"How to React When the Bear's Hibernation Ends"

[Taylor Larimore]

The bull market celebrated its sixth birthday party on March 9, making this the fourth longest month-by-month ascent on record.

Bogleheads:

Boglehead author and advisor, Bill Schultheis, gives us his usual sound advice:

How to React When the Bear's Hibernation Ends

Best wishes.
Taylor

[Sheepdog]

Thank you, Taylor.
His piece ends with

In the midst of a six-year bull market, it is easy to talk about staying the course in the next bear market. It is a far greater challenge to stay the course when the market is actually down 25 percent and the financial media are forecasting the end of the world, as they did in 2008.

That is very true. I hope we all can when the time comes the next time.

[jebmke]

Thank you, Taylor.
His piece ends with

In the midst of a six-year bull market, it is easy to talk about staying the course in the next bear market. It is a far greater challenge to stay the course when the market is actually down 25 percent and the financial media are forecasting the end of the world, as they did in 2008.

That is very true. I hope we all can when the time comes the next time.

What did you do in 2000? 2008?

[nisiprius]

Thank you, Taylor.
His piece ends with

In the midst of a six-year bull market, it is easy to talk about staying the course in the next bear market. It is a far greater challenge to stay the course when the market is actually down 25 percent and the financial media are forecasting the end of the world, as they did in 2008.

That is very true. I hope we all can when the time comes the next time.

What did you do in 2000? 2008?

This is simply a statement of what I actually did. I eased back my stock allocation a bit, gradually, over calendar year 1997, in reaction to Greenspan's "irrational exuberance" speech. I'm not completely sure where that falls on the "stupid" scale, I have my rationalizations. I stayed the course in 2000. In 2008-2009 I was terrified. I stayed the course in terms of not doing anything, but I could not bring myself to place any order to rebalance from bonds into stocks. [Corrected]

A relevant third year is 2011. That's the year in which behavioral expert Cass Sunstein admits to having sold his stocks. I did nothing in 2011 and was only moderately jittery. The relevant thing here is that it was very easy to believe in 2011 that the bull market was over, the "bear was out of hibernation," and that we might be seeing the beginning of a new plunge.

I do NOT think it helps things to personalize markets as "the bull" and "the bear" and use language like "when the bear's hibernation ends."

Incidentally, what exactly is he talking about when he says "It is a far greater challenge to stay the course when the market is actually down 25 percent and the financial media are forecasting the end of the world, as they did in 2008?" I think this is unreasonably dismissive in two ways. The market was down 50%, not 25%. And I think language like "forecasting the end of the world" is unfair--it suggests that the media was being Chicken Little. Well, I think the United States along with much of the developed world was really, seriously truly at risk of financial collapse. Personally, I think there was a 1 to 10% chance. What do you think? Do you think it was much less than 1%? The fact that it didn't happen didn't mean the fear was unfounded.

[sschullo]

Thank you, Taylor.
His piece ends with

In the midst of a six-year bull market, it is easy to talk about staying the course in the next bear market. It is a far greater challenge to stay the course when the market is actually down 25 percent and the financial media are forecasting the end of the world, as they did in 2008.

That is very true. I hope we all can when the time comes the next time.

The accurate test of one's risk tolerance remains with actual losses. No models or formulas can do this for most of us. Only a few fortunate people appear to predict their risk tolerance ahead of time. I was not one of them, however, I did learn it through mistakes and pain. Thinking back, it was the greatest learning experience ever.

[aj44]

I started my career in 2001 so the first real dive I went through was 2008, when I had 5% of the investments I have today. I stayed the course then because I didn't know what the heck I was doing, not because I was keeping a well thought out allocation plan.

I think it will have a lot more meaning when I stay the course through the next dive with a lot more assets and a lot more knowledge, but I have no doubts that I will. Bring it on.

[goingup]

Jeesh, talk about a Debbie Downer. The article was sobering, and rightly so. It was in the vein of "Dress for war; pray for peace", but war's more likely.

For readers not familiar with Bill Schultheis, he wrote the wonderful concise book "The Coffeehouse Investor". Through the years I've sent several copies to family members who I thought would enjoy his philosophy and advice.

[Maynard F. Speer]

Thank you, Taylor.
His piece ends with

In the midst of a six-year bull market, it is easy to talk about staying the course in the next bear market. It is a far greater challenge to stay the course when the market is actually down 25 percent and the financial media are forecasting the end of the world, as they did in 2008.

