Dow posts worst Opening Day in 8 years

[Mman]

But it hard to time the market. After all if u put 10k in 2000. In 2010. U still would have had the same 10k (due to stock market crash 40% in 2001 and of course the crash in late 2008).

That's only true for dollars invested exactly at the peak. If you were continually investing all along, you made a lot of money from 2000 to 2010 because you would've had so much invested at much lower points rather than just at the peak.

So yes, if you put all your money in at the top of a bubble it will be a long time before you get ahead. But if you just keep investing day after day, month after month, and year after year you are nearly guaranteed to come out ahead.


The moral of the story? Everyone should stop trying to predict where the market is going in the next 12 months and just stick with the plan. People have been strongly calling for a bear market since 2011. 5 years later and it's gone up this whole time. If you sat out this entire time (or worse took a net short position), you may have done permanent harm to your portfolio.

---

Members don't see this ad.

 

[GA8314]

That's only true for dollars invested exactly at the peak. If you were continually investing all along, you made a lot of money from 2000 to 2010 because you would've had so much invested at much lower points rather than just at the peak.

So yes, if you put all your money in at the top of a bubble it will be a long time before you get ahead. But if you just keep investing day after day, month after month, and year after year you are nearly guaranteed to come out ahead.


The moral of the story? Everyone should stop trying to predict where the market is going in the next 12 months and just stick with the plan. People have been strongly calling for a bear market since 2011. 5 years later and it's gone up this whole time. If you sat out this entire time (or worse took a net short position), you may have done permanent harm to your portfolio.

Yeah, the best investment books I've read just say never attempt to outperform the market. You'll likely lose. Dollar cost averaging is key. It's harder to do for some who have quarterly bonus structures like myself, but still doable. Invest consistently into a good low fee Vanguard fund and forget about it.

My philosophy is going to be high savings with anticipated 5-6% returns over the long run. But, high savings will drive the growth. If I attain a better return, then great. But, I'm not counting on much more than 6% long term. I'm o.k. with that. Better than negative or risking too much.

 

[BLADEMDA]

always nice to revisit stock prediction threads. We had a host of them from 2014 to early this year predicting the upcoming doom. Hope nobody sat on the sidelines or went short this year as S&P total return now up almost 13% YTD and about 25% from February lows.

Or the election. The evening Trump won the experts were predicting a market crash. Not only didn't the market crash but the rally is the best one in years.

 

[BLADEMDA]

Yeah, the best investment books I've read just say never attempt to outperform the market. You'll likely lose. Dollar cost averaging is key. It's harder to do for some who have quarterly bonus structures like myself, but still doable. Invest consistently into a good low fee Vanguard fund and forget about it.

My philosophy is going to be high savings with anticipated 5-6% returns over the long run. But, high savings will drive the growth. If I attain a better return, then great. But, I'm not counting on much more than 6% long term. I'm o.k. with that. Better than negative or risking too much.

I'm counting on a 3.5-4% return for my calculations. I think being conservative can't hurt when I actually retire. Plus, I'm only 45% equity/55% right now. I'd like to be 55/45 especially in this market. But, Ill be patient waiting for a January pullback; overall, I'm bullish on Trump's vision of the USA and hence the stock market.

 

[deleted126335]

Yeah, the best investment books I've read just say never attempt to outperform the market. You'll likely lose. Dollar cost averaging is key. It's harder to do for some who have quarterly bonus structures like myself, but still doable. Invest consistently into a good low fee Vanguard fund and forget about it.

My philosophy is going to be high savings with anticipated 5-6% returns over the long run. But, high savings will drive the growth. If I attain a better return, then great. But, I'm not counting on much more than 6% long term. I'm o.k. with that. Better than negative or risking too much.

Actually it is not. Statistically, if one were to be the beneficiary of a windfall, lump sum investing has outperformed dollar cost averaging the majority of the time. However, behaviorally, loss aversion is an extremely powerful motivator. Thus the emphasis on dollar cost averaging.

 

[pgg]

Actually it is not. Statistically, if one were to be the beneficiary of a windfall, lump sum investing has outperformed dollar cost averaging the majority of the time. However, behaviorally, loss aversion is an extremely powerful motivator. Thus the emphasis on dollar cost averaging.

