Historically, what is the recovery time for a market "correction"?

[mrfeh]

We keep 3 years in short term investments for use during a market drop.

A little context - we do this because until 59.5, we will live off of our taxable accounts, which are 100% equities.

 

[FlaGator]

What is a good fixed income choice to hold in a taxable non ira account? Feel free to be specific. I’ve been buying total bond funds but still nowhere near enough fixed. I’m thinking of moving my roth and my former employer 401 k to vanguard and putting it all in wellington.

Munis if you still have a paycheck that puts you in a higher tax bracket. VGD has several for high tax states and a spectrum of durations for the rest of us.

If tax rate is not a concern, but yield is, a corporate fund with a 5-7 year duration. If you prefer safety over yield, Treasuries.

My holdings are Munis <5 years, TIPS and short Treasuries with a 70/30 allocation.

 

[rayvt]

I like that rebalancing rule of not going below a certain amount of fixed income during a bear market for stocks. For me, I think 5 years of fixed income would work, but to each his/her own.

VW

I don't see how this makes any sense. If we're 2 years into a bear market and you've spent 2 years worth of bonds, when you go to bump it up to 5 years you do so by selling stocks. But isn't that the opposite of what we're trying to accomplish by keeping this minimum bonds allocation--selling stocks when they are down?

Every time I work through all the scenarios, the only thing that "works" in all conditions isto just maintain your chosen asset allocation.

 

[rayvt]

What is a good fixed income choice to hold in a taxable non ira account? Feel free to be specific. I’ve been buying total bond funds but still nowhere near enough fixed. I’m thinking of moving my roth and my former employer 401 k to vanguard and putting it all in wellington.

You gave the best answer yourself----total bond market fund.

 

[VanWinkle]

I don't see how this makes any sense. If we're 2 years into a bear market and you've spent 2 years worth of bonds, when you go to bump it up to 5 years you do so by selling stocks. But isn't that the opposite of what we're trying to accomplish by keeping this minimum bonds allocation--selling stocks when they are down?

Every time I work through all the scenarios, the only thing that "works" in all conditions isto just maintain your chosen asset allocation.

By not selling all of your bonds to rebalance, you can still draw bonds for income instead of having to sell stocks while they are depressed. I am not talking about selling stocks to buy bonds-just the opposite. At some point you have to stop using your income funds to buy stocks, or you will have to sell stocks for income. Does that make sense?

VW

 

[audreyh1]

I don't see how this makes any sense. If we're 2 years into a bear market and you've spent 2 years worth of bonds, when you go to bump it up to 5 years you do so by selling stocks. But isn't that the opposite of what we're trying to accomplish by keeping this minimum bonds allocation--selling stocks when they are down?

Every time I work through all the scenarios, the only thing that "works" in all conditions isto just maintain your chosen asset allocation.

The rule applies to rebalancing when selling bonds to buy stocks. Not to drawing on your bonds for income.

 

[rayvt]

Like I said, I've run many different scenarios-----and the only thing that makes sense is keeping to your chosen asset allocation.

People come up with all sorts of different plans ... cash buckets, bond buckets, sell bonds/buy stocks, buy bonds/sell stocks, etc. etc. The thing is, two different people come up with the "best, makes sense" plans to do the opposite thing in the exact same market scenario. They can't both be right. That right there is a sign that these plans haven't been completely thought out.

What it amounts to is people come up with a scenario and design a plan that fits. But they ignore how their plan works in other scenarios. Hint: The market will not do what you plan for it to do. You cannot just assume that a bear market will last X years.

Sticking with your AA works in all scenarios. It will never be the best in any certain market conditions, but it will be the best when averaged over all market cycles.

 

[DEC-1982]

Re-balancing to maintain asset allocation is a good idea, and I think most people here would do it.

I think most people in this forum could handle 5-7 years of expenses without selling equities. OP, you need a poll/pol/pole asking whether people can get by without touching equities for 5, 6, 7, 8, 9, 10, 10+ years . Or has there already been a poll like this in the past?

 

[audreyh1]

Like I said, I've run many different scenarios-----and the only thing that makes sense is keeping to your chosen asset allocation.

