Testing Our Allocations Emotionally

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selftalk
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Testing Our Allocations Emotionally

Post by selftalk » Sat Aug 12, 2017 5:02 pm

I thought it would be interesting to ask the Boglehead members how many folks would like to be tested via their allocations in a real bad market drop of maybe 50 to 60 percent or maybe more ? I think that`s the only way to tell if your allocation is right for you. I don`t think you can find the right allocation for yourself by answering pre- printed questions in a comfortable environment. I really hesitated writing this but curiosity prevailed. It would be a time and money saver. See what Taylor wrote WHAT A BEAR MARKET IS LIKE on 5/28/16 at 7:24 am.
Last edited by selftalk on Sat Aug 12, 2017 5:21 pm, edited 2 times in total.

jebmke
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Re: Testing Our Allocations Emotionally

Post by jebmke » Sat Aug 12, 2017 5:11 pm

Not sure I understand your question. I started investing in early '80s so I've seen at least a couple of deep drops as well as a short-term, less deep but violent one in 1987.
When you discover that you are riding a dead horse, the best strategy is to dismount.

selftalk
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Re: Testing Our Allocations Emotionally

Post by selftalk » Sat Aug 12, 2017 5:15 pm

Were you panicked out of anything and how did you feel about the decrease in net worth of your securities ? Did you continue to buy more shares ?

jebmke
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Re: Testing Our Allocations Emotionally

Post by jebmke » Sat Aug 12, 2017 5:21 pm

Yes, I did keep investing. Most investing was automatic (my 401(k) and my spouses pension/profit sharing scheme). Keep in mind that for a long time, many of us had no instant reporting to show the damage. Also, a large part of our assets were in a private pension/profit sharing scheme that only reported quarterly. No online panic button - transactions were done over the phone or by mail. I should also add that for most of the time I was pretty busy at work so didn't spend a lot of time thinking about it. Of the two deep market dives (2000-2002 and 2008-09) I'd say the first was the most psychologically draining since it lasted longer. 1987 was rather exciting. 22%+ down in one day.
When you discover that you are riding a dead horse, the best strategy is to dismount.

selftalk
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Re: Testing Our Allocations Emotionally

Post by selftalk » Sat Aug 12, 2017 5:24 pm

I think it`s hard to keep investing when it seems like you`re throwing good money after bad as prices fall and the NEWS becomes bad and widespread.

dwickenh
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Re: Testing Our Allocations Emotionally

Post by dwickenh » Sat Aug 12, 2017 5:25 pm

I would like to think that a dollar amount of loss based on the drop of the market would be a better barometer. Back in 08, I was willing to lose 150K and my AA reflected that. My AA allows for the loss of 250K now but the AA is much more moderate than in 08. I did not sell anything in 08 and was on Auto Rebalance in my 401K.

Just my 2 cents worth,

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

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whodidntante
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Re: Testing Our Allocations Emotionally

Post by whodidntante » Sat Aug 12, 2017 5:29 pm

I rode through the tech bubble pop circa 2000 and the global financial crisis circa 2008 without doing anything against my best interests. It doesn't make a very good t-shirt, though. The only big mistake I've made was to start off by thinking Dave Ramsey knew what he was talking about. It lead to undersaving and paying a lot for mediocre performance early in my career.

tibbitts
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Re: Testing Our Allocations Emotionally

Post by tibbitts » Sat Aug 12, 2017 5:29 pm

Your perspective will probably be different if you're retired without significant other income, or lose your job or business at the same time as the market downturn, vs. being relatively securely employed and early in a career, with low investment balances.

selftalk
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Re: Testing Our Allocations Emotionally

Post by selftalk » Sat Aug 12, 2017 6:12 pm

tibbits that`s true but no one likes to lose money.

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Re: Testing Our Allocations Emotionally

Post by Fallible » Sat Aug 12, 2017 7:09 pm

selftalk wrote:
Sat Aug 12, 2017 5:02 pm
I thought it would be interesting to ask the Boglehead members how many folks would like to be tested via their allocations in a real bad market drop of maybe 50 to 60 percent or maybe more ? I think that`s the only way to tell if your allocation is right for you. I don`t think you can find the right allocation for yourself by answering pre- printed questions in a comfortable environment. ...
The wiki has a page that takes up the basics of emotional risk tolerance in setting an asset allocation. Page includes what risk tolerance is, why it's important, why it's hard to determine, problems with risk tolerance questionnaires, and Bill Bernstein on evaluating tolerance based on reaction to the ’08 financial critis.
https://www.bogleheads.org/wiki/Risk_tolerance
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

Admiral
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Re: Testing Our Allocations Emotionally

Post by Admiral » Sat Aug 12, 2017 7:29 pm

Um...I guess I don't wish for a 50-60% market plunge to test my resolve. :? Anyway there's no predicting how you will feel: would I feel great losing "only" $150k versus $200k? I doubt it. Anyway some market drops are quick and then the recovery is quick. Some take longer. All you can do is pick an AA that allows you to sleep well at night.