Follow up question ...

Statistically, investing a windfall as a lump sum has the largest up side. More time in the market, makes perfect sense.

What about down side risk? Intuitively it seems to me that investing 1/12th of it every month for a year may miss some gains on some of the money for some of the year, but is a lot less likely to have it all go in right before a drop. But intuition is often wrong.

I'm sure someone has backtested this a thousand ways. How does gradually investing a windfall alter the risk?

 

[deleted126335]

Follow up question ...

Statistically, investing a windfall as a lump sum has the largest up side. More time in the market, makes perfect sense.

What about down side risk? Intuitively it seems to me that investing 1/12th of it every month for a year may miss some gains on some of the money for some of the year, but is a lot less likely to have it all go in right before a drop. But intuition is often wrong.

I'm sure someone has backtested this a thousand ways. How does gradually investing a windfall alter the risk?

Going from memory. About 75% of the time lump sum investing beats DCAing a lump sum over a year because stocks and bonds always have a higher expected but not guaranteed return over cash/money market-which is where presumably someone who is doing dca of a lump sum into whatever their preferred stock/bond allocation is. In terms of risk/reward? I expect that it Is no different than the risk reward ratio of ones desired allocation.


Sent from my iPhone using SDN mobile app

 

[Matty44]

Or the election. The evening Trump won the experts were predicting a market crash. Not only didn't the market crash but the rally is the best one in years.

It's still coming. Just wait a few months for it.

25-40% drop.

Book it.

Buy some silver.

 

[pgg]

It's still coming. Just wait a few months for it.

25-40% drop.

Book it.

Buy some silver.

Why not hold your stocks for a few months and then sell right before the crash and load up on silver the day before?

 

[Matty44]

Why not hold your stocks for a few months and then sell right before the crash and load up on silver the day before?

Didn't say I knew the exact day the market will tank. But it will.

I have very minimal stock holdings in my retirement account currently. Heavily positioned with silver already. It's going to $25/oz at minimum.

Just friendly advice

 

[Matty44]

 

[pgg]

I have very minimal stock holdings in my retirement account currently. Heavily positioned with silver already.

Were you ever substantially invested in equities in the first place?

If so, when exactly did you change your position to "minimal" holdings?

Just friendly advice

Just friendly ribbing

Thinking you know where stocks (or an industrial commodity like silver) are going with the time resolution of "a few months" is just as wishful as thinking you know what it'll do tomorrow.

 

[pgg]

View attachment 211886

Why did you pick this time frame for silver and what do you think that chart means?

 

[Matty44]

Were you ever substantially invested in equities in the first place?

If so, when exactly did you change your position to "minimal" holdings?

Been a while (years) since I've held stocks/mutual funds/standard 401k type holdings.

Just friendly ribbing

Thinking you know where stocks (or an industrial commodity like silver) are going with the time resolution of "a few months" is just as wishful as thinking you know what it'll do tomorrow.

Agree to disagree : )

Longer term moves like the silver one I mention are hard to time, yes. That could take weeks or months - I never put a time frame on silver. I do think a big drop in stocks is coming in the next 3-4 months, if not sooner. But yeah, I can't tell you what day.

Short term trades, like intraday moves can be surprisingly "timed" however.
Especially the foreign currency markets.

I picked that chart, - weekly one - because that's the TF on which my analysis got me into a silver trade and it shows where I believe price will be drawn to.

 

[facted]

Agree to disagree : )

Longer term moves like the silver one I mention are hard to time, yes. That could take weeks or months - I never put a time frame on silver. I do think a big drop in stocks is coming in the next 3-4 months, if not sooner. But yeah, I can't tell you what day.

Short term trades, like intraday moves can be surprisingly "timed" however.
Especially the foreign currency markets.

If you could time the market as well as you say, you wouldn't be an anesthesiologist and you wouldn't be on SDN giving us advice. You'd be on a yacht in the Mediterranean.

 

[Matty44]

If you could time the market as well as you say, you wouldn't be an anesthesiologist and you wouldn't be on SDN giving us advice. You'd be on a yacht in the Mediterranean.