People come up with all sorts of different plans ... cash buckets, bond buckets, sell bonds/buy stocks, buy bonds/sell stocks, etc. etc. The thing is, two different people come up with the "best, makes sense" plans to do the opposite thing in the exact same market scenario. They can't both be right. That right there is a sign that these plans haven't been completely thought out.

What it amounts to is people come up with a scenario and design a plan that fits. But they ignore how their plan works in other scenarios. Hint: The market will not do what you plan for it to do. You cannot just assume that a bear market will last X years.

Sticking with your AA works in all scenarios. It will never be the best in any certain market conditions, but it will be the best when averaged over all market cycles.

We all have our different schemes. Psychology matters, and different people have different psychology.

Personally, I won't go below X years after-tax expenses when rebalancing from bonds to buy stocks. I did it in Jan 2009, and I'd do it again. It worked for me. It gave me the fortitude to go ahead and rebalance most of the way.

What would have happened if I hadn't used that criteria? I probably wouldn't have rebalanced and bought stocks at all. Many folks didn't. It was a very difficult thing to do psychologically under those circumstances.

That's my scheme and I'm sticking to it under all conditions.

Maybe I can get some credit for retiring in 1999, having been through two very nasty bear markets and retired over 18 years now. I know how I react psychologically to various scenarios. So my "schemes" are designed to help me get through them in a reasonable way.

 

[VanWinkle]

"Maybe I can get some credit for retiring in 1999, having been through two very nasty bear markets and retired over 18 years now. I know how I react psychologically to various scenarios. So my "schemes" are designed to help me get through them in a reasonable way."

This is the most important sentence!!! You have been there and have the experience of making the tough decisions. I couldn't agree with you more on this one. Thanks for the insight and real world experience.

VW

 

[audreyh1]

There is theory, and there is practice. Once I started taking my personal psychology into account I became a far better investor.

 

[street]

I don't rebalance and really just watch what happens to my portfolio. I don't need my investments to live or retire on or too. The question asked in this post got a little off track but I have more in cash then most the way it looks. I'm talking cash as cd, savings accounts, etc.. I have enough at my present expenses to not ever have to touch equities or bonds in my life time. When I start taking SS I will have a WR of my cash funds of .3%.

This is the way I have planned for when I retired not sure if it is good or bad but I can say if the market hit a 10-20 bear market I still wouldn't have to sell any stock or bonds to live. To have that much in cash (which is make income) I did sacrifice 18% of my portfolio to live on in retirement. The other 82% is invested and working each day and always hoping it is working in the positive direction.

 

[VanWinkle]

I don't rebalance and really just watch what happens to my portfolio. I don't need my investments to live or retire on or too. The question asked in this post got a little off track but I have more in cash then most the way it looks. I'm talking cash as cd, savings accounts, etc.. I have enough at my present expenses to not ever have to touch equities or bonds in my life time. When I start taking SS I will have a WR of my cash funds of .3%.

This is the way I have planned for when I retired not sure if it is good or bad but I can say if the market hit a 10-20 bear market I still wouldn't have to sell any stock or bonds to live. To have that much in cash (which is make income) I did sacrifice 18% of my portfolio to live on in retirement. The other 82% is invested and working each day and always hoping it is working in the positive direction.

Also a great plan, because it works for you.

VW

 

[NW-Bound]

About 20-25% of my portfolio is in cash, or rather low-yielding instruments. The difference between its yield and bond yield is low, and it does not bother me.

At the 2.5% spending rate of the last 12 months, that would last me 10 years. In case of trouble, I would draw SS early, or cut back my spending. Just a quick look, and I could see that cutting back to 2% WR is easy. And then, the stock's dividend also helps generate some cash in that 10 years of drought.

So, perhaps I could go more than the current 70% stock AA. However, being a market timer that I am and seeing that the market is near topping out with high P/E, I am not going to throw it all in. But then, I never had the courage to throw it all in, certainly not at the bottom in March 2009.

 

[audreyh1]

Some people sold at the bottom in 2008 or 2009 no matter what their plan/intentions had been prior to that. Some of them did not buy back in either.