I can tell you that after living through 2008 with zero fixed income, I am now 70/30. Though at that time I was in my mid 30s and didn't see a need for bonds.

Dottie57
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Re: Testing Our Allocations Emotionally

Post by Dottie57 » Sat Aug 12, 2017 7:36 pm

I've been investing since 1988. I don't need a big market downturn at this point. I've been tested enough.

jbolden1517
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Re: Testing Our Allocations Emotionally

Post by jbolden1517 » Sat Aug 12, 2017 7:48 pm

selftalk wrote:
Sat Aug 12, 2017 5:02 pm
I thought it would be interesting to ask the Boglehead members how many folks would like to be tested via their allocations in a real bad market drop of maybe 50 to 60 percent or maybe more ? I think that`s the only way to tell if your allocation is right for you. I don`t think you can find the right allocation for yourself by answering pre- printed questions in a comfortable environment. I really hesitated writing this but curiosity prevailed. It would be a time and money saver. See what Taylor wrote WHAT A BEAR MARKET IS LIKE on 5/28/16 at 7:24 am.
I'm not sure exactly what you are asking. I wrote my own sort of similar post to some younger investors whom I thought weren't really getting what bears are like: viewtopic.php?f=10&t=225330#p3486463 and thought it was all about not selling for 2 years. Honestly it is not during bad market drops you test your allocation, at that point there isn't much you can do. You go to war with the army you have not the army you would like to have. Similarly you enter a bear with the AA you have not the one you would like to have. You take the beating whether you feel good about it or not. Most investors are ready for the early months, your reaction is likely going to be "ok this is what I was expecting". What's going to change is when the things happen you weren't expecting. That's where you learn and get better.

It isn't about your feelings. What you are doing right now is being afraid of being afraid. Emotionally big losses suck. For most people emotionally small bleeds that over the years do much more damage but are much easier to take. That's why most people's portfolios are irrationally conservative. Focus instead on the long term devastation that substantial losses do to your financial plans and how long it will take to a portfolio to recover and what those lost years (and possibly decades) do. And contrast that with the never ending bleed of a conservative asset allocation that converts the possibility of loss into the certainty of loss. That's the tradeoff to focus on. Stop focusing on how you think you are going to feel when you went into battle with the wrong AA. I'll tell you the answer to that question. Most of the time you are going to vindicated because the bear didn't focus his attention on you. You took a glancing blow or two while he was ripping someone else to shreds. If you are where the bear focused are going to feel lousy and beaten down badly by the end of it. You'll know you screwed up bad and got horribly punished.

There are sectors and nations that drop all the time. One of the biggest problems (or virtues) with TSM as a portfolio holding is that it blurs together too many loses and gains so that the only thing you really see are overall drops. If you are doing TSM as the core of your portfolio the slight difference in bonds and stocks is one of the few decisions you are making. One of the things that might change is you decide you would rather not have that blur. Or you decide you are thrilled with it, and don't want to see the details. That's about it.

Dandy
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Re: Testing Our Allocations Emotionally

Post by Dandy » Sun Aug 13, 2017 6:17 am

During the accumulation stage market plunges were scary but I kept on investing. Whole different story in 2008 when I was forced to retire at age 60, no jobs were available and the nest egg was supposed to last for up to 30 years. Then I moved 401k money from old employer to VG money market and waited a few months before DCAing back in and doubling down the DCA amount when the market was down for any month.

When the market plunges there are often collateral damages that go with it. In 2008 things like no jobs (I mean none) were available in my area, people in "secure" jobs lost their job, valuable contacts/mentors were retired or couldn't help, people couldn't sell their houses in many areas, some banks refused early withdrawals from CDs, and froze HELOC accounts, etc.

One of the reasons to move money from my old 401k was I wasn't sure the Stable Value Fund was "safe" and the company itself was at risk as was my pension and health insurance. Things you take for granted during "normal" times suddenly don't work. I was fortunate to have no debt, just collected a modest pension from my old job and had some cash from severance payment. Otherwise I would have had to sell depressed equities to meet monthly expenses. I could have easily gone from having a secure retirement to be in long term trouble.