That is very true. I hope we all can when the time comes the next time.

The accurate test of one's risk tolerance remains with actual losses. No models or formulas can do this for most of us. Only a few fortunate people appear to predict their risk tolerance ahead of time. I was not one of them, however, I did learn it through mistakes and pain. Thinking back, it was the greatest learning experience ever.

That's why I diversify probably more than most .. I don't know that rebalancing into US stocks was a good move (without foresight) in 2009 .. It certainly wouldn't have been for Japanese investors in the early 90s .. So my risk tolerance would've been tested in a 60:40 portfolio

I realised that with no more than a 1/3rd in any one asset class, I find it much easier to maintain good disciplined behaviour .. The difference between, say, 35%, and 40% (in stocks) seems to be a psychological threshold for me

[Sheepdog]

Thank you, Taylor.

That is very true. I hope we all can when the time comes the next time.

What did you do in 2000? 2008?

Basically, I did follow my plans. I had just retired a the end of 1998 and 1999 was a banner investment year. My stock allocation was 55% at retirement and in 2000 I was starting to lower my stock allocation toward my goal of "my age in bonds" or "stocks at 100 minus my age" where I would be at 30% by age 70. So, I went down to 51% at the end of 2000 (I actually had a small gain that year (+0.65%) , then to 47% stock at the end of 2001 (a loss of only -0.11% that year), then to 31% stock at the end of 2002 when my loss was only -1.5%. So I hit my lowered stock allocation plan and I had a gain of +8.3% in 2003, my age 70 year. By the way I was pulling from investments to go along with my SS in this period to meet expenses.

In 2008, I stayed basically firm. My investments dropped -9.6%. The next year, 2009, I had a gain of +12.7%. I have remained at 22% to 24% stock since 2009.

What would I have done if I was at 70% stock then? I'll never know.

[mptness]

I stayed the course in 2000. In 2008-2009 I was terrified. I stayed the course in terms of not doing anything, but I could not bring myself to place any order to rebalance from stocks into bonds.

Did you mean the opposite? What I found most difficult was re-balancing into stocks in a declining market.

From the article:

A 14 percent dip can be hard to ride out, but if you stay committed to your portfolio allocation, rebalancing when necessary, you are likely to generate decent investment returns over the next 10 years and beyond. This is predicated not on selling your common stock positions during market declines, but on having the perseverance to use these inevitable sell-offs to purchase additional shares at lower prices.

Easier said than done IMO.

[nisiprius]

I stayed the course in 2000. In 2008-2009 I was terrified. I stayed the course in terms of not doing anything, but I could not bring myself to place any order to rebalance from stocks into bonds.

Did you mean the opposite?

Yes.

What I found most difficult was re-balancing into stocks in a declining market.

I couldn't do it. However, most of my stock holdings were in balanced funds that rebalance automatically.

From the article:

A 14 percent dip can be hard to ride out, but if you stay committed to your portfolio allocation, rebalancing when necessary, you are likely to generate decent investment returns over the next 10 years and beyond. This is predicated not on selling your common stock positions during market declines, but on having the perseverance to use these inevitable sell-offs to purchase additional shares at lower prices.

Easier said than done IMO.

It's also not clear that it accomplishes that much. More or less continuous rebalancing during 2008-2009 had almost no overall effect. It actually made the decline slightly worse, and the recovery slightly better, with practically zero net. The idea that rebalancing is a big win depends either on rebalancing infrequently and having your rebalancing interval resonate with mean reversion, or a smuggled-in assumption of good market timing. When one thinks of "purchasing additional shares at lower prices" the mental image is of buying close to the bottom. In reality, if you don't know when you are at the bottom, you purchase additional shares at lower prices only to see them go still lower on the way down, and sell them at higher prices only to see the shares you sold go still higher on the way up.

[White Coat Investor]

Thank you, Taylor.
His piece ends with

In the midst of a six-year bull market, it is easy to talk about staying the course in the next bear market. It is a far greater challenge to stay the course when the market is actually down 25 percent and the financial media are forecasting the end of the world, as they did in 2008.

That is very true. I hope we all can when the time comes the next time.

What did you do in 2000? 2008?

