Move to safer investments

[24601NoMore]

Thanks. Not being critical because, as I always admit, I've made every mistake in the book (with the exception of NOT saving - always been a good saver): With your equities at only about 25%, I don't understand the major concern. In my case, at maybe 35% I know I could lose a bundle of that, but I have my other cash-like vehicles to sustain me until the market eventually returns. True, it might not return, but it always has.

Strictly being nosey here, do you have a small commitment to precious metals? That's been my "play" to (hopefully) make up for equity losses. It worked like a charm for me in the 2007/8 debacle. Very much YMMV - especially here on the forum.

No prob. The major concern is a big dollar value drop in the equities part of our portfolio that takes 5-10 years to recover from. Even at 25% exposure, that'd be brutal. Can we pay the bills? Sure. But watching that much of your net worth evaporate is not something I ever want to do again after living through 2008 and other similar downdrafts.

We had a pretty brutal decade in 2000-2009. Equities essentially went NOWHERE for the entire decade. Ending value on 12/31/09 was actually lower than on 1/1/00. Not interested in doing that again.

Markets do not always "come back" quickly. Ten years (to me) is not "quickly". And it's happened multiple times in the past.

My general observation FWIW is that many here tend to downplay risk, or take on more risk than necessary simply to get "more" (vs "enough"). I read a LOT of "but, it 'always' comes back quick!" No, it doesn't. And we should be honest with ourselves as to how much psychological pain and suffering we can each tolerate during such times. I'm someone who doesn't want to be "down" a big, six figure chunk of money for 5-10 years. Others may have a need to in order to meet their goals, or be fine with being "underwater" for 5+ years. But for me..no thanks. I'll happily take my 3+% (reasonably) guaranteed income and be perfectly happy with that, as doing so gets me & DW through end of life no problem.

ETA - I should have probably also added that investment strategy can and often does change IN retirement vs. during the accumulation phase. If you're not already retried and need to accumulate more to meet your financial goals, the discussion is much different..

 

[Chuckanut]

Buy your straw hats in the winter, and your parkas in the summer.

 

[pjigar]

Here's why I think "this time is different" with a bunch of new signs we have not seen in recent history:.....

Without going into micro analysis, forecasting anything is very hard. And forecasting a random process (e.g. equity market) is next to impossible. There are several good read on this topic:
https://www.schwab.com/resource-center/insights/content/does-market-timing-work
https://www.collaborativefund.com/blog/expectations-vs-forecasts/


I am sure you can find more if you try. The bottom line is: it is very HARD (aka impossible) to consistently beat the market. Market is a giant information analysis machine and any data you can process has been processed by thousands of other people already. And current equity prices are reflection of objective data (e.g. lot of the data you presented in your post) and the subjective data (feeling, emotions, etc.). What makes market movement forecasting impossible is the later component.

 

[livingalmostlarge]

So what are you invested in that you dropped so much? 1 company stock make up the bulk of your $1.1M portfolio that was a tech stock and went gangbusters for a decade allowing for retirement? Get out of that if it's the case. GET OUT now. If it's 1 stock diversify.

 

[HarryHawk]

Without going into micro analysis, forecasting anything is very hard. And forecasting a random process (e.g. equity market) is next to impossible. There are several good read on this topic:
https://www.schwab.com/resource-center/insights/content/does-market-timing-work
https://www.collaborativefund.com/blog/expectations-vs-forecasts/


I am sure you can find more if you try. The bottom line is: it is very HARD (aka impossible) to consistently beat the market. Market is a giant information analysis machine and any data you can process has been processed by thousands of other people already. And current equity prices are reflection of objective data (e.g. lot of the data you presented in your post) and the subjective data (feeling, emotions, etc.). What makes market movement forecasting impossible is the later component.

I'm not sure I totally follow you. It seems like you are saying it is impossible to forecast (analyze) the market because it is random. But go on to say the market is the result extensive information analysis of massive amounts of data.

I agree that the market is a vast universe perhaps impossible to totally analyze/model, but is it possible to
analyze an individual stock?

I appreciate the collective insight the folks here provide.

 

[pjigar]

I'm not sure I totally follow you. It seems like you are saying it is impossible to forecast (analyze) the market because it is random. But go on to say the market is the result extensive information analysis of massive amounts of data.

Because the missing pieces are all subjective: felling, emotions, fear, greed, behavioral biases rooted deep in our genes, etc. They are not easy to quantify and almost impossible to forecast. You only know how you will react to adverse event when you actually face the event. It is not a coincidence that almost all recessions in the history are precipitous i.e market drops in a matter of days/weeks. "Sky is falling" feeling kicks in. As opposed to every economic growth spans months/years following a recession.

