Protecting against the possibility of a correction?

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Always passive
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Protecting against the possibility of a correction?

Post by Always passive » Tue Oct 10, 2017 12:37 am

Is anyone doing anything to protect against the possibility of a correction, apart, of course, from the standard Bogleheads stay the course, rebalance, etc?

Meb Faber has an article out where he explains the use of a combination of monthly 5% out of the market put options on the market plus government bonds. I attach the article below...

https://www.cambriainvestments.com/wp-c ... -411825373

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eye.surgeon
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Re: Protecting against the possibility of a correction?

Post by eye.surgeon » Tue Oct 10, 2017 12:45 am

The Bogleheads® Philosophy
*Develop a workable plan
*Invest early and often
*Never bear too much or too little risk
*Never try to time the market <-----------
*Use index funds when possible
*Keep costs low
*Diversify
*Minimize taxes
*Keep it simple
*Stay the course <--------------
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett

AlohaJoe
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Re: Protecting against the possibility of a correction?

Post by AlohaJoe » Tue Oct 10, 2017 12:52 am

Always passive wrote:
Tue Oct 10, 2017 12:37 am
Meb Faber has an article out where he explains the use of a combination of monthly 5% out of the market put options on the market plus government bonds. I attach the article below...
It looks like the cheapest option (with the 20% Tail Risk allocation) ends up costing 28% of your total portfolio. Seems like pretty expensive insurance to me.

I realise it is just a quick newsletter but the analysis of costs is a bit unsatisfying. It only shows the final cost over a 30 year period (a period that included the 1987 crash, the 2000 crash, and the 2008 crash, by the way -- showing the previous 30 year period would have had very different results). Most people aren't going to evaluate their strategy at the end of 30 years so it would have been nice to see what the costs look like over shorter intervals. For instance, how much money would one have lost over the past 5 years with that strategy?

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Tyler Aspect
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Re: Protecting against the possibility of a correction?

Post by Tyler Aspect » Tue Oct 10, 2017 12:54 am

Any kind of "put" market insurance is fairly expensive over the long term. Also you have to remember any kind of option action you place there's a counter party doing the exact opposite thing. This is a picture of herds pushing each other to a stand-still. Die hard Bogleheads do not do options.

We do explore our risk tolerance, and adjust accordingly.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

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White Coat Investor
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Re: Protecting against the possibility of a correction?

Post by White Coat Investor » Tue Oct 10, 2017 12:55 am

Always passive wrote:
Tue Oct 10, 2017 12:37 am
Is anyone doing anything to protect against the possibility of a correction, apart, of course, from the standard Bogleheads stay the course, rebalance, etc?
No. I do the boring old "don't invest money you need anytime soon in stocks, static asset allocation I can tolerate in a market downturn rebalanced periodically thing." It worked fine for me in 2008 and ever since. It worked fine when I had a 4 figure portfolio, a 5 figure portfolio, a 6 figure portfolio, and a 7 figure portfolio. I expect it will continue to work fine throughout my investing career. Why change? In hopes that I can reach more than "enough?" Seems more likely to backfire. Will certainly use up more time and mental energy that I could put toward better uses. But there are many roads to Dublin.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

runner3081
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Re: Protecting against the possibility of a correction?

Post by runner3081 » Tue Oct 10, 2017 1:12 am

Once the correction comes, will try to scrap as much money together to buy more!

Always passive
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Re: Protecting against the possibility of a correction?

Post by Always passive » Tue Oct 10, 2017 1:36 am

eye.surgeon wrote:
Tue Oct 10, 2017 12:45 am
The Bogleheads® Philosophy
*Develop a workable plan
*Invest early and often
*Never bear too much or too little risk
*Never try to time the market <-----------
*Use index funds when possible
*Keep costs low
*Diversify
*Minimize taxes
*Keep it simple
*Stay the course <--------------
This a standard motherhood statement. We all know that, I have been practicing it for 30 years. But when you reach 69 and time is short your answer may not be that relevant. Of course I have reduced the risk by cutting back on equities, but whatever is left during a deep correction may be lost in my life time. Have you thought about that? I am looking for your creative side. Is that possible?

Always passive
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Re: Protecting against the possibility of a correction?

Post by Always passive » Tue Oct 10, 2017 1:38 am

White Coat Investor wrote:
Tue Oct 10, 2017 12:55 am
Always passive wrote:
Tue Oct 10, 2017 12:37 am
Is anyone doing anything to protect against the possibility of a correction, apart, of course, from the standard Bogleheads stay the course, rebalance, etc?
No. I do the boring old "don't invest money you need anytime soon in stocks, static asset allocation I can tolerate in a market downturn rebalanced periodically thing." It worked fine for me in 2008 and ever since. It worked fine when I had a 4 figure portfolio, a 5 figure portfolio, a 6 figure portfolio, and a 7 figure portfolio. I expect it will continue to work fine throughout my investing career. Why change? In hopes that I can reach more than "enough?" Seems more likely to backfire. Will certainly use up more time and mental energy that I could put toward better uses. But there are many roads to Dublin.
Please see my reply to “eye surgeon”

sailaway
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Re: Protecting against the possibility of a correction?

