Strategy for a prolonged bear market

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keepingitsimple
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Strategy for a prolonged bear market

Post by keepingitsimple » Sun Jun 10, 2018 11:19 pm

In the event of a prolonged bear market (define the timeframe as you will), does your Investment Policy Statement (IPS) contain a strategy beyond "stay the course" and "rebalance by directing funds to the decreased asset"? I'm just curious if other Bogleheads have adopted lesser discussed strategies. To be clear, I'm not questioning the above two strategies. Rather, I'm simply enquiring so as to learn more. Thanks to all in advance.

Jags4186
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Re: Strategy for a prolonged bear market

Post by Jags4186 » Sun Jun 10, 2018 11:35 pm

Interesting question since we really don’t have prolonged bear markets. Since World War 2 there have only been two calendar year periods where the stock market has returned negative returns In consecutive years 1973-1974 and 2000-2002. 2008 is merely a blip in 15 years of positive returns.

tibbitts
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Re: Strategy for a prolonged bear market

Post by tibbitts » Sun Jun 10, 2018 11:38 pm

Jags4186 wrote:
Sun Jun 10, 2018 11:35 pm
Interesting question since we really don’t have prolonged bear markets. Since World War 2 there have only been two calendar year periods where the stock market has returned negative returns In consecutive years 1973-1974 and 2000-2002. 2008 is merely a blip in 15 years of positive returns.
Well, only a blip in retrospect. At the time it seemed like the end of the world and the forum was filled with discussions of Plan B. I think Plan B is what the OP is referring to. It's not about the length of a recession, it's about the depth. At some point most people have a plan to bail out even if they won't admit it here.

keepingitsimple
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Re: Strategy for a prolonged bear market

Post by keepingitsimple » Sun Jun 10, 2018 11:54 pm

tibbitts wrote:
Sun Jun 10, 2018 11:38 pm
Jags4186 wrote:
Sun Jun 10, 2018 11:35 pm
Interesting question since we really don’t have prolonged bear markets. Since World War 2 there have only been two calendar year periods where the stock market has returned negative returns In consecutive years 1973-1974 and 2000-2002. 2008 is merely a blip in 15 years of positive returns.
Well, only a blip in retrospect. At the time it seemed like the end of the world and the forum was filled with discussions of Plan B. I think Plan B is what the OP is referring to. It's not about the length of a recession, it's about the depth. At some point most people have a plan to bail out even if they won't admit it here.
Indeed, it is Plan B to which I am referring or perhaps additional steps in one's Plan A that are discussed less often.

rgs92
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Re: Strategy for a prolonged bear market

Post by rgs92 » Sun Jun 10, 2018 11:55 pm

I don't see any strategy beyond hang on and hope and have faith the sun will rise again.

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Re: Strategy for a prolonged bear market

Post by jebmke » Sun Jun 10, 2018 11:55 pm

tibbitts wrote:
Sun Jun 10, 2018 11:38 pm
It's not about the length of a recession, it's about the depth.
My recollection of 2000-2002 is one of a longer psychological grind than '08-09. The latter was fairly quick and a steep recovery of the equity market after March, 2009. The real scary part in '08-09 was in the fall of '08 when the debt markets nearly seized up. Once we got through that I wasn't too worried, even though equity markets continued to plunge. Note: I'm talking markets, not economy. I retired in December of 2007 so the actual economy wasn't an impact on me personally.
When you discover that you are riding a dead horse, the best strategy is to dismount.

SimplicityNow
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Re: Strategy for a prolonged bear market

Post by SimplicityNow » Mon Jun 11, 2018 12:05 am

I don't think it is a plan to bail, at least not a plan that is strategized in advance.

More of, "I can't take any more of this" and I would think that is based on panic and fear rather than something based on a need for cash to meet expenses.

That said, never underestimate panic and fear.

There is nothing in my IPS that resembles a Plan B.

My rebalancing schema calls for rebalancing plus or minus a certain percentage and only once a year. So I would hope that would win out over any desire to so something different. We never know though until it happens.

I am reminded of Sheepdog's thread during that time. One never knows what one will do in a situation until they are in that situation.

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Re: Strategy for a prolonged bear market

Post by tibbitts » Mon Jun 11, 2018 12:33 am

SimplicityNow wrote:
Mon Jun 11, 2018 12:05 am
I don't think it is a plan to bail, at least not a plan that is strategized in advance.

More of, "I can't take any more of this" and I would think that is based on panic and fear rather than something based on a need for cash to meet expenses.

That said, never underestimate panic and fear.

There is nothing in my IPS that resembles a Plan B.

My rebalancing schema calls for rebalancing plus or minus a certain percentage and only once a year. So I would hope that would win out over any desire to so something different. We never know though until it happens.