All in good time my friend : )

 

[pgg]

Been a while (years) since I've held stocks/mutual funds/standard 401k type holdings.

Soooo ... your market timing move has kept your assets out of equities for years of growth and in a shiny industrial (not monetary) metal for years of decline:

I guess it's a good thing past performance is no guarantee of future results.

Agree to disagree : )

Sure.

 

[Mman]

It's still coming. Just wait a few months for it.

25-40% drop.

Book it.

Buy some silver.

I do think a big drop in stocks is coming in the next 3-4 months, if not sooner. But yeah, I can't tell you what day.

So are you saying you've been loading up on stocks for years and now you are suddenly seeing an imminent crash? Or have you been predicting an imminent crash for years and it has never come, but soon it will.

Guess what? Stocks will go up. Stocks will go down. If you are trying to predict when that happens, you will likely fail. You should always be ready to tolerate a 50% drop in the quoted value of your stock holdings. That sort of thing is no big deal when you are investing on a 30 or 40 year time line. It just doesn't matter. I actually hope the stock market drops 50% in the next 6 months. It'd be great because that next $300-500K or so I'll be putting into the market will go a lot farther than if prices don't drop. But if you spend time out of the stock market because of fear of future drops, you are almost guaranteeing yourself a poor return on your investments over time.

One of the most interesting things in financial literature is that people that make vague bear predictions almost never get called out on it after the fact. You just go on TV or write books or articles talking about the impending doom. Sometimes it happens, most of the time it doesn't, but nobody bothers to care that you were usually wrong.


I don't know where the stock market will be 6 months from now. I don't know where it will be 5 years from now. I can, however, promise you that it will be a lot higher 30 years from now than it is today and that every single dollar invested in the market today will provide a satisfactory return over the decades. Guaranteed.

 

[Matty44]

Soooo ... your market timing move has kept your assets out of equities for years of growth and in a shiny industrial (not monetary) metal for years of decline:

I guess it's a good thing past performance is no guarantee of future results.




Sure.

You sure made a lot of assumptions...

I bought silver about 3 weeks ago and I'm up a hair over 4% return. I got in at $15.40, and if it hits $25 this year, I'll have made over 60% return. I only posted my opinion on silver because I feel like NOW is a great time to buy, not 5 years ago. Obviously holding it for the last 5 years woulda been a bad call. I've been waiting for a chance to get in for a while...

According to your chart, holding an S&P index fund since 2013 would have had a ~50% increase in 4 years. 12.5% return per year is GREAT for the stock market, but not for me. I've made well over 12.5%/year since i've learned how to manage my own funds (and i'm still learning a lot!), so i'm very happy with my choice not to just hold index funds.

And Mman, it all depends on what "satisfactory" means

Cheers

 

[Matty44]

One of the most interesting things in financial literature is that people that make vague bear -predictions almost never get called out on it after the fact. - Mman

I could be wrong, but there, now I'm not vague at least. We can look back on this post in a year and see if I'm right [/QUOTE]

 

[pgg]

You sound just like my day trader friends back in 1999, trying to help me understand tech stocks.

I think you're on the wrong side of the Dunning-Kruger effect, but I wish you the best of luck.

 

[Matty44]

You sound just like my day trader friends back in 1999, trying to help me understand tech stocks.

I think you're on the wrong side of the Dunning-Kruger effect, but I wish you the best of luck.

Well, that's not the nicest thing in the world to say but best of luck to you too

 

[facted]

I've made well over 12.5%/year since i've learned how to manage my own funds (and i'm still learning a lot!), so i'm very happy with my choice not to just hold index funds.

Larry Fink... Is that you? This is such ridiculousness. Since when? If you could make. "well over" 12.5% per year over a multi year period (say 10 yrs), you'd have your own hedge fund and a nytimes write up. The truth of the matter is most of the guys on wall street and at the funds in Greenwich can't do this more than a few years at a time. There is a ton of evidence against active investment and the idea that anyone can beat the market with regularity. It may be possible on a small scale with super sophisticated computer algorithms written by math quants... But certainly not by you picking just the right day to buy silver.

 

[sazerac]

Intuitively it seems to me that investing 1/12th of it every month for a year may miss some gains on some of the money for some of the year, but is a lot less likely to have it all go in right before a drop. But intuition is often wrong.

