What's Next For Equity Markets? And What To Do?

[haha]

When I look back to fall of '08 I think I must have been asleep. I was so used to crummy valuations on decent stocks that when they got a bit better I was like the high school boy who unexpectedly got led into the bedroom. Only I got no second chance.

My all-equity or equity-like portfolio was down 40% at its worst, in November '08 then again in early March of this year, when compared against its max value in Oct '07. Today, it is still down 25%. (Maybe 7% or so of this is living expenses, but wherever it went it is gone.)

So to get whole, I need a 33% gain. Definitely we will see 33% gains, probably sooner than later. (I mean within 2 years or so.)

But from what level will that 33% gain start? Today’s level? Or will we have another thud down, from which I would need much more than any 33% to get even?

I treat maybe half of my holdings as "will not sell unless something is wrong", but that still leaves 1/2 that I could trade. 1/3 or so of my port is in an IRA, and I could sell it out completely with no tax and little transaction costs. The other 2/3 is taxable, but I think my gains could be offset more or less completely with losses that linger in the account.

The thing is, I see most of what I own as attractively priced, at least compared to anything I have encountered in the last 10 or 15 years, save perhaps REITs and tobacco stocks around the millennium. Against that is the reality that if it is attractively priced now, what the heck was it one short month ago when the quotes were much lower?

Also it produces more income than cash or intermediate term treasuries. That can be a false consideration though, as the drawdown I experienced could take me a long way even at 1% interest rates. Income isn't much when compared to violent capital depreciation.

I probably would not consider anything at this point other than holding, but being down 40% was a real pain, and I am not so sure that I like being down 25% either. Also, we are nearing the "sell in May and go away" date that has too often been accurate. I have already jettisoned all junk except of course the board favorites ISM and OSM, as well as one bulk shipper and one terrible bank. Other than ISM/OSM these were (or are now) small positions not worth selling, and definitely worth keeping for recoveries that I believe are possible though perhaps not likely.

Perhaps others are thinking this same way, or wondering along the same lines. Ideas and opinions?

Ha

 

[Moemg]

When I think of my portfolio I never compare it to Oct.2007 . That to me was a brief fantasy . My portfolio is also down a lot and the only way I can think of the losses is in terms of how much my income has dropped so thinking of it that way has kept me sane . What will the stock market do now ? If I knew I would place a huge chunk on red but the stock market gives and the stock market takes but I feel better now that at least we are having more up days .I have some cash on the sideline that I may throw back in the market .

 

[Gone4Good]

Also, we are nearing the "sell in May and go away" date that has too often been accurate.

I've been thinking that too. Mostly because markets don't just move in one direction for long. And the past two months they've been straight up. I figure we're due for a nice pull back even if we really are out of the woods and the old lows hold. If I were to sell anything it would purely be as a trade hoping to put money back in at lower levels.

In terms of thinking about what I've lost, it's a sunk cost analysis. The previous highs don't (or at least shouldn't) matter to the decisions facing me today. The only thing that matters today is whether I would buy my existing investments all over again at today's prices and in today's proportions. For me that answer is yes, which makes selling equities very hard right now even though I think it might be wise as a short term trade.

 

[Bikerdude]

My all-equity or equity-like portfolio was down 40% at its worst, in November '08 then again in early March of this year, when compared against its max value in Oct '07. Today, it is still down 25%. (Maybe 7% or so of this is living expenses, but wherever it went it is gone.)

That's a great record for that type of portfolio. I'm still down 21% from the 07 high with a balanced portfolio that began at 50/50. The S&P500 is still down 44% or so from the peak. Care to share your asset makeup?

 

[Animorph]

I selling most of my temporary positions and saving the cash for maybe one more downturn. Just about complete. If that doesn't come, then I guess it's living expenses for a little longer or paying off the HELOC.

 

[LOL!]

FWIW, I have rebalanced completely back to my desired asset allocation. I am back to 31% US, 31% foreign, 31% bonds, 7% commercial real estate.

I have no cash to deploy: my money market account is at $0.00 and my cash sweep has about 84 cents in it. All tax loss harvesting is done. All current holdings are in the black I think. 401(k) contributions nearly maxed for the year and 401(k) is showing a net gain for the year as well. All Roth IRAs maxed for the year.

After the nice little run in the last month, I can now sit back and watch my portfolio get destroyed again. And I can start spending money again.

 

[bbbamI]

I sure wish I knew what the stock market will do. For a little over a year, I haven't been investing much in the market....mainly I've been hoarding cash. My AA is off by 7%, so I think next week I'm going to start buying...or maybe the week after that....

