How to deal with the temptation to pullback on stocks

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pswift
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How to deal with the temptation to pullback on stocks

Post by pswift »

sambb's post "who here is tempted to pullback on stocks?" showed that a many people are tempted to time the market in a run up. Some pullback outright, while others weasel into it by "adjusting" their Asset Allocation. Since I started investing about a year ago, I've learned a lot and recognize the importance of sticking with a stable AA, but actually going through market ups and downs with your retirement funds fully invested is very different than understanding the theory. Of course, we first need to write an Investment Policy Statement, but even when you've done that, there's a temptation to "adjust" it as the market rises and falls. Joining the discussion here at Bogleheads.org is also helpful for me, and I thought it would be helpful to make a separate post focused on dealing with that temptation.

So what are your strategies for overcoming the temptation to pullback in market run-ups or to sell when the market plummets? How do you minimize/eliminate that temptation?
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Re: How to deal with the temptation to pullback on stocks

Post by Toons »

Experience has been my best teacher over the last 35 years,been through bull runs and bear markets along the way ,from panic in the streets to wild euphoria.What I learned. Pick an asset allocation and STICK to it.Once a year or so,if you need to re balance then do so,either by selling an asset a class to re balance or contribute new monies to the under performing asset class.The market will do what the market will do. :happy
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Re: How to deal with the temptation to pullback on stocks

Post by Fallible »

pswift wrote:sambb's post "who here is tempted to pullback on stocks?" showed that a many people are tempted to time the market in a run up. Some pullback outright, while others weasel into it by "adjusting" their Asset Allocation. Since I started investing about a year ago, I've learned a lot and recognize the importance of sticking with a stable AA, but actually going through market ups and downs with your retirement funds fully invested is very different than understanding the theory. Of course, we first need to write an Investment Policy Statement, but even when you've done that, there's a temptation to "adjust" it as the market rises and falls. Joining the discussion here at Bogleheads.org is also helpful for me, and I thought it would be helpful to make a separate post focused on dealing with that temptation.

So what are your strategies for overcoming the temptation to pullback in market run-ups or to sell when the market plummets? How do you minimize/eliminate that temptation?
You minimize that temptation with a proper asset allocation based on your financial capacity and your emotional tolerance for risk. That risk tolerance is ultimately what will determine whether you can stay the course in bad markets; too often we don't learn our tolerance level until we panic and bail out or are so tempted to do so we can't sleep nights. Sounds as if it would be a good idea for you to revisit your AA to see if adjustments are needed to better reflect your tolerance.

Check the wiki for more info, especially "Asset Allocation" and "Behavioral Pitfalls." Also, since you've been invested only a year, check out "Getting Started" to see where you might have started out wrong: http://www.bogleheads.org/wiki/Getting_Started
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Re: How to deal with the temptation to pullback on stocks

Post by bertilak »

Toons and Fallible are exactly right. Use an appropriate Asset Allocation to deal with risk.

More to the point, us an appropriate AA to deal with your reaction to risk.

Even more to the point, what would you expect your reaction to be if the risk actually materialized. Pick an AA where you can "keep calm and carry on," as the British said in the face of more risk than you are likely to encounter!

Now, when you are feeling the unease caused by awareness of the risks you are taking with your portfolio, is probably a really good time to collect your thoughts and decide on an AA with which you can "carry on," even if you lose your calm a little.

I found it helpful to think "where would I be if the equity side of my AA fell 50%?" That's an arbitrary number but it does give you something to help focus your thoughts. I picked an AA where I could say I would be quite unhappy but it wouldn't materially affect my life (by much) and my best course of action would be to remain fully invested and to continue investing new money in a way to maintain that AA. Think of the stocks you could be picking up at a fire sale!
Last edited by bertilak on Thu Nov 21, 2013 6:37 pm, edited 1 time in total.
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Re: How to deal with the temptation to pullback on stocks

Post by Steadfast »

Make solemn vows not to touch correctly allocated current assets. If you absolutely cannot help yourself and must do something, then in certain circumstances you could tilt new inflows in accordance with your anxieties, rather than your exact target AA.