Fundamentally you describe having a windfall in cash but you know the best allocation for you is to have some or most of it in the market. You wonder if it would be better to invest it all at once, or ease into the market over a year.

Ask yourself, if you instead received the windfall exactly in your desired allocation of stocks / bonds / cash on day one, would you (1) leave the investment as is and get a good night's sleep, or (2) sell the windfall immediately, and then gradually invest the proceeds over the next 12 months?

I find this thought experiment convinces people to do the right thing and invest it all at once. And still get a good night's sleep.

 

[Matty44]

Larry Fink... Is that you? This is such ridiculousness. Since when? If you could make. "well over" 12.5% per year over a multi year period (say 10 yrs), you'd have your own hedge fund and a nytimes write up. The truth of the matter is most of the guys on wall street and at the funds in Greenwich can't do this more than a few years at a time. There is a ton of evidence against active investment and the idea that anyone can beat the market with regularity. It may be possible on a small scale with super sophisticated computer algorithms written by math quants... But certainly not by you picking just the right day to buy silver.

Listen, my goal wasn't to get into a pissing match or anything. I'm not gonna try and argue my returns with you. Just wanted to post a couple of thoughts on the stock market and silver. But I will say that there's a lot more to trading than just trying to pick stocks/commodities/etc on the right day and hold for the year. When you understand how price (of any asset) is delivered to the market, you can easily pull in a few % increase per trade with low risk. And if you net +10 winning trades per year, i.e. 50 winning trades and 40 losers, there's your 12.5% + per year. Only 55% correct if your risk to reward is 1:1. Is that so hard to believe? And if you take 1:2 or 1:3 risk to reward trades, you don't even need to be correct on the majority of your trades and you can see double digit returns.

 

[Mman]

Listen, my goal wasn't to get into a pissing match or anything. I'm not gonna try and argue my returns with you. Just wanted to post a couple of thoughts on the stock market and silver. But I will say that there's a lot more to trading than just trying to pick stocks. And when you understand how price (of any asset) is delivered to the market, you can easily pull in a few % increase per trade with low risk. And if you net +10 winning trades per year, i.e. 50 winning trades and 40 losers, there's your 12.5% + per year. Only 55% correct if your risk to reward is 1:1. Is that so hard to believe? And if you take 1:2 or 1:3 risk to reward trades, you don't even need to be correct on the majority of your trades and you can see double digit returns.

The question is more over what time frame you have perfect (or close enough) investment transaction records and how are you measuring your returns (time weight or money weighted). For me, I prefer to use the Bogleheads spreadsheet that calculates both and relies on me inputting nothing more than deposits and balances at given dates. I've got pretty good data since 2005 which includes a nice fat downturn with which to gauge my ability to stay the course.

Pulling in good returns in an up going market is no big deal. I mean lots of people have. As your time frame gets longer, it gets harder. I kinda doubt you have invested serious money for 10+ years with perfect transaction records with which to calculate your actual returns.

So when do your personal investment returns date back to? Because S&P going back by year has had the following returns...

2016: up almost 12% and counting
2015: 1.40%
2014: 13.70%
2013: 32.39%
2012: 16.00%
2011: 2.11%
2010: 15.06%
2009: 26.46%

That's slightly under 8 years and it's up over 160% in that time frame. It's up over 60% in just the last 4 years, not 50% that you seem to think. VTI (Vanguard total stock) is up 155% from January 2009 to today.

 

[Matty44]

You're right, I haven't been doing my own investing for 10+ years, more like 5, and I've been improving steadily over those 5 years. Like I said, don't want to get into a big thing defending my returns, I'll just repeat that I'm much happier/profitable doing it myself, actively trading, than I would be with long-term holdings in the S&P/DJI/NASDAQ.

Its interesting that you happen to reference only back to 2009 though.

 

[Mman]

You're right, I haven't been doing my own investing for 10+ years, more like 5, and I've been improving steadily over those 5 years. Like I said, don't want to get into a big thing defending my returns, I'll just repeat that I'm much happier/profitable doing it myself, actively trading, than I would be with long-term holdings in the S&P/DJI/NASDAQ.

