Anyone else taking less risk

[FedGuy]

I'm currently trying to increase my fixed income percentage, not because of any kind of market timing or trying to get out before a crash or anything, but because my asset allocation used to be more tilted to equities than I'd like and I'm trying to adjust. I'm comfortable with the emotional side of the equation--I continued to buy equities during the recession even after I lost my job--but have come to appreciate that, as a 40-something, I should start building a fixed income position.

I've moved my TSP entirely into the G Fund and am currently having all of my additional TSP contributions go into G as well. I'm looking forward to the day when my G Fund holdings reach my goal of about 40% of my overall portfolio, but since the equities I hold outside of the TSP keep appreciating faster than I can add funds to the TSP, that's proving to be somewhat of a challenge. I find myself in the weird position of kind of hoping for a crash just so I can reach my allocation goal.

[F150HD]

I realize no one can predict the end of this rally and when the next correction will come, but has anyone else adjusted their asset allocation to a more conservative one because it has been a long bull market whether it was hated or not.

I went from 65/35 to 60/40 just in case. #1: Pigs Get Fat, Hogs Get Slaughtered! ... If you get too greedy like a hog, you can end up loosing it all.

you referring to the correction in Jan 2016?

[MnD]

I think anyone sweating their current AA as too high now will have a terrible time maintaining it when there is a big downturn.
Your fears will have been confirmed and where the bottom is will be unknown.

If the market drops 10%, the posts and articles about the soon to be 50% decline based on X, Y and Z will be everywhere.
Pick an asset allocation you can live with now _and_ over a significant market decline.

[Cosmo]

I realize no one can predict the end of this rally and when the next correction will come, but has anyone else adjusted their asset allocation to a more conservative one because it has been a long bull market whether it was hated or not.

I went from 65/35 to 60/40 just in case. #1: Pigs Get Fat, Hogs Get Slaughtered! ... If you get too greedy like a hog, you can end up loosing it all.

50/50 here. I haven't been actively reducing my % exposure to equities but this has been naturally happening (taking less risk) as I rebalance annually to 50/50. Or at least that is how I think about it.

Cosmo

[rgs92]

If you have a 60/40 stock/bond AA and there is a pretty big 20% stock market drop that everyone will call a crash (to about 1900 on the S&P from 2378 now) your portfolio will drop all of 12%, and maybe less as there may well be a flight-to-quality/safety in bonds.

So your million dollars will be around $880K for a while. End of the world for you? Not really.

[TheTimeLord]

I realize no one can predict the end of this rally and when the next correction will come, but has anyone else adjusted their asset allocation to a more conservative one because it has been a long bull market whether it was hated or not.

I certainly understand the urge and did eliminate some risk a while back but only to be in line with my plan which if successful is designed to give me plenty of financial resources in retirement when I need them, not maximize the return of my portfolio. Now that I have fully funded my pre-SS portfolio, I am actually increasing my equity allocation since most the new money is designated for my post-SS portfolio which won't need to be accessed for over more than 10 years. So in my pre-SS portfolio you will see me converting maturing CDs into I-Bonds and TIPS as well as a little out and out buying, while in the post-SS portfolio you will see me investing in more equity heavy AA.

[hollowcave2]

Yes, I have decided it is a good time to change my asset allocation. I did this due to a combination of factors, not the least of which I am entering retirement mode. I plan to keep working and getting an income yet, but this will be the first year I am eligible to withdraw from my IRA without penalty. This, combined with all time highs in the market (just lucky I guess, so I am taking advantage of that), and also political uncertainty in government policies, has convinced me to take action. So I have reduced my allocation to 50/50 stocks/bonds, which for me is incredibly conservative. But I am happy with the gains I have made in this market and I want to protect some of that.

I feel some empathy for younger investors wondering what to do in an all time high market. For anyone who is considering entering the market these days with new money, I really do sympathize with your plight. But I still have confidence in the long term outlook of the market even if short term turbulence happens. So I would still invest, but I would probably dollar cost average over the rest of the calendar year. I am still basically positive, but cautious.

