How to weather market downturn with a high chance of layoff

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PoorManatee
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How to weather market downturn with a high chance of layoff

Post by PoorManatee »

I'm a firm believer in the superiority of buy-and-hold over day-trading. However, it is unclear to me how the tracking-the-index strategy works well given the fact that during boom years we tend to have more money to invest, whereas in downturns we tend to have less (due to layoffs, less work for freelancer, etc.) In other words, in theory all the highs and lows will balance out. But in practice, we tend to invest more during highs and less during lows, which is of course harmful.

The alternative is that we can still stick to buy-and-hold, but time our buy during major recessions. For example, during boom times I can sock my money away in a 0.9% CD or savings account, and only buy into index fund when the index is low.

May be this alternative sucks but the issue above is a problem nonetheless. So please share your thoughts separately on 1) whether the 1st paragraph raises a legitimate concern, and 2) whether the 2nd paragraph proposes a viable solution.

Thank you!
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SimpleGift
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Re: How to weather market downturn with a high chance of lay

Post by SimpleGift »

PoorManatee wrote:I'm a firm believer in the superiority of buy-and-hold over day-trading. However, it is unclear to me how the tracking-the-index strategy works well given the fact that during boom years we tend to have more money to invest, whereas in downturns we tend to have less (due to layoffs, less work for freelancer, etc.) In other words, in theory all the highs and lows will balance out. But in practice, we tend to invest more during highs and less during lows, which is of course harmful.
You seem to be missing an essential element in the passive investment strategy: it's buy-hold-and rebalance.

With a mix of both safe assets (bonds and cash) and risky assets (stocks) in the portfolio, an investor can rebalance the mix periodically back to a pre-set ratio, say 50/50. When one asset grows out of proportion to the rest (typically stocks), some portion is sold and the proceeds invested in the underperforming asset (typically bonds). If stocks were to drop, you'd be selling bonds and purchasing more stocks. This re-establishes the preset ratio and allows the investor to mostly be selling high and buying low.

There's no need to horde your hard-earned cash during your higher earning periods, waiting for a market downturn. Just establish a portfolio in the beginning with a preset ratio of stock and bonds that suits your risk tolerance, then rebalance it periodically.

PS. Welcome to the Forum!
Last edited by SimpleGift on Wed Aug 20, 2014 4:04 pm, edited 2 times in total.
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Re: How to weather market downturn with a high chance of lay

Post by Grt2bOutdoors »

A properly designed asset allocation plan can help you weather a market downturn with a high chance of layoff.
You adjust for risk by holding less risky assets, not more. Holding more fixed income/cash can provide you with what poster "cfs" calls a SWAN ("sleep well at night") portfolio. Is it perfect? No, maybe or yes it all depends are what your particular situation requires.
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FinancialDave
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Re: How to weather market downturn with a high chance of lay

Post by FinancialDave »

PoorManatee wrote:I'm a firm believer in the superiority of buy-and-hold over day-trading. However, it is unclear to me how the tracking-the-index strategy works well given the fact that during boom years we tend to have more money to invest, whereas in downturns we tend to have less (due to layoffs, less work for freelancer, etc.) In other words, in theory all the highs and lows will balance out. But in practice, we tend to invest more during highs and less during lows, which is of course harmful.

The alternative is that we can still stick to buy-and-hold, but time our buy during major recessions. For example, during boom times I can sock my money away in a 0.9% CD or savings account, and only buy into index fund when the index is low.

May be this alternative sucks but the issue above is a problem nonetheless. So please share your thoughts separately on 1) whether the 1st paragraph raises a legitimate concern, and 2) whether the 2nd paragraph proposes a viable solution.

Thank you!
1) If you don't have a strategy that you can stick to - such as investing 10-15% of your salary year in and year out, of course it can be harmful. It is not buy-and-hold that you need to look at, it is dollar cost averaging as much as you can over your lifetime. If you do that, that is pretty much all you can do.

2) Go back to item 1 - invest as much as you can as often as you can and the index will take care of itself.

fd
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Toons
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Re: How to weather market downturn with a high chance of lay

Post by Toons »

Proper Asset Allocation and Invest accordingly,regardless of where the economy is.
Timing is impossible on a consistent basis.
Save and invest consistently.Don't know if you are in the accumulation stage or not but if you are keep as little as possible in CDs and savings accounts.
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
FinancialDave
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Re: How to weather market downturn with a high chance of lay

Post by FinancialDave »

PoorManatee wrote:
The alternative is that we can still stick to buy-and-hold, but time our buy during major recessions. For example, during boom times I can sock my money away in a 0.9% CD or savings account, and only buy into index fund when the index is low.

