Is the next downturn coming soon...?

[pb4uski]

Yes, I prepared for a crash when I selected my asset allocation. It’s very conservative and has been since the crash at the beginning of the pandemic. Yes, it’s true that I didn’t participate as robustly as I would have liked in the significant increase since then, but that last downturn taught me a very important lesson. If you’re not willing to lose it, don’t risk it. I’m currently at 30% equities and if there’s another down turn, I will do nothing other than rebalance if it lasts long enough.

I know I can live on the 70% non-equities and while nothing is 100% safe, if those investments go down, we’ll all be in for a nasty ride.

+1. I went into capital preservation mode during the covid crash. Even before the covid crash I was concerned that equities were overvalued because of too easy money and the uncertainty caused me to act. I'm currently at 20% equities and am defensive at that... some in SWAN and some slightly ITM 2023 SPY call options.

I've gotten over FOMO. I view today's markets as very speculative with Dogecoin being a great example. It was created as a joke and is now worth $85 billion, more than GM or Ford.

Dogecoin (/ˈdoʊ(d)ʒkɔɪn/ DOHJ-koyn or DOHZH-koyn, code: DOGE, symbol: Ð) is a cryptocurrency created by software engineers Billy Markus and Jackson Palmer, who decided to create a payment system as a joke, making fun of the wild speculation in cryptocurrencies at the time. Despite its satirical nature, some consider it a legitimate investment prospect. Dogecoin features the face of the Shiba Inu dog from the "Doge" meme as its logo and namesake. It was introduced on December 6, 2013, and quickly developed its own online community, reaching a market capitalization of over $85 billion on May 5, 2021.

Dogecoin.com promotes the currency as the "fun and friendly internet currency", referencing its origins as a joke. ...

 

[Markola]

I have a limited bond understanding, if interest rates go down, bonds go up and vice versa. Also, if the stock market seems more risky or is going down, people will gravitate to bonds, driving bond prices up, thus reducing yields.

We already have low bond yields, how much lower can they go?(to drive up bond prices)
If stocks falter, the government is like to poor more money into the economy, lowering interest rates and lowering bond prices.



Why will bond values act like the did in 2000 and 2008?



Not withstanding, bonds did very poor during the stock market downturn of during FEB, Mar, April of 2020.

I think you understand it like I understand it, with one wrinkle: When the government turns on the tap and lowers rates during recessions, total bond index fund prices tend to go up, as investors will pay a premium for the older, higher-rate issues still lodged in those comprehensive index funds.

Plus there is a “flight to bond safety” among investors, usually after a period of panicky “sell everything!” flight to cash. I suspect that last year’s recession was too brief for the flight to bond safety to occur but who knows.

Is having half my portfolio in bonds the right strategy for hedging every recession? I have no idea, because the future is unpredictable. However, I’m not interested in holding a bunch of cash for years and years that is absolutely certain to lose ground to inflation. No calculator I play with shows an advantage of a large, inert pile of cash over long periods.

Some investors, including posters on this string, claim they can use their cash to buy cheap stocks, but that is just attempted market timing. They never talk about how much ground they are losing on their cash to inflation during bull market years, which are most of the years. It’s called “opportunity cost.”

 

[Montecfo]

Some investors, including posters on this string, claim they can use their cash to buy cheap stocks, but that is just attempted market timing. They never talk about how much ground they are losing on their cash to inflation during bull market years, which are most of the years. It’s called “opportunity cost.”

Hi Markola,

Not sure if you refer to me, but to clarify when I talked about using cash, bonds and low risk investments to buy equities, I was not suggesting holding idle cash. I was referring to cash invested in CDs or MM accounts as bond proxies. Good way to avoid losses in bonds as rates rise. I'm earning 1-3 percent there with no risk of loss.

I agree with you that holding idle cash through market cycles makes little sense. I doubt many would disagree.

 

[Lawrencewendall]

I ran the number 3 years ago before RE when they were saying a crash was imminent. How much of a crash would effect my plans? At that time, the numbers said as long as it didn't crash 50%, I would be fine.

Just ran the numbers again today based on this thread and now it says if the crash is not more than 64%, I'll be fine. That is with pulling 60k a year for the the last 2 years I've been FIRE.

Go bull market and monthly dividends!

 

[NW-Bound]

Fair enough. But I was making a different point: buy into market declines by deploying your cash, bonds or other safe type investments AFTER equities drop.

I wasn't suggesting to sell in anticipation of a decline for the simple reason there is no way to know the timing of declines. You will leave more money on the table trying to anticipate them than you can make back when stocks finally do drop.

As an active investor, I sell equities from time to time when I they have reached a price objective or are fully valued. That freed up cash can then be redeployed as needed.

