Reducing Blow-Up risk

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Topic Author
m@ver1ck
Posts: 296
Joined: Fri Sep 14, 2018 2:18 pm

Reducing Blow-Up risk

Post by m@ver1ck » Tue Jun 30, 2020 3:31 am

I've been on this forum for about a year now, have learnt a bunch and helped others. When I look at the covid numbers, it's not clear what lies ahead of us. This has probably always been true that we know nothing, but specially true now.

To hedge against stocks going down 90%, and at the same time, a job loss and other calamities looking to see what moves I can make now.

I'm probably in a safe spot where I work, but who knows. If things really go bad, layoffs will come - just so the organization lives for another day.

So - current asset allocation is 84/26, should really be 76/24 - I'll get there at some point - just selling stocks at peaks, and investing new money in vbtlx to get there.

Total Assets excluding home, mostly in retirement: around 1.4M.

Thinking of following moves:
a) Not contributing to Mega-BackDoor ROTH until steps below are achieved.

b) All new monies go to bonds in retirement until I hit the 76/24 mark again - and after that will invest to maintain that ratio

c) Refinance home. I'm currently in a 2.75% 15 year mortgage, maturing in 2018. Outstanding is 230K, montly payment around 3500. Thinking of doing a $0 cost refinance so I can get into a 30 year loan. In case of crisis this means that monthly payments would be easier to handle - and I would need a correspondingly lower EF. Once the crisis is over, I'll write a check to pay the home off - or aggressively pay it off in the next 5-8 years.

d) Shore up EF. My 'EF' - which is part of my AA and is invested in a CD ladder is about 50K. Need to get to 2 years of EF - about 168K now, but 120K after d) below. I do have stocks (VTI, MSFT) in taxable worth around 250K - and about that much in 240K bonds in retirement. in a pinch, I could sell stocks in taxable, and buy stocks in retirement by selling bonds.

So - the goal here is not to optimize returns, but to reduce risk of total failure - of having to sell at a huge loss.

Oh - and hope to put this on auto-pilot and focus 110% on work - to reduce likelihood to be on chopping block.

Thoughts?

lakpr
Posts: 5398
Joined: Fri Mar 18, 2011 9:59 am

Re: Reducing Blow-Up risk

Post by lakpr » Tue Jun 30, 2020 7:41 am

m@ver1ck,

1. I would suggest that you view your mortgage as a negative bond. What bond holdings you have in your portfolio are earning only 1.4% on average (the yield of Total Bond Market Index), and pay down your mortgage instead. Sell those stocks in taxable, buy stocks in your retirement account, and pay down / pay off your mortgage with the proceeds from stock sale. That 2.75% return you will be implicitly earning is tax-free, as I am almost sure that your mortgage interest is non-deductible (unless you regularly donate upwards of $10k to charity per year).

2. I wouldn't really consider the EF as part of the asset allocation. Shore it up, as you said, but its purpose is to be there when the times are tough, not to be part of your investments whose value can fluctuate.

Other than these two suggestions, I think you are doing everything right.

neilpilot
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Location: Memphis area

Re: Reducing Blow-Up risk

Post by neilpilot » Tue Jun 30, 2020 8:12 am

m@ver1ck wrote:
Tue Jun 30, 2020 3:31 am
current asset allocation is 84/26, should really be 76/24
Is this an error - Is your current allocation actually 84/16?

In my opinion, an allocation change from 84% to 76% equity is not a significant change.

Swivelguy
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Joined: Sun Jan 18, 2009 11:37 pm

Re: Reducing Blow-Up risk

Post by Swivelguy » Tue Jun 30, 2020 9:01 am

There are many ways things can go bad, some you can hedge against, others you can't. Some reasonable hedges you could consider would be holding 5-10% of your portfolio in gold (to mitigate real losses in extended stagflation), expanding your emergency fund, and/or cultivating alternative sources of income. Further down the spectrum we move away from "hedging" and get into "prepping" - beans, bullets, and bandaids, and so on.

livesoft
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Re: Reducing Blow-Up risk

Post by livesoft » Tue Jun 30, 2020 9:32 am

m@ver1ck wrote:
Tue Jun 30, 2020 3:31 am
So - current asset allocation is 84/26, should really be 76/24 - I'll get there at some point - just selling stocks at peaks, and investing new money in vbtlx to get there.
What do you define to be a peak? I am curious of exactly which dates you have rebalanced out of equities in the past 2 months. Thanks!
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Misenplace
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Re: Reducing Blow-Up risk

Post by Misenplace » Tue Jun 30, 2020 11:25 am

I removed a few off topic posts speculating about the future course of the COVID-19 pandemic, and replies. Please review the Please read before posting on coronavirus/COVID-19 sticky at the top of every forum, and restrict your replies to helping the OP.

Topic Author
m@ver1ck
Posts: 296
Joined: Fri Sep 14, 2018 2:18 pm

Re: Reducing Blow-Up risk

Post by m@ver1ck » Tue Jun 30, 2020 2:19 pm

livesoft wrote:
Tue Jun 30, 2020 9:32 am
m@ver1ck wrote:
Tue Jun 30, 2020 3:31 am
So - current asset allocation is 84/26, should really be 76/24 - I'll get there at some point - just selling stocks at peaks, and investing new money in vbtlx to get there.
What do you define to be a peak? I am curious of exactly which dates you have rebalanced out of equities in the past 2 months. Thanks!
I've always been 100/0, but after discovery bogleheads decided to buy more bonds - and moved from 100/0 to 77/23 sometime last year or the year before. Don't recall exactly. I might have even stopped buying stocks after June 2019 to buy more bonds to get to that 77/23 mark.
When the market crashed this year, I rebalanced, going from 70/30 back to 77/23, The market recovery puts me back up at 86/14, and i've been slowly selling stocks to buy bonds/CDs etc.

I had a smallish position in global wellington. I've also been moving $$ from vtsax to global wellington. Non-US positions are still less than 10% all up, and I'll probably leave it around 10%.

livesoft
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Re: Reducing Blow-Up risk

Post by livesoft » Tue Jun 30, 2020 2:25 pm

OK, but you didn't even come close to answering my question. It is OK to write that you don't identify peaks, but just sell when you feel like it.
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Topic Author
m@ver1ck
Posts: 296
Joined: Fri Sep 14, 2018 2:18 pm

Re: Reducing Blow-Up risk

Post by m@ver1ck » Tue Jun 30, 2020 8:11 pm

Ah - peaks = market marching upwards and my rebalancing bands breached.

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