AntsOnTheMarch
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Re: Testing Our Allocations Emotionally

Post by AntsOnTheMarch » Sun Aug 13, 2017 6:28 am

Dandy wrote:
Sun Aug 13, 2017 6:17 am
When the market plunges there are often collateral damages that go with it. In 2008 things like no jobs (I mean none) were available in my area, people in "secure" jobs lost their job, valuable contacts/mentors were retired or couldn't help, people couldn't sell their houses in many areas, some banks refused early withdrawals from CDs, and froze HELOC accounts, etc.

...
I was fortunate to have no debt...
This whole thing plus bold for emphasis (mine).

SirRunsabit
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Re: Testing Our Allocations Emotionally

Post by SirRunsabit » Sun Aug 13, 2017 7:07 am

It was touch and go, thankfully I was in a secure position. This allowed me to keep plugging away. Who knows how the next one will turn out.
Hi!

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tennisplyr
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Re: Testing Our Allocations Emotionally

Post by tennisplyr » Sun Aug 13, 2017 7:13 am

I did nothing in 2008. I think the fact that significant downturns have occurred several times over the past decades and the market has come back. One's ability to weather the storms is supported by many factors which can change over time. For me, I continue to believe "this too shall pass".
Last edited by tennisplyr on Sun Aug 13, 2017 7:44 am, edited 1 time in total.
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freedom66
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Re: Testing Our Allocations Emotionally

Post by freedom66 » Sun Aug 13, 2017 7:23 am

I didn't sell during any big market sell-off, and am now retired for over a year after about a 34-year investing window. I feel that one simply has to fully understand that market falls, gains, etc. are "the nature of the beast". This forum allows you to read about how hundreds of other folks have dealt with the market's volatility first-hand. You can learn valuable lessons second-hand and therefore avoid investing pitfalls, vice having to make your own costly mistakes that have already been made before countless times.

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ruralavalon
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Re: Testing Our Allocations Emotionally

Post by ruralavalon » Sun Aug 13, 2017 9:03 am

We have been investing since the early 1980s, so have been thru several crashes. I was basically not paying attention to the markets so had no emotional difficulty with staying invested and continuing regular monthly 401k contributions.

It was different and much more difficult emotionally in 2008, because by then I was paying attention and was 63 years old and planning my retirement. We did not sell any stock funds. It was not hard to continue monthly contributions which were put into more stock index funds.

It was very hard to rebalance by exchanging zero coupon Treasury bonds for more stock index funds, which I did in December 2008. But I did not rebalance back to the 65/35 allocation I had been using, instead only enough to get to a 50/50 asset allocation. That is the asset allocation we are still using.
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Re: Testing Our Allocations Emotionally

Post by Nate79 » Sun Aug 13, 2017 9:54 am

I think recency bias has caused people to think that -40% represents a bad drop and subsequent quick recovery means they can stay the course. While 2008 was very scary we were very lucky in the final outcome.

If you want to test your resolve try -80%, no recovery for 10 years, significant unemployment, and many companies failed.

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Re: Testing Our Allocations Emotionally

Post by Fallible » Sun Aug 13, 2017 12:28 pm

Nate79 wrote:
Sun Aug 13, 2017 9:54 am
I think recency bias has caused people to think that -40% represents a bad drop and subsequent quick recovery means they can stay the course. While 2008 was very scary we were very lucky in the final outcome.

If you want to test your resolve try -80%, no recovery for 10 years, significant unemployment, and many companies failed.
Good points. And the '08 crisis, which included "The Great Recession," also saw unemployment at near-record highs and failed companies with many still out of work years later. There also can be long periods when markets make little headway.
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rgs92
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Re: Testing Our Allocations Emotionally

Post by rgs92 » Sun Aug 13, 2017 12:33 pm

I think that Dandy's fear about Stable Value funds being unsafe is overdoing it. Maybe the interest rate could go to zero, but that's it for worry.
No offense here of course, just trying to help.

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tennisplyr
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Re: Testing Our Allocations Emotionally

Post by tennisplyr » Sun Aug 13, 2017 4:47 pm

Nate79 wrote:
Sun Aug 13, 2017 9:54 am
I think recency bias has caused people to think that -40% represents a bad drop and subsequent quick recovery means they can stay the course. While 2008 was very scary we were very lucky in the final outcome.

If you want to test your resolve try -80%, no recovery for 10 years, significant unemployment, and many companies failed.
If this happens, they'll be way more people than me in deep trouble.
Those who move forward with a happy spirit will find that things always work out.

