Market Volatility

[mrfeh]

- 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?

Simple - don't buy individual stocks.

bogleheads.org

 

[audreyh1]

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.

Market crashes can certainly impact dividend income streams as many found out in 2008!

 

[karen1972]

I bought a lot of individual stock during 2008 and its still about 20% of my portfolio but I'm actively reducing that. I never got even close to 15% in one stock, the most I had was 6% in apple because there was too much overlap in my mutual funds plus individual meant I ended up selling all my individual shares.

I tried to be disciplined and every time anything double, I sold half. Yeh it bites when the stock keeps skyrocketing but I know locking in gains is part of why I had been successful, plus you get moments like Jan of this year, where I sold half of 4 different stocks and then we had that huge reversal and you feel like a huge winner. That has happened multiple times over the years so it helped reinforce my rules.

I do have what I call my "vegas" trading account which anything goes. I now limit my risky stock investing to just that account which doesn't have any rules.

 

[kcowan]

sold off all but AAPL.

Yup also sitting on $380k of capital gains! But also ok continuing to hold...

 

[haha]

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.

True as far as it goes, but the trouble is that you cannot be in control of the price at which this gold can be exchanged for cash to buy food, housing, and whatever else you need or want. You may need other sources of actual money such as pensions, SS, or secure interest paying securities. Like most investments, gold has an array of pluses and minuses.

Ha

 

[audreyh1]

Yup also sitting on $380k of capital gains! But also ok continuing to hold...

This is in DHs SEP-IRA that he directs (i.e. leaves alone). He’s been a lucky fella - even though it now threatens to turn into a tax torpedo. Oh well!

 

[treeofpain]

There are various approaches, depending on your risk threshold. My perspective is that I will never spend my retirement fund. I will live off its earnings. You can debate whether the withdrawal rate should be 2%, 3%, 4%, whatever and accumulate accordingly.



That said, we also know that when the market corrects/crashes/(insert your favorite term here), it typically rebounds in a couple of years. So it makes sense to have cash on hand (or CD ladder, etc) to weather a storm for this anticipated period. If you want to assume less risk, keep more years of cash on hand, but this will decrease your earning potential.



The rest of your money should be working for you. Whether than is 100% index funds, 80/20, 50/50, 20/80 depends on your risk threshold.

 

[kcowan]

This is in DHs SEP-IRA that he directs (i.e. leaves alone). He’s been a lucky fella - even though it now threatens to turn into a tax torpedo. Oh well!

Well I am in Canada. 25% CG and 100% applied on death. No step-ups. Yup a high-powered torpedo. Back in the day of strict asset allocation, we sold off half and decided to ride the rest into the sunset. So it could have been double that amount!

 

[robmars]

Market crashes can certainly impact dividend income streams as many found out in 2008!

Yes, unless you invest into companies that have increased their dividends every single year in the past 25+ years - these are called Dividend Aristocrats. These companies have not only sustained but even increased their dividend payouts during the Great Recession (2008-9) and before and after, each and every year. Therefore, investing into DAs you minimise the probability of market volatility effects to the dividend income from your portfolio. See more about Dividend Growth Investing on here.

 

[Al18]

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.

Sorry my memory wasn't correct
Many folks reported a 5% maximum, though some stated their limit was 0%. Here's the discussion link -it was NOT a poll


http://www.early-retirement.org/forums/f44/maximum-percent-for-single-security-92373.html

 

[OldShooter]

There is a worthwhile discussion of diversification here: https://www.investopedia.com/articles/stocks/11/illusion-of-diversification.asp and the punch line is, yes, one has to diversify across sectors as well as having many stocks.

My takeaway from this type of discussion is that it is essentially impossible for an individual to diversify away individual stock risk. The portfolio is just too big and too much work to manage.

 

[Firedafter30]

Now that I'm in FIRE, I am working to get out of individual stocks. Been reading up on investment books (from the library - great source!!), and low cost ETF's or funds diversified between stocks and bonds are the way to go.


One thing I read that stuck with me is something like this saying- "stop trying to hit home runs, and just avoid having to eat catfood". With this mindset, I'm not worrying about missing that next big stock story that used to hook me in the past.

 

[97guns]

Gold-to-Decent-Suit Ratio

https://www.businesswire.com/news/home/20110819005774/en/History-Shows-Price-Ounce-Gold-Equals-Price


The idea here is that gold paces inflation, it’s not held to create income or gains, its held for preservation

 

[marko]

Having 2 stocks comprise 15% of a portfolio is over concentration IMO, esp when these specific stocks are very likely to move together.

My thoughts exactly.

 

[jazz4cash]

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.

This is a great point. Looking at my Fido GPS report from 1 yr ago, it uses 11 sectors to represent US Total Market Index. The tech sector has 20% allocation. Four other sectors are 11-15% and the rest are single digit.

 

[erkevin]

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.

Keep a year's worth of cash on the side to use while the market recovers

 

[Dtail]

Keep a year's worth of cash on the side to use while the market recovers

Curious about does the concept of not selling stocks when they are down i.e. using bonds/cash until some recovery occurs - would this really apply for TIRA the same way it applies for Taxable accounts?

