Larry Swedroe:Better To Face The Correction

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Random Walker
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Larry Swedroe:Better To Face The Correction

Post by Random Walker » Wed Oct 18, 2017 7:03 am

http://www.etf.com/sections/index-inves ... nopaging=1

Excellent article by Larry. He shows that it is more wise to stay in the market than to try to time a correction when equities seem over valued or generously valued. The stock market makes most all of its gains in extremely short periods of time; its best to already be there.
This article makes the strong case for staying invested. It makes no reference to changes in our personal circumstance. For example, over the last 9 years we have had a strong bull, valuations increased, expected returns decreased, whole dispersion of future expected returns has shifted left, investors have aged, and other circumstances in the individual’s life may have changed. So on the one hand, it’s best to just stay put in equities, but this article does not preclude big once in a lifetime type AA changes that an investor might rationally make as he ages and progresses through his own glidepath. Staying invested described here as opposed to market timing, is a different issue from rational rare changes in AA in response to changes in personal circumstance.

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Re: Larry Swedroe:Better To Face The Correction

Post by rustymutt » Wed Oct 18, 2017 7:17 am

Yeah, like he said. Can't take it with me when I go anyway. Leave it invested. That's how I see it myself. Can't do any better or any worst than the markets allow for. Take the positive long term slope, and live within your means.
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Re: Larry Swedroe:Better To Face The Correction

Post by ERMD » Wed Oct 18, 2017 7:37 am

Random Walker wrote:
Wed Oct 18, 2017 7:03 am
Excellent article by Larry. He shows that it is more wise to stay in the market than to try to time a correction when equities seem over valued or generously valued.
This is probably the least news-worthy thing to post in this particular forum. :D
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Re: Larry Swedroe:Better To Face The Correction

Post by 2pedals » Wed Oct 18, 2017 7:45 am

Excellent article by Larry. Many good reasons we should not get fooled into the trading and timing gurus ideas.

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Re: Larry Swedroe:Better To Face The Correction

Post by yukonjack » Wed Oct 18, 2017 7:49 am

A very good and timely piece by Larry especially given all the recent posts about increasing cash and the impending correction. Thanks for keeping us up to date with Larry.

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Re: Larry Swedroe:Better To Face The Correction

Post by Silk McCue » Wed Oct 18, 2017 8:00 am

Thanks for posting. This article provides a thorough and reasoned analysis of historic market behaviour that clearly demonstrates the financial cost and risk of timing the markets rather than investing for the long term. I already subscribe to this approach but now have a more informed reason for doing so rather than "just sticking with it".

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Re: Larry Swedroe:Better To Face The Correction

Post by Random Walker » Wed Oct 18, 2017 8:27 am

When I think of all the high tech algorithmic nanosecond trading on Wall Street, I sort of smile to myself because I’m already there; I already have what the computer is buying. (Of course I’m holding on to what the other computer is selling :-)

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Re: Larry Swedroe:Better To Face The Correction

Post by CULater » Wed Oct 18, 2017 8:54 am

I think the primary benefit of being concerned about a market correction is that it focuses attention on the investor's risk tolerance. If you are so concerned about current market valuations that you are willing to withdraw money from stocks to pare your allocation, or to defer adding stocks to maintain your planned allocation, then you should probably just adjust your target allocation to the level you are comfortable with and then keep it there because it must have been too high for you. Be grateful for teachable moments.

As Edward Thorpe said: “Sell down to the sleeping point. As far as asset classes go, it is hard to know when you are in a bubble, and if you are in one, when it will pop.”
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Re: Larry Swedroe:Better To Face The Correction

Post by HomerJ » Wed Oct 18, 2017 9:12 am

Elm noted that while the CAPE ratio for the U.S. market is currently hovering around two standard deviations above average, there aren’t enough equivalent periods in the historical record to construct a statistically significant data analysis.
The irony is thick enough to cut with a knife.

