My automatic plan to max gains & min. loss is cancelled

[sc98007]

4/10 UPDATE:

OK I finally came to simulating my scenario with an excel spreadsheet with date from 2003 to 2013 and I want to say that your are right ! In all the scenario I've tried I could not match the market. So silly me !

So here's my new plan, and I will stick with it through think and thin:

Use my $10,000 to buy
33 % of VTI
33% of VXUS
33% of TIP

with NO sell out perimeters. Meaning I am accepting that my balance may go down to $5000 if I am unlucky. But I will not sell it not matter what.
I will not add anything to it either until 2020, since for me $10,000 is already a lot of money, and it's the maximum risk I can tolerate.
I will re-balance the amount once a year, only if the cost of re-balancing costs me 1% of less of the transaction amount, that is if I need to sell VXUS stocks ($4) & buy some TIP (4) , and the cost of that is $8, the VXUS has to be $800 higher than TIP or 26% higher at $3333 initial balance. Should I be willing to accept a higher re-balancing cost to the amount re-balanced percentage ?

-------------------------------------

I am just turning 30 but I am fairly (if not very) risk averse person. I have a Roth IRA stock market account with 10K balance, and I like it to keep it fairly simple yet safe. Here's my plan's mechanics:

(1) Invest all my IRA fund's into the 2 Vanguard ETFs that suppose to encompass most of the worldwide market VEU (FTSE All-World ex-US) & VTI (Total Stock Market); plus SPY for S&P 500 & TIP for Inflation Protected Treasures
(2) (a) Purchase 25 Shares of VEU (aprox $1200); 25 Shares of VTI (aprox $3000); 25 Shares of SPY (aprox $3800) & 25 Shares of TIP (aprox $3000)
(b) Total cost at Option House is $16 for four Buy transactions
(3) Set a Sell Order for VEU, VTI & SPY when the last price is down 5% (from its peak) & for TIP when the last price is down 2.5% (from its peak) with Limit that is several dollars bellow the current selling price
(4) Once a quarter (a) transfer $1375 into this account ($5500 rough IRA limit divided by 4)
(b) Buy equal portions of VEU, VTI, SPY & TIP shares with all available cash funds (from transfer and any automatic sell outs)

Since this is a retirement account I should't worry about tax implications of the short-term gains. And the total transaction fees would constitute $64 a year if no sellouts are triggered, up to the double of that (very unlikely) if sellouts get triggered of all stocks every quarter.

Here's my questions:

(1) If the goal is to capture most & best of the market in just 4 ETFs would you agree with my picks
(2) How about my allocation which is very roughly 1/11 for VEU; 3/11 for VTI; 4/11 for SPY & 3/11 for TIP
(3) Is 5% for stocks & 2.5% for bonds sell-out trigger too aggressive or too conservative when it comes to minimizing risks & maximizing gains
(4) Will a Limit of several dollars bellow of the equity price small enough to protect from sell-outs in case of temporary freak market drops & big enough to generate sell-outs when genuine market panics occur?
(5) Is revisiting my stock portfolio once a quarter (let's say Early March; Early June; Early September & Early December) frequent enough to utilize the cash from any sell-outs & capture market gains; while infrequent enough to allow things to settle down for those stocks than plunge bellow 5% of their peak before new investments

Many Thanks !

[Default User BR]

Sounds like a good way to lock in losses. That's generally not what a long-term investor should be trying to do.


Brian

[InvestorNewb]

I'm not sure why you want to hold both VTI and SPY. If you compare the returns on Yahoo Finance, they are practically identical.

I read that over the long haul, VTI is preferable to SPY (it also contains way more stocks, so it's a lot more diverse too).

If you really want to hold SPY hold VOO instead. It's cheaper.

[Aptenodytes]

It won't work. Maximizing gains is impossible. Minimizing losses is impossible (anyway, if you could maximize gains there would be no losses to minimize). There is no plan that will achieve what you seek, so you need to set more realistic goals.

Read one of the introductory books in the Wiki. A diversified portfolio that you regularly rebalance is the smart approach. You won't maximize gains, and you will go through periods of loss. There simply is no alternative, unless you believe in magic.

[roymeo]

I'm not sure that you can qualify as a a fairly/very risk adverse investor and also put a lot of faith in 'the perfect plan' based on a lot of naive assumptions. But then again, you're at least asking questions, so maybe you still do qualify.

Aside from what the others have said: How are the trading fees on ETF's really saving you money vs. buying the mutual funds directly?

[letsgobobby]

Do you know which forum you are posting on? Have you read the wiki?

[Taylor Larimore]

sc98007:

Welcome to the Bogleheads Forum!

I have a Roth IRA stock market account with 10K balance, and I like it to keep it fairly simple yet safe.

Your fund investments add to more than your 10K balance, nevertheless, I like the fact you are attempting to structure a simple 4-fund total market portfolio.

Set a Sell Order for VEU, VTI & SPY when the last price is down 5% (from its peak) & for TIP when the last price is down 2.5% (from its peak) with Limit that is several dollars bellow the current selling price.