I am reminded of Sheepdog's thread during that time. One never knows what one will do in a situation until they are in that situation.
Let's say you want to retire with 50k annual income from investments based on your SWR and have built your portfolio to fund that under normal circumstances, say a 3% SWR. But you know your SWR is based on historical returns and isn't guaranteed. You feel you NEED $20k in expenses. So you watch the markets and when things go south you hit a point where something safe - TIPS, and inflation-adjusted annuity, etc - bought with your remaining portfolio value will generate only exactly $20k. That's your plan B trigger point - you move to 100% safe investments and you're done.

Maybe Bernstein and others would have you already having funded that $20k with an annuity or other safe investment before you even had any money at risk in the markets, but I don't think a lot of Bogleheads take that approach. So you're stuck with Plan B.

It's not about cash expenses, it's about what your remaining investments can generate going forward.

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Re: Strategy for a prolonged bear market

Post by flyingaway » Mon Jun 11, 2018 12:42 am

Plan B is to keep working.

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Re: Strategy for a prolonged bear market

Post by oldcomputerguy » Mon Jun 11, 2018 6:15 am

I'm retired, DW is still working for about another 1-1/2 years. My "plan B" is covered by my "Plan A": have enough in bonds to cover 2-3 years worth of non-SS/pension-covered expenses, and if necessary, tighten our belts.
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.

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Re: Strategy for a prolonged bear market

Post by TSWNY » Mon Jun 11, 2018 6:32 am

I think my Plan B is to not really try and pay attention. DW and I both have good paying recession proof jobs with pensions. We max out all our retirement options and have been doing so for a couple of years now, so I think we have saved enough now combined with 15-20 years before retirement to ride out any kind of serious bear market.

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Re: Strategy for a prolonged bear market

Post by Call_Me_Op » Mon Jun 11, 2018 6:43 am

keepingitsimple wrote:
Sun Jun 10, 2018 11:19 pm
In the event of a prolonged bear market (define the timeframe as you will), does your Investment Policy Statement (IPS) contain a strategy beyond "stay the course" and "rebalance by directing funds to the decreased asset"? I'm just curious if other Bogleheads have adopted lesser discussed strategies. To be clear, I'm not questioning the above two strategies. Rather, I'm simply enquiring so as to learn more. Thanks to all in advance.
No. You cannot predict what the stock market will do in advance. Therefore, I do not adjust my strategy based upon what I think will happen.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Strategy for a prolonged bear market

Post by AlohaJoe » Mon Jun 11, 2018 7:51 am

Trend following/momentum is the only strategy that seems to have much real world support for it working. It has downsides of its own, though, and I'm not convinced enough to try it myself.

For instance, right now two popular trend following signals say to sell off any Emerging Markets you have. (It is good when two signals give the same answer.) However, right now one signal says to keep global REITs and another says to sell them off. So what you do? :D Plus, most of my assets are held in taxable accounts...

I think that a lot of people also stop rebalancing during a prolonged bear market. I'm not sure if their IPS says that but the reality is that rebalancing is easier on the way up than on the way down, when it can feel like you are throwing good money after bad.

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Svensk Anga
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Re: Strategy for a prolonged bear market

Post by Svensk Anga » Mon Jun 11, 2018 7:57 am

My IPS does mention a plan B. It would include tapping a home equity conversion mortgage, which we would otherwise not need. I suppose I might start SS earlier than planned also, especially for my wife's benefit. (She has the lower PIA.).

The above is unlikely because we have set up a TIPS ladder to get us to age 70. Once both SS benefits are flowing and assuming no reduction, we will have all basics plus some discretionary spending covered. This is a very comforting situation. It might give me the confidence to spend more on Roth conversion taxes while equities are discounted. We are currently planning on converting to the top of the 22% bracket, but could go into the 24 if equities get cheap. We would be in the 25% bracket later if current tax rates sunset as scheduled.

Those still working should shovel new funds into equities. They might also consider Roth conversions to the top of their current bracket. The conversion taxes will be a bargain should stocks eventually rebound.

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Re: Strategy for a prolonged bear market

Post by tibbitts » Mon Jun 11, 2018 7:58 am

flyingaway wrote:
Mon Jun 11, 2018 12:42 am
Plan B is to keep working.
When you'd need plan B would be most likely in retirement or near it, when you either lose your job or can't get one due to a poor economy.

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Re: Strategy for a prolonged bear market

Post by KlangFool » Mon Jun 11, 2018 8:02 am

OP,

There are 2 substantial different scenarios.

A) A bear market without unemployment

This is a good thing. You buy stock on sale.

B) A bear market with unemployment

i) I am prepared for a period of 5 years. After that, it is time to retire overseas.

ii) My AA is 61/39 with 1 year of the emergency fund not counted in my portfolio.

iii) 40% of my portfolio is in the Wellington Fund( 65/35). It will auto rebalance. This is to protect me from freezing and not rebalancing.