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Re: Larry Swedroe:Better To Face The Correction

Post by HomerJ » Wed Oct 18, 2017 9:14 am

CULater wrote:
Wed Oct 18, 2017 8:54 am
I think the primary benefit of being concerned about a market correction is that it focuses attention on the investor's risk tolerance. If you are so concerned about current market valuations that you are willing to withdraw money from stocks to pare your allocation, or to defer adding stocks to maintain your planned allocation, then you should probably just adjust your target allocation to the level you are comfortable with and then keep it there because it must have been too high for you. Be grateful for teachable moments.

As Edward Thorpe said: “Sell down to the sleeping point. As far as asset classes go, it is hard to know when you are in a bubble, and if you are in one, when it will pop.”
My philosophy is that one should always assume the market is going to crash tomorrow. Because it could. Regardless of valuations.

One should always have an Asset Allocation that lets you sleep at night knowing that it's possible the market could start a crash tomorrow and take years to recover.

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Re: Larry Swedroe:Better To Face The Correction

Post by lazyday » Wed Oct 18, 2017 9:16 am

At first I was thinking that Larry is sticking his neck out speaking against cutting back while equity is so expensive. But then I noticed there's not much you can quote him on here, if the market falls 85% over the next year and you angrily go back to this article.

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Re: Larry Swedroe:Better To Face The Correction

Post by Grt2bOutdoors » Wed Oct 18, 2017 9:20 am

Another great post by Larry. +1 :beer
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Re: Larry Swedroe:Better To Face The Correction

Post by Grt2bOutdoors » Wed Oct 18, 2017 9:21 am

lazyday wrote:
Wed Oct 18, 2017 9:16 am
At first I was thinking that Larry is sticking his neck out speaking against cutting back while equity is so expensive. But then I noticed there's not much you can quote him on here, if the market falls 85% over the next year and you angrily go back to this article.
If it does fall 85% over the next year, I am going to beat Warren Buffett to the front of the line - buying with whatever cash I have on me.
Buy when there is blood on the streets.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Larry Swedroe:Better To Face The Correction

Post by JBTX » Wed Oct 18, 2017 9:23 am

While I agree with just about everything he has said here, I take a bit of exception to a couple of notable omissions he engages in to bolster his point.

He references the CAPE10 as being very high. He doesn’t discuss that returns over the next 10 hears on average tend to be very muted. I agree trying to time the market to avoid a “correction” is a fools errand. Overvalued markets can stay that way a long time. I think Greenspan, one of the smartest people out there coined the phrase “irrational exuberance” in the mid 90s. The S&P was about 766. It took another 4 years before the market fully “corrected” with the S&P basically doubling. In fact even after correcting it never got below around 840, and that excludes dividends.

So if the guy everybody thought was the smartest financial mind in the world couldn’t predict a crash then what makes us think we can?

However the example above does show that at the point of “irrational exuberance” the following 10 years returns were muted. Jumping out of the market would have been stupid. But adjusting your allocation downward to optimize the risk/reward tradeoff may have been rational, especially if you are anywhere approaching retirement. You probably can’t increase your long term returns by market timing. Most likely you will hurt them. But you may be able to optimize the risk/reward tradeoff by tweaking your allocation based upon CAPE10.

I also find Swedroes Grantham quote a bit irritating as he took it out of context somewhat. JG surely said that, but LS fails to mention that in spite of that, JG said that he doesn’t make short term market predictions but if he had to guess the market would go up MORE. His rationale was that most recent bubbles seem to pop when they are 3 sigmas over the long term mean, and at that time the US stock market was just under 2 sigma and didn’t meet his (admittedly somewhat arbitrary) criteria of being a bubble. But he repeatedly said the market could decrease the next day or continue to increase for years. In fact after he said that many publications quoted him out of context the other way and said he predicted the S&P will reach 2100-2200.

GMO did some reasearch to try to see if you could smooth returns by using various macro indicators such as CAPE10. I think their conclusion was you can but it isn’t easy to do and takes a great deal of fortitude.

