Preparing for My First Recession?

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YoungSisyphus
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Preparing for My First Recession?

Post by YoungSisyphus » Mon Sep 24, 2018 7:51 am

I am a first-time poster but have lurked here for quite some time. Thought this would be a good place to get advice from folks who may be further along on their financial journey than me. Background:

1. Just turned 30. Recently passed the ~200k mark in investment funds (primarily spread across Roth IRA, 401k, HSA) - small amount in taxable (~10k).
2. When I started more intensive saving / passive investing, I had decided to go 100% into stocks. This was ~3 years ago. My thought process at the time was that I'm ~27 and will not need to pull out of the market for a long time. My time horizon is very long and so a targeted fund / 3 fund portfolio shouldn't be needed. Regardless of what happens in the next ~10 years, my timing would be ~25 years to de-risk.
3. That was then. Three years later, after seeing (very) healthy gains in this market, there is an emotional side to me that would hate to see 40% of my portfolio wiped out. It also 'feels' like it is coming. From the time since the last recession, to the way my friends and their neighbors are leveraged to their eyeballs in debt (house, fancy cars, random stuff), to how 'assured' everyone is about low unemployment, the housing market, etc.

I am having a hard time with a few things right now. It feels like I should be preparing for the worst, or at least, I would like to. When the 2007 recession hit, I was still in college and living on ramen. I didn't really feel the impacts. Now I feel like I have something to lose, or could at least optimize / plan for.

What would your advice for me be? Does it make sense to de-risk out of a 100% stock portfolio now? If you are operating under an assumption that you'd like to 'bet' on a recession, what would you do?

Appreciate you reading my semi-ramble and for any advice you could give.

retiredjg
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Re: Preparing for My First Recession?

Post by retiredjg » Mon Sep 24, 2018 8:59 am

YoungSisyphus wrote:
Mon Sep 24, 2018 7:51 am
What would your advice for me be?
You answered your own question when you said " there is an emotional side to me that would hate to see 40% of my portfolio wiped out." This indicates you are invested more aggressively than your comfort level. Another way to say this is you have exceeded your "willingness" to take risk.

That's a dangerous position to be in because that is what causes people to do really dumb stuff when the bad times do arrive.

You should add bonds immediately - at least 20%, even 25% - and stop worrying about when the next deep and extended downturn happens. The trick is to be invested in such a way that you are comfortable when it does happen, whether that is next week or a decade from now.

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Re: Preparing for My First Recession?

Post by bloom2708 » Mon Sep 24, 2018 9:02 am

Stay the course. Add 15 to 20% bonds (Age -10 or Age -15 is reasonable).

Stay the course. Re-balance when your mix is off by 10%. Keep buying when things are dropping.

Stay the course. The next recession may be mild or steep or not come for 10 years. Nobody knows.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

Nate79
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Re: Preparing for My First Recession?

Post by Nate79 » Mon Sep 24, 2018 9:04 am

How healthy is your emergency fund?

arf30
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Re: Preparing for My First Recession?

Post by arf30 » Mon Sep 24, 2018 9:05 am

Smells like market timing, increase your emergency fund and/or bond allocation to whatever level allows you to sleep at night and change nothing else.

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Re: Preparing for My First Recession?

Post by nisiprius » Mon Sep 24, 2018 9:11 am

You should always be prepared for a recession. And you should always be prepared for stock market crash (they are not really the same thing.)

I believe that the equity risk premium only exists because there really is a risk. If there were a simple way to avoid the risk, everyone would use it, there would be no risk, and there would be no equity risk premium. Too many people seem to think "stocks are risky for everybody else, but not for me, because I will ride the bull market up, then see the bear market coming in time to get out before it hits."

Watch out for any thinking that amounts to "risky for everyone else, but not for me."

Wanting the equity risk premium without the risk is a form of greed.

I think you are unconsciously expressing fear, and shielding yourself against looking risk in the face by using the number -40% instead of the nice round number -50%. In any case, if you suspect you cannot tolerate a -40% drop in your portfolio, then you need to adopt a portfolio now that is unlikely to drop that much, and stick with it even after the danger seems to have passed--and even though you are aware of "missing out" on higher gains by doing so.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Preparing for My First Recession?

Post by jebmke » Mon Sep 24, 2018 9:23 am

I would focus primarily on your human capital to make sure your skills and experience are as competitive as you can make them. The best defense in a recession is staying employed and continuing to invest when asset values are much lower.
When you discover that you are riding a dead horse, the best strategy is to dismount.

YoungSisyphus
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Re: Preparing for My First Recession?

Post by YoungSisyphus » Mon Sep 24, 2018 9:31 am

Nate79 wrote:
Mon Sep 24, 2018 9:04 am
How healthy is your emergency fund?
Thanks for this question. Emergency Funds had been on my mind but forgot to put them in my post:

1. I think that my larger fear is that in a recession I would be forced to realize my losses in investments due to loss of a job or needing funds.
2. I work in a very stable corporation and rank highly in performance so I do not foresee losing my job (or if my current role closed), to not be transferred to something else.
3. All that said - I just used ~10k for an unforeseen house expense (ouch) and had also invested ~10k of it because I was tired of the cash just sitting around. Leaves me with about ~8k (much lower than I'm comfortable with - although I am really frugal and my expenses are already pretty low).
3A. Working in the next 6 months to aggressively build this back (~$20k yearly bonus, ~$4k tax return and a few other things should help with this).... But it is lower than I like right now. If the "worst case" happened tomorrow with my job, with my investments, and I had to pull money out, I wouldn't be a happy camper.

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Re: Preparing for My First Recession?

Post by pkcrafter » Mon Sep 24, 2018 9:32 am

Yes, you're thinking of market timing. The real problem here is a bad choice on your original asset allocation. Allocation adjustment is OK here, but keep in mind when you do it never go back to 100% stock. Most long time members here will recommend 80% max in equity. Never forget the stock market really is risky, meaning you can lose substantial amounts of money, a.k.a. "The market can remain irrational longer than you can remain solvent: (Keynes). Also keep in mind that Bogleheads rebalance during a market fall (buy low) and you can't do that if 100% in equity.