I actually run through the scenario and plan out the steps that I need to do to handle my cash flow. The answer is nothing for the first 2 years. And, I had a dress rehearsal since I was unemployed for more than 1 year a few years ago.

C) My prediction is that we are heading towards a recession and bear market between now and end of 2019. This prediction is as bad as anyone else. I know nothing.

If you fail to plan, you are planning to fail.
-Benjamin Franklin

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Re: Strategy for a prolonged bear market

Post by staythecourse » Mon Jun 11, 2018 8:08 am

Yes. Mine is keep working. I work for myself so can't say don't get fired, but if I worked for someone else it would be have a job or source of income that doesn't matter what the economy is doing.

Who cares about bear markets. What folks should care about is not getting laid off when the economy tanks which happens during prolonged bear markets.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: Strategy for a prolonged bear market

Post by livesoft » Mon Jun 11, 2018 8:21 am

I guess our Plan B is to stop spending money. We can live much more incredibly cheaply than we already do. Cut out the charitable donations, we don't have a mortgage, the kids are now out of college, stop paying for vacations. Our biggest expenses would be health care and property taxes. We could probably live on less than $20,000 a year if we included those.
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Re: Strategy for a prolonged bear market

Post by nisiprius » Mon Jun 11, 2018 8:24 am

Jags4186 wrote:
Sun Jun 10, 2018 11:35 pm
Interesting question since we really don’t have prolonged bear markets. Since World War 2 there have only been two calendar year periods where the stock market has returned negative returns In consecutive years 1973-1974 and 2000-2002. 2008 is merely a blip in 15 years of positive returns.
I don't agree with the statement that "we really don't have prolonged bear markets." Obviously, of course, it depends on your definition of "bear market" and by defining them suitably you can make them go away.

Nevertheless, according to table 13-4, p. 172 of the 2015 Ibbotson SBBI Classic Yearbook (i.e. this is a tabulation from a standard reference work, not an article written to prove a point), the largest decline in U.S. stock market history was:

Peak, Aug. 1929; Trough, May 1932; Decline, 79.00%; Recovery, Nov. 1936 (i.e. over seven years)

However, the fifth largest decline, 49.93%--comparable to 2008-2009--was:

Peak, Feb. 1937; Trough, 1938; Decline, 43.39%; Recovery, Feb. 1945 (i.e. eight years).

Notice that the 1929 decline ended Nov. 1936, but the 1937 decline began in Feb. 1937. There was only three months' respite. 1936 was one of the best years in stock market history, and because the peak was just slightly higher than 1929 it is accurate enough to call these two separate bear markets of 7 and 8 years, respectively. However, a very small difference would have resulted in its being tabulated as a single 15-year secular bear market, and in most respects the effects would have been about the same. Only good market timing would have resulted in being able to exploit the brief gap between the two bear markets.

In any case, you either had something like a 15-year bear market, or two 7-year markets back to back.
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Re: Strategy for a prolonged bear market

Post by Sandtrap » Mon Jun 11, 2018 8:47 am

Liability Matching Portfolio able to withstand most any market fluctuation no matter how deep or how long.
Built in Exit strategy.
j

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Re: Strategy for a prolonged bear market

Post by JW-Retired » Mon Jun 11, 2018 9:21 am

AlohaJoe wrote:
Mon Jun 11, 2018 7:51 am
I think that a lot of people also stop rebalancing during a prolonged bear market. I'm not sure if their IPS says that but the reality is that rebalancing is easier on the way up than on the way down, when it can feel like you are throwing good money after bad.
We have no plan B. Our plan A (that we have followed since 2000) says don't sell bonds to rebalance in any bear market. We only rebalance on the way up and not before we exceed our 60/40 target AA.

It's been very calming to implement and our results were good.
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Re: Strategy for a prolonged bear market

Post by jebmke » Mon Jun 11, 2018 9:42 am

I am actually going the other way - for a reason. My pension started this year so we are past the initial "no-income" 10-year window. Our tax losses have also been used up. So, from here on, I will only re-balance on the downside and I'll let the portfolio run on the upside to avoid taxes. We are just a tad below 45/55 now so there is room to run without creating huge risks.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: Strategy for a prolonged bear market

Post by Dandy » Mon Jun 11, 2018 10:02 am

Here are two "strategies" I've used:

In 2008-9 I stopped pouring more money into equities after my nest egg reduction reached a certain threshold. I waited until the market recovered to that threshold or a bit more before continuing to buy equities. Note - I was just retired in April of 2008 - not the best time to retire.

In retirement I roughly use Dr. Bernstein's approach of having X years worth of draw down in "safe" products. For me X is to age 90. When I take my draw down I take it from a mix of equities and fixed income including the "safe" assets. If we enter a bear market I will take all or most of my draw down from my "safe" assets. I will buy equities up to a point and then again stop buying them until there is some equity recovery.

