Talk me out of selling everything

[Mark1]

...... For what it's worth, I sort of hoped we'd make an average of 7% a year in equities with some down years and some up years but average 7%.
Thoughts? Words of wisdom?

What is the problem, the S&P 500 has returned roughly 7% for the past 5 years based on Friday's close and much higher than 7% over the last 10 years? You're saying one two different things.

1) I only want 7% average
2) I can't stand being down so much in one year (even if it averages out to 7%).

I have to wonder if Robbie is right, i.e., sell tomorrow. It would be better than selling once Putin does something really stupid and the market drops a bunch. Unfortunately, that is when I suspect you won't be able to tolerate it anymore and you will end up selling.

 

[ShokWaveRider]

Sell if you wanna sell, play if you wanna play. Wild horses could not drag me into the [-]Casino[/-] Stock Market, now or in the near future.

 

[tulak]

I have to wonder if Robbie is right, i.e., sell tomorrow. It would be better than selling once Putin does something really stupid and the market drops a bunch. Unfortunately, that is when I suspect you won't be able to tolerate it anymore and you will end up selling.

For the OP, I’d recommend they find an AA that prevents them from selling. Otherwise it sounds like classic buy high, sell low, which will turn into sell low, buy high when they try to get back into the market.

Personally, I appreciate a good market correction. Every now and then you need to declutter. Capitulation posts are a good sign of a market bottom. The more people sell, the higher chance we’re at a bottom. This, along with getting rid of cheap/easy money, is a plus for long-term investors. So when I see a post like this, I feel like we’re moving in the right direction.

 

[11522914]

I see that the Bonds solve everything crowd is out, including statements to the effect that anyone who doesn't agree with them just doesn't understand bonds.

No where in my post to OP did I say they shouldn't have bonds, nor am I opposed to laddering.

But please don't fool yourself into thinking that bonds at 4% when inflation is 8.5% are automatically good investments. YOU ARE LOSING 4.5% per year.

Now, you may argue that inflation will come down and thus that 4% or 5% or whatever bond is a good investment, or that the 2% 30-year treasury you bought is a good investment because it will be guaranteed to pay off after 30 year, so pricing now doesn't matter.

If the inflation rate remains higher than the bond yield over those 5, 10, 20 or 30 years - then it wasn't a good investment. YOU HAVE LOST MONEY in terms of buying power, period.

All that I said to the OP was that there is more in life than return risk. There is inflation risk, counter party risk, and a bunch of other factors.

I'm not here to tell the 100% bond folks that they shouldn't be. Your investments are on you.

But I will tell you that there have been periods of time when bond holders were hurt dramatically in terms of purchasing power, and to argue that it can't happen is nonsensical based on history.

Good point about bonds. Another perspective. Per https://i0.wp.com/lplresearch.com/wp-content/uploads/2022/05/blog-3-1.png?ssl=1

If there is a bear market in stocks like 73-74 SPY dropped 48.2% and it took 69 months to recover.

Bear market of 2000 - 2002 dropped 49.1% and took 56 months to recover.

And lastly bear market of 2007 -2009 dropped 56.8% and took 49 months to recover.

Could this bear market end up being worse than those noted?

I realize we're both talking possible extremes. Bottom line is neither one of us knows what is going to happen. Invest accordingly.

 

[copyright1997reloaded]

IMO, losing 4% due to inflation over time is a heck of a lot better than losing 30% in less than a year. I'll go with 4% treasuries for at least 50% of our portfolio.

Sigh.

Which is why I am 50% fixed, all short duration or inflation adjusted, and why I even stated that losing 5% due to inflation was better than losing 15%. Here's what I typed:

Even now, my near 4% T-Bill is not good in inflation adjusted terms. I’m buying them only because -5 is better than -15.

My point to the OP is that being 0% in equities has its own set of risks, and loss of buying power due to inflation is one of them.

Which is the post that has seemed to bring out the responses because I dared to say that bonds too have risks.

 

[connor77]

Sigh.