Read up on asset allocation (link below), make a decision (70-80% equity) and then stay with it for a decade or until there is some life changes that alter you risk profile.

https://www.bogleheads.org/wiki/Asset_allocation

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.

YoungSisyphus
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Re: Preparing for My First Recession?

Post by YoungSisyphus » Mon Sep 24, 2018 9:32 am

arf30 wrote:
Mon Sep 24, 2018 9:05 am
Smells like market timing, increase your emergency fund and/or bond allocation to whatever level allows you to sleep at night and change nothing else.
Thank you. I had responded to Nate regarding my emergency fund. It is currently lower than I'd like. Part of this is less about market timing, but the fear of being forced to realize losses if I lost my job and burned through a (currently low) emergency fund to start taking money out of diminished investments.

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Re: Preparing for My First Recession?

Post by Texanbybirth » Mon Sep 24, 2018 9:35 am

jebmke wrote:
Mon Sep 24, 2018 9:23 am
I would focus primarily on your human capital to make sure your skills and experience are as competitive as you can make them. The best defense in a recession is staying employed and continuing to invest when asset values are much lower.
+1, which is a very important, often-overlooked aspect of people's financial lives.

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Re: Preparing for My First Recession?

Post by harvestbook » Mon Sep 24, 2018 9:37 am

You're young and even a 40 percent drop isn't that big in the grand scheme. It's "felt" like things are about to break for virtually my entire investing life. I don't trust my feelings when it comes to money. History says the market always goes up...eventually. When that history ends, then maybe I'll try trusting feelings.
I'm not smart enough to know, and I can't afford to guess.

YoungSisyphus
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Re: Preparing for My First Recession?

Post by YoungSisyphus » Mon Sep 24, 2018 9:39 am

Texanbybirth wrote:
Mon Sep 24, 2018 9:35 am
jebmke wrote:
Mon Sep 24, 2018 9:23 am
I would focus primarily on your human capital to make sure your skills and experience are as competitive as you can make them. The best defense in a recession is staying employed and continuing to invest when asset values are much lower.
+1, which is a very important, often-overlooked aspect of people's financial lives.
Thank you both. Great feedback. I feel pretty good in this area, however I'm also a 'worrier' so it never feels safe enough. Company is paying for my MBA (in progress) and I currently rank top 2% in a stable corporation....... but with a recession you just never know. I'll continue to focus on this area.

BigMoneyNoWhammies
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Re: Preparing for My First Recession?

Post by BigMoneyNoWhammies » Mon Sep 24, 2018 9:40 am

YoungSisyphus wrote:
Mon Sep 24, 2018 7:51 am
I am a first-time poster but have lurked here for quite some time. Thought this would be a good place to get advice from folks who may be further along on their financial journey than me. Background:

1. Just turned 30. Recently passed the ~200k mark in investment funds (primarily spread across Roth IRA, 401k, HSA) - small amount in taxable (~10k).
2. When I started more intensive saving / passive investing, I had decided to go 100% into stocks. This was ~3 years ago. My thought process at the time was that I'm ~27 and will not need to pull out of the market for a long time. My time horizon is very long and so a targeted fund / 3 fund portfolio shouldn't be needed. Regardless of what happens in the next ~10 years, my timing would be ~25 years to de-risk.
3. That was then. Three years later, after seeing (very) healthy gains in this market, there is an emotional side to me that would hate to see 40% of my portfolio wiped out. It also 'feels' like it is coming. From the time since the last recession, to the way my friends and their neighbors are leveraged to their eyeballs in debt (house, fancy cars, random stuff), to how 'assured' everyone is about low unemployment, the housing market, etc.

I am having a hard time with a few things right now. It feels like I should be preparing for the worst, or at least, I would like to. When the 2007 recession hit, I was still in college and living on ramen. I didn't really feel the impacts. Now I feel like I have something to lose, or could at least optimize / plan for.

What would your advice for me be? Does it make sense to de-risk out of a 100% stock portfolio now? If you are operating under an assumption that you'd like to 'bet' on a recession, what would you do?

Appreciate you reading my semi-ramble and for any advice you could give.
As others have noted above, your comments suggest that you're likely more aggressively invested than you are really comfortable with, which I imagine is not an uncommon thing during such a long bull market. I'm about your age with an analogous amount of total $ invested, and am also 100% equities (90% total stock market). My rationale for this all along has been the same as the one you listed above. I would loathe a market correction or recession, but a market decline of 50% or so over a time frame of a few years wouldn't really cause me to panic (at least I believe so; no one really knows until they experience it). Your reaction to the same market conditions could be entirely different, and your investment planning should be shaped accordingly. This is really more a matter of personal comfort than anything given your fairly long time horizon. I was invested in the market during the Recession, but was so young and had so little skin in the game that it didn't have a meaningful impact on me. Would I feel differently now that I have 10x as much money invested? I'd like to say no, but there's really no way to be sure until it happens. All you can do is come up with an investment plan that is as honest about your risk tolerance as you can manage and try to stick to it. If you woke up tomorrow and would be tearing your hair out to see that 25% of your portfolio was wiped out and would be running to the computer to sell off assets, you likely need to adjust your asset allocation. If not, I could see an argument for staying the course you've already laid out. Whatever keeps you from churning your profile/selling low and buying high/constantly tinkering at every market gyration. Again, it's a very personal decision that only you can really make, but it seems like you know the answer to your question before even posting.
Last edited by BigMoneyNoWhammies on Mon Sep 24, 2018 9:42 am, edited 1 time in total.

YoungSisyphus
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Re: Preparing for My First Recession?

Post by YoungSisyphus » Mon Sep 24, 2018 9:42 am

harvestbook wrote:
Mon Sep 24, 2018 9:37 am
You're young and even a 40 percent drop isn't that big in the grand scheme. It's "felt" like things are about to break for virtually my entire investing life. I don't trust my feelings when it comes to money. History says the market always goes up...eventually. When that history ends, then maybe I'll try trusting feelings.
Great point. This was my original thinking - I did not do a good job articulating in my original post. What worries me about a recession is that I may need to "realize" my losses if I lost my job, burn through EF, etc.

