Lessons learned from the debacle

[Lsbcal]

Reading through some of these statements I get the feeling that people feel the worst is over and it's time to reflect now. I don't think there is anyway to know where we are at it in this chart pattern we will call history until a few years from now. You should look at the 1930's monthly returns to see how variable things can get. A few good months is (unfortunately) not a trend.

So here is what I've done to my equity plan since last year:
(1) identify a buy and hold percentage that is pretty much weighted towards the total stock market
(2) identify a percentage that will be allocated to international and will be moved into US funds if the trend reverses in favor of US over international
(3) identify a percentage that is market timed between
..(a) smallValue-midcap-treasury
..(b) largeValue-largeGrowth-treasury
..(c) international-US-treasury

Along with this I've done lots of hours of spreadsheet calculations using publicly available data to get at a reasonable monthly (not daily) market timing approach that has some possibility of working going forward. I think the algorithms are reasonably robust but can only be sure of the backtests -- not the future.

No guarantees unfortunately.

 

[Steve O]

"I also learned that retiring in the midst of a market and economic debacle makes people very jealous of you."

Im guilty of this one

My timing could not have been better

I was at a 100% employee owned company, ESOP... All of it in one stock was making me very uncomfortable, and the job sucked

Right after I left on 7/18/08 their business went to hell with everything else...

Some others left too, and the ones I've heard from that are still there wish they would have...

I have NO REGRETS

I went into cash and bought in pretty low

I haven't been at this long but Im ready to take a little off the table, and wait for another buying opportunity

 

[calmloki]

Learned again that slow and plodding works ok. I get all jealous of the flipper people that make 25% on a 3 month flip or shiny up a place and score $75k profit for paint, shutters & roll-out sod. I read about stock market folks that make 15% every year and seemingly are on auto-pilot, rebalancing once a year. All you do is have a diverse set of asset classes, an appropriate balance of bonds and equities, and Bob's your uncle! Makes me feel like a real dummy paying off places rather than maximising leverage to amass massive real estate holdings. Makes me feel stupid for having renters that i answer too rather than a REIT fund. Sheesh. Then along comes times like these and i don't feel so bad. You will pardon my sense of schadenfreude - for a brief time on this race i think i'm actually ahead of the pack.

('course i'm also not hiking in the Rockies, but am still wearing my slippers...)

 

[audreyh1]

Reading through some of these statements I get the feeling that people feel the worst is over and it's time to reflect now. I don't think there is anyway to know where we are at it in this chart pattern we will call history until a few years from now. You should look at the 1930's monthly returns to see how variable things can get. A few good months is (unfortunately) not a trend.

Impossible to predict the future and the equity markets could easily be a rollercoaster for several years going forward, HOWEVER, the LIBOR is signaling pretty strongly that the worst of the credit crisis is over. It is finally normalizing. And the group that studies business cycles (Economic Cycle Research Institute - ECRI) says their indicators are predicting very strongly that the recession will be over soon.

Audrey

 

[DougViages]

Three words - "Stop Loss Trigger". I wish that I had put at least some in place last summer.

 

[ziggy29]

Three words - "Stop Loss Trigger". I wish that I had put at least some in place last summer.

On one hand, yes. But on the other hand, it would have really sucked to be stopped out in early March.

 

[WhoDaresWins]

Lessons learned

I learned that I was not well diversified...too much in aggressive growth large caps. I also tended to buy stocks and hold too long, not taking my profits when I should(oh, to go back to Oct. 17, 2007!). I was caught flat-footed, with too many of my resources invested and not enough liquidity. I have since rectified this by socking more of my salary in ready access CDs and a money market fund. I continue to purchase stock mutual funds via a deferred compensation plan at work, which is separate from my state pension plan, but other than this, I am not buying(or selling for that matter).

 

[Zoocat]

I suspect that we all have a lot more to learn during this financial crisis. After all, we're only seven months post-crash. Even though the economy appears to be stabilizing, I suspect that's because of the stimulus.

 

[snodog]

I've learned that one can never have too much adult beverages in the fridge.

 

[brewer12345]

I've learned that one can never have too much adult beverages in the fridge.

Generally sage advice regardless of the economic environment.

 

[FUEGO]

I learned that I can live with the volatility of 100% equities during the accumulation stage. I have 1/4 to 1/3 of the bare minimum amount needed to FIRE accumulated right now. My plan is to back down from 100% to something less (80%? 70%) over time as I get closer to my goal. In the meantime, I expect to be rewarded with a nice risk premium for my risk taking.

I learned that 100% equities in retirement will not work for me. This is probably as risky as I will get in ER: 80% equities and 20% cash or CD's and short to intermediate term high grade corp bonds or treasuries. I hope to have perhaps 5+ decades of FIRE, and so I think having a large equity allocation will be key to fighting inflation and keeping real purchasing power at or above the level of growth in wages.