Good luck to all.

Steve

[itstoomuch]

^ @hollowcave 2
I see that you are joined BH in 2007, at the beginning of the bubble popping.
So is your experience in 2007-2010 influencing you today?

[mmcmonster]

So this weekend I decided to reduce my Stocks by 1% and increase my Bonds by 1%.

Why? My investment policy says that my percentage Bonds should equal my age-15....

....and it's my birthday on Monday.

[Random Walker]

I am a huge believer in market efficiency and I don't believe in market timing. That being said, for all of us with maybe less than 10 years to retirement, I think it makes sense to individualize the glidepath towards the retirement AA. Rather than formulaicly take say 1% out of equities per year, why not take a little more off the table after good runs and less or hold pat after poor runs. It's not so much market timing as it is reacting to where we are compared to our goals, with an eye towards valuations.

Dave

[Omo]

My asset allocation has dictated that, for the moment, I don't invest in shares.

[Ari]

I don't do bonds, so where would I shift my money to? I'm holding tight as a 100%er.

[james22]

If you already wanted to reduce risk, then I think this is a great time to do it because of low expected returns today.

If you're only doing it because markets are expensive, then I would ask if you're ok keeping your new allocation forever, if there is never an opportunity to buy back cheaper than today. If so, then I think it's fine.

I am taking less risk because expensive markets offer lower expected returns.

I'll keep to the new allocation until the market is less expensive and offers higher expected returns.

[lazyday]

I am taking less risk because expensive markets offer lower expected returns.

I'll keep to the new allocation until the market is less expensive and offers higher expected returns.

I think that can be a reasonable approach for some. It’s just that some people seem to assume that they will be able to buy back in at a lower price than today. It sounds like you’re willing to buy back in at a higher price, if and when expected returns are higher.

Someone who reduced their stock allocation in 1990 and waited for expected returns (according to the dividend discount model) to get back just to the then historical mean, is still waiting. If they do get their chance, they will most likely be buying at a much higher price than 1990, and I expect they will have badly underperformed even with good bond returns.

Even if they used CAPE back then, they might have missed March 2009 which wasn’t very much below mean.

The stock market historically has frequently dipped well below its mean valuation. So most of us would have probably waited for a cheap market, not just average.

I do expect that the S&P 500 price will someday be much lower than today’s, but am not counting on it.

[NiceUnparticularMan]

Steady as she goes.

But this does remind me why having a substantial cash allocation is good for me. I'm trimming a little long-term expected return, but it helps me maintain my attitude that if stocks drop, that is just a good buying opportunity.

[MnD]

I am taking less risk because expensive markets offer lower expected returns.

I'll keep to the new allocation until the market is less expensive and offers higher expected returns.

I'm sure that Fidelity, Vanguard, Blackrock, T Rowe and others have discovered this excellent system and offer actively managed mutual funds to the masses that invests more in equities when the market offers higher expected returns and less in equities when markets offer lower expected returns. Sounds like a no-brainer booster rocket to the 2 comma club.

Can you give examples of funds run by professionals with vast research and trading resources available to them that have used this approach to beat the pants off the simplistic approaches advocated for here? I'm excited to see several real-world examples of just how great this system can be versus staying the course. I feel pretty dumb for sticking to buying stocks every two weeks since 1986, especially when the market was expensive with lower expected returns.

[orca91]

It is funny how many ways folks will word it to avoid saying they're market timing, isn't it?

Taking less risk based on market signals.... then will take more risk later based on market signals.... Hmmm??

