Talk me off my ledge, if you can

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
relentless
Posts: 457
Joined: Mon Mar 14, 2011 10:05 pm

Post by relentless »

SVariance1 wrote:You won't be safe in foreign bonds.
Not reasonably safe in Bunds?
User avatar
SVariance1
Posts: 1376
Joined: Mon Jun 20, 2011 11:27 am
Location: Philadelphia Area

Post by SVariance1 »

Drain wrote:
SVariance1 wrote:You won't be safe in foreign bonds.
I might be, and that's the point of diversification. If the U.S. financial system collapsed, but foreign financial systems did not, then holding a foreign bond in paper form, without any connection to the U.S. system, might be okay.

Put it this way: If the foreign bonds in paper form wouldn't help me, nothing would. This is not to say that there are no investments of any type that will work out, but rather that there is no alternative I can think of that I could consider appropriate for my own portfolio.
Anything is possible but I am sure that a US default would trigger a global meltdown
Mike
linebanking
Posts: 65
Joined: Wed Jun 08, 2011 9:36 pm

Post by linebanking »

Drain wrote: I guess the difference is that I'm trying to figure out what's best to do, as opposed to just assuming that what's worked in the past must also work in the future. (And that IS what Bogleheads tend to assume, even as they claim they don't. Without that assumption, "stay the course" doesn't make sense.)
I think this is just false. The reason I come to this forum is to hear about what might work better, to consider changes to my portfolio, to react in ways that make sense. If anything, this forum follows a scientific method, where there are hypotheses and they are constantly being tested by forum members. Otherwise, we would all just do the same thing, which we obviously don't (see recent thread on how much you would put in equities if you had $5,000,000.) I like a gentle reminder to "stay the course" which I interpret to mean "don't always get freaked out by the chicken littles of the world running around saying the sky is falling, they will always be there." If you have an alternative strategy let's hear it, but you told the poster to "stay put" and maybe think about putting international bonds in a bank, not really a strategy any more than "stay the course" is.
AA 50/50 stocks/bonds;AA 40/40/20 Stocks/Bonds/House Equity; AA 40/40/20/{-16} Stocks/Bonds/House Equity/ {Mortgage}
User avatar
SVariance1
Posts: 1376
Joined: Mon Jun 20, 2011 11:27 am
Location: Philadelphia Area

Post by SVariance1 »

relentless wrote:
SVariance1 wrote:You won't be safe in foreign bonds.
Not reasonably safe in Bunds?
I doubt it.
Mike
User avatar
SVariance1
Posts: 1376
Joined: Mon Jun 20, 2011 11:27 am
Location: Philadelphia Area

Post by SVariance1 »

I want to reiterate that the probability of US default is very low, IMO.
Mike
DonSmith
Posts: 23
Joined: Sat Jul 02, 2011 1:35 pm

Post by DonSmith »

Don't jump! The stock market is worth investing in. Remember the last government shutdown. The S&P 500 index went up during the 1995 shutdown.

If Congress fails to raise the debt ceiling, the Executive branch has to decide which bills to pay and which bills to default on. One way would be to cut 100% of Discretionary, 100% of Net Interest, 30% of Medicare and Medicaid, and 30% of Defense Dept. These massive cuts would not be gradual. The checking account is empty, so the workers have to be immediately furloughed. (My first cut would be Congress's pay and health benefits.) We've been through shutdowns before. They are so painful, politicians only last a short time before finding a solution. Is this time different than 1995?

--------------------------------------------------------------------------------------
If the debt ceiling is not raised, $1,294 Billion in spending cuts are needed.
U.S. Federal Spending - Fiscal Year 2010 ($ Billion)
$416 Other Mandatory
$197 Net Interest
$701 Social Security
$793 Medicare and Medicaid
$689 Defense Dept
$660 Discretionary
----------------------------------------------------------------------------------------
The longest government shutdown was from Dec. 15, 1995 to Jan. 6, 1996. Stock market was not affected much.
Vanguard SP500 index fund (VFINX):
Nov 30, 1995: $57.19
$0.69 dividend
Dec 29, 1995: $57.60 (net gain of 2%)
Jan 31, 1996: $59.55 (net gain of 5%)
-----------------------------------------------------------------------------------------
"Shutdown of the Federal Government: Causes, Processes, and Effects" (a February 18, 2011 report by the Congressional Research Service) states that:
"When federal agencies and programs lack appropriated funding, they experience a funding gap. Under the Antideficiency Act, they must cease operations, except in emergency situations. Failure of the President and Congress to reach agreement on interim or full-year funding measures occasionally has caused government shutdowns, the longest of which lasted 21 days, from December 16, 1995, to January 6, 1996. Government shutdowns have necessitated furloughs of several hundred thousand federal employees, required cessation or reduction of many government activities, and affected numerous sectors of the economy"
User avatar
ofcmetz
Posts: 2465
Joined: Tue Feb 08, 2011 7:09 pm
Location: Louisiana

