.).

 

[pb4uski]

This bull market started on March 23, 2020, after the markets dropped 34% due to Covid. So this bull market is not old, rather, quite young. The markets "seem" overvalued at the moment, but with the light at the end of the tunnel on Covid growing by the day and the new stimulus about to jumpstart GDP growth not seen in decades, with predictions that it will last into 2024, and the possibility of infrastructure further stimulating growth, I don't see a major pullback as likely in the near term. (Famous last words[emoji857]) ...

I was actually quite concerned about the markets being overvalued before covid hit... since then the economy has stalled in comparison to the expected economy pre-covid while the market has soared after a brief drop... so I'm more concerned about the markets being overvalued now than I was in early 2020. Also, consumer spending is 70% of the economy and there have been millions of lost jobs... many of which will never come back. The impact of easy money by the Fed artificially inflating stock values, etc.

I have no faith that stocks are a sensible value proposition at these levels so I'm not buying but I have a fair amount of dry powder if they ever come down to earth. I have tried to selectively buy preferreds and have about 27% of the portfolio in preferreds that yield ~5.5%.... and I have 35% in 3.0-3.5% 5-year CDs that I bought in 2019 so the portfolio is still growing since we have such a low WR.

 

[MRG]

This is one of the reasons why we put all of our assets under the management of a Vanguard advisor, who has them in a fairly conservative 50/50 allocation of index funds. I couldn’t panic and fiddle, even if I wanted to.

+1

I manage 65% of our assets and the other is at Vanguard under PAS for .30. Part of my logic is if I predecease DW her directions are to put it all in Vanguard and allow them to manage everything. When I signed up and gave them our desired AA they did it all including putting it all to work at once.

 

[MichaelB]

My DH and I went to mostly cash in our retirement accounts mid-2020. We're currently sitting on about $1M in money market funds. I also have a "play money" account with about $138K in it.

Now we're trying to figure out when the heck to dive back into the market.

At the start of this year, we were thinking something horrible was looming as a result of the economic destruction caused by the Covid virus. So we keep waiting and waiting for some kind of "significant" (subjective term) drop where we'll feel good about getting back in.

As you well know, all the indexes are now at or near all-time highs. I remember the former president wearing a hat with "30,000" on the front at a news conference back when the Dow hit that number, because it felt amazingly high. And now?--it's over 33.5K! Unbelievable.

Does anyone here still think something "catastrophic" is bound to happen later this year? It just feels like everything is SO high, it's a dumb time to even consider getting back in.

I know this is bottom-line a question about market timing, which never works. So I suspect what we SHOULD do is just decide on some percentage and put that much back into the market say, once per month, until we're back in completely--so basically dollar cost averaging.

Thoughts?

BTW, I retired in Feb 2020 at age 61 and my younger spouse is still working a $40K-year job that pays for our health insurance and most of our bills. I took a part-time job 12-15 hrs/week just to keep my sanity last Spring, so that covers "extra" stuff like personal training and gifts. We don't need any of the money in our IRAs for at least a couple of years.

Thanks.

Here’s a recent thread about major fears expressed by institutional investors and portfolio managers over the past 10 years, and two things can be concluded. 1) There is always a major fear, and it usually looks legitimate. 2) The event that brought about a market crisis was not among the top feared issues in the preceding one or two years.

There is always something to fear. Competent investing requires us to manage portfolio risk, not avoid it. There is nothing easier than to spout all the things that can go wrong and list reasons why we should be afraid. Always remember fear is the mind killer.

 

[street]

Here’s a recent thread about major fears expressed by institutional investors and portfolio managers over the past 10 years, and two things can be concluded. 1) There is always a major fear, and it usually looks legitimate. 2) The event that brought about a market crisis was not among the top feared issues in the preceding one or two years.

There is always something to fear. Competent investing requires us to manage portfolio risk, not avoid it. There is nothing easier than to spout all the things that can go wrong and list reasons why we should be afraid. Always remember fear is the mind killer.

That is nicely said, and reminder of the market timers, selling and trying to get back in. I have made one bad decisions through the years having fear of what could happen. I learned really fast to have patience, and not fold. I'm a believer everyday I'm not in the markets I'm loosing, the sooner people get back in the better they will be.

I have dry powder if I want to buy in but prefer to keep my dry powder to live on. My thinking is not to sell until I have too, compounding, plus time is huge.

 

[RetireeRobert]

......The impact of easy money by the Fed artificially inflating stock values, etc.