Which is why I am 50% fixed, all short duration or inflation adjusted, and why I even stated that losing 5% due to inflation was better than losing 15%. Here's what I typed:


Which is the post that has seemed to bring out the responses because I dared to say that bonds too have risks.

I appreciate this perspective and the inflation run up inspired me to get clever (bad move, ultimately) and sell my bond fund holdings because I was convinced that my returns would not keep up with inflation. Had I held them, I would still be down but not as much as I am due to holding only equities.

I also understand completely that the market doesn't only go up and corrections are a part of investing in equities. [mod edit]

As suggested, I'll do more research on a more appropriate AA.

 

[daylatedollarshort]

TIPS at 1.33% (real yield + inflation) provide a 4% safe withdrawal rate over 30 years. The real yields are bumping up against 2% now.

Individual TIPS for inflation, nominal bonds for deflation, and stocks as much as your risk tolerance will bear would make for an all weather, diversified portfolio. If rates start to decline you can always buy back into bond funds if their yields become more attractive than what is available on the market. But in a rising rate environment, one year Treasuries have higher yields and no loss of principal.

For the posters who say stay 100% in stocks, you have to be okay with there being a nonzero chance stocks could continue to go down, as much as the Great Depression, possibly even more. The Great Depression and the Japan meltdown happened before, they could happen again. Or a Black Swan event worse than the Great depression could happen. Based on history are they likely? No, but certainly well within the realm of possibility. There wasn't a Great Depression until there was. None of us know the future on inflation or stocks.

OP, there is a good book you might enjoy, if you haven't already read it, called Against the Gods: The Remarkable Story of Risk. It really changed my investing style, especially after reading about the law of diminishing marginal utility. For us more gains from stocks would have diminishing marginal utility, but huge losses would be very painful. So we keep our stock allocation pretty low.

 

[connor77]

For the posters who say stay 100% in stocks, you have to be okay with there being a nonzero chance stocks could continue to go down, as much as the Great Depression, possibly even more. The Great Depression and the Japan meltdown happened before, they could happen again. Or a Black Swan event worse than the Great depression could happen. Based on history are they likely? No, but certainly well within the realm of possibility. There wasn't a Great Depression until there was. None of us know the future on inflation or stocks.

OP, there is a good book you might enjoy, if you haven't already read it, called Against the Gods: The Remarkable Story of Risk. It really changed my investing style, especially after reading about the law of diminishing marginal utility. For us more gains from stocks would have diminishing marginal utility, but huge losses would be very painful. So we keep our stock allocation pretty low.

Thanks. Appreciate this. I will look for this book.

 

[daylatedollarshort]

Thanks. Appreciate this. I will look for this book.

Some posters need the extra returns from stocks to fund their retirements. Unless you have some very high fixed expenses, it seems like you could retire and live very well on the current portfolio, as long as you don't have any huge future losses.

The short version of what I got out of the book is here - Law of Diminishing Marginal Utility Definition (investopedia.com)

ETA: Or as Warren Buffett is famous for saying - Never risk what you have and need, for what you don't have and don't need.

 

[Exchme]

I appreciate this perspective and the inflation run up inspired me to get clever (bad move, ultimately) and sell my bond fund holdings because I was convinced that my returns would not keep up with inflation. Had I held them, I would still be down but not as much as I am due to holding only equities.

I also understand completely that the market doesn't only go up and corrections are a part of investing in equities. My lack of confidence in returning to some form of normalcy has a lot to do with our current "leadership". I'll leave it at that.

As suggested, I'll do more research on a more appropriate AA.

Everyone loves risk when the market is up and gets FOMO for not finding the hot stock or hot fund. Then the market tanks and everyone hates risk and swears they clearly saw the problems coming and almost got out, but then the sun got in their eyes and they froze.

You have been guilty of this, making a rash move to time the market by dumping your bonds, even though you really should have some near retirement. Since that didn't work out, your proposal is to make another rash move to try to time the market again.

Even experts can't do this as it presumes you know more than everybody else, not just about the myriad possible events in the future, but others' reactions in the markets to those events. That's just not real. If anyone has proven they can do that, we don't know them as they are on their mega yacht.