Its interesting that you happen to reference only back to 2009 though.

It's only interesting in that I'm pointing out that you can have up to 8 years of returns that are way beyond historical norms by nothing more than low cost index funds. You wouldn't have nearly as good returns if you included 2008.

So when somebody says they've been way better than 12.5%, it really doesn't mean anything. As far as I'm concerned you should only judge your performance in comparison to a low cost fund that has a similar risk profile. If you are going 100% equities, it's OK to compare to S&P 500 or VTI total stock market. And if you've got 5 years of data, you should probably be >25% per year for those 5 years to even begin to consider the possibility that you are doing better yourself than by indexing. If you are piddling along at the same 15-20% per year that the overall market has performed in that time frame you haven't done any better. I mean VTI is up 82% last 5 years.


And please don't get me wrong. I actively invest with a strong emphasis on value in the same vein as Charlie Munger and Warren Buffett and Seth Klarman and others with my taxable account and I have personally exceeded the returns of the S&P by a few percent per year so I'm not arguing you can't successfully do it. I'm just pointing out you need to have a valid benchmark to compare yourself to and a long enough track record before you can claim it. I have now done it long enough starting off very small that I'm fairly confident I can avoid losing my shirt and if it gets me an extra 1-2% per year over 20 years I'll be happy. But if I had even 1 year of massive underperformance I'd have to significantly reassess.

Be careful and be honest. You only hurt yourself if you think you are outperforming when in reality you are underperforming. So while you might be happier and still underperforming, that might mean you need to find a different path to happiness.

And to reiterate, I'm not sure why you find it interesting I stopped at 2009 if you weren't investing prior to that. If you were up 15% in equities in 2008, major hat tip since the market lost 37% that year. I considered it a personal win to only have lost ~26% that year.

 

[Matty44]

So when somebody says they've been way better than 12.5%, it really doesn't mean anything. As far as I'm concerned you should only judge your performance in comparison to a low cost fund that has a similar risk profile. If you are going 100% equities, it's OK to compare to S&P 500 or VTI total stock market. And if you've got 5 years of data, you should probably be >25% per year for those 5 years to even begin to consider the possibility that you are doing better yourself than by indexing. If you are piddling along at the same 15-20% per year that the overall market has performed in that time frame you haven't done any better. I mean VTI is up 82% last 5 years.

I appreciate your concern for my ability to quantify my true returns, but trust me, I have zero doubt that I'm doing better than "indexing."

 

[sevoflurane]

On a related note... WTF is going on with the DJI? We 'bout to hit 20K? Geeesus.
I didn't see that coming. Honestly thought Trump would have had the opposite effect.

 

[deleted126335]

On a related note... WTF is going on with the DJI? We 'bout to hit 20K? Geeesus.
I didn't see that coming. Honestly thought Trump would have had the opposite effect.

Nobody knows nothing. Accept it.


Sent from my iPhone using SDN mobile app

 

[Pooh & Annie]

On a related note... WTF is going on with the DJI? We 'bout to hit 20K? Geeesus.
I didn't see that coming. Honestly thought Trump would have had the opposite effect.

Just wait.

 

[caligas]

Just wait.

Yes, but wait how long exactly?

 

[sevoflurane]

Nobody knows nothing. Accept it.


Sent from my iPhone using SDN mobile app

Love u Doze.

Always a voice of experience.

Def. misjudged this one.

 

[Mman]

Yes, but wait how long exactly?

30 years

You can be assured it will be much higher in 30 years with plenty of ups and downs in between. It's only when people pay attention to those individual ups and downs and (even w0rse) change their plans because of them.

There are a lot of ways to get rich with your retirement savings, but they all involve a high savings rate and a refusal to constantly change your plan because of market ups and downs. Pick your basic allocation/strategy and stick with it and you will do well.

 

[Pooh & Annie]

Yes, but wait how long exactly?

My personal guess is within a month or two of inauguration. I think traders were reassured by what looked like an amicable changing of the guard. But I think things are extremely volatile politically and geopolitically, and we know what that means for the market.

I'm not touching my long term stuff. I agree with the 30 year growth comments. But I sold some short term stuff this week.