 

[Dawg52]

I'm a dumb ass. I have no idea what to suggest.

 

[emilylynn]

I have had some success trading the volatility around some badly beaten core positions. I can usually grab at least a few percentage points of profit each day regardless of the trend. With respect to several seriously negative holdings, I've managed to decrease my average cost per share by more than 10 percent. Every little bit helps.

 

[CCdaCE]

I dumped 3k into the wife's R-IRA from the tax return. I chose Target Retirement 2035 (72% Total Stock Mkt., 10% Bond, 10% Euro. Stock, 5% Pacific Stock, 3% Emerg. Mkt.) for that simply because everything seemed relatively correlated lately. The ol' shotgun approach is all I can muster. I've dumped all my money into Total Stock Mkt fund and all of hers into Total Retire 2045 or 35. Google Finance says Total Retire 2045 is only down 7% or so, since Nov. '03 (that's all the data they show) as opposed to Total Stock Market being down 14%. Assuming lump sum back in '03 -- which is never the case. See this link for a comparison.

If I had to guess about an additional fund/sector/style box to consider it would be small cap. Simply because that's the one "I've heard" has been beaten down the most. But, when you do a similar comparison between small cap and Total Stock Mkt.; over the last year there's not much difference. Back to the correlation thing/problem.

In summary, I wish there were some ragin' hot screamin' deals out there, but, none seem to be screaming for my attention. But, then again, maybe I'm not listening very hard. My guess is Mr. Market has to get smacked around summore before he comes out of his stupor.

-CC

 

[harley]

I'm a dumb ass. I have no idea what to suggest.

Actually, if you were a dumb ass you'd have all sorts of advice.

I can't address the OP either, not following that type of investing model. I've read your posts often, Ha, and admire your knowledge and cojones in your decisions. I'm still holding a lot of cash, wondering if I missed the bottom or am still waiting to see it. It shouldn't matter since I keep telling myself I'm not a dirty timer. I've got my AA defined, but I just can't seem to pull the trigger in these uncertain times. I wonder what I'll feel like if I buy in after missing about 50% of the recovery, whenever that happens.

 

[ejman]

Well, we certainly had some great valuations last month but who knows? maybe they will be back - maybe not. After a lot of stumbles along the way I found that the plan that works for me is a fairly wide 10% band in my asset allocation for stocks (50-60 % - I'm 59 years old ER'd since December 2002). I sold stock funds in early 2007 when my allocation went well over 60%. I started wondering If I would really have the guts to sell bond funds/MM funds when my stock fund allocation hit 53% at the March lows and we started approaching the 50% lower boundary. Well, its now back up to 54.7% so whew! postponed that decision for now.

Long story short for me if stocks are between 50-60% allocation I do nothing. I can't tell you how much this has simplified my ER life. Is it the best approach? probably not I'm sure people far smarter than me could tell me a long litany of missed opportunities and how I would do much better if I did XYZ, or how I would sleep much better if I was all cash, or all gold, or all annuities but this approach works for me so there you are.

 

[unclemick]

I'm a dumb ass. I have no idea what to suggest.

-32% at one point Norwegian widow stocks, and dinged on divy's. I'm all ears. I haven't really sold any losers or culled any financials where I got dinged by dividend cuts.

I have the - shifting the deck chairs on the Titanic feeling as far what to chase next.

heh heh heh - ah yes also DOW and EGLE took hits. . At least my hormones are getting a workout and it's not even football season.

P.S. My weird meter has me looking at Vanguard's Total World Stock Index. But just looking.

 

[Grep]

The strategies that people adopt on this board are as varied as the characters behind them. But many of us were probably more paralyzed than asleep last month. I did do some buying near the low, but in hindsight I wish it had been more.

At this point I'm about 85% equities, and I'm down about 15% including interest and dividends. This is a little better than I had been expecting back at the March lows, but it has still been a traumatic ride that is far from over.

This level of equities is more than I wish to maintain long term, and I'll be looking to reduce this exposure. But when? I tend to suspect that we have seen the worst, and I'll probably hang on a while, neither buying nor selling except for a final round or two of tax-loss harvesting.

Should we revisit the lows, I'll buy a bit more again. Should we see a fairly rapid 33% rise from here, as mentioned above - well, that would certainly be very, very welcome! Before then I'd have to review my longer-term goals and asset allocation plans.

 

[audreyh1]

Long story short for me if stocks are between 50-60% allocation I do nothing. I can't tell you how much this has simplified my ER life. Is it the best approach? probably not I'm sure people far smarter than me could tell me a long litany of missed opportunities and how I would do much better if I did XYZ, or how I would sleep much better if I was all cash, or all gold, or all annuities but this approach works for me so there you are.