Thus Bernstein's huge about face in investing advice and his new "won the game" philosophy. https://www.whitecoatinvestor.com/bernstein-says-stop-when-you-win-the-game/

 

[street]

"Bernstein recommends a rule of thumb, based on annuity payouts and spending patterns late in life, that you should have 20-25 times your residual living expenses (after pensions/Social Security) invested solely in safe assets". He also said quoted that the 20 to 25% is not invested in stocks of any kind.

I find it interesting but I wonder how many have or had this plan when they started.

 

[43210]

Like I said, I've run many different scenarios-----and the only thing that makes sense is keeping to your chosen asset allocation.

People come up with all sorts of different plans ... cash buckets, bond buckets, sell bonds/buy stocks, buy bonds/sell stocks, etc. etc. The thing is, two different people come up with the "best, makes sense" plans to do the opposite thing in the exact same market scenario. They can't both be right. That right there is a sign that these plans haven't been completely thought out.

What it amounts to is people come up with a scenario and design a plan that fits. But they ignore how their plan works in other scenarios. Hint: The market will not do what you plan for it to do. You cannot just assume that a bear market will last X years.

Sticking with your AA works in all scenarios. It will never be the best in any certain market conditions, but it will be the best when averaged over all market cycles.

If you permit your asset allocation to be modified depending on your need, ability and willingness for risk, as circumstances change, then the differences between "asset allocation" and "buckets" become purely semantic.

 

[rayvt]

The rule applies to rebalancing when selling bonds to buy stocks. Not to drawing on your bonds for income.

There is nothing magical about the interest paid by bonds. A dollar doesn't know where it came from, and it doesn't act any differently depending on where it came from.

I think most people in this forum could handle 5-7 years of expenses without selling equities.

Why would you do that? Spending your non-equities (bonds, cash, etc.) is just another name for shifting your asset allocation more heavily toward equities.

So you're 5 years into a bear market and you have spent all your non-equity money so you're now 100% equites and NOW you have to sell them. Is that a great plan or what? Instead of rebalancing on the way down and selling stocks at 10%-20% down, now you HAVE to sell them at 40%-50% down.

 

[pj.mask]

I think historic items may not match very well. Remember when oil prices crashed and everyone said it will be a quick recovery? I think more people are expecting historic and that changes the outcome

 

[ERD50]

...

I think most people in this forum could handle 5-7 years of expenses without selling equities.

Why would you do that? Spending your non-equities (bonds, cash, etc.) is just another name for shifting your asset allocation more heavily toward equities.

So you're 5 years into a bear market and you have spent all your non-equity money so you're now 100% equites and NOW you have to sell them. Is that a great plan or what? Instead of rebalancing on the way down and selling stocks at 10%-20% down, now you HAVE to sell them at 40%-50% down.

But in a bear market, stocks are dropping, so any rebalancing is likely by selling off bonds instead, right?

Here's a simple spreadsheet, start at 60/40, stocks drop 10%/year for 7 years. As I mentioned before, a portfolio like this will probably kick off ~ 2.5% divs, so with a moderately conservative WR of 3.5%, only 1% has to be sold, so I keep a steady $10,000 spend, taken only from bonds (no inflation adjustment, keep in today's $). ("$00,000" added to keep things aligned)

# $600,000 $400,000 $00,000 60% 40%
1 $540,000 $390,000 $10,000 58% 42%
2 $486,000 $380,000 $10,000 56% 44%
3 $437,400 $370,000 $10,000 54% 46%
4 $393,660 $360,000 $10,000 52% 48%
5 $354,294 $350,000 $10,000 50% 50%
6 $318,865 $340,000 $10,000 48% 52%
7 $286,978 $330,000 $10,000 47% 53%

Selling off that from bonds isn't enough to keep equities up to 60/40. So you certainly would not sell stocks on the way down.