If the 40% (or more) was a "temporary" setback on unrealized gains / losses I don't think I'd be as worried. Which is why originally I thought 100% stocks over the course of ~30 years was my go-to. I guess an alternative would be to have a massive emergency fund and keep that allocation. But see that the advice here is mainly 70-80% equities with bonds.

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Re: Preparing for My First Recession?

Post by CyclingDuo » Mon Sep 24, 2018 9:44 am

YoungSisyphus wrote:
Mon Sep 24, 2018 7:51 am
I am a first-time poster but have lurked here for quite some time. Thought this would be a good place to get advice from folks who may be further along on their financial journey than me. Background:

1. Just turned 30. Recently passed the ~200k mark in investment funds (primarily spread across Roth IRA, 401k, HSA) - small amount in taxable (~10k).
2. When I started more intensive saving / passive investing, I had decided to go 100% into stocks. This was ~3 years ago. My thought process at the time was that I'm ~27 and will not need to pull out of the market for a long time. My time horizon is very long and so a targeted fund / 3 fund portfolio shouldn't be needed. Regardless of what happens in the next ~10 years, my timing would be ~25 years to de-risk.
3. That was then. Three years later, after seeing (very) healthy gains in this market, there is an emotional side to me that would hate to see 40% of my portfolio wiped out. It also 'feels' like it is coming. From the time since the last recession, to the way my friends and their neighbors are leveraged to their eyeballs in debt (house, fancy cars, random stuff), to how 'assured' everyone is about low unemployment, the housing market, etc.

I am having a hard time with a few things right now. It feels like I should be preparing for the worst, or at least, I would like to. When the 2007 recession hit, I was still in college and living on ramen. I didn't really feel the impacts. Now I feel like I have something to lose, or could at least optimize / plan for.

What would your advice for me be? Does it make sense to de-risk out of a 100% stock portfolio now? If you are operating under an assumption that you'd like to 'bet' on a recession, what would you do?

Appreciate you reading my semi-ramble and for any advice you could give.
Although you have not yet invested through a recession, you have experienced the 16% drop in 2010, the 20% drop in 2011, and again the nearly 20% drop from mid 2015 to mid 2016, and the 10% drop earlier this year. How did you feel through all of those? Most of us have just kept on staying the course and investing into our accounts through it all to come out on the other side of each of those better than we were going into each dip.

The last official recessions in the US were 1990-91 (lasted 8 months); 2001 (lasted 8 months); 2007-2009 (lasted 18 months). Again, staying the course has proven to work out just fine and dandy with a diversified and balanced portfolio, where as panic and selling at lows or near lows or any attempt to time it all on both sides of the recession has lowered average investor returns to below what the market returns have been. That's why so many have ended up with returns in the below chart listed under "average investor" since 1998. The investor behavior for many involved too much timing, panic selling and panic buying along the way rather than just staying the course.

Image

There have been a total of 47 recessions in the US since the Articles of Confederation. Remove the first three recessions, and look at the 44 recessions we have had in 216 years since 1802 in chart form...

Image



Write up your own little index card and keep it stashed in a safe place:

Image

Look at all that fear, gloom and doom along the way in the chart of shame...

Image

Scare tactics. Loss aversion fear. Panic. It all sells and draws far too much attention. The media capitalizes on the fear. Advertisements capitalize on the fear.

You are correct. We will have recessions in the future. Dividends have only been suspended twice in history (the first time during the depression that began 89 years ago, and for the financial stocks during the 2007-2009 recession/depression). Otherwise, the dividends keep chugging along, quarter after quarter, year after year, and that means they are added to your account along with your new contributions each month into your 401k/403b/457b/Roth IRA/tIRA/taxable account/HSA, etc... .

There will always be "key events" or "walls of worry" along the way over the next 10, 20, 30, 40, 50, 60+ years.

Image
"Everywhere is within walking distance if you have the time." ~ Steven Wright

Nate79
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Re: Preparing for My First Recession?

Post by Nate79 » Mon Sep 24, 2018 9:46 am

YoungSisyphus wrote:
Mon Sep 24, 2018 9:31 am
Nate79 wrote:
Mon Sep 24, 2018 9:04 am
How healthy is your emergency fund?
Thanks for this question. Emergency Funds had been on my mind but forgot to put them in my post:

1. I think that my larger fear is that in a recession I would be forced to realize my losses in investments due to loss of a job or needing funds.
2. I work in a very stable corporation and rank highly in performance so I do not foresee losing my job (or if my current role closed), to not be transferred to something else.
3. All that said - I just used ~10k for an unforeseen house expense (ouch) and had also invested ~10k of it because I was tired of the cash just sitting around. Leaves me with about ~8k (much lower than I'm comfortable with - although I am really frugal and my expenses are already pretty low).
3A. Working in the next 6 months to aggressively build this back (~$20k yearly bonus, ~$4k tax return and a few other things should help with this).... But it is lower than I like right now. If the "worst case" happened tomorrow with my job, with my investments, and I had to pull money out, I wouldn't be a happy camper.
I will tell you what I do. I have an emergency plan. The emergency plan goes thru various scenarios of what if X happens I do Y. For example if I lose my job I have X # of months of expenses in cash, Y# of months in brokerage, Z amount from unemployment, etc. Then I do a two scenario at once like I lose my job and stocks drop 50%. Or I lose my job and house needs a new roof. Basically run thru as many scenarios as possible and see how I can handle them financially.

This helps ease my mind on the emergency planning. Then I have an appropriate AA for my entire portfolio.

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Re: Preparing for My First Recession?

Post by KlangFool » Mon Sep 24, 2018 9:54 am

YoungSisyphus wrote:
Mon Sep 24, 2018 9:42 am
harvestbook wrote:
Mon Sep 24, 2018 9:37 am
You're young and even a 40 percent drop isn't that big in the grand scheme. It's "felt" like things are about to break for virtually my entire investing life. I don't trust my feelings when it comes to money. History says the market always goes up...eventually. When that history ends, then maybe I'll try trusting feelings.
Great point. This was my original thinking - I did not do a good job articulating in my original post. What worries me about a recession is that I may need to "realize" my losses if I lost my job, burn through EF, etc.
YoungSisyphus,

1) If you are unemployed and the market drops 50%, how long before you burn through your EF and need to sell stock?