Your more recent post would be a contradiction of your earlier post, unless when you sell some stocks you immediately buy something else to keep your AA the same.

If you sell something and are not deploying the cash right away, then you are practicing tactical AA, which is what I described earlier: raising cash when you think the market is overvalued, in order to use the cash to buy back when the market value is more compelling.

 

[teetee]

Keep your emergency fund handy and well cover the recession period (I give it a random number 200 days). I have all other assets in stock-heavy index funds and has only been putting money into them (I don't even know what should be done with aa balancing - they are diversed enough for me lol). Things look to be ok so far. If the market is down 70% tomorrow, I will check how much cash from my emergency fund I have that I can spare and put more into the market while I wait it out.

Not losing sleep over my investment has been my goal but I have high risk tolerance because I don't see me cashing in anytime soon.

 

[pjigar]

I have a limited bond understanding, if interest rates go down, bonds go up and vice versa. Also, if the stock market seems more risky or is going down, people will gravitate to bonds, driving bond prices up, thus reducing yields.

We already have low bond yields, how much lower can they go?(to drive up bond prices)
If stocks falter, the government is like to poor more money into the economy, lowering interest rates and lowering bond prices.



Why will bond values act like the did in 2000 and 2008?

Not withstanding, bonds did very poor during the stock market downturn of during FEB, Mar, April of 2020.

If you haven't noticed, bonds have lost its negative correlation in the last two decades. My hypothesis: Big money thinks that RE will afford negative correlation and hence the price crazy RE valuations. Lot of firms are now in business of buying RE. FWWIW: My record in predicting the future has been very dismal at best.

 

[Montecfo]

Your more recent post would be a contradiction of your earlier post, unless when you sell some stocks you immediately buy something else to keep your AA the same.

If you sell something and are not deploying the cash right away, then you are practicing tactical AA, which is what I described earlier: raising cash when you think the market is overvalued, in order to use the cash to buy back when the market value is more compelling.

I consider the most of important 3 words on it nearing to be: Stay Fully Invested. I have stated that a few times on this board. I have not contradicted that in any way.

I am ok if you or anyone wishes adjust their AA based on market conditions. I am also fine if you call it market timing. Or if you choose to call it something else. Most (All?) investing strategies are designed to buy low and sell high. That seems good to do.

My only quibble is a general market decline is not predicable. So selling in advance of one is not something I would try to do, personally.

But that's just me.

 

[MRG]

Oh no. This time we have stonks that only go up.

Honestly I don't know when this market corrects and for how long but it will recover. Some of the worst investment choices I've made is listening to people who get paid to write. No write = no paycheck.

 

[REWahoo]

Oh no. This time we have stonks that only go up.

And bunds, too!

 

[NW-Bound]

UOT

I consider the most of important 3 words on it nearing to be: Stay Fully Invested. I have stated that a few times on this board. I have not contradicted that in any way.

I guess I don't know what you mean by "fully invested". Obviously, you were talking about selling some stocks that you feel are getting overvalued. What do you do next to stay fully invested?

I am ok if you or anyone wishes adjust their AA based on market conditions. I am also fine if you call it market timing. Or if you choose to call it something else. Most (All?) investing strategies are designed to buy low and sell high. That seems good to do.

My only quibble is a general market decline is not predicable. So selling in advance of one is not something I would try to do, personally.

But that's just me.

Of course it is OK for anybody to do whatever they want to do with their money, including going to all "cash under mattress" or to put it all on Bitcoins or "Gamestonk". We are only sharing what each of us is doing.

And of course there's no way anybody can call the market top/bottom reliably. It's all about probabilities. When I perceive that the market risk is getting higher, I reduce my stock exposure, or at least stepping up my option selling activity. I have never gone to all cash, or gone to 100% stock. And it's because I don't know exactly the market bottom or top.

Some people use rebalancing to handle market top/bottom. They say it's not market timing, and it's only reacting to the market

I prefer to take a bit more action, and over-rebalance if you will. And that means I rely on some subjective judgment to say whether the market is nearer to the top or to the bottom. I am not afraid to make that judgment for myself, but again it's all about probabilities and never an exact thing.

PS. I have been busy selling call options, and even selling some stocks outright today. When I have had a 7-figure gain in the last 12 months, I feel like taking some chips off the table. And being an active investor, I am talking about selling individual stocks, and not the entire market because I am not an indexer.

 

[ExFlyBoy5]

And bunds, too!