I have no faith that stocks are a sensible value proposition at these levels so I'm not buying but I have a fair amount of dry powder if they ever come down to earth. I have tried to selectively buy preferreds and have about 27% of the portfolio in preferreds that yield ~5.5%.... and I have 35% in 3.0-3.5% 5-year CDs that I bought in 2019 so the portfolio is still growing since we have such a low WR.

Very nice! I like your approach. I myself last April, when Covid slew the stock market, deployed a bunch of my then dry powder (which was then over 90% of AA) into strong dividend paying stocks and preferreds.

I now have income into my IRAs which exceeds my RMDs from my IRAs. The runup in the preceding year was so nice, to the tune of up 50% nice, I also took some profits and put back into dry powder. But still leaving me with nice income inside my IRAs. Now awaiting the next shoe to drop so I can top off my income producing investments inside my IRA.

 

[harley]

I have always been highly invested in equities, at many points 100% other than my real estate holdings. I, like pb4uski, was concerned about equities being overvalued even before the pandemic started, and I used that concern to reallocate my AA to something more to my comfort level. My RE slice is still about 50% of my net worth, but within the other 50% I'm 50/50 stocks/bonds and FI. That actually gives me a relatively low equity chunk, and I'm happy with that. I've been tempted to increase my rental properties in place of FI, but housing prices are even more out of whack than equities, so I'll just keep on keeping on.

But yes, I do expect the other show to drop. Paying for real stuff with monopoly money just doesn't seem sustainable in my opinion. However, as JM Keynes said, "Markets can remain irrational longer than you can remain solvent."

 

[flintnational]

This is one of the reasons why we put all of our assets under the management of a Vanguard advisor, who has them in a fairly conservative 50/50 allocation of index funds. I couldn’t panic and fiddle, even if I wanted to.

+1

OP, I do not believe "When is the other shoe going to drop" the right question. It appears fear led you to get out last year and regret is apparently driving your decisions now. Neither are helpful to maximize long term performance. You may want to consider an advisor at Vanguard or Fidelity. They can help set an AA that fits your risk tolerance and hopefully ease your mind when the market crashes. And, it will crash and soar and crash and soar, and repeat.

 

[street]

+1

OP, I do not believe "When is the other shoe going to drop" the right question. It appears fear led you to get out last year and regret is apparently driving your decisions now. Neither are helpful to maximize long term performance. You may want to consider an advisor at Vanguard or Fidelity. They can help set an AA that fits your risk tolerance and hopefully ease your mind when the market crashes. And, it will crash and soar and crash and soar, and repeat.

Some more great advise for you. FA can get get you what your are wanting and back on track for your future goals. Having that help I would think would help a lot. Doesn't mean you have to continue with his service but can help get the ship headed in the direction you want.

Good luck to you.

 

[Athermos4u]

My DH and I went to mostly cash in our retirement accounts mid-2020. We're currently sitting on about $1M in money market funds. I also have a "play money" account with about $138K in it.

Now we're trying to figure out when the heck to dive back into the market.

At the start of this year, we were thinking something horrible was looming as a result of the economic destruction caused by the Covid virus. So we keep waiting and waiting for some kind of "significant" (subjective term) drop where we'll feel good about getting back in.

As you well know, all the indexes are now at or near all-time highs. I remember the former president wearing a hat with "30,000" on the front at a news conference back when the Dow hit that number, because it felt amazingly high. And now?--it's over 33.5K! Unbelievable.

Does anyone here still think something "catastrophic" is bound to happen later this year? It just feels like everything is SO high, it's a dumb time to even consider getting back in.

I know this is bottom-line a question about market timing, which never works. So I suspect what we SHOULD do is just decide on some percentage and put that much back into the market say, once per month, until we're back in completely--so basically dollar cost averaging.

Thoughts?

BTW, I retired in Feb 2020 at age 61 and my younger spouse is still working a $40K-year job that pays for our health insurance and most of our bills. I took a part-time job 12-15 hrs/week just to keep my sanity last Spring, so that covers "extra" stuff like personal training and gifts. We don't need any of the money in our IRAs for at least a couple of years.

Thanks.

There is timing the market, and there is recognizing when the building is on fire. I sold some cisco stock awhile back for around $30.00 a share, my cost basis was over $80.00 a share. I purchased it 20 years ago during the dot com. Webvan, corning glass, and many others are gone or still underwater. I knew better back then, but did it anyway. Everyone is fairly sure the market will correct sooner rather than later, and as I learned, price is more important than time. Whatever you do, be aware of the risks, and make an informed decision.

 

[Out of Steam]

On the "sleep at night" principle, we dropped from 35-40% stocks, to about 20% stocks after the first rebound in May. This doesn't include shares in an ESOP.