You said you were hoping for an average return of 7%. That's pretty close. After inflation and including dividends, stocks have given about 6.6% for decades, including the World Wars, Great Depression, Great Financial Crisis and everything else. That's a great result, but it only went to folks that could stay on the risk roller coaster. You have to accept that in order to get that return, you have to live with the fact that stocks can be down a painful amount for an excruciatingly long time.

Look at the wiki at bogleheads.org for a primer on investing, making an investment policy statement, staying the course, etc. Given your stage in life, it probably is advisable to hold more bonds, but you need to teach yourself that you can't market time or you will forever be making mistakes.

 

[FindingForward]

I appreciate this perspective and the inflation run up inspired me to get clever (bad move, ultimately) and sell my bond fund holdings because I was convinced that my returns would not keep up with inflation. Had I held them, I would still be down but not as much as I am due to holding only equities.

I also understand completely that the market doesn't only go up and corrections are a part of investing in equities. My lack of confidence in returning to some form of normalcy has a lot to do with our current "leadership". I'll leave it at that.

As suggested, I'll do more research on a more appropriate AA.

It's interesting how people make drastic, life-changing portfolio moves based upon political leanings. I get it - if someone feels the country's on a dangerous path, it's tempting to jump off before the "crash".

I remember when Trump won, there were so many Boglehead posts about people selling 100% of their equities - as they firmly believed the viability of the U.S., the future, the entire way of life was in danger. Rinse and repeat when Biden won with a different crowd.

Obviously no crystal ball, but most of the time here in the U.S., the market, economy and other factors prove far more complex and surprisingly unpredictable vs solely driven by the actions of a single guy in office.

Now if I had holdings focused in a few other, more volatile countries, that's a different story.

 

[Car-Guy]

Not that's it's worth anything to anyone but me, here are a few of the points I agree with for the most part in this thread.

I agree that this is a painful downturn, made worse because it feels self-inflicted due to economic policy. But because of that, I have to believe that there’s a way to manage out of it. How long that will ultimately take and how far down things will need to go is the question.

Going with 100% in equities into retirement is not usually recommended.

Fortunately fixed income pays something, actually a lot right now.

Loss of capital is not your only risk. High inflation is also a risk

I will say it again. The stock market is a house of cards.

It's always different this time because it is different:

Rarely a good idea to make financial decisions based on emotion.

Sell if you wanna sell, play if you wanna play. Wild horses could not drag me into the [-]Casino[/-] Stock Market, now or in the near future.

[mod edit]

For the posters who say stay 100% in stocks, you have to be okay with there being a nonzero chance stocks could continue to go down, as much as the Great Depression, possibly even more. The Great Depression and the Japan meltdown happened before, they could happen again. Or a Black Swan event worse than the Great depression could happen. Based on history are they likely? No, but certainly well within the realm of possibility. There wasn't a Great Depression until there was. None of us know the future on inflation or stocks.

Or as Warren Buffett is famous for saying - Never risk what you have and need, for what you don't have and don't need.

 

[yhoomajor]

Contrary to what media says, modern Stock markets (that rely on Fiat monetary system) move with Central Banks' actions. It doesn't matter that much whether its Democrats are in power or Republicans in power.. major mover for stock markets is whether Federal reserve is pumping more Fiat into system.. or draining Fiat from system.

Plot the Federal reserve accommodating policies for last 30-40 years and overlay the S&P chart over that period. And there is the secret. Hidden but open for all of us to see.

 

[MichaelB]

<mod note> Snarky political sniping is unwelcome and ruins discussions that otherwise are interesting and helpful. Please leave the politics out the discussion.

 

[FIREd_2015]

I've talked to friends who say it's too late to get out because they are already down x percent. My response is if it drops another 10% or 20% would you wish you had gotten out then. I don't usually get a response but my advice to them is to take some money off the table.

I got out of the market several years ago. If it drops another 10-20% I'll probably buy some SPY or SSO. Given everything the Feds have said, the odds are interest rates will continue to go up in the remaining 2 Fed meeting this year. With margin debt at $687 billion and rising interest rates I don't think the market has capitulated yet. I think there is still too much optimism in the market.

