Impending market correction

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Jon H
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Impending market correction

Post by Jon H » Tue Mar 20, 2018 8:09 pm

It’s going to happen, nobody knows how soon or how big.

Not a recession question but a market correction one. I am not an economist, just another guy in the accumulation of wealth-building phase. Given the current valuations (CAPE higher than 1929 and 2008), and the other noise, I’m finding it hard to stay the course. The S&P 500 trend line is really out of whack. I interpolate (unscientific and nonmathematic holding of a ruler up to the trend line of the S&P500) the historical level to be at 1100 or 1200. It’s hard to believe that the these new businesses justify such high P:E ratio and for that matter the market as a whole.

Given the current valuations have you taken some profits and moved some into cash or fixed income? According to your IPS of course! Or are you letting it ride?

Personally, I’m getting spooked and reallocated to age in bonds/FI/cash. From 55:45 to 45:55. I know this isn’t boglehead philosophy to rearrange according to emotion and “market timing” but I don’t have my FI number yet and it seems silly to invest contrary to my beliefs about the current market conditions. I’m wondering if I should just take it all out.

It’s different for me now compared to 2008. In 2008 I had $18k invested, now I have a lot more at risk.

Anybody else feel this way?

The only think stopping me from completely selling is not having a plan for reinvestment that makes sense. Anyhow, thanks for listening.

Mods: if you think this should go into the jitters thread, merge away.
Consider gain and loss, but never be greedy and everything will be alright (fortune cookie)

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Pajamas
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Re: Impending market correction

Post by Pajamas » Tue Mar 20, 2018 8:12 pm

Didn't we just have a correction a couple of months ago, end of January going into February?

JoeRetire
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Re: Impending market correction

Post by JoeRetire » Tue Mar 20, 2018 8:15 pm

Jon H wrote:
Tue Mar 20, 2018 8:09 pm
Personally, I’m getting spooked and reallocated to age in bonds/FI/cash. From 55:45 to 45:55. I know this isn’t boglehead philosophy to rearrange according to emotion and “market timing” but I don’t have my FI number yet and it seems silly to invest contrary to my beliefs about the current market conditions. I’m wondering if I should just take it all out.
What did you do the last few market corrections?
Why would this one be different?

JoeRetire
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Re: Impending market correction

Post by JoeRetire » Tue Mar 20, 2018 8:16 pm

Pajamas wrote:
Tue Mar 20, 2018 8:12 pm
Didn't we just have a correction a couple of months ago, end of January going into February?
Yes we did.
Maybe the OP didn't even notice?

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cfs
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Re: Impending market correction

Post by cfs » Tue Mar 20, 2018 8:17 pm

Mister Jon H, you are a few weeks late to the party.

Please check the note from Mister Pajamas.

My signature applies, y gracias por leer ~cfs~
~ Member of the Active Retired Force since 2014 ~

Valdeselad
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Re: Impending market correction

Post by Valdeselad » Tue Mar 20, 2018 8:18 pm

Bonds are more expensive than stocks, so which correction are you referring to?

youngpleb
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Re: Impending market correction

Post by youngpleb » Tue Mar 20, 2018 8:36 pm

Sounds to me like your asset allocation (or rather, previous AA) wasn’t at what it actually should have been set at.
27. Always learning.

Jon H
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Re: Impending market correction

Post by Jon H » Tue Mar 20, 2018 8:37 pm

That “correction” was minor. Didn’t even get to 10%. I’m talking about a 30-50% correction.

Anyhow I’m reallocating because it’s a personal decision. Right?
Consider gain and loss, but never be greedy and everything will be alright (fortune cookie)

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Flymore
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Re: Impending market correction

Post by Flymore » Tue Mar 20, 2018 8:37 pm

Is the correction over or just getting started? :twisted:

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Pajamas
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Re: Impending market correction

Post by Pajamas » Tue Mar 20, 2018 8:44 pm

Jon H wrote:
Tue Mar 20, 2018 8:37 pm
That “correction” was minor. Didn’t even get to 10%.
Didn't it?

https://www.investopedia.com/terms/c/correction.asp
I’m talking about a 30-50% correction.
You mean a recession?
Anyhow I’m reallocating because it’s a personal decision. Right?
No, from what you have said, you're market timing. At least be honest with yourself.

magicrat
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Re: Impending market correction

Post by magicrat » Tue Mar 20, 2018 8:47 pm

It does not seem silly to invest contrary to your beliefs about current market conditions. I would say that is what many of us are doing quite often. Have you tracked you beliefs about market conditions over time and evaluated whether or not they're a reliable guide for investing decisions?