Post by ofcmetz »

Findelglorin wrote:
SVariance1 wrote:I have some unconventional advice. A better approach might be get a good bottle of merlot. Wine is a hard asset and may help you relax about all of this.
Wine is fine but whiskey's quicker... :wink: :lol:
:D ^


I'm going to agree with the other posters who suggested that instead of worrying about this you could just evaluate your overall asset allocation in reference to your need or desire to take risk.

Without going into political specifics, the government will not default on its debt. Not any chance this time, I'm 99.999999% sure. If there was a default most asset classes would be affected especially those considered safe.

I would worry more about a random earth quake, terrorist attack on a major city with a thermonuclear bomb, or sudden flood. Perhaps throw in a lightning strike.

Good luck and If I were you I'd just turn the news off and watch some good movies or a baseball game instead. Much better for the blood pressure.
Never underestimate the power of the force of low cost index funds.
bpp
Posts: 2017
Joined: Mon Feb 26, 2007 11:35 am
Location: Japan

Post by bpp »

richard wrote:
bpp wrote:
richard wrote:
bpp wrote:What do you know that the rest of the market doesn't know?
That's a very important question, but it's not the only question. The other question is whether if the risks manifest themselves you'd do much worse than others.
You're thinking too hard about this.

No matter what happens, some will do better and some will do worse. Overall the market will weight the possibilities, and assign prices accordingly. No guarantee that one will be happy with the outcome, but even less guarantee that one can outsmart accumulated knowledge of the markets.

But feel free to try, if that makes you happy.
The market portfolio is only appropriate if you are not meaningfully different from the representative investor. See Portfolio advice for a multifactor world for a good explanation - pdf at http://citeseerx.ist.psu.edu/viewdoc/do ... 1&type=pdf

It's the same as the standard advice that tenured professors can take more equity risk and workers at a tech startup should underweight tech, if not equities generally. Or even the oft-heard rule of thumb, age in bonds, reflects the fact that different people have different risks.

It's a mistake to think you can outsmart markets, but it's also a mistake to think one size fits all and everyone should hold the world cap-weighted market portfolio, which would be the logical conclusion of ignoring individual risk profiles in an efficient market.
Ok, I see what you are getting at. I don't see how it applies to the OP's situation, though. The OP is worried about "the markets" crashing, for whatever reason. The only way I can see individual risk profiles coming into play here is if one determines that the OP has less ability to tolerate loss than the average market participant, in which case the OP should have lower exposure. But that is a very generic case, similar to the age-in-bonds recommendation, as you point out. I don't see what it has to do with why the OP fears the markets may collapse soon. It doesn't seem to me to really matter why the OP thinks that may happen at this particular point -- there is always something to worry about.

And so I gave the generic advice that I did, instead of trying to predict the future for the OP as most of the other replies on this thread seemed to me to be doing ("don't worry, that will never happen because ...", etc.)
User avatar
Morgthorak
Posts: 359
Joined: Mon Oct 12, 2009 7:32 am

Re: good topic

Post by Morgthorak »

hollowcave2 wrote:
But I have my AA set right where I want it and I'm just not going to change it over some political games in Washington.

Steve
^This.

Ditto. I'm not changing a thing, at all. Period. To do would open Pandora's Box and lead me down a road that I do NOT want to go down.

So I will stay the course. 8-)
User avatar
steve roy
Posts: 1855
Joined: Thu May 13, 2010 5:16 pm

Post by steve roy »

rustymutt wrote:I was more concerned about the Greece bond default than our country defaulting. Greece has kicked the can down the road for now. There will always be something people fear within our markets.
Best analysis of the last twist of the economic crisis in Greece.

