What to do in a market correction

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DonCamillo
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What to do in a market correction

Post by DonCamillo » Sun Jul 20, 2014 10:12 am

I have no idea of when. But having seen several corrections in 30 years of investing, I expect to see more of them. I have been thinking about planning for them.

Right now I think yields are low, P/Es are high, and the book value of the market is ridiculously high. So I think a correction is certainly possible in the next few months or years.

1) The first thing I expect will happen automatically. If prices go down, so will the amount of minimum required distributions, and also the taxes paid on them. This could be a problem if you spend the MRD, as you lose a bigger percentage of your assets. But I just transfer from a tax deferred account to a taxable account, and spend only the taxable dividends.
2) The second response is standard Bogleheads practice. Rebalance. If equities go up, sell them and buy bonds. If equities go down, sell bonds and buy equities.
3) The third is a little bit of opportunism. If you were planning to retire, work another year or two and take advantage of low prices for 401a, 401k, 403b, and 457b plans and IRA/Roth IRA investments.
4) The fourth response is probably market timing, but I think it may be justified. Take advantage of low prices (in the hope that they are temporary low prices) to do Roth conversions.
5) I am also tempted to invest any idle cash and even increase savings rates when I think I spot a bargain. I consider bargains in terms of the three factors I mentioned at the beginning, yield, P/E and book value.

Are all of these legitimate responses to a correction? Are there other good ones?
Les vieillards aiment à donner de bons préceptes, pour se consoler de n'être plus en état de donner de mauvais exemples. | (François, duc de La Rochefoucauld, maxim 93)

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Re: What to do in a market correction

Post by chaz » Sun Jul 20, 2014 10:22 am

Avoid timing.

Stay the course.
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Re: What to do in a market correction

Post by livesoft » Sun Jul 20, 2014 11:00 am

I'm going to add more penguin to my asset allocation in the next market correction.
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Re: What to do in a market correction

Post by zaboomafoozarg » Sun Jul 20, 2014 12:31 pm

livesoft wrote:I'm going to add more penguin to my asset allocation in the next market correction.
What's the correlation coefficient between penguin and other major asset classes?

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Re: What to do in a market correction

Post by zaboomafoozarg » Sun Jul 20, 2014 12:36 pm

Those all sound like good what-to-dos if you are in or near retirement. I am still accumulating so wouldn't do #1 or #3.

I do have some extra cash that I would probably invest, per #5. Right now it's part of my emergency fund, but that's about double the size I need it.

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Re: What to do in a market correction

Post by magician » Mon Jul 21, 2014 12:10 am

What, exactly, is a market correction?
Simplify the complicated side; don't complify the simplicated side.

stlutz
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Re: What to do in a market correction

Post by stlutz » Mon Jul 21, 2014 12:18 am

What, exactly, is a market correction?
The traditional definition is a drop > 10% but <20% (which would be a "bear market"). The drop in 2011 was interesting because it was a "bear market" if you look at intraday prices but only a "correction" if you went by close prices. :moneybag

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Re: What to do in a market correction

Post by DSInvestor » Mon Jul 21, 2014 12:21 am

DonCamillo wrote: 1) The first thing I expect will happen automatically. If prices go down, so will the amount of minimum required distributions, and also the taxes paid on them. This could be a problem if you spend the MRD, as you lose a bigger percentage of your assets. But I just transfer from a tax deferred account to a taxable account, and spend only the taxable dividends.
RMD amount is based on retirement account balances on Dec 31 of prior year. If market correction happens on Jan 02, there would be no change in your RMD amount for the year. If account balances stay down for the rest of the year, then RMD amount for the next year will be reduced.
Wiki

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Re: What to do in a market correction

Post by Professor Emeritus » Mon Jul 21, 2014 12:37 am

livesoft wrote:I'm going to add more penguin to my asset allocation in the next market correction.
Is that due to prices "going south"?

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Re: What to do in a market correction

Post by Professor Emeritus » Mon Jul 21, 2014 12:38 am

stlutz wrote:
What, exactly, is a market correction?
The traditional definition is a drop > 10% but <20% (which would be a "bear market"). The drop in 2011 was interesting because it was a "bear market" if you look at intraday prices but only a "correction" if you went by close prices. :moneybag
Call it a "decline" Only a veteran of the House of Correction would call it anything else.

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Re: What to do in a market correction

Post by magician » Mon Jul 21, 2014 12:43 am

stlutz wrote:
What, exactly, is a market correction?
The traditional definition is a drop > 10% but <20% (which would be a "bear market"). The drop in 2011 was interesting because it was a "bear market" if you look at intraday prices but only a "correction" if you went by close prices. :moneybag
Why 10%? Why not 8%, or 12%, or 15%?