May be this alternative sucks


Thank you!
This would tell me that in 2012 & 2013 and so far in 2014, you would have been earning maybe 2% on your cash, while the rest of the market went up close to 60%. This is why this idea doesn't work, even a 10% pull back now is no consolation to your lost income.

fd
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PoorManatee
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Re: How to weather market downturn with a high chance of lay

Post by PoorManatee »

Simplegift wrote:
PoorManatee wrote:I'm a firm believer in the superiority of buy-and-hold over day-trading. However, it is unclear to me how the tracking-the-index strategy works well given the fact that during boom years we tend to have more money to invest, whereas in downturns we tend to have less (due to layoffs, less work for freelancer, etc.) In other words, in theory all the highs and lows will balance out. But in practice, we tend to invest more during highs and less during lows, which is of course harmful.
You seem to be missing an essential element in the passive investment strategy: it's buy-hold-and rebalance.
I'm in my early 20s and currently holding 50% US stock and 50% international stock. Can I or should I rebalance? (I know it depends on my risk tolerance, and I think I'm okay with 100% stock since I'm so young.)

What are options for fixed incomes to sleep well at night? Does that basically means money socked away in savings account? Is there a rule of thumb on how much of that should I keep?
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Toons
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Re: How to weather market downturn with a high chance of lay

Post by Toons »

"I think I'm okay with 100% stock since I'm so young."

Do you think?Or do you know?Have you experienced a severe prolonged bear market yet,where you assets slowly lose value day after day ,month after month?

Take a quick risk assessment profile with Vanguard :happy

https://personal.vanguard.com/us/funds/ ... mmendation
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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PoorManatee
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Re: How to weather market downturn with a high chance of lay

Post by PoorManatee »

FinancialDave wrote:
PoorManatee wrote:
The alternative is that we can still stick to buy-and-hold, but time our buy during major recessions. For example, during boom times I can sock my money away in a 0.9% CD or savings account, and only buy into index fund when the index is low.

May be this alternative sucks


Thank you!
This would tell me that in 2012 & 2013 and so far in 2014, you would have been earning maybe 2% on your cash, while the rest of the market went up close to 60%. This is why this idea doesn't work, even a 10% pull back now is no consolation to your lost income.

fd
While the dollar amount of my investment could have gone up close to 60%, my share of the total stock market is the same. If we have a recession similar to the dot-com and housing bubbles, my investment would plunge right along with the total stock market.

While I agree that it's hard to predict market movement in any day, week, or month, I think we can agree that there's boom-and-bust cycle. My question is why not wait until the bust to buy into the index fund? What do I gain for buying into it earlier? (Notice that since we buy-and-hold, my share of the total stock market matters instead of the dollar value of my investment).
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SimpleGift
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Re: How to weather market downturn with a high chance of lay

Post by SimpleGift »

PoorManatee wrote:I'm in my early 20s and currently holding 50% US stock and 50% international stock. Can I or should I rebalance? (I know it depends on my risk tolerance, and I think I'm okay with 100% stock since I'm so young.)

What are options for fixed incomes to sleep well at night? Does that basically means money socked away in savings account? Is there a rule of thumb on how much of that should I keep?
Rather than try to answer your portfolio construction questions here, I'd recommend you publish your entire portfolio and financial plan, organized according to these guidelines , in the Help With Personal Investments Forum.

You'll find lots of experienced experts there who will be more than happy to help with your portfolio questions.
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Re: How to weather market downturn with a high chance of lay

Post by nisiprius »

PoorManatee wrote:...given the fact that during boom years we tend to have more money to invest, whereas in downturns we tend to have less (due to layoffs, less work for freelancer, etc.) In other words, in theory all the highs and lows will balance out. But in practice, we tend to invest more during highs and less during lows, which is of course harmful.
This raises a legitimate concern.
The alternative is that we can still stick to buy-and-hold, but time our buy during major recessions. For example, during boom times I can sock my money away in a 0.9% CD or savings account, and only buy into index fund when the index is low.
This isn't a viable solution.

There isn't a "viable solution." Life is uncertain. Stuff happens. What your first paragraph says is that you need to allow for the fact that your actual investing history is likely to be less favorable than the idealized perfect DCA-and-hold-forever scenarios.
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PoorManatee
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Re: How to weather market downturn with a high chance of lay

Post by PoorManatee »

nisiprius wrote:
PoorManatee wrote:...given the fact that during boom years we tend to have more money to invest, whereas in downturns we tend to have less (due to layoffs, less work for freelancer, etc.) In other words, in theory all the highs and lows will balance out. But in practice, we tend to invest more during highs and less during lows, which is of course harmful.
This raises a legitimate concern.
The alternative is that we can still stick to buy-and-hold, but time our buy during major recessions. For example, during boom times I can sock my money away in a 0.9% CD or savings account, and only buy into index fund when the index is low.
This isn't a viable solution.