Jon H
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Re: Impending market correction

Post by Jon H » Tue Mar 20, 2018 8:49 pm

youngpleb wrote:
Tue Mar 20, 2018 8:36 pm
Sounds to me like your asset allocation (or rather, previous AA) wasn’t at what it actually should have been set at.
10 years ago I didn’t even know where the tunnel was.
It’s different when you have gone into the tunnel and can see the light at the end. You’ll see or not.

For me, a 30-50% drop now is reduced to about 1.3-2 years of retirement income (after reallocation). I still think that’s a lot to lose. Why work to re-earn that loss when a few clicks guarantees no loss?
Consider gain and loss, but never be greedy and everything will be alright (fortune cookie)

crit
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Re: Impending market correction

Post by crit » Tue Mar 20, 2018 8:50 pm

I fully agree that a downturn is overdue, and I think the downstream effects of these tariffs are going to do it.

However, I'm doing nothing different beyond ordinary rebalancing, which I do about monthly. For better or worse, I do not think I can beat the overall market, and that is why I'm invested in market index funds. It will go down. And up. And down again, and up again.

magicrat
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Re: Impending market correction

Post by magicrat » Tue Mar 20, 2018 8:53 pm

One other thought - your underlying belief is that stocks are overvalued. In a later post, you say that this might result in a 30-50% correction. If stocks are overvalued, that is one possible outcome. Other possible outcomes include 1) steady but low returns for a period of time until valuations come down, and 2) earnings increase faster than expected. These alternate, plausible outcomes would lead you to different actions if you chose to act on your beliefs.

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arcticpineapplecorp.
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Re: Impending market correction

Post by arcticpineapplecorp. » Tue Mar 20, 2018 8:54 pm

have you ever read the following repsonse by HomerJ:

viewtopic.php?f=10&t=229429&start=50#p3567987

I think it's worth reading. Especially this part:
by HomerJ » Wed Oct 11, 2017 12:22 am

Timing the market is hard. Here's an example. The Shiller PE10 ratio crossed 25 in 1996. The Shiller PE10 had never crossed 25 before that except in 1929.

A total signal to sell, right? The S&P 500 was in the low 600s in 1996. It more than doubled again to 1500 by 2000 before crashing back to the 800s. Anyone who got out in 1996 was never able to buy back in cheaper.

And today it's at 2550, more than 4x what it was in 1996. And that's just the price. You also got 2% dividends each year. $10,000 invested in 1996 is worth $64,000 today... 6.4x what you invested, or a 9.3% annualized return.

Buying in 1996, right when the PE10 ratio was the highest it had ever been since the Great Depression turned out to be great time to buy, not to sell.

Weird, right? Just set a conservative allocation (70/30 or 60/40 or 50/50 stocks/bonds), and stay the course. Slowly move more and more to bonds to protect your investments as you get closer to retirement.
Pretty good information, wouldn't you say?
"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

finite_difference
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Re: Impending market correction

Post by finite_difference » Tue Mar 20, 2018 8:56 pm

Changing from 55:45 to 45:55 or whatever is reasonable if you feel your capacity for risk is not what it was.

But taking it all out is foolish in my opinion. (I am assuming you are doing something like the 3-fund portfolio, so they are very diversified and low-cost.)

At most go 25:75 but I think age in bonds is perfectly reasonable if you are on track for your retirement goals (then you don’t need to take more risk than that.)

Personally I’m much more worried about the folks that are going for the extremes, that is a) are going 100% stocks because they think bonds are going to implode or b) going 100% bonds/cash because they think the opposite.

It’s seldom good to try to think you know too much. Just keep saving and investing and save your worrying for things other than the stock market :) You don’t get paid enough to worry about that!
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh

Bud
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Re: Impending market correction

Post by Bud » Tue Mar 20, 2018 8:59 pm

Corrections are a great opportunity to buy low...

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Pajamas
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Re: Impending market correction

Post by Pajamas » Tue Mar 20, 2018 9:01 pm

Here is a recent thread that discusses the same thing that you are worried about.

viewtopic.php?p=3833319

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aj76er
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Re: Impending market correction

Post by aj76er » Tue Mar 20, 2018 9:01 pm

If you hold international equities, then they are more reasonably valued. So look at the combined P/E of your stock portion (US + Intl). If international stocks do well, the US will be along for the ride, most likely.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

PhilosophyAndrew
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Re: Impending market correction

Post by PhilosophyAndrew » Tue Mar 20, 2018 9:06 pm

Jon H wrote:
Tue Mar 20, 2018 8:49 pm
For me, a 30-50% drop now is reduced to about 1.3-2 years of retirement income (after reallocation). I still think that’s a lot to lose. Why work to re-earn that loss when a few clicks guarantees no loss?
Perhaps so, but this market timing also guarantees that you will lose any equity gains that occur until you reverse your decision whenever your gut feeling changes. Avoiding emotional decisIons like this is Boglehead orthodoxy precisely because such decisions frequently lead to bad outcomes.