I'm not sure if you meant that as a personal attack, or if you're not aware of what Sheepdog actually did in 2008.

viewtopic.php?t=25126

From October 9, 2008:

I have been retired for 10 years. I am one who has said over and over again. Stay the course. Look for the long term. Yeah, sure. That's fine until today. Today did it. I am just starting to be scared so that I won't tell my wife what happened today...stocks down...bonds down...I'm down. Our retirement funds are sucking down the drain. I lost today alone a year's worth of normal distributions for expenses. I keep thinking tomorrow will be a turn around. I have said that for 30 days.
I am 25% capitulating tomorrow, maybe 50% to money markets....maybe all. This is not me. I will see tomorrow.

I think Sheepdog has very good reason to hope that he can stay the course the next time. His example also gives the rest of us good reason to purposely underestimate our risk tolerance, just in case.

For those wondering how the story ended....6 weeks later he posted this:

As I bring this thread back from the dead, I think...I did not sell some of my holdings at the low, after all...my years of savings keep going lower and lower and lower in perceived value.
Retirement can be stressful.....but fun. Okay, I've gone over the cliff.....
No, I'm foolishly not selling any more for at least 3 years....
Sigh......
I can sleep soundly tonight. I hope you will as well.

[jebmke]

I'm not sure if you meant that as a personal attack, or if you're not aware of what Sheepdog actually did in 2008.

No, I was genuinely curious. I "worry" less about the folks who experience previous market declines than the newer investors who have not experience periods like October 1987 (falling knives), 2000-2003 -- a slow, punishing grind down and IMO harder to take mentally than '08-09. '08-09 was abrupt but once we got past the fall of '08 when the debt markets were vibrating I was less worried. I bought stocks in early 2009 and was madly tax loss harvesting through late 08 and the first half of 09.

His example also gives the rest of us good reason to purposely underestimate our risk tolerance, just in case.

This is precisely why it is helpful to recall what you did during the periods of turmoil. in 1987 we tried to avoid sidewalks to not get hit by falling portfolio managers. For those who were not invested in 1987, imagine the Dow dropping 4,000 points in one day. In 2000-03 we kept investing our savings in equity since it seemed to be leaking out everywhere, every year. I retired in December 2007. Reminding myself what these earlier periods were like helped keep me calm.

[vitaflo]

There's nothing I enjoy more than buying stocks when they're tanking. Right now I hold my lip and buy because "time in market, not timing the market" but when prices keep going up it starts to become tougher to swallow.

In 2000 and 2008 I did what I do now, put as much as I could save into the market, it was just much more fun during the downturns because I felt like I was getting a better deal. I don't worry about my overall balance, I worry about what price I'm buying at. The balance will eventually take care of itself over time.

[toto238]

What to do when the bear wakes up?

1. Check my portfolio a bit less
2. Keep doing what I was doing
3. Try to see if there's any other way to generate more income to get more money into the market while it's at a low
4. Perhaps defer some discretionary spending to put additional amounts into the market to take advantage of low prices

Basically stay the course.

[Fallible]

Thanks for a good article about how to act now, before the hibernation ends. I like the advice to ASSUME many more bear markets because there WILL be many more, possibly as bad as '08, maybe worse. And it really wouldn't be that hard for one to be worse than '08, simply by not coming back as quickly. I'm pleased I stayed the course in '08, though I didn't rebalance, but still wonder whether I would have had the market not recovered as fast.

I also had the advantage of having survived previous crashes since '87. For investors who haven't been through a crash, the next best thing is to ask now whether they could hold through a market worse than 2000 or 2008. If the answer is sleepless nights, it's time to lower the stock allocation - now.

[seeshells]

With the new technology's offerings, and multiple markets offering 40 or more venues to trade on I'd suggest that perhaps there will be increasingly volatile markets. I've heard new markets vernacular involving, tic sizes, dark pools, algorithmic trading, HFTrading, all increasing the level of complexity proliferating additional volatility that can only be managed by light speed computers. Today 50-75% of trades are digitized trades, with latency arbitrage looking for the best execution similar to cat and mouse trades. Opaque trading has becoming the norm. Thanks for the link TL!

[ironchef320]

As a young person who has just started investing it is a little nerve wracking knowing that the next economic downturn will be my first as an investor. With a stock to bond ratio of 85/15 I also know I will take a much bigger hit that most of the older and less risky portfolios out there. Knowing tho that I have another 40 years before I retire will allow me to see light at the end of the tunnel.
All I have to do is tap my shoes together, repeat "stay the course" and think to myself What. Would. Bogle. Do?