"Europe agrees to give billions to large, European banks."

Which is pretty much what's going on with this particular crisis, right?
User avatar
pjstack
Posts: 1308
Joined: Tue Feb 20, 2007 4:03 am
Location: Harbor City, CA

Re: Talk me off my ledge, if you can

Post by pjstack »

ilskeptic wrote: Given that, why shouldn't I cash out when the markets reopen Tuesday, then sit on those funds for a month or six weeks, until the situation more or less sorts itself out? (I'm dealing totally with tax-advantaged accounts, Roth and TIRAs for my wife and myself, and I'm 62, uncomfortably late to rebuild if the worst, or anything like it, takes place.)
Since it is all in tax sheltered accounts (therefore no taxes to pay on capital gains), I say go for it!

If the sky falls, as you fear, you will be the smartest guy on the board!

If nothing much happens, then it will be a learning experience. How much could you lose by being on the sidelines for a month? (No one knows.)

I was surprised to read (above) that the Govt. had shut down for 21 days in 1995. That was only 16 years ago but I had totally forgotten about it.

I don't know if being out of the market for those 21 days would have been a big deal or not (I'm not going to bother to figure it out, either.), but whatever the impact would have been has probably been smoothed out over the intervening 16 years.
pjstack
User avatar
nisiprius
Advisory Board
Posts: 52212
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Post by nisiprius »

I think Drain is pretty much right, but I'd like to stir some things into the mix.

a) Buy-and-hold will not get you through The Big One. If you bought sovereign debt from the CSA* in 1862, buy-and-hold did not work for you, and neither did buy-hold-and-rebalance.

b) The Big One can happen, and it's not a negligible probability. It's not in the struck-by-a-meteorite category. It's more in the your-own-house-burns-down category.

c) Behavior during a period like 2008-2009 is shaped by a genuine widespead belief that this might be The Big One, it really might. I certainly thought so.

d) But, it usually isn't. We probably think it's The Big One ten to a hundred times more often than it really is.

e) And when The Big One occurs, it usually takes people by surprise. It doesn't follow the rules. We don't see it coming. It didn't unfold according to the storyline. The things people did to protect themselves against the storyline don't work.

So, as I said before, my suggestion is to "feel the fear and do nothing anyway." Otherwise you fall prey to people who want to sell you asafoetida bags to hang around your neck.


*The Confederate States of America. I have spent most of my life north of the Mason-Dixon line, and one day when I was at a business convention in Dallas I was spending some off time strolling around the city, and came to a venerable graveyard full of tombstones with names followed by the initials CSA. It took me an amazingly long time to figure it out.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
SVariance1
Posts: 1376
Joined: Mon Jun 20, 2011 11:27 am
Location: Philadelphia Area

Post by SVariance1 »

nisiprius wrote:
The Big One

The Big One

The Big One

The Big One

You sound like Fred Sanford, haha
Mike
User avatar
HomerJ
Posts: 21281
Joined: Fri Jun 06, 2008 12:50 pm

Post by HomerJ »

Drain wrote:I've reached the point where I simply don't buy into the Bogleheads philosophy anymore--at least not the part about staying the course, anyway. It's a strategy that works only in periods of relative financial calm. As soon as something really serious happens, the strategy can fail entirely, and I don't believe most on this board appreciate that.
Hmm.. serious things have happened in the past, and the Boglehead strategy would have worked fine... In many cases, you would have done very well, long-term, "staying the course" through financial crisises...

It's true that the Boglehead strategy may not work in the future, but so far, it works very well, and not only in periods of financial calm. That part of your statement is very incorrect.
User avatar
HomerJ
Posts: 21281
Joined: Fri Jun 06, 2008 12:50 pm

Re: Talk me off my ledge, if you can

Post by HomerJ »

YDNAL wrote:
ilskeptic wrote:Given that, why shouldn't I cash out when the markets reopen Tuesday, then sit on those funds for a month or six weeks, until the situation more or less sorts itself out? (I'm dealing totally with tax-advantaged accounts, Roth and TIRAs for my wife and myself, and I'm 62, uncomfortably late to rebuild if the worst, or anything like it, takes place.)
The OBVIOUS answer is that your AA should reflect your ability and need for risk.