1 month? 3 months? 6 months?

2) If you increase your bond allocation to 20%, what would be your new answer?

3) What would be the answer that will be good enough for you? 3 months? 6 months? 1 year?

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goingup
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Re: Preparing for My First Recession?

Post by goingup » Mon Sep 24, 2018 9:54 am

YoungSisyphus wrote:
Mon Sep 24, 2018 9:31 am
3. All that said - I just used ~10k for an unforeseen house expense (ouch) and had also invested ~10k of it because I was tired of the cash just sitting around. Leaves me with about ~8k (much lower than I'm comfortable with - although I am really frugal and my expenses are already pretty low).
That action may have attributed to your current angst. It's a common and understandable foible to try to eek more return out of safe assets.

Author Bill Bernstein (Dr. William) has said "more money has been lost reaching for yield than has ever been lost to the point of a gun". He was specifically talking about bonds, but the idea is the same. Don't get greedy with investments and remember the role of the money in your portfolio.

Maybe bring that $10K to the sidelines for safety until you can build up your reserve again. I'm personally not a believer that a 30 year old needs bonds in his portfolio, but having 6-12 months cash reserve is wise.

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Re: Preparing for My First Recession?

Post by YoungSisyphus » Mon Sep 24, 2018 9:55 am

Nate79 wrote:
Mon Sep 24, 2018 9:46 am
YoungSisyphus wrote:
Mon Sep 24, 2018 9:31 am
Nate79 wrote:
Mon Sep 24, 2018 9:04 am
How healthy is your emergency fund?
Thanks for this question. Emergency Funds had been on my mind but forgot to put them in my post:

1. I think that my larger fear is that in a recession I would be forced to realize my losses in investments due to loss of a job or needing funds.
2. I work in a very stable corporation and rank highly in performance so I do not foresee losing my job (or if my current role closed), to not be transferred to something else.
3. All that said - I just used ~10k for an unforeseen house expense (ouch) and had also invested ~10k of it because I was tired of the cash just sitting around. Leaves me with about ~8k (much lower than I'm comfortable with - although I am really frugal and my expenses are already pretty low).
3A. Working in the next 6 months to aggressively build this back (~$20k yearly bonus, ~$4k tax return and a few other things should help with this).... But it is lower than I like right now. If the "worst case" happened tomorrow with my job, with my investments, and I had to pull money out, I wouldn't be a happy camper.
I will tell you what I do. I have an emergency plan. The emergency plan goes thru various scenarios of what if X happens I do Y. For example if I lose my job I have X # of months of expenses in cash, Y# of months in brokerage, Z amount from unemployment, etc. Then I do a two scenario at once like I lose my job and stocks drop 50%. Or I lose my job and house needs a new roof. Basically run thru as many scenarios as possible and see how I can handle them financially.

This helps ease my mind on the emergency planning. Then I have an appropriate AA for my entire portfolio.
Awesome. Not sure why I hadn't thought about these scenarios but feel my excitement with the opportunity to plan like that. I'll start working on that shortly. Glad to find kindred spirits :D

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Re: Preparing for My First Recession?

Post by KlangFool » Mon Sep 24, 2018 9:58 am

YoungSisyphus wrote:
Mon Sep 24, 2018 9:31 am

2. I work in a very stable corporation and rank highly in performance so I do not foresee losing my job (or if my current role closed), to not be transferred to something else.
YoungSisyphus,

Many of my ex-employers are more than 100 years old. And, I was ranked very high in my performance. But, that did not stop the employers from going bankrupt or me from being laid off.

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Re: Preparing for My First Recession?

Post by Sandtrap » Mon Sep 24, 2018 10:02 am

Here is one step by step approach.
Actionably:
1. Start increasing the fixed side of your assets, either by investing new funds and/or selling or exchanging equities.
2. Diversify the fixed side of your assets. Blend your "emergency fund" (cash since you said it was "sitting" and bugging you).
Into the following in various amounts. (a few, several, a mix, or all).
a. High Yield Accounts.
b. Money Market Accounts.
c. Brokered CD's/CD Ladder
d. Treasuries.
e. Short/Intermediate Term Bond Fund, Muni's, etc.
f. etc.
3. In this way you are not just preparing for "your first recession" but putting in safety margins that can cover you at different times and needs.
4. All of the above = "sleep factor".
5. It goes without saying to minimize debt.

j

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Watty
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Re: Preparing for My First Recession?

Post by Watty » Mon Sep 24, 2018 10:09 am

YoungSisyphus wrote:
Mon Sep 24, 2018 7:51 am
Just turned 30.
Just for comparison the Vanguard 2050 fund is 90% stocks.

https://en.wikipedia.org/wiki/Target_date_fund#History

Adding some bonds to your retirement funds is the right thing to do but your asset allocation may not have been as extreme as you are thinking if you are not planning on retiring unusually early.

The key is that this is only for your retirement money. You may have other goals too like saving up for a house down payment and that money would have a much more conservative asset allocation.
YoungSisyphus wrote:
Mon Sep 24, 2018 7:51 am
Three years later, after seeing (very) healthy gains in this market, there is an emotional side to me that would hate to see 40% of my portfolio wiped out.
That would be stomach churning so if you are risk averse you might need to invest more conservatively just to match you emotional temperament so that you don't panic and make the wrong move in a bear market.

That said since you are still early in the accumulation phase having the stock market drop 40% would be one of the best things possible for your portfolio since that would allow you to buy stocks cheap. This can be hard to accept but one of the worst things that could happen for your investments is if stocks went up a lot higher and stayed high for a long time while you are still buying stock.

I was still working and in my early 50's after the financial crisis in 2008 when the stock market crashed and saw my portfolio take a major drop. To help make up for this I started saving as much as possible when my portfolio was low. While this was far from fun all that money that I saved during that bear market did VERY well when the stock market recover and I was probably able to retire at least a year earlier because of the 2008 stock market crash.
If you are operating under an assumption that you'd like to 'bet' on a recession, what would you do?
There is a saying, "It is a recession when your neighbor loses is laid off, it is a depression when you are laid off."

Seeing your portfolio slump in a bear market is hard but those usually recover in a few years so unless you are retired or unemployed and living on your portfolio the financial impact of that is not permanent.