For instance, 100% of my 401k deferral is going into bonds right now which will result in a very slightly overweight bond allocation going into 2014. This is not because I believe bonds are a great investment right now - I don't. It's because I want to get something for the money and have a heavy bond payload to deploy into equities when the inevitable correction comes. This lets me sleep at night, and also doesn't change my overall AA meaningfully. Meanwhile, my existing equity allocation continues to enjoy the ride to the top, wherever that may be.

When the correction comes, my bonds and I will be waiting.
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Re: How to deal with the temptation to pullback on stocks

Post by billern »

Have your IPS define your re-balancing threshold and how frequently you evaluate and re-balance. Stick to it regardless of recent market performance or your emotions.
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Re: How to deal with the temptation to pullback on stocks

Post by RenoJay »

For me, I was 85% in equities when the market tanked in 2008/2009. I stayed the course, but it ate me up inside. I had a ton of anxiety. So I realized that was way too high an allocation to equities. Eventually I figured out that 50/50 is right for me, and I waited until the market had made a nice recovery and have slowly gotten down to 50/50 over the past two years. Now, to quell the "is this the top?" feeling, I'll sell just a tiny bit of equities on big up days. The act of "doing something" can usually quell the unease, while not causing any shifts in my AA since I'm only making itty bitty minor revisions like selling off 1/2 of 1% of my equities. I admire the older guys/women who truly can stay the course without even looking at their portfolios. For me, however, most of my investing career has occurred in the past 12 years which has obviously been a rough time to learn the ropes, so I suppose I'm a little jumpier than the people with decades of experience.
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Re: How to deal with the temptation to pullback on stocks

Post by bertilak »

RenoJay wrote:For me, I was 85% in equities when the market tanked in 2008/2009. I stayed the course, but it ate me up inside. I had a ton of anxiety. So I realized that was way too high an allocation to equities. Eventually I figured out that 50/50 is right for me, and I waited until the market had made a nice recovery and have slowly gotten down to 50/50 over the past two years. Now, to quell the "is this the top?" feeling, I'll sell just a tiny bit of equities on big up days. The act of "doing something" can usually quell the unease, while not causing any shifts in my AA since I'm only making itty bitty minor revisions like selling off 1/2 of 1% of my equities. I admire the older guys/women who truly can stay the course without even looking at their portfolios. For me, however, most of my investing career has occurred in the past 12 years which has obviously been a rough time to learn the ropes, so I suppose I'm a little jumpier than the people with decades of experience.
I'm also at 50/50. I figure I'm both as aggressive as I can get and as conservative as I can get all at the same time. No need to fret over being too much one way or the other. I'm already all the way in both directions!
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Re: How to deal with the temptation to pullback on stocks

Post by livesoft »

My technique to avoid selling on sharp pullbacks is that my IPS says that I MUST buy on single-day sharp pullbacks called Really Bad Days (RBDs). It works.

Since I make so much money by buying on RBDs (positive reinforcement), I have no problems rebalancing when my asset allocation gets out of whack otherwise.
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Re: How to deal with the temptation to pullback on stocks

Post by Toons »

billern wrote:Have your IPS define your re-balancing threshold and how frequently you evaluate and re-balance. Stick to it regardless of recent market performance or your emotions.

+3 Excellent :happy
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Re: How to deal with the temptation to pullback on stocks

Post by columbia »

Buy into a LifeStrategy fund and let them handle it?
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Re: How to deal with the temptation to pullback on stocks

Post by berntson »

livesoft wrote:My technique to avoid selling on sharp pullbacks is that my IPS says that I MUST buy on single-day sharp pullbacks called Really Bad Days (RBDs). It works.

Since I make so much money by buying on RBDs (positive reinforcement), I have no problems rebalancing when my asset allocation gets out of whack otherwise.
I really like this idea. What are your cutoffs from RBDs?
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Re: How to deal with the temptation to pullback on stocks

Post by livesoft »

berntson wrote:What are your cutoffs from RBDs?
I don't understand your question, but the description of an RBD algorithm can be found by searching the forum.
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Re: How to deal with the temptation to pullback on stocks

Post by Toons »

columbia wrote:Buy into a LifeStrategy fund and let them handle it?
+1 Good Idea :happy
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Re: How to deal with the temptation to pullback on stocks

Post by IlliniDave »

pswift wrote:sambb's post "who here is tempted to pullback on stocks?" showed that a many people are tempted to time the market in a run up. Some pullback outright, while others weasel into it by "adjusting" their Asset Allocation. Since I started investing about a year ago, I've learned a lot and recognize the importance of sticking with a stable AA, but actually going through market ups and downs with your retirement funds fully invested is very different than understanding the theory. Of course, we first need to write an Investment Policy Statement, but even when you've done that, there's a temptation to "adjust" it as the market rises and falls. Joining the discussion here at Bogleheads.org is also helpful for me, and I thought it would be helpful to make a separate post focused on dealing with that temptation.