There isn't a "viable solution." Life is uncertain. Stuff happens. What your first paragraph says is that you need to allow for the fact that your actual investing history is likely to be less favorable than the idealized perfect DCA-and-hold-forever scenarios.
Could you elaborate on why it is not a viable solution? It is impossible to predict market movement in the next month or year, but there's such a thing as recession (with proper definition from the NBER if one needs a precise declaration.) Why is it not better to only buy into index fund during recession? I do not have to time the absolute bottom of the market -- simply investing during the downturn is better than during the boom time.
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Re: How to weather market downturn with a high chance of lay

Post by FinancialDave »

PoorManatee wrote:
FinancialDave wrote:
PoorManatee wrote:
The alternative is that we can still stick to buy-and-hold, but time our buy during major recessions. For example, during boom times I can sock my money away in a 0.9% CD or savings account, and only buy into index fund when the index is low.

May be this alternative sucks


Thank you!
This would tell me that in 2012 & 2013 and so far in 2014, you would have been earning maybe 2% on your cash, while the rest of the market went up close to 60%. This is why this idea doesn't work, even a 10% pull back now is no consolation to your lost income.

fd
While the dollar amount of my investment could have gone up close to 60%, my share of the total stock market is the same. If we have a recession similar to the dot-com and housing bubbles, my investment would plunge right along with the total stock market.

While I agree that it's hard to predict market movement in any day, week, or month, I think we can agree that there's boom-and-bust cycle. My question is why not wait until the bust to buy into the index fund? What do I gain for buying into it earlier? (Notice that since we buy-and-hold, my share of the total stock market matters instead of the dollar value of my investment).
I seem to be totally missing your point, as I don't see how you can "eat" your share of the market -- all you can "eat" is from the dollar amount of your portfolio. So if I tell you that no buy and hold investor (even in 100% equities) has ever lost money over a 30 year period in the last 115 years doesn't that mean something? Furthermore if you are a faithful dollar cost average investor your average is much better - for the simple reason that the market has always had an upward slant over long time periods.

fd
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PoorManatee
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Re: How to weather market downturn with a high chance of lay

Post by PoorManatee »

@fd

I understand that my point is not clear at all. Here's an example:

Looking at the US S&P 500, which had a high peak in 2007. That means that the index has the same value at two points, one in 2006 and one in 2008. If I have $10,000 to invest, it does not matter whether I invest early (2006) or late (2008), since at both points $10,000 can buy the same share of the total stock market.

On the other hand, had I socked my money in a savings account instead of investing early, I also earn interest from 2006-2008.

So why shouldn't I just put money in savings accout and wait for a recession to pump that money into an index fund?
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Re: How to weather market downturn with a high chance of lay

Post by wassabi »

PoorManatee wrote:@fd

I understand that my point is not clear at all. Here's an example:

Looking at the US S&P 500, which had a high peak in 2007. That means that the index has the same value at two points, one in 2006 and one in 2008. If I have $10,000 to invest, it does not matter whether I invest early (2006) or late (2008), since at both points $10,000 can buy the same share of the total stock market.

On the other hand, had I socked my money in a savings account instead of investing early, I also earn interest from 2006-2008.

So why shouldn't I just put money in savings accout and wait for a recession to pump that money into an index fund?
You're not taking into account the dividend yield of the Total Stock Market. VTSAX, for example, pays a yield of 1.84%. It's your call whether the risk associated with the dividend yield of a total stock index fund is worth it to you.
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Re: How to weather market downturn with a high chance of lay

Post by madbrain »

PoorManatee wrote: Looking at the US S&P 500, which had a high peak in 2007. That means that the index has the same value at two points, one in 2006 and one in 2008. If I have $10,000 to invest, it does not matter whether I invest early (2006) or late (2008), since at both points $10,000 can buy the same share of the total stock market.

On the other hand, had I socked my money in a savings account instead of investing early, I also earn interest from 2006-2008.

So why shouldn't I just put money in savings accout and wait for a recession to pump that money into an index fund?
You are making a common mistake, forgetting about dividends.
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PoorManatee
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Re: How to weather market downturn with a high chance of lay

Post by PoorManatee »

madbrain wrote:
PoorManatee wrote: Looking at the US S&P 500, which had a high peak in 2007. That means that the index has the same value at two points, one in 2006 and one in 2008. If I have $10,000 to invest, it does not matter whether I invest early (2006) or late (2008), since at both points $10,000 can buy the same share of the total stock market.

On the other hand, had I socked my money in a savings account instead of investing early, I also earn interest from 2006-2008.

