Is it different this time?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Hiredgun
Posts: 166
Joined: Thu Sep 27, 2007 2:56 pm

Is it different this time?

Post by Hiredgun »

I'm just looking for OPINIONS from the people on this board. I'm 40, so I've been through several "crashes", 1987 and the Tech Meltdown come to mind. But this time, it really seems much more cataclysmic. The scope of this meltdown touches the entire economy.

After alot of reading (including the Boglehead guide) and help from several posters on this board, I put together an allocation of stocks (Total Market, Int'l, Small cap, REIT) and bonds that was fairly conservative.

I've got at least 10 years until I retire (but would like to retire around then). I've been putting a significant amount into the market every month (in the low 10,000s) and it just keeps disappearing.

Now, for the first time, I have had difficulty pulling the trigger (sticking to plan and investing right at the beginning of the month). I watched the market implode this week, and I'm having a hard time making my usual investment (split in portions among the stock and bond mutual funds).

I know that there are no guarantees. But I'd like a pep talk I guess. My head is telling me to stick to plan and keep pulling the trigger. My heart (fear) is another thing. I'm worried this may be another Japan, where 10 years from now things won't have recovered.

Any thoughts, advice or otherwise is appreciated.
Eureka
Posts: 1123
Joined: Thu Apr 05, 2007 10:24 pm
Location: Illinois

Post by Eureka »

No financial crisis is the same as the last financial crisis. I'm 55, and the only time I can recall the country being as pessimistic about its future is the late 1970s. The problems then were different: a post-Vietnam and Watergate hangover and an "outsider" president who could not work effectively with Congress.

The United States is nothing like Japan. We may have severe problems, but they are unique to us.

Be thankful you still have a paycheck and didn't just retire, as I did. Depending on how you view your job security, you might sleep better if you had a huge emergency fund -- maybe even two years' worth -- in safe, liquid assets. If you need to curtail long-term investing temporarily to accumulate that reserve, why not?

That said, my brain and gut tell me that the country will pull out of this and emerge stronger than ever. Because that's what we do. It may take a few years. But I don't believe the doomsayers who are stocking up on gold bars and ammunition are finally going to be right.

Oh, I should mention that I've been a pessimist all my life.
Valuethinker
Posts: 41446
Joined: Fri May 11, 2007 11:07 am

Post by Valuethinker »

Eureka wrote:
That said, my brain and gut tell me that the country will pull out of this and emerge stronger than ever. Because that's what we do. It may take a few years. But I don't believe the doomsayers who are stocking up on gold bars and ammunition are finally going to be right.

Oh, I should mention that I've been a pessimist all my life.
I think we can safely say in most respects things were far worse in the early-mid 70s (Watergate, Vietnam etc.) and again in the second oil crisis 1979 and the subsequent brutal recession of 1980-81.

However what is happening on financial markets is unprecedented since the 1930s. The collapse of 'money markets' and a string of bank failures in Europe (remember the 1931 failure of CreditAnstalt in Austria was part of what led Roosevelt to close the US banks). Unhelpfully, the US is also in the midst of a change of political regime, inducing paralysis in Washington.

Media concentrate on the stock market (because it's easy to understand) but that is really just a barometer. Companies get relatively little money in any given period from the issuance of new shares.

By contrast money markets are the plumbing of modern commerce. The Commercial Paper market (which finances the day to day business of America's companies) is a c. $1.6 trillion market.

And that market is freezing. Is near frozen. Since Lehman went bust, with $600bn or so of debts, financial institutions are afraid to lend to other financial institutions, and so banks lack the cash to lend to their corporate customers.

I would say overall then that (so far) things are much better than they were in the 1970s for the US and for the world, BUT the money market collapse has the potential to make things much much worse.

What, then, to do? See my '80 years...' post.

Expanding on that:

- increase emergency cash from 3-6 months to 12 months of living expenses (assuming you don't have other sources of reliable income like pensions or social security, or you do not have a US Federal government job)

- hold that cash in a variety of 'pots' which are either FDIC insured or backed by very safe instruments like TBills etc. Consider also iBonds. Don't bet on a financial institution being there tomorrow just because it was there yesterday

The problem more generally is not to make huge decisions or variations from asset allocation, unless the risk level is just way too high in the portfolio.