Congrats on an AA strategy that so simplifies your ER life!

The lesson for me this past year was to have a wider band like you! I ended up rebalancing on the downswing too often last year (twice, but that was once too often!). I had set a narrower AA range band so that under "normal" swift market corrections (10 to 15%) there would be enough of an out-of-balance condition to cause me to rebalance.

After this past year I've decided to wait for more extreme market events/stronger divergences before rebalancing. The other little market correction "opportunities" aren't so important.

Audrey

 

[Rambler]

I was a little too heavy in equities and too lite in bonds, so I needed to true up my AA. The past three weeks since my bonus came (no, not AIG) have been bond shopping, with a few stocks thrown in, mostly a few stocks that are in my opinion beaten up too badly.

Next thing for me to work on is to shift away from higher cost, lower performing mutual funds to lower cost ETFs. That will take time, the losses are humungous...

Next contributions will be towards some of those beaten up stocks and my target ETFs.

R

 

[freebird5825]

2007 - chicken feathers at 50/50 AA, DCA to bond funds
2008 - market migrated it to 45/55 AA, DCA to bond funds, -24% annual loss exceeded my comfort zone.
2009 - damage control mode - I set AA to 40/60 with a minor "psst Wellesley" manuever, majority of DCA to stock fund (VHDYX) until market recovers, a little bit of DCA to bond funds ongoing.

An overall strategy change I made is trying to get maximum "match" to my DCA thru reinvested dividends from TE munis and dividend stocks in the choice of MFs to direct my DCA toward.

Simple and brainless MO here - redirect my annual DCA to the current losers.
A few mouseclicks to change the Automatic Investments settings at Vanguard beats the heck out of all that Proceeds of Sales of Mutual Funds and Cost Basis paperwork at tax time.

I don't mess with individual stocks. Too much thinking involved.

 

[Midpack]

Perhaps others are thinking this same way, or wondering along the same lines. Ideas and opinions?

I used to be all individual equities, now I'm all funds, so you're smarter/braver than I am. From Oct 07 to Mar 09 our net worth has dropped exactly 25%. I've deliberately let our AA drift from 79/15/6 to 59/34/7 mostly through changes in NAV, less through rebalancing. Right or wrong, despite the (unexpected) decoupling in (negative) correlations between asset classes, I know of no better approach than the AA I've always followed (Four Pillars to be specific), and that's what I plan to stay with.

I'm a dumb ass. I have no idea what to suggest.

Join the club, we've all been given lifetime memberships in the dumb ass club over the past 18 months. Actually you're not, unless we all are - so let's not.

May be news to no one, but I have always tried to remember what I got from Peter Lynch (I think) years ago. Don't look back AT ALL to decide your next move, look only at your options going forward. Looking back is one of leading causes of the sell low mistake. You should sell or buy something only when you're convinced the upside of the new holding is greater than where your money is now. If you're not sure, stay until you are, if nothing else - why generate trading costs if you're uncertain. Which makes me question a few of my holdings FWIW...

...I have small positions (both formerly at least 2X) in REIT (VGSIX) and Comm/Energy (VGENX) in tax sheltered accounts that I wonder about in terms of relative upside right about now. I believe VGENX does have a lot of upside, but it's hard to imagine any REIT coming back strong any time soon. I also have all my bond exposure (34%) in an intermediate bond fund, and keep asking myself if I should have part of it in a TIPS fund. Comments are welcome. Good thread.

 

[MichaelB]

Are you looking for maximizing your return or having a positive return while minimizing your risk? Focusing on the delta to your highest portfolio value isn’t likely to lead to the right portfolio choices – it’s like staring at the aftermath of one of those high speed highway multicar collisions. The scene is compelling but it is distracting you from what you should be looking at – the road ahead.

My long term portfolio objective is to provide 4% (at 2009 levels) after inflation for us indefinitely. This is now riskier - a small portfolio decline now makes non-survivability a real possibility and another large decline makes it the most likely outcome. Therefore, ’09 and ’10 have to be positive – real after expense return. That means there needs to be more focus on risk.

We are dedicating more resource to fixed income and less to equity, and as equity rises we are selling. No worries about ST cap gains, as we booked enough losses last year to avoid CG taxes for awhile. Corporate fixed income is yielding 7-8% right now with a lower level of risk, so combined with a lower equity allocation (around 25%) I thing we can achieve our objectives.

Uncertainty about 1) bank balance sheets 2) household balance sheets, 3) political commitment to aid someone other than wall street means there’s still opportunity for lots of volatility in equity prices.