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Re: Strategy for a prolonged bear market

Post by BeBH65 » Mon Jun 11, 2018 10:28 am

keepingitsimple wrote:
Sun Jun 10, 2018 11:19 pm
In the event of a prolonged bear market (define the timeframe as you will), does your Investment Policy Statement (IPS) contain a strategy beyond "stay the course" and "rebalance by directing funds to the decreased asset"? I'm just curious if other Bogleheads have adopted lesser discussed strategies. To be clear, I'm not questioning the above two strategies. Rather, I'm simply enquiring so as to learn more. Thanks to all in advance.
Not directly. When developping my strategy i took into account that a bear market will happen.

My IPS tells me to reconfirm my need, willingness and ability to take risk every year, and to change my AA if needed.
In the event this would change I oblige myself to keep a 3 month delay between decision and implementation (at my birthday).
Last edited by BeBH65 on Mon Jun 11, 2018 11:12 am, edited 1 time in total.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

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Re: Strategy for a prolonged bear market

Post by thangngo » Mon Jun 11, 2018 10:30 am

keepingitsimple wrote:
Sun Jun 10, 2018 11:19 pm
In the event of a prolonged bear market (define the timeframe as you will), does your Investment Policy Statement (IPS) contain a strategy beyond "stay the course" and "rebalance by directing funds to the decreased asset"? I'm just curious if other Bogleheads have adopted lesser discussed strategies. To be clear, I'm not questioning the above two strategies. Rather, I'm simply enquiring so as to learn more. Thanks to all in advance.
Cut down more discretionary expenses and buy, buy, buy... and buy some more.

Just kidding, buy enough. And save some for traveling and going on adventures. No need to keep checking balances during a prolonged bear market.

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Re: Strategy for a prolonged bear market

Post by Boglegrappler » Mon Jun 11, 2018 10:42 am

For those old enough, the Dow hit 1000 in the late 60s and then again around 1972 (I'm not looking this up, but going from memory), and in mid summer 1982 was knocking around 800-850 or so. Not sure what the S&P 500 was doing over that period. The Dow bottomed in 74 or 75 around 450ish.

I'm not sure that qualified as a bear market, but there wasn't much appreciation over a decade or so, and in the late 70s Fortune had the cover story titles "The death of equities" (if I remember correctly). Also, Buffett was quoted in that article that the return on equity seemed to be stuck at a certain level.

I was too young to be too worried about it during that time. Interest rates were rising steadily, and the Fed tightened up in the late 70s, until they gave up in August of 1982, surprised the market with a couple of quick unexpected rate cuts, and the market took off like gangbusters.

I guess if you were staying the course you were rewarded mightily that August, I want to say that the market was up around 10% in a month, but it could have been even more than that.

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Re: Strategy for a prolonged bear market

Post by CaliJim » Mon Jun 11, 2018 10:44 am

In an extended bear, an 'age in bonds' type AA glide path will reduce the amount by which one sells bonds to 'catch a falling knife'.

Starting with a healthy dose of bonds is good. Always try to have at least $10m or $15m in bonds as insurance. :?

More seriously, build in a higher margin of safety into your target retirement net worth number. Plan for a low withdrawal rate.

Retirement is a relatively new thing. Ten generations ago, pretty much everybody worked until they couldn't.
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Re: Strategy for a prolonged bear market

Post by asif408 » Mon Jun 11, 2018 10:45 am

No, I think you can only prepare for a prolonged bear market before hand, and even the things you do probably won't help much during the actual bear market. If I was near retirement and stocks were in the process of a good run (as US stocks have been), I would simply own more safe investments and fewer US stocks. That is the easiest way to weather a prolonged bear market, but you risk missing any run up before that and having lower returns.

For the accumulation phase, assuming you are willing to take risk and don't own much in the way of bonds, I think the best you can do is tilt to underperformers of the last 5-10 years in the stock markets. This won't necessarily help your portfolio stay up during a bear market (it could, or it may fall a little less, but certainly no guarantees, as we saw in 2007-2009, when pretty much every risky asset cratered), but it certainly could recover more quickly. For instance, emerging markets fell along with US stocks during the tech bubble, but they recovered by 2003, vs 2006 for US stocks: https://www.portfoliovisualizer.com/bac ... ion2_3=100. And for the 10 years from March 2000-March 2010, you earned a 10% return in EM vs almost no return in the US (0.48%). Not to say you should own 100% EM, but some diversification before bad things happen is a good idea.

Even a total international stock fund, which is a topic of popular conversation around here, improved your return over the March 2000-March 2010 decade, as it had about a 3% return over that time frame and recovered by 2005 vs 2006 for the US. Not better than bonds during that time frame, but sure beats a 0% return. So some international diversification lowered the bear market from 6 years to anywhere between 3-5 years. And of course using bonds did even better.