So why shouldn't I just put money in savings accout and wait for a recession to pump that money into an index fund?
You are making a common mistake, forgetting about dividends.
Could you explain where this dividend may be coming from if the US S&P 500 index is exactly the same (at some point) in 2006 and in 2008?
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Re: How to weather market downturn with a high chance of lay

Post by madbrain »

PoorManatee wrote: Could you explain where this dividend may be coming from if the US S&P 500 index is exactly the same (at some point) in 2006 and in 2008?
It comes from the companies that are part of the index. Every year that you own an S&P 500 index fund, you will receive your pro-rated share of dividends from all 500 companies in the index.
You can choose to do what you want with those dividends, just like the interest you receive from a bank in a savings account. Either you can spend the dividends, or you can reinvest them, to buy more share of the same S&P 500 fund, or buy another investment.
If you reinvest the dividends into the fund, your $10k investment will grow, not just because the price of the fund went up, but because you own more shares as well.
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Re: How to weather market downturn with a high chance of lay

Post by FinancialDave »

Dividends come from the stocks in the index.

For instance in 2006 VTSMX paid $.524 income on a year ending price of $34.09. About 1.5% dividend.
In 2008 the income was $.586 on a $21.80 year end price. About 2.7% dividend.

Let's forget about the fact that as the market trends higher over time, there will be times when it's price will be at the same as it was 2 or 10 years before -- but are you a fortune teller such that you know when that will occur, not likely. So your only best option, for which most will agree, is that you need to stay invested, at least with the core of your holdings or you will fall to the fate that most market timers do -- they underperform the market.

fd
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Re: How to weather market downturn with a high chance of lay

Post by nisiprius »

PoorManatee wrote:...Could you explain where this dividend may be coming from if the US S&P 500 index is exactly the same (at some point) in 2006 and in 2008?...
The easiest thing to do is look at a growth chart. A growth chart shows you the total return of an index fund. When you invest in a mutual fund, you are usually given the option of whether to reinvest dividends or have them paid out. The default is to have them reinvested. It is exactly similar to an ordinary bank account, where the interest is almost always "reinvested," i.e. paid into the account itself. A growth chart shows you what your brokerage balance would look like if you put $10,000 in a mutual fund and left it there, with dividends reinvested.

First, the S&P index itself.
It closed at 1,268.80 on Jan 3rd, 2006.
It closed at 1,266.07 on Aug 7, 2008.

So it was at almost the same value on those two days... very slightly lower in 2008.

Now let's look at the growth chart for Vanguard 500 Index Fund, and, along with it, not the S&P 500 index (i.e. the price index) but the S&P 500 total return index, which include dividends.

As you can see, the fund and the index tracked so perfectly that you cannot see any separation on the chart.

As you can also see, although the index was very slightly lower on August 7th, 2008
an investment in the fund was higher on August 7th 2008.

$10,000 grew to $10,659.78 in the fund. That is to say, over that time period, it grew by a total of about 6.6%, even though the S&P index itself was unchanged.

The difference is due to dividends paid by all of the stocks in the fund.

If you ask it to show you prices instead of total return, the price per share was $116.82 on Jan 3rd and $116.82 on August 7th.

In other words, if you had told the fund company to pay you the dividends instead of reinvesting them, you would indeed have no more money in the fund on August 7th than on January 3rd BUT the fund would have paid out over $600 in dividends to you during that time period.
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Re: How to weather market downturn with a high chance of lay

Post by postingname »

Hi PoorManatee,
PoorManatee wrote:I'm a firm believer in the superiority of buy-and-hold over day-trading.
You've set up a strawman in your opening sentence. Not even daytraders think daytrading is wise. :P There are other forms of market timing that are a better "foil" to make your comparison against. I personally have found no better timing method than Buffet's "blood in the streets". That's where you buy when everyone is fearful and sell when everyone is greedy. It's a little more complicated than it sounds, but once one begins to practice it, it solves most of the behavioral problems with investing ...as long as it is combined with DIVERSIFICATION (such as with index funds)... And this strategy, when practiced correctly, also reduces risk.

The short version? Buy heavily during bear markets and lightly durng bull markets. Plus, use index funds or a wide variety of securities to give you diversification.

But alas, I have probably steered you onto a path of moral turpitude. Many Bogleheads don't like the term market timing even when it is used in a way that most people don't really object to. Also, while the strategy works for many people and keeps them comfortable in the market...and profitable, and avoiding that most hated of feelings - the feeling of high opportunity cost...it does take practice to master this system and it also takes time. Obviously one has to let the market cycles come to you. Trying to practice this strategy in the MIDDLE of a cycle won't work.

SO, an alternative strategy that works for many people is simply to go with what the market is giving you NOW and realize that markets tend to go up in the long run, and if you balance equities (or other risk assets) with bonds, you will likely get a decent return over the long run. You will have to suffer the painful feeling of opportunity costs, but some people are more sensitive than others, and the longer your time horizon and the more bonds you have, the less hateful this feeling will be. And you have this board with others to keep you company and on the path. In 20 years, you'll never remember that you had so much angst.