With a minimum 20% of the portfolio in safe money, that will afford a little over 5 years at 4% withdrawal rate or around 7 years at a 3% withdrawal rate without ever touching equities. This is in the event we have another 2008-2009 market correction or a similar correction that lasts many years. 5-7 years in fixed income plus dividends from a stock portfolio should get me through most negative market events without severely harming the equities in the portfolio. And there is always w*rk to make ends meet if things got really harry... And the ability to cut expenses.

Investing wise, I have stuck to my guns, never selling and in the mean time buying all I could at these lows, including going hog wild with a triple leveraged financial bought within a day of the absolute bottom. Unlike many investors (present company excluded), I view stocks getting cheaper as a sign to buy more instead of sell them all. But I am also very young and have ample time to wait out a market recovery. The portfolio remains very heavily tilted to value (incl. overweight financials), small value, REIT, international, international value, emerging markets, int'l small cap, etc. I'm willing to take on more risk in the hopes that I will see higher return and some lower correlation among asset classes. I have used this market bottom and volatility to load up on some asset classes that were underweight. And I may rebalance soon to pare down some gains (for example, in emerging markets).

If I could go back in time to 2007 or early 2008, I would probably increase my emergency fund some and secure a HELOC (belts and suspenders and all). At this point, I would rather plow all that I can afford into the stock market and splurge a little on luxuries while prices are low. If DW and I both lose our jobs tomorrow, our unemployment benefits would more than cover our current spending for at least 57 weeks. And we do have a small amount of cash saved (maybe 2 months of expenses). In other words, our expenses are low enough that disruptions in income would not adversely impact us for a while.

In the meantime, we are trying to enjoy life (what recession!! ) and keeping paying down debt and DCA'ing into 401k's, IRA's, HSA, 529, taxable accounts, ESOP, etc.

 

[Bimmerbill]

I learned there are more important things than money.

Also, the futility of a FIRE plan when I have 12 to 16 years left in the working world. The amount of "stuff" that can happen in that time (also called life) is HUGE.

 

[BunsGettingFirm]

I knew that intellectually, Meadbh, but I guess it didn't sink in. Ironically, now I have an iron-clad job so I can take whatever risks I please in my investment portfolio.

LOL! I read the stuff you wrote in the CFA curriculum almost every day. The curriculum even points out the bond-like and stock-nature of certain jobs, but it's not easy to be so analytical when you're in the middle if it. The only saving grace was that I cashed out a portion of my portfolio in September to pay for my house, and that was not any kind of prescience. It was because my realtor wanted to make sure that he was going to get paid.

 

[brewer12345]

LOL! I read the stuff you wrote in the CFA curriculum almost every day. The curriculum even points out the bond-like and stock-nature of certain jobs, but it's not easy to be so analytical when you're in the middle if it. The only saving grace was that I cashed out a portion of my portfolio in September to pay for my house, and that was not any kind of prescience. It was because my realtor wanted to make sure that he was going to get paid.

This sort of thing is why I find behavioral finance fascinating. Even highly educated professionals who have specifically been told about this stuff still fall prey to these traps. Reminds me of the old thing about Sir John Templeton: he knew he would never have the courage to buy the stocks he liked on the really awful market collapse days, so he would decide a price he would love to buy at and submit limit orders at those prices.

 

[saluki9]

I've learned that one can never have too much adult beverages in the fridge.

I agree

I learned that 2 liters of bourbon may look like a lot when standing in line at Costco (in August) I had to buy another by December.

 

[yakers]

I learned there are more important things than money.

.

Good one, although not related to the financial debacle I learned that from one night in the cardiac ward. I retired in March 08 and I am sure there were better times financially but I wasn't going to wait around once I knew I had 'enough'. More is not always better.

 

[pensionrecovery]

I learned that most investors:
don't have a clue and are easily manipulated.
become paralyzed after losses mount.
are subject to the same old thing: greed and fear.
are far too short term oriented.
cannot sell because of greed and taxes when they should
cannot sell because of fear and they can't afford to when they should

In other words, most investors are going to lose a substantial amount of their
money. A few investors will literally make a killing. A few will prepare for
a lifetime and guarantee they will never run out of money regardless of how things
turn out.

 

[Mysto]

I learned that the experts - pundits - advisers- and economists don't know s**t! They knew it all before the fall (whoops) and if you look around they all know it all again. They all have post-cognition. They can't predict the future but they can tell you why it happened after it happened. I'll trust myself - thank you very much.

 

[headingout]

I subscribe to several investing newsletters. Some experts will pick 50 stocks/funds and leave it to you to apply that advice to your portfolio. They can crow about their 10 winners next year, but the devil is in the details of how you implement the advice.

My own great failing, indeed, was not to sell and rebalance some profitable positions. I had a special fear of complexity and taxes. I believe I'm cured of that, partly by all the rebalancing I had to do this year, and partly by the largely passive index (rather than volatile sector) funds I have moved to.

 

[crazy connie]

The sun still comes up in the morning.

The people being interviewed frequently have less knowledge than I do.

Sometimes it's ok to sell at a loss.