 

[W2R]

Market timing doesn't work for those who do not have inside information. This is not new information on this board, or I would provide links.

Decide on your asset allocation, diversify, and hang on for the ride.

(If you have money to invest, dollar cost average, dollar value average, or don't. I like to DCA because it is easy and because that way I don't kick myself quite so much.)

 

[audreyh1]

One thing I had done during the 2000s - after the market recovery in 2003 - was let my equity allocation drift higher. Not much, just very gradually 55% to 58%. The main motivation for this was tax efficiency. After 2004 our portfolio seemed to start throwing out a LOT more in distributions and the tax bite was higher percentage wise. I didn't like that! Another thing subtly encouraging this AA creep was knowing that a 60% equity portfolio had a slightly better portfolio survival than 55%.

Well, we sure got punished for letting our AA drift up slightly! I would have been rebalancing slightly more aggressively during the run-up otherwise. I'm sure it didn't really make that much difference. But, do I regret letting the equity AA drift higher (even though so tiny) - yes!

In fact, now that I am 10 years into retirement I am thinking that before long I should be adopting a different type of AA creep. At some point as we get older I think it makes sense to reduce equity exposure by 1% a year because the portfolio survival time period is shrinking, and gradually reducing short term volatility makes sense as long-term inflation concerns become less of an issue.

Tax consequences be damned! Well - they won't be an issue for a few years now - funds have large capital gains losses that can be offset against future capital gains; interest rates are low so interest income/dividends are much reduced.

Just some more thoughts on adapting/tweaking investment philosophies.

Audrey

 

[FIREd]

My net worth reached an all time high this week (thanks to strong inflows of new money in the past 6 months and the nice market run up in the past month). XIRR says I'm still down about 25% from the 10/2007 top though. In the meantime AA has shifted from 65/35 to just below 60/40. I intend to keep it there so I consider myself fully rebalanced at this point. I am still buying stocks and bonds. I think that we are probably going to retest the lows at some point, but I'm too chicken to do anything about it, so I'll ride it and maybe rebalance if the DOW dips below 7,000 again.

 

[FIREd]

...I have small positions (both formerly at least 2X) in REIT (VGSIX) and Comm/Energy (VGENX) in tax sheltered accounts that I wonder about in terms of relative upside right about now. I believe VGENX does have a lot of upside, but it's hard to imagine any REIT coming back strong any time soon. I also have all my bond exposure (34%) in an intermediate bond fund, and keep asking myself if I should have part of it in a TIPS fund. Comments are welcome. Good thread.

FWIW...
I have been very aggressive with my VGSIX position. I loaded up on VGSIX when it dipped below $8/share and the 38% run up from the bottom has helped cut my losses in half. The dividend has held up surprising well too. I think that, looking forward, REITs will go back to be primarily an income play rather than a growth play. That's fine by me... As for bonds, I am slowly increasing my exposure to TIPS and I-bonds and lowering my bond funds' average duration as I believe that inflation is a bigger risk than deflation in the next 5 years.

 

[Grep]

FWIW...
I have been very aggressive with my VGSIX position. I loaded up on VGSIX when it dipped below $8/share and the 38% run up from the bottom has helped cut my losses in half.

I also did this, as well as having increased my positions in Small Cap Value and Emerging Markets. All three have done well during the past month.

I expect to hold VGSIX (in tax-advantaged) for a while, if only for the dividends. I'm not hopeful for a continued rush higher in NAV, however, especially given recent rumblings in the commercial real-estate sector (e.g., General Growth's bankruptcy), and I wouldn't be too surprised if it collapsed again.

Psychologically, it would feel nice to cash in some of the profits off of the recent lows. But of course I've got a raft of underwater equities to think about, too.

Plenty has been written about buying, and relatively little about strategies for selling (perhaps this is the selfish bias of Wall Street in action). One thought is to follow Audrey's example and value average down by reducing my exposure by say 2% per year (larger than her 1% since I'm starting from a higher equity allocation).

 

[audreyh1]

On "cashing in profits": I rebalanced to my target AA (55% equities) on Jan 15 of this year when the S&P was 840 or so.

As of yesterday, the portfolio was already at 56.5% equities. If the S&P makes it back to 1000 anytime soon, this should be enough to trigger my out-of-balance even with my new wider "tolerance band".

Kind of hard to guesstimate because it also depends on what my bond funds do at the same time. If they rally as well (they contain plenty of corporate bonds), then it might take longer to rebalance.

Well, we'll just wait and see. No action taken unless the portfolio gets sufficiently out of balance.

Audrey