How To Invest Now and Best Limit Risk of Big Recession Loss

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spruceandpine
Posts: 2
Joined: Fri Feb 08, 2019 6:28 pm

How To Invest Now and Best Limit Risk of Big Recession Loss

Post by spruceandpine » Fri Feb 08, 2019 7:48 pm

Hey Everyone,

I really appreciate this forum and all of your wisdom! I've been a reader for a while but this is my first post.

I recently sold my company and now have $1MM+ in cash to try to FIRE. My strategy had been to just invest everything in VTWAX (Overall World Market Cap) and leave it forever. After looking at the 10/2 treasury term spread, corporate debt cycle, net worth to income, Shiller PE, etc, it seems like the market will have a recession in the next 1-2 years. I know no one knows if that's correct, but I just can't emotionally handle a big drop right away if I was to invest and a recession hit. I'm comfortable with volatility long term so long as my balance doesn't drop below my initial investment.

I've been researching strategies to try to avoid sitting on cash but also avoid the emotional risk of an immediate market downturn. Right now my money is parked in Monkey Market (VMFXX). These are a few strategies I've been looking at:
  • Balance. Ray Dalio got a lot of press last year for his Pure Alpha fund win and he commented that: ‘If you are worried when the stock market goes down and happy when it goes up, it probably indicates that your portfolio is unbalanced. If your income is also tied to how the economy does, you are doubly at risk because your portfolio can go down when your income is worst, which is scary.’ I don't really understand how to achieve the "balance" that he speaks of when bonds are on the verge of Bear too and interest rates are set to rise in the foreseeable future. What asset classes are actually expected to rise through the next recession?
  • Tactical Asset Allocation (TAA). Enhance returns and minimize losses by increasing allocation to assets expected to outperform, and reducing allocation to assets expected to underperform. I could use this strategy until I'm more comfortable with entering the market fully. I found this website allocatesmartly.com which tracks popular TAA but I'm not clear how do you go about the actual buying process? Does anyone here use TAA and readjust monthly?
  • Defensive Portfolio. The theory is to move toward high-quality bonds and defensive sectors such as consumer staples, health care and utilities, which outperform during recessions. Does anyone know of a good example portfolio for this with specific buys? Are high quality bonds really a good idea with bond yields so low and interest rates rising? Bond funds seem to drop during recessions too, as do large cap stocks, so is this strategy really better than just Money Market?
  • Dividend Stocks. These historically perform better in a Bear. With bond performance so low, the income from the dividends is in line with bonds but you also get to own the stock potential. While it's argued dividends are less relevant than total growth, this option emotionally would be better in a downtown because I'd still have income without needing to sell shares. Does anyone do a dividend strategy?
  • Other options?
Your thoughts are super appreciated!! Sitting on cash is stressing me out!

Thank you!

magister
Posts: 25
Joined: Thu Jun 21, 2018 4:18 pm

Re: How To Invest Now and Best Limit Risk of Big Recession Loss

Post by magister » Fri Feb 08, 2019 11:05 pm

One of the principles around which this community is organized is that it is impossible to reliably time financial markets. So, to the extent that each of the three strategies you’ve identified seems to be one sort of market-timing scheme or other, you are unlikely to find much sympathy for them here.

What are your goals for this money? Do you need to make withdrawals for living expenses? Do you just want to let it grow over the course of decades? Being able to answer this question for yourself will be important for making a decision about how to invest it.

One final point: if you really can’t stomach even a short-term reduction of principal, you probably shouldn’t be invested in stocks or bonds.

venkman
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Joined: Tue Mar 14, 2017 10:33 pm

Re: How To Invest Now and Best Limit Risk of Big Recession Loss

Post by venkman » Fri Feb 08, 2019 11:12 pm

You want something with above-average returns and below-average risk. We all want that. It doesn't exist.

The only way to guarantee you never go below your initial balance is to put everything into a MM fund, then invest the dividends that it throws off. And even that doesn't guarantee you won't lose ground to inflation.