"Stonks" is a thing. https://slate.com/business/2021/01/stonks-not-stocks-got-it.html

 

[purplesky]

This article lays out an interesting indicator that WB supposedly uses..

https://www.msn.com/en-us/money/markets/warren-buffetts-favorite-market-indicator-hits-205percent-signaling-stocks-are-way-too-expensive-and-a-crash-may-be-coming/ar-AANLNCp?li=BBnb7Kz

A basic valuation of the entire market calculated:
Wilshire 5000 Total Market / GDP

Currently this stands at roughly 205% ($46.69T / $22.72T) - as of 2Q21 GDP

The article notes that for both the dot com bubble (late 1990s) and the 2007/2008 crisis, this indicator remained under 150%.

The article does acknowledge there are Companies whose valuation is based domestically, but don't contribute 100% of their income to the GDP.

I respect those who hold their AA through these downturns. However, I pose the following questions to those who take a more active approach..

- Are you preparing for a "crash" in the near future?
- If so, how?

I have found myself of late, trimming some earnings off Index Funds (in my tIRA & Roth) in very small increments to cash on a bi-weekly basis. I think it's the "the NASDAQ hits a new record" that gets me thinking..

A market crash will not last long so don't worry. Just hold 3 years of cash in the cash bucket.

Privatize the profits and Socialize the losses is still the game for now.

Socialism for the rich and capitalism for the poor will continue so owning total market index funds or ETFs will not fail.

Obviously if it does fail we are all screwed anyway.

But it won't fail because the house(casino) always wins and the house is the taxpayer.

 

[CincyDave]

Holding pat at 70/30 allocation. If equities get to 80%, will probably rebalance.

 

[NW-Bound]

I am not sure of any reason to cause the market to crash, but one thing that has helped driving up the stock market and housing prices will not continue: stimulus from the Fed.

As markets reeled from the start of the pandemic in March 2020, Fed officials announced that the bank would buy $200 billion of agency mortgage-backed securities and $500 billion of Treasuries. Initially, that was described as a way of helping to maintain market liquidity. In December 2020, officials said the bank would purchase $80 billion a month in Treasuries and $40 billion a month in mortgage securities until there was “substantial progress” in the economic recovery. Between early March 2020 and late August 2021, the Fed raised the value of the assets it holds from $4.2 trillion to $8.3 trillion.

From $4.2 trillion to $8.3 trillion, that's $4.1 trillion worth of bond purchases due to Covid. How does that compare to the subprime mortgage stimulus?

In the six years that followed the 2008 financial crisis, the Fed bought more than $3.5 trillion in bonds.

The Fed is now talking about "tapering" or turning off the spigot. Just earlier today, Powell talked about doing it gently to avoid lifting up the interest rate too quickly. People still remember the "taper tantrum" that the market threw back then.

The last time the Fed tapered, the 1-year T-bill rate went from 0.2% in Jan 2015 to 2.5% in early 2019. Bonds [-]dropped slightly over the 4 years[/-] gained 6.6%, but the S&P managed to gain [-]21%[/-] 31% before inflation. The market return was not great, but it was not a crash.

PS. I corrected the return numbers for dividends.

 

[NW-Bound]

Digging out the data for the period of 1/2015-1/2019, I saw that I did not get anywhere near that 31% market return for the 4 years. So what did I do wrong? Were my stock picks that bad?

But, but, but one look on Quicken told me the story: in those 4 years, I withdrew a total of 14%. Yikes! And I was never 100% in stocks, so cannot compare myself to that 31% market rise.

Ah, I feel much better, knowing I did not mess up that badly.

And now with a WR of less than 1% due both to lower expenses and portfolio growth, I am certainly not afraid of any market crash. I still want to grow my stash, to see how well I can manage my own money.

PS. I did trail Wellington MF for the above 4-year period, due to my holdings of international equities.

 

[RobbieB]

I've been blowing 5 to 7 percent for 7 years. Got more dough than I started with. Just bought a boat with an 80 gallon gas tank and 2 miles per gallon. And a slip to park it in at the marina. Where gas is six dollars a gallon.

What me worry -

I'm sticking with the 80/20 allocation.

 

[UnrealizedPotential]

I smiled when I read the title of this post. Of course no one has a clue when the next downturn will come. But I do not worry much. What difference does it make worrying over something I do not have any control over? If the AA is right for yourself that goes a long ways towards addressing questions like this.

 

[JoshTrent]

I smiled when I read the title of this post. Of course no one has a clue when the next downturn will come. But I do not worry much. What difference does it make worrying over something I do not have any control over? If the AA is right for yourself that goes a long ways towards addressing questions like this.

If you are accusing me of picking a provocative title.. well, I did so on purpose. I have been a lurker on this forum for a long while (see join date vs # of posts), and I have always appreciated the discussions amongst its members. I am by no means a Chicken Little, and I am certainly not running a fire sale.