 

[OldShooter]

Curious about does the concept of not selling stocks when they are down i.e. using bonds/cash until some recovery occurs - would this really apply for TIRA the same way it applies for Taxable accounts?

Sure. I can't call tops and bottoms any better than anyone else, but if the market has taken a hit and is recovering over several years I am better off waiting if I have enough fixed-income type assets in my first bucket that I am never forced to sell. (Not wishing to re-ignite the anti-bucket passions here, though.)

Re "cash" for a year, hopefully this is shorthand for "fairly liquid assets" like t-bills, bank loan funds, etc. Not to really tie up a year's worth of money with near-zero return.

 

[marko]

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.

A good cash balance is critical. Plus you might consider MFs instead of individual stocks. Plus dividends generally keep paying during a downturn.
Personally I'd welcome a 2008 repeat (sort of) in order to better reload on some winners.
Yes, "cash" means MM or short bonds or something

 

[Dtail]

Sure. I can't call tops and bottoms any better than anyone else, but if the market has taken a hit and is recovering over several years I am better off waiting if I have enough fixed-income type assets in my first bucket that I am never forced to sell. (Not wishing to re-ignite the anti-bucket passions here, though.)

Re "cash" for a year, hopefully this is shorthand for "fairly liquid assets" like t-bills, bank loan funds, etc. Not to really tie up a year's worth of money with near-zero return.

Let me explain a little better. My reference is also using index funds.
My question is more surrounding the potential tax angle too. If one has a drop in Equities in their taxable account, one has to consider the tax effects plus selling equities at a low point.
In a TIRA, there are no tax consequence differentials in selling the depressed equities or the bonds.
Additionally, if one sells the depressed equities, one could just rebalance from the bond fund. Thus the non tax consequence of rebalancing with index funds in a TIRA account should eliminate the negatives of selling depressed equities, which would exist in a taxable account.

Am I making sense at all?

 

[LOL!]

Curious about does the concept of not selling stocks when they are down i.e. using bonds/cash until some recovery occurs - would this really apply for TIRA the same way it applies for Taxable accounts?

Presumably if one is retired, then one is not 100% stocks/equities. So if equities drop, one simply rebalances by exchanging from fixed income assets (bonds!) into equities to get back to one's desired asset allocation.

And one only has one portfolio. Not a taxable portfolio. Not a tIRA portfolio. One portfolio possibly made up of several accounts: tIRA, Roth, taxable, whatever.

If one isn't buying equities after substantial drops, then one ain't doing it right.

If one has to pay expenses, then one sells something, but should always rebalance back to their desired asset allocation.

Also consider that a retiree with a 60/40 asset allocation and withdrawing 4% a year, sort of has 10 years of assets in fixed income.

This is not rocket science, brain surgery, nor rocket surgery.

 

[Dtail]

Presumably if one is retired, then one is not 100% stocks/equities. So if equities drop, one simply rebalances by exchanging from fixed income assets (bonds!) into equities to get back to one's desired asset allocation.

And one only has one portfolio. Not a taxable portfolio. Not a tIRA portfolio. One portfolio possibly made up of several accounts: tIRA, Roth, taxable, whatever.

If one isn't buying equities after substantial drops, then one ain't doing it right.

If one has to pay expenses, then one sells something, but should always rebalance back to their desired asset allocation.

Also consider that a retiree with a 60/40 asset allocation and withdrawing 4% a year, sort of has 10 years of assets in fixed income.

This is not rocket science, brain surgery, nor rocket surgery.

I UNDERSTOOD already everything you wrote. You are missing my point/question.
Moving on......

 

[jollystomper]

To the OP, over time before being close to RE I reduced the amount of my portfolio I had in individual stocks. I preferred the "string of small singles" growth from mutual funds vs. the "swing for the fences" approach in individual stocks. Going into RE only 2% of my savings/investments are in individual stocks (mainly Microsoft and Oracle, which had them for 20+ years; even with me taking out double my original investment years ago they still have been very, very good to me).

I would be uncomfortable having your percentage invested in individual stocks, even my former Megacorp stock.

I agree with those who keep a large cash position to buffer any downturns. Currently I have enough in cash to not require selling any stocks or funds for 6 years, until FRA time.

In 2008-2009, with a higher equities allocation than I have now, my overall assets were down around 20% at the worst, and I have less debt now that I had then. Fortunately I have a pension, so a 20% cut will not impact our planned RE spending, so I can sleep at night. I also modeled a 20% cut without a pension, and we could still afford our "needs", only our "wants" would be impacted.

 

[enjoyinglife102]

When the overwhelming data says investors will underperform index funds when they buy individual stocks, I'm completely baffled when someone chooses to do so. What is it? it can't be the increased work involved, angst, complexity and tracking leading to that underperformance - could it?

 

[aja8888]

When the overwhelming data says investors will underperform index funds when they buy individual stocks, I'm completely baffled when someone chooses to do so. What is it? it can't be the increased work involved, angst, complexity and tracking leading to that underperformance - could it?

Don't forget the panic when finding out your 1,500 shares of XYZ Corp fell 25% overnight on a bad earnings report that was announced after the markets closed.