Market Volatility

[Byb747]

I have had the unfortunate "luck" of having two stocks lose about 20% in consecutive days (FB and TWTR). The two stocks represent about 15% of my portfolio. While the paper loses suck, I feel strongly that these companies will be around for a significant time (more confident in FB vs. TWTR)

- As a person on the road to FIRE in the next 5 years and DW in the next 10, how do you handle volatility in your portfolio? What if you were already in retirement, do people not own these types of high volatility stocks?

I too have "safer" dividend payers in my portfolio but also have some growth stocks as well. I am curious on how people think, react or adjust to situations.

Thanks!

 

[RunningBum]

I got burned in 2000, holding way too much company stock (a dotcom high flyer) and other similar individual stocks. It delayed my retirement for 10 years. Over that time I slowly diversified into mostly index funds. It's probably been 7 or 8 years since I've owned an individual stock. There's nothing wrong with owning individual stocks, but it's not for me anymore. If I did own any, I probably wouldn't let any holding be more than 5% of my portfolio. I can understand people who bought AAPL or other huge gainers may have tax reasons for not selling.

 

[OldShooter]

... how do you handle volatility in your portfolio? ...

It is almost impossible for an individual to assemble a portfolio of stocks that will diversify away individual stock risk (= volatility). It's a statistical game, but numbers like holding 60-100 stocks get thrown around, with the stocks themselves diversified across sectors.

Most of us, IMO, simply buy index mutual funds. This delivers automatic diversification if the fund is a broad market fund based on something like the Russell 3000, the Wilshire 5000, or the ACWI All Cap. In general, over a 10 year period these funds will beat 90% or more of the professional stock pickers. And, for a professional stock picker to have a chance of doing well, he/she must hold a non-diversified portfolio. So, back to volatility.

IMO if investing is not boring, you're doing it wrong.

 

[97guns]

Volatility and the fact that I want to remain retired is the reason I’m not in any paper assets, at this point in time I’m not concerned with gains, preservation is my only concern.

 

[trumpeting_angel]

Don't sell at the bottom! It's a natural tendency to want to get out right away. FB and TWTR both dropped due to bad earnings reports - hopefully a short-term drop. Make a plan to get out of stocks that have risen a lot, and talk to your CPA. I'm virtually all in to index funds, VG Target in fact. I can't stand watching the individual stocks go down. I know I'd fold and buy high/sell low in a situation like this. I'd like to think I wouldn't . . . but I'm semi-retired already and I can't take the suspense!

Individual stocks, if you're lucky, smart, talented, and persistent, can bring great wealth. But only in a long timeline. I hope the rest of your portfolio isn't in more tech/social media. That's certainly not a good plan.

 

[LOL!]

I don't hold such individual stocks, but I do own ETFs such as MTUM which probably hold these stocks. I feel confident buying more shares when MTUM drops by a big chunk because I feel confident something in MTUM won't go to zero.

Basically, if you don't buy lots more when something drops, then you never were into that something anyways. So put your money where you mouth is and buy more ... or get out and buy something that you will buy more of when it drops.

 

[audreyh1]

We didn’t buy any more individual stocks once we retired, and have gradually sold off all but AAPL.

 

[target2019]

I too have "safer" dividend payers in my portfolio but also have some growth stocks as well. I am curious on how people think, react or adjust to situations.

Thanks!

For the week, Russell 3000 was up a small bit. Since we have broad indices as the core of our strategy, for every Twitter, there are multiple gainers to offset what happened on 1 day.
We also have individual stocks, but just a few. If they tank, I can only blame myself.

 

[copyright1997reloaded]

I have had the unfortunate "luck" of having two stocks lose about 20% in consecutive days (FB and TWTR). The two stocks represent about 15% of my portfolio. While the paper loses suck, I feel strongly that these companies will be around for a significant time (more confident in FB vs. TWTR)

- As a person on the road to FIRE in the next 5 years and DW in the next 10, how do you handle volatility in your portfolio? What if you were already in retirement, do people not own these types of high volatility stocks?

I too have "safer" dividend payers in my portfolio but also have some growth stocks as well. I am curious on how people think, react or adjust to situations.

Thanks!

I feel your pain. I had several stocks today have good earnings reports but stick get whacked. EW (-8.5%), ABBV (-3.6%), INTC (-8.6%), BAX (-2.9%).

You have too much single stock risk, especially since FB and TWTR both are social media stocks. 20% * 15* = 3% of your net worth gone.

I tried to help you out today, initiated a position in TWTR @ 34.99.

What do I do? Have a beer and chill. Keep a decent % in cash to help me sleep well. Remind myself that FB is still higher than a year ago (172) and TWTR is double a year ago.