Risk and return are inextricably related. You have to decide how much short-term risk you can handle, in exchange for higher long-term return.

michaeljmroger
Posts: 288
Joined: Fri Sep 21, 2018 10:54 am

Re: How To Invest Now and Best Limit Risk of Big Recession Loss

Post by michaeljmroger » Fri Feb 08, 2019 11:20 pm

spruceandpine wrote:
Fri Feb 08, 2019 7:48 pm
Monkey Market
:mrgreen:

HEDGEFUNDIE
Posts: 1780
Joined: Sun Oct 22, 2017 2:06 pm

Re: How To Invest Now and Best Limit Risk of Big Recession Loss

Post by HEDGEFUNDIE » Fri Feb 08, 2019 11:22 pm

The magic asset you are looking for is long term Treasuries.

JTColton
Posts: 18
Joined: Wed Jun 20, 2018 7:41 pm

Re: How To Invest Now and Best Limit Risk of Big Recession Loss

Post by JTColton » Sat Feb 09, 2019 12:30 am

Wellesley Income might be of interest.

John Laurens
Posts: 403
Joined: Mon Nov 14, 2016 7:31 pm

Re: How To Invest Now and Best Limit Risk of Big Recession Loss

Post by John Laurens » Sat Feb 09, 2019 8:24 am

Before we can help, how is your situation different than someone who has invested a couple thousand a month over a long period of time and now has 1MM+ invested? Would they not experience the exact same “loss” during a recession as you? You have a financial behavioral problem to work out.

I would consider using the 1MM+ to become completely debt free if you are not already. Keep six months of cash in your “monkey market” and invest the rest in a 3 fund portfolio in an allocation that matches your need, ability, and willingness to accept risk.

Regards,
John

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nedsaid
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Re: How To Invest Now and Best Limit Risk of Big Recession Loss

Post by nedsaid » Sat Feb 09, 2019 9:58 am

The problem with your strategy is that the market anticipates future events or at least tries too. Stocks may fall in anticipation of a recession and actually rise when the recession arrives. Hard to know how far ahead exactly the markets are looking. This last market correction was in anticipation of a recession or at least a slow down, what December took away. . .January gave back. Anywho, that recession or slowdown didn't arrive. It might have all been a battle of the bots.

There are a lot of factors that drive markets and it is hard to say that any one thing makes the markets do what they do. Sometimes the tape goes crazy for no apparent reason. The old fashioned human emotions of fear and greed play into this also.

It is a way of me saying that market timing is very difficult to do. John Bogle said that he didn't know of anyone who did market timing consistently well. Furthermore, he said that he didn't know anyone who knew anyone who succeeded at marketing timing. Or has Jane Bryant Quinn once said, "The Market Timing Hall of Fame is an empty room."
A fool and his money are good for business.

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CyclingDuo
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Re: How To Invest Now and Best Limit Risk of Big Recession Loss

Post by CyclingDuo » Sat Feb 09, 2019 10:20 am

spruceandpine wrote:
Fri Feb 08, 2019 7:48 pm
Hey Everyone,

I really appreciate this forum and all of your wisdom! I've been a reader for a while but this is my first post.

I recently sold my company and now have $1MM+ in cash to try to FIRE. My strategy had been to just invest everything in VTWAX (Overall World Market Cap) and leave it forever. After looking at the 10/2 treasury term spread, corporate debt cycle, net worth to income, Shiller PE, etc, it seems like the market will have a recession in the next 1-2 years. I know no one knows if that's correct, but I just can't emotionally handle a big drop right away if I was to invest and a recession hit. I'm comfortable with volatility long term so long as my balance doesn't drop below my initial investment.