This is almost certainly a mistake. This is what our mentor, Jack Bogle, wrote in "Common Sense on Mutual Funds":

"Stay the course. It is the most important piece of wisdom that I can give to you"

"Stay the course" is also the last sentence in the last chapter of "The Bogleheads' Guide to Investing."

Best wishes
Taylor

[nisiprius]

Your automatic plan for maximizing gains while minimizing losses won't work the way you expect. Everyone goes through a stage in which they think something like this will work, just as everyone goes through a stage in which they think an overbalanced-wheel perpetual-motion machine



will work.

There are several ways to explain why it won't work, but ultimately you will have to decide for yourself.

Argument #1: "Stop-loss orders" have been around for, I dunno, at least fifty years, probably a hundred. If they were the magic key to wealth without risk, then why hasn't anyone created an easy-to-use mutual fund that works that way?

Argument #2: Can you explain why your system would work on the stock market, but not at the casino? For example, imagine going to a casino with $1,000 in each of four wallets, and going, in turn, to four roulette wheels which I will call VEU, VTI, SPY, and TIP. Go to the first roulette wheel. Play until you are either a) exhausted, or b) down to $975, whichever comes first. Move on to the second, then the third, then the fourth. Then quit and return next weekend. Can you explain why this system would not work at the casino? When you are convinced it would not work at the casino, then see if you can explain why the stock market would be different.

Argument #3: You need to consider magnitude as well as direction. Let's suppose that your system creates a string of wins and losses, in which the wins are consistently big and the losses are consistently small--but there are many, many losses and few wins. Overall, you might be no better off. In general, gambling systems can reshape the distribution of returns, but cannot change the expectation. In your case, you can, if you wish, create a system rather like a lottery, in which you have a very high chance of a very small loss, coupled with a very low chance of a very big win, but you can't change the return of the stock market (surely positive in the long run--I think and hope), the casino (negative), and the state lottery (strongly negative).

Argument #4: Collect some stock market data and try a simulation. This is dangerous, though, because if it doesn't work you'll be tempted to keep tinkering with it... just as perpetual-motion people always have something that doesn't quite work but they always know what small improvement they need to make that will make it work. By the way, perpetual motion is alive and well--it's just not called that any more. Search YouTube for "overunity" and you will see numerous videos of big, impressive-looking gadgets in action that their inventors claim are generating more energy than they consume.

As others have mentioned, there's very little sense in holding both VTI and SPY. There's very little harm in it either, but it's just a sort of weirdly irrational thing to do, and makes me think you need to understand better what you are doing.

Your 1:3:4:3 fractions seem arbitrary and overprecise to me. But there's nothing crazily wrong them them.

Overall, your choice of 30% bonds, 70% stocks is reasonable for someone your age but you really, really, really need to understand the behavior of such a portfolio and your own risk tolerance. Seat-of-the-pants, $10,000 in that portfolio at the start of 2008 would have dropped to maybe something like $6,000 or $6,500 in early 2009. The concern I have is that you're not content to accept the risk of your portfolio as it stands--just to stand there and say "hit me"--but think that it is necessary to reduce the risk by a scheme--a scheme that doesn't actually work.

The choice of making your fixed-income 100% TIPS is a little heterodox, but Scott Burns has suggested it in his "Margarita portfolio."

[chipmonk]

Since this is a retirement account I should't worry about tax implications of the short-term gains. And the total transaction fees would constitute $64 a year if no sellouts are triggered, up to the double of that (very unlikely) if sellouts get triggered of all stocks every quarter.

$64 a year on a $10k portfolio is a large trading expense, by the standards of many Bogleheads. That's 0.64% on top of the expense ratios of the funds/ETFs you own.

Many of us have well-diversified portfolios with net expense ratios on the order of 0.1-0.2%. Not too difficult to assemble with Vanguard's mutual funds or ETFs.

[nydad]

+1 to what Nisiprius said. This won't work...

There are rooms full of PhDs on Wall Street with lots of money and lots of computers and they use incredibly complex algorithms, derivatives and arbitrage strategies to try to tease out exactly what you're looking for - risk-free return in the market. If they could find even a guaranteed 4% return in this environment they have the resources to turn that into billions. But even those guys don't always get it right, and they sometimes fail spectacularly.

I'd say if you just have the 10k in an IRA, put it in a target fund with an appropriate bond allocation, and let it ride. It will go up, and down, but if the markets do well over the next few decades then you'll make a lot of money. If you want to have some money you can't possibly lose, then just buy iBonds or EE bonds.

[sc98007]

So sorry about the late replies (I was waiting for a notification email, but apparently it wasn't set as such)

Sounds like a good way to lock in losses. That's generally not what a long-term investor should be trying to do.


Brian

I actually want to lock gains.

I'm not sure why you want to hold both VTI and SPY. If you compare the returns on Yahoo Finance, they are practically identical.

I read that over the long haul, VTI is preferable to SPY (it also contains way more stocks, so it's a lot more diverse too).

If you really want to hold SPY hold VOO instead. It's cheaper.

Thanks, I think that is a good idea. I am a minimalist and hence three ETFs is better than four. So VTI, VEU & TIP is all I need. (this would also allow me to invest more into international)

A diversified portfolio that you regularly rebalance is the smart approach. You won't maximize gains, and you will go through periods of loss. There simply is no alternative, unless you believe in magic.