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Re: Strategy for a prolonged bear market

Post by msk » Mon Jun 11, 2018 11:15 am

I have a COLA pension that meets all my basic needs. My portfolio is 100% stocks. If the market drops 30 to 40% from peak I spend $50k to buy one year Calls. Dropping further to 40 to 50% from the same peak I buy another $50k (all on margin since I do not keep cash or bonds) one year Calls. Each $50k lets you benefit from a million$ worth of the SP500. This strategy worked well for me in the last 2 bear markets. If the market stays way down for long I'll start selling one-year Calls on my portfolio. That brings in about 5% p.a. plus dividends of 1.5 to 2% p.a. If interested in this strategy I suggest you start dabbling in options when the market is lack luster, like now.

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Re: Strategy for a prolonged bear market

Post by Toons » Mon Jun 11, 2018 11:24 am

If you have time on your side,,,
10 years minimum
Increase your allocation to equities.
Doom and Gloom scenarios,the death of equities,,,
Great news for wealth building

💪💪
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: Strategy for a prolonged bear market

Post by 2015 » Mon Jun 11, 2018 2:49 pm

Sandtrap wrote:
Mon Jun 11, 2018 8:47 am
Liability Matching Portfolio able to withstand most any market fluctuation no matter how deep or how long.
Built in Exit strategy.
j
Absolutely. Any other strategy for me depends too much on luck, and luck to harsh a taskmaster.

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Re: Strategy for a prolonged bear market

Post by InvMoney » Mon Jun 11, 2018 3:40 pm

While it's true that most bear markets last less than two years, it usually takes more than two years for the market to fully recover.

The last two bear markets illustrate this point.

During the 2000-2002 bear market, Vanguard's S&P 500 Index Fund had annual losses of -9.06%, -12.02% and -22.15% respectively. A January 1, 2000 $1,000,000 balance in this fund declined to $622,870 by January 1, 2003. It took until late 2006 for the the fund's balance to get back to the $1,000,000 mark.

During the 2008 bear market, Vanguard's S&P 500 Index Fund had annual losses of -37.08%. A January 1, 2008 $1,000,000 balance in this fund declined to $629,800 by January 1, 2009. It took until mid-2012 for the the fund's balance to get back to the $1,000,000 mark.

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Re: Strategy for a prolonged bear market

Post by heyyou » Mon Jun 11, 2018 4:25 pm

There may be a plan for the future, but that is beyond my control.
This is what we are doing:
Already living in a Low Cost area
Future variable withdrawals based on each recent annual portfolio value
Spend only from bonds until they run out, or until equities grow to rebalancing point, per Michael H. McClung's suggestion
Currently at age 68, so 20 months from starting my Social Security, 20 more months to younger wife's SS
Current no-COLA pension is near SS size
We already have 40 years of practice at living within our means
Dear Wife is a better tight wad than I am
Parents lived to 76 and 92, so my spending will end some day

Edited to add (ETA): We have 10-12 years of spending in bonds equal to the pension if it fails. We are not rich by urban coastal standards, but we do have 30 years of compounding on some of our savings that were put in the S&P500 when it was the only index fund.
Last edited by heyyou on Mon Jun 11, 2018 11:58 pm, edited 1 time in total.

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Re: Strategy for a prolonged bear market

Post by celia » Mon Jun 11, 2018 4:51 pm

Svensk Anga wrote:
Mon Jun 11, 2018 7:57 am
...It might give me the confidence to spend more on Roth conversion taxes while equities are discounted. We are currently planning on converting to the top of the 22% bracket, but could go into the 24 if equities get cheap. We would be in the 25% bracket later if current tax rates sunset as scheduled.

Those still working should shovel new funds into equities. They might also consider Roth conversions to the top of their current bracket. The conversion taxes will be a bargain should stocks eventually rebound.
Yes!!!

Roth conversions are perfect during a deep bear market. In 2008, I did my first Roth conversion early in the year, but as things started going downhill, I converted again and again, knowing that I would recharacterize some of it. My last tIRA dollar was converted on the lowest day that year! I was done. I think I did 8 conversions that year, each into a separate new account (to facilitate recharacterizations).

But I had to get ready in case the markets kept falling in 2009 and I wanted to take advantage of the situation again. I did all my calculations to see how much I could afford for conversion taxes. I ended up keeping more of those Roths than I normally would have. Then I recharacterized the rest.

Unfortunately (fortunately?) there is nothing left to convert any more. But I would do it all over again. The assets that I converted and kept that year are now worth multiples of what they were at the time, while the taxes I paid were based on that low value.

But... we now have an Inherited traditional IRA that we're required to take RMDs from each year. Since we're nearing SS, we've been taking out as much as we can to bring the future RMDs down. In a bear market, I would withdraw a lot more than we usually do and save on the RMD taxes (which are the same as the conversion taxes, except that the RMD can't go into a Roth).
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: Strategy for a prolonged bear market

Post by Chrono Triggered » Mon Jun 11, 2018 5:05 pm

Toons wrote:
Mon Jun 11, 2018 11:24 am
If you have time on your side,,,
10 years minimum
Increase your allocation to equities.
Doom and Gloom scenarios,the death of equities,,,
Great news for wealth building

💪💪
+1.