Post by sailaway » Tue Oct 10, 2017 1:45 am

Always passive wrote:
Tue Oct 10, 2017 1:36 am
eye.surgeon wrote:
Tue Oct 10, 2017 12:45 am
The Bogleheads® Philosophy
*Develop a workable plan
*Invest early and often
*Never bear too much or too little risk
*Never try to time the market <-----------
*Use index funds when possible
*Keep costs low
*Diversify
*Minimize taxes
*Keep it simple
*Stay the course <--------------
This a standard motherhood statement. We all know that, I have been practicing it for 30 years. But when you reach 69 and time is short your answer may not be that relevant. Of course I have reduced the risk by cutting back on equities, but whatever is left during a deep correction may be lost in my life time. Have you thought about that? I am looking for your creative side. Is that possible?
The whole point is that this is not the place for creativity. There are more creative losers than winners in this game.

Get creative about how you make money. Get creative about how you save money. Be smart about how you invest money.

GoldenFinch
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Re: Protecting against the possibility of a correction?

Post by GoldenFinch » Tue Oct 10, 2017 4:14 am

If I were 69 and worried about my portfolio losing money the last thing I would do would be infuse some creativity into my strategy. Maybe I would adjust my asset allocation, but that’s as far as I would go.

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CyclingDuo
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Re: Protecting against the possibility of a correction?

Post by CyclingDuo » Tue Oct 10, 2017 4:39 am

Always passive wrote:
Tue Oct 10, 2017 12:37 am
Is anyone doing anything to protect against the possibility of a correction, apart, of course, from the standard Bogleheads stay the course, rebalance, etc?

Meb Faber has an article out where he explains the use of a combination of monthly 5% out of the market put options on the market plus government bonds. I attach the article below...

https://www.cambriainvestments.com/wp-c ... -411825373
The opening argument of that white paper needs to be challenged - especially the "this bull has been raging since 2009" misnomer.

So let's challenge it with Zor Capital's guru Joe Fahmy:

Financial Crisis of 2008-09 is still fresh in people’s minds and the recovery has already lasted 8 years. Most people can’t even consider the possibility of the market going significantly higher from here because, according to the media, this 8 year recovery is “long in the tooth” and about to end. However, I have made the argument for ten months now that we resumed a NEW Bull Market in July 2016 (that really began in Jan 2013, NOT March 2009). Very few people want to talk about the Bear Market that recently happened from mid 2015 to mid 2016 where the average stock corrected over 20% and many of the leading sectors corrected between 25-50%.

https://www.joefahmy.com/2017/04/29/mar ... rmedbroker

Not to mention the 2011 negative 20% move: https://www.yardeni.com/pub/sp500corrbear.pdf

That being said, if you are 69 - why not consider taking some of your portfolio and purchasing a ladder SPIA strategy for age 70 and 75 (maybe even 80 as well) to make sure you are covered with all of your income needs? Then you can let the remainder of your AA do what it is going to do without you having to worry.

Finally, Ben Carson had a nice blog last week about investing based on headlines, as they may be consuming too much of your thought:

http://awealthofcommonsense.com/2017/10 ... at-itself/

magneto
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Re: Protecting against the possibility of a correction?

Post by magneto » Tue Oct 10, 2017 5:10 am

eye.surgeon wrote:
Tue Oct 10, 2017 12:45 am
The Bogleheads® Philosophy
*Develop a workable plan
*Invest early and often
*Never bear too much or too little risk
*Never try to time the market <-----------
*Use index funds when possible
*Keep costs low
*Diversify
*Minimize taxes
*Keep it simple
*Stay the course <--------------

There is a fine line between guiding principles and dogma.
Now imagine it is 1929!
Do we switch off our brains?
Do we stay the course?
And which particular course?

Thanks OP for posting.
Informative article although solution a little too rarefied and short-term for this investor.
While wide market valuation measures conflict to some degree, our portfolio individual Stock positions measure predominately toppy.
Portfolio is therefore currently tilted defensive and likely to stay that way for the foreseeable future.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

Always passive
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Re: Protecting against the possibility of a correction?

Post by Always passive » Tue Oct 10, 2017 7:41 am

CyclingDuo wrote:
Tue Oct 10, 2017 4:39 am
Always passive wrote:
Tue Oct 10, 2017 12:37 am
Is anyone doing anything to protect against the possibility of a correction, apart, of course, from the standard Bogleheads stay the course, rebalance, etc?

Meb Faber has an article out where he explains the use of a combination of monthly 5% out of the market put options on the market plus government bonds. I attach the article below...

https://www.cambriainvestments.com/wp-c ... -411825373
The opening argument of that white paper needs to be challenged - especially the "this bull has been raging since 2009" misnomer.

So let's challenge it with Zor Capital's guru Joe Fahmy:

Financial Crisis of 2008-09 is still fresh in people’s minds and the recovery has already lasted 8 years. Most people can’t even consider the possibility of the market going significantly higher from here because, according to the media, this 8 year recovery is “long in the tooth” and about to end. However, I have made the argument for ten months now that we resumed a NEW Bull Market in July 2016 (that really began in Jan 2013, NOT March 2009). Very few people want to talk about the Bear Market that recently happened from mid 2015 to mid 2016 where the average stock corrected over 20% and many of the leading sectors corrected between 25-50%.

https://www.joefahmy.com/2017/04/29/mar ... rmedbroker

Not to mention the 2011 negative 20% move: https://www.yardeni.com/pub/sp500corrbear.pdf

That being said, if you are 69 - why not consider taking some of your portfolio and purchasing a ladder SPIA strategy for age 70 and 75 (maybe even 80 as well) to make sure you are covered with all of your income needs? Then you can let the remainder of your AA do what it is going to do without you having to worry.