[goingup]

As a young person who has just started investing it is a little nerve wracking knowing that the next economic downturn will be my first as an investor. With a stock to bond ratio of 85/15 I also know I will take a much bigger hit that most of the older and less risky portfolios out there. Knowing tho that I have another 40 years before I retire will allow me to see light at the end of the tunnel.
All I have to do is tap my shoes together, repeat "stay the course" and think to myself What. Would. Bogle. Do?

Yes, that is exactly right. Another thing he says is, "Don't just do something; stand there.".

[dbCooperAir]

What do you worry about more?

When the Bear comes out or hitting the tipping point of 50 years old with the hope you are able to hold on to your job without going backwards? I'm becoming more and more aware seeing first hand what being 50 really means, so far I have been lucky, in the right place, smarter than I think I am, take your pick.

The take away, learn to live below your means now rather than latter with a good current savings plan.

[magneto]

It's also not clear that it accomplishes that much. More or less continuous rebalancing during 2008-2009 had almost no overall effect. It actually made the decline slightly worse, and the recovery slightly better, with practically zero net. The idea that rebalancing is a big win depends either on rebalancing infrequently and having your rebalancing interval resonate with mean reversion, or a smuggled-in assumption of good market timing.

In fact frequent/daily rebalancing can hurt both ways. The investor is continually selling the winning asset and adding to the losing asset whether stocks are falling or rising.
A worst case might be if stocks fall 50% =% daily over 1 year, then rise 100% =% daily over the next year, the investor loses 12%ish on the way down and 12%ish on the way back up, versus the do nothing investor. A 24%ish loss for the round trip versus 0% for the do nothing investor.
Where daily rebalancing can really score is in rippling sideways markets.

[selftalk]

I would continue dollar cost averaging and stick to my percentage created plan. I won`t rebalance since sometimes it works and sometimes not as John Bogle has indicated.

[livesoft]

Incidentally, what exactly is he talking about when he says "It is a far greater challenge to stay the course when the market is actually down 25 percent and the financial media are forecasting the end of the world, as they did in 2008?" I think this is unreasonably dismissive in two ways. The market was down 50%, not 25%.

I think he was writing about BEFORE the market was down 50% and when it was only down 25%. Yes, it dropped further after that first 25% drop.

[Sidney]

Don't forget that some of the hyperbole in the press was triggered by the vibrations in the debt markets as well. Something we didn't really see in 2000-2003. Each has to draw one's own opinion as to how close to the abyss we were or were not.

[Maynard F. Speer]

It's also not clear that it accomplishes that much. More or less continuous rebalancing during 2008-2009 had almost no overall effect. It actually made the decline slightly worse, and the recovery slightly better, with practically zero net. The idea that rebalancing is a big win depends either on rebalancing infrequently and having your rebalancing interval resonate with mean reversion, or a smuggled-in assumption of good market timing.

In fact frequent/daily rebalancing can hurt both ways. The investor is continually selling the winning asset and adding to the losing asset whether stocks are falling or rising.
A worst case might be if stocks fall 50% =% daily over 1 year, then rise 100% =% daily over the next year, the investor loses 12%ish on the way down and 12%ish on the way back up, versus the do nothing investor. A 24%ish loss for the round trip versus 0% for the do nothing investor.
Where daily rebalancing can really score is in rippling sideways markets.

Well it's a reverse-momentum effect, isn't it .. In the short-term, what's rising tends to rise and what's falling tends to fall - so too-frequent rebalancing would be constantly limiting upside and catching fall knives ..

So I suppose in principle the optimal rebalancing period for a market would be at least as long as the optimal period for measuring momentum - which for the S&P 500 has tended to be about 300 days .. or about annually .. Or perhaps even better, wait till a market shows positive momentum before rebalancing into it (I don't think this would have performed any better than annual rebalancing in 2008, but would've probably avoided rebalancing into a long-term bear market, like Japan's)

[carolinaman]

This thread reinforces the need to have a proper AA based upon your current situation and risk tolerance. The fact you "stayed the course" in prior bear markets does not necessarily mean you will do so again, especially if your situation is different. IMO, young investors should have an easier time "staying the course" than older investors, especially those nearing retirement or in retirement. Young investors typically have less money in the market and have plenty of time to accumulate wealth.