So what are your strategies for overcoming the temptation to pullback in market run-ups or to sell when the market plummets? How do you minimize/eliminate that temptation?
I don't have any strategies to try to overcome my judgement. Sorry, I'm just not into being Mr. Stoic and playing AA chicken with the universe. What I do to keep myself out of trouble is move slowly and in small steps and within the confines of my written plan. I said this in a different thread, but I could legitimately call all the activities I'm considering over the next 13 months rebalancing/value averaging and/or responding to a changing personal financial situation (stocks shot up faster than expected so I'm wealthier than anticipated today). But that would be disingenuous because it's not the whole story. There's a visceral component that respects reversion to the mean.

One of my "flaws" is that I have that characteristic you hear about in stock pickers where they have a hard time selling the "losers". So when markets are moving down my instincts are to hang on and wait it out, not to sell. "Rebalancing back in" is tough, but I manage to get it done. All that's covered in the IPS too.
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Re: How to deal with the temptation to pullback on stocks

Post by Sriracha »

No pullbacks since I started this level of investing, which includes the '08 crash. So far during this run-up, I've rebalanced into bonds on schedule per my IPS, and - after hitting our 2013 target for contributions to all accounts - decided to use further contributions this year to rebalance USA/international, which was just shy of needing a rebalance per IPS. Nothing more serious than that....
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Re: How to deal with the temptation to pullback on stocks

Post by magneto »

If tempted strongly then maybe the stock AA is too high. Alternatively a dynamic AA will have the investor at least 'doing something' not too adverse in situations such as the present rising stock market. Following notes put together prompted by previous posts, trying to summarise my own approach for an IPS include an example :-

A ‘Proportional Reset Method’ for Rebalancing

Rebalancing is commonly based on time or deviation bands. This method attempts to use both in a progressive manner.

At regular intervals, say monthly or for the ultra-cautious quarterly, the investor looks at deviations from the desired AA and rebalances, say 10% of the way to the desired AA. The proportional response controls the rate of approach to the desired AA, captures some momentum effect, and is a calming influence. The investor is always moving in the right direction, towards, but seldom reaching the desired AA, and thus not making large changes which could lead to regret. The method must surely be sub-optimal, and not the lowest cost, but may suit those of a cautious nature.

The desired AA can either be a fixed target or a target based on valuations.

For example take a multiple of the S&P 500 dividend yield (say 20) and make that a target stock allocation percentage (e.g. 20 * 2.0% yield = 40%).
Should the investor finds himself being pushed to uncomfortable allocations then limits can be applied, or the investor can use a modified target which is an average of the above simple multiple and a desired central allocation to act as a restraining influence. The slow timed proportional restriction does in any event tend to iron out the wilder asset allocations when the market moves to extremes such as 1999 and 2008/9.

The use of the US Dividend Yield as a market valuation measure is flawed in the long term, as is discussed by Andrew Smithers in Valuing Wall Street, but does however have the advantage of being a number readily accessible and meaningful in showing the income produced.

All Best
Last edited by magneto on Fri Nov 22, 2013 6:27 am, edited 1 time in total.
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Re: How to deal with the temptation to pullback on stocks

Post by max12377 »

I started at 60/40 before the big bull run. Now I'm pretty much 70/30. VERY Tempted to stay here for a while because bonds/fixed income returns are so poor. Most of my fixed income is in a Stable Value returning 3.5%. Watching the difference in returns between stocks and fixed causes an overpowering temptation to throw it all in stocks and let it ride.. But I won't.. I'm a deer in the headlights investor.. I tend to leave things alone. However, I know I need to take my re-balancing medicine soon even though it won't taste very good. Maybe let it ride a few more days.. :oops:
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Re: How to deal with the temptation to pullback on stocks

Post by z3r0c00l »