 

[Montecfo]

To be clear, the Fed is forecasting rate increases throughout 2023, including another 1.25 point rise in Fed funds yet this year. Pundits and market watchers have their own predictions.

Interest rates are the most powerful driver of stock market returns historically and higher rates reduce the value of future cash flows of businesses. Further, resulting economic declines and higher financing costs reduce earnings, further reducing equity values.

But ultimately, equity markets begin to forecast the end of the rate rise cycle, stocks bottom and begin to rise. This time will not be different.

In my view, now is not the time to sell, as equities have fallen too far. Most sellers now will re-enter the market at higher prices, adding to losses.

This too shall pass.

 

[bmcgonig]

Conor sometimes at times like this it’s good to sacrifice something to the gods. My advice short term would be to sell enough to get to 3-4 or even 5 years expenses and put it in treasuries at 4% or whatever. Then you can think long term at your leisure and not panic. You’ll probably also sleep a lot better with this breathing room.

Good luck.

 

[Al18]

The S&P 500 is only 25% down from it’s peak. History says 50% drops every few years are common.

 

[Sunset]

Can someone school me a bit about buying and laddering bonds? Where would I do this? I just recently learned about I bonds last year so I bought two and will buy 2 more in 2023. Sucks that we're limited to $10k for these.
....

You are not limited to $20K in I-bonds each year. Right now you can easily buy another $40K (or $60K would be as high as I'd go) in I-bonds.

Read the I-bond thread about gifting, basically you can gift two or three $10K I-bonds to your wife, and she can gift can gift two or three $10K I-bonds to you.
If you do it now, they will earn the wonderful 9.6x% for 6 months and then reset to the current rate for the next 6 months...etc...etc..

The I-bonds you buy as a gift will sit in the gift box and you can give 1 per year, which is why I would only go out 3 years worth.

It does not solve your problem of having too much in equities for your comfort level.

 

[dixonge]

The S&P 500 is only 25% down from it’s peak. History says 50% drops every few years are common.

Only a few drops have been in the 50% vicinity. Most are much shallower, but they happen faster than the recoveries. On the other hand, the recoveries are normally *double* the drop, or even more. There are a couple of very revealing charts on this page:

https://www.investopedia.com/a-history-of-bear-markets-4582652

 

[RobbieB]

Not selling, not buying. Maintaining.

 

[RetMD21]

"Everyone has a plan 'till they get punched in the mouth." Mike Tyson

 

[connor77]

To be clear, the Fed is forecasting rate increases throughout 2023, including another 1.25 point rise in Fed funds yet this year. Pundits and market watchers have their own predictions.

Interest rates are the most powerful driver of stock market returns historically and higher rates reduce the value of future cash flows of businesses. Further, resulting economic declines and higher financing costs reduce earnings, further reducing equity values.

But ultimately, equity markets begin to forecast the end of the rate rise cycle, stocks bottom and begin to rise. This time will not be different.

In my view, now is not the time to sell, as equities have fallen too far. Most sellers now will re-enter the market at higher prices, adding to losses.

This too shall pass.

Conor sometimes at times like this it’s good to sacrifice something to the gods. My advice short term would be to sell enough to get to 3-4 or even 5 years expenses and put it in treasuries at 4% or whatever. Then you can think long term at your leisure and not panic. You’ll probably also sleep a lot better with this breathing room.

Good luck.

These 2 posts are sort of where I'm at.

I can sell one fund in our taxable account that will give us a cushion of 3 to 4 years of very lean living but it would be enough.

 

[lawman]

Stock returns can be misleading..Just remember if a security drops 50% in value it has to go up 100% just to get back to even.

Take the 10 year compound annual growth rate (CAGR) from Jan. 1, 2000 to Dec. 31, 2009 and you will see that 10 year period had a negative annualized return..
http://www.moneychimp.com/features/market_cagr.htm

 

[RobbieB]

For times of low equity market values, we have bonds. Yeah, down also but not as much.