Someone who is nearing retirement or in retirement typically has a much larger nest egg. and who has maintained a high equity allocation (arguably inappropriate for their age) might panic in a deep or protracted downtown, even though they had not before. They no longer have the time or human capital to recover. The "sequence of returns" risk can be devastating for retirees if they need to spend any of these funds before the market fully recovers.

Also, even though 2008 was a really bad bear market, markets have bounced back quite nicely with a steady recovery. The next bear market may or may not bounce back so quickly. IMO, we should not assume that it will.

[carolinaman]

This thread reinforces the need to have a proper AA based upon your current situation and risk tolerance. The fact you "stayed the course" in prior bear markets does not necessarily mean you will do so again, especially if your situation is different. IMO, young investors should have an easier time "staying the course" than older investors, especially those nearing retirement or in retirement. Young investors typically have less money in the market, lots of human capital and have plenty of time to accumulate wealth.

Older investors who are nearing retirement or in retirement typically has a much larger nest egg and will need those funds for their retirement expenses. An older investor who has maintained a high equity allocation (arguably inappropriate for their age) might panic in a deep or protracted downtown, even though they had not before. They no longer have the time or human capital to recover. The "sequence of returns" risk can be devastating for retirees if they need to spend any of these funds before the market fully recovers.

Also, even though 2008 was a really bad bear market, markets have bounced back quite nicely with a steady recovery. The next bear market may or may not bounce back so quickly. IMO, we should not assume that it will.

[spectec]

I think you just nailed the main reasons I'm 25/75 at age 68. Still working and accumulating, but very conservative.

I consider the potential equity earnings I'm foregoing as roughly the equivalent of a phantom "safe withdrawal rate" on a 50/50 allocation. Some day I'm going to do the math on that, just for fun.

[gasdoc]

I am not changing a thing. Keep the AA, keep the rebalancing program, keep saving....

[Taylor Larimore]

Bogleheads:

My asset allocation is simple: Money I cannot afford to lose is in bonds and cash. The rest is in stocks.

I sleep like a baby.

Best wishes.
Taylor

[itstoomuch]

Will do OK.
We have deferred GWLB annuities. Their Income Accounts will stepup the guaranteed 5%.
If the Bear market continues for fiscal 2 years, I am going to start taking income from the annuities (not annuitize) and leverage into stuff that are in deep correction.

[magneto]

Bogleheads:

My asset allocation is simple: Money I cannot afford to lose is in bonds and cash. The rest is in stocks.

I sleep like a baby.

Best wishes.
Taylor

+1
Happy dreams

[HomerJ]

Always assume a bear market is going to start tomorrow, and have an AA that will let you stay the course.

That, by definition, means you don't do anything different the day a bear market starts, because you're already prepared for it.

Now, many will tell you to rebalance as the bear market deepens... Keep that AA constant... And this is indeed, probably the correct thing to do, especially when you're a long way from retirement and/or have less money invested... Forces you to buy low and sell high.

I will tell you this, in 2008, I never once thought about selling, and I actually changed all my NEW money (contributions to 401k, IRA, etc.) to 100% stocks, but I was much too scared to rebalance...

No way I wanted to sell bonds to buy stocks during that time... I wanted to keep my bonds, just in case...

I learned that about myself, and I'll just accept it... I rebalance stocks/bonds as stocks go up, to keep my AA constant.... but I know when they go down, I won't be rebalancing (other than with new money).

For the record, I'm 50/50 stocks/bonds with the house paid off...

I don't know when the next bear will start, but I'm ready for it to start tomorrow.

[Leif]

I learned that about myself, and I'll just accept it... I rebalance stocks/bonds as stocks go up, to keep my AA constant.... but I know when they go down, I won't be rebalancing (other than with new money).

I'm with you on that. In 08-09 I did rebalance at the start. But after a while I got tired of catching the falling knife. I still did my TLH, but after a while I stopped trying to bring my equity up to target through additional purchases. I can only imagine how much more difficult that would be in retirement.

I recall Taylor said once in a post that it is even more important to rebalance in retirement. I'm not retired yet, but I think when I am I will either expand my rebalance range from 5/25 to 10/50 or only rebalance on the equity sell side.

[Lynette]

.....

[DonCamillo]

I'll do a Roth conversion to reduce high RMDs I'll have soon.