[elgob.bogle]

Last year, we sold our 10-year TIPS bond ladder and intermediate bond funds, and loaded up on a combination of the Vanguard Short Term TIPS Fund and the Vanguard Short Term Treasury Fund, reducing risk on that side of the portfolio. We recently adjusted our AA from my age in bonds to my spouse's age in bonds, i.e. fixed income from 69% to 62%, in an attempt to compensate. Actually taking more equity risk was a bitter pill, but we swallowed it after considering that our investment horizon is likely 20-30 years out, and our then current fixed income allocation theoretically (Monte Carlo Simulations) would not support our anticipated withdrawal rate which will start in 3 years when dear wife retires. The other alternative we considered was leaving our current fixed income funds intact and exchanging our equity (total stock market indices) funds for small value funds and building a Larry-Type Portfolio to take on the additional risk. We may move in this direction if a big market crash occurs, and exchange some of the short-term treasuries for small value funds when re-balancing our portfolio is called for.

elgob

[rgs92]

Rebalancing more frequently (meaning when things diverge from your original target even a small amount) is not the bad kind of market timing.
Readjusting your AA depending on your conditions is mild market timing, but nowhere near as bad as those who post about going to all cash or 100% stocks. So it's a spectrum thing.

[lazyday]

It is funny how many ways folks will word it to avoid saying they're market timing, isn't it?

Taking less risk based on market signals.... then will take more risk later based on market signals.... Hmmm??

Tactical Asset Allocation is probably more accurate than Market Timing. I do it myself, though I think it's easy to get wrong and should generally be avoided.

[nedsaid]

I realize no one can predict the end of this rally and when the next correction will come, but has anyone else adjusted their asset allocation to a more conservative one because it has been a long bull market whether it was hated or not.

I went from 65/35 to 60/40 just in case. #1: Pigs Get Fat, Hogs Get Slaughtered! ... If you get too greedy like a hog, you can end up loosing it all.

You had two good reasons for reducing your risk profile. First, you were getting nervous about valuations in the US Stock Market. I don't advocate market timing but I have always said that it is better to "panic" near a market top than to really panic at a market trough. You are selling from a position of strength. Second, you are getting older like the rest of us and de-risking your portfolio a bit is not irrational.

I am sure that others will point out that the differences between 65/35 and 60/40 are not great. Others will say, why bother?

As for what I have been doing, I am been in a process of "mild rebalancing" since July 2013 since the days of the "taper tantrum." My portfolio has held steady at about 2/3 stocks and 1/3 bonds and cash. My off the top of my head guess is that if I had done nothing that I would be about 3/4 stocks. I have of course been rebalancing from stocks to bonds. I have not begun the process of de-risking my portfolio.

[tibbitts]

I guess I haven't been paying attention, but the last time I heard, we were only now supposed to be nearing the end of what was virtually guaranteed(?) to be a 17-20 year "secular" bear market that began in 2000, so what's with taking less risk now?

[aj44]

I am comfortable with my 120-age in stock asset allocation, the only move towards less risk for me is the 1% more allocation in bonds each year, this year I'm up to 17%

[harvestbook]

The only moves I made were ones moving toward my desired AA as I learned (basically trimming minor mistakes made through ignorance.) I had a Vanguard Balanced Fund when I started but I exchanged it into two US stock indexes to reach the Admiral levels and cut expense ratios. The result was reducing my bonds by about 2 percent. I'm now at 11 percent bonds overall but also have a small business with very liquid profit and little overhead and no debt, so along with emergency cash stash I can reasonably expect to survive a few years without being forced to dip into taxable investment funds.

We loosely follow Paul Merriman's recommended buy-and-hold strategies using Vanguard Funds although we're much lighter in bonds than he recommends. Instead of "timing the market," I simply buy in whichever asset class I am lagging in, so it's kind of a constant rebalancing without doing any selling.

I did boost the bond portion of my daughter's 529 since she'll need the money presumably over the next two to six years, boosting bonds to 25 percent and will raise that 10 percent a year on the premise we won't need all the money in the first year. It's a little risky but again with a cash cushion and no debt it makes sense for our personal situation. If the market crashes, we'll simply move that money to some future descendant or grandkids and let it ride. Right now the risk of outliving our money is greater than the risk of a big crash. I'm just dumb enough to admit that "I don't know."