Steadfast wrote: When the correction comes, my bonds and I will be waiting.
What if there is no correction? The Dow may never drop below 16,000 again. When do you decide to even out the AA again?
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Re: How to deal with the temptation to pullback on stocks

Post by JoMoney »

I have been browsing the book The Intelligent Investor lately, it seems Ben Graham believed some of the main benefits of portfolio rebalancing was to relieve the itch to do something with market changes:
In Ch.8 of Intelligent Investor, Benjamin Graham wrote:A serious investor is not likely to believe that the day-to-day or even month-to-month fluctuations of the stock market make him richer or poorer. But what about the longer-term and wider changes? Here practical questions present themselves, and the psychological problems are likely to grow complicated. A substantial rise in the market is at once a legitimate reason for satisfaction and a cause for prudent concern, but it may also bring a strong temptation toward imprudent action. Your shares have advanced, good! You are richer than you were, good! But has the price risen too high, and should you think of selling? Or should you kick yourself for not having bought more shares when the level was lower? Or— worst thought of all—should you now give way to the bull-market atmosphere, become infected with the enthusiasm, the overconfidence and the greed of the great public (of which, after all, you are a part), and make larger and dangerous commitments? Presented thus in print, the answer to the last question is a self-evident no, but even the intelligent investor is likely to need considerable will power to keep from following the crowd.
It is for these reasons of human nature, even more than by calculation of financial gain or loss, that we favor some kind of mechanical method for varying the proportion of bonds to stocks in the investor’s portfolio. The chief advantage, perhaps, is that such a formula will give him something to do. As the market advances he will from time to time make sales out of his stockholdings, putting the proceeds into bonds; as it declines he will reverse the procedure. These activities will provide some outlet for his otherwise too-pent-up energies. If he is the right kind of investor he will take added satisfaction from the thought that his operations are exactly opposite from those of the crowd.
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Re: How to deal with the temptation to pullback on stocks

Post by Padlin »

Like Fallible, if your current AA causes too much anxiety then it may the smart time to reevaluate and adjust. I've also found re-balancing can make one feel you've done something, enough to stop any dumb emotion based moves.
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Re: How to deal with the temptation to pullback on stocks

Post by The Wizard »

z3r0c00l wrote:
Steadfast wrote: When the correction comes, my bonds and I will be waiting.
What if there is no correction? The Dow may never drop below 16,000 again. When do you decide to even out the AA again?
Best way to deal with this is to write a P/E10 valuation clause into your IPS, to deal with the BUBBLES that occur from time to time.
Something like, when P/E10 > 30, shift AA to 50/50.
And then, when P/E10 < 20, shift AA to 65/35.
Once it's in your IPS, you see, all Bogleheads will nod in agreement that you must follow it...
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Re: How to deal with the temptation to pullback on stocks

Post by Aptenodytes »

Steadfast wrote:Make solemn vows not to touch correctly allocated current assets. If you absolutely cannot help yourself and must do something, then in certain circumstances you could tilt new inflows in accordance with your anxieties, rather than your exact target AA.

For instance, 100% of my 401k deferral is going into bonds right now which will result in a very slightly overweight bond allocation going into 2014. This is not because I believe bonds are a great investment right now - I don't. It's because I want to get something for the money and have a heavy bond payload to deploy into equities when the inevitable correction comes. This lets me sleep at night, and also doesn't change my overall AA meaningfully. Meanwhile, my existing equity allocation continues to enjoy the ride to the top, wherever that may be.

When the correction comes, my bonds and I will be waiting.
I would not generalize this rule. Misallocating new contributions can do a lot of damage under some circumstances. It sounds like it works for you because it tricks you into thinking you have changed your AA when in fact you haven't, but such an outcome won't be the same in other circumstances. Under other circumstances the trick won't work and the AA change will be substantial.