That is about half of my plan for a significant downturn. The other half, if it happens before I retire, would be to teach an extra two or three semesters before I retire so I can invest at levels that are a relative bargain compared to today.

Since my basic needs are covered by pensions, I am more concerned with preserving a meaningful amount of the value of my earnings during my working years to spend during retirement than I am with making significant gains. In past centuries, people tried to preserve wealth by buying land, gold, or jewelry, all of which were quite volatile in price. A lot of people were unsuccessful. Considering historic volatility in asset prices makes Social Security taxes seem a relatively attractive investment!

[hale2]

This thread reinforces the need to have a proper AA based upon your current situation and risk tolerance. The fact you "stayed the course" in prior bear markets does not necessarily mean you will do so again, especially if your situation is different. IMO, young investors should have an easier time "staying the course" than older investors, especially those nearing retirement or in retirement. Young investors typically have less money in the market, lots of human capital and have plenty of time to accumulate wealth.

Older investors who are nearing retirement or in retirement typically has a much larger nest egg and will need those funds for their retirement expenses. An older investor who has maintained a high equity allocation (arguably inappropriate for their age) might panic in a deep or protracted downtown, even though they had not before. They no longer have the time or human capital to recover. The "sequence of returns" risk can be devastating for retirees if they need to spend any of these funds before the market fully recovers.

Also, even though 2008 was a really bad bear market, markets have bounced back quite nicely with a steady recovery. The next bear market may or may not bounce back so quickly. IMO, we should not assume that it will.

I agree. It was easy for me to put everything I could into more stocks during the 2000 and 2008 downturns since my portfolio was smaller and I was a long way from retirement. But now that retirement is possibly only a few years away, there is no way I would consider doing that in the next downturn. I have also made my AA more conservative over the last couple of years. I was excited to see stocks drop when I was young and aggressively saving, but I know at this point I need to set up my portfolio to keep from having sleepless nights during the next bear market.

[dc81584]

Indeed.

[rgs92]

At today's valuations, a 2009 or 1987 type crash would make stocks a screaming bargain and a good Boglehead would be able to wait things out comfortable that the downturn would be short (A P/E of 9? Hooray! Toss some mad money at the market.)
A more likely scenario of a 25% downer would cause minor damage to a 60/40 portfolio, and here too, a dedicated follower of stay-the-course will not even blink. No pain no gain, and it shakes off the faint of heart, like a forest fire clearing the brush, which is good for the market long-term.
So either way, no problem.

[TheTimeLord]

I plan to pray for a quick and painless death.

[arthurdawg]

I plan to pray for a quick and painless death.

Hmmm... How many regenerations do you have left Time Lord?

[TheTimeLord]

I plan to pray for a quick and painless death.

Hmmm... How many regenerations do you have left Time Lord?

[Maynard F. Speer]

At today's valuations, a 2009 or 1987 type crash would make stocks a screaming bargain and a good Boglehead would be able to wait things out comfortable that the downturn would be short (A P/E of 9? Hooray! Toss some mad money at the market.)
A more likely scenario of a 25% downer would cause minor damage to a 60/40 portfolio, and here too, a dedicated follower of stay-the-course will not even blink. No pain no gain, and it shakes off the faint of heart, like a forest fire clearing the brush, which is good for the market long-term.
So either way, no problem.

I'm going to sound like the perma-bear around here, but be aware we don't always get the crashes we want ..

A Japan 1990 bear market, lasting over 20 years, is just as likely - imagine thinking you'd hit the market bottom every year or two, rebalancing in, then finding stocks bombing again a few months later .. (Some might say much more likely, as banks today wouldn't have the spending they had to stimulate their way out of the previous crash)

You can have a 25% drawdown year after year after year - you never know when you're at the bottom .. Eventually stocks might be 90% down, next year they're 95% down, and you've halved your investment again ... Be aware of the risks ... Almost every global market has had these kind of dips - some lasting as long as 60 years ... Staying-the-course with a 60:40 portfolio may be the best simple advice you can give people, but if there were a real panacea in investing, the whole financial world would run very differently

[fortyofforty]

Have the trading curbs eliminated the possibility of a 1987-style crash? Do we now see a slower "slide downward" instead of the sudden, one day "fall off a cliff" drop? If I remember correctly, that 1987 crash led the nightly news programs, it was so sudden and severe.