[stemikger]

Thank you all!!! As always all good advice! Stemikger needs to chill out!!!

I know many don't agree with Jack's advice, but for someone like myself, I think it is very appropriate. I will not Peek and hopefully at the end of this journey my assets will Peak.

I lost patience with myself and while back and will temporarily ban myself from this forum. However, I will still be a lurker.

[itstoomuch]

As much as I have respect for Jack and Warren, I think that they mean well but they do seem to have much more wealth than we do and it seems that their income streams are seemingly inexhaustible. ...

We are fine and OK, but our streams of income aren't inexhaustible and do have big tail risks.
YMMV

[oldzey]

60/40 helps me to behave better and stay the course. I do tinker with my portfolio less frequently than I did when I was at 65/35.

[Alto Astral]

Actually I am thinking of taking more. Planning to change from 70/30 to 80/20. I just picked the "age-in-bonds" a few years back and stuck with it. Now I am re-evaluating this is my mid-thirties.

[ram]

I am a huge believer in market efficiency and I don't believe in market timing. That being said, for all of us with maybe less than 10 years to retirement, I think it makes sense to individualize the glidepath towards the retirement AA. Rather than formulaicly take say 1% out of equities per year, why not take a little more off the table after good runs and less or hold pat after poor runs. It's not so much market timing as it is reacting to where we are compared to our goals, with an eye towards valuations.

Dave

Agree. That's what I have done from Jan this year. I have converted to Bonds what I was supposed to over the next 4-5 yrs. I realize that some people may consider this as Market Timing and I am OK with that.

[james22]

Someone who reduced their stock allocation in 1990 and waited for expected returns (according to the dividend discount model) to get back just to the then historical mean, is still waiting. If they do get their chance, they will most likely be buying at a much higher price than 1990, and I expect they will have badly underperformed even with good bond returns.

... investors should remember that the 2000-2002 market collapse wiped out the entire total return of the S&P 500, in excess of risk-free Treasury bill returns, all the way back to May 1996. Likewise, the 2007-2009 market collapse wiped out the entire total return of the S&P 500, in excess of risk-free Treasury bill returns, all the way to June 1995. By the time that a market cycle is completed, a value-conscious, full-cycle investment discipline tends to be enormously forgiving of early exit, particularly when one exits at historically rich valuations.

https://www.hussmanfunds.com/wmc/wmc170320.htm

The stock market historically has frequently dipped well below its mean valuation. So most of us would have probably waited for a cheap market, not just average.

It is never easy, no.

[whodidntante]

I wouldn't say I'm taking less risk, but I have been cash flowing into more fixed income lately. For a long-time 100% stock guy, that might represent "less risk." I'll probably dump it all into stock if the market gets a haircut. For the market timing police, save your words, I am a lost cause.

[james22]

Can you give examples of funds run by professionals with vast research and trading resources available to them that have used this approach to beat the pants off the simplistic approaches advocated for here? I'm excited to see several real-world examples of just how great this system can be versus staying the course.

Few investors like to pay fund managers to hold cash.

But Buffett has done pretty well, yeah?


A simplistic approach:

...historically, once prospective returns have dropped below about 7.5%, investors could have adopted what I've called a "Rip van Winkle" strategy: just going to sleep until stocks dropped by at least 30% or moved back to prospective returns above 10% - a strategy that would have historically outperformed the S&P 500 with about half the overall risk.

http://www.hussman.net/wmc/wmc110523.htm

[jharkin]

Ive thought about it recently. My IPS says age-10 in bonds, so at 40y.o. I just did my annual re-balance to get to 70/30.

Thing is, after a few years off with young kids my wife is going back to work this fall and we will have the chance to significantly increase our savings rate (to the tune of saving 30-40% of income rather than 10-15%). Running some numbers is telling me that we may be able to accelerate our planned retirement date of 62ish to something more like mid-late 50's (not accounting for the two major wildcards of healthcare and college funding).

