Playing Defense [against possible market correction]

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williemoe
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Playing Defense [against possible market correction]

Post by williemoe »

With the probabilities of the market correcting, how do you position your portfolio to play defense?
steve_14
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Re: Playing Defense

Post by steve_14 »

I hear fixed income does the job there pretty well.
stingray5688
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Re: Playing Defense

Post by stingray5688 »

i just do what ever livesoft does.
"Don't be emotional about investing. So even a first investment should not be exciting." - livesoft
Call_Me_Op
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Re: Playing Defense

Post by Call_Me_Op »

williemoe wrote:With the probabilities of the market correcting, how do you position your portfolio to play defense?
What are the "probabilities of the market correcting?" Are they listed somewhere?

Your AA should be designed to accommodate a market "correction" at any point in time.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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nisiprius
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Re: Playing Defense

Post by nisiprius »

How do you position your portfolio for defense?
By having it already positioned. It is always positioned for a stock market crash because a crash could occur any time and I don't know when it will be. And the positioning means not having so much in stocks that I cannot tolerate a 50% drop.

My last adjustment was made in 2007, in anticipation of retirement, and since then I've stayed the course. I did NOT predict or expect 2008-2009 except in the sense that I knew, and think I even said in this forum, that 50% drops can occur any time. And by the way... this is tricky because after the fact we edit our own memories and we remember the experts who seemed to predict things and forget the ones who failed... I did not see 2008-2009 coming, it took me by surprise. After the fact I of course remember some "things are going too well" feelings, but basically, no, I didn't expect it. To the best of your recollection, how about you?

My asset allocation in 2007 was probably a good deal conservative than most experts would have advised. 2008-2009 hurt much worse than I'd expected. But because I'd gauge my risk tolerance properly, my wife and I were able to stay the course, just barely, when at least two experts--this one and this one, were not.

I hope I am not going to get punished for smugness, because frankly another 50% drop would be really really really hard to take, but I am not changing anything.

By the way, "how do you position your portfolio for defense" sounds like sales talk to me. As I said in another posting, the equity risk premium is a reward for taking risk. To get the equity risk premium, you must really take the risk. If it were possible to dodge stock market crashes, that would mean that you had a way of getting the risk premium without really taking the risk. It is dangerous to think that some investment is risky for everybody else, but not for you.
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Topic Author
williemoe
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Re: Playing Defense

Post by williemoe »

By the way, "how do you position your portfolio for defense" sounds like sales talk to me.
Really? With all due respect that is absurd.
It is a simple question on how would investors position themselves with an expected downturn in the market.
Of course no one has a crystal ball, but if you are well versed in technical analysis you can see the probabilities unfold.
To often people forget that "cash" is a position.
Novine
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Re: Playing Defense

Post by Novine »

Sounds like you're talking market timing, not proper portfolio allocation. I'm investing for the next 20 years, not the next crash. If things go south this year, I have no interest in jumping out of the market and into cash and then back into the market when the crash is over. If that's your plan, please share with us how you're going to determine the top and bottom. I tried that with stocks in 2008 and got both wrong.
DualIncomeNoDebt
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Re: Playing Defense

Post by DualIncomeNoDebt »

What happened to all the people who were "100% equitites"? Where are the 95/5 chest thumpers?

To your question OP, fixed income is the answer. Get some yield, take a little less market risk, enjoy. Also, give a gander at http://www.portfolioreviewonline.com/in ... article=47 and some of the attendant charts and analyses, even better if you can find the original article. Its times like this, and possibly the ensuing months, that I love me some bonds.
mosu
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Re: Playing Defense

Post by mosu »

.....
Last edited by mosu on Tue Apr 29, 2014 8:37 pm, edited 1 time in total.
Twins Fan
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Re: Playing Defense

Post by Twins Fan »

williemoe wrote:
By the way, "how do you position your portfolio for defense" sounds like sales talk to me.
Really? With all due respect that is absurd.
It is a simple question on how would investors position themselves with an expected downturn in the market.
Of course no one has a crystal ball, but if you are well versed in technical analysis you can see the probabilities unfold.
To often people forget that "cash" is a position.
Yes, with all due respect, most bogleheads would say the same about your thread title and original question.