Even at $30,000 being sold from bonds, an ~ 60/40 is held w/o selling any stocks:

# $600,000 $400,000 $00,000 60% 40%
1 $540,000 $370,000 $30,000 59% 41%
2 $486,000 $340,000 $30,000 59% 41%
3 $437,400 $310,000 $30,000 59% 41%
4 $393,660 $280,000 $30,000 58% 42%
5 $354,294 $250,000 $30,000 59% 41%
6 $318,865 $220,000 $30,000 59% 41%
7 $286,978 $190,000 $30,000 60% 40%

-ERD50

 

[DEC-1982]

So you're 5 years into a bear market and you have spent all your non-equity money so you're now 100% equites and NOW you have to sell them. Is that a great plan or what? Instead of rebalancing on the way down and selling stocks at 10%-20% down, now you HAVE to sell them at 40%-50% down.

>>> I think most people in this forum could handle 5-7 years of expenses without selling equities.

It is an independent statement. In fact I did say most people will do re-balancing.


Could you or somebody else provide 4-5 examples of when 5 years into a bear market, the market was 50% down?

 

[audreyh1]

There is nothing magical about the interest paid by bonds. A dollar doesn't know where it came from, and it doesn't act any differently depending on where it came from.

I don't get your point. If it is to say a dollar doesn't care whether you got it by selling stocks or bonds - I don't get that point. Investors probably care whether they are drawing funds from stocks while depressed or living off the fixed income portion of their portfolio.

Different people come up with doing the opposite things investing ALL THE TIME! That's because there is not "one true way" or "one perfect answer", but diffierent individual needs and preferences/psychology and willingness to take on risk.

 

[audreyh1]

So you're 5 years into a bear market and you have spent all your non-equity money so you're now 100% equites and NOW you have to sell them. Is that a great plan or what? Instead of rebalancing on the way down and selling stocks at 10%-20% down, now you HAVE to sell them at 40%-50% down.

If you had rebalanced more aggressively and sold more fixed income to buy stocks which are now down 50%, you would have run out of your fixed income sooner!

So I still don't get your point.

You do understand that rebalancing on the way down means you are selling bonds to buy stocks and not vice versa?

 

[USGrant1962]

Could you or somebody else provide 4-5 examples of when 5 years into a bear market, the market was 50% down?

Interesting question. It turns out that in REAL terms, without dividends, it is not rare (I'm a little surprised). Just eyeballing this graph (Inflation Adjusted S&P 500), depending how you want to define the zigs and zags in between, we're looking at:

• 1911-1922 (looks like any year from 1911-1915)
• 1929-1934
• 1937-1943 (or to 1950)
• 1966-1981 (again any year from '66 to about '71 qualifies)
• 2000-2009 (with a dead-cat bounce in the middle - this one is arguable)

So that is about a dozen cases in 4 or 5 bear markets where you are still ~50% down after 5 or more years in real terms. If you don't adjust for inflation most of these drop out, but you are still running out of money if you are in the decumulation stage. S&P 500 Historical Prices

Someone can do a more precise analysis with actual S&P numbers, the "Table" feature shows the actual numbers.

 

[audreyh1]

Interesting question. It turns out that in REAL terms, without dividends, it is not rare (I'm a little surprised). Just eyeballing this graph (Inflation Adjusted S&P 500), depending how you want to define the zigs and zags in between, we're looking at:

• 1911-1922 (looks like any year from 1911-1915)
• 1929-1934
• 1937-1943 (or to 1950)
• 1966-1981 (again any year from '66 to about '71 qualifies)
• 2000-2009 (with a dead-cat bounce in the middle - this one is arguable)

So that is about a dozen cases in 4 or 5 bear markets where you are still ~50% down after 5 or more years in real terms. If you don't adjust for inflation most of these drop out, but you are still running out of money if you are in the decumulation stage. S&P 500 Historical Prices

Someone can do a more precise analysis with actual S&P numbers, the "Table" feature shows the actual numbers.

I don't have the research to argue for the others, but 2000-2009 is two bear markets, not one, with a major recovery in between. So rebalancing would have you selling stocks again to buy bonds during part of that period and the portfolio would have increased overall until 2008 (depending on withdrawal rate, AA, etc.).

OK, you were talking in inflation adjusted terms. Yep, the portfolio probably didn't keep up with inflation. But that has no meaning for rebalancing.

We will go through periods where the portfolio does not keep up with inflation. That's just life. Folks like me who do % remaining portfolio withdrawals will just have to live with it. The key is having a high degree of discretionary expenses which means you have the flexibility to belt tighten when required.