Not only do I find the differing opinions stimulating to read, but I also enjoy the different personalities of those on this board. Add to that the YEARS of experience you all have.. and I really find myself reading more and more.

 

[target2019]

If you are accusing me of picking a provocative title.. well, I did so on purpose. I have been a lurker on this forum for a long while (see join date vs # of posts), and I have always appreciated the discussions amongst its members. I am by no means a Chicken Little, and I am certainly not running a fire sale.

Not only do I find the differing opinions stimulating to read, but I also enjoy the different personalities of those on this board. Add to that the YEARS of experience you all have.. and I really find myself reading more and more.

My early morning thought for you is that a provocative title works for a time. Then it's necessary to provide a thought or two to sustain us in glorious retirement.

MarketWatch is clicks-driven, and that tends to drive away the personalities here. It is free though, and more interesting than watching tickers rise and fall.

I suppose the backstory to your question is about economies and the hope which investors have about the future. Has your opinion changed at all? Are you going to reduce equities and accumulate more cash to use in the next decline?

My reaction to these downturns included increasing my 401(k) contributions throughout the crash.

 

[Markola]

……Are you going to reduce equities and accumulate more cash to use in the next decline?.

That’s the rub for those who try this approach. That cash can’t earn enough to keep up with inflation during the years (and even decades) between stock plunges. Then, one has to time the bottom and time the peaks correctly, cycle after cycle. As all kinds of research shows, a market timing approach cannot be repeated consistently and is suboptimal to buy-and-hold.

Or, the objective for the cash is to spend down for living expenses during stock plunges, then build back up as stocks improve. That approach is simply slow-motion-rebalancing, and doesn’t make enough difference to a portfolio’s returns vs. daily, annual, random or rebalance bands rebalancing approaches, or no rebalancing at all, to bother with over the course of a couple of decades or more.

Over spans that long, the higher return approach is to avoid significant cash and stay fully invested in a stock/bond allocation that is conservative enough to let one sleep at night as stock volatility cycles.

 

[Lsbcal]

Come on now folks, how bad could it really get? I ask myself this recently and recalled 1987. That was a great year until October. Here is the SP500 chart for 1 year starting July 1 1987:

How would markets react if we had another -20% day? Off 33% from August high to late November low

So I'm at 70% equities and looking at the tea leaves. I told myself after a surge I would reduce by 5% increments, i.e. to 65% around about now. As of Friday if felt like a surge.

I would just add to my short term investment grade bonds which I expect will preform barely up to inflation but most of that money will be sticking around at least. Bonds were paying high real rates in 1987 but they are ugly now.

 

[audreyh1]

Darn, I was hoping you were talking about COVID!

 

[JoshTrent]

My early morning thought for you is that a provocative title works for a time. Then it's necessary to provide a thought or two to sustain us in glorious retirement.

MarketWatch is clicks-driven, and that tends to drive away the personalities here. It is free though, and more interesting than watching tickers rise and fall.

I suppose the backstory to your question is about economies and the hope which investors have about the future. Has your opinion changed at all? Are you going to reduce equities and accumulate more cash to use in the next decline?

My reaction to these downturns included increasing my 401(k) contributions throughout the crash.

I am currently residing in a GMT +2 location, so I'm sure that my posts come through at strange times.

I was more interested in opinions based on the Economics of Buffet's "indicator". In hindsight, I realize I didn't place enough emphasis on that in the OP. FWIW - the link in the OP was from MSN (owned by Microsoft), originally based on an article from Business Insider (owned by Insider). It was not a MarketWatch (owned by Dow Jones) Article. I appreciate what a click-bait article is, I was reading more into what Buffet was quoted as saying.

Input noted on how titles of threads can be a turn-off. Thank you for that.

I am paring small long term gains on a bi-weekly basis. While it's a fact that I am missing out on some gain presently, I am "hopeful" to be buying in the near term (< 1 year) at a larger discount will work to my favor. To me, the opportunity cost is worth it.

 

[JoshTrent]

Come on now folks, how bad could it really get? I ask myself this recently and recalled 1987. That was a great year until October. Here is the SP500 chart for 1 year starting July 1 1987:

How would markets react if we had another -20% day? Off 33% from August high to late November low

So I'm at 70% equities and looking at the tea leaves. I told myself after a surge I would reduce by 5% increments, i.e. to 65% around about now. As of Friday if felt like a surge.

I would just add to my short term investment grade bonds which I expect will preform barely up to inflation but most of that money will be sticking around at least. Bonds were paying high real rates in 1987 but they are ugly now.

Thank you for that.. I entered the market in the late 90's, so 1987 was a bit before I was paying attention. While focused on the future, I think it's important to be mindful of the past.