Finally, Ben Carson had a nice blog last week about investing based on headlines, as they may be consuming too much of your thought:

http://awealthofcommonsense.com/2017/10 ... at-itself/
Very good points. Thank you.
Now on me, I do have more than enough to live from even if I lose all my equity, that is not the reason i started this post. The issue seems to me to be that the Bogleheads philosophy works perfectly for investors that still have a long way to go, just stay the course, the market has always recovered!!!
But for those in retirement, like me, markets may not fully recover during our life time after a 2008 type correction. So, what is the Bogleheads strategy for us? NO equities?

retiredjg
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Re: Protecting against the possibility of a correction?

Post by retiredjg » Tue Oct 10, 2017 7:47 am

Always passive wrote:
Tue Oct 10, 2017 7:41 am
But for those in retirement, like me, markets may not fully recover during our life time after a 2008 type correction. So, what is the Bogleheads strategy for us? NO equities?
Perhaps you should take a look at the "liability matching portfolio". I don't know enough about it to comment, but it might be a solution you are looking for.

Another possibility is to buy a SPIA (single payment immediate annuity) with part of your money. It's like buying a pension.

My question....if the market does not fully recover during your life time, why does it matter?

Jack FFR1846
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Re: Protecting against the possibility of a correction?

Post by Jack FFR1846 » Tue Oct 10, 2017 7:57 am

Always passive wrote:
Tue Oct 10, 2017 7:41 am

Very good points. Thank you.
Now on me, I do have more than enough to live from even if I lose all my equity, that is not the reason i started this post. The issue seems to me to be that the Bogleheads philosophy works perfectly for investors that still have a long way to go, just stay the course, the market has always recovered!!!
But for those in retirement, like me, markets may not fully recover during our life time after a 2008 type correction. So, what is the Bogleheads strategy for us? NO equities?
What is your asset allocation?

Perhaps it's time to move your stock/bond ratio down. If you can't sleep at night with what you've got, then change it. I'm 9 years behind you, still working with 1 kid in college and another 2 years away. My AA is 50/50 which some people think is way too conservative. I sleep fine and still see gains as the market climbs.
Bogle: Smart Beta is stupid

Always passive
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Re: Protecting against the possibility of a correction?

Post by Always passive » Tue Oct 10, 2017 8:02 am

retiredjg wrote:
Tue Oct 10, 2017 7:47 am
Always passive wrote:
Tue Oct 10, 2017 7:41 am
But for those in retirement, like me, markets may not fully recover during our life time after a 2008 type correction. So, what is the Bogleheads strategy for us? NO equities?
Perhaps you should take a look at the "liability matching portfolio". I don't know enough about it to comment, but it might be a solution you are looking for.

Another possibility is to buy a SPIA (single payment immediate annuity) with part of your money. It's like buying a pension.

My question....if the market does not fully recover during your life time, why does it matter?
I have a TIPS ladder to cover my expenses. I do not need any further help. See my previous response.
Your last statement is intriguing. In my case it may be relevant since I may never get to use the equity money. What about for someone that must have some equities to fund retirement and cannot afford to lose them?

goingup
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Re: Protecting against the possibility of a correction?

Post by goingup » Tue Oct 10, 2017 8:20 am

Always passive wrote:
Tue Oct 10, 2017 7:41 am
CyclingDuo wrote:
Tue Oct 10, 2017 4:39 am
Always passive wrote:
Tue Oct 10, 2017 12:37 am
Is anyone doing anything to protect against the possibility of a correction, apart, of course, from the standard Bogleheads stay the course, rebalance, etc?

Meb Faber has an article out where he explains the use of a combination of monthly 5% out of the market put options on the market plus government bonds. I attach the article below...

https://www.cambriainvestments.com/wp-c ... -411825373
The opening argument of that white paper needs to be challenged - especially the "this bull has been raging since 2009" misnomer.

So let's challenge it with Zor Capital's guru Joe Fahmy:

Financial Crisis of 2008-09 is still fresh in people’s minds and the recovery has already lasted 8 years. Most people can’t even consider the possibility of the market going significantly higher from here because, according to the media, this 8 year recovery is “long in the tooth” and about to end. However, I have made the argument for ten months now that we resumed a NEW Bull Market in July 2016 (that really began in Jan 2013, NOT March 2009). Very few people want to talk about the Bear Market that recently happened from mid 2015 to mid 2016 where the average stock corrected over 20% and many of the leading sectors corrected between 25-50%.

https://www.joefahmy.com/2017/04/29/mar ... rmedbroker

Not to mention the 2011 negative 20% move: https://www.yardeni.com/pub/sp500corrbear.pdf

That being said, if you are 69 - why not consider taking some of your portfolio and purchasing a ladder SPIA strategy for age 70 and 75 (maybe even 80 as well) to make sure you are covered with all of your income needs? Then you can let the remainder of your AA do what it is going to do without you having to worry.

Finally, Ben Carson had a nice blog last week about investing based on headlines, as they may be consuming too much of your thought:

http://awealthofcommonsense.com/2017/10 ... at-itself/
Very good points. Thank you.
Now on me, I do have more than enough to live from even if I lose all my equity, that is not the reason i started this post. The issue seems to me to be that the Bogleheads philosophy works perfectly for investors that still have a long way to go, just stay the course, the market has always recovered!!!
But for those in retirement, like me, markets may not fully recover during our life time after a 2008 type correction. So, what is the Bogleheads strategy for us? NO equities?
Lots of Bogleheads are much older than your youthful age of 69. The Bogleheads durable philosophy is ageless. You should focus on the "Never bear too much or too little risk" tenet and adjust your level of equities down to your comfort level.

dccboone
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Re: Protecting against the possibility of a correction?