And to be honest I'm not even completely confident in the 30 year guarantee of market climb, which has always been a no-brainer. I think things in the world are happening on hyper-speed. 30 years might as well be 300 years. And I think the world's confidence in our financial and political systems are fading.

I think it'll be alright in the long run. I just don't know.

 

[deleted126335]

30 years

You can be assured it will be much higher in 30 years with plenty of ups and downs in between. It's only when people pay attention to those individual ups and downs and (even w0rse) change their plans because of them.

There are a lot of ways to get rich with your retirement savings, but they all involve a high savings rate and a refusal to constantly change your plan because of market ups and downs. Pick your basic allocation/strategy and stick with it and you will do well.

Actually, stocks are still risky even for periods as long as 30 years. You are only looking at the US market over the last century. Take a look at the Japanese market for the last 27 years. Take a look at European markets over the last 100. If stock market returns over thirty years were virtually certain their prices would be bid up so that the return mirrored the 30 year US treasury bond. The stock market is not an actuarial table.

 

[deleted126335]

From William Bernstein's The Four Pillars of Investing. Emphasis mine:

As a general rule, the historical record suggests excellent investment returns in the ancient world. But this record reflects only those societies that survived and prospered, since successful societies are much more likely to leave a record. Babylonian, Greek, and Roman investors did much better than those in the nations they vanquished—the citizens of Judea or Carthage had far bigger worries than their failing financial portfolios.

This is not a trivial issue. At a very early stage in history we are encountering “survivorship bias”—the fact that only the best results tend to show up in the history books. In the twentieth century, for example, investors in the U.S., Canada, Sweden, and Switzerland did handsomely because they went largely untouched by the military and political disasters that befell most of the rest of the planet. Investors in tumultuous Germany, Japan, Argentina, and India were not so lucky; they obtained far smaller rewards.

Thus, it is highly misleading to rely on the investment performance of history’s most successful nations and empires as indicative of your own future returns.

At first glance, it might appear that the above list of winners and los- ers contradicts the relationship between risk and return. This is an excellent example of “hindsight bias”; in 1913 it was by no means obvious that the U.S., Canada, Sweden, and Switzerland would have the highest returns, and that Germany, Japan, Argentina, and India, the lowest. Going back further, in 1650 France and Spain were the might- iest economic and military powers in Europe, and England an impov- erished upstart torn by civil war.

 

[Mman]

Actually, stocks are still risky even for periods as long as 30 years. You are only looking at the US market over the last century. Take a look at the Japanese market for the last 27 years. Take a look at European markets over the last 100. If stock market returns over thirty years were virtually certain their prices would be bid up so that the return mirrored the 30 year US treasury bond. The stock market is not an actuarial table.

Not exactly and I'm not going to bother to get into the 1000 paragraph conversation it would take to have this discussion seriously. But if you look at Japan, sure their market tanked for a long time, but that was following a 5 year explosion that saw it rise 300%. If the S&P goes to 8000 in 2022, you'd obviously want to back off your equity exposure in the US. Extreme times call for extreme measures and what not. From 1984 to 2014, the Nikkei 225 had an annualized return 0f 4.4% (in USD). Not great, but not terrible. I'll let you know if the US approaches the Japanese bubble of the late 80s.

 

[Mman]

It's still coming. Just wait a few months for it.

25-40% drop.

Book it.

Buy some silver.

One of the most interesting things in financial literature is that people that make vague bear -predictions almost never get called out on it after the fact. - Mman


View attachment 211930

I could be wrong, but there, now I'm not vague at least. We can look back on this post in a year and see if I'm right

Well nearly 4 months later Dec 12th to April 4th) and we sitting on a 5% increase in the S&P since your claimed the 25-40% drop was coming in a few months. Vague bear predictions certainly never get called out after the fact, but you purposefully didn't want to be vague.

Personally I don't know or care when the next market drop will happen, but I will be ready to keep buying stocks right on through it.

 

[BLADEMDA]

Well nearly 4 months later Dec 12th to April 4th) and we sitting on a 5% increase in the S&P since your claimed the 25-40% drop was coming in a few months. Vague bear predictions certainly never get called out after the fact, but you purposefully didn't want to be vague.