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Re: Larry Swedroe:Better To Face The Correction

Post by Riley15 » Wed Oct 18, 2017 10:10 am

This right here is ingrained into everyone and common knowledge now! I believe investors are much smarter and less emotional today then that of the past, therefore we won't have a major correction and low volatility going forward. As soon as there is some flight to safety (1-2% drop) algos and opportunistic investors will jump right in and bring the demand right back up. Although that will also work adversely to reduce long term returns.hat will also work adversely to reduce long term returns.
Last edited by Riley15 on Wed Oct 18, 2017 9:02 pm, edited 2 times in total.

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Re: Larry Swedroe:Better To Face The Correction

Post by Grt2bOutdoors » Wed Oct 18, 2017 10:34 am

Riley15 wrote:
Wed Oct 18, 2017 10:10 am
Grt2bOutdoors wrote:
Wed Oct 18, 2017 9:21 am
lazyday wrote:
Wed Oct 18, 2017 9:16 am
At first I was thinking that Larry is sticking his neck out speaking against cutting back while equity is so expensive. But then I noticed there's not much you can quote him on here, if the market falls 85% over the next year and you angrily go back to this article.
If it does fall 85% over the next year, I am going to beat Warren Buffett to the front of the line - buying with whatever cash I have on me.
Buy when there is blood on the streets.
This right here is ingrained into everyone and common knowledge now! I believe investors are much smarter and less emotional today then that of the past, therefore we won't have a major correction and low volatility going forward. As soon as there is some flight to safety (1-2% drop) algos and opportunistic investors will jump right in and bring the demand right back up. Although that will also work adversely to reduce long term returns.
Nonsense - when the oil market was tanking about two years ago, oils sold off like they were going out of business - multibillion dollar Fortune 500 companies, fire sales. Go look at them now. Suddenly a $10-$11 pop in the price of a barrel translates into a 40%+ increase in stock price. :oops:
And it's not just there, there was a fire sale in a few healthcare companies about 7 months ago, today they are up 30%+. Investors are sheeple, they follow their emotions and the crowd. Next 10% drop, we'll have the crowers on CNBC talk about the coming implosion, how markets are going to continue declining with no end in sight, they will be the spark that feeds the selling. Institutional investors are the dumb money because their bonuses are based on short-term performance - hedge funds, day traders, traders at the wirehouses, and let's not forget about the "AI" think tanks who believe they hold the recipe to the secret sauce.
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Re: Larry Swedroe:Better To Face The Correction

Post by alpine_boglehead » Wed Oct 18, 2017 11:12 am

Grt2bOutdoors wrote:
Wed Oct 18, 2017 10:34 am
Nonsense - when the oil market was tanking about two years ago, oils sold off like they were going out of business
+1
Same for emerging markets (ok, these are expected to be more volatile). The catch is that when there's a crash in the making, it's not that the market crashes just because. There's a reason (or at least some narrative). We've seen quiet times over the last year, general economic recovery, combined with low interest rates - no major wars, no industries collapsing etc. (oil/resources recovered a bit, no banks going down). So why should there be a crash, or a correction?

As of now, I hear many people saying "you have to invest, there's no return elsewhere", and some more waiting to buy the dip. But that's only the current situation. If there were major political/economic upheaval, the tune would be different.

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Re: Larry Swedroe:Better To Face The Correction

Post by rj49 » Wed Oct 18, 2017 11:40 am

--The Buffett argument really doesn't fly, since Buffett currently has $100 billion in cash, due to lack of buying opportunities.

--Grantham's calls aren't as valuable as his GMO 7-year returns...in January they estimated EM and Developed to be the only asset classes to have positive returns over 7 years, and they have significantly outperformed US stocks the rest of the year. A Goldman Sachs estimate in Marketwatch this morning also forecasted that European and Japanese stocks will outperform US ones over the next 10 years, so reducing home bias might be a good way to stay invested and increase returns (or decrease losses) at the same time.

--For those of us who stayed invested during some of the biggest months of returns mentioned, we got to see those returns evaporate in 40% or so losses soon afterwards. Those experiences certainly accentuate the natural propensity to loss aversion.

--If somebody needs support for ratcheting down risk during an overvalued market, Mr. Bogle did the same, starting in 2000, significantly increasing his bond allocation. But buying into a 35-yr bond bull market could also result in losses, and other alternatives that worked well after 2000, such as TIPS and REITs, also don't seem to have promising returns. At least the Prime and tax-free MMFs are yielding over 1% now, and I've been getting 4-6% lately in Prosper and Lending Club, as well as a fixed 5% in Streetshares veterans bonds.

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Re: Larry Swedroe:Better To Face The Correction

Post by Toons » Wed Oct 18, 2017 12:18 pm

Nothing New Under the Sun .
Sounds like common sense :happy
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Re: Larry Swedroe:Better To Face The Correction

Post by Fallible » Wed Oct 18, 2017 12:21 pm

HomerJ wrote:
Wed Oct 18, 2017 9:14 am
CULater wrote:
Wed Oct 18, 2017 8:54 am
I think the primary benefit of being concerned about a market correction is that it focuses attention on the investor's risk tolerance. If you are so concerned about current market valuations that you are willing to withdraw money from stocks to pare your allocation, or to defer adding stocks to maintain your planned allocation, then you should probably just adjust your target allocation to the level you are comfortable with and then keep it there because it must have been too high for you. Be grateful for teachable moments.

As Edward Thorpe said: “Sell down to the sleeping point. As far as asset classes go, it is hard to know when you are in a bubble, and if you are in one, when it will pop.”
My philosophy is that one should always assume the market is going to crash tomorrow. Because it could. Regardless of valuations.

One should always have an Asset Allocation that lets you sleep at night knowing that it's possible the market could start a crash tomorrow and take years to recover.
Agree with both posters. Worry about market valuations, crashes, uncertainty, volatility, etc., etc., should be taken into account when setting an allocation, then written into an IPS. If the tolerance level was misjudged, or the need and ability to take risk has changed, those are legitimate reasons (not market timing) to rework the allocation, to correct the course and make it the right one to hold.

Also liked this from Larry, especially the last sentence: "Despite this type of evidence, which makes clear how difficult market timing must be, one of the most popular beliefs held by individual investors is that timing stock markets is the winning strategy. After all, who doesn’t want to buy low, right at the end of a bear market, and sell high, just before the next bear market begins. Unfortunately, an idea is not responsible for the people who believe in it."
John Bogle on his often bumpy road to low-cost indexing: "When a door closes, if you look long enough and hard enough, if you're strong enough, you'll find a window that opens."

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Re: Larry Swedroe:Better To Face The Correction

Post by Riley15 » Wed Oct 18, 2017 12:28 pm

alpine_boglehead wrote:
Wed Oct 18, 2017 11:12 am
Grt2bOutdoors wrote:
Wed Oct 18, 2017 10:34 am
Nonsense - when the oil market was tanking about two years ago, oils sold off like they were going out of business
+1
Same for emerging markets (ok, these are expected to be more volatile). The catch is that when there's a crash in the making, it's not that the market crashes just because. There's a reason (or at least some narrative). We've seen quiet times over the last year, general economic recovery, combined with low interest rates - no major wars, no industries collapsing etc. (oil/resources recovered a bit, no banks going down). So why should there be a crash, or a correction?

As of now, I hear many people saying "you have to invest, there's no return elsewhere", and some more waiting to buy the dip. But that's only the current situation. If there were major political/economic upheaval, the tune would be different.
Things have been quiet? By what measure. Relatively speaking, we've had one of the most volatile years with Brexit and the Presidential election, two world changing events that were not priced into the market and had the potential to derail the markets and start a correction. But it did not happen. This year has been marked by an unstable administration, trade agreements in jeopardy, unprecedented debt levels, threats from north korea.
Seems pretty volatile to me. Yet the markets did not react, complacence? maybe but it could also be that investors know better and won't be driven by emotion anymore. This combined with that there is no "other" better option.

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Re: Larry Swedroe:Better To Face The Correction

Post by carofe » Wed Oct 18, 2017 12:38 pm

Thank you for posting. I really enjoyed reading the article. I saved it to my Evernote notebook.
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Re: Larry Swedroe:Better To Face The Correction

Post by carofe » Wed Oct 18, 2017 12:41 pm

Riley15 wrote:
Wed Oct 18, 2017 12:28 pm
alpine_boglehead wrote:
Wed Oct 18, 2017 11:12 am
Grt2bOutdoors wrote:
Wed Oct 18, 2017 10:34 am
Nonsense - when the oil market was tanking about two years ago, oils sold off like they were going out of business
+1
Same for emerging markets (ok, these are expected to be more volatile). The catch is that when there's a crash in the making, it's not that the market crashes just because. There's a reason (or at least some narrative). We've seen quiet times over the last year, general economic recovery, combined with low interest rates - no major wars, no industries collapsing etc. (oil/resources recovered a bit, no banks going down). So why should there be a crash, or a correction?

As of now, I hear many people saying "you have to invest, there's no return elsewhere", and some more waiting to buy the dip. But that's only the current situation. If there were major political/economic upheaval, the tune would be different.
Things have been quiet? By what measure. Relatively speaking, we've had one of the most volatile years with Brexit and the Presidential election, two world changing events that were not priced into the market and had the potential to derail the markets and start a correction. But it did not happen. This year has been marked by an unstable administration, trade agreements in jeopardy, unprecedented debt levels, threats from north korea.
Seems pretty volatile to me. Yet the markets did not react, complacence? maybe but it could also be that investors know better and won't be driven by emotion anymore. This combined with that there is no "other" better option.
The rebound of the market after the 2008 crisis has caused a lot of confidence in people as it has been the perfect case for "why you should stay the course and ignore the news". It will take many years and maybe a whole generation to forget the aftermath of 2008.
US Total Stock Market + Intermediate Term Bond. That's it.

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Re: Larry Swedroe:Better To Face The Correction

Post by flyingaway » Wed Oct 18, 2017 12:51 pm

I think the article is biased.

Has anyone done a comparable study to see what is the average return for the remaining 1,001 months if one removes the 91 months with the worst returns?

If one does market timing many times, one might do it right some times.

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Re: Larry Swedroe:Better To Face The Correction

Post by S_Track » Wed Oct 18, 2017 1:00 pm

What does Market timing really mean? Does it mean adjusting your AA slightly or in a big way? What if you are in a TD fund, is that Marketing timing for me to stay to on its internal glide path? Thanks

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Re: Larry Swedroe:Better To Face The Correction

Post by alpine_boglehead » Wed Oct 18, 2017 1:08 pm

Riley15 wrote:
Wed Oct 18, 2017 12:28 pm
alpine_boglehead wrote:
Wed Oct 18, 2017 11:12 am
Grt2bOutdoors wrote:
Wed Oct 18, 2017 10:34 am
Nonsense - when the oil market was tanking about two years ago, oils sold off like they were going out of business
+1
Same for emerging markets (ok, these are expected to be more volatile). The catch is that when there's a crash in the making, it's not that the market crashes just because. There's a reason (or at least some narrative). We've seen quiet times over the last year, general economic recovery, combined with low interest rates - no major wars, no industries collapsing etc. (oil/resources recovered a bit, no banks going down). So why should there be a crash, or a correction?

As of now, I hear many people saying "you have to invest, there's no return elsewhere", and some more waiting to buy the dip. But that's only the current situation. If there were major political/economic upheaval, the tune would be different.
Things have been quiet? By what measure. Relatively speaking, we've had one of the most volatile years with Brexit and the Presidential election, two world changing events that were not priced into the market and had the potential to derail the markets and start a correction. But it did not happen. This year has been marked by an unstable administration, trade agreements in jeopardy, unprecedented debt levels, threats from north korea.
Seems pretty volatile to me. Yet the markets did not react, complacence? maybe but it could also be that investors know better and won't be driven by emotion anymore. This combined with that there is no "other" better option.
Yes, but how do these events/developments compare to the magnitude of the underlying reasons of the last 2 big crashes? The market obviously says "don't care too much", or there's other developments compensating for these events. Who knows?

Society and the economy are a incredibly complex machinery, 7 billion moving human parts alone, with lots of positive and negative feedback loops. At the end of the day, as usually nobody (me especially) knows nothing, thus making the full circle to the original post

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Re: Larry Swedroe:Better To Face The Correction

Post by Riley15 » Wed Oct 18, 2017 1:20 pm

I agree. It's no more useful than any other click-bait article. Once you have agreed on a objective, you can find any number of ways to prove your point. The problem with back-testing is that market conditions that existed in the past will not be the same in the future and never in the same order. It's possible within the next 20+ years we never have big up days like in the past and just slow gradual growth, then this whole article is rubbish.
Last edited by Riley15 on Wed Oct 18, 2017 9:04 pm, edited 2 times in total.

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Re: Larry Swedroe:Better To Face The Correction

Post by alpine_boglehead » Wed Oct 18, 2017 1:25 pm

flyingaway wrote:
Wed Oct 18, 2017 12:51 pm
If one does market timing many times, one might do it right some times.
Yes, but if you assume that on average the market goes up (has done that up to now), on average every month you stay out will on cost you the 0,95% that Larry mentions. (or 0,2%, if you're with John Bogle on the 3% expected annualized return going forward).

If you are out of the market, and into cash, you have several strong forces working against you (because you're hoping that it will go down):
- inflation eating away at your cash, while the market will probably auto-adjust to (moderate) inflation
- companies trying hard to earn money
- companies trying hard to grow
- central banks/politics trying to (more or less successfully) stimulate the economy/trying to keep things calm - they somehow managed to keep the great recession from going to great depression.

And that is before the friction of trading costs, spreads and taxes.

Disclaimer: I've adjusted my AA a bit (only few percent) because I'm closer to my goals now - thanks to the market runup.

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Re: Larry Swedroe:Better To Face The Correction

Post by Fallible » Wed Oct 18, 2017 1:26 pm

bob_m10 wrote:
Wed Oct 18, 2017 1:00 pm
What does Market timing really mean? Does it mean adjusting your AA slightly or in a big way? What if you are in a TD fund, is that Marketing timing for me to stay to on its internal glide path? Thanks
If you are adjusting your allocation based on predicting what the market will do, that is about market timing. If you are adjusting it to lower risk because you are anxious or can't sleep nights because of what the market is doing (or even if it's just what you think it's doing), that is about risk tolerance.

Here's the wiki on market timing:
https://www.bogleheads.org/wiki/Market_timing
Last edited by Fallible on Wed Oct 18, 2017 1:34 pm, edited 1 time in total.
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Re: Larry Swedroe:Better To Face The Correction

Post by jjustice » Wed Oct 18, 2017 1:31 pm

Noted author Peter Bernstein provided this insight: “In the end, what matters is the quality of our decisions in the face of uncertainty.”
I agree with Bernstein. If the decision is full speed ahead with CAPE at 31, I doubt the quality of the decision. Our uncertainty about the dates of corrections does not mean that we should reject the evidence we have about likely returns from here.

John
Last edited by jjustice on Wed Oct 18, 2017 1:35 pm, edited 1 time in total.

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Re: Larry Swedroe:Better To Face The Correction

Post by alpine_boglehead » Wed Oct 18, 2017 1:34 pm

bob_m10 wrote:
Wed Oct 18, 2017 1:00 pm
What does Market timing really mean? Does it mean adjusting your AA slightly or in a big way? What if you are in a TD fund, is that Marketing timing for me to stay to on its internal glide path? Thanks
Basically, any move you make because you *think* you know how things will play out is market timing :)

One very extreme example of market timing would be to sell all your stocks and short the market on margin.

So no, just keeping on the glide path in a target date fund or rebalancing your portfolio due to price changes would not be market timing, because you're not speculating on how you think things will go, but you just reacting to the facts and acting according to your plan.

If you're like me, absolutely staying the course is hard, so you might give yourself some small leeway in adjusting your AA. As long is it's only small changes, it's