I agree that the market is a vast universe perhaps impossible to totally analyze/model, but is it possible to
analyze an individual stock?

Theoretically yes. But there are hoards of people with full time jobs who are getting paid to find such under priced securities. So you/me/any average Joe can not find an undervalued security. There are exceptions for the companies in micro/small cap universe of the securities where "professionals" can not dabble because they can't deploy enough capital to get their money's worth. The downside with this security universe is they are highly illiquid and they may remain undervalued for years if not forever. The undervalue can only be realized if someone else also realize the fact and try to buy it at fair value. And that's the rub: it is very hard to "realize" the perceived undervaluation. A note about liquidity: One of such stock I bought took me over a month to fill my order!


PS: By the way, I read somewhere recently what "Benjamin Graham" said in an interview in 1950. It was something along the line that "my investing technique of finding undervalued securities may not work any more since the information about securities is widely available"! That's a lot coming from a father of "Security Analysis".

 

[HarryHawk]

Because the missing pieces are all subjective: felling, emotions, fear, greed, behavioral biases rooted deep in our genes, etc. They are not easy to quantify and almost impossible to forecast. You only know how you will react to adverse event when you actually face the event. It is not a coincidence that almost all recessions in the history are precipitous i.e market drops in a matter of days/weeks. "Sky is falling" feeling kicks in. As opposed to every economic growth spans months/years following a recession.

So if I understand, the "market" is the sum of the objective analysis of a myriad of individual securities overlaid with the subjective randomness the "human condition" (for lack of a better term).

 

[pjigar]

So if I understand, the "market" is the sum of the objective analysis of a myriad of individual securities overlaid with the subjective randomness the "human condition" (for lack of a better term).

Exactly.

 

[HarryHawk]

Exactly.

Thanks, that makes sense. That being the case, I agree that it would be tough to "beat the market" and therefore makes sense not to pay for an advisor who tries to do so.

I will say I'm not convinced that it is impossible to cherry pick individual securities or segments which present a better than "average" risk/reward ratio.

thanks again, I appreciate everyone's collective wisdom.

 

[pjigar]

I will say I'm not convinced that it is impossible to cherry pick individual securities or segments which present a better than "average" risk/reward ratio.

I hear what you are saying. Been there, done that. It is just super hard. Speaking of segments: I am sure you have seen "The Callan Periodic Table of Investment Returns" somewhere more than once. Returns of different assets classes are widely different year-to-year but predicting the winners for the next year is not easy.


I went back to the very basic after years of trying to find the silver bullet: Every "real" investment (defined as something that throws a positive free cash flow somewhat regularly) aka stocks/bonds/REIT/real estate will always preserve and grow the capital over time. Every year some winners and some losers. But if I diversify among these classes then I should see positive returns long term. So I do just that now (minus bonds, until coupon rate are reasonably close to the inflation). Like they said in the movie Matrix: "There is no spoon".

 

[Chuckanut]

I bought a new car in late 2019. Had I waited about 4 more months, after Covid caused shutdowns, I could have bought the same car (in a newer model) for less. Or a used car for far less thanks to the rental car companies dumping zillions of cars on the used car market.

OTOH, had I waited about 30 months, I could have bought the same car (in a much newer model) for at least $6000 more. Chip and other shortages crimped the supply of new cars very badly. And we all know what has happened to used car prices - to the moon!.

IMHO, the stock market is similar. Things come out of nowhere and seem to drive it up or down, sometimes in the opposite way one would expect. My hat is off to the better man who can consistent figure it out.

 

[finnski1]

I bought a new car in late 2019. Had I waited about 4 more months, after Covid caused shutdowns, I could have bought the same car (in a newer model) for less. Or a used car for far less thanks to the rental car companies dumping zillions of cars on the used car market.

OTOH, had I waited about 30 months, I could have bought the same car (in a much newer model) for at least $6000 more. Chip and other shortages crimped the supply of new cars very badly. And we all know what has happened to used car prices - to the moon!.

IMHO, the stock market is similar. Things come out of nowhere and seem to drive it up or down, sometimes in the opposite way one would expect. My hat is off to the better man who can consistent figure it out.

I agree.on the stock picking.
Similar car story. We bought a late model Subaru Outback Limited with only 48000 miles on it on Dec 28th 2020. Bargained hard and got a very good deal of $15k. Those same models lately have been listed at $20-24k. Pure luck on my part. Not even sure I would buy the same model year right now.