Not to be intrested in individual stocks who are making money by massive headcount cuts, pension plan cuts and stopping 401k match (suspension for a while on this is ok though). Good human capital is not easily replaced and frequently is replaced by lesser wages and not where I want to invest.

When everyone else is whipped into a panic by the pundits and the drops are more then a couple of % points you can find some good bargains.

Read the analyst opinion, headlines, and message board but buy based on my own evaluation of the business. Good business ethics are an asset and reflected in the employees.

We have a wealth of knowledge available and many choose to be led around by the golden ring placed by the FA's who are making another killing on the portfolio rebalancing now. So be it. People who are content to pay big bucks and will have a life of less are entitled to not learn.

Active account management can be fun for some people but it can be a bit stressful.

Real friends enjoy home made soup and bread or beans and cornbread for dinner.

Laughter is essential and tears don't help or hurt they just make my nose red!

 

[deserat]

Late again:

I reinforced my belief that having options allows you to lower your stress regarding money and markets, to whit:

having several 'streams' of income - could be like thinking of yourself or your family as a company - in our case, three small pensions, after tax savings, tax-deferred saving, LBYM (ensure you manage your lifestyle costs-or manage your wants and minimize your needs costs), owning your own business (small one-person company) for tax advantages (may go-away soon!), adjusting your AA slowly and realizing there will both bad and good times, staying away from the damn TV, working to vote fiscally responsible people into government offices (although that didn't work too well this time), deciding on how much you wish to 'manage' your portfolio and allocating appropriately (use of index funds, versus single stocks, use of target funds versus your own 'bucket' mix)

 

[Eagle43]

LBYM works. I actually knew that before this mess.

On allocation, Isn't 100 minus your age about right? I never was good at math. Anyway, I'm close to that number and it seems to work.

That and a few streams of income have saved me. Since I don't need it, my Vanguard loot seems to be coming back, slowly but surely.

 

[IndependentlyPoor]

I learned that my reaction to the financial crisis was not panic selling, but paralysis. I didn't do anything: no selling, no rebalancing, nada.

I learned that having some money in target retirement funds is good for me, because they rebalance automatically, no matter how scared I am.

I learned that you must be sure that your bond funds include some treasuries. Here is a chart showing the growth of $10K in three Vanguard bond funds:

• Intermediate Term Investment Grade VFICX, which has almost no U.S. government bonds

• Intermediate-Term Treasury VFITX, which is almost all U.S.government bonds

• Total Bond Market Fund VBMFX, which has a some of everything.

All three are intermediate term and VFICX and VBMFX could both be described as diversified, but when the panic happened VFICX had a sickening drop.

However, if the government had allowed Fannie May and Freddie Mac to go under, VBMFX would have suffered a terrible loss.

I learned that pokey old cash isn't so bad after all.

Even with automatic rebalancing and a very conservative asset allocation, the Target Retirement Income fund still performed worse than even the Prime Money fund.

Edited to add:
Add me to those who are not sure that this is over.

 

[Lsbcal]

Nice charts and comments IP. One might want to add VIPSX to the bond mix so if (when?) unexpected inflation shows up there is not a backward looking lesson to learn. It was a rough ride in late 2008 for TIPS. One way to handle that is to have maybe 50% intermediate Treasuries and 50% TIPS -- or something of that nature.

 

[audreyh1]

After many months of cogitation, I made some minor tweaks to my investment plan as a result of the debacle. Overall I felt my AA approach to investing under all market conditions was a good one, just needed some minor tweaks.

I widened my "allocation trigger" - i.e. how far to stocks and bonds allocation have to deviate from my target before I rebalance. I rebalanced twice in 2008 unfortunately "catching a falling knife" both times and again in mid Jan of 2009. Each time I sold bonds and bought equities. That just felt like way too often, and so I am going with a wider allocation even if it means I miss some opportunities during milder market corrections.

I realized that 10 years after retirement, I really needed to consider gradually allowing the allocation to equities decrease over time so that by the time I reach say 70 I have a more age appropriate equity allocation. I slightly lowered my equities allocation - not by much, 58% to 55%. I was actually forced to do this anyway, because I didn't want my cash+bonds to fall below a certain number of years expenses, and so I was limited with how much I could put into stocks. My bond funds had misbehaved as well (see below). Fortunately I had a pretty large allocation to cash, so I was able to put the cash to work. The rule was, however, that as things recovered I had to rebalanced back to that 55% equities number and gradually reduce that allocation as I get older.

But the biggest lesson was in terms of how differently various bond funds behave in harsh bear markets and whether they are keeping their value when you most need them too - i.e. when you are ready to sell bonds to buy beaten up stocks! I wasn't happy with how my core bond fund behaved and am changing it. I detail this lesson in this post on another thread - http://www.early-retirement.org/forums/showpost.php?p=841418&postcount=21

Audrey

P.S. Can't bring myself to buy TIPs. Too US $$ centric. I don't trust the CPI anyway. I rely on the equities portion of my portfolio to protect me from inflation. Besides, some of my diversified bond funds buy TIPs when they think they are compelling value.