Also, it isn't clear what is illusion and what is reality in your own case. At the same time you say your AA isn't meaningfully different and you say you are building up a big overage in bonds ready to pounce on falling equities. Both statements can't be true.
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Re: How to deal with the temptation to pullback on stocks

Post by ofcmetz »

The Wizard wrote: Best way to deal with this is to write a P/E10 valuation clause into your IPS, to deal with the BUBBLES that occur from time to time.
Something like, when P/E10 > 30, shift AA to 50/50.
And then, when P/E10 < 20, shift AA to 65/35.
Once it's in your IPS, you see, all Bogleheads will nod in agreement that you must follow it...
If its written in the IPS, then it is extremely bogleheadish to practice it. My IPS tells me to freeze a bag of bite size Snickers bars on Friday nights, and then to eat them while watching Marvel superhero movies. This too shall never be questioned.
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Re: How to deal with the temptation to pullback on stocks

Post by scone »

My stock allocation is 30%, which is my real comfort zone. The diversification of the stock allocation is far better than it was before I read the Boglehead, Bernstein, and Swedroe books, so the everyday swings are not nearly as crazy as they were before I got a clue. Thank you, Bogleheads!

Then again, my Stable Value helps me deal with the fear of bonds and stocks both crashing at the same time. My goal at this point is to have many years of retirement income in Stable Value, and more in cash savings, so I can ride out a multi-year global meltdown without having to sell stocks in a down market. Not quite Apocalypse-proof, but getting a little better every day. Three years and one week to retirement.
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Re: How to deal with the temptation to pullback on stocks

Post by goodenoughinvestor »

I envy all of you because at least you have an IPS! At this point I don't. I feel that I'm too new to investing to know for certain what works for me. I parted ways with my AUM investment adviser a few months ago when I decided to learn the ropes and keep that annual 1.1% for myself. So I'm still in the stage of learning--and until I understand more, both about finances and my own psychology as an investor, I don't know what risk level I can commit to. Right now I'm at 60/40--with the 40 being a mix of bonds and cash. I haven't made dramatic changes in my portfolio since liberating it other than to sell individual equities in my retirement accounts and shift those funds to Vanguard Total Stock Market and Vanguard International. I also removed the cash from the brokerage accounts and put it in Ally CDS. My next step is to "de-complicate" things. I have 50 different holdings! I think investing will always be a foreign language for me--I will never feel as confident as a fluent, native-born speaker. So I need to be slow, careful and deliberate. My best guess is that if there's, say, a 30% "correction" I wouldn't sell and would probably buy a bit to increase my exposure to equities. But if four years later the market hasn't returned, I can't say what I would do because this is all new to me. I know that Vanguard and some other sites have questionnaires to help assess your risk level. But they can only ask what you think you would do. And when you don't have a track record, it's hard to know.

That's why this site is so great. I've learned a ton from reading and the direct advice I've received. I think if there's a market sell-off we will all cyberly "hold hands" and keep each other from doing something stupid. Or at least there will be even more endless threads debating arcane aspects of economic theory, which will be distracting enough to keep ME from doing something stupid--I hope!
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Re: How to deal with the temptation to pullback on stocks

Post by JW-Retired »

pswift wrote:
So what are your strategies for overcoming the temptation to pullback in market run-ups or to sell when the market plummets? How do you minimize/eliminate that temptation?
My strategy says never sell assets to rebalance unless the equity AA exceeds a high end maximum. That is only going to happen at some historic stock market high. It is flirting with my high end limit right now but isn't quite there yet. This policy requires you to do nothing at all in bear markets except wait them out. I like that because we find it so extremely easy to do nothing. Never tempted in the slightest to sell anything. It's a minority option here, but IMO active rebalancing is at best useless. Selling bonds to rebalance into stocks on the way down and then the reverse again on the way up, accomplishes nothing at all except increasing your risk and your worry about when you should do something.

So far in the 21st century the only semi-active rebalancing I've done is buying 100% stocks during 08/09 with the new money. I admit that was market timing but a couple of year's new money didn't amount to all that much. There is no more new money now so our future investment management is going to be plenty boring. :happy
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Re: How to deal with the temptation to pullback on stocks

Post by momar »

I'm greedy.
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Re: How to deal with the temptation to pullback on stocks

Post by ObliviousInvestor »

columbia wrote:Buy into a LifeStrategy fund and let them handle it?
This is what I do. It's working very nicely for me so far -- no stress, second thoughts, or temptation to tinker.
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Re: How to deal with the temptation to pullback on stocks

Post by gks »

pswift wrote:sambb's post "who here is tempted to pullback on stocks?"
So what are your strategies for overcoming the temptation to pullback in market run-ups or to sell when the market plummets? How do you minimize/eliminate that temptation?
Don't look.
Rationalize, a lot:

There is more money in the account than I put in. (Didn't work well in 87, but after that it was sufficient)

It is going to be a long time before I need the money. (Easier then than now)

Wait to the end of the year before entering fund totals into the spread sheet.
(Worked in 08. Didn't enter 2nd or 3rd quarter totals because of the pain)

This will pass, etc.