Good luck.
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PoorManatee
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Re: How to weather market downturn with a high chance of lay

Post by PoorManatee »

Thank you all for your education -- I've learned a lot. This is quite the most friendly forum I have ever seen.

Back to business: I posted a similar question on Money Stackexchange -- a Q&A site, and a poster shares an answer similar to that of postingname. He also advises that index fund is great, but can improved based on simple buy / sell decision based on momentum. (He also provided evidence). See here: http://money.stackexchange.com/a/36231/12760

Is there a straightforward way to implement this buy during bear market strategy? Given that it is such a rule-based strategy, I'm guessing that it may not be much more time-consuming than immediately investing my paycheck every month.

Also, since most Bogleheads seem to follow the invest-immediately stratgy, what do you guys think about postingname's answer about Buffett's "blood on the street" strategy?
FinancialDave wrote: Let's forget about the fact that as the market trends higher over time, there will be times when it's price will be at the same as it was 2 or 10 years before -- but are you a fortune teller such that you know when that will occur, not likely.
fd
Hi Dave, I agree that I cannot predict when the market will return to a certain value. But to make the decision to buy later instead of now, I need only to believe WHETHER the market will at some point in the future dip down to equal today's value (or lower, to take into account dividend being paid.) Given the boom-and-bust cycle, isn't that more certain? Or should one think that the stock market will never in the future be lower than today?
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Re: How to weather market downturn with a high chance of lay

Post by madbrain »

PoorManatee wrote:Given the boom-and-bust cycle, isn't that more certain? Or should one think that the stock market will never in the future be lower than today?
Some people have waited for years, or decades, and remained out of the stock market waiting for it to go lower. Even if it does go lower eventually, you need to know when that will happen, and at what level, to be able to benefit.

By staying out of the market, you are guaranteed to miss out on the dividends. Sort of like putting your money under the mattress instead of an interest-bearing savings account.

Even if the market stays relatively flat for the next 10 years, if is still paying dividends, you will miss out on dividends, which over a long period of time can add up to quite a bit.

At this time, the dividend yield on the S&P500 is higher than the risk-free interest rate at a bank.

Of course, the principal is much more at risk in the index fund than it is in the savings account, but you are still being rewarded better for taking the risk of holding the market than you are for having a bank savings account.
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Re: How to weather market downturn with a high chance of lay

Post by yukon50 »

Grt2bOutdoors wrote:A properly designed asset allocation plan can help you weather a market downturn with a high chance of layoff.
You adjust for risk by holding less risky assets, not more. Holding more fixed income/cash can provide you with what poster "cfs" calls a SWAN ("sleep well at night") portfolio. Is it perfect? No, maybe or yes it all depends are what your particular situation requires.
Lets say you have an aggressive portfolio at 80/20.

If you are aggressively saving 20k per year and you are young and you get laid off, not being able to contribute a big chunk when the market is down actually does have a pretty negative effect.

Nothing you can really do about it, but getting laid off during a downtown really sucks for your long-term retirement saving, especially if you are young.
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Re: How to weather market downturn with a high chance of lay

Post by LongerPrimer »

@Poor Manatee
[quote/PoorManatee]
I'm in my early 20s and currently holding 50% US stock and 50% international stock. Can I or should I rebalance? (I know it depends on my risk tolerance, and I think I'm okay with 100% stock since I'm so young.)

What are options for fixed incomes to sleep well at night? Does that basically means money socked away in savings account? Is there a rule of thumb on how much of that should I keep?
PoorManatee
[/quote]

MadBrain is correct. IMO.

Further, if your financial goal is to have $$$$Big$$$$, you will have to do it with either, 1) What you invest in, and/or, 2) How well the investments do. I my years, I have discovered that some rebalancing is helpful, PROVIDED that you have the time to see the results and can tolerate the periods when the rebalancing lags the market and your original growing allocation.

If your $$$$Big$$$$ goal requires you and investments to grow by 8%/yr, and the act of rebalancing forces your investments to grow somewhat less, your goal will never be reached. Therefore either you must either change your goal or change your thinking on investing. Two great choices. :beer
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Re: How to weather market downturn with a high chance of lay

Post by LeeMKE »

During much of my career I was an independent consultant and my income could fluctuate drastically. Staying the course, and contributing the maximum allowed to tax deferred accounts every year (no matter how bad the year was, I contributed the max. If the year is really bad, the max ain't much.) was enough to reach financial independence.

I was still ready to retire by age 53, my target date. But that turned out to be the end of 2008, so I continued working another 4 years to let the portfolio recover.