Well in some ways the portfolio will self-balance. Once a stock reaches a high it will inevitably decline to more than 5%, and then auto-sell. When I repurchase the stock may have plunged to maybe 20% of its peak, so I will buy more of it. On the other hand if it dropped 5% and the shot 20% higher, I will buy less of it. Since I will buy the stocks in equal proportions.

Aside from what the others have said: How are the trading fees on ETF's really saving you money vs. buying the mutual funds directly?

Well, I just feel like I have more control over ETFs, since mutuals don't have a stop-limit feature, do they?

Do you know which forum you are posting on? Have you read the wiki?

I am sorry, isn't Board index ‹ Investing - Help with Personal Investments correct forum?

This is almost certainly a mistake. This is what our mentor, Jack Bogle, wrote in "Common Sense on Mutual Funds":

Taylor

Thanks, I will read the book

[sc98007]

Argument #1: "Stop-loss orders" have been around for, I dunno, at least fifty years, probably a hundred. If they were the magic key to wealth without risk, then why hasn't anyone created an easy-to-use mutual fund that works that way?

Argument #2: Can you explain why your system would work on the stock market, but not at the casino? For example, imagine going to a casino with $1,000 in each of four wallets, and going, in turn, to four roulette wheels which I will call VEU, VTI, SPY, and TIP. Go to the first roulette wheel. Play until you are either a) exhausted, or b) down to $975, whichever comes first. Move on to the second, then the third, then the fourth. Then quit and return next weekend. Can you explain why this system would not work at the casino? When you are convinced it would not work at the casino, then see if you can explain why the stock market would be different.

Argument #3: You need to consider magnitude as well as direction. Let's suppose that your system creates a string of wins and losses, in which the wins are consistently big and the losses are consistently small--but there are many, many losses and few wins. Overall, you might be no better off. In general, gambling systems can reshape the distribution of returns, but cannot change the expectation. In your case, you can, if you wish, create a system rather like a lottery, in which you have a very high chance of a very small loss, coupled with a very low chance of a very big win, but you can't change the return of the stock market (surely positive in the long run--I think and hope), the casino (negative), and the state lottery (strongly negative).

Argument #4: Collect some stock market data and try a simulation. This is dangerous, though, because if it doesn't work you'll be tempted to keep tinkering with it... just as perpetual-motion people always have something that doesn't quite work but they always know what small improvement they need to make that will make it work. By the way, perpetual motion is alive and well--it's just not called that any more. Search YouTube for "overunity" and you will see numerous videos of big, impressive-looking gadgets in action that their inventors claim are generating more energy than they consume.

As others have mentioned, there's very little sense in holding both VTI and SPY. There's very little harm in it either, but it's just a sort of weirdly irrational thing to do, and makes me think you need to understand better what you are doing.

Your 1:3:4:3 fractions seem arbitrary and overprecise to me. But there's nothing crazily wrong them them.

Overall, your choice of 30% bonds, 70% stocks is reasonable for someone your age but you really, really, really need to understand the behavior of such a portfolio and your own risk tolerance. Seat-of-the-pants, $10,000 in that portfolio at the start of 2008 would have dropped to maybe something like $6,000 or $6,500 in early 2009. The concern I have is that you're not content to accept the risk of your portfolio as it stands--just to stand there and say "hit me"--but think that it is necessary to reduce the risk by a scheme--a scheme that doesn't actually work.

The choice of making your fixed-income 100% TIPS is a little heterodox, but Scott Burns has suggested it in his "Margarita portfolio."

Re: Argument 1 Maybe they just got too greedy. I don't want phenomenal profits. Just reasonable one, but so I can sleep at night.

Re: Argument 2 Well casino is all or nothing game. Stock is not just piece of the same pie, but a constantly growing pie, with catastrophic periods when the pie "burns down".

Re: Argument 3 Well, even if I under-perform the market in the long run, but never experience catastrophic losses, I will still be satisfied. There must be a better alternative for neurotics like me, than earning 1% interests in CDs.

Re: Argument 4 Great idea, but do you know of any historical market simulator out there? I guess I can simulate myself using excel spreadsheet but I need to import historical data into it, do you know where can I?

So the overall idea is to keep 10k from becoming 6.5k , but perhaps 9K in case of a great crash. Even if I loose 5% every quarter, that would be an overall 20% loss a year instead of 40% by just riding the market. Of course that's contingent on the performance of the brokerage software, but considering that I've chosen ETFs with billions in assets, I hope it can be executed as intended.

[sc98007]

Since this is a retirement account I should't worry about tax implications of the short-term gains. And the total transaction fees would constitute $64 a year if no sellouts are triggered, up to the double of that (very unlikely) if sellouts get triggered of all stocks every quarter.

$64 a year on a $10k portfolio is a large trading expense, by the standards of many Bogleheads. That's 0.64% on top of the expense ratios of the funds/ETFs you own.

Many of us have well-diversified portfolios with net expense ratios on the order of 0.1-0.2%. Not too difficult to assemble with Vanguard's mutual funds or ETFs.