I've been researching strategies to try to avoid sitting on cash but also avoid the emotional risk of an immediate market downturn. Right now my money is parked in Monkey Market (VMFXX). These are a few strategies I've been looking at:
  • Balance. Ray Dalio got a lot of press last year for his Pure Alpha fund win and he commented that: ‘If you are worried when the stock market goes down and happy when it goes up, it probably indicates that your portfolio is unbalanced. If your income is also tied to how the economy does, you are doubly at risk because your portfolio can go down when your income is worst, which is scary.’ I don't really understand how to achieve the "balance" that he speaks of when bonds are on the verge of Bear too and interest rates are set to rise in the foreseeable future. What asset classes are actually expected to rise through the next recession?
  • Tactical Asset Allocation (TAA). Enhance returns and minimize losses by increasing allocation to assets expected to outperform, and reducing allocation to assets expected to underperform. I could use this strategy until I'm more comfortable with entering the market fully. I found this website allocatesmartly.com which tracks popular TAA but I'm not clear how do you go about the actual buying process? Does anyone here use TAA and readjust monthly?
  • Defensive Portfolio. The theory is to move toward high-quality bonds and defensive sectors such as consumer staples, health care and utilities, which outperform during recessions. Does anyone know of a good example portfolio for this with specific buys? Are high quality bonds really a good idea with bond yields so low and interest rates rising? Bond funds seem to drop during recessions too, as do large cap stocks, so is this strategy really better than just Money Market?
  • Dividend Stocks. These historically perform better in a Bear. With bond performance so low, the income from the dividends is in line with bonds but you also get to own the stock potential. While it's argued dividends are less relevant than total growth, this option emotionally would be better in a downtown because I'd still have income without needing to sell shares. Does anyone do a dividend strategy?
  • Other options?
Your thoughts are super appreciated!! Sitting on cash is stressing me out!

Thank you!
Let's go with a few basic questions outside of your business that you just sold.

Have you ever invested in stocks & bonds before - either individually or via mutual funds/ETF's?

What is your age and time horizon for the establishment of this portfolio? You mention FIRE, but are you 30, 43, 57, 61?

Do you own real estate such as a home and or any rentals?

Do you plan on doing any more work to bring in income now that you have sold your business?

Do you have any retirement accounts or taxable investing accounts established that you set up while you were running your business?

How much do you need to generate each year in income to cover your household expenses?

Is this $1M going to support you only, or is there a partner and or children involved as well?

If there is another involved, are they working and bringing in income to the household cash flow?

Have a look here, as the format does - believe it or not - help guide answers to questions:

viewtopic.php?f=1&t=6212
Last edited by CyclingDuo on Sat Feb 09, 2019 10:26 am, edited 2 times in total.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

matthewbarnhart
Posts: 14
Joined: Sat Feb 25, 2017 4:05 pm

Re: How To Invest Now and Best Limit Risk of Big Recession Loss

Post by matthewbarnhart » Sat Feb 09, 2019 10:20 am

spruceandpine wrote:
Fri Feb 08, 2019 7:48 pm
Your thoughts are super appreciated!! Sitting on cash is stressing me out!
The most important lesson I've received about investing: "It is better to adjust your psychology to the optimal investing strategies than to adjust the strategies to your psychology." -- JL Collins.

User avatar
Sandtrap
Posts: 5906
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

Re: How To Invest Now and Best Limit Risk of Big Recession Loss

Post by Sandtrap » Sat Feb 09, 2019 11:09 am

You've gotten great advice already from the experts here, "cyclingduo", "nedsaid" . . .
Here's a visual that addresses anticipating the highs and lows of the market.
Take a look at the asset classes and see if you could have made predictions.
This is why the focus on diversification.

Also, a downloadable PDF.

Callan periodic table of investment returns + (Wiki)
https://www.bogleheads.org/wiki/Callan ... nt_returns
https://www.callan.com/wp-content/uploa ... d_2018.pdf
Image

From "nedsaid"
Have a look here, as the format does - believe it or not - help guide answers to questions:
Have a look here, as the format does - ... f=1&t=6212
You can enter this in your original post (pencil icon) or post a new post including within the title something like, "new funds portfolio review request".

MotoTrojan
Posts: 3117
Joined: Wed Feb 01, 2017 8:39 pm

Re: How To Invest Now and Best Limit Risk of Big Recession Loss

Post by MotoTrojan » Sat Feb 09, 2019 11:14 am

John Laurens wrote:
Sat Feb 09, 2019 8:24 am
Before we can help, how is your situation different than someone who has invested a couple thousand a month over a long period of time and now has 1MM+ invested? Would they not experience the exact same “loss” during a recession as you? You have a financial behavioral problem to work out.

I would consider using the 1MM+ to become completely debt free if you are not already. Keep six months of cash in your “monkey market” and invest the rest in a 3 fund portfolio in an allocation that matches your need, ability, and willingness to accept risk.

