Am I wrong in thinking about the bull this way?

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jmetsrule
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Am I wrong in thinking about the bull this way?

Post by jmetsrule » Fri Dec 15, 2017 2:17 pm

As the market continues to climb, many people start to develop a fear for the eventual drop. I'm full-blooded Bogle in the sense that I admit I have no clue when it's going to happen--only that it will, eventually.

I keep my asset allocation exactly where I want it for my age and stage in life: basically 80/20 (stocks/bonds), with 25+ years to go. So, when the bull eventually gets chased off by the bear, my allocation will do what it does and I'll keep feeding the 403b and Roth IRA.

Now, here's where I'd like some feedback on my thoughts on the fear in a rising market.

When we think of our own money, we tend to think of it in dollars and cents: in other words, I lost $550 dollars. That always stings.

When we theorize about the market rising and dropping, we tend to think in percentage points: in other words, what happens if the market drops 30% tomorrow?

Even though I know the market will eventually drop at some point in the next 25+ years, I'm happy for each percentage point it goes up until then, because, in my mind, it raises the precipice point from which the drop begins.

If I started the year with a $1000 on January 1st and it has grown 10% to $1100 and then drops 20% that's better than not growing at all and then dropping 20% to 800, right?

We have no control over how far the market will drop: 20, 30, 40%. However, if the market is going to drop anyway, isn't it better that it drops from a higher point?

Bonus Content:

My guess is that one possible negative to this scenario is that valuations have risen so much that you have further to climb in order to get back to that point. Is that a fair counterargument?

Can I counter my own counterargument by asking, isn't the hopes (not promise) of a rising market the reason why we invest at all? Therefore, the market is doing what we want it to do.

livesoft
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Re: Am I wrong in thinking about the bull this way?

Post by livesoft » Fri Dec 15, 2017 2:21 pm

I discount all talk about dropping 30% in one day as hogwash. We see all the time on the forum people fearing a big drop in a very short time like one day. If the market dropped 30% in one day, I would be all over that buying if I was near a computer and my orders could get submitted.

There are circuit breakers in place for big drops in one day, too.
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David Jay
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Re: Am I wrong in thinking about the bull this way?

Post by David Jay » Fri Dec 15, 2017 2:50 pm

You are correct in your evaluation, but there is also the behavioral side to consider. For human beings, the pain of loss is greater than the joy of gain. By a factor of perhaps three-to-one.

This can easily be demonstrated by looking at a coin flip for serious money. Very few people would take double-or-nothing odds on a serious sum of money. Even at two-to-one, very few.

The import is that people are loss-averse. Which is why ads are running on the radio up here for financial products promising that you will "not lose a penny" in the next stock market crash. People will accept minuscule returns in order to avoid even minor drops. Look at the numerous threads here on BH with concerns about putting money in the "dangerous" bond market, when the worst annual performance in the lifetime (1986) of the Vanguard Total Bond fund is -2.9%. But, but... loss!
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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SimpleGift
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Re: Am I wrong in thinking about the bull this way?

Post by SimpleGift » Fri Dec 15, 2017 2:52 pm

jmetsrule wrote:
Fri Dec 15, 2017 2:17 pm
Can I counter my own counterargument by asking, isn't the hopes (not promise) of a rising market the reason why we invest at all? Therefore, the market is doing what we want it to do.
Right. But the reason why we invest in stocks is much more than a hope — it's a calculated expectation that companies worldwide will continue to increase their earnings-per-share, driving the real value of our invested shares higher (chart below).
  • Image
    Note: Shows total, inflation-adjusted returns, with income reinvested.
    Source: Credit Suisse
If diversified broadly across many companies worldwide, one is really betting on the future of global capitalism — i.e., that its resilience and dynamism will overcome the future challenges ahead. Though much could go wrong (a global pandemic, an environmental collapse), its past track record is pretty impressive over the long term — the occasional market crash included.
Last edited by SimpleGift on Fri Dec 15, 2017 3:33 pm, edited 1 time in total.
Cordially, Todd

KlangFool
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Re: Am I wrong in thinking about the bull this way?

Post by KlangFool » Fri Dec 15, 2017 3:21 pm

OP,

In your case, with 25 years to go, do you want to buy the stock at a bull market (overprice) or bear market (on-sale)? In fact, in your case, whether it is bull or bear market, it really does not matter. Your future and current contribution are larger than your existing portfolio. As long as you keep a fixed AA and buy according to your AA, you will buy low.

KlangFool

thangngo
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Re: Am I wrong in thinking about the bull this way?

Post by thangngo » Fri Dec 15, 2017 3:41 pm

jmetsrule wrote:
Fri Dec 15, 2017 2:17 pm
If I started the year with a $1000 on January 1st and it has grown 10% to $1100 and then drops 20% that's better than not growing at all and then dropping 20% to 800, right?
If you are in it for the gain, you must take the loss when it comes. Don't be greedy. This year I have 20%+ gain, I expect to take a loss of 20-30% in the future, only that I don't know when. A lot of people try to avoid the loss and many has done worse than those who stay invested.