[protagonist]

A Japan 1990 bear market, lasting over 20 years, is just as likely - imagine thinking you'd hit the market bottom every year or two, rebalancing in, then finding stocks bombing again a few months later .. (Some might say much more likely, as banks today wouldn't have the spending they had to stimulate their way out of the previous crash)

You make a very good point here about the risks inherent in rebalancing to maintain a fixed AA, which might outweigh its benefits. Proponents of rebalancing religiously to maintain an AA and "stay the course" may simply be relying on the limited experience of the US market during a cherry-picked time. I wonder what effect rebalancing would have had in the couple of years following October 1929 if you kept a large stock allocation.

In fact, I learned that lesson when the tech bubble burst (was that 1999?) When the NASDAQ declined from just under 5000 to around 3500 I thought of it as a huge buying opportunity. Same when it continued its fall to 2500. I got hammered. It is still far below its peak I imagine if you take into account inflation.

Rather than religiously rebalancing, I take the approach of keeping a certain minimum fixed sum in safe fixed income investments which I could probably live off for a long time if necessary without undue suffering- I aim to try to at least keep up with inflation there. That represents my security (for what it is worth) in case of a Japanese-like slow meltdown. I realize not everybody can do that. But to me, that is the whole purpose of fixed income investing- a safety net. My stock allocation is gambling for potential growth- i.e., play money. If I whittle that down to zero in times of extreme crisis I would not suffer horribly. And because I maintain that safety net I don't worry much about whether stocks are overvalued. But if you wind up gambling away your safety net in times of economic crisis through a combination of rebalancing and bad luck, you are defeating the purpose of a safety net.

I'm no finance expert, but that seems to make common sense to me. Perhaps if I was still working in a relatively secure job with a good income, with less to lose (or at least that perception), I would take a different approach.

[obgyn65]

Same for me. I believe I am one of the most conservative investors in this forum, being 90% in CDs and bonds. I will keep the same AA, possibly lowering my expenses while retired.

I am not changing a thing. Keep the AA, keep the rebalancing program, keep saving....

[ofcmetz]

Should you be concerned? Not if you have created a smart portfolio allocation between stocks and bonds that reflects the reality of periodic bear markets.

Thanks for the link to the article

It's so easy to talk about what you would do while things are going well. Much harder to put into practice when the poo hits the fan. I was investing during the 2008-2009 period but was only high five figures. I was intrigued that despite all our contributions our account was still going down in value. A major hurricane hitting my hometown provided a major distraction from some of the worst market days.

My portfolio balance was much higher during 2011 than 2008 and I remember trying to move fixed income money into equities several times during the fall of 2011 (fall as in October/ November as well as the drop in values). I think the actual dollar amount your portfolio drops in value can be more emotionally traumatic than the percentage fall.

toto238 » Mon Jun 01, 2015 6:04 pm

What to do when the bear wakes up?

1. Check my portfolio a bit less
2. Keep doing what I was doing
3. Try to see if there's any other way to generate more income to get more money into the market while it's at a low
4. Perhaps defer some discretionary spending to put additional amounts into the market to take advantage of low prices

Basically stay the course.

^This is my plan for the next time, but only when it's actually happening will I know for sure.

[fortyofforty]

What exactly was the suggestion about not rebalancing to the starting percentages but some variation thereof? It was something like rebalance to half your target allocation at a time, if I remember correctly. How did this idea work, again?

[dbCooperAir]

Rather than religiously rebalancing, I take the approach of keeping a certain minimum fixed sum in safe fixed income investments which I could probably live off for a long time if necessary without undue suffering- I aim to try to at least keep up with inflation there. That represents my security (for what it is worth) in case of a Japanese-like slow meltdown. I realize not everybody can do that. But to me, that is the whole purpose of fixed income investing- a safety net. My stock allocation is gambling for potential growth- i.e., play money. If I whittle that down to zero in times of extreme crisis I would not suffer horribly. And because I maintain that safety net I don't worry much about whether stocks are overvalued. But if you wind up gambling away your safety net in times of economic crisis through a combination of rebalancing and bad luck, you are defeating the purpose of a safety net.

I'm no finance expert, but that seems to make common sense to me. Perhaps if I was still working in a relatively secure job with a good income, with less to lose (or at least that perception), I would take a different approach.

To me this sounds more like asymmetric rebalancing, I think a few of the experts may agree with you.