In all seriousness, if the swings of these securities really bothers you (or if you keep smiling and counting your money when you saw them go up every day, day after day), then you have too much money in them. Diversify.

ETA: I am *not* telling you to sell them today. I'd guess that most of the damage has been done (as can be seen by my purchase of TWTR).

 

[Byb747]

Thanks for the reply all. I have no intention of selling and it's not necessarily bothering me, I wonder from a retired person point of view. Even if you are in index funds, how would you feel if it was 2008 - 2009 again? Your net worth gets a shave of 40%. How to account for that especially when the income from a job is no longer there.

 

[97guns]

Even if you are in index funds, how would you feel if it was 2008 - 2009 again? Your net worth gets a shave of 40%. How to account for that especially when the income from a job is no longer there.

I’d feel like crap, that’s why I’m in what I’m in, hard assets only. I don’t care for the counterparty risks involved with all paper assets. At least with gold I avoid this, there’s no CEO of the company, no board of directors making decisions, no insider trading, I make all my own decisions and feel in control of my assets.

 

[wingfooted]

You pay your money and you take your chances when you play individual stocks. Big daily gains or losses and hopefully you have just a few more up days than down at the end of the year.

I personally have days where the portfolio goes up or down as much as 5%.

And this is on a mid seven figure balance so that 5% is real money.

As has been pointed out, fluctuations can be smoothed out via indexing, but of course this also limits opportunities for big market beating gains as well.

You could also try writing calls on your long stock positions or even buy protective puts. Premiums are high around earnings season. Hedging is not just for the big boys.

PS - I had no FB or TWTR going into earnings !!!

 

[W2R]

[…]I wonder from a retired person point of view. Even if you are in index funds, how would you feel if it was 2008 - 2009 again? Your net worth gets a shave of 40%. How to account for that especially when the income from a job is no longer there.

I am retired. Like some other retirees, I pretty much assume that other market crashes will occur in the future, not just once but from time to time. Because of this I am financially (and hopefully mentally) prepared for such an event.

I have a little income from a tiny pension and Social Security. My investments and asset allocation are fairly conservative and not unusually volatile (mostly broad index funds, no individual stocks, AA is 45:55 equities:fixed). With a paid off house and car, and living in an area with a moderate COL, my bare bones monthly expenses that are necessary to maintain life do not amount to much. I spend quite a bit more now, but in the event of a downturn I could cut back pretty easily.

Different people prepare for these things differently, but I think probably most of us have thought about and planned for such an eventuality.

 

[Al18]

There was a poll posted on this forum a few weeks ago, and most posters said they would limit their single stock exposure to a maximum of 1% of their investable assets.

 

[Katsmeow]

Thanks for the reply all. I have no intention of selling and it's not necessarily bothering me, I wonder from a retired person point of view. Even if you are in index funds, how would you feel if it was 2008 - 2009 again? Your net worth gets a shave of 40%. How to account for that especially when the income from a job is no longer there.

Even when DH and I were working full-time we didn't buy individual stocks. We were more for index funds although we do own a few managed funds but most everything is in index funds.

Well - I would not like it to be 2008-2009 again. I didn't like it at the time as DH was retiring in 2010 and I was going to semi-retire.

But, basically I just endeavored to ignore it as much as possible. DH and I are on SS which for next year should cover almost 2/3 of our expenses. After next year it should cover about 70% of them.

But I do have faith that if I remain invested in the broad market that things will eventually rebound. I don't expect my net worth to go down 40% even if it is 2008-2009 because we have a 50-50 asset allocation. In 2008-2090 we were about 80-20 which I think was too much in equities. Since then we have reduced it down to the 50-50 level.

SO even if it was 2008-2009 I wouldn't expect my net worth to go down 40%. Whatever it did go down I would expect to eventually go back up.

 

[audreyh1]

Thanks for the reply all. I have no intention of selling and it's not necessarily bothering me, I wonder from a retired person point of view. Even if you are in index funds, how would you feel if it was 2008 - 2009 again? Your net worth gets a shave of 40%. How to account for that especially when the income from a job is no longer there.

That’s just part of what you have to be prepared for if you retire and depend on your investments. You run models like Firecalc to see how you might survive during worst case scenarios. You broadly diversify across asset classes and rebalance. I made it through two big nasty bear markets so far and things were dire, but then recovered. In the meantime I had plenty of cash and fixed income to wait out a recovery.

Like Katsmeow mentions, a 40% S&P500 hit does not translate to a 40% hit for our portfolio. Maybe 20%. We are diversified across much broader range of equities, and our equity exposure is only 50% anyway.

 

[DrRoy]

Most of us, IMO, simply buy index mutual funds. This delivers automatic diversification if the fund is a broad market fund based on something like the Russell 3000, the Wilshire 5000, or the ACWI All Cap.