Yeah, so with reduction to 3 ETFs from 4 ETFs that would constitue $12 a quorter for buys or $48 a year and when in several years I get to 40K in my account it would be around 0.1%
I know just2trade has ETFs for only 2.50 or $7.50 per quorter and 30 a year, but I've heard it comes at a cost of poorer execution. Hopefully other brokerage catch up and lower to a couple dollars a trade soon.

I'd say if you just have the 10k in an IRA, put it in a target fund with an appropriate bond allocation, and let it ride. It will go up, and down, but if the markets do well over the next few decades then you'll make a lot of money. If you want to have some money you can't possibly lose, then just buy iBonds or EE bonds.

I am just afraid bonds will tank when interests rise, hence I have 2.5% down sellout on my TIPs, since unless the inflation shots up to double digit levels, TIPs will lose badly in the shorter term when interest rates rise

[nydad]

There are strategies using options to do what you want (instead of stop-loss orders). Look here, and elsewhere, for information on collars:
http://www.theoptionsguide.com/the-collar-strategy.aspx

These can be used to limit your downside, but they also limit your upside.

Note: I am not suggesting you do this - these sort of strategies are only for very advanced investors. Do not use options unless you understand them very well - they can be quite dangerous. And, as a retail investor you will certainly do better in the long run with buy-and-hold.

But your concern about swings in equity makes me think you should significantly dampen your equities exposure, and increase your bond and cash holdings. That way, your portfolio will grow much more calmly, if not as much. Why not look at diversifying your fixed income side of your portfolio, to hedged foreign and emerging market bond funds, perhaps invest in some consumer debt notes through Prosper.com, etc - all of this fixed income stuff is much less likely to have wild swings, especially if you have a diverse portfolio of them (avoid concentration in any single holding of course). Why not have 20% total stock market index, and 10% cash, and 70% bonds (mix of total bond market, total international bond market, emerging bond market ETF, prosper notes, municipal bond fund, etc)

yes, bonds will decrease if/when interest rates rise, but if you hold them through the duration they will catch up. There's nothing risk-free out there except a bank account, and you know what that pays...

[sc98007]

There are strategies using options to do what you want (instead of stop-loss orders). Look here, and elsewhere, for information on collars:
http://www.theoptionsguide.com/the-collar-strategy.aspx

Thanks for the link, I'll check it out

perhaps invest in some consumer debt notes through Prosper.com

Funny you mention that, since I was an early pioneer in Peer to peer landing, albeit at low sums. I am waiting for the full repay of my several thousands in 2014, and am hoping to put my IRA money into Prosper and/or Lending Club. I've had a half a dozen of defaults there (at $25 each), but in general, despite what pundits say, people are deeply ashamed of defaulting. Unlike companies for which defaults are business as usual. So I am a great believer in peer-to-peer landing. The only barrier to entry is 10K minimum for their IRAs (after the second year) to avoid a fee. So I am a bit reluctant to invest that match in yet a new investment instrument.

[sjb19]

Not making any comment on your proposed plan, but VTI, VEU, and TIP can all be traded commission-free at ameritrade. FYI.

[Aptenodytes]

I hate to say it, but it doesn't seem like you've really understood the responses. I fear you are setting yourself up for unnecessary losses.

If you are hell-bent on pursuing this scheme, I'd encourage you to set aside half of your portfolio and manage it along the lines of one of the recommended lazy portfolios discussed here. Whenever you add new money, add equal amounts in the lazy portfolio and your other scheme. If you are right, the lazy portfolio will fall behind. If the rest of us are right, the lazy portfolio will pull ahead (unless you get really lucky, in which case you will be sitting pretty).

You don't seem to believe the research but maybe you'll believe your own fund statements.

[BBL]

by Aptenodytes » Wed Feb 20, 2013 11:36 am

I hate to say it, but it doesn't seem like you've really understood the responses. I fear you are setting yourself up for unnecessary losses.

Some lessons are expensive; some lessons are valuable; some lessons are both.

[momar]

If you don't want to take the losses the market gives, just buy more bonds and fewer stocks. If you are worried about bonds losing value, buy shorter bonds or a cash equivalent.

Rule of thumb around here is that you should be prepared for your equity funds to lose half of their value. So if you can tolerate a 10% loss but not a 30% loss, hold 20% equity and not 60%.

[Random Musings]

Big picture - set up your allocation at 70/30 equities/bonds (whatever your preference is).

Howvever, what you should be doing is rebalacing that portfolio (buying lower, selling higher). Probably seems counterintuitive to you, but your strategy will (more of the time) sell lower and buy higher since long-term (at least on the side where more of your dollars reside), equity prices rise.

RM

[chipmonk]

Re: Argument 1 Maybe they just got too greedy. I don't want phenomenal profits. Just reasonable one, but so I can sleep at night.

Re: Argument 2 Well casino is all or nothing game. Stock is not just piece of the same pie, but a constantly growing pie, with catastrophic periods when the pie "burns down".

It sounds like you have a specific level of risk/reward tolerance in mind. The way that Bogleheads typical suggest managing this balance is via a choice of overall asset allocation between stocks/bonds (for example 80/20 would be very aggressive, while 30/70 would be very conservative).