Regards,
John
This. Also I’d add that you should become comfortable with tax-loss harvesting and have a strategy ready to execute. If you take a $250K loss it will make you feel a little better.

dbr
Posts: 27940
Joined: Sun Mar 04, 2007 9:50 am

Re: How To Invest Now and Best Limit Risk of Big Recession Loss

Post by dbr » Sat Feb 09, 2019 11:20 am

spruceandpine wrote:
Fri Feb 08, 2019 7:48 pm
. . . it seems like the market will have a recession in the next 1-2 years. I know no one knows if that's correct, but I just can't emotionally handle a big drop right away if I was to invest and a recession hit. I'm comfortable with volatility long term so long as my balance doesn't drop below my initial investment.

If you can't tolerate a big drop in the next one or two years then don't invest in stocks now and for the next few years. You can choose an intermediate course investing in not very many stocks.

Being comfortable with volatility in the long run but not in the short run is contradictory. You have too much faith in your ability to know what is going to happen and the long run is just the short run continuously compounded.

". . . so long as my balance does not drop below my initial investment . . ." if truly intended absolutely is a stiff requirement to meet that pretty much excludes investing in stocks at all. Keep in mind if one really intends that it should be in terms of real dollars, after inflation. You can meet a requirement like that by putting everything in TIPS, but there isn't much else. Stocks in the long run promise to outrun inflation, but there will be periods of loss.

DB2
Posts: 111
Joined: Thu Jan 17, 2019 10:07 pm

Re: How To Invest Now and Best Limit Risk of Big Recession Loss

Post by DB2 » Sat Feb 09, 2019 11:33 am

spruceandpine wrote:
Fri Feb 08, 2019 7:48 pm
Hey Everyone,

I really appreciate this forum and all of your wisdom! I've been a reader for a while but this is my first post.

I recently sold my company and now have $1MM+ in cash to try to FIRE. My strategy had been to just invest everything in VTWAX (Overall World Market Cap) and leave it forever. After looking at the 10/2 treasury term spread, corporate debt cycle, net worth to income, Shiller PE, etc, it seems like the market will have a recession in the next 1-2 years. I know no one knows if that's correct, but I just can't emotionally handle a big drop right away if I was to invest and a recession hit. I'm comfortable with volatility long term so long as my balance doesn't drop below my initial investment.

I've been researching strategies to try to avoid sitting on cash but also avoid the emotional risk of an immediate market downturn. Right now my money is parked in Monkey Market (VMFXX). These are a few strategies I've been looking at:
  • Balance. Ray Dalio got a lot of press last year for his Pure Alpha fund win and he commented that: ‘If you are worried when the stock market goes down and happy when it goes up, it probably indicates that your portfolio is unbalanced. If your income is also tied to how the economy does, you are doubly at risk because your portfolio can go down when your income is worst, which is scary.’ I don't really understand how to achieve the "balance" that he speaks of when bonds are on the verge of Bear too and interest rates are set to rise in the foreseeable future. What asset classes are actually expected to rise through the next recession?
  • Tactical Asset Allocation (TAA). Enhance returns and minimize losses by increasing allocation to assets expected to outperform, and reducing allocation to assets expected to underperform. I could use this strategy until I'm more comfortable with entering the market fully. I found this website allocatesmartly.com which tracks popular TAA but I'm not clear how do you go about the actual buying process? Does anyone here use TAA and readjust monthly?
  • Defensive Portfolio. The theory is to move toward high-quality bonds and defensive sectors such as consumer staples, health care and utilities, which outperform during recessions. Does anyone know of a good example portfolio for this with specific buys? Are high quality bonds really a good idea with bond yields so low and interest rates rising? Bond funds seem to drop during recessions too, as do large cap stocks, so is this strategy really better than just Money Market?
  • Dividend Stocks. These historically perform better in a Bear. With bond performance so low, the income from the dividends is in line with bonds but you also get to own the stock potential. While it's argued dividends are less relevant than total growth, this option emotionally would be better in a downtown because I'd still have income without needing to sell shares. Does anyone do a dividend strategy?
  • Other options?
Your thoughts are super appreciated!! Sitting on cash is stressing me out!