Post by dccboone » Tue Oct 10, 2017 8:25 am

“Meb Faber has an article out where he explains the use of a combination of monthly 5% out of the market put options on the market plus government bonds.”

I believe the use of the term “article” implies this piece has some journalistic value. Let’s be clear, this is a sales brochure. Its job is to sell and there is no attempt, nor should there be an expectation by the reader that it is objective in the story it tells.

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CyclingDuo
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Re: Protecting against the possibility of a correction?

Post by CyclingDuo » Tue Oct 10, 2017 8:25 am

Always passive wrote:
Tue Oct 10, 2017 7:41 am
CyclingDuo wrote:
Tue Oct 10, 2017 4:39 am
Always passive wrote:
Tue Oct 10, 2017 12:37 am
Is anyone doing anything to protect against the possibility of a correction, apart, of course, from the standard Bogleheads stay the course, rebalance, etc?

Meb Faber has an article out where he explains the use of a combination of monthly 5% out of the market put options on the market plus government bonds. I attach the article below...

https://www.cambriainvestments.com/wp-c ... -411825373
The opening argument of that white paper needs to be challenged - especially the "this bull has been raging since 2009" misnomer.

So let's challenge it with Zor Capital's guru Joe Fahmy:

Financial Crisis of 2008-09 is still fresh in people’s minds and the recovery has already lasted 8 years. Most people can’t even consider the possibility of the market going significantly higher from here because, according to the media, this 8 year recovery is “long in the tooth” and about to end. However, I have made the argument for ten months now that we resumed a NEW Bull Market in July 2016 (that really began in Jan 2013, NOT March 2009). Very few people want to talk about the Bear Market that recently happened from mid 2015 to mid 2016 where the average stock corrected over 20% and many of the leading sectors corrected between 25-50%.

https://www.joefahmy.com/2017/04/29/mar ... rmedbroker

Not to mention the 2011 negative 20% move: https://www.yardeni.com/pub/sp500corrbear.pdf

That being said, if you are 69 - why not consider taking some of your portfolio and purchasing a ladder SPIA strategy for age 70 and 75 (maybe even 80 as well) to make sure you are covered with all of your income needs? Then you can let the remainder of your AA do what it is going to do without you having to worry.

Finally, Ben Carson had a nice blog last week about investing based on headlines, as they may be consuming too much of your thought:

http://awealthofcommonsense.com/2017/10 ... at-itself/
Very good points. Thank you.
Now on me, I do have more than enough to live from even if I lose all my equity, that is not the reason i started this post. The issue seems to me to be that the Bogleheads philosophy works perfectly for investors that still have a long way to go, just stay the course, the market has always recovered!!!
But for those in retirement, like me, markets may not fully recover during our life time after a 2008 type correction. So, what is the Bogleheads strategy for us? NO equities?
BH "strategy" includes the scenario you mention via the recommendation from Jack Bogle...

https://www.bogleheads.org/wiki/Boglehe ... philosophy

John Bogle advises that "as we age, we usually have (1) more wealth to protect, (2) less time to recoup severe losses, (3) greater need for income, and (4) perhaps an increased nervousness as markets jump around. All four of these factors suggest more bonds as we age." [3]

If we used the older formula of "age in bonds", then a 65 year old would retire with 65% in bonds, and 35% in stocks. Various formulas have developed in recent decades to account for longevity, but the point being BH philosophy centers around entering retirement with a significant portion of your assets in bonds. Other strategies often discussed include alternative investments, and income streams be it from real estate, SPIA's, pensions, SS so that the retiree is well diversified and prepared for a scenario for entering retirement in the midst of a bear market, or one ensues during the first decade of one's retirement.

Either way, the downdrafts are gut wrenching as we can all attest to having lived through the past 32 years or more of ups and downs. Having one's AA positioned at the beginning of retirement, or the early years of retirement to weather the storm is standard BH philosophy.

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friar1610
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Re: Protecting against the possibility of a correction?

Post by friar1610 » Tue Oct 10, 2017 8:55 am

I'm 72 and, at least for me, a gradual drawdown of equity allocation (but not elimination of equities) seems to be the answer. It was pointed out in a recent thread that the 30% and 20% equity allocations of the income versions of Vanguard Target Retirement and Life Cycle funds, respectively, seem to be good guidelines for placing a senior retiree in the ballpark. Also, there is the Rick Ferri 30% "center of gravity for retirees" recommendation. Some find those equity allocations to be too low and they should adjust according to their own circumstances. (I myself am at 40% at the moment after having pretty close to liability-matched the fixed income side.) My simple mind doesn't see any way other than reducing equity allocation to reduce/eliminate the risk of an equity crash/correction.
Friar1610

Wricha
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Re: Protecting against the possibility of a correction?

Post by Wricha » Tue Oct 10, 2017 9:05 am

Always passive wrote:
Tue Oct 10, 2017 8:02 am
retiredjg wrote:
Tue Oct 10, 2017 7:47 am
Always passive wrote:
Tue Oct 10, 2017 7:41 am
But for those in retirement, like me, markets may not fully recover during our life time after a 2008 type correction. So, what is the Bogleheads strategy for us? NO equities?
Perhaps you should take a look at the "liability matching portfolio". I don't know enough about it to comment, but it might be a solution you are looking for.

Another possibility is to buy a SPIA (single payment immediate annuity) with part of your money. It's like buying a pension.