Now the analytical side of my brain gets to thinking... If I'm only 15-18 years out from retirement, should my AA adjust to match? Is it time to move to a more conservative AA and start protecting what we have built? i.e. If I'm going to retire 10 years earlier than my "nominal" retirement age (67 for full SS), should my AA be 10 years more conservative as well? In other words, is it time to move from Age-10 in bonds to age in bonds and reset to 60/40?


Anyone else grapple with it this way?

[sleepysurf]

Went from 60/40 to 50/50 over the past year, but just following my updated IPS, anticipating retirement next year, and wanting a better "sleep well at night" allocation.

[OnFire]

My Roth got skewed from my planned 70/30 to 82/18 over the bull run, so I just rebalanced back to 70/30. It was hard, but Buffet's mantra kept ringing in my ears as my finger hovered over the button.... "Be fearful when others are greedy... be greedy when others are fearful."

[F150HD]

I realize no one can predict the end of this rally and when the next correction will come, but has anyone else adjusted their asset allocation to a more conservative one because it has been a long bull market whether it was hated or not.

I went from 65/35 to 60/40 just in case. #1: Pigs Get Fat, Hogs Get Slaughtered! ... If you get too greedy like a hog, you can end up loosing it all.

so 40% of your portfolio is growing slower then inflation.

I understand diversify, but, just sayin'.

[lostdog]

100% VTSAX and VINIX. When we hit the goal of $1,500,000 we will change to 80/20. When we hit $2,500,000 we'll change to 60/40. I will use Total Bond for the bond portion. This is goal based and very easy for us to follow this plan. This keeps us from making market timing decisions.

[stemikger]

I realize no one can predict the end of this rally and when the next correction will come, but has anyone else adjusted their asset allocation to a more conservative one because it has been a long bull market whether it was hated or not.

I went from 65/35 to 60/40 just in case. #1: Pigs Get Fat, Hogs Get Slaughtered! ... If you get too greedy like a hog, you can end up loosing it all.

so 40% of your portfolio is growing slower then inflation.

I understand diversify, but, just sayin'.

Yes this is true, but at 52 years old, do I want to see my all stock portfolio go down 50% when the next 2008 happens. The way I look at my bond portion is not for growth but for a smoother ride. Stocks are to eat and bonds are to sleep.

[Random Walker]

Anyone read the book Value Averaging by Michael Edleson? It talks about creating a value path for the distribution of a lump sum, but I think the concept is worthwhile for anyone, no matter their investing life cycle stage. I think it makes one focus on a specific financial goal and decide how much is "enough". It engrains in the investor the idea of taking advantage of market fluctuations to meet ones goals as opposed to timing the market for maximal gain.

Dave

[Random Walker]

Stemiker,
You and I are on the same page of the playbook. I'm 54 years old and have been aggressive through the 2000-2002 bear and 2007-2009 bear. I agree at our age it's time to be grateful for the last 7-8 year run and decrease risk of our portfolios significantly. I've gone from about 80/20 to about 50% equities over last two years.

Dave

[stemikger]

Stemiker,
You and I are on the same page of the playbook. I'm 54 years old and have been aggressive through the 2000-2002 bear and 2007-2009 bear. I agree at our age it's time to be grateful for the last 7-8 year run and decrease risk of our portfolios significantly. I've gone from about 80/20 to about 50% equities over last two years.

Dave

+1

I agree Dave. Stocks are to eat and bonds are to sleep. In my world, sleeping well is important. I don't think I can handle another 2008, so I'm realistic with my AA. Will I earn less in the long run? Most likely, but I probably will have enough. I rather increase my savings and live within my means than take on too much risk in the stock market.