Without knowing specifics, if you are unable to take risk and/or have no need to take risk, your AA should reflect that.
This... If a 50% market drop would devastate you, then you have too much in stocks..

A 50% drop is possible AT ANY TIME.

You're not always going to see it coming...

Work backwards.... If you're 62, and close to retirement, your AA should be very conservative...
User avatar
HomerJ
Posts: 21281
Joined: Fri Jun 06, 2008 12:50 pm

Post by HomerJ »

Drain wrote:I guess the difference is that I'm trying to figure out what's best to do, as opposed to just assuming that what's worked in the past must also work in the future. (And that IS what Bogleheads tend to assume, even as they claim they don't. Without that assumption, "stay the course" doesn't make sense.)
Yes, that is true... We do assume that the overall trend of human prosperity is upwards... That the world economy will grow, over the long term.

I see 1 billion people in China and India about to join the middle class... I think the world economy (with bumps and stops and starts) will grow over the long term.

Things actually look more positive now, in my opinion than they did before World War II, in my opinion, or during stagflation in the 70s, etc.

And like you said, what else is there? Spread your bets among stocks, bonds, cash, maybe even gold... What else can you do? Trying to guess which asset class is going up next is a game we cannot win.
User avatar
HomerJ
Posts: 21281
Joined: Fri Jun 06, 2008 12:50 pm

Post by HomerJ »

Drain wrote:If the U.S. financial system collapsed, but foreign financial systems did not
That's one hell of an assumption...

Stock market dropped here in the US because of worries about GREECE defaulting... Everything is connected these days.

If the US financial system collapses, foreign financial systems are going to collapse too.
User avatar
HomerJ
Posts: 21281
Joined: Fri Jun 06, 2008 12:50 pm

Post by HomerJ »

nisiprius wrote:I think Drain is pretty much right, but I'd like to stir some things into the mix.

a) Buy-and-hold will not get you through The Big One. If you bought sovereign debt from the CSA* in 1862, buy-and-hold did not work for you, and neither did buy-hold-and-rebalance.

b) The Big One can happen, and it's not a negligible probability. It's not in the struck-by-a-meteorite category. It's more in the your-own-house-burns-down category.

c) Behavior during a period like 2008-2009 is shaped by a genuine widespead belief that this might be The Big One, it really might. I certainly thought so.

d) But, it usually isn't. We probably think it's The Big One ten to a hundred times more often than it really is.

e) And when The Big One occurs, it usually takes people by surprise. It doesn't follow the rules. We don't see it coming. It didn't unfold according to the storyline. The things people did to protect themselves against the storyline don't work.

So, as I said before, my suggestion is to "feel the fear and do nothing anyway." Otherwise you fall prey to people who want to sell you asafoetida bags to hang around your neck.


*The Confederate States of America. I have spent most of my life north of the Mason-Dixon line, and one day when I was at a business convention in Dallas I was spending some off time strolling around the city, and came to a venerable graveyard full of tombstones with names followed by the initials CSA. It took me an amazingly long time to figure it out.
Good post
realitytruthprozac
Posts: 201
Joined: Thu Jul 16, 2009 11:38 pm

Post by realitytruthprozac »

Well, here's one vote for JUMP !
It's just plain foolish to be in these bond markets.
Topic Author
ilskeptic
Posts: 61
Joined: Wed Feb 10, 2010 10:35 am

Post by ilskeptic »

Wow, didn’t expect this many replies. Thanks to all. A couple followups.

1) When I mentioned ‘markets,’ I meant more than the stock market. Sorry if some found that unclear. My AA is an equity funds/bond funds/TIPs portfolio pretty much correlated with my age. For most purposes in most times, it’s plenty conservative already.

2) I bought after 9/11. I slept peacefully through the last couple government shutdown threats. I cringed in 2008-09, but who didn’t? But I think the likely consequences of a default are a different order of magnitude than the aftermaths of those crises. None of the responses to this thread, frankly, have convinced me otherwise. A couple of you even seem to be looking forward, ever so slightly, to a default. I believe you need to think again.

3) I actually agree that the odds are against a default. But 99 percent against? Uh-uh, not in this political climate. 75-25, maybe, and I consider that uncomfortably high. (I know who I’ll blame if it happens, but I’ll leave it at that.)