With recovery and a little bit of returning to the market, we're now at 28%. [EDITED TO ADD: Made a transaction today that increased that by about a percentage point.] At this point, we think we've taken enough money off the table and can let the stock proportion drift up, while replacing some of the fixed income with growth and income or inflation-linked bond funds. The ESOP will cash out over five years starting in 2022, and will become more diversified stock investments.

We have been drawing income and still have more money than when we retired in 2019, so no complaints.

 

[jazz4cash]

. ... if I did it in one transaction the market will crash the next day.

But if you did, wouldn’t that solve the OPs problem?

 

[street]

When is a good time to get back in, my answer would be now! Looking back since April 1st, 2020 the DJIA has moved from 21,917 points to what is at this moment of 33,800 points 04/09/2021 of 2:23MT. That is a 11,883 point advantage which could of meant a lot of green backs in just one year.

So, waiting till the other shoe ever drops, a lot of market gain has happened. Not saying this style fits all, some expressed their motives and ideas/thinking how they manage their money and that is great also. My point is NOW is better then tomorrow if you want to get back in. IMO

 

[braumeister]

My point is NOW is better then tomorrow if you want to get back in. IMO

One of the best bits of advice I ever got was to turn what many people do around. It's common for people to dollar cost average by buying more shares of something when the price is going down, because they are getting them cheaper and cheaper, and lowering their average cost.

But if you think about it, it makes more sense to DCA on the way up, because you're buying something that has momentum to go still higher and all your shares are getting more valuable. Many other conditions apply, of course, but other things being equal this makes more sense to me.

 

[Montecfo]

On the "sleep at night" principle, we dropped from 35-40% stocks, to about 20% stocks after the first rebound in May. This doesn't include shares in an ESOP.

With recovery and a little bit of returning to the market, we're now at 28%. At this point, we think we've taken enough money off the table and can let the stock proportion drift up, while replacing some of the fixed income with growth and income or inflation-linked bond funds. The ESOP will cash out over five years starting in 2022, and will become more diversified stock investments.

We have been drawing income and still have more money than when we retired in 2019, so no complaints.

Stocks are higher now than in May, but you were nervous then but comfortable now.

Leaving a lot on the table it seems like. Unless your investment portfolio does not matter due to pension or similar.

 

[street]

One of the best bits of advice I ever got was to turn what many people do around. It's common for people to dollar cost average by buying more shares of something when the price is going down, because they are getting them cheaper and cheaper, and lowering their average cost.

But if you think about it, it makes more sense to DCA on the way up, because you're buying something that has momentum to go still higher and all your shares are getting more valuable. Many other conditions apply, of course, but other things being equal this makes more sense to me.

Yes, that is a great point, and in the past when I bought I did actually what you have said. I bought in large amounts one time and was done with it, no messing around each month, got it in there and didn't look back.

Great advise braumeister!! Time keeps ticking and at the end of the day, I should of bought yesterday. LOL That is a game I don't play, don't need the worriers.

 

[Lsbcal]

Well SoReadytoRetire, with all this advice have you made a decision?

P.S. I would just close my eyes and go to your AA allocation. But I don't have this tough decision. My agonizing occured last year.

 

[Bee4]

patience

My DH and I went to mostly cash in our retirement accounts mid-2020. We're currently sitting on about $1M in money market funds. I also have a "play money" account with about $138K in it.

Now we're trying to figure out when the heck to dive back into the market.

At the start of this year, we were thinking something horrible was looming as a result of the economic destruction caused by the Covid virus. So we keep waiting and waiting for some kind of "significant" (subjective term) drop where we'll feel good about getting back in.

As you well know, all the indexes are now at or near all-time highs. I remember the former president wearing a hat with "30,000" on the front at a news conference back when the Dow hit that number, because it felt amazingly high. And now?--it's over 33.5K! Unbelievable.

Does anyone here still think something "catastrophic" is bound to happen later this year? It just feels like everything is SO high, it's a dumb time to even consider getting back in.

I know this is bottom-line a question about market timing, which never works. So I suspect what we SHOULD do is just decide on some percentage and put that much back into the market say, once per month, until we're back in completely--so basically dollar cost averaging.

Thoughts?

BTW, I retired in Feb 2020 at age 61 and my younger spouse is still working a $40K-year job that pays for our health insurance and most of our bills. I took a part-time job 12-15 hrs/week just to keep my sanity last Spring, so that covers "extra" stuff like personal training and gifts. We don't need any of the money in our IRAs for at least a couple of years.

Thanks.

it will drop; it just might take a while. I waited 3 years for the march 2020 cliff drop to get back in.