Personally I don't know or care when the next market drop will happen, but I will be ready to keep buying stocks right on through it.

Doze is correct that no one and I mean no one can predict the next bear market. That said, it can't hurt to keep some powder dry to re-allocate with the next market correction. IMHO, with markets at this level keeping an additional 10% in cash or short term bonds over your typical asset allocation seems very prudent. Again, I certainly agree that trying to predict market pull backs or even bear markets will leave a lot of egg of your face. I can attest to that fact.

Some smarter SDN members may be buying options to protect their positions; I'm just a simple investor who keeps it KISS for my allocation.

 

[pgg]

Doze is correct that no one and I mean no one can predict the next bear market. That said, it can't hurt to keep some powder dry to re-allocate with the next market correction. IMHO, with markets at this level keeping an additional 10% in cash or short term bonds over your typical asset allocation seems very prudent. Again, I certainly agree that trying to predict market pull backs or even bear markets will leave a lot of egg of your face. I can attest to that fact.

Some smarter SDN members may be buying options to protect their positions; I'm just a simple investor who keeps it KISS for my allocation.

Well, if you're uncomfortable with what a market correction might do to your portfolio at any time, the best answer is probably to have a more conservative asset allocation in the first place.

If you're 80/20 equities/bonds, and you occasionally get antsy and worried, and start thinking you should put 10% in cash just in case ... then your AA should be 70/30 in the first place, because that's what your actual risk tolerance is. No timing required.

Doze is correct that no one and I mean no one can predict the next bear market. That said, it can't hurt to keep some powder dry to re-allocate with the next market correction.

This is the very definition of market timing.

Of course it can hurt. Every minute you have cash out of equities hurts you because you miss out on expected gains.

 

[BLADEMDA]

Well, if you're uncomfortable with what a market correction might do to your portfolio at any time, the best answer is probably to have a more conservative asset allocation in the first place.

If you're 80/20 equities/bonds, and you occasionally get antsy and worried, and start thinking you should put 10% in cash just in case ... then your AA should be 70/30 in the first place, because that's what your actual risk tolerance is. No timing required.



This is the very definition of market timing.

Of course it can hurt. Every minute you have cash out of equities hurts you because you miss out on expected gains.

PGG,

Detailed analysis by experts based on stock valuation metrics over long periods of time have shown that when valuations get stretched going to a more conservative allocation at that time with the understanding to redeploy the cash along with re-balancing leads to higher returns. This is NOT the same as going to 100% cash or "market timing" in the sense one moves more than 10% of his/her allocation to the reversion to the mean.

The whole theory behind "value investing" is reversion to the mean which is the same point I am making here. I disagree that going to 70/30 during periods of stretched market valuations is the same as "actual risk tolerance" as you will quickly find out the latter when stocks get really cheap and the best plan of action is to go 90/10 using the same "reversion to the mean" theory.

Let's assume 80/20 is your typical allocation.

During periods of high stock valuations (right now we are at 1.1 Fair value so this is close) you go to 70/30.

When stocks fall back to below fair value (let's say 0.9 Fair value) you go to 80/20.

Finally, when stocks become cheap (less than 0.8 Fair value) you go to 85/15 or even 90/10.

During the market crash of 2008 Fair value hit 0.55. That was the time to go "all in" or 95/5.

Using Fair Value Investing is simply common sense based on reversion to the mean.

Of course, you can just keep a fixed allocation and re-balance once per year and try to accomplish a similar reversion to the mean. But, returns will likely be higher with just a bit more flexibility in one's allocation model based on valuation metrics.

Even the young investor may be better off with 10% in cash or short term bonds based on the current valuation metrics. Once Fair Value has dropped below 0.9 the young investor could deploy all of his/her cash for the desired 100% equity model.

 

[BLADEMDA]

I used the reversion to the mean to buy International and Emerging Market Equities last year. This is simply Doze's advice which resulted in nice gains so far.

• The Morningstar Global Markets Index has returned more than 6% year to date and 16% over the past year.
• The market-cap-weighted price/fair value estimate ratio for our equity analysts' coverage universe is 1.06.
• Healthcare is the most undervalued sector, with a price/fair value estimate ratio of 0.98. Basic materials is the most overvalued sector, with a price/fair value estimate ratio of 1.44.