My question....if the market does not fully recover during your life time, why does it matter?
I have a TIPS ladder to cover my expenses. I do not need any further help. See my previous response.
Your last statement is intriguing. In my case it may be relevant since I may never get to use the equity money. What about for someone that must have some equities to fund retirement and cannot afford to lose them?
What folks are saying: if you have yourself covered in a down turn, which you do. "The recovery" is a battle in another life time.

truenorth418
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Re: Protecting against the possibility of a correction?

Post by truenorth418 » Tue Oct 10, 2017 9:06 am

My advice is focus on the Bogleheads tenet about adjusting your AA to fit your risk profile.

You are getting older, but so is this bull market. You are getting nervous. This indicates you are taking too much risk than you are comfortable with and you should adjust your asset allocation so that you feel more comfortable. If that means 40% stocks, do that. If that means 20% stocks, do that. If that means 0% stocks, then do that.

But whatever you decide to do, make sure it's a strategy you can live with for a while. Don't jump back and forth and try to time the entries and exits. What can you be comfortable with over the long term? Maybe it is a periodic reallocation away from stocks every couple of years. Write it down. Make an investment policy statement that you feel comfortable with and stick to it.

staythecourse
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Re: Protecting against the possibility of a correction?

Post by staythecourse » Tue Oct 10, 2017 9:08 am

White Coat Investor wrote:
Tue Oct 10, 2017 12:55 am
Always passive wrote:
Tue Oct 10, 2017 12:37 am
Is anyone doing anything to protect against the possibility of a correction, apart, of course, from the standard Bogleheads stay the course, rebalance, etc?
No. I do the boring old "don't invest money you need anytime soon in stocks, static asset allocation I can tolerate in a market downturn rebalanced periodically thing." It worked fine for me in 2008 and ever since. It worked fine when I had a 4 figure portfolio, a 5 figure portfolio, a 6 figure portfolio, and a 7 figure portfolio. I expect it will continue to work fine throughout my investing career. Why change? In hopes that I can reach more than "enough?" Seems more likely to backfire. Will certainly use up more time and mental energy that I could put toward better uses. But there are many roads to Dublin.
Agreed. There definitely seems to be a new page of financial porn coming out the last 3 months or so about the ways to protect against the markets dropping. A LOT of our own posters seem to be getting up in it as well. It almost seems like the active management community has monthly meetings on how to best attack the retail investor into doing something.

The best diversifier for an equity investor is TIME. Don't put money in that you need to pay the bills into the market. If you have liquidity and time horizon who cares what the market is doing now. Just keep throwing INVESTING money into it up, down, or sideways.

Good luck.

p.s. The BEST investment advice I have ever heard is Mr. Bogle's simple advice of simply do nothing and just stand there.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

TonyDAntonio
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Re: Protecting against the possibility of a correction?

Post by TonyDAntonio » Tue Oct 10, 2017 9:14 am

I don't know enough about options to attempt portfolio protection using them. All I know is I will need my investment money to buy things now that I'm in retirement. And now seems as good a time as any to exchange some equities (or bonds if I had them) for a nice cash cushion. I'm selling some of my 'winners' so that I have about 5 years worth of cash. If the market goes down for more than 5 years I'll check back and let you know plan B.

whomever
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Re: Protecting against the possibility of a correction?

Post by whomever » Tue Oct 10, 2017 9:23 am

"but whatever is left during a deep correction may be lost in my life time. Have you thought about that? I am looking for your creative side. Is that possible?"

The way I think about it is this: I imagine a Strategy X that will give a higher return than a safe strategy (TIPS or t-bills or whatever meets your definition of 'safe'), with no less safety.

Why doesn't some clever whiz package that strategy in a fund, and get rich by charging a tiny fraction of the higher return as fees? I mean, if strategy X really worked, wouldn't every t-bill/TIPS/whatever investor switch? This is a variant of the old one: why is the author of 'You Can Easily Make Millions in a Month' trying to make money selling a book on late night TV, instead of enjoying the zillions his strategy made for him?

Beating the market requires that you find some strategy that most of the other players don't see. By definition, the market beating strategy you just read about in some pundits blog post isn't a strategy that the other players aren't aware of.

The boglehead philosophy is that you (maybe) accept more risk (to get more return) when you can afford to (young, long time frame, lots of human capital) and then (maybe) accept less return (to get less risk) when you have a shorter time frame, less human capital, etc. This strategy doesn't depend on some insight that other market participants don't see; it works even when everyone else knows it too.

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Re: Protecting against the possibility of a correction?

Post by Watty » Tue Oct 10, 2017 9:55 am

The "stay the course" mantra is good but it might be better to say, "get on the right course, then stay the course".

There have been a lot of posts by people saying that 100% stocks is a good idea or that having a large mortgage so that you can leverage your investments is a good idea so while they have done well for the last few years it might be time to reconsider that.

You can check to see if you are on the right course by comparing your asset allocation to the asset allocation that a comparable target date fund to see if it is at least somewhat similar.

You can then do the math to see how much of an impact a big drop in stock prices would have with your investments allocations.

For example I retired a few years ago and have most of my funds in a target date 2015 fund which is about 45% stocks.

A 10% drop in stocks would result in a 4.5% drop in my portfolio but often bonds would do well when stocks decline, or at least generate dividends which would reduce the impact. VERY roughly a 2% dividend would reduce that drop to just 2.5%

A 20% drop in stocks would result in a 9% drop in my portfolio which might be 7% after dividends if bonds did not rally in a big drop like that.