4) Yes, unexpected calamities are possible any time. I’ll take my chances on them, not that I have a choice. But this is foreseeable and, if it happens at all, even date-certain. Why shouldn’t people hedge it? I never expect my house to be hit by a tornado, either, but I still go down in the basement when the sirens sound.

5) Drain: Thanks, you get it.

6) Nisiprius: As always, we are not worthy.

Hang on, folks, it could be a wild ride.
User avatar
Frugal Al
Posts: 1736
Joined: Fri May 28, 2010 10:09 am

Post by Frugal Al »

It's (usually) not the train you see that hits you. I agree with Rusymutt; I'm (still) more concerned about Greece than the US.

A failure of the US to increase the debt limit would not automatically mean debt default. The actions in --political comments deleted--. I really don't think our debt limit is the black swan we need to worry about--not yet anyway. Stay the course.
User avatar
Drain
Posts: 1404
Joined: Mon Feb 26, 2007 12:27 pm
Location: Maryland

Post by Drain »

rrosenkoetter wrote:
Drain wrote:If the U.S. financial system collapsed, but foreign financial systems did not
That's one hell of an assumption...
It's obviously not an assumption. See the word "if". Useful diversification doesn't require correlations of -1. Zero is good.
Stock market dropped here in the US because of worries about GREECE defaulting... Everything is connected these days.
So if financial contracts in the U.S. become null and void, the same must occur in other nations?

People just aren't taking the potential consequences of a sovereign default, not to mention the current political climate, seriously enough.

(And no, I don't believe the voiding of financial contracts is a likely outcome, even assuming a default actually occurs. But that and other wacky outcomes become possible with a default--outcomes that you otherwise could have comfortably assigned zero probability to.)
Darin
marco100
Posts: 763
Joined: Thu Mar 01, 2007 6:09 pm

Post by marco100 »

The fight over raising the debt ceiling is purely political and not a function of economic reality.

Raising it or not raising it is just a bookkeeping matter. It will not change the economic realities of the country which exist the day before it happens or doesn't happen, nor the day after.
DonSmith
Posts: 23
Joined: Sat Jul 02, 2011 1:35 pm

Post by DonSmith »

For all you doomsday planners, another possibility is a Federal Reserve bailout. The Fed might agree to print money to avoid a Treasury bond default. This could lead to inflation. Not likely, but I think inflation is much more likely than a Treasury bond default if the debt ceiling is not raised. The Fed will not finance all spending though. Geithner has said Social Security benefits and military paychecks would be the first defaults. When that happens, Congress will raise the debt ceiling.
Epaminondas
Posts: 178
Joined: Tue Feb 01, 2011 3:52 pm
Location: Ohio

Post by Epaminondas »

Get a grip folks! :D Its not going to happen. There is no need to default. Politicians talk, but they won't actually let it happen. Nothing in the world is safer than a US Treasury bond.
User avatar
HomerJ
Posts: 21281
Joined: Fri Jun 06, 2008 12:50 pm

Post by HomerJ »

ilskeptic wrote:1) When I mentioned ‘markets,’ I meant more than the stock market. Sorry if some found that unclear. My AA is an equity funds/bond funds/TIPs portfolio pretty much correlated with my age. For most purposes in most times, it’s plenty conservative already.
You never answered the question... What are you going to change all your money into? Cash?

What if the Fed prints money to stave off the crisis and there's a huge inflation blip?
Sidney
Posts: 6784
Joined: Thu Mar 08, 2007 5:06 pm

Post by Sidney »

DonSmith wrote:For all you doomsday planners, another possibility is a Federal Reserve bailout. The Fed might agree to print money to avoid a Treasury bond default.
Doesn't borrowing from the FED count?
I always wanted to be a procrastinator.
Epaminondas
Posts: 178
Joined: Tue Feb 01, 2011 3:52 pm
Location: Ohio

Post by Epaminondas »

Sidney wrote:
DonSmith wrote:For all you doomsday planners, another possibility is a Federal Reserve bailout. The Fed might agree to print money to avoid a Treasury bond default.
Doesn't borrowing from the FED count?
The Fed could just print and give it. That is what a smart Fed would do if Congress lost its marbles.
Locked