I'm 31, 100% in stocks, work in the federal government, and max out my 401K, IRA, and HSA. A prolonged bear market would be extremely beneficial for me.

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Re: Strategy for a prolonged bear market

Post by PhilosophyAndrew » Mon Jun 11, 2018 5:08 pm

No Plan B. Fully committed to Plan A - “stay the course and rebalance by directing funds to the decreased asset” as specified in my IPS.

Why complicate matters? Plan A should meet my investing needs.

That said, I will reduce discretionary spending as I deem appropriate during the remaining bear markets in my lifetime. No grand strategy here — I’ll just make small ad hoc adjustments to err on the side of spending less.

Andy.

Jags4186
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Re: Strategy for a prolonged bear market

Post by Jags4186 » Mon Jun 11, 2018 5:37 pm

nisiprius wrote:
Mon Jun 11, 2018 8:24 am
Jags4186 wrote:
Sun Jun 10, 2018 11:35 pm
Interesting question since we really don’t have prolonged bear markets. Since World War 2 there have only been two calendar year periods where the stock market has returned negative returns In consecutive years 1973-1974 and 2000-2002. 2008 is merely a blip in 15 years of positive returns.
I don't agree with the statement that "we really don't have prolonged bear markets." Obviously, of course, it depends on your definition of "bear market" and by defining them suitably you can make them go away.

Nevertheless, according to table 13-4, p. 172 of the 2015 Ibbotson SBBI Classic Yearbook (i.e. this is a tabulation from a standard reference work, not an article written to prove a point), the largest decline in U.S. stock market history was:

Peak, Aug. 1929; Trough, May 1932; Decline, 79.00%; Recovery, Nov. 1936 (i.e. over seven years)

However, the fifth largest decline, 49.93%--comparable to 2008-2009--was:

Peak, Feb. 1937; Trough, 1938; Decline, 43.39%; Recovery, Feb. 1945 (i.e. eight years).

Notice that the 1929 decline ended Nov. 1936, but the 1937 decline began in Feb. 1937. There was only three months' respite. 1936 was one of the best years in stock market history, and because the peak was just slightly higher than 1929 it is accurate enough to call these two separate bear markets of 7 and 8 years, respectively. However, a very small difference would have resulted in its being tabulated as a single 15-year secular bear market, and in most respects the effects would have been about the same. Only good market timing would have resulted in being able to exploit the brief gap between the two bear markets.

In any case, you either had something like a 15-year bear market, or two 7-year markets back to back.
Yes--I specifically chose the ending of WW2 as my barometer because it was a truly New World Order event. Since American hegemony began, there have only been two multi year bear markets. Now what I can't tell you from briefly scanning nominal SP500 returns is the effects of inflation. I'm sure there are many more years of returns where the real return was near 0 or negative, but those are more difficult to feel in real time. Although in fairness I cannot tell you what the 1970s inflation felt like in real time since I wasn't around then.

What is interesting is that by ignoring the noise, we are able to completely disregard other "really bad day" events. 1987 was an up year for the SP500 even though you had the biggest RBD of the last 89 years.

remomnyc
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Re: Strategy for a prolonged bear market

Post by remomnyc » Mon Jun 11, 2018 5:47 pm

Plan A: Reduce expenses (~25% discretionary).
Plan B: Sell only fixed income to finance expenses.
Plan C: Move from VHCOL to lower COL (only in case of job loss).

zengolf2011
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Re: Strategy for a prolonged bear market

Post by zengolf2011 » Mon Jun 11, 2018 6:06 pm

We're in the distribution phase, no Plan B. But I think (hope?) we have prepared for bear markets with Plan A. We have annuitized income sufficient to meet foreseeable non-discretionary expenses. We plan to reduce discretionary expenses during downdrafts (Taylor's plan, I think), possibly down to zero. We keep short-term investments sufficient to meet RMDs for 3 years if both stocks and intermediate-term bonds decline substantially. After that, we will withdraw from the best performing (or, in this scenario, least worst performing) asset. Finally, we keep a stash of short- and intermediate-term bonds in taxable and tax-exempt accounts for large, unexpected expenses.

Perhaps you are concerned with the accumulation phase. We remained invested through the 2000 and 2008 slumps. Our Plan A was to ride the roller coaster down, and start rebalancing into stocks after a substantial paper loss when things seemed terrible (-30% or more). I guess some would consider this market timing, but to my way of thinking we stayed the course.

I always think our most potent tool is to reduce expenses.