I generally stayed heavy in stocks, shunning bonds. However, right now IMHO is a good example of why folks should have bonds as a part of their portfolio. When stocks drop and/or bonds rise, rebalancing allows you to be ready and able to "buy low and sell high." This way, your annual income, your intuition about the market, the hot stock tip you hear about on the golf course, don't interfere with your making serious money by simply rebalancing. If you remember that the market moves before most of us can figure out why, you can "beat the market" by not hallucinating some superior knowledge, but just rebalancing every so often.

The only reason I'm not a fan of holding CDs is because I want rebalancing to be as friction free as possible. CDs have different dates of maturity, and are held by a separate entity that is motivated to keep your funds invested with them. That's why I'm in a bond index fund right now. In September of 2008, I went to laddered CDs at 5.5%, so I'm not against CDs per se. Just don't see a benefit of using them in your scenario.
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letsgobobby
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Re: How to weather market downturn with a high chance of lay

Post by letsgobobby »

nisiprius wrote:
PoorManatee wrote:...given the fact that during boom years we tend to have more money to invest, whereas in downturns we tend to have less (due to layoffs, less work for freelancer, etc.) In other words, in theory all the highs and lows will balance out. But in practice, we tend to invest more during highs and less during lows, which is of course harmful.
This raises a legitimate concern.
The alternative is that we can still stick to buy-and-hold, but time our buy during major recessions. For example, during boom times I can sock my money away in a 0.9% CD or savings account, and only buy into index fund when the index is low.
This isn't a viable solution.

There isn't a "viable solution." Life is uncertain. Stuff happens. What your first paragraph says is that you need to allow for the fact that your actual investing history is likely to be less favorable than the idealized perfect DCA-and-hold-forever scenarios.
Exactly.
FinancialDave
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Re: How to weather market downturn with a high chance of lay

Post by FinancialDave »

PoorManatee wrote:
FinancialDave wrote: Let's forget about the fact that as the market trends higher over time, there will be times when it's price will be at the same as it was 2 or 10 years before -- but are you a fortune teller such that you know when that will occur, not likely.
fd
Hi Dave, I agree that I cannot predict when the market will return to a certain value. But to make the decision to buy later instead of now, I need only to believe WHETHER the market will at some point in the future dip down to equal today's value (or lower, to take into account dividend being paid.) Given the boom-and-bust cycle, isn't that more certain? Or should one think that the stock market will never in the future be lower than today?
To "market time" which is what you are suggesting you have to get two things right, and forgetting the fact that most of us can't predict even one of these things, let's see what would have happened to your money that you pulled out of the market in 2007. What do you do a couple months later when the market has dropped down to below where you sold -- your thesis has to tell you it's time to put your money back in the market and wait for it to go higher - or maybe you sell again on the way down, and buy back a month later further down the slippery slope.

Also to believe in a momentum strategy that simply looks great "back tested" over 5 years is very dangerous indeed, especially when that 5 year period included a "financial meltdown" such that we hadn't seen before in our lifetime.

Really what "one should think" is that the market trends up over time and throws off income, in the way of dividends along the way, so just looking at price points does not tell the whole story.

fd
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Re: How to weather market downturn with a high chance of lay

Post by nisiprius »

PoorManatee wrote:...but there's such a thing as recession (with proper definition from the NBER if one needs a precise declaration.) Why is it not better to only buy into index fund during recession?...
Because that is like Will Roger's advice,
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it.
One of the most important things about the NBER's definition of a recession is that they never identify a period of time as a recession until after it is over.

The stock market has risk. That's why you get a "risk premium." The risk exists no matter what you do, if it could be eliminated it wouldn't be risk. You can if you choose take additional unrewarded risk, for example by failing to diversify; but at the bottom of it all there is bedrock risk, quite a lot of risk, that can't be eliminated.

You have observed, correctly, that careers have risks, too, that often make it impossible to adhere strictly to a preset plan, and that this is additional risk piled on top of intrinsic stock market risk.

You propose to offset that risk by devising some simple valuation-based plan, what could be called "soft market timing," that depends on knowing what the NBER will say before it says it.

I may have missed something, but I don't see how this solves the problem of being mostly likely to be laid off at during the exact times that you think you should be concentrating your stock purchases...
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Re: How to weather market downturn with a high chance of lay

Post by HomerJ »

PoorManatee wrote:Hi Dave, I agree that I cannot predict when the market will return to a certain value. But to make the decision to buy later instead of now, I need only to believe WHETHER the market will at some point in the future dip down to equal today's value (or lower, to take into account dividend being paid.) Given the boom-and-bust cycle, isn't that more certain? Or should one think that the stock market will never in the future be lower than today?
1997 was considered boom times... PE10 was near 30, market was up 200% in 5 years... Yet if you got out in 1997, at NO time was the Total Stock Market Index fund lower.