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arcticpineapplecorp.
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Re: Testing Our Allocations Emotionally

Post by arcticpineapplecorp. » Sun Aug 13, 2017 8:50 pm

selftalk wrote:
Sat Aug 12, 2017 6:12 pm
tibbits that`s true but no one likes to lose money.
But you don't really lose money until you sell. If you don't understand that, then you don't understand what you own. If you think because the "value of your account" goes down you've lost money, then you don't realize there's no money at all in your 401(k). Not a single penny. Don't believe me? Go look at your most recent statement or log in to your account. Then look beyond the value of your account. What do you see? "Total number of shares owned". What's that? You own shares, not money. You had to give up your money to buy the shares. The shares have a value, but that fluctuates. When the share price is up the value of your account is up, but that doesn't mean you've made money.

You only make money when you sell shares for more than you bought them.
You only lose money when you sell shares for less than you bought them.

Until you sell, the value of what you own changes. That's all. Can't call it a loss or a gain, until you sell. Remember Brexit? Did you "lose" money because international stocks fell 7% the day after the vote and U.S. stocks fell 3%? Well, if you didn't sell then one week later the value of your account would have been back to where it was the day before the Brexit vote occurred. How can it be a loss, if the value of your account falls, and then later recovers? Temporary loss perhaps. Paper loss perhaps. Not permanent or real. If you sold at a loss, you made your losses permanent and real. That's your fault. Not the market's fault.

Don't be confused and think the "value of your account" tells you how much money you have. It doesn't. It's telling you how much you WOULD have if you sold what you DO have (shares) at their current value. That's all. Nothing more, nothing less. If the value of your account falls, you haven't lost money but you WOULD lose money if you sell your shares at a loss. See the difference?
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

Jackson12
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Re: Testing Our Allocations Emotionally

Post by Jackson12 » Mon Aug 14, 2017 6:30 pm

selftalk wrote:
Sat Aug 12, 2017 5:02 pm
I thought it would be interesting to ask the Boglehead members how many folks would like to be tested via their allocations in a real bad market drop of maybe 50 to 60 percent or maybe more ? I think that`s the only way to tell if your allocation is right for you. I don`t think you can find the right allocation for yourself by answering pre- printed questions in a comfortable environment. I really hesitated writing this but curiosity prevailed. It would be a time and money saver. See what Taylor wrote WHAT A BEAR MARKET IS LIKE on 5/28/16 at 7:24 am.
That 5/28/16 post on the forum referred back to the piece below , right? I hope I never have to experience something like that bear market. But I don't discount the possibility and it tempers my AA. I'm not as conservative as my Depression era parents ....but then they were the ones who advised me to take more risk than they ever could.

https://finpage.blog/2017/01/25/on-bear-markets/

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Re: Testing Our Allocations Emotionally

Post by Fallible » Mon Aug 14, 2017 6:48 pm

arcticpineapplecorp. wrote:
Sun Aug 13, 2017 8:50 pm
selftalk wrote:
Sat Aug 12, 2017 6:12 pm
tibbits that`s true but no one likes to lose money.
...You only lose money when you sell shares for less than you bought them.
...
And that's why, when deciding how much risk to take in their allocations, investors always need to ask themselves how much they can afford to lose before the they will need the money.
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

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Peter Foley
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Re: Testing Our Allocations Emotionally

Post by Peter Foley » Mon Aug 14, 2017 7:30 pm

ruralavalon wrote:
It was different and much more difficult emotionally in 2008, because by then I was paying attention and was 63 years old and planning my retirement. We did not sell any stock funds. It was not hard to continue monthly contributions which were put into more stock index funds.

It was very hard to rebalance by exchanging zero coupon Treasury bonds for more stock index funds, which I did in December 2008. But I did not rebalance back to the 65/35 allocation I had been using, instead only enough to get to a 50/50 asset allocation. That is the asset allocation we are still using.
My experience was similar. I could only rebalance to a certain point because I was planning on retiring in 2 to 3 years. If I continued to rebalance bonds to stocks and the market did not recover I would be "forced" to work longer. So I skipped my last couple of rebalancing bands.

I admit I was greatly influenced by the past that I had personally experienced. The 1987 crash came suddenly and recovered relatively quickly. When the 2000-2001 drop came I again expected a fast recovery, and was disappointed. I did not want to suffer a similar disappointment in 2008-9. The lengthy Japanese market drop was also in the back of my mind. Trends have a lot of emotional/psychological influence.

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