Best way to "play defense" boglehead style... tune out the noise, stay the course, and rebalance if needed. :beer
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pjstack
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Re: Playing Defense

Post by pjstack »

"well versed in technical analysis"?

Oh, dear.

I'm afraid you are on the wrong forum. Every week here someone posts that they got out/stayed in when "the market" was too high/too low and don't know whether or not to invest now because the market is rising/is falling.

It's never ending.

Technical analysis puts forth the promise that watching the wiggles of various charts (take your pick) will predict, or at least give omens, of future movements. If you are "well versed" in this form of astrology, the you probably know how to position yourself.

Best of luck to you.
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in_reality
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Re: Playing Defense [against possible market correction]

Post by in_reality »

williemoe wrote:With the probabilities of the market correcting, how do you position your portfolio to play defense?
There is always that possibility. In fact, it is 100% sure to happen at some point. Thus, you should always have your portfolio ready for that possibility.

Always have your portfolio ready for a downturn, always have it ready for an upturn. Set it for both and leave it alone. Then you don't have to consult a fortune teller, witchdoctor or read the tea leaves. And you don't have to rely on dicey info from the internet or go by a hunch. You can get out of the prediction business because nobody is good at it anyway.

Don't forget to rebalance.

Anyway, playing defense is something you do in sports. We are keen on sound investment practices here.
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arcticpineapplecorp.
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Re: Playing Defense [against possible market correction]

Post by arcticpineapplecorp. »

design your portfolio to get the growth you need, while taking into consideration the corresponding amount of risk you're comfortable with.

Choose your risk/reward relationship in accordance with your own needs/risk tolerance.

Don't think there's any special magic besides that.

oh, and if you do experience a loss from time to time (which is inevitable as long as you invest) know that:
1. this too shall pass
2. you're buying more shares at cheaper prices which should eventually appreciate in value (unless invested in individual stocks, of which little is certain).
Last edited by arcticpineapplecorp. on Fri Apr 11, 2014 7:33 pm, edited 1 time in total.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
DSInvestor
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Re: Playing Defense

Post by DSInvestor »

williemoe wrote:
By the way, "how do you position your portfolio for defense" sounds like sales talk to me.
Really? With all due respect that is absurd.
It is a simple question on how would investors position themselves with an expected downturn in the market.
Of course no one has a crystal ball, but if you are well versed in technical analysis you can see the probabilities unfold.
To often people forget that "cash" is a position.
willemoe wrote:1. I am shifting from being an active trader to passive investing and want to know how I could allocate the funds now sitting in money market accounts at Vanguard. This will be a work in progress as I am a technical trader and letting go of that process isn’t easy. I appreciate any suggestions and thank you in advance.
The technical trader in you is trying to get to jump in and out of the market. If you come to terms with the fact that you cannot jump in and out successfully consistently, you shouldn't do it. There are lots of posts here where folks got scared in the dot com bust and sold at low only to buy back in 2007 after a run up to get slammed again in 2008/2009, sell again and then ask if it is safe to buy back in in 2013 after another huge run up.

Here at Bogleheads we recommend that investors pick a mix of stocks and bonds that they'd be comfortable holding through all market conditions. In your other thread, you indicated that you wanted 70% stocks and 30% bonds. If stocks fall 50%, your portfolio will fall 35%. If you're not comfortable with this, reduce your stock allocation.

Whatever your stock/bond AA may be, it is the AA that will guide your trading actions to rebalance and control risk in your portfolio. If stocks run up, your asset allocation is going to say that your stocks are above target levels and you should sell stocks and buy bonds. Your AA is telling you to sell stocks high to reduce risk. If stocks crash, your stock AA is going to be below target and your AA plan tells you to buy stocks while they're low, selling bonds if necessary to do so. As a former trader, you may be familiar with "Buy low, sell high".

Having such an asset allocation plan would have served you well:
In the late 90s, your stock allocation would have above target, so the plan would have told you to sell stocks, buy bonds.
In early 2000s, your stock allocation would have been below, so the plan would have told you to buy stocks, sell bonds.
In 2006/2007, your stocks were likely to be above target.
In 2008/2009, your stocks were likely to be below target.
In 2013/2014, your stocks are likely to be above target.