Thank you!
You might want to take a look at the Ray Dalio "All-weather portfolio" thread. In short, only 30% of it is in equities.

Mike Scott
Posts: 1157
Joined: Fri Jul 19, 2013 2:45 pm

Re: How To Invest Now and Best Limit Risk of Big Recession Loss

Post by Mike Scott » Sat Feb 09, 2019 11:49 am

You say holding "cash" is causing stress but you don't want to lose any of this money. FDIC cash accounts (high interests savings, CDs) and bonds are how you don't lose money (except for inflation). You could hold the 1M in cash/cash equivalents as a "bucket" and then invest any future income from this money and any other income you might have into stocks for growth. There are probably better choices but you can do what you please with your own money.

It's probably best to let this money sit in the money market fund while you take some time to learn more about yourself, your investing approach and the variety of investing options you have. It's time to educate yourself in fiancial and tax management and consider that your new business is managing your money. Of course, there are many who would be happy to manage it for you for a fee.

mikeyzito22
Posts: 129
Joined: Sat Dec 02, 2017 5:42 pm

Re: How To Invest Now and Best Limit Risk of Big Recession Loss

Post by mikeyzito22 » Sat Feb 09, 2019 12:08 pm

John Laurens wrote:
Sat Feb 09, 2019 8:24 am
Before we can help, how is your situation different than someone who has invested a couple thousand a month over a long period of time and now has 1MM+ invested? Would they not experience the exact same “loss” during a recession as you? You have a financial behavioral problem to work out.

I would consider using the 1MM+ to become completely debt free if you are not already. Keep six months of cash in your “monkey market” and invest the rest in a 3 fund portfolio in an allocation that matches your need, ability, and willingness to accept risk.

Regards,
John
+1

tibbitts
Posts: 8329
Joined: Tue Feb 27, 2007 6:50 pm

Re: How To Invest Now and Best Limit Risk of Big Recession Loss

Post by tibbitts » Sat Feb 09, 2019 12:21 pm

There will always be a looming recession and market plunge. The last time the market was down 50%, a lot of people felt it was likely to drop another 50%. It doesn't feel like the worst is over when the worst (for the moment) is over. When it seems like the market is "safe" is usually when it's most likely to drop.

The solutions here seems to be limited: TIPS, and (probably inflation adjusted) annuities.

User avatar
fortfun
Posts: 1532
Joined: Tue Apr 19, 2016 7:31 pm

Re: How To Invest Now and Best Limit Risk of Big Recession Loss

Post by fortfun » Sat Feb 09, 2019 1:04 pm

Found this for a friend last week. Seems like solid advice. It is a few years old though...
https://investorplace.com/2015/08/best- ... stability/

Topic Author
spruceandpine
Posts: 2
Joined: Fri Feb 08, 2019 6:28 pm

Re: How To Invest Now and Best Limit Risk of Big Recession Loss

Post by spruceandpine » Mon Feb 11, 2019 8:18 pm

HEDGEFUNDIE wrote:
Fri Feb 08, 2019 11:22 pm
The magic asset you are looking for is long term Treasuries.
Thanks! This was interesting to look into. Seems it's less reliable of a strategy than it once was: https://seekingalpha.com/article/423005 ... treasuries

Coltrane75
Posts: 5
Joined: Wed Feb 06, 2019 2:32 pm

Re: How To Invest Now and Best Limit Risk of Big Recession Loss

Post by Coltrane75 » Mon Feb 11, 2019 8:31 pm

Balance: I'm not sure what he means by "balance" either; what he seems to have said is vague. You should use Portfolio Visualizer and run some tests on various asset allocations to see which one you can live with. Include historical bear markets as a stress test for you. Determining which asset classes will do well during a recession is tough; that is a sector rotation type of strategy; I wouldn't recommend it.

Bonds still make money perfectly fine in long term interest rate increase trends. Nothing to worry about there and you should search this forum to find threads that debunk that.

TAA: I don't do this, I chose the plain indexing approach that is orthodox here; pick your percentages and stick with it.

Defensive Portfolio: I don't do this either. If i feel like I'm too woozy about the future, then maybe I would consider lowering the % in stocks.

Dividend: I looked into this and didn't find Dividend indexing to be any less volatile than other collections of stocks.

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