 

[BLADEMDA]

The bear markets in 2000 and 2007 were not just reversions to the mean, but rather a massive reversion to 2-standard deviations below the mean. Like stretching a rubber band as far as possible in one direction, the snap-back resulted in large, advancing cyclical bull markets.

When valuations really fall to low levels (less than 0.7) that's when you really find out what your comfort level is for owning equities. Of course, that's the time to buy equities by re-balancing your portfolio and even moving your equity portion higher by 10%.

 

[BLADEMDA]

 

[Mman]

Doze is correct that no one and I mean no one can predict the next bear market. That said, it can't hurt to keep some powder dry to re-allocate with the next market correction. IMHO, with markets at this level keeping an additional 10% in cash or short term bonds over your typical asset allocation seems very prudent. Again, I certainly agree that trying to predict market pull backs or even bear markets will leave a lot of egg of your face. I can attest to that fact.

Some smarter SDN members may be buying options to protect their positions; I'm just a simple investor who keeps it KISS for my allocation.

My personal strategy is to mostly stick with my asset allocation amongst my invested assets. However, if the market tanks enough I'll be selling bonds to buy more stocks (keeping that ratio of allocation) as well as decreasing my cash position and scrounging around for spare cash to buy even more stocks.

 

[epidural man]

With stretched valuations, does anyone really believe that stocks will return 10% over the next business cycle?

If that is the case, why not allocate to a different asset?

Over the past decade, compound annual growth rate of earnings has been 1.27% per year.

Profit margins have fallen over the last 5 years (where it peaked).

S&P P/E ratios are reported so differently depending on the website, but some report that it is 26 (historical average is 15.5).

This is an interesting article that says that there is no way valuations will keep up.

Boomer Retirement: Headwinds for U.S. Equity Markets?

Historical perspective may help.

Warren Buffett On The Stock Market What's in the future for investors--another roaring bull market or more upset stomach? Amazingly, the answer may come down to three simple factors. Here, the world's most celebrated investor talks about what really makes the market tick--and whether that ticking should make you nervous. - December 10, 2001

Here is a quote from a blog where I found that above link.

"Warren Buffett shared his favorite yardstick for gauging stock market valuations. Interestingly, this market cap-to-GDP measure shows stocks to be almost as highly valued as they were at that major market peak. What is most useful about this measure, though, is that it is highly correlated to future 10-year returns in the stock market. Currently, it implies an annual total return for the S&P 500 of a negative2.59% over the next 10 years. And the last time stocks were this highly valued, that is almost exactly the annual return they delivered over the following decade."

John Hussman calls this market "the most broadly overvalued moment in market history.”

The price you pay determines future returns. If that is the case, one needs to ask - do things look expensive right now?

If so, are they a good deal?

Or just sell Iron Condors on TSLA. Implied volatility on those options are crazy high.

 

[epidural man]

So the market looks really expensive - you would think people would be cautious.

But apparently, market exuberance is at an all time high.

Individual Investors Wade In as Stocks Soar

Margin debts (with relation to GDP) has never been higher.

We have never seen household financial assets invested in the stock market compared to those in money market funds higher than it is today.

This all seems to a very ominous sign and bad news for many.

What is that saying - be fearful when others are greedy?

 

[BLADEMDA]

So the market looks really expensive - you would think people would be cautious.

But apparently, market exuberance is at an all time high.

Individual Investors Wade In as Stocks Soar

Margin debts (with relation to GDP) has never been higher.

We have never seen household financial assets invested in the stock market compared to those in money market funds higher than it is today.

This all seems to a very ominous sign and bad news for many.

What is that saying - be fearful when others are greedy?

Which is why Buffet's rule 1 should be in play right now: Never Lose money.

Since no one can time the market the best strategy is to keep some cash on hand. Some experts recommend a 10% increase in cash/short term bonds when valuations appear stretched in order to have funds available to buy equities at a lower price when the market drops. It's not IF the market corrects but rather WHEN the market corrects so that is the reason for only having an extra 10% in cash available over one's typical allocation model.

For PGG and others, Bueffett's rule number 1 is why you should increase your cash/short term bond allocation at this time by 10% or more.