On asset allocation I think 'tweaking' is appropriate and in particular I still think High Yield bond funds could do spectacularly badly as the recession bites (although i accept the argument that now is the time to buy when those fears are peaking). In general, risky fixed income assets aren't a great idea: Total Bond Market funds or (to some extent) Investment Grade bond funds are about as far as I am prepared to go.

TIPS (long maturity) are now at attractive real interest rates c. 2.4-2.5%.

On equities, pessimism is high, and experience shows that it will turn, and equities will shoot up. When that comes, or from what level, I do not know, but it will happen.

As to the US economy generally. Yes, it will recover. It is very unlikely to be as bad as Japan. But there is real pain yet to take.
Valuethinker
Posts: 41446
Joined: Fri May 11, 2007 11:07 am

Re: Is it different this time?

Post by Valuethinker »

Hiredgun wrote:I'm just looking for OPINIONS from the people on this board. I'm 40, so I've been through several "crashes", 1987 and the Tech Meltdown come to mind. But this time, it really seems much more cataclysmic. The scope of this meltdown touches the entire economy.

After alot of reading (including the Boglehead guide) and help from several posters on this board, I put together an allocation of stocks (Total Market, Int'l, Small cap, REIT) and bonds that was fairly conservative.

I've got at least 10 years until I retire (but would like to retire around then). I've been putting a significant amount into the market every month (in the low 10,000s) and it just keeps disappearing.

Now, for the first time, I have had difficulty pulling the trigger (sticking to plan and investing right at the beginning of the month). I watched the market implode this week, and I'm having a hard time making my usual investment (split in portions among the stock and bond mutual funds).

I know that there are no guarantees. But I'd like a pep talk I guess. My head is telling me to stick to plan and keep pulling the trigger. My heart (fear) is another thing. I'm worried this may be another Japan, where 10 years from now things won't have recovered.

Any thoughts, advice or otherwise is appreciated.
It is different, but that's not a huge case to change your asset allocation massively.

The best thing one can do is anticipate a recession that now seems inevitable: hold more emergency cash (say 12 months rather than 6) and hold it in a variety of 'pots' which are FDIC insured or backed by safe assets (iBonds, T Bills etc.).

This period has underlined the sage advice that you should hold low risk or risk free fixed income investments, and take your risk in the equity portfolio (where your upside is also unlimited).

On the rest of your plan, it is almost certain that at some point equity markets will rebound. Cutting and running now could cost you a lot of money.
User avatar
LH
Posts: 5490
Joined: Wed Mar 14, 2007 2:54 am

Re: Is it different this time?

Post by LH »

Hello,

To me this deal is quite simple. My horizon is 20 years roughly.

Take VGK, european stock market. I just bought some at 51 dollars, in this time of great stress and such. Stupid? Its down I think 25 percent or something, and it FEELS like it will go lower. I think the lady who took my order kinda thought I was crazy, she even commented that it was down a dollar that day, I said "good" and put in the order.

Now, take VGK again, when I bought it at 70 and 68, when it FELT ok to buy it. When I made that order, its like whatever.

OK now, when I made that move to buy it at 70, it felt fine, was more expensive, now buying the same thing, at 51 its a bad thing? I mean, I bought something at 70 thats now 51, what exactly did that FEELING that it was fine to buy then get me.... Nothing. The same thing that some FEEL bad about buying now get them, nothing.

The feeling does not mean anything man.

The herd of humans, is gonna consider buying now scary, and heck, maybe even stupid. what are you thinking! Buying the entire eurpean(large cap I think but whatever) stock market now!!!!! Its gonna drop, your buying it at 51!!! Wherease before, when it was expensive relative to now, and at 70 dollars, ah, it was ok????? People felt things were gonna be ok going forward, they were wrong I guess really since now its down. But now things are cheap, its bad to buy, cause they think it will continue to go down?

I mean, think about it, its nonsensical. My future predictive ability when I bought at 70, is no better now than my futures predictive ability now buying at 51.