If the deeper issue is that your AA doesn’t allow you to sleep at night, that’s a different issue. Do you have a written IPS? If so, what does it say about revising your AA over time? A thoughtful decision to make a longer-term adjustment to your AA is much easier to justify than a fearful decision to attempt to time the market.

bberris
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Re: Impending market correction

Post by bberris » Tue Mar 20, 2018 9:14 pm

Don't market corrections loom rather than impend?

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oldcomputerguy
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Re: Impending market correction

Post by oldcomputerguy » Tue Mar 20, 2018 9:14 pm

I did in fact move some money from stocks to bonds some months back, because I had hit a rebalance band. Not since, though. Get back with me around July 1.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

Jon H
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Re: Impending market correction

Post by Jon H » Tue Mar 20, 2018 9:17 pm

Bud wrote:
Tue Mar 20, 2018 8:59 pm
Corrections are a great opportunity to buy low...
Exactly. But that’s considered market timing by some here if done in a calculated manner :beer
Consider gain and loss, but never be greedy and everything will be alright (fortune cookie)

WhyAmeriprise
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Re: Impending market correction

Post by WhyAmeriprise » Tue Mar 20, 2018 9:36 pm

Bud wrote:
Tue Mar 20, 2018 8:59 pm
Corrections are a great opportunity to buy low...
Corrections can also be a good opportunity to get rid of losers in the portfolio, even if not buying with new funds.

A Correction can also be used to take advantage of the justification to look at your portfolio. In my case, I had funds that were barely at their cost basis after ten years, as well as proprietary sub-accounts that my former FA had recommended and continued to defend, and he kept insisting that I shouldn't pay a surrender charge. The Correction makes you think about why you invested in the first place, or can be used to harvest tax losses to allow other beneficial activities.

My former FA didn't see the writing on the wall and held to his argument that I shouldn't pay surrender charges to get out of proprietary sub-accounts that he'd recommended. It stung a little to pay 1%, but as the market fell by more than 1%, it hurt less...

JBTX
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Re: Impending market correction

Post by JBTX » Tue Mar 20, 2018 9:36 pm

Jon H wrote:
Tue Mar 20, 2018 8:09 pm
It’s going to happen, nobody knows how soon or how big.

Not a recession question but a market correction one. I am not an economist, just another guy in the accumulation of wealth-building phase. Given the current valuations (CAPE higher than 1929 and 2008), and the other noise, I’m finding it hard to stay the course. The S&P 500 trend line is really out of whack. I interpolate (unscientific and nonmathematic holding of a ruler up to the trend line of the S&P500) the historical level to be at 1100 or 1200. It’s hard to believe that the these new businesses justify such high P:E ratio and for that matter the market as a whole.

Given the current valuations have you taken some profits and moved some into cash or fixed income? According to your IPS of course! Or are you letting it ride?

Personally, I’m getting spooked and reallocated to age in bonds/FI/cash. From 55:45 to 45:55. I know this isn’t boglehead philosophy to rearrange according to emotion and “market timing” but I don’t have my FI number yet and it seems silly to invest contrary to my beliefs about the current market conditions. I’m wondering if I should just take it all out.

It’s different for me now compared to 2008. In 2008 I had $18k invested, now I have a lot more at risk.

Anybody else feel this way?

The only think stopping me from completely selling is not having a plan for reinvestment that makes sense. Anyhow, thanks for listening.

Mods: if you think this should go into the jitters thread, merge away.
There are a lot of people here that have a lot more at risk, including quite a few in 7 figures. So have you saved enough to retire on at about a 2.0-2.5% withdrawal rate? If so, then great, sell all of your stocks if you want and put it all in cash, money markets etc for the rest of your life.

If you can't, then you have to figure out how you are going to get there. If market risk is too much for you to handle, then put it all in cash, and realize over the long term you will have to work more, and save more, and will have to spend less in retirement, because you chose to accept a lower rate of return because you were scared of the market going down 30-50% at any given time.

Just make sure you understand, if you choose not to be in the stock market, you are making the choice to not ever participate in the stock market again. If you think you can jump back in when (and if) it goes down, then I guarantee you'll be one of those who buys high and sells low. How many threads have you read in here over past year of remorseful investors who have sat out the last 5 years and NOW want to jump back in. This is your future.