Image

Yes, yes... you probably could have stopped investing new money in 1997, and invested in CDs or bonds (both returned quite well back then), waiting for 2001-2002... but to make any significant money, you would have had to time the bottom pretty well... Just investing into the top of the downward curve in 2001 wouldn't have made you much more than just buying and holding.

And of course, it would be tough to watch the stock market continue to soar for 3 straight years while you sat on the sidelines.
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Re: How to weather market downturn with a high chance of lay

Post by greg24 »

You want to time the market. Good luck selecting the correct entry points. Most people cannot succeed with such a plan.
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Re: How to weather market downturn with a high chance of lay

Post by nisiprius »

P.S. Although I'm not a fan of Jeremy Siegel, whose cheerleading for stocks, in my opinion, goes beyond enthusiasm into spin and dogmatism, I trust his data, and Stocks for the Long Run makes a good case for its being OK to invest in stocks at peaks. Not ideal, but good enough. Of course, if you can manage to invest at other times too, not exclusively at market tops, that's better yet.
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HomerJ
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Re: How to weather market downturn with a high chance of lay

Post by HomerJ »

nisiprius wrote:P.S. Although I'm not a fan of Jeremy Siegel, whose cheerleading for stocks, in my opinion, goes beyond enthusiasm into spin and dogmatism, I trust his data, and Stocks for the Long Run makes a good case for its being OK to invest in stocks at peaks. Not ideal, but good enough. Of course, if you can manage to invest at other times too, not exclusively at market tops, that's better yet.
This is why I think all timing "strategies" are a waste of time and effort...

Investing at peaks, even when PE10 or other benchmarks are at all time highs... still pays off okay...

Money invested at the very top of 2000 or 2007 is still worth more today... Money invested VTSAX in March 2000 has returned an average of about 5%.

And since most of us also invested in 2001, 2002, 2003, 2004, 2005, 2006, etc, we've done even better...
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Re: How to weather market downturn with a high chance of lay

Post by postingname »

PoorManatee wrote:

Back to business: I posted a similar question on Money Stackexchange -- a Q&A site, and a poster shares an answer similar to that of postingname. He also advises that index fund is great, but can improved based on simple buy / sell decision based on momentum. (He also provided evidence). See here: http://money.stackexchange.com/a/36231/12760
Hi PoorManatee,

Just want to be clear than I am not advocating a momentum strategy. (Note that I'm speaking after a mere quick scan of your link, since I've seen just about every momentum strategy that exists. :) ) The shorter-term momentum strategies have you buying high and selling higher. There is too much that can go wrong there and usually too much effort is expended (and too much time in front of the computer) for the gains received.

If it's a longer-term momentum strategy using moving averages, rate-of-change or a similar indicator, those can work for a longer-term investor, but they generally work best for TRENDING markets, less well for RANGING markets. You don't know in advance which type of market you are in, so you can have many false alarms on the buy/sell signals. That in itself can reduce one's confidence in the strategy.

Buffet-style market timing is better iMO. White it's best to wait for a new cycle, you can start investing at any time (especially prudent if you have a 401K/company plan with matching contributions), but make the larger buys with a reserve pool of cash (dry powder) that is used when pessimistic sentiment is at extremes. That pool of cash will come from sells that come when euphoria sentiment is at extremes, and also from accumulated dividends, should you choose not to reinvest them.

Everything gets down to personality. There are many competing investing strategies -- some that give you the market, some which beat the market. But if they don't suit your personality, you won't stick with them. I personally cannot follow the "traditional" Boglehead style of investing as I have a real problem with sitting in a long, down market with no cash available to take advantage of the fire sales on risk assets. I'm more of a "go-getter" personality so sitting passively, without being able to act on attractive buys causes extreme frustration. If you're not that person, and you have solved some of the other emotional issues (getting fear and greed under control), then a traditional Boglehead strategy may very well work for you. Realize though, that Bogleheads really do mean it when they say past returns are not a guarantee of future performance. There is much discussion on the board dealing with the possibiity of low returns in both stocks and bonds in the coming years. If you have even the slightest concern about that, then adding a respected (i.e., Buffet-style) market-timing component to your investing may help boost returns. So that's another consideration to think about.
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PoorManatee
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Re: How to weather market downturn with a high chance of lay

Post by PoorManatee »

Thank you all once again for your help. As mentioned in the title, I originally thought about socking money away during boom time and invest more during bust (to compensate for a higher chance of being laid off during bust). But this discussion brings many good points I did not consider.
HomerJ wrote: Money invested at the very top of 2000 or 2007 is still worth more today... Money invested VTSAX in March 2000 has returned an average of about 5%.
An average annual growth of 5% even if I started during the dot-com bubble? If that's true that a lot of my concerns aren't that severe at all -- the payoff is clearly better than a savings account!
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Re: How to weather market downturn with a high chance of lay

Post by postingname »

PoorManatee, look at this chart very closely.