There's a great deal of academic research that suggests that this is a cost-effective way to maximize your portfolio's long-term expected return for a given level of volatility (risk), or conversely to minimize your portfolio's expected risk for a given level of expected long-term return. The notion of the Efficient Frontier captures this concept: http://en.wikipedia.org/wiki/Efficient_frontier

Re: Argument 3 Well, even if I under-perform the market in the long run, but never experience catastrophic losses, I will still be satisfied.

Again, if you're willing to accept lower expected long-term returns for lower volatility, then a well-thought and maintained balance of stock/bond assets is the way to achieve the optimal combination of the two.

Your proposed strategy will almost certainly not achieve this balance. You will never experience "catastrophic" losses, but you'll frequently sell your stocks on a 5% dip and be left holding a pile of cash... when will you reinvest it? I notice that your plan makes no mention of that. Over the long term, gains are more likely after dips, and you'll miss out on them entirely. Sounds like death by 1000 cuts to me.

There must be a better alternative for neurotics like me, than earning 1% interests in CDs.

If you cannot maintain your portfolio in a disciplined fashion without worrying about it and altering it and trading on a frequent basis, then you are taking more risk then you can personally handle. The solution is to take less risk, perhaps by reducing your asset allocation to something like 50/50.[/quote]

So the overall idea is to keep 10k from becoming 6.5k , but perhaps 9K in case of a great crash. Even if I loose 5% every quarter, that would be an overall 20% loss a year instead of 40% by just riding the market.

If you can predict the future and foresee a 40% loss with great confidence, why don't you just stay out of the market entirely rather than accept a "mere" 20% loss?

[greg24]

I think it'd be a mistake to implement this plan.

[bottlecap]

If you don't want to take the losses the market gives, just buy more bonds and fewer stocks. If you are worried about bonds losing value, buy shorter bonds or a cash equivalent.

Bingo. You need to buy fewer stocks, not more with stop-loss orders. Problem solved.

The only reason to buy stocks in your scenario is to be exposed to the upside. This is unrealistic, as once your stop loss goes in, the question is when do you get back in with that money. You will create a mess and are likely to significantly under perform the market do to your fears. The solution is to invest in bonds, which are much less risky than stocks.

Good luck,

JT

[Clever_Username]

Do you know which forum you are posting on? Have you read the wiki?

I am sorry, isn't Board index ‹ Investing - Help with Personal Investments correct forum?

Yes; are you familiar with what site the forum is on? Check out the Bogleheads' Investment Philosophy. What you're doing isn't really an investment strategy and is more gambling, only with ETFs instead of individual stocks.

[Default User BR]

Sounds like a good way to lock in losses. That's generally not what a long-term investor should be trying to do.

I actually want to lock gains.

So you're holding some asset at price P. You set a stop-loss for P-x. There's a Really Bad Day[1] and the market drops so that P goes down by x triggering your loss. Then the next couple days the market says, "just kidding", and it's back up. Now you have some cash, no asset, and the cost is back where it was. What happened? You locked in the loss. What do you do now?

As the others have said, it seems like your asset allocation isn't right for your risk profile.


1. I think I owe Livesoft 17 cents in royalties.

Brian

[rr2]

So you're holding some asset at price P. You set a stop-loss for P-x. There's a Really Bad Day[1] and the market drops so that P goes down by x triggering your loss. Then the next couple days the market says, "just kidding", and it's back up. Now you have some cash, no asset, and the cost is back where it was. What happened? You locked in the loss. What do you do now?
...

1. I think I owe Livesoft 17 cents in royalties.

Brian

I imagine livesoft is frantically searching the forum to see how many times people have used RBD thus far and rushing off to file a registered trademark

[Scott S]

My "automatic" plan to avoid locking in losses is just to never sell* -- simpler, too.


*Well, at least until I need to in retirement.

[sc98007]

I hate to say it, but it doesn't seem like you've really understood the responses. I fear you are setting yourself up for unnecessary losses.

If you are hell-bent on pursuing this scheme, I'd encourage you to set aside half of your portfolio and manage it along the lines of one of the recommended lazy portfolios discussed here. Whenever you add new money, add equal amounts in the lazy portfolio and your other scheme. If you are right, the lazy portfolio will fall behind. If the rest of us are right, the lazy portfolio will pull ahead (unless you get really lucky, in which case you will be sitting pretty).

You don't seem to believe the research but maybe you'll believe your own fund statements.

Thanks, Good idea. But I may just compare my portfolio with S&P 500 instead,

[sc98007]

Not making any comment on your proposed plan, but VTI, VEU, and TIP can all be traded commission-free at ameritrade. FYI.

They don't offer SPY, and I think there is a restriction on when you can sell after buying.

[sc98007]

If you don't want to take the losses the market gives, just buy more bonds and fewer stocks. If you are worried about bonds losing value, buy shorter bonds or a cash equivalent.

Rule of thumb around here is that you should be prepared for your equity funds to lose half of their value. So if you can tolerate a 10% loss but not a 30% loss, hold 20% equity and not 60%.