For someone in their 30's the big risk is that you might be laid off in a recession. Being laid off always sucks but during a recession a big problem is that few companies are hiring so finding your next job can be very difficult.

Take a look at the people you work with and try to figure out who would be laid off if they laid off a quarter of your department. Now is a good time to do things like get extra training, even if you have to pay for it, and to take on important assignments that make you move valuable to your company. That will put you higher up on the list when the company has to decide who to lay off.

That will not help much though if they shut your entire department. You should also work on building up your network of contacts so that if you do have to look for a job in a recession you will have a better chance of finding one.

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Re: Preparing for My First Recession?

Post by Phineas J. Whoopee » Mon Sep 24, 2018 10:13 am

I offer a personal finance suggestion, rather than an investing one. As is my wont I will apply business accounting terms to individual people.

Keep your fixed costs low. It's possible to cut back, if necessary, on variable costs.

PJW

YoungSisyphus
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Re: Preparing for My First Recession?

Post by YoungSisyphus » Mon Sep 24, 2018 10:15 am

goingup wrote:
Mon Sep 24, 2018 9:54 am
YoungSisyphus wrote:
Mon Sep 24, 2018 9:31 am
3. All that said - I just used ~10k for an unforeseen house expense (ouch) and had also invested ~10k of it because I was tired of the cash just sitting around. Leaves me with about ~8k (much lower than I'm comfortable with - although I am really frugal and my expenses are already pretty low).
That action may have attributed to your current angst. It's a common and understandable foible to try to eek more return out of safe assets.

Author Bill Bernstein (Dr. William) has said "more money has been lost reaching for yield than has ever been lost to the point of a gun". He was specifically talking about bonds, but the idea is the same. Don't get greedy with investments and remember the role of the money in your portfolio.

Maybe bring that $10K to the sidelines for safety until you can build up your reserve again. I'm personally not a believer that a 30 year old needs bonds in his portfolio, but having 6-12 months cash reserve is wise.
This is great feedback... and love the quote. Will look at what it would take to do that this week.

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Re: Preparing for My First Recession?

Post by YoungSisyphus » Mon Sep 24, 2018 10:20 am

Phineas J. Whoopee wrote:
Mon Sep 24, 2018 10:13 am
I offer a personal finance suggestion, rather than an investing one. As is my wont I will apply business accounting terms to individual people.

Keep your fixed costs low. It's possible to cut back, if necessary, on variable costs.

PJW
Thank you! I am trying to be more fanatical about my expenses. Also lurk over at all the early FI blogs and embraced the frugal lifestyle about 5 years ago when I realized I was somehow in debt even though at the time I was making ~90k a year. "Your Money or Your Life" was a big catalyst for me.

My current state is that I purchased a home last-year (appreciated nearly 20% ... crazy market).. and am renting it out while living in a backyard mother-in-law suite. So I don't have a living expense which has helped. Still have a car payment but at least it's at a 1.5 interest rate. After this though, no new cars for me. :)

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Re: Preparing for My First Recession?

Post by YoungSisyphus » Mon Sep 24, 2018 10:22 am

Watty wrote:
Mon Sep 24, 2018 10:09 am
YoungSisyphus wrote:
Mon Sep 24, 2018 7:51 am
Just turned 30.
Just for comparison the Vanguard 2050 fund is 90% stocks.

https://en.wikipedia.org/wiki/Target_date_fund#History

Adding some bonds to your retirement funds is the right thing to do but your asset allocation may not have been as extreme as you are thinking if you are not planning on retiring unusually early.

The key is that this is only for your retirement money. You may have other goals too like saving up for a house down payment and that money would have a much more conservative asset allocation.
YoungSisyphus wrote:
Mon Sep 24, 2018 7:51 am
Three years later, after seeing (very) healthy gains in this market, there is an emotional side to me that would hate to see 40% of my portfolio wiped out.
That would be stomach churning so if you are risk averse you might need to invest more conservatively just to match you emotional temperament so that you don't panic and make the wrong move in a bear market.

That said since you are still early in the accumulation phase having the stock market drop 40% would be one of the best things possible for your portfolio since that would allow you to buy stocks cheap. This can be hard to accept but one of the worst things that could happen for your investments is if stocks went up a lot higher and stayed high for a long time while you are still buying stock.

I was still working and in my early 50's after the financial crisis in 2008 when the stock market crashed and saw my portfolio take a major drop. To help make up for this I started saving as much as possible when my portfolio was low. While this was far from fun all that money that I saved during that bear market did VERY well when the stock market recover and I was probably able to retire at least a year earlier because of the 2008 stock market crash.
If you are operating under an assumption that you'd like to 'bet' on a recession, what would you do?
There is a saying, "It is a recession when your neighbor loses is laid off, it is a depression when you are laid off."

Seeing your portfolio slump in a bear market is hard but those usually recover in a few years so unless you are retired or unemployed and living on your portfolio the financial impact of that is not permanent.

For someone in their 30's the big risk is that you might be laid off in a recession. Being laid off always sucks but during a recession a big problem is that few companies are hiring so finding your next job can be very difficult.

Take a look at the people you work with and try to figure out who would be laid off if they laid off a quarter of your department. Now is a good time to do things like get extra training, even if you have to pay for it, and to take on important assignments that make you move valuable to your company. That will put you higher up on the list when the company has to decide who to lay off.

That will not help much though if they shut your entire department. You should also work on building up your network of contacts so that if you do have to look for a job in a recession you will have a better chance of finding one.
Thanks, Watty. All great feedback - the third section being what I am most nervous about (have provided a bit of context in other posts). From the different advice here I may ultimately work on a lopsided emergency fund (more than I realistically probably need) while keeping an aggressive portfolio. Helps to see the target funds weren't much different.

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Re: Preparing for My First Recession?

Post by ruralavalon » Mon Sep 24, 2018 11:07 am

1) Add a bond allocation, using a good credit quality short-term or intermediate-term bond fund, around 20-25% of portfolio.

2) Increase your emergency fund a bit.

3) Keep your spending/expenses modest.

4) Concentrate on your work, keep your job skills honed.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Re: Preparing for My First Recession?