What about a 10% increase; is that a correction, too? Or is it an anticorrection?

How do we know that the market was "incorrect" before the "correction" but not afterward?
Simplify the complicated side; don't complify the simplicated side.

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Re: What to do in a market correction

Post by corner559 » Mon Jul 21, 2014 2:23 am

zaboomafoozarg wrote:
livesoft wrote:I'm going to add more penguin to my asset allocation in the next market correction.
What's the correlation coefficient between penguin and other major asset classes?
About the same as the correlation coefficient between unicorns and leprechauns.

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Re: What to do in a market correction

Post by Leeraar » Mon Jul 21, 2014 4:16 am

So I think a correction is certainly possible in the next few months or years.
Tomorrow?
Read the Rick Ferri sticky:
http://www.bogleheads.org/forum/viewtop ... 00#p312000

L.
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Re: What to do in a market correction

Post by Toons » Mon Jul 21, 2014 5:23 am

Nothing. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: What to do in a market correction

Post by fourwedge » Mon Jul 21, 2014 5:45 am

I always buy more so if it is in correction mode I will certainly buy as much as I can. I have 20+ years and I plan to pile as much in to tax sheltered accts and Taxable acct as is humanly possible.
Max out your tax sheltered retirement accounts with inexpensive, well diversified, index funds and you will beat 90% of all investors.

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Re: What to do in a market correction

Post by munemaker » Mon Jul 21, 2014 6:36 am

magician wrote:
stlutz wrote:
What, exactly, is a market correction?
The traditional definition is a drop > 10% but <20% (which would be a "bear market"). The drop in 2011 was interesting because it was a "bear market" if you look at intraday prices but only a "correction" if you went by close prices. :moneybag
Why 10%? Why not 8%, or 12%, or 15%?

What about a 10% increase; is that a correction, too? Or is it an anticorrection?

How do we know that the market was "incorrect" before the "correction" but not afterward?
You are reading too much into this. "Correction" is an investing term. Look up the definition in Investopedia http://www.investopedia.com/terms/c/correction.asp . By DEFINITION, a correction is defined as a 10% movement and it is usually used to indicate a decline. A 10% increase can technically be considered correction. Since 12% and 15% movements are greater than 10%, they are also corrections. Since an 8% movement is less than 10%, it is not a correction. Also note that to be a correction, the market movement has to reverse the trend, i.e. be a reverse movement.

CORRECTION: A reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation. Corrections are generally temporary price declines interrupting an uptrend in the market or an asset. A correction has a shorter duration than a bear market or a recession, but it can be a precursor to either.

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Re: What to do in a market correction

Post by pennstater2005 » Mon Jul 21, 2014 6:40 am

chaz wrote:Avoid timing.

Stay the course.
Agreed.
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Re: What to do in a market correction

Post by nisiprius » Mon Jul 21, 2014 7:52 am

"When in danger, or in doubt,
Run in circles, scream and shout."
--Herman Wouk, The Caine Mutiny, 1951
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: What to do in a market correction

Post by laughlinlvr » Mon Jul 21, 2014 8:11 am

magician wrote:
What, exactly, is a market correction?
Reminds me of what someone once said you could think of it as:

"Your portfolio has too much money. We're going to correct that."
Investing - The hardest way to make an easy living.

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Re: What to do in a market correction

Post by magician » Mon Jul 21, 2014 9:07 am

munemaker wrote:
magician wrote:
stlutz wrote:
What, exactly, is a market correction?
The traditional definition is a drop > 10% but <20% (which would be a "bear market"). The drop in 2011 was interesting because it was a "bear market" if you look at intraday prices but only a "correction" if you went by close prices. :moneybag
Why 10%? Why not 8%, or 12%, or 15%?

What about a 10% increase; is that a correction, too? Or is it an anticorrection?

How do we know that the market was "incorrect" before the "correction" but not afterward?
You are reading too much into this.
No; I just think that it's a stupid term.
Simplify the complicated side; don't complify the simplicated side.

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Re: What to do in a market correction

Post by magneto » Mon Jul 21, 2014 10:24 am

Don, couple of questions :-

How comfortable do you feel about your present AA targets?
What does your IPS say about rebalancing?

All Best
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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Re: What to do in a market correction

Post by nisiprius » Mon Jul 21, 2014 12:44 pm

Toons wrote:Nothing. :happy
Which prompts the following question. If my plan is "during a market correction, I will do nothing," how should I prepare to ensure that I actually follow that plan?

We know that it is common for people not to follow their plan during a market correction. Author and professional wealth advisor Dan Solin did not do so in 2008-9. Behavioral economics researcher Cass Sunstein did not do so in 2010.