Now, in 20 years time, when I look back, whats gonna be better, when I bought at 51 or when I bought at 70? Regardless of the price then, be it 10 or 10000 its gonna be better at 51.

Now, if you can time the market sure. Time the market. Goto all cash or something. But all evidence says you cannot. You will likely fail if you try. Simple conclusion, if you follow the boglehead reasoning, evidence, and literature at all:

YOU CANNOT TIME and this time is no different. No matter how you bad you feel, its not different. Everyone feels bad. The bad feeling is priced into the market.

If you accept you cannot time, what are you going to do, stay the course is the only path to market return.

There is no guarentee what that return may be, we may hit a depression, and the market will tank for 30 years, and never effectively recover in our investing lifetimes.

This has always been true. It was true 1 year ago, it was true 5 years ago. We might not have truly FELT like it was true, but is was true.

Now, maybe you did not appreciate risk. Maybe before, when things were going relatively fine, you never felt like this could happen.

So maybe you overestimated your ability/need to take risk?????

Thats possible. If you seriously screwed up your risk ability/need and made a too risky allocation, then maybe you should change your allocation, and goto bonds, or cash or something. I dunno. But if you did the job right before, and understood the risk part, understood your need and desire, then you should stay the course.

At its heart, this whole ability/need to take risk is pure behavoiral stuff as far as I can appreciate. The key is to try and divorce yourself from the usually good current market condition, and to try and imagine what you would want to have in the bad times allocation wise. Ie, humans should likely not have 100 percent stocks. They should take what the feel is thier risk tolerance when things are good, and knock it down a couple notches.

The key is now kinda reversed, what kinda allocation would you want to have when the market is "good" again? The two desires should be equalized, to arrive at a single allocation you are happy with under any condition, knowing that the market can dang well do anything. This is what you should have already done.

You cannot time. Timing=failure.


Buy stocks low, sell high.

Now is the time, we buy the stocks low, with the hope, 10 or 20 years from now, of selling them high. Human nature is geared against buying low, it is scary, and does not feel good. But right now, in all those models you looked at/read about, with boglehead type investing that ended up paying out, and beating other returns, RIGHT NOW, this is where a good portion of those returns are made, in the bad times, where you can buy low........

If you skip the bad times....... Well, you are missing all the good buying opportunities if the market performs as expected. It may not. Thats the risk we take investing in the market. Its real, but usually completely discounted.

Sorry for being verbose. I dunno, I just think it likely, when I look back 20 years from now, that 51 buy is gonna make more so much more percentagewise than the buying at 70 did. I will wish I had bought more then, and not paid put some toward paying off the house.

right now, is the point of being a boglehead. We may lose. But the evidence points to us coming out ahead. I do not know any other rational approach I can take but to stay the course.

This is expected. Really, the great depression was only 75 years ago, maybe its time for another one? Possible. But I cannot predict it. There is nothing rational I can do in response to the possibility that it may occur, even now, reading the wall street journal, in between editing this post:

"If you were among the courageous few who bought and held stocks during and after the depression, you earned spectacular returns" (summon your courage and buy stocks, money and investing, oct4-5,2008)

stay the course : )
Last edited by LH on Sat Oct 04, 2008 6:45 am, edited 2 times in total.
YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Is it different this time?

Post by YDNAL »

on 2/24 Hiredgun wrote:I am in the 35% tax bracket.
My portfolio breakdown (the goal I'm working toward) is:

40% Total Market Index (FSTVX)
20% Large Cap Value (VIVAX)
20% International Large (FSIIX)
10% Emerging Markets (VEIEX)
10% Small Cap Value (VISVX)
on 2/24 Hiredgun wrote:Thanks for the Link Laura, Here's the info I should have included:

Emergency Fund - 6 Mos worth
Debt - Home Mortgage$115,000
Tax Filing Status and Rate: Joint, Married 35%
Age: 40
Desired Allocation: 100% Stock Mutual Funds (for now)
Int'l Stocks: 30%
My desired allocation for all funds is listed in my 1st post.
Current Portfolio: High six figures
Taxable: Approx 600K in taxable accounts
Non-Taxable: Approx 300K in Rollover IRAs and 401Ks
All Funds in Taxable/Non-Taxable are the funds mentioned in my first post.
Hiredgun,

LH had a little too much coffee this early in the morning, but he is right talking about psychological traps. :lol:

Back in Feb/Mar we took on a huge house remodeling job and I was pretty absent from the forum. I posted your previous information since I'm not familiar with your particulars and wanted a refresher course.