The asset allocation plan doesn't consider whether stocks are overvalued and poised for correction, It just considers how much you have relative to bonds. No emotion, no gut feelings, no attempts to forecast. If you want 10% REIT allocation and you currently have 15% REIT. Sell REIT and buy another asset class that is below target. Simple as that. You don't have to think about whether REIT is over valued or under valued. You just know you to have too much so sell it or if you don't have enough, buy some.
Last edited by DSInvestor on Fri Apr 11, 2014 7:45 pm, edited 2 times in total.
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Johm221122
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Re: Playing Defense

Post by Johm221122 »

williemoe wrote:but if you are well versed in technical analysis you can see the probabilities unfold.
To often people forget that "cash" is a position.
If you could know when market would drop with any accuracy you would be very wealthy.Could you please share who can do this market timing with any accuracy

John
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Re: Playing Defense

Post by MN Finance »

williemoe wrote:
By the way, "how do you position your portfolio for defense" sounds like sales talk to me.
Really? With all due respect that is absurd.
It is a simple question on how would investors position themselves with an expected downturn in the market.
Of course no one has a crystal ball, but if you are well versed in technical analysis you can see the probabilities unfold.
To often people forget that "cash" is a position.
Well then it sounds like you should be telling, not asking (a board full of millionaires) how to do it.
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cfs
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Re: Playing Defense [against possible market correction]

Post by cfs »

Good question!

I just do whatever the Bogleheads tell me to do. Now seriously, as the manager of my family's boring SWAN (sleep well at night) portfolio, we are well-positioned for the ups and downs of the market, and hopefully we will avoid a Japan II type of loses. If you listen to the so-called experts on radio and television, then there is no reason to worry because this is a stock-pickers market (you can ask Larry his opinion on stock-pickers markets).

Thanks for reading this note.
~ Member of the Active Retired Force since 2014 ~
etarini
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Re: Playing Defense [against possible market correction]

Post by etarini »

willimoe wrote:Of course no one has a crystal ball, but if you are well versed in technical analysis you can see the probabilities unfold.
If you are well versed in technical analysis you are not an investor, you are a gambler.

Eric
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Re: Playing Defense [against possible market correction]

Post by jebmke »

so far, the best technical analysis I have ever seen is this.

http://www.theonion.com/articles/blue-l ... rcent,333/
When you discover that you are riding a dead horse, the best strategy is to dismount.
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nedsaid
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Re: Playing Defense [against possible market correction]

Post by nedsaid »

The best way to protect against market correction is to have enough bonds and cash in your portfolio to allow you to sleep at night. In the strength of the stock market rally, I did a mild rebalancing program from stocks to bonds. I started this in July 2013 and my last round of selling was in March 2014. My sales of stock funds were about 2% of my portfolio and purchases of bonds with new monies was about another 1% or so. The stock market was strong enough that my asset allocation held steady at 69% stocks and 31% bonds and cash.

I have about 4 times done strategic rebalancing, doing my best to find opportunities to pick up asset classes on the cheap. Mostly refusing to performance chase, that is buying asset classes that recently have been hot. Having a value orientation and doing your best to look for bargains also helps.

Also you have to look at down markets as potential opportunities. You make your big money in bear markets, it just doesn't feel that way. The big thing is not to sell your stocks when things look tough. If you can be in there buying when most everyone else is selling, that will make you lots of money. John Templeton said to "invest at the point of maximum
pessimism. Warren Buffett said, "Be greedy when others are fearful and fearful when others are greedy."
A fool and his money are good for business.
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JoMoney
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Re: Playing Defense

Post by JoMoney »