+1.

I don't hold such individual stocks, but I do own ETFs.

+1.

Even if you are in index funds, how would you feel if it was 2008 - 2009 again? Your net worth gets a shave of 40%. How to account for that especially when the income from a job is no longer there.

I have cut my AA from 83% (and a beta >1) then to ~60% now and beta ~1.0. I still would not like the drop but I am less exposed now.

 

[jebmke]

Nearly all of my equity investment is in index funds. A small number of legacy stocks sit in the account mainly because selling them will trigger a capital gain. Eventually I will donate them to charity.


You post subject says "market volatility" but what you are describing in your post is uncompensated unsystematic risk.

 

[jazz4cash]

Having 2 stocks comprise 15% of a portfolio is over concentration IMO, esp when these specific stocks are very likely to move together. We've had a few threads recently about over concentration of the Index funds in FAANG stocks, but it pales in comparison to what you have. I think 5% is a generally accepted maximum for concentration in a single stock.

As a retiree, I've never been through a severe downturn like '08-'09, but having that experience as an accumulator should help. I use longer term CD's for my bond allocation (30%) which should let me SWAN and ride out a downturn.

 

[pb4uski]

I haven't owned individual stocks since the early 1980s.... nothing against individual stocks... it is just that the time and effort required to do them right and research the target companies was much more time than I was willing to spend.

That said, I think it would be prudent to have no more than 5% in any one individual stock.... otherwise, too much event risk... think of many high flying, well regarded companies that have imploded (Enron, WorldCom, General Motors).

 

[Dtail]

I haven't owned individual stocks since the early 1980s.... nothing against individual stocks... it is just that the time and effort required to do them right and research the target companies was much more time than I was willing to spend.

That said, I think it would be prudent to have no more than 5% in any one individual stock.... otherwise, too much event risk... think of many high flying, well regarded companies that have imploded (Enron, WorldCom, General Motors).

In addition to the 5% limit, wouldn't it probably be prudent to have some industry limit exposure?
I don't have individual stocks either, but it is an interesting topic to me.

 

[RunningBum]

There was a poll posted on this forum a few weeks ago, and most posters said they would limit their single stock exposure to a maximum of 1% of their investable assets.

I don't recall that poll nor can I find it. Can you post a link to it?

1% just seems very low.

 

[imoldernu]

After the first 10 years of retirement, 1989 to 1999, and remembering peak interest rates well into the double digits... when the rates began to plummet, we decided to take a chance and invest in I Bonds. The max at the time was 30K/person/yr, so for several years, we transferred what we had (not that much) , into what looked pretty safe at the time... adjustable with the CPI.

In 2003 at age 63 and not wanting to abandon a wonderful retirement... we looked at what we had, and decided to take a chance, realizing that we wouldn't make a killing, but hoping to track inflation and whatever the government bond rate would be. It seemed to work out on paper, and the decision helped avoid the stress of watching the market.

Over the years, ups and downs, but overall pretty steady, and though not a big deal, we're still getting 5+%. Enough to provide a base for our current lifestyle expenses.
................................................
Fast forward to today. Don't know if we'd do it again, but I watch the macro economy and the Treasury Bond rate, and think I might follow that as a guide to investment in any media. Longer term, it seems that "safety" for us would be in not trying to outguess the stock market. As long as some government investment instrument that tracked the greater economy was available I'd tend to go with that.

Am not sure I understand the details of this kind of correlation, but so far it has worked for us. I found this article (which is kind of technical for me) that purports to show the correlation.

https://upfina.com/10-year-us-treasury-vs-stocks-does-historical-correlation-matter/

Overall, If we had to start over again, I think we'd look at government debt as a precursor/indicator to avoid volatility.

"A bird in the hand is worth two in the bush."

 

[flintnational]

Volatility and the fact that I want to remain retired is the reason I’m not in any paper assets, at this point in time I’m not concerned with gains, preservation is my only concern.

Stocks are as much a hard asset as real estate. The stock certificate and property title are both paper documents that simply identify ownership in a hard asset.

I’d feel like crap, that’s why I’m in what I’m in, hard assets only. I don’t care for the counterparty risks involved with all paper assets. At least with gold I avoid this, there’s no CEO of the company, no board of directors making decisions, no insider trading, I make all my own decisions and feel in control of my assets.

And with gold you also avoid income production. Accordingly there is not a mechanism to increase value. That is why it is considered a store of value only. Real estate and stocks both produce income increasing their value over time.

 

[robmars]

I am building a retirement portfolio based of companies with ever increasing dividends, for several decades (Dividend Growth Investing), e.g. JNJ, MMM, KO, T, O, etc. Market volatility does not affect the dividend income stream.