Bonds are just dismal in their return and there is talk about bond bubble. I was holding TIPs but I decided to dump them until the inflation return. Else I may as well stick with 5-year CDs (I like Ally because there is only 60 days withdrawal penalty there)

[sc98007]

My "automatic" plan to avoid locking in losses is just to never sell* -- simpler, too.


*Well, at least until I need to in retirement.

Well most people are by nature risk-averse, and hence holding through thick and thin is not for everyone.

[sc98007]

Sounds like a good way to lock in losses. That's generally not what a long-term investor should be trying to do.

I actually want to lock gains.

So you're holding some asset at price P. You set a stop-loss for P-x. There's a Really Bad Day[1] and the market drops so that P goes down by x triggering your loss. Then the next couple days the market says, "just kidding", and it's back up. Now you have some cash, no asset, and the cost is back where it was. What happened? You locked in the loss. What do you do now?

As the others have said, it seems like your asset allocation isn't right for your risk profile.


1. I think I owe Livesoft 17 cents in royalties.

Brian

Well it actually happened to me recently. My plan morphed into a simpler idea: buy 10K of SPY (because of its extreme liquidity) and I started with sell-out at 1%, and sure enough the stock lost 1% within the last week and gained it back next day. But it cashed my 10K so I lost about $100. According to my revised plan I will be reinvesting those 10K back into SPY on monthly basis. So the first market date on April I will reinvest those 10K but now at 2% stop-loss. Furthermore I will be deleting and reentering stop-loss sell order monthly, so each month my ETF will have a 2% latitude to go down from that month's peak, instead of from it's buyout peak. That hopefully will reduce sell-outs, but I feel my need to up to 3% stop-loss, if it will start selling too often. Especially if stock would gain its value after sell-out.

[sc98007]

If you don't want to take the losses the market gives, just buy more bonds and fewer stocks. If you are worried about bonds losing value, buy shorter bonds or a cash equivalent.

Bingo. You need to buy fewer stocks, not more with stop-loss orders. Problem solved.

The only reason to buy stocks in your scenario is to be exposed to the upside. This is unrealistic, as once your stop loss goes in, the question is when do you get back in with that money. You will create a mess and are likely to significantly under perform the market do to your fears. The solution is to invest in bonds, which are much less risky than stocks.

Good luck,

JT

Well according to my revised plan I will be reinvesting monthly instead of quarterly. And I hope that will recapture most gains since the most my cash will be idle is 30 days, and on average 2 weeks if sell-out occurs.

[chipmonk]

Well it actually happened to me recently. My plan morphed into a simpler idea: buy 10K of SPY (because of its extreme liquidity) and I started with sell-out at 1%, and sure enough the stock lost 1% within the last week and gained it back next day. But it cashed my 10K so I lost about $100. According to my revised plan I will be reinvesting those 10K back into SPY on monthly basis. So the first market date on April I will reinvest those 10K but now at 2% stop-loss. Furthermore I will be deleting and reentering stop-loss sell order monthly, so each month my ETF will have a 2% latitude to go down from that month's peak, instead of from it's buyout peak. That hopefully will reduce sell-outs, but I feel my need to up to 3% stop-loss, if it will start selling too often. Especially if stock would gain its value after sell-out.

Well according to my revised plan I will be reinvesting monthly instead of quarterly. And I hope that will recapture most gains since the most my cash will be idle is 30 days, and on average 2 weeks if sell-out occurs.

So let's see... you used your stop-loss approach and you lost money while you were out of the market... just as others on here pointed out that would likely happen.

Now you're going to try the same thing, but with a larger stop-loss limit (2-3%) and a different out-of-the-market interval (1 month instead of 1 quarter).

What makes you think that adjusting the size of the stop-loss bands or the out-of-market interval is going to make your plan work? There are quant investment firms and hedge funds with armies of PhDs and 7-figure supercomputers who do nothing but data-mining the heck out of stock market data... if there were a simple loss limit and interval that would guarantee "maximal gains and minimal losses," they would find it and exploit it until it was arbitraged away.

It looks like you're "drifting" in the direction of (a) accepting the possibility of larger losses and (b) getting back into the market sooner. If you speed this whole learning process up (likely to be painful and expensive as you're doing it), you'll eventually approach the Boglehead strategy of buy-and-hold-and-rebalance.

[sc98007]

Do you know which forum you are posting on? Have you read the wiki?

I am sorry, isn't Board index ‹ Investing - Help with Personal Investments correct forum?

Yes; are you familiar with what site the forum is on? Check out the Bogleheads' Investment Philosophy. What you're doing isn't really an investment strategy and is more gambling, only with ETFs instead of individual stocks.

Ok
(1) Develop a workable plan
Check. I think my plan is workable.

(2) Invest early and often
Check. I started at before 30 and will continue to invest.

(3) Never bear too much or too little risk
Check. Well instead of going with the bond route. I've selected the most liquid ETF - SPY - so I can bear the risk of 2% per month which is not trivial if annualized (almost 25% a year) but it's easier to take the loss in smaller doses.

(4) Diversify
Check. While ideally I would have gone with VT (or VTI & VXUS). For the purposes of my plan I need the highest liquidity possible and no ETF comes even close to SPY.