DualIncomeNoDebt wrote:...What happened to all the people who were "100% equitites"? Where are the 95/5 chest thumpers? ...
I'm sure there's plenty of us still out here, <yawning> at the markets fluctuations and averaging in each paycheck knowing that money we have invested in the market today isn't needed for many years to come... Incidentally, for those looking to allocation strategies hoping to garner extra through rebalancing, this is the results over the past decade of someone who invested $10,000 each year into
VTSMX ="Buy and hold" 100% Total Stock Market
VBINX = "Rebalanced" 60% Total Stock Market / 40% Total Bond
VASGX = "Rebalanced" 80%/20% with International allocation
Image
Data from Morningstar ( link )
Understandably, not everyone is willing, able, or has the temperament to accept the risks and volatility of a 100% stock strategy... Rebalancing between stocks and bonds is a great way to control risk, but I don't buy into the belief some have that it's a method to trade opportunistically to higher returns.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Playing Defense

Post by dbr »

JoMoney wrote:
DualIncomeNoDebt wrote: Incidentally, for those looking to allocation strategies hoping to garner extra through rebalancing, this is the results over the past decade of someone who invested $10,000 each year into . . .


Why do people think rebalancing is a trick to get more return from an allocation that is not all stock than one gets from holding all stock altogether? The metaphor of "dry powder" simply isn't so.
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williemoe
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Re: Playing Defense [against possible market correction]

Post by williemoe »

Thanks to all of you for your kind replies and actionable ideas.
Greatly appreciated.
physicsgal
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Re: Playing Defense

Post by physicsgal »

JoMoney wrote:
DualIncomeNoDebt wrote:...What happened to all the people who were "100% equitites"? Where are the 95/5 chest thumpers? ...
I'm sure there's plenty of us still out here, <yawning> at the markets fluctuations and averaging in each paycheck knowing that money we have invested in the market today isn't needed for many years to come... Incidentally, for those looking to allocation strategies hoping to garner extra through rebalancing, this is the results over the past decade of someone who invested $10,000 each year into
VTSMX ="Buy and hold" 100% Total Stock Market
VBINX = "Rebalanced" 60% Total Stock Market / 40% Total Bond
VASGX = "Rebalanced" 80%/20% with International allocation
Image
Data from Morningstar ( link )
Understandably, not everyone is willing, able, or has the temperament to accept the risks and volatility of a 100% stock strategy... Rebalancing between stocks and bonds is a great way to control risk, but I don't buy into the belief some have that it's a method to trade opportunistically to higher returns.
Thank you for posting this! I've been wondering about how DCA into the market over the last 10 years has worked out but I haven't seen anything as clear cut on it as this. I will keep this chart in mind when the market starts correcting. I'm in a Vanguard Target date fund and I'm young so I'm 90% equities and I haven't had $ in yet when the market tanks (started my Roth in Dec 2008 when the market was on sale) so I know I need to make sure I can keep my head through those times. That's part of why I'm here.
Professor Emeritus
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Re: Playing Defense

Post by Professor Emeritus »

williemoe wrote:.
Of course no one has a crystal ball, but if you are well versed in technical analysis you can see the probabilities unfold.
Wow I've been teaching the regulatory use of mathematical models for a few decades and I've seen a "probability unfold" !!!!

Is this a variation on the Eightfold way?
Last edited by Professor Emeritus on Sat Apr 12, 2014 11:36 am, edited 1 time in total.
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Re: Playing Defense [against possible market correction]

Post by nisiprius »

williemoe wrote:Thanks to all of you for your kind replies and actionable ideas.
Greatly appreciated.
Well some of the replies were not perhaps quite optimally kind, but if you've read anything by Bogle you should have expected that in this forum...

You could take the time, if you haven't already, to look at Bogleheads' Investment Philosophy with particular attention to "Never try to time the market," "invest with simplicity," and "Stay the course." I'm going to copy that last part here:
Stay the Course