If you can't stomach the bumpy ride and your fear of loss might make you sell at the bottom, keep your AA at an appropriate level.
Last edited by thangngo on Fri Dec 15, 2017 3:43 pm, edited 2 times in total.

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midareff
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Re: Am I wrong in thinking about the bull this way?

Post by midareff » Fri Dec 15, 2017 3:42 pm

I lived through the 1999-2000 tech wreck and 2007-2008 drop and recession. These things come along and they are beyond your control. Your AA is within your control. Set your asset allocation as appropriate for your age and other factors and continue to invest, and continue to maintain your AA by re-balancing as appropriate, and maintain your investment program (IPO)..

In other words, put the blinders on and follow your plan.

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Lancelot
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Re: Am I wrong in thinking about the bull this way?

Post by Lancelot » Sun Dec 17, 2017 2:04 am

William J O'Neil, Investor Business Daily, opined that investors make "The big money" when the market tanks and they remain invested. That assumes that folks continue to invest in the market, snapping u those depressed shares.

Of course an 80 year old might not be as thrilled :)
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xxd091
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Re: Am I wrong in thinking about the bull this way?

Post by xxd091 » Sun Dec 17, 2017 5:58 am

Hi jmetsrule
Great to see you starting the “run” with such a good plan in place
Keep coming to this forum to get more knowledge and more encouragement
midareff has it exactly right-follow his advice
Now the biggest enemy is yourself-can you “hold the bridge” while the “enemy” come at you with gloom and doom and fancy financial schemes!
I am 71 now-been through all the recent crashes-the Bogle way does work-it’s a tried and tested system
“Circle the waggons and hold the ring “
Keep learning and you will make it through !
xxd09
PS apologies for the mixed metaphors!

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bottlecap
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Re: Am I wrong in thinking about the bull this way?

Post by bottlecap » Sun Dec 17, 2017 8:46 am

It’s a fair, and I think correct, counter argument. Nonetheless, if mental accounting helps you get through the day, so be it.

JT

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blaugranamd
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Re: Am I wrong in thinking about the bull this way?

Post by blaugranamd » Sun Dec 17, 2017 8:58 am

I have and continue to emphasize looking at your portfolio as shares that have value not dollar amounts. The ONLY reason we care about this issue is because the value of our shares is appraised in real time. If you have 100 shares of VTSAX, you don't have $6700 sitting around, you have 100 fractional shares of thousands of companies that Vanguard tells you someone will pay you $67/share for at this exact moment. This continuous appraisal process and representation of our shares in dollars on websites instead of shares makes us feel like if we miss an opportunity to convert shares to dollars that we've somehow lost money. IMO, this is not true. The value of your shares is meaningless unless you're planning to sell. If you're not doing that for 25+ years looks me, then their current value is irrelevant. It might be splitting hairs but it keeps me from overthinking fluctuations.
-- Don't mistake more funds for more diversity: Total Int'l + Total Market = 7k to 10k stocks -- | -- Market return does NOT = average nor 50th percentile, rather 80-90th percentile long term ---

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Re: Am I wrong in thinking about the bull this way?

Post by AlohaJoe » Sun Dec 17, 2017 9:49 am

jmetsrule wrote:
Fri Dec 15, 2017 2:17 pm
We have no control over how far the market will drop: 20, 30, 40%. However, if the market is going to drop anyway, isn't it better that it drops from a higher point?
First, let me agree with you that people are completely irrational about market crashes. That said, the typical crash fear captures something you are missing.

What you are saying is that the probability of a crash is unconditional of any stock market increases -- that is, the probability is the same whether the market is flat, goes up 10%, or goes up 200%.

But most people believe that the probability of a crash is conditional on booms -- that the chance goes up as returns go up. They believe that if the market goes up by 100% in 2018 then the chance of a crash goes up really high, too. (I'd wager that nearly everyone on this board also believes this at a gut-feel level.)

So the question is...which is it? Does a boom increase the chance of a crash or not?

It turns out (according to Goetzmann's Bubble Investing: Learning from History, 2016) that a boom does increase the chance of a crash. In fact, a boom makes a crash 10-times more likely. So there's something to what people commonly feel....

That said "10-times more likely" still isn't a lot. We're talking about going from a ~1.4% chance to a 10% chance.

Wakefield1
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Re: Am I wrong in thinking about the bull this way?

Post by Wakefield1 » Sun Dec 17, 2017 10:58 am

Sophisticated investors might look down at this but I am somewhat focused on dividends-if the dividends are tending to increase over time I feel O.K. even if there are paper unrealized losses due to valuation drop if not too large-did valuation just retreat to where it was a few months back or did it retreat 4 years worth :!: Still exciting to see all that play money that has magically appeared since the last election cycle!
That is so even if some of my mutual funds especially in taxable were chosen as having somewhat modest dividend payout %--I like to see that going up over time ("dividend growth Fund might have lower dividends than Index 500! but is that negated by higher Cap Gains distribution?)
Of course in a really bad drop occasioned by bad times dividends may drop!

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