Which is most likely to work? Say "I plan to follow my plan?" Or think about what makes a plan possible for me to follow?
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: What to do in a market correction

Post by DonCamillo » Mon Jul 21, 2014 2:26 pm

magneto wrote:Don, couple of questions :-

How comfortable do you feel about your present AA targets?
What does your IPS say about rebalancing?

All Best
AA: As equities have gone up so much in the past few years, I have been putting dividends, distributions, and new investments into bonds to maintain my AA. But I am not really happy with bonds either, so I have allowed my cash to drift up to about 1% of my portfolio.

Rebalancing: I allow about 3% leeway around my target AA, mainly because I do not like to sell equities. But if a correction caused me to be bond heavy, I would not hesitate to sell part of a bond fund to buy equities.
Les vieillards aiment à donner de bons préceptes, pour se consoler de n'être plus en état de donner de mauvais exemples. | (François, duc de La Rochefoucauld, maxim 93)

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Re: What to do in a market correction

Post by tadamsmar » Mon Jul 21, 2014 7:29 pm

magician wrote:
stlutz wrote:
What, exactly, is a market correction?
The traditional definition is a drop > 10% but <20% (which would be a "bear market"). The drop in 2011 was interesting because it was a "bear market" if you look at intraday prices but only a "correction" if you went by close prices. :moneybag
Why 10%? Why not 8%, or 12%, or 15%?

What about a 10% increase; is that a correction, too? Or is it an anticorrection?
Something in need of correction, apparently.

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Re: What to do in a market correction

Post by james99 » Tue Jul 22, 2014 3:13 am

In a casino roulette, after having black 10 times in a row, it doesn't make it easier to make money out of the game. You still have same chance of having black or red for the next one.

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Re: What to do in a market correction

Post by Professor Emeritus » Tue Jul 22, 2014 3:39 am

munemaker wrote:
CORRECTION: A reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation. Corrections are generally temporary price declines interrupting an uptrend in the market or an asset. A correction has a shorter duration than a bear market or a recession, but it can be a precursor to either.
So who has the crystal balls to call it an overvaluation. as opposed to merely a decline in price?

Oh and "up trend" is a market timer's word, just like over valued
I would still suggest correction is a term used by liars and thieves that they learned in the House of Correction

The proper term is a decline except for those who can accurately and consistently predict the future.

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Re: What to do in a market correction

Post by magneto » Tue Jul 22, 2014 10:21 am

DonCamillo wrote: AA: As equities have gone up so much in the past few years, I have been putting dividends, distributions, and new investments into bonds to maintain my AA. But I am not really happy with bonds either, so I have allowed my cash to drift up to about 1% of my portfolio.

Rebalancing: I allow about 3% leeway around my target AA, mainly because I do not like to sell equities. But if a correction caused me to be bond heavy, I would not hesitate to sell part of a bond fund to buy equities.
Seems then that the stock allocation is about on track, but the main worry surrounds bonds.
In common with several others on the forum, must confess we too are uneasy with bonds. Bonds are mostly offering a negative real yield, with the potential for further capital loss should interest rates rise. Looking simply at bond fund total return charts masks the underlying problem.

It is possible, however unlikely, that stocks and bonds could become correlated at the worst possible time, and both lose value together, in which situation some cash would be useful.

While cash is also currently offering a negative real yield, dependant on your estimate of forward inflation, remember the Permanent Portfolio advocates employ 25% cash!
So upping the cash just a little is not wildly unreasonable, as per your present approach?

Note : We are very cash heavy at present for above and other reasons.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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Re: What to do in a market correction

Post by Sheepdog » Tue Jul 22, 2014 11:19 am

Maybe it is time to resubmit history:

From John Merrill, "Outperforming the Market". Mr. Merrill's excellent book has a table showing that a diversifed portfolio of stocks, bonds, and cash, and held for approximately five years, would have enabled an investor to survive and eventually prosper during the worst bear market of all time (The Great Depression).

Using a moderate risk portfolio of 47% domestic stocks; 47% 5-year Treasuries; and 6% Cash; here is what would have happened to a diversified $1,000,000 portfolio on September 1, 1929 (the market peak).

YR.
END
1929 $863,000
1930 $769,000
1931 $598,000
1932 $603,000
1933 $842,000
1934 $901,000
1935 $1,124,000
1936 $1,339,000

Other reasonably diversified allocations also would have survived intact. For example, a 67% stock/28% bond/and 5% cash portfolio had a low of $416,000 in 1932 but was worth $1,195,000 at the end of 1936.