 

[Cayman]

Knowing your risk tolerance and setting your AA to reflect it is a strong predictor of success/failure. For most of us, that's easier said than done.

Your risk tolerance sounds fairly low (mine is too, I'm 54, RE 4 years WR <2%). I still want some skin in the market, so I leave 35% in equities, might be 40% now. Sure I'd like more $ but it'd just go to my estate. I place a higher value on sleeping at night than potential market gains (and losses).When you've set an AA that reflects your conservative risk tolerance, then you can DCA in, as others have suggested

 

[Closet_Gamer]

I think there are four questions:

1) Will the market have a major "shoe drop" at some point?

Yes. Definitively. We will climb a wall of worry, something bad will happen, and the market will drop precipitously.


2) When the "shoe drops" will it create a lower point than where the market is right now, and therefore a better time to get back in?

Just because the other shoe drops, it doesn't mean it creates a more opportune buying moment.

Consider this graph of the DJIA:

https://www.google.com/search?q=dji...131i433j0l2.3268j0j7&sourceid=chrome&ie=UTF-8

During the great blowout of 07-09, the DJIA dropped about 50%...

14000 Oct 2007
7000 Feb 2009

It took four years for it to recover its previous high: 14000 Mar 2013

It then went on a relatively straight climb to 28000 Jan 2020.

When Covid hit there was a "devastating" pull back to 19000.

But...there has never been a point to get back in at a price lower than 2013's 14000. Even at the point of maximum Covid pain, the market was 35% higher than when it had recovered its previous high after "first shoe" dropped in 2007.

Let's say we caught at 35% drop from here...that would still leave the market at 21970...higher than the Covid low of 19000 where you sold.

A future "shoe drop" will feel catastrophic when it happens, but even after that decline, your buy-in price may well be above 33,800.


3) Will such a decline be so great as to also overcome the foregone dividend yield?

Gains in the market are not solely driven by asset prices, but also based on the dividend yield along the way.

Let's estimate the S&P 500 dividend yield from 2013 to 2020 to be 1.7%.

If you stayed out of the market waiting for the shoe to drop, that's another 10% or so you would have left on the table. So, not only would you need to catch a new market bottom...that bottom would have to be even lower than when you could have bought in.

The S&P 500 is currently yielding 1.45%. Money put in back in November would have had a yield of 1.8%


4) If it does correct drop lower than 33800,will you have the ability to overcome your emotions and jump back in?

History...and investor psychology...says no.

Your loss aversion will be screaming its maximum volume as CNBC puts up giant pictures of bears wearing red sweaters while flashing "market carnage destroys all hopes of safe retirement" on the screen.


Am I saying that there will never be a time to get into the market below 33800? No. Could well happen. Probably will happen to some degree in the coming days and weeks.

But can you properly time this at scale within your portfolio.
Almost certainly not.

As others have said: pick a sustainable AA and then DCA towards your target allocations over the next few months. The "all-in" approach may actually be better, but it will be emotionally quite difficult.

My $0.02.

 

[Brian]

+1


Yes, I'm expecting a significant stock market drop in the next 1 to 2 years.



I moved from 100% stocks to less than 10% stocks in Feb 2021. I did this because the market reaction just doesn't make sense to me. Looking at the big money investor investment actions (Warren Buffet, Bill Gates, etc.) was part of my decision process.


I've been 100% stocks for +30 years. I've held fast during all the past ups and downs. I've typically kick myself for not anticipating the previous big drops after the fact. I'm retired and have more than enough $ saved for my lifestyle (savings = 40 X last annual salary). So I've decided to just drop out of the market for awhile. My only real concern with my current cash/bond position is losses due to high inflation.

 

[Out of Steam]

Stocks are higher now than in May, but you were nervous then but comfortable now.

Leaving a lot on the table it seems like. Unless your investment portfolio does not matter due to pension or similar.

We've learned since May that people and companies have figured out how to do commerce in a pandemic, and that Americans will accept somewhat higher disease risk to continue commerce than people in most other developed countries.

My risk tolerance has always been pretty low, and I've never been much over 50% in stocks. My wife's tolerance is a little higher. Almost half the fixed income has a minimum yield of 3%, so is not a zero-interest situation.

I have a pension that, with Social Security, will meet our basic needs. Reasonable comfort will require 2.5% from retirement savings, and our tolerance for risk on enough money to provide that is pretty much gone.

 

[Markola]

I like the Exchanges at Goldman Sachs podcast. Smart peeps. This week, one of their egg heads said they are trying to advise clients that stock market drops of 10% or more are more frequent and that we are likely to experience one during 2021. However, he said, the stock market might rise 15% before a drop happens.

So there you go.