A 40% drop in stocks would result in an 18% drop in my portfolio which might be 16% after dividends if bonds did not rally.

The larger drops would sting but I would be OK with that.

People that are early in their accumulation phase also need to remember that they should be hoping for stock market declines so that they can buy stocks when they are cheap. If you are in the accumulation phase and reduce your stock allocation then any new money, like monthly 401k contributions, will be buying fewer stocks when they are inexpensive.
Last edited by Watty on Tue Oct 10, 2017 11:33 am, edited 1 time in total.

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Re: Protecting against the possibility of a correction?

Post by pkcrafter » Tue Oct 10, 2017 10:12 am

Always passive, I don't think you have yet mentioned your AA, but you did say you have "enough" even without equities. This brings to mind ability and need to take risk. If investors has ability, they don't have much need; if they have need, they don't have much ability. Sounds like you don't have much need and are keeping risk exposure pretty low. What's that saying about a perfect plan?

Always passive:
This a standard motherhood statement (BH philosophy) . We all know that, I have been practicing it for 30 years. But when you reach 69 and time is short your answer may not be that relevant. Of course I have reduced the risk by cutting back on equities, but whatever is left during a deep correction may be lost in my life time. Have you thought about that? I am looking for your creative side. Is that possible?
It sounds like a big downturn won't harm your living style. What you are talking about occurred after the tech crash where market returns were flat for almost 10 years, but we all survived.

If you want to start playing the protection racket, your costs will rise and there is simply not much upside--you are already protected from the impact of tail risk if your equity allocation is below 40%.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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eye.surgeon
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Re: Protecting against the possibility of a correction?

Post by eye.surgeon » Tue Oct 10, 2017 10:28 am

Always passive wrote:
Tue Oct 10, 2017 1:36 am
eye.surgeon wrote:
Tue Oct 10, 2017 12:45 am
The Bogleheads® Philosophy
*Develop a workable plan
*Invest early and often
*Never bear too much or too little risk
*Never try to time the market <-----------
*Use index funds when possible
*Keep costs low
*Diversify
*Minimize taxes
*Keep it simple
*Stay the course <--------------
This a standard motherhood statement. We all know that, I have been practicing it for 30 years. But when you reach 69 and time is short your answer may not be that relevant. Of course I have reduced the risk by cutting back on equities, but whatever is left during a deep correction may be lost in my life time. Have you thought about that? I am looking for your creative side. Is that possible?
Then at age 69 you shouldn't be that worried about a market correction because as a long-time boglehead your asset allocation should already be heavily into bonds and you could weather a downturn without impacting your retirement lifestyle. If not, rebalance until your risk tolerance is satisfied.

At 69 if you can't comfortably afford a 50% drop in the market, you have too much in equities.
Last edited by eye.surgeon on Tue Oct 10, 2017 11:25 am, edited 1 time in total.
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Re: Protecting against the possibility of a correction?

Post by CnC » Tue Oct 10, 2017 11:22 am

runner3081 wrote:
Tue Oct 10, 2017 1:12 am
Once the correction comes, will try to scrap as much money together to buy more!
That's my plan.

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Re: Protecting against the possibility of a correction?

Post by retiredjg » Tue Oct 10, 2017 4:00 pm

Always passive wrote:
Tue Oct 10, 2017 8:02 am
retiredjg wrote:
Tue Oct 10, 2017 7:47 am
Always passive wrote:
Tue Oct 10, 2017 7:41 am
But for those in retirement, like me, markets may not fully recover during our life time after a 2008 type correction. So, what is the Bogleheads strategy for us? NO equities?
Perhaps you should take a look at the "liability matching portfolio". I don't know enough about it to comment, but it might be a solution you are looking for.

Another possibility is to buy a SPIA (single payment immediate annuity) with part of your money. It's like buying a pension.

My question....if the market does not fully recover during your life time, why does it matter?
I have a TIPS ladder to cover my expenses. I do not need any further help. See my previous response.
Your last statement is intriguing. In my case it may be relevant since I may never get to use the equity money. What about for someone that must have some equities to fund retirement and cannot afford to lose them?
If your withdrawal rate is low enough, the rise and fall of equities does not matter much in the long run. If you are taking less than the portfolio makes in the good years and taking more than the portfolio makes in the bad years...it can work out if your percentage is small enough.

Most people do need a good chunk of equites in their portfolios in retirement. Those equities are going to go up and go down. There is no way to avoid it. The trick is to spend only a small percentage (maybe 4% or less) of the portfolio's value when retirement started and increase that only by inflation each year.

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Re: Protecting against the possibility of a correction?

Post by heyyou » Tue Oct 10, 2017 4:44 pm

My protection for the "possibility" of the inevitable next correction, is storing a decade of retirement spending in bond funds. Just to tease those who do not sleep well at night, there will be more corrections in the future, some years after the next one.

Note that the worst year to retire was not due to market volatility, but due to a long period of high inflation without any real (inflation adjusted) equity gains.

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Re: Protecting against the possibility of a correction?