Post by arcticpineapplecorp. » Mon Sep 24, 2018 11:48 am

YoungSisyphus wrote:
Mon Sep 24, 2018 7:51 am
Three years later, after seeing (very) healthy gains in this market, there is an emotional side to me that would hate to see 40% of my portfolio wiped out. It also 'feels' like it is coming. From the time since the last recession, to the way my friends and their neighbors are leveraged to their eyeballs in debt (house, fancy cars, random stuff), to how 'assured' everyone is about low unemployment, the housing market, etc.

I am having a hard time with a few things right now. It feels like I should be preparing for the worst, or at least, I would like to. When the 2007 recession hit, I was still in college and living on ramen. I didn't really feel the impacts. Now I feel like I have something to lose, or could at least optimize / plan for.

What would your advice for me be? Does it make sense to de-risk out of a 100% stock portfolio now? If you are operating under an assumption that you'd like to 'bet' on a recession, what would you do?

Appreciate you reading my semi-ramble and for any advice you could give.
Three things:

1. If you have 25 years to "de-risk" then what does it matter what happens in the market now, tomorrow, next year or 10 years from now. Doesn't it really only matter what you've accumulated when you're ready to retire in 25 years? Do you think the values of stocks declining in the next recession won't recover over the next 25 years? Have you looked at historical data to see how long it took typically (or even worst case scenarios like 1929-1945, 16 years) to recover from losses?

2. when you say wiped out, how would it be wiped out if you do not sell any stocks, continue holding them and continue to buy more? You don't have enough to retire now, you'd have even less during a market crash so you have no choice but to continue accumulating (while holding on to what you had in hopes of future recovery). You do not "lose" unless you would sell after a decline. That's up to you, not the markets. I saw people I worked with sell their stock holdings in 2008 at a great loss. They also missed the subsequent runup over the past 10 years. I didn't sell. I held. I continued buying. Which of us do you suspect is better off and closer to meeting our retirement goals?

3. If you can't stand the thought of seeing a 40% decline, then you should hold less equities (as others have been saying). Larry Swedroe's advice from the 73-74 bear market (similar losses as 2007-2009, 50% declines) is this:

Image

Holding 90% in stocks (the target date 2050 fund previous mentioned) would see around 40% declines if the market falls 50%. So hold less than 90% in stocks if you can't stand a 40% decline. Incidentally the market has only lost 40% a few times since the 1929 depression so it's not something that happens that often:

source: https://www.ftportfolios.com/Common/Con ... 8ff9bfe12d

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Re: Preparing for My First Recession?

Post by cdu7 » Mon Sep 24, 2018 1:10 pm

10-20% bonds and move on with life.

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Re: Preparing for My First Recession?

Post by JBTX » Mon Sep 24, 2018 3:51 pm

Agree 10-20% bonds. Steadily increase Em Fund. Beyond that, get in the mindset that:

1. You cannot time or call the market. So don't try.
2. If the market goes down, for you that is good, because now you can buy more shares for the same amount of money.

It seems counterintuitive, but at your age, you should be hoping for a market crash. What is relevant is the value in approx 30 years, not the value now. The more shares you can buy now, the better.

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Re: Preparing for My First Recession?

Post by RCL » Mon Sep 24, 2018 4:02 pm

YoungSisyphus wrote:
Mon Sep 24, 2018 10:20 am

My current state is that I purchased a home last-year (appreciated nearly 20% ... crazy market).. and am renting it out while living in a backyard mother-in-law suite. So I don't have a living expense which has helped. Still have a car payment but at least it's at a 1.5 interest rate. After this though, no new cars for me. :)
The highlighted snipped portion above is a possible trouble area.
What would your financial situation look like if a recession hits you and your renter winds up jobless? What if you both lost your jobs?

Really a good idea to have a "cushion" to soften some of life's surprises
It Is Best To Consult Others Before Taking Unusual Actions

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Re: Preparing for My First Recession?

Post by tesuzuki2002 » Mon Sep 24, 2018 4:08 pm

YoungSisyphus wrote:
Mon Sep 24, 2018 7:51 am
I am a first-time poster but have lurked here for quite some time. Thought this would be a good place to get advice from folks who may be further along on their financial journey than me. Background:

1. Just turned 30. Recently passed the ~200k mark in investment funds (primarily spread across Roth IRA, 401k, HSA) - small amount in taxable (~10k).
2. When I started more intensive saving / passive investing, I had decided to go 100% into stocks. This was ~3 years ago. My thought process at the time was that I'm ~27 and will not need to pull out of the market for a long time. My time horizon is very long and so a targeted fund / 3 fund portfolio shouldn't be needed. Regardless of what happens in the next ~10 years, my timing would be ~25 years to de-risk.
3. That was then. Three years later, after seeing (very) healthy gains in this market, there is an emotional side to me that would hate to see 40% of my portfolio wiped out. It also 'feels' like it is coming. From the time since the last recession, to the way my friends and their neighbors are leveraged to their eyeballs in debt (house, fancy cars, random stuff), to how 'assured' everyone is about low unemployment, the housing market, etc.

I am having a hard time with a few things right now. It feels like I should be preparing for the worst, or at least, I would like to. When the 2007 recession hit, I was still in college and living on ramen. I didn't really feel the impacts. Now I feel like I have something to lose, or could at least optimize / plan for.

What would your advice for me be? Does it make sense to de-risk out of a 100% stock portfolio now? If you are operating under an assumption that you'd like to 'bet' on a recession, what would you do?

Appreciate you reading my semi-ramble and for any advice you could give.
I want to bet on a good pull back, recession, bear market etc.. You're young.... I'm calling myself young still but a bit older that you. I have LOT;s to lose... but I also see the other side... a temporary decline of 40% on money I won't even be trying to touch in the next 15 years is fine...

That decline is the opportunity to buy as much up as I can.... I've watched the markets go up 3X since 2009... pretty awesome.. The Pilot in me, says it's gotta come down some time.

Do you Have you paid up your debts? I have be focused on debt payoff for around 2 years now... I want to have no payments when the market does decline so I can focus simply on investing and accumulating again.

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Re: Preparing for My First Recession?