This is perhaps the most challenging part of Boglehead investing, but is essential to its success. Bogleheads adopt a reasonable investment plan and then stay the course. When index funds were dramatically outperforming all the alternatives in the 1990's, this advice was easy to follow. But with the crash of 2008, many investors panicked, or at least wavered in their commitment to buy, hold, and rebalance investing. Bogleheads realize that in exchange for the high returns that stocks produce over time, the equity markets are enormously volatile. After big drops, it can be very difficult to continue to follow your pre-set plan. Even during normal markets there are always distractions, such as attractive new asset classes that have recently outperformed, or fancy alternative investment vehicles, such as hedge funds. Bogleheads strive not to be distracted, and strive not to waver. Create an asset allocation that includes bonds to reduce the volatility caused by the stock part of your portfolio, then rebalance when needed. This balanced approach will help you to stay the course. Once you set up a Boglehead portfolio, the only real course correction needed is to rebalance once per year to bring the stock/bond allocations back to pre-set levels. (Investors generally want to increase bond holdings slightly every year, such as by setting the percentage of bonds "to your age in bonds".) Although making only that one change every year takes discipline, it is also an enormous relief to be able to tune out the endless chatter of when and what to buy and sell.
I would add this. I've looked for myself, carefully, at the long-term behavior of the stock market with respect to both risk and return, and what I've concluded is this:
  • I think the long-term return of the stock market, including bad stocks along with good, bear markets along with bull markets, is worth the (considerable) risk.
  • I know how to get the long-term return of the stock market, within 0.2% or so. It is easy and it works. I invest in index funds and don't tinker with my allocation. Well, let's be honest--try not to tinker much.
  • I don't think I personally can beat that.
  • All the evidence suggests that almost everyone who tries does worse, that the people who do better don't do much better except by luck.
  • So, I use a simple portfolio of index funds, stay the course, and actually accept the risk (as opposed to kidding myself I can get the reward without the risk).
  • The key to accepting the risk is to be honest with yourself about how much risk you can accept.
Like a lot of people, I hope to heck last week wasn't the start of a big crash, but if it is I hope I can just sit there and watch my portfolio plummet, because that is my plan and the evidence suggests that's a good plan.
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FrugalInvestor
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Re: Playing Defense

Post by FrugalInvestor »

dbr wrote: Why do people think rebalancing is a trick to get more return from an allocation that is not all stock than one gets from holding all stock altogether? The metaphor of "dry powder" simply isn't so.
Because it is common for the financial press to preach this. A quick Google search pulled up this one...

http://www.forbes.com/sites/investor/20 ... cing-work/

Quote from article:
For the entire 25 year period, the rebalanced portfolio ended with a higher return: a $10,000 investment became $97,000 vs. $89,000 for the un-rebalanced portfolio. But over these 25 years, there were many times when these two portfolios behaved very differently.
Have a plan, stay the course and simplify, but most importantly....Ignore the Noise!
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Re: Playing Defense [against possible market correction]

Post by Twins Fan »

I think there may be a rebalance "bonus" for a set amount just sitting there growing or shrinking. That is the only way the set amount is going to get more shares when things are at a discount. But, when folks are adding/saving/accumulating/DCA'ing/etc., I don't see the "bonus" being so great. The continued contributions buy at a discount... and no selling of shares of anything.

I have no numbers of studies to back this statement up... just the way my simple mind wraps around it. :D
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Phineas J. Whoopee
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Re: Playing Defense [against possible market correction]

Post by Phineas J. Whoopee »

Offense is important to score points. Defense is important to avoid one's opponent scoring points. Nothing profound: you already know that.

You don't get to plan investments play by play. There are no 10-yard first downs, no field goals, and no two-minute warnings.

Your game plan has to be for the whole game season career history of the team game.

Losses are always possible. So are gains. Sometimes your pinch hitter pinches a nerve. Other times your halfback hurts half his back.

Enough of the sports metaphors? Good.

Nobody knows nuttin', therefore the plan has to take into account not knowing nuttin', and the outcome is always uncert'n . The best way to mess oneself up, at least in my observation, is to pretend to know what one doesn't.

Does that help?

PJW
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Toons
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Re: Playing Defense [against possible market correction]

Post by Toons »

I do nothing. :happy
"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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Re: Playing Defense

Post by berntson »

JoMoney wrote:
DualIncomeNoDebt wrote:...What happened to all the people who were "100% equitites"? Where are the 95/5 chest thumpers? ...
I'm sure there's plenty of us still out here, <yawning> at the markets fluctuations and averaging in each paycheck knowing that money we have invested in the market today isn't needed for many years to come...
:thumbsup

Suppose you're Rip Van Winkle and you know that you're about to fall asleep for thirty years. You can setup an automatic investment plan ahead of time. What asset allocation would you choose? Me, I would put it all in stocks. Maybe I would have a bond glide path start a few years before I woke up.
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Re: Playing Defense [against possible market correction]