Image

Can you stomach the rise, then fall back to baseline, then rise again, then fall back to baseline?... A lost decade? Most investors can't, which is why they have trouble with buy and hold and even buy and rebalancing strategies. The opportunity costs during the down periods are significant and extremely hard for the average investor, let alone the professional investor to ignore.
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Re: How to weather market downturn with a high chance of lay

Post by DonCamillo »

There is something that I do like about all the market timing and "buy when there is blood in the streets" talk on Bogleheads.

If you are thinking that way before a bear market comes, you will see it as an opportunity instead of as a problem. That should make you less likely to panic and sell, which is usually the most financially damaging thing you can do.

So even if we do not have any extra money to pile into the market when there is blood in the streets because we were laid off from our job, we are probably still less likely to do something stupid because we thought about it in advance.

We Bogleheads love this quote from the White Rabbit in Alice in Wonderland;
Don't just do something, stand there!
which has also apparently been quoted by Saint Jack. :sharebeer
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Re: How to weather market downturn with a high chance of lay

Post by nisiprius »

DonCamillo wrote:...We Bogleheads love this quote from the White Rabbit in Alice in Wonderland;
Don't just do something, stand there!
I was hoping you were right, because I a) love Alice's Adventures in Wonderland and b) love that saying, but I can't find it there, nor in Through the Looking-Glass.
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Re: How to weather market downturn with a high chance of lay

Post by DonCamillo »

nisiprius wrote:
DonCamillo wrote:...We Bogleheads love this quote from the White Rabbit in Alice in Wonderland;
Don't just do something, stand there!
I was hoping you were right, because I a) love Alice's Adventures in Wonderland and b) love that saying, but I can't find it there, nor in Through the Looking-Glass.
I think it is from this part of the script of the 1951 Disney movie.
Disney's Alice In Wonderland movie script
http://scifiscripts.name2host.com/carto ... Script.htm
"White Rabbit: Don’t just do something standing... Uh... no no! Go go!
Go get my gloves! I’m late! "
But I could be wrong. You can find a lot of misinformation on the Web.
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FinancialDave
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Re: How to weather market downturn with a high chance of lay

Post by FinancialDave »

DonCamillo wrote:

But I could be wrong. You can find a lot of misinformation on the Web.
:D

And in the movie world!

:oops:

And retirement simulations!

.....

.....

fd
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Re: How to weather market downturn with a high chance of lay

Post by Dandy »

You set your portfolio allocation and then if a life changing event happens or is very likely - like a lay off then you need to adjust your approach. I was in a high probability of layoff in 2008. I kept a higher cash position/eliminated debt. Banked bonus, stopped buying company stock, cut back a bit on discretionary spending which helped increase liquidity. I also applied for a HELOC while I was still working. When the layoff came I was in decent shape to make the transition from employee to retiree without losing much sleep during an especially horrible financial time.

I always liked having liquidity options as opposed to being very fully invested in equities and bonds and when it looked like employment was questionable expanded my cash like position.
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Re: How to weather market downturn with a high chance of lay

Post by epictetus »

I think an emergency fund that can you get through X months without employment can help a lot re: market downturn with high chance of layoff.

if you want to do tactical purchases during extreme times you might try doing that with a certain percentage of your assets (maybe 10%) so that if things don't go well you won't have wrecked your overall plan. and if things go well you will get a bit of a boost.

otherwise buy/hold/rebalance will let you take advantage of selling high/buying low.
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Re: How to weather market downturn with a high chance of lay

Post by postingname »

Agreed with the two prior posts.

Although the stock market is not euphoric at this time, IMO, for anyone anticipating a layoff in the future, now is a good time to take some profit and build or fill-out an emergency fund. Also consider the cash as a source of dry powder for judicious market timing (more on this later).

Eliminating debt is also obviously a no-brainer as is reducing spending and learning ways to be more frugal.

Learning more about the market can be advantageous for anyone with an open mind. There is a spectrum of risk assets. Equities are synonomous with "risk asset" on this board, but when looking at the entire risk specturm, they are the most risky. Not necessarily the best vehicle for someone with insecure employment. Learning about other risk assets that both provide both income and equity-like returns can provide more sustainable investing. The income, especially if distributed monthy, will come in handy and give confidence to stay the course. And of course, taking advantage of any sharp downturns to get into these income-producing vehicles is advantageous since it positions one for the maximum yield and total return. (I will say no more on this since it's not a Boglehead position and anyone interested would have to visit other boards for help in this.)

But building up a cash position by lightening one's position in the current market is the first place to start. The market has had a good run and there is no shame in taking some profit now and putting oneself in a more secure position for the future.
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