This time may/may not be different, but YOU must be prepared to take market volatility and risk based on your willingness, ability and need to take risks. At 40yo, and having gone through an extended bull market, I can see where you wanted 100% Equities - with pretty heavy overweights. Regretably, markets change and economic environments change and you are now caught-up in the uncertainty mode.

This is the right time to accumulate for the next 20+ years into your sixties. That said, you need to reach that comfort level that doesn't freak you out when the S&P 500 drops from around 1,400 (Feb) to 1,100 (today). You can actually get to that comfort level by adjusting your target AA to be more conservative and to help you sleep at night. IF you decide to do so, then increase your Bond exposure - make sure Bonds are in the portfolio to mitigate Equity risk and NOT to chase yields.
Hiredgun wrote:I know that there are no guarantees. But I'd like a pep talk I guess.
Not much of a pep talk, I presume, but a call to more closely evaluate your risk tolerance.

Regards,
Landy
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
User avatar
LH
Posts: 5490
Joined: Wed Mar 14, 2007 2:54 am

Post by LH »

I would add, if you do increase your Bond exposure now, only do it by deciding you will not decrease it again when stocks go back up.

Make that a rock solid commitment.

If you have screwed up your risk assessment, fine. Correct it now. But I am extremely wary of "corrections" that lie in tune with human nature. Bad times, ah I will correct myself and buy bonds! Good times, ah I can afford to be risky, more stocks! Buy high, sell low.

That way lies failure.

My rule would be if you increase your bond allocation now, you can never go back (barring winning the lottery or something). This is the basis of proper asset allocation in terms of need/ability to take risk, it is market independant.
Topic Author
Hiredgun
Posts: 166
Joined: Thu Sep 27, 2007 2:56 pm

Post by Hiredgun »

Thanks alot for the comments so far. I appreciate their supportive and practical nature.

The portfolio breakdown someone posted for me is not completely accurate. With recommendations from this board I tweaked it to:

10% REIT
10% Total Bond
80% Stocks (60% Total Market Index, 10% Small Cap Value and 30% Vanguard Total World Ex US)

After reading the comments above, I may hold 1/2 of this months contributions to up my cash position a bit. But I will continue with my plan otherwise.

I just needed a reminder (pep talk) about the principles. It is hard to judge exactly how bad it feels when there is "blood in the streets". It's just very difficult to not let the heart rule the head when $$$ FEELS like it is disappearing.

But your posts (the verbose one especially), help alot. Thanks guys and gals,

Hiredgun
muddlehead
Posts: 276
Joined: Mon Sep 22, 2008 2:03 pm

crossing my fingers

Post by muddlehead »

and hoping worst case scenario approx 20 yr bear mkt began mar '99 which, of course, means we are half way through.
bookshot
Posts: 392
Joined: Mon Sep 01, 2008 9:25 pm

Post by bookshot »

Again: Except for the superrich, I believe anyone aged 40 with 100% in equities is taking too much risk, period, end of story.
Topic Author
Hiredgun
Posts: 166
Joined: Thu Sep 27, 2007 2:56 pm

Post by Hiredgun »

I'm not 100% in equities.

10% is in REIT and 10% in Total Bond Fund (all in tax sheltered part of my portfolio).

My plan is to add approx 5% in bonds per year until I'm 50, eventually ending up with a 50% Bond and 50% Stock Portolio (hopefully around the 5 Million range if the market cooperates. I'd hope to live off the bond income and not touch the stocks except in case of emergency).

Right now I'm sticking to plan. Worst case scenario, I may up the bond portion an extra 5% (for a total of 10%) in 2009. However, I'm out of room in my 401K for sheltering.