Post by BogleInvestorLondon »

OP, don't you contradict yourself? If there is a general feeling that stocks are high and that the market might drop, shouldn't you be buying more equities?
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Re: Playing Defense [against possible market correction]

Post by goodenyou »

Read Charlie Ellis' book Winning The Loser's Game. It is a very good read. One of the best analogies I remember was the analogy of the amateur tennis player winning points. Most points were won NOT by aces, down the line or cross court winners, but by the opponent making a mistake. Think of investing as this strategy. You will win by NOT making mistakes, and you will lose by trying to make miraculous "shots".
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.
Dulocracy
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Re: Playing Defense [against possible market correction]

Post by Dulocracy »

goodenyou wrote:Read Charlie Ellis' book Winning The Loser's Game. It is a very good read. One of the best analogies I remember was the analogy of the amateur tennis player winning points. Most points were won NOT by aces, down the line or cross court winners, but by the opponent making a mistake. Think of investing as this strategy. You will win by NOT making mistakes, and you will lose by trying to make miraculous "shots".
That is the perfect analogy.

OP: Determine what asset allocation best suits you. Stick to it in up markets and down markets.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
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greg24
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Re: Playing Defense [against possible market correction]

Post by greg24 »

Here are 10 Keys to a Great Defensive Stance:

Fronts of the Feet - Most of your weight should be on the fronts or balls of your feet and the majority of the weight should be on the big toes. Heel should still be in contact with the ground.

Wide Base & Feet Turned Slightly In - Your feet should be pointing straight ahead or slightly turned in (pigeon-toed). This creates an angle that allows you to provide more force against the ground.

Your feet should also be slightly wider than shoulder width apart.

Hips Back & Knees Bent - Butt should be behind the heels and your knees should be pointing forward, but not past the toes.

Knees Inside of Feet - This helps create better push-off power.

Butt Down - Staying low helps maintain balance.

Shoulders Over Knees - Your shoulders should be over your knees with your chest out and back straight or slightly arched.

Hands up - Depending on the tactic (Hands out or hand up to defend shot/dribble).

Eyes focused on the player's waist or chest.

You should be able to draw a vertical line from the front of your forehead thru the front of your knees thru the front of your toes.

All of this should create GREAT BALANCE.
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Meaty
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Re: Playing Defense

Post by Meaty »

DualIncomeNoDebt wrote:What happened to all the people who were "100% equitites"? Where are the 95/5 chest thumpers?

To your question OP, fixed income is the answer. Get some yield, take a little less market risk, enjoy. Also, give a gander at http://www.portfolioreviewonline.com/in ... article=47 and some of the attendant charts and analyses, even better if you can find the original article. Its times like this, and possibly the ensuing months, that I love me some bonds.
I'm 100% equities and have been since 2005. I relished the downturn and literally sold a car so I could buy more stocks. I have several decades to retirement and know my risk tolerance. To top it off, my portfolio is only marginally different from Vanguards target date fund for my age.
"Discipline equals Freedom" - Jocko Willink
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Re: Playing Defense

Post by new2bogle2 »

nisiprius wrote:By having it already positioned. It is always positioned for a stock market crash because a crash could occur any time and I don't know when it will be. And the positioning means not having so much in stocks that I cannot tolerate a 50% drop.

My last adjustment was made in 2007, in anticipation of retirement, and since then I've stayed the course. I did NOT predict or expect 2008-2009 except in the sense that I knew, and think I even said in this forum, that 50% drops can occur any time....

My asset allocation in 2007 was probably a good deal conservative than most experts would have advised.....
nisiprius, would you be open to sharing in a bit more detail about how you positioned yourself in 2007 please? I am a few decades away from retirement but am still curious to learn about how one can correctly invest to withstand a drop in the market. Is this done strictly with a 3-fund portfolio? Of course no one likes to lose money in the market and no one can time it correctly but being ready for a possible drop is always good.
I hope the OP doesn't mind my question but if I'm hijacking this forum, then would you just send me a PM please nisiprius? Thanks
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