This has similarly happened in all other downturns since. It really pays to not panic and stay the course.
It's not what you gather, but what you scatter which tells what kind of life you have lived---Helen Walton

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Re: What to do in a market correction

Post by Rodc » Tue Jul 22, 2014 11:58 am

Sheepdog wrote:Maybe it is time to resubmit history:

From John Merrill, "Outperforming the Market". Mr. Merrill's excellent book has a table showing that a diversifed portfolio of stocks, bonds, and cash, and held for approximately five years, would have enabled an investor to survive and eventually prosper during the worst bear market of all time (The Great Depression).

Using a moderate risk portfolio of 47% domestic stocks; 47% 5-year Treasuries; and 6% Cash; here is what would have happened to a diversified $1,000,000 portfolio on September 1, 1929 (the market peak).

YR.
END
1929 $863,000
1930 $769,000
1931 $598,000
1932 $603,000
1933 $842,000
1934 $901,000
1935 $1,124,000
1936 $1,339,000

Other reasonably diversified allocations also would have survived intact. For example, a 67% stock/28% bond/and 5% cash portfolio had a low of $416,000 in 1932 but was worth $1,195,000 at the end of 1936.

This has similarly happened in all other downturns since. It really pays to not panic and stay the course.
Unfortunately the market then cashed again.

I do not have the data memorized, but I do remember there was a quote that went something like "The dumb money was all lost in 1929 and the smart money was all lost in 1936", so this seems to be less than the entire story.

Also, if one lost their job and had to start spending as more than a few had to do, things were not so rosy.

I think the general idea that being well diversified helps is correct, but this might overstate the benefit.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: What to do in a market correction

Post by letsgobobby » Tue Jul 22, 2014 12:28 pm

That is the risk everyone underestimates, losing one's shirt (portfolio) and one's loom (job) at the same time. It's one thing to say you'll stay the course, it's another to actually have the guts to do it in the teeth of a brutal decline, and still another to have the actual ability (new money) to do it. If your portfolio went down 30% in 2008 and then you lost your job and had to take withdrawals while the portfolio declined another 20%, it's not clear you'd ever recover from it.

That's why a good IPS and appropriate asset allocation take into account all risks, including the risk of losing your job at the most inopportune moment.

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Re: What to do in a market correction

Post by SHL » Tue Jul 22, 2014 1:07 pm

As Mr. Bogle might say: "Don't just do something, stand there!"
Stephen

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Re: What to do in a market correction

Post by freddie » Tue Jul 22, 2014 1:10 pm

Rodc wrote:
Sheepdog wrote:Maybe it is time to resubmit history:

From John Merrill, "Outperforming the Market". Mr. Merrill's excellent book has a table showing that a diversifed portfolio of stocks, bonds, and cash, and held for approximately five years, would have enabled an investor to survive and eventually prosper during the worst bear market of all time (The Great Depression).

Using a moderate risk portfolio of 47% domestic stocks; 47% 5-year Treasuries; and 6% Cash; here is what would have happened to a diversified $1,000,000 portfolio on September 1, 1929 (the market peak).

YR.
END
1929 $863,000
1930 $769,000
1931 $598,000
1932 $603,000
1933 $842,000
1934 $901,000
1935 $1,124,000
1936 $1,339,000

Other reasonably diversified allocations also would have survived intact. For example, a 67% stock/28% bond/and 5% cash portfolio had a low of $416,000 in 1932 but was worth $1,195,000 at the end of 1936.

This has similarly happened in all other downturns since. It really pays to not panic and stay the course.
Unfortunately the market then cashed again.

I do not have the data memorized, but I do remember there was a quote that went something like "The dumb money was all lost in 1929 and the smart money was all lost in 1936", so this seems to be less than the entire story.

Also, if one lost their job and had to start spending as more than a few had to do, things were not so rosy.

I think the general idea that being well diversified helps is correct, but this might overstate the benefit.
This guy would have lost ~20%( I don't know the 5 year treasury returns off the top of my head) and been slightly ahead. And of course I think we are talking nominal dollars here. With the huge deflation, it would have looked slightly better. I am pretty sure the 1973-1977 5 year period was worse. You turned 1 million into 1.2 million and but that 1.2 million only had the buying power of 800k while the opposite happened in the depression where 1 million in 1935 had the same buying power at 1.5 million in 1929.

This is all good and mathematically correct. But go back and read the board postings here in February of 2009. Now imagine instead of a like 18 month blip, you had one what went on for like 4 years.

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Re: What to do in a market correction

Post by tadamsmar » Tue Jul 22, 2014 1:12 pm

10%+ sell offs average one every 1.5 years with lots of variation:

http://www.businessinsider.com/history- ... ns-2013-12

I like it best when I don't even notice these events.

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