[asif408]

I've made some shifts among my stock asset classes but nothing between stocks and bonds, that is pretty much set in stone until I get closer to retirement. There are a number of asset classes that have fallen 30, 40, 50%+ during the past 5-10 years while US stocks have gone mostly up. I've been loading up on those asset classes for the past year or two. I see them as less risky from the standpoint that they have less far to fall than good ole' US stocks. They likely will have a higher standard deviation, but I don't view standard deviation necessarily as a valid measure of risk. Statistically speaking, I expect my portfolio to have a higher standard deviation than the S&P but a smaller chance of a large drawdown than a 100% S&P allocation.

[fourwedge]

Nope, staying the same. I by 90% stock and 10% bonds with every purchase and will continue.

[IlliniDave]

I've been on a gradual glide path to increasing my bond percentage and correspondingly lowering my equity, though I wonder sometimes just how much less risky bonds are. I haven't made any, "Oh my gosh the stock market is at an ALL TIME HIGH I better get out'" moves. Just stuffing most all my new money into bonds.

[2cents2]

I was 65/35 and then I turned 61 (DH is a year older) a couple of months ago and my Vanguard recommendation (which had been 65/35) went to 55/45. I don't know if I jiggled some setting or it was a matter of my latest birthday. I re-balanced. But, all the new contributions will be going into stocks, so we'll see how long this will hold up.

[james22]

so 40% of your portfolio is growing slower then inflation.

I understand diversify, but, just sayin'.

Cash is not just for sleeping:

Ms. Schroeder argues that to Mr. Buffett, cash is not just an asset class that is returning next to nothing. It is a call option that can be priced. When he thinks that option is cheap, relative to the ability of cash to buy assets, he is willing to put up with super-low interest rates, said Ms. Schroeder, who followed Mr. Buffett for years before she became his biographer.

“He thinks of cash differently than conventional investors,” Ms. Schroeder says. “This is one of the most important things I learned from him: the optionality of cash. He thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.”

It is a pretty fundamental insight. Because once an investor looks at cash as an option – in essence, the price of being able to scoop up a bargain when it becomes available – it is less tempting to be bothered by the fact that in the short term, it earns almost nothing.

Suddenly, an investor’s asset allocation decisions are not simply between earning nothing in cash and earning something in bonds or stocks. The key question becomes: How much can the cash earn if I have it when I need it to buy other assets that are cheap, versus the upfront cost of holding it?"

http://www.businessinsider.com/cash-as- ... ion-2012-9

Given low expected returns today in both stocks and bonds, there is little opportunity cost in sitting it out.

[itstoomuch]

^
Very good...

[F150HD]

Because once an investor looks at cash as an option – in essence, the price of being able to scoop up a bargain when it becomes available –

So this essentially advocates market timing.

[Dandy]

About 3 weeks ago I reduced my equity allocation by 2%. I consider it an early rebalance since equities were near the top of my acceptable range. So, as usual, I stayed within my equity range of 40-45%. With a goal of asset preservation vs growth I view my role as having a gentle hand on the tiller to guide my allocation between the range.

Will this move provide much relief if the equity markets take a 50% plunge? No way. Was there a market timing aspect to the move? Sure. While underlying economic data has been good it seemed as if the run up on equities was mostly due to a lot of business favorable legislative changes that will stimulate the economy further e.g. tax cuts, regulation roll backs, infrastructure spending etc. that may well happen but maybe not as quickly as the market sensed.

While not traditional, some financial gurus say, for example, if you are going to invest in individual stocks or invest in a more speculative manner confine that to no more than 5% of your portfolio. I think my approach fits this idea.

[Bogel0048]

My wife and I are retired and have enough assured current income from pension, RMDs and SS to cover our annual expenses. Our portfolio has been at 75/25 for many years. I have been following Trump run-up and high PE threads, and this "should we be less greedy" thread made sense to me. I carefully explained the risk pros and cons to my wife, who generally takes little interest in our family finances. To my surprise she said she wanted to stay at 75/25. After some discussion we agreed to rebalance to 70/30, with the understanding that if the market keeps going up we will get back to 75/25 and if it goes down we will have taken a very small edge off of our equity losses.