So you choices are:

- Deal with your short term fears (which may or may not have merit, but they are short term)
- Get out of the stock market forever, work more, save more and spend less for the rest of your life.

As to CAPE and valuation issue - yes CAPE is high. Market could drop tomorrow. Who knows. But it is likely this is far more of a long term structural issue. CAPE valuation tend to be inversely correlated to interest rates. Having bonds yield 2.0% and have P/E's at 15.0 would not make any sense. So if interest rates are low for long periods, it stands to reason PE's would be higher than average

http://www.macrotrends.net/2016/10-year ... ield-chart

So the real question is do you think that this trend that has been going on for 30 years is going to suddenly reverse? I suspect not. But who knows. Good luck.

MJW
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Re: Impending market correction

Post by MJW » Tue Mar 20, 2018 9:36 pm

Market timing aside, if you are this concerned about your exposure it probably is a good idea to retreat to a less aggressive allocation. There is no reason why we should attempt to talk you out of it if your willingness to take risk is not as great as it was when you had a much smaller account balance. The question you should ask yourself is whether you will hold firm on a more conservative allocation in the event you begin to "feel better" about the market. Will you be okay watching a run-up of the market knowing you are missing out on some of those gains? Taking a seesaw approach is a good way to get screwed over the long run.

PhilosophyAndrew
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Re: Impending market correction

Post by PhilosophyAndrew » Tue Mar 20, 2018 9:37 pm

Jon H wrote:
Tue Mar 20, 2018 9:17 pm
Bud wrote:
Tue Mar 20, 2018 8:59 pm
Corrections are a great opportunity to buy low...
Exactly. But that’s considered market timing by some here if done in a calculated manner :beer
For those in the accumumation phase, corrections provide an opportunity to buy more shares than you normally would in your regular investment inflows, and you can enjoy the same benefit if you have a rebalancing policy and a correction makes your equities hit a lower rebalancing boundary. Taking advantage of this “DCA effect” as part of your regular investing routine is great.

What is of less obviously valuable is withholding assets from the investment markets with the aim to “cash in big” at the next correction — that tactic carries significant opportunity costs.

Taking the next step to full-on market timing can be a catastrophic mistake, as JBTX suggests.

PFInterest
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Re: Impending market correction

Post by PFInterest » Tue Mar 20, 2018 9:46 pm

Jon H wrote:
Tue Mar 20, 2018 8:09 pm
It’s going to happen, nobody knows how soon or how big.

Not a recession question but a market correction one. I am not an economist, just another guy in the accumulation of wealth-building phase. Given the current valuations (CAPE higher than 1929 and 2008), and the other noise, I’m finding it hard to stay the course. The S&P 500 trend line is really out of whack. I interpolate (unscientific and nonmathematic holding of a ruler up to the trend line of the S&P500) the historical level to be at 1100 or 1200. It’s hard to believe that the these new businesses justify such high P:E ratio and for that matter the market as a whole.

Given the current valuations have you taken some profits and moved some into cash or fixed income? According to your IPS of course! Or are you letting it ride?

Personally, I’m getting spooked and reallocated to age in bonds/FI/cash. From 55:45 to 45:55. I know this isn’t boglehead philosophy to rearrange according to emotion and “market timing” but I don’t have my FI number yet and it seems silly to invest contrary to my beliefs about the current market conditions. I’m wondering if I should just take it all out.

It’s different for me now compared to 2008. In 2008 I had $18k invested, now I have a lot more at risk.

Anybody else feel this way?

The only think stopping me from completely selling is not having a plan for reinvestment that makes sense. Anyhow, thanks for listening.

Mods: if you think this should go into the jitters thread, merge away.
Nope, I have a plan.

asif408
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Re: Impending market correction

Post by asif408 » Tue Mar 20, 2018 9:50 pm

Developed ex-US markets had a 25% correction from mid-2011 to late 2013 and another 25% correction from mid-2014 to early 2016. Emerging markets (EM) had an almost 44% five year bear market from May 2011 to January 2016. So plenty of markets out there are only starting year 3 of a bull market. Why not put some money in those markets that have had more recent significant corrections?

Look at the developed ex-US and EM vs the US over the last 10 years: http://quotes.morningstar.com/chart/etf ... 2%3A955%7D

An essentially 0% return outside the US, while those invested in the US doubled their money. In fact, you could say most of the markets outside of the US are still in a 10 year bear market that started in late 2007/early 2008.

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