WhiteMaxima
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Re: Strategy for a prolonged bear market

Post by WhiteMaxima » Mon Jun 11, 2018 6:13 pm

The only way to cope with bear is to wait out. stay in course and reduce living expenses. Room share, car share, moving to LCOL area to save. Typical economy is long bull and short bear. Equity rise slow during bull market (10-15% every year) and drop fast during bear (30-40% a year) We all being through 2000 and 2008. Actually, I like bear market: everything is on sale.

dalmatiandan
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Re: Strategy for a prolonged bear market

Post by dalmatiandan » Mon Jun 11, 2018 6:26 pm

I’ve seen mentioned a couple times about trying “not to catch a falling knife,” and “only rebalancing on the backside.”

I’m bracing myself for the first time I would need to adhere to my IPS, and rebalance according to my 5/25 bands, even if that means selling fixed income to buy equities. 33 years old, in accumulation stage, in recession-proof job, for reference.

Would anyone care to explain the line of reasoning of the above quotes, which seemed to me when I read them to indicate refraining from selling fixed income, or perhaps only using new contributions to bring AA back in line?

Thanks!

Dan

2015
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Re: Strategy for a prolonged bear market

Post by 2015 » Mon Jun 11, 2018 6:26 pm

celia wrote:
Mon Jun 11, 2018 4:51 pm
Svensk Anga wrote:
Mon Jun 11, 2018 7:57 am
...It might give me the confidence to spend more on Roth conversion taxes while equities are discounted. We are currently planning on converting to the top of the 22% bracket, but could go into the 24 if equities get cheap. We would be in the 25% bracket later if current tax rates sunset as scheduled.

Those still working should shovel new funds into equities. They might also consider Roth conversions to the top of their current bracket. The conversion taxes will be a bargain should stocks eventually rebound.
Yes!!!

Roth conversions are perfect during a deep bear market. In 2008, I did my first Roth conversion early in the year, but as things started going downhill, I converted again and again, knowing that I would recharacterize some of it. My last tIRA dollar was converted on the lowest day that year! I was done. I think I did 8 conversions that year, each into a separate new account (to facilitate recharacterizations).

But I had to get ready in case the markets kept falling in 2009 and I wanted to take advantage of the situation again. I did all my calculations to see how much I could afford for conversion taxes. I ended up keeping more of those Roths than I normally would have. Then I recharacterized the rest.

...
I"m already doing Roth conversions, and sadly, recharacterizations of conversions are no more. OTOH, in a deep bear market, I do intend to rock the TLH activity.

MotoTrojan
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Re: Strategy for a prolonged bear market

Post by MotoTrojan » Mon Jun 11, 2018 6:40 pm

dalmatiandan wrote:
Mon Jun 11, 2018 6:26 pm
I’ve seen mentioned a couple times about trying “not to catch a falling knife,” and “only rebalancing on the backside.”

I’m bracing myself for the first time I would need to adhere to my IPS, and rebalance according to my 5/25 bands, even if that means selling fixed income to buy equities. 33 years old, in accumulation stage, in recession-proof job, for reference.

Would anyone care to explain the line of reasoning of the above quotes, which seemed to me when I read them to indicate refraining from selling fixed income, or perhaps only using new contributions to bring AA back in line?

Thanks!

Dan
Doesn't make sense to me as it is clearly market-timing. How do you know when things will turn around? Of course waiting until the bottom to rebalance is the best option, but you could just as easily miss the run-up.

Assuming things rebound to the same level, you're better off rebalancing early than you are not rebalancing at all, so I wouldn't worry too much about using a 5%/25% band to control things.

Teague
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Re: Strategy for a prolonged bear market

Post by Teague » Mon Jun 11, 2018 6:45 pm

Chrono Triggered wrote:
Mon Jun 11, 2018 5:05 pm

I'm 31, 100% in stocks, work in the federal government, and max out my 401K, IRA, and HSA. A prolonged bear market would be extremely beneficial for me.
I worked for a government agency for 20 years, maxing out my accounts as you describe you do. During 2008-9, I was 50 years old, and I owed more than our house was worth because of the crash in property values. Our entire work group was de-funded as a result of panicked lawmakers passing austerity legislation with little understanding of, or regard for, the consequences. Up until then we thought that we were recession-proof because our work was critical to public health. We were given our 30-day pink slips and had to figure out who would archive the last cases and turn off the lights on the way out the door. I sincerely hope nothing like this ever happens to you, or anyone else. But please be aware that it is possible.
Semper Augustus

Ron Scott
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Re: Strategy for a prolonged bear market

Post by Ron Scott » Mon Jun 11, 2018 7:38 pm

I didn't see it mentioned above so I'll throw out the obvious Plan B for a particular class of investor.

This is for those who are a) retired, b) not really employable, c) depend on a relatively high WR and d) who have maintained an overly aggressive equity position in their AA. These retirees are literally de-accumulating and need more than their income (SS and dividends) to fund their ongoing expenses. They have likely relied on historical market return analyses to develop their financial plans.