Post by goodenyou » Mon Sep 24, 2018 4:20 pm

This is a classic “have your cake and eat it too”. You have to decide for yourself if you will have more regrets having a paper loss when the stock market goes down, or regrets that you missed a run-up and have a higher entry point and theoretically more risk. Your age works in your favor. Trying to time the market, as others have said, is a fool’s errand. The best advice was to stay healthy, employed and live below your means. The rest is unnecessary anxiety that leads to bad decisions. The best thing that has happened to me was to continue to fully fund my retirement accounts in equities (that I wouldn’t touch for 25 years) from 2007-on.
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

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tadamsmar
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Re: Preparing for My First Recession?

Post by tadamsmar » Mon Sep 24, 2018 5:02 pm

Just watch the rock roll down, then watch it roll back up. You don't have to put in any effort to roll it back up. You just have to rebalance on your predetermined schedule at most, but maybe you don't have to even do that if you have only one fund! Your move to bonds should be based on a pre-determined schedule or life changes, not the market.

In some ways, the fate of Boglehead is worst than that of Sisyphus!

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Re: Preparing for My First Recession?

Post by annielouise » Mon Sep 24, 2018 5:31 pm

viewtopic.php?f=2&t=139157

Read through the ones that include the last recession and see how quickly accounts recovered when sticking to BH ways.

For example, here is a snippet of our net worth progression:

2007: $609,000
2008: $687,000
2009: $567,000
2010: $750,000

Ron Scott
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Re: Preparing for My First Recession?

Post by Ron Scott » Mon Sep 24, 2018 5:45 pm

YoungSisyphus wrote:
Mon Sep 24, 2018 7:51 am
If you are operating under an assumption that you'd like to 'bet' on a recession, what would you do?
Sounds like a reasonable bet, although you never know with the timing...

But if that's your assumption: Get most of your money out of stocks and keep a good chunk in reasonably liquid assets that can be redeployed back into stocks in the drop. (Note it's also hard to predict the dips and rebounds.)

In any event, I suggest at least your-age-in-bonds regardless how you handle the next recession.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

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Re: Preparing for My First Recession?

Post by MotoTrojan » Mon Sep 24, 2018 5:57 pm

Ron Scott wrote:
Mon Sep 24, 2018 5:45 pm
YoungSisyphus wrote:
Mon Sep 24, 2018 7:51 am
If you are operating under an assumption that you'd like to 'bet' on a recession, what would you do?
Sounds like a reasonable bet, although you never know with the timing...

But if that's your assumption: Get most of your money out of stocks and keep a good chunk in reasonably liquid assets that can be redeployed back into stocks in the drop. (Note it's also hard to predict the dips and rebounds.)

In any event, I suggest at least your-age-in-bonds regardless how you handle the next recession.
Short QQQ.

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Re: Preparing for My First Recession?

Post by mortfree » Mon Sep 24, 2018 5:57 pm

YoungSisyphus wrote:
Mon Sep 24, 2018 9:31 am

3A. Working in the next 6 months to aggressively build this back (~$20k yearly bonus, ~$4k tax return and a few other things should help with this)....
Why are you getting a 4K tax return?

If that is what you anticipate under the 2018 tax laws as well, adjust your W4.

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Re: Preparing for My First Recession?

Post by Flyer24 » Mon Sep 24, 2018 9:28 pm

You’ve never loss any money until you sell the shares. So you hold the course during the recession and it eventually comes back. Also keep in mind that you are still young and accumulating shares. Any drop in the market means that you are getting more shares for your money.

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Re: Preparing for My First Recession?

Post by 2015 » Tue Sep 25, 2018 1:57 pm

annielouise wrote:
Mon Sep 24, 2018 5:31 pm
viewtopic.php?f=2&t=139157

Read through the ones that include the last recession and see how quickly accounts recovered when sticking to BH ways.

For example, here is a snippet of our net worth progression:

2007: $609,000
2008: $687,000
2009: $567,000
2010: $750,000
This was a "V" shaped recovery. It didn't necessarily have to turn out that way.

We attribute way more things in life to skill (e.g., "sticking to BH ways") when we should be attributing them to luck. If things are going well for us, it's good to remember that much of that is due to luck. Every day, it's also good to ask "how can I make my results a little less about luck today?" That usually means focusing more on our efforts, as it's the only thing we really have any control over.

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Phineas J. Whoopee
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Re: Preparing for My First Recession?

Post by Phineas J. Whoopee » Tue Sep 25, 2018 3:50 pm

Flyer24 wrote:
Mon Sep 24, 2018 9:28 pm
You’ve never loss any money until you sell the shares. So you hold the course during the recession and it eventually comes back. Also keep in mind that you are still young and accumulating shares. Any drop in the market means that you are getting more shares for your money.
An unrealized loss is still a loss. Pretending it isn't can lead to poor financial decisionmaking, like waiting for a dropped investment to rise in price before selling it to buy something that better serves one's needs.

PJW

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Re: Preparing for My First Recession?

Post by Busdrvr » Tue Sep 25, 2018 5:06 pm

I bookmarked this wsj article from 2013 because it illustrates such a powerful lesson. DO NOT DO THIS

"When stock prices collapsed in 2008, the bear market wiped out half of the savings of L W and her husband, both doctors in Houston. Feeling "sucker punched," she says, they swore off stocks and put their remaining money in a bank.

This week, as the Dow Jones Industrial Average and Standard & Poor's 500-stock index pushed to record highs, Ms. W and her husband hired a financial adviser and took the plunge back into the market."

https://www.wsj.com/articles/SB10001424 ... 2458161986


I only hope their savings amounted to $100 at that point. Luckily for them they are better situated than most to recover from that error. Many will not have that luxury.

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Re: Preparing for My First Recession?

Post by 22twain » Tue Sep 25, 2018 6:13 pm

nisiprius wrote:
Mon Sep 24, 2018 9:11 am
In any case, if you suspect you cannot tolerate a -40% drop in your portfolio, then you need to adopt a portfolio now that is unlikely to drop that much, and stick with it even after the danger seems to have passed--and even though you are aware of "missing out" on higher gains by doing so.
When I started to invest in the 403B plan at my first teaching job after grad school, in the early 1980s, I allocated 50% of my contributions to stock, and 50% to "bonds" (actually the TIAA Traditional stable-value-like account). In the late 1990s during that period of "irrational exuberance", I considered raising the stock contributions to 75%, but never got around to going to the HR office to fill out the paperwork. Then the dot-com bust hit and I was glad I had stayed with 50%. I left it there even afterwards, and rode through 2008-09 with only about a 17% dip in my total account value, continuing to contribute at the same level.