My strategies don't eliminate the temptation, but they certainly reduce it-for me.

Greg
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Re: How to deal with the temptation to pullback on stocks

Post by midareff »

I simply return to my AA when it reaches certain out of balance thresholds. I used the recent excess to purchase more short and limited term bonds. If equities run another 10-12% next year, I will have to do it again. :oops:
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Re: How to deal with the temptation to pullback on stocks

Post by Dandy »

I pull back on stocks when they exceed my target and add to them when they are below my target. That keeps the decisions focused on my plan and opposed to my emotions. This rebalancing controls my risk. The intent isn't to time the market it is to control risk. If I was selling because I thought the market was too high then I would be market timing i.e. making moves because I thought I had superior knowledge than the market.

So to me the same action can be re balancing or market timing depending on the thought process involved.
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Re: How to deal with the temptation to pullback on stocks

Post by Steadfast »

Aptenodytes wrote:
Steadfast wrote:Make solemn vows not to touch correctly allocated current assets. If you absolutely cannot help yourself and must do something, then in certain circumstances you could tilt new inflows in accordance with your anxieties, rather than your exact target AA.

For instance, 100% of my 401k deferral is going into bonds right now which will result in a very slightly overweight bond allocation going into 2014. This is not because I believe bonds are a great investment right now - I don't. It's because I want to get something for the money and have a heavy bond payload to deploy into equities when the inevitable correction comes. This lets me sleep at night, and also doesn't change my overall AA meaningfully. Meanwhile, my existing equity allocation continues to enjoy the ride to the top, wherever that may be.

When the correction comes, my bonds and I will be waiting.
I would not generalize this rule. Misallocating new contributions can do a lot of damage under some circumstances. It sounds like it works for you because it tricks you into thinking you have changed your AA when in fact you haven't, but such an outcome won't be the same in other circumstances. Under other circumstances the trick won't work and the AA change will be substantial.

Also, it isn't clear what is illusion and what is reality in your own case. At the same time you say your AA isn't meaningfully different and you say you are building up a big overage in bonds ready to pounce on falling equities. Both statements can't be true.

I wouldn't generalize the rule either. The theme of this thread is what people do to cope with bubble anxiety. I view tweaking inflows as among the least-worse sort of tweaking, if one must tweak. I grant you that one shouldn't tweak.

When I say my AA isn't meaningfully different, I should have specified that my bond allocation will not get >10% above target. Another poster asked me, what if the correction never comes. Well, if bonds became +10% above AA target I would just re-adjust the inflows again, reducing bond purchases slowly (tapering!). These are small, relatively harmless activities that can give one great psychological comfort, if one needs it. I am not advocating it as a strategy for all, just sharing what gets me by sometimes.
We don't see things as they are, we see things as we are.
swaption
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Re: How to deal with the temptation to pullback on stocks

Post by swaption »

Here is my recommendation. Picture yourself 10 years from now with whatever wisdom you will have gained over the years. When you see yourself, do you see someone that will struggle with this question? Perhaps not. So the questiion is, how do you get there from here? Your choices are either through mistakes or through a conviction based on your past success. Which path will you choose? View your anxiety as the price for some valuable lessons.
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Kulak
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Location: Weimar America

Re: How to deal with the temptation to pullback on stocks

Post by Kulak »

Easy. I keep feeling this same temptation, and then I ask myself, "What if you do and then it goes up another 20%? Then what? Buy back in THEN? Never buy back in?" That dilemma is way more stressful to me than the thought of a downturn.
Depriving ourselves to boost our 40-year success probability much beyond 80% is a fool’s errand, since all you are doing is increasing the probability of failure for [non-financial] reasons. --wbern
denovo
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Joined: Sun Oct 13, 2013 1:04 pm

Re: How to deal with the temptation to pullback on stocks

Post by denovo »

I

1. Don't read that thread

2. Don't read financial news or check my balances every day

3. Watch sitcoms instead when I come home from work.
"Don't trust everything you read on the Internet"- Abraham Lincoln
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