(5) Never try to time the market
Check. Well I never really time the market. I just buy monthly no matter of the market conditions.

(6) Use index funds when possible
Check.

(7) Keep Costs Low
Check. Less than $100 in transaction fee if SPY is selling every month. More likely about $20 a year in transaction cost for a 10K investment.

(8) Minimize taxes
Check. Investment is in Rough.

(9)Invest with simplicity
Check. Well just holding SPY is plenty simple.

(10) Stay the course
I will, because I will only loose up to 2% a month.

[Dale_G]

Oops - apparently misquoted someone - sorrry.

Dale

[sc98007]

Big picture - set up your allocation at 70/30 equities/bonds (whatever your preference is).

Howvever, what you should be doing is rebalacing that portfolio (buying lower, selling higher). Probably seems counterintuitive to you, but your strategy will (more of the time) sell lower and buy higher since long-term (at least on the side where more of your dollars reside), equity prices rise.

RM

Well again I will be buying monthly, so there wouldn't be that much time for the equity to gain - two weeks on average WHEN stock sells. And considering that the stock sometimes continue on losing streak for a few weeks by the time I rebuy option I will buy low. And sell it at "high - 2%"

[sc98007]

Well it actually happened to me recently. My plan morphed into a simpler idea: buy 10K of SPY (because of its extreme liquidity) and I started with sell-out at 1%, and sure enough the stock lost 1% within the last week and gained it back next day. But it cashed my 10K so I lost about $100. According to my revised plan I will be reinvesting those 10K back into SPY on monthly basis. So the first market date on April I will reinvest those 10K but now at 2% stop-loss. Furthermore I will be deleting and reentering stop-loss sell order monthly, so each month my ETF will have a 2% latitude to go down from that month's peak, instead of from it's buyout peak. That hopefully will reduce sell-outs, but I feel my need to up to 3% stop-loss, if it will start selling too often. Especially if stock would gain its value after sell-out.

Great thinking Default User BR. I'm sure no one has every tried this before - except for a few brilliant investors who have kept it a secret from the masses.

My advice: Do this for a couple of years or preferably until some fixed time in the future. Adjust your stops up and down based on your previous results or what you gut is telling you. Then, a few years from now or at the fixed time, compare your results to simply buying and holding SPY.

BTW - I am one of those brilliant investors who have kept it a secret from the masses - but it didn't work 50 years ago and I don't think it will work today

Dale

Yeah, maybe I need to learn this the hard way. But my purpose is not to beat the market. But simply to beat currently dismal CD & bond rates. And even I underperform the market but outperform CD & bonds, while being able to sleep at night - I will consider this a success.

[sc98007]

Well it actually happened to me recently. My plan morphed into a simpler idea: buy 10K of SPY (because of its extreme liquidity) and I started with sell-out at 1%, and sure enough the stock lost 1% within the last week and gained it back next day. But it cashed my 10K so I lost about $100. According to my revised plan I will be reinvesting those 10K back into SPY on monthly basis. So the first market date on April I will reinvest those 10K but now at 2% stop-loss. Furthermore I will be deleting and reentering stop-loss sell order monthly, so each month my ETF will have a 2% latitude to go down from that month's peak, instead of from it's buyout peak. That hopefully will reduce sell-outs, but I feel my need to up to 3% stop-loss, if it will start selling too often. Especially if stock would gain its value after sell-out.

Well according to my revised plan I will be reinvesting monthly instead of quarterly. And I hope that will recapture most gains since the most my cash will be idle is 30 days, and on average 2 weeks if sell-out occurs.

So let's see... you used your stop-loss approach and you lost money while you were out of the market... just as others on here pointed out that would likely happen.

Now you're going to try the same thing, but with a larger stop-loss limit (2-3%) and a different out-of-the-market interval (1 month instead of 1 quarter).

What makes you think that adjusting the size of the stop-loss bands or the out-of-market interval is going to make your plan work? There are quant investment firms and hedge funds with armies of PhDs and 7-figure supercomputers who do nothing but data-mining the heck out of stock market data... if there were a simple loss limit and interval that would guarantee "maximal gains and minimal losses," they would find it and exploit it until it was arbitraged away.

It looks like you're "drifting" in the direction of (a) accepting the possibility of larger losses and (b) getting back into the market sooner. If you speed this whole learning process up (likely to be painful and expensive as you're doing it), you'll eventually approach the Boglehead strategy of buy-and-hold-and-rebalance.

Well I don't think my strategy is that different. I BUY monthly HOLD until the stock drops beyond my comfort zone and RE-BALANCE by selling high and buying low (assuming the stock that looses 2% will keep losing until another month when I will rebuy it at lower price)

[chipmonk]

Well I don't think my strategy is that different. I BUY monthly HOLD until the stock drops beyond my comfort zone and RE-BALANCE by selling high and buying low (assuming the stock that looses 2% will keep losing until another month when I will rebuy it at lower price)

Why do you think you will be "selling high and buying low"? You will be selling after a significant loss (1-3% in various versions of your strategy), which sounds like "selling low" to me.

Your assumption is unsupported by any research.