Post by White Coat Investor » Wed Oct 11, 2017 11:27 am

Always passive wrote:
Tue Oct 10, 2017 1:38 am
White Coat Investor wrote:
Tue Oct 10, 2017 12:55 am
Always passive wrote:
Tue Oct 10, 2017 12:37 am
Is anyone doing anything to protect against the possibility of a correction, apart, of course, from the standard Bogleheads stay the course, rebalance, etc?
No. I do the boring old "don't invest money you need anytime soon in stocks, static asset allocation I can tolerate in a market downturn rebalanced periodically thing." It worked fine for me in 2008 and ever since. It worked fine when I had a 4 figure portfolio, a 5 figure portfolio, a 6 figure portfolio, and a 7 figure portfolio. I expect it will continue to work fine throughout my investing career. Why change? In hopes that I can reach more than "enough?" Seems more likely to backfire. Will certainly use up more time and mental energy that I could put toward better uses. But there are many roads to Dublin.
Please see my reply to “eye surgeon”
Have I thought about that? Yes I have. But I don't see another method that when looked into would seem to work better than boring old stay the course. The closest thing I've found is a simple, mechanistic, automatic trend-following tactic, but I prefer just buying, holding, and rebalancing.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Protecting against the possibility of a correction?

Post by Sandtrap » Wed Oct 11, 2017 12:06 pm

For myself, retired and in my 60's, short genetics :( vs DW long genetics and perfect health.
IMHO I don't have time to ride out a 10 or 20 year correction/recovery.
So. . in the spirit of "prepare for the worse and hope for the best", I've constructed my portfolio as one 20 years older might be prone to do.

Bernstein's, Liability Matching Portfolio with a lot of emphasis on the "liability part".
Very conservative allocation taking into consideration Swedroe's "Black Swans".

30/70 gliding to 20/80 in 10 years.
25% in income property, multi unit housing.
3-5 years reserves.
50x+ gliding to 70x in 10 years.
SPIA ladder in progress sometime in the future, maybe.
Other stuff as the Boglehead senior experts advise over time. :D

IMHO, at least only for myself (not advice to others) this makes for a very good "sleep factor" for DW and I, and is the best I can do to "protect against a correction or worse".

I hope this is actionable input that is of benefit.
Onward. :D
j

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Re: Protecting against the possibility of a correction?

Post by runner540 » Wed Oct 11, 2017 12:42 pm

eye.surgeon wrote:
Tue Oct 10, 2017 10:28 am
Always passive wrote:
Tue Oct 10, 2017 1:36 am
eye.surgeon wrote:
Tue Oct 10, 2017 12:45 am
The Bogleheads® Philosophy
*Develop a workable plan
*Invest early and often
*Never bear too much or too little risk
*Never try to time the market <-----------
*Use index funds when possible
*Keep costs low
*Diversify
*Minimize taxes
*Keep it simple
*Stay the course <--------------
This a standard motherhood statement. We all know that, I have been practicing it for 30 years. But when you reach 69 and time is short your answer may not be that relevant. Of course I have reduced the risk by cutting back on equities, but whatever is left during a deep correction may be lost in my life time. Have you thought about that? I am looking for your creative side. Is that possible?
Then at age 69 you shouldn't be that worried about a market correction because as a long-time boglehead your asset allocation should already be heavily into bonds and you could weather a downturn without impacting your retirement lifestyle. If not, rebalance until your risk tolerance is satisfied.

At 69 if you can't comfortably afford a 50% drop in the market, you have too much in equities.
+1.
Here's my creative answer from someone less than half your age: I'm preparing by directing new taxable savings to my house fund, which is much more conservative than my retirement funds. I'm also prepping my human capital (network, resume, etc.) so I have the best shot to land another job.

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Re: Protecting against the possibility of a correction?

Post by greg24 » Wed Oct 11, 2017 12:47 pm

My asset allocation was chosen, in part, to protect against the possibility of a correction.

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Re: Protecting against the possibility of a correction?

Post by Fallible » Wed Oct 11, 2017 1:36 pm

eye.surgeon wrote:
Tue Oct 10, 2017 10:28 am
Always passive wrote:
Tue Oct 10, 2017 1:36 am
eye.surgeon wrote:
Tue Oct 10, 2017 12:45 am
The Bogleheads® Philosophy
*Develop a workable plan
*Invest early and often
*Never bear too much or too little risk
*Never try to time the market <-----------
*Use index funds when possible
*Keep costs low
*Diversify
*Minimize taxes
*Keep it simple
*Stay the course <--------------
This a standard motherhood statement. We all know that, I have been practicing it for 30 years. But when you reach 69 and time is short your answer may not be that relevant. Of course I have reduced the risk by cutting back on equities, but whatever is left during a deep correction may be lost in my life time. Have you thought about that? I am looking for your creative side. Is that possible?
Then at age 69 you shouldn't be that worried about a market correction because as a long-time boglehead your asset allocation should already be heavily into bonds and you could weather a downturn without impacting your retirement lifestyle. If not, rebalance until your risk tolerance is satisfied.

At 69 if you can't comfortably afford a 50% drop in the market, you have too much in equities.
Agree, and if one has too much risk, then the BH philosophy is not being followed.

Also, the issue is not about being "creative," but being willing to spend time first fully understanding and then properly implementing the tail-strategy-based-on-put-options defense that Faber suggests. I've gone with the BH philosophy to keep it simple, and lowered equities when I retired.
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Re: Protecting against the possibility of a correction?

Post by The Wizard » Wed Oct 11, 2017 2:06 pm

runner3081 wrote:
Tue Oct 10, 2017 1:12 am
Once the correction comes, will try to scrap as much money together to buy more!
Yes, but just remember to wait for the correction to hit bottom first...
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Re: Protecting against the possibility of a correction?

Post by goodenyou » Wed Oct 11, 2017 2:45 pm

It appears that the common wisdom here (in a Bogle philosophy) is that the greatest risk is the attempt to mitigate risk with a complicated strategy. Bogle is often attributed with the remark "don't do something, stand there" during times of turbulence. Protecting against a correction is market timing by another name.
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Re: Protecting against the possibility of a correction?