It seems likely that there are hundreds of thousands of American retired couples in this boat.

Plan B: You start to sell equities at their lows just to live and begin the death spiral while you pray for a rebound.

MrPotatoHead
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Re: Strategy for a prolonged bear market

Post by MrPotatoHead » Mon Jun 11, 2018 7:48 pm

It is not in an IPS, but I have a lifestyle alteration/commitment contingency plan that kicks in in the event I cannot refill my expense bucket's via dividend's and interest. Essentially I alter my food consumption pattern which is a large portion of expenses, thus effectively lowering my expenses in order to compensate for portfolio deterioration. The idea is I do not want to sell my principle stake. I have looked at this closely and we figure we can easily cut our food bill by 75% fairly easily. And I can go up to 85% without too much difficulty. So that would lower my expense by about 21-23%. So that would drop me from a 1.44% withdraw rate to a 1.114% withdraw rate. Of course we are talking the likely hood of perhaps a 70% portfolio haircut so the % would change.

This also doubles as a catastrophic event plan. In part it stems from what my grandfather did in the depression, lessons that were not lost on me.

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Re: Strategy for a prolonged bear market

Post by pkcrafter » Mon Jun 11, 2018 8:34 pm

Here is some good information on bear markets. There are two types, cyclical and secular. Of course you won't know which type you are in, so these plan B strategies may not help at all.

https://finance.zacks.com/bear-market-s ... -5670.html

article from 2012

http://business.financialpost.com/inves ... urns-ahead



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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Re: Strategy for a prolonged bear market

Post by tibbitts » Mon Jun 11, 2018 10:10 pm

MrPotatoHead wrote:
Mon Jun 11, 2018 7:48 pm
It is not in an IPS, but I have a lifestyle alteration/commitment contingency plan that kicks in in the event I cannot refill my expense bucket's via dividend's and interest. Essentially I alter my food consumption pattern which is a large portion of expenses, thus effectively lowering my expenses in order to compensate for portfolio deterioration. The idea is I do not want to sell my principle stake. I have looked at this closely and we figure we can easily cut our food bill by 75% fairly easily. And I can go up to 85% without too much difficulty. So that would lower my expense by about 21-23%. So that would drop me from a 1.44% withdraw rate to a 1.114% withdraw rate. Of course we are talking the likely hood of perhaps a 70% portfolio haircut so the % would change.

This also doubles as a catastrophic event plan. In part it stems from what my grandfather did in the depression, lessons that were not lost on me.
Things would have to go pretty far south to not be able to earn 1.44% from a portfolio. But I suspect that for all the talk of 3% vs. 4% around here, lots of Bogleheads are going to be in that 1-2% range, even in the best of times. I wish that would be true for me but - not going to happen.

MrPotatoHead
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Re: Strategy for a prolonged bear market

Post by MrPotatoHead » Mon Jun 11, 2018 10:46 pm

tibbitts wrote:
Mon Jun 11, 2018 10:10 pm
MrPotatoHead wrote:
Mon Jun 11, 2018 7:48 pm
It is not in an IPS, but I have a lifestyle alteration/commitment contingency plan that kicks in in the event I cannot refill my expense bucket's via dividend's and interest. Essentially I alter my food consumption pattern which is a large portion of expenses, thus effectively lowering my expenses in order to compensate for portfolio deterioration. The idea is I do not want to sell my principle stake. I have looked at this closely and we figure we can easily cut our food bill by 75% fairly easily. And I can go up to 85% without too much difficulty. So that would lower my expense by about 21-23%. So that would drop me from a 1.44% withdraw rate to a 1.114% withdraw rate. Of course we are talking the likely hood of perhaps a 70% portfolio haircut so the % would change.

This also doubles as a catastrophic event plan. In part it stems from what my grandfather did in the depression, lessons that were not lost on me.
Things would have to go pretty far south to not be able to earn 1.44% from a portfolio. But I suspect that for all the talk of 3% vs. 4% around here, lots of Bogleheads are going to be in that 1-2% range, even in the best of times. I wish that would be true for me but - not going to happen.
Well the central point I was trying to make was not about my preferred withdraw percentage but what I intend to do if I think we are getting to the point where I might need to consider liquidation of assets in order to generate cashflow.

In our case the ability to produce and preserve the majority of our own food (we prep for it biannually) could save us over 20% of our annual budget, thus buying us more time before liquidation might be needed. Canceling Internet service, ceasing driving, reducing energy consumption all would also be on the table. But food is easy for us.

In other words I part of our plan is for a reduced level of consumption that we can adopt with little effort.

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Tyler Aspect
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Re: Strategy for a prolonged bear market

Post by Tyler Aspect » Mon Jun 11, 2018 11:17 pm

Double the amount of your emergency cash from 6 months to one year.

Maintain your pre-set asset allocation. Keep investing.
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