If I had started out at 75% stock and stuck with it, my 403B would now be about 12% higher. If I had gone 100% stock, it would now be about 25% higher. Not trivial sums, to be sure, but we have "enough" anyway, so I'm not losing any sleep over my choice.
My investing princiPLEs do not include absolutely preserving princiPAL.

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Re: Preparing for My First Recession?

Post by RonBurgAM » Wed Sep 26, 2018 4:48 pm

You are 30 with a nice nut for your age. A pullback in the stock market in the next few years would likely be a boon for you. You will invest more money in the next 5 years then you have in the last 5 and it would be good to do it at a discount. Start buying VBTLX or VWIUX (depending on where you put it) until you get to 20 to 30%. Set an allocation and resolve to look at your financial situation once/month. The 30s are arguably the most fun decade in a person's life. You are in better shape financially than 90% of the population. Set it, forget it, and go enjoy life.
:sharebeer

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Re: Preparing for My First Recession?

Post by aspirit » Wed Sep 26, 2018 5:05 pm

If you've experienced viewing both 09/02 you've seen what can happen, do not doubt much worse might happen. Your 30ish, invest accordingly. :D Good luck!
Time & tides wait for no one. A man has to know his limitations.

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Re: Preparing for My First Recession?

Post by Artsdoctor » Wed Sep 26, 2018 5:22 pm

nisiprius wrote:
Mon Sep 24, 2018 9:11 am
You should always be prepared for a recession. And you should always be prepared for stock market crash (they are not really the same thing.)

I believe that the equity risk premium only exists because there really is a risk. If there were a simple way to avoid the risk, everyone would use it, there would be no risk, and there would be no equity risk premium. Too many people seem to think "stocks are risky for everybody else, but not for me, because I will ride the bull market up, then see the bear market coming in time to get out before it hits."

Watch out for any thinking that amounts to "risky for everyone else, but not for me."

Wanting the equity risk premium without the risk is a form of greed.

I think you are unconsciously expressing fear, and shielding yourself against looking risk in the face by using the number -40% instead of the nice round number -50%. In any case, if you suspect you cannot tolerate a -40% drop in your portfolio, then you need to adopt a portfolio now that is unlikely to drop that much, and stick with it even after the danger seems to have passed--and even though you are aware of "missing out" on higher gains by doing so.
Extraordinarily focused synopsis of investor psychology at play here. :sharebeer

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Re: Preparing for My First Recession?

Post by dknightd » Wed Sep 26, 2018 6:15 pm

Sorry, I did not read all posts. Some of this will likely be redundant and duplicative.
This is a perfect time to reassess your risk tolerance. You lived through a remarkable period. Who knows what the future might bring.
I assume somebody above pointed you to a risk tolerance worksheet. If not, google it and find one.
At 25 you can be pretty risk tolerant with your long term investments. I would always keep some in a bond fund, or similar. This does two things, it gives you a cushion, and perhaps more importantly it gives you some money you can put into stocks should they drop and market becomes cheap. I suggest an annual reassessment of your risk tolerance, and, re-balance accordingly.

There are two big mistakes you should avoid. Never panic and sell stocks when they are down. You are young and have many years ahead of you. Buy (re-balance) when they are down. The second mistake IMO is to try and time things. Do it annually on a day that works for you. One mistake I made was being too conservative when I was young. I would have had more money now if I had been more aggressive with stocks. But it is impossible to predict how I might have done, or how you might do. I picked my asset allocation. I was moderate, about 50/50. So that is what I stuck with plus or minus 10% depending on how I felt each year. That has cost me a lot of money over the years. I would have been much better off doing 75/25. But who knew?

The other thing to consider is your stock investments (or retirement investments, or what ever you want to call them) do not always correspond to what might be called a "recession". In addition to your long term investments, you also have to consider your shorter term living expenses. The ideal is to never have to touch your long term investments to cover a short term problem. You have to judge for yourself how much emergency money you need. Your job could be very stable, or, very unstable. You could find a new one quickly, or maybe not if your industry is the cause of the next recession.

As part of your risk tolerance assessment you need to consider how likely is it you will loose your job. If you do, how long might it take to find a new one. How much might it cost to avoid dipping into your long term savings.

Basically life is a crap shoot. Live below your means and likely you will come out ahead. But there are no guaranties :(

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Re: Preparing for My First Recession?

Post by bigROI » Thu Sep 27, 2018 10:59 am

You need to look at a recession as an opportunity to buy stock on sale. I would say if you had 25% in bonds you could set a benchmark for re-balance to trade those bonds for stocks on say a 20% dip, 30% dip or 40% dip to capture the opportunity while still backstopping your holdings. I like to leverage my new contributions and ROTH to buy in when I think its a good time to re-balance.
A penny saved is much more then a penny earned when you consider the tax/SS/medicare cut.

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Re: Preparing for My First Recession?

Post by retiredjg » Thu Sep 27, 2018 11:42 am

It has kind of bugged me since the topic began that people are saying "recession" when they are really talking about a "bear market". A bear market is a long period of falling stock prices and general market pessimism. That is what this poster's question is about.

Recession does not refer to market activity at all. It refers to a state of the economy which is not the same thing as the stock market. A recession may or may not accompany a bear market. A bear market may or may not accompany a recession.

The confusion is probably great, especially for you younger investors, because the last bear market actually did coincide with a recession and the whole mess came away with the name "The Great Recession". It's no wonder you don't know the difference.

Here is a chart that demonstrates what I'm talking about.

https://www.ftportfolios.com/Common/Con ... 8ff9bfe12d

As you can see, recessions can occur during both bull (long period of rising stock prices) and bear markets. Bear markets can occur with or without a recession. And so on.
Last edited by retiredjg on Thu Sep 27, 2018 1:17 pm, edited 1 time in total.

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