Can anyone recommend a good Vanguard Muni Bond Fund? I'm in AZ, so I'd still pay state taxes BUT the Vanguard expenses are so cheap that I believe Vanguard would be a better deal than Fidelity's AZ Muni Bond Fund. Thanks in advance,
booch221
Posts: 210
Joined: Sun Sep 14, 2008 11:56 am
Contact:

Post by booch221 »

Interestingly, the Vanguard Asset Allocation Fund in 100% invested in stocks now:

Investment strategy

The fund allocates its assets among common stocks, bonds, and money market instruments in proportions consistent with the advisor’s evaluation of their expected returns and risks. These proportions are changed from time to time as return expectations shift. The fund may invest up to 100% of its assets in any one of the three asset classes.
https://personal.vanguard.com/us/funds

Gordon
Posts: 331
Joined: Tue Feb 20, 2007 4:56 pm
Location: Lake Havasu City, Arizona

Indexer Strategy

Post by Gordon »

We rebalance our portfolios-buy stocks regularily know the market is going up two thirds of the time and insist on low costs.

The more experienced of us do not keep tinkering with our portfolios , but sray the cource through thick and thin.

Stocks are on sale right now. For how long no body knows. Is this the bottom-possibly but no one knows.
newport1
Posts: 281
Joined: Fri Jun 27, 2008 9:37 am

Post by newport1 »

booch221 wrote:Interestingly, the Vanguard Asset Allocation Fund in 100% invested in stocks now:

Investment strategy

The fund allocates its assets among common stocks, bonds, and money market instruments in proportions consistent with the advisor’s evaluation of their expected returns and risks. These proportions are changed from time to time as return expectations shift. The fund may invest up to 100% of its assets in any one of the three asset classes.
https://personal.vanguard.com/us/funds

That is interesting. Does anyone know what the historical averages have been? The YTD performance is about the same as the S&P500 so the fund has probably been all equities for the entirety of 2008.
Roy
Posts: 970
Joined: Wed Sep 10, 2008 9:34 am

Re: Is it different this time?

Post by Roy »

Any thoughts, advice or otherwise is appreciated.[/quote]


Yes, I think it is different this time. Apparently, it's somewhat different every time (just look at the prior bears and comapare). What is not different is the understandable fear each provides.

But if investing veterans, like Taylor and Larry, have shown anything, it is that our response to this fear determines much of what happens to our portfolios.

For me, I decide to stay invested in the market--assuming a proper risk profile--or get out for good. My understanding of the research strongly suggests there is no third choice.


Roy
AlwaysaQ
Posts: 600
Joined: Fri Apr 13, 2007 7:37 am

Post by AlwaysaQ »

If you can put over 100k in the market each year I doubt you will be reduced to eating squirrels and dandelions.
User avatar
Judsen
Posts: 863
Joined: Sat Feb 24, 2007 8:29 am
Location: Birmingham, Al.

Post by Judsen »

Is it different this time?
It is a matter of degree. Some guy with a name like Kondratif developed a cyclical chart that shows an assortment of effects of changes.
The trouble is we can never tell except in hindsight where we think we are or were.
So, yes. If it is always "different" then now it is unusually different but the same old math and principles still apply.
It's sort of like the difference in running up a mountain VS running down a mountain. Momentum can be crucial.
Jud
snowman9000
Posts: 1003
Joined: Tue Feb 26, 2008 10:16 am

Re: crossing my fingers

Post by snowman9000 »

muddlehead wrote:and hoping worst case scenario approx 20 yr bear mkt began mar '99 which, of course, means we are half way through.
That is not the worst case scenario. It's just the worst that you are letting yourself believe possible, I'm guessing. Or the worst you are aware of in the US for a certain period looking backwards. Etc.

If you want some worse scenarios, look beyond the US and beyond the past few decades. Weimar Germany. Argentina. Etc. etc. We can never say it won't happen here. Look at what is currently happening. It has never happened before.
CoderDude
Posts: 178
Joined: Mon Aug 04, 2008 8:19 pm

Post by CoderDude »

DFA has an interesting video titled (appropriately) "Is It Different This Time?":

http://www.dfaus.com/library/videos/different/

It compares the current bear market to previous bear markets, in terms of both price changes as well as the media and public opinion.
Post Reply