If the stock keeps losing for one month... why will it not keep losing for one more month after that? Why is one month the "magic number"? Why do you think stocks always crash all at once rather than lose in a slow slide over many months or years? (The latter case is in some sense what has been happening in Japan for the past 20+ years.)

[momar]

If you don't want to take the losses the market gives, just buy more bonds and fewer stocks. If you are worried about bonds losing value, buy shorter bonds or a cash equivalent.

Rule of thumb around here is that you should be prepared for your equity funds to lose half of their value. So if you can tolerate a 10% loss but not a 30% loss, hold 20% equity and not 60%.

Bonds are just dismal in their return and there is talk about bond bubble. I was holding TIPs but I decided to dump them until the inflation return. Else I may as well stick with 5-year CDs (I like Ally because there is only 60 days withdrawal penalty there)

Bonds, CDs, cash. Whatever. I don't differentiate, unless you are talking about long bonds.

The key thing is that you are putting money in something that (and I feel like I am channeling nisiprius here) is not stocks. They are unlikely to suffer losses at all, or in the case of a intermediate bonds losses much, much less than stocks. Using a generous portion of these kinds of assets will dampen the volatility and losses of your portfolio.

If stocks lose 10%, but half of your portfolio is in cash/cds/bonds then you will only lose 5%. And you will still do better than cash/cds/bonds when stocks do well.

[RobInCT]

You're 30. Why do you care if your retirement portfolio drops 50% in a few months? Do you think it will stay there for 30+ years? If that level of national catastrophe happens, we've all got much bigger problems than retirement, frankly. I understand some of this is about psychological comfort, but I really think you should examine the source of your anxieties. I'm about your age. We've got a long way to go. The current value fluctuations of our portfolios resulting from market performance are really kind of meaningless at this point.

[JamesSFO]

...

(5) Never try to time the market
Check. Well I never really time the market. I just buy monthly no matter of the market conditions.
...

(9)Invest with simplicity
Check. Well just holding SPY is plenty simple.

(10) Stay the course
I will, because I will only loose up to 2% a month.

I'll just pick on these 3 of the ten, but if you think you are following the principles with your plan you are really deluding yourself. You ARE market timing with stop-loss orders and those are complex and don't constitute staying the course. These are all variations of emphasizing buy-and-hold.

Separately, there is a lot of research that missing the ~5 or so best days each year account for a huge percentage of the gains. You expect to statistically be out of the market and in cash 2 weeks/month or 50% of the year, making it VERY likely you will miss the 5 best days.

You can achieve the same result by being 50% in cash all the time...

Anyhow, best of luck.

[rr2]

At the very least, have you back tested this strategy. We have plenty of data for the S&P 500.

[Wolkenspiel]

Well I don't think my strategy is that different. I BUY monthly HOLD until the stock drops beyond my comfort zone and RE-BALANCE by selling high and buying low (assuming the stock that looses 2% will keep losing until another month when I will rebuy it at lower price)

Looking at SPY since its inception in the early 90's what you are assuming appears to have no basis in fact. On average, SPY has been UP a month after 2% intra-day drops. It has not "kept loosing" in the past, even with the massive 2000-2003 and 2008-2009 declines taken into account. All your strategy would have done is ratchet down the value of your portfolio compared to buy-and-hold. For illustration, consider an extended side-ways market with the price of your stock fluctuating around some value. Each of your sell-wait-buy roundtrips will cost you 2% with no benefit whatsoever.

[Dale_G]

Yeah, maybe I need to learn this the hard way. But my purpose is not to beat the market. But simply to beat currently dismal CD & bond rates. And even I underperform the market but outperform CD & bonds, while being able to sleep at night - I will consider this a success.

Exactly. Lessons learned through the school of hard knocks are usually learned very well - and the younger in life the better. Give it the old college try - and let us know five years down the line how it all worked out.

Dale

[Default User BR]

Well it actually happened to me recently. My plan morphed into a simpler idea: buy 10K of SPY (because of its extreme liquidity) and I started with sell-out at 1%, and sure enough the stock lost 1% within the last week and gained it back next day. But it cashed my 10K so I lost about $100. According to my revised plan I will be reinvesting those 10K back into SPY on monthly basis. So the first market date on April I will reinvest those 10K but now at 2% stop-loss. Furthermore I will be deleting and reentering stop-loss sell order monthly, so each month my ETF will have a 2% latitude to go down from that month's peak, instead of from it's buyout peak. That hopefully will reduce sell-outs, but I feel my need to up to 3% stop-loss, if it will start selling too often. Especially if stock would gain its value after sell-out.

Best of luck with your endeavors.


Brian

[newbeginning]

Put your $10,000 in I-Bonds and be done with it. At least it beats CD Rates.

[sc98007]

Put your $10,000 in I-Bonds and be done with it. At least it beats CD Rates.

Well I do want to pickup some of the stock winning - like when I hear "Today DOW passed 14,000...today DOW reached a new high.." I want to be part of the action. But I also want to run away when the party is over. And then every month crawl from my hiding and see if the rain stopped (metaphorically speaking)

[letsgobobby]

Investors like you are the reason indexers like me can become rich. So thank you!