Post by The Wizard » Wed Oct 11, 2017 2:50 pm

goodenyou wrote:
Wed Oct 11, 2017 2:45 pm
It appears that the common wisdom here (in a Bogle philosophy) is that the greatest risk is the attempt to mitigate risk with a complicated strategy. Bogle is often attributed with the remark "don't do something, stand there" during times of turbulence. Protecting against a correction is market timing by another name.
Well, maybe.
But changing your target AA permanently from higher stocks percentage to lower stocks percentage might be an exception...
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Re: Protecting against the possibility of a correction?

Post by Dottie57 » Wed Oct 11, 2017 2:53 pm

White Coat Investor wrote:
Tue Oct 10, 2017 12:55 am
Always passive wrote:
Tue Oct 10, 2017 12:37 am
Is anyone doing anything to protect against the possibility of a correction, apart, of course, from the standard Bogleheads stay the course, rebalance, etc?
No. I do the boring old "don't invest money you need anytime soon in stocks, static asset allocation I can tolerate in a market downturn rebalanced periodically thing." It worked fine for me in 2008 and ever since. It worked fine when I had a 4 figure portfolio, a 5 figure portfolio, a 6 figure portfolio, and a 7 figure portfolio. I expect it will continue to work fine throughout my investing career. Why change? In hopes that I can reach more than "enough?" Seems more likely to backfire. Will certainly use up more time and mental energy that I could put toward better uses. But there are many roads to Dublin.
Mee too. I just keep putting the money in whether high or low, rising or falling. This has worked well for me over 30 years of investing.

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Re: Protecting against the possibility of a correction?

Post by Whatyear? » Wed Oct 11, 2017 2:55 pm

In general I try to "stay the course" and just stick with a plan, but in times like this (market hitting all-time highs multiple times within a short period) I also do what I think of as "trimming", which is to sell off small portions ($5K - $10K here or there) of over-performing equity funds and put the proceeds into bond funds, even if that wasn't in my original plan. If the correction comes, I'll be glad I did at least that. If the market keeps going up, I still have plenty in equities. I'm within 5 - 8 years from retirement, so to me doing "nothing" seems like the wrong answer.

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Re: Protecting against the possibility of a correction?

Post by goodenyou » Wed Oct 11, 2017 2:57 pm

The Wizard wrote:
Wed Oct 11, 2017 2:50 pm
goodenyou wrote:
Wed Oct 11, 2017 2:45 pm
It appears that the common wisdom here (in a Bogle philosophy) is that the greatest risk is the attempt to mitigate risk with a complicated strategy. Bogle is often attributed with the remark "don't do something, stand there" during times of turbulence. Protecting against a correction is market timing by another name.
Well, maybe.
But changing your target AA permanently from higher stocks percentage to lower stocks percentage might be an exception...
That is not "protecting against a correction". Permanently changing your asset allocation is choosing a lower risk profile not temporally related to market performance. If change is driven by predicting a correction, it is market timing. "Possibility"=timing.
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Re: Protecting against the possibility of a correction?

Post by The Wizard » Wed Oct 11, 2017 2:57 pm

Whatyear? wrote:
Wed Oct 11, 2017 2:55 pm
In general I try to "stay the course" and just stick with a plan, but in times like this (market hitting all-time highs multiple times within a short period) I also do what I think of as "trimming", which is to sell off small portions ($5K - $10K here or there) of over-performing equity funds and put the proceeds into bond funds, even if that wasn't in my original plan. If the correction comes, I'll be glad I did at least that. If the market keeps going up, I still have plenty in equities. I'm within 5 - 8 years from retirement, so to me doing "nothing" seems like the wrong answer.
Incremental rebalancing, yes indeed.
A fine plan, that...
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Re: Protecting against the possibility of a correction?

Post by David Scubadiver » Wed Oct 11, 2017 3:23 pm

There is nothing inherently wrong with positioning yourself against a possible decline. However, because there is a 100% certainty that there will be a decline and a fairly good chance you will not accurately predict when it will come, the best way to protect yourself is to have an asset allocation you can live with recognizing that there will be times when your portfolio loses value (sometimes substantial value, depending upon one's asset allocation).

All of that being said, if you were fully invested in equities and have ridden them high and are dizzy from the prospect of a crash at this point, you probably have too much invested in equities and should mitigate risk by selling some of your winners and either buying bonds or holding on to cash.

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Re: Protecting against the possibility of a correction?

Post by livesoft » Wed Oct 11, 2017 3:47 pm

Maybe a good way to protect against the possibility of a correction is to make gains of 25% with your investments before the correction happens?
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Re: Protecting against the possibility of a correction?

Post by White Coat Investor » Thu Oct 12, 2017 3:36 am

Whatyear? wrote:
Wed Oct 11, 2017 2:55 pm
In general I try to "stay the course" and just stick with a plan, but in times like this (market hitting all-time highs multiple times within a short period) I also do what I think of as "trimming", which is to sell off small portions ($5K - $10K here or there) of over-performing equity funds and put the proceeds into bond funds, even if that wasn't in my original plan. If the correction comes, I'll be glad I did at least that. If the market keeps going up, I still have plenty in equities. I'm within 5 - 8 years from retirement, so to me doing "nothing" seems like the wrong answer.
That market is usually hitting all-time highs. That's hardly a reason to not invest. Look at a long-term chart of the market.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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