 

[Love This Community]

No prob. The major concern is a big dollar value drop in the equities part of our portfolio that takes 5-10 years to recover from. Even at 25% exposure, that'd be brutal. Can we pay the bills? Sure. But watching that much of your net worth evaporate is not something I ever want to do again after living through 2008 and other similar downdrafts.

We had a pretty brutal decade in 2000-2009. Equities essentially went NOWHERE for the entire decade. Ending value on 12/31/09 was actually lower than on 1/1/00. Not interested in doing that again.

Markets do not always "come back" quickly. Ten years (to me) is not "quickly". And it's happened multiple times in the past.

My general observation FWIW is that many here tend to downplay risk, or take on more risk than necessary simply to get "more" (vs "enough"). I read a LOT of "but, it 'always' comes back quick!" No, it doesn't. And we should be honest with ourselves as to how much psychological pain and suffering we can each tolerate during such times. I'm someone who doesn't want to be "down" a big, six figure chunk of money for 5-10 years. Others may have a need to in order to meet their goals, or be fine with being "underwater" for 5+ years. But for me..no thanks. I'll happily take my 3+% (reasonably) guaranteed income and be perfectly happy with that, as doing so gets me & DW through end of life no problem.

ETA - I should have probably also added that investment strategy can and often does change IN retirement vs. during the accumulation phase. If you're not already retried and need to accumulate more to meet your financial goals, the discussion is much different..

I am in the accumulation phase and heavy into stocks >90% with 8- month emergency fund. Provided, one has the ability to handle downturns, staying fully invested helps in the long run IMO. I did not sell during 2008 and the recent dip. Agree my paper losses in 2008 were in low 5 figures and 2022 were in low 6 figures. It’ll be interesting to see how I’ll be able to handle a high 6 figure paper losses over a sustained period of time. As long as I have money coming in during earning years, I think I can ride it out.

 

[cyber888]

Sure, those economic conditions you cited are all true for - now, but:

(1) The Stock Market is not the Economy. And we know this because the Stock Market ran up when the economy was on a stand-still during the pandemic.
(2) Companies are still hiring and jobs are all around
(3) You can be wrong on the assuming the CPI and PPI will continue at 8%, because people begins substituting for cheaper products. That's how competitive markets work. My shampoo went up 50%, but I found a better and equally great product cheaper by 50%. Prime rib went up by 20%, but T-Bone remains about the same - so switching has been easy.
(4) Gas prices may go lower - remember that oil prices are based on market futures, not the actual production cost. They were artificially pumped during the Bush era gulf war and down after.

Here's why I think "this time is different" with a bunch of new signs we have not seen in recent history:

- CPI ~8% (previously 2'ish or lower %) - this reduces Consumer consumption, which is ~70% of the US economy. Lower consumer consumption lowers corporate profits and in turn, equity valuations
- PPI even higher than CPI - Producers currently absorbing a lot of those costs..will lower corporate profits.
- Oil at $100 - $130/barrel (recently). This will further damage the US economy in 22 and likely beyond as the cost of oil is in just about EVERYTHING and affects far more than just the cost of gas at the pump
- Fed plan to raise FFR 8X (to 2-3%, per public statements). One Fed Governor just yesterday publicly said he is aiming for 3+% by EOY. Lots of public statements last few days by different Fed Governors talking about at least a 50 bps increase at the May meeting, and likely at the following meeting. That'd be two, 50 bps raises, back to back, followed by additional 25-50 bps raises through end of year winding up at 2 - 3% overall.
- QE ending
- Yield curve inverting (2s/10s flipped briefly yesterday..many other curves already inverted) - typically a very clear recessionary indicator
- Cost of debt (due to FFR and Yield curve increases) will further lower corporate profits
- Equity valuations continue to be at crazy levels compared to historical averages, even post 22 YTD drop
- GDP forecasts coming WAY down (Atlanta Fed forecast ZERO percent Q1 growth, for instance just a few weeks back. They've now increased it to...zero point 9 percent)
- Exogenous, geopolitical events - markets hate uncertainty as we all know..

We haven't had ANY of those signs or conditions in the recent past (aside from different geopolitical dust-ups, albeit not to the level we have with Russia/Ukraine and that putting the whole world on the edge of WW3). In fact, we haven't seen CPI and PPI numbers like this since the 70s.

So unfortunately, the market conditions we're facing in 22 are likely the most challenging of any of our lifetimes. Bond markets have already been crushed due to rising yields. Any of the factors I mention above could hit equity markets pretty hard and already started to do so in Jan-early March. In fact, I think it was JPMC that forecast a max of 4,700'ish by end of year, which is obviously less than a couple percent north of here. I've heard others (eg B of A) forecast that it's very likely the S&P will be south of 4K at some point this year. I haven't heard an EOY forecast from them, but lots of folks are saying S&P 3,600 from a TA perspective is pretty darn possible. FWIW..

I suppose we all have to make our own assessments of economic realities and invest accordingly. But it does appear the US economy is in for some pretty rough sledding for at least the next 12 months and likely much longer if we do slip into recession as many indicators are now suggesting is likely..

ETA - regarding your comment on why active fund managers can't consistently outperform passive..they're managing a lot more $$$ than individual investors, and "have" to maintain certain AAs per the prospectus. We as individuals don't face those same challenges and constraints. It's a lot easier to do risk management on a typical retiree portfolio than on one that has hundreds of millions of dollars, or even billions of dollars invested.

 

[Magus]

(3) You can be wrong on the assuming the CPI and PPI will continue at 8%, because people begins substituting for cheaper products.

CPI & PPI already reflect this (substitutions) now. In fact, inflation today when you use the same methodology as 1981 is actually about the same as 1981. CPI assumes a lot of substitutions today, it uses OER instead of actual rent surveys (bogus) and adjusts for quality significantly more today than in 1981 (ie increased laptop or tv performance). If you adjust CPI for OER alone, inflation is over 11%, remove substitutions and performance adjustments and its roughly 14% today. This methodology needless to say is significantly more controversial in a high inflationary environment than a low one (especially the OER) although its obvious why politicians of all stripes prefer this one. We've had a few changes to the calculations in the last 50 years and all have made inflation look lower than they previously did, which is one of the reasons why looking at current and prior inflation isn't really accurate.

 

[Bergamo]

If you move to safer investments, are you going to stay put after that and permanently accept your current losses?

If you move to safer investments, will you want to buy back your current investments after the markets have recovered and permanently accept your current losses?

If you move to safer investments, what will you do if you lose another 10%? Sell again?

Ideally you would already be in your safer investments now, avoiding the past market drop and ready to buy more aggressive investments at the market bottom. Kind of already screwed up the timing of buying the safer investments. Will you be better at timing the market bottom? Are you willing to move a significant percentage of your investments based on your market timings? If not, even if the timing works out in your favor your total portfolio gain over a down/up cycle may only be a low single digit percentage.

You know you should buy low and sell high. Selling now is sort of the opposite. What I do is let it ride (my base allocation is 75/25 stocks/bonds plus roughly 1 year of expenses in cash) until the market is 20% down. At that point I change my AA to 80/20, adding to my equities (buying low). If the market continues down I again shift my AA by 5 percentage points for each 5% the market drops (from the original peak). At 40% down I'm all equities and thinking about how I can shift to more aggressive equities. If I run out of cash I sell just enough of my best performing (least down) equities on a monthly basis to meet expenses. That's where I was in the 2008 recession.

I'm a lot looser on the market recovery timing. Ideally I don't return my AA to normal until the market has fully recovered. But I usually hang on a little longer if the recovery looks like it will continue.

All of that, while not too hard, buys something like an extra 5% portfolio gain over just holding on to your base AA the whole -40% down and back to a full recovery. Not super significant in the long run, but it's something, and something to do. I can see where simply doing nothing has its appeal. For those who don't want to fuss with it, sticking to your normal AA and rebalancing if you can stomach it will work just fine.

Of course that all assumes that the market will behave something like it has in the past...

Interesting strategy. Is this all in non-taxable accounts? What do you use for FI as you make these AA adjustments?

 

[Koolau]

CPI & PPI already reflect this (substitutions) now. In fact, inflation today when you use the same methodology as 1981 is actually about the same as 1981. CPI assumes a lot of substitutions today, it uses OER instead of actual rent surveys (bogus) and adjusts for quality significantly more today than in 1981 (ie increased laptop or tv performance). If you adjust CPI for OER alone, inflation is over 11%, remove substitutions and performance adjustments and its roughly 14% today. This methodology needless to say is significantly more controversial in a high inflationary environment than a low one (especially the OER) although its obvious why politicians of all stripes prefer this one. We've had a few changes to the calculations in the last 50 years and all have made inflation look lower than they previously did, which is one of the reasons why looking at current and prior inflation isn't really accurate.

I wonder if this isn't why so many folks doubt the official inflation numbers (as I do). Perhaps some of us refuse to substitute and OUR inflation is higher. Thanks for the numbers as they make a lot of sense.

 

[marko]

You would have been better off NOT selling when the '87, '00 and '09 downturns pummeled the market. It's a fools errand to think you can accurately time when to re-enter the market, most people miss most of the gains on the way up when they've sold off. Why do you believe "this time is different?" Patience has been rewarded time and time again...

There are millions of people who say they lost big time in the '08-'09 crash - they're the one who sold out of equities. There are millions of people who stayed the course and have done VERY well.

+1
I've often mentioned here my "smarter than you" neighbor who smugly announced that she "sold everything" on the last Friday of February 2009.

 

[Magus]

I wonder if this isn't why so many folks doubt the official inflation numbers (as I do). Perhaps some of us refuse to substitute and OUR inflation is higher. Thanks for the numbers as they make a lot of sense.

Yup you bet - I was fascinated by the changes when I was getting my BS in Economics ~15 years ago, mainly that every update was designed to make inflation look lower than before. For a history of changes to the CPI calculation in BLS "economist speak", see this link here.

https://www.bls.gov/cpi/additional-resources/historical-changes.htm

Some of the bigger ones:

*Introduced rental equivalence concept (January 1983 for the CPI-U; January 1985 for the CPI-W)
*Implemented new sample procedures to prevent overweighting items whose prices are likely to rise (aka substitutions)
*Estimated price change for owners’ equivalent rent directly from rents (an estimate of the implicit rent owner occupants would have to pay if they were renting their homes) 1999
*Improved the handling of new models of vehicles and other goods (aka improved performance adjustments - yeah the car's price went up 3% but its performance went up 3% so its actually no inflation is the way the logic goes there)

 

[cyber888]

CPI & PPI already reflect this (substitutions) now. In fact, inflation today when you use the same methodology as 1981 is actually about the same as 1981. CPI assumes a lot of substitutions today, it uses OER instead of actual rent surveys (bogus) and adjusts for quality significantly more today than in 1981 (ie increased laptop or tv performance). If you adjust CPI for OER alone, inflation is over 11%, remove substitutions and performance adjustments and its roughly 14% today. This methodology needless to say is significantly more controversial in a high inflationary environment than a low one (especially the OER) although its obvious why politicians of all stripes prefer this one. We've had a few changes to the calculations in the last 50 years and all have made inflation look lower than they previously did, which is one of the reasons why looking at current and prior inflation isn't really accurate.

Nah. There’s little inflation in my area. You’re only talking about big cities.

 

[milford]

Nah. There’s little inflation in my area. You’re only talking about big cities.

I doubt that's true... most likely you mean inflation hasn't affected you that much as inflation affects everyone differently (i.e. you own your home so you are not affected by rent increases when it comes to lease renewal, you haven't done any remodeling recently as plywood has gone up as much as 50% among other supplies, you don't drive that much so the 25% increase in gas price doesn't really bother you...etc) vs. there is little inflation in your area.

 

[Koolau]

Nah. There’s little inflation in my area. You’re only talking about big cities.

My first thought was you were being facetious, but perhaps it is as milford suggests.

I doubt that's true... most likely you mean inflation hasn't affected you that much as inflation affects everyone differently (i.e. you own your home so you are not affected by rent increases when it comes to lease renewal, you haven't done any remodeling recently as plywood has gone up as much as 50% among other supplies, you don't drive that much so the 25% increase in gas price doesn't really bother you...etc) vs. there is little inflation in your area.

We're essentially done buying consumer goods (other than replacing things that break.) So it's mostly food, gas, electricity kinds of things. I sure notice the outrageous prices, but there's no major effect on overall lifestyle. For one thing, we more or less planned on inflation eventually happening. Sorry were were right! YMMV

 

[target2019]

Inflation impact eventually spreads out to all communities. Whatever.

 

[GTFan]

Nah. There’s little inflation in my area. You’re only talking about big cities.

If you buy food and gas, there's inflation. You might not realize it but it's there - when Aldi in my area starts jacking up prices on a lot of stuff I know it's there, and they have.

 

[Rianne]

I do this for a little peace of mind:

Google S&P 500 historical chart
Dow Jones historical chart

You'll get a grim graph currently. Click on "Max" and find comfort in long-term historical data. With your pointer, follow backward. It will show every day where the markets were. The dips these days are scary, but the big picture is comforting. We are considering investing in stock index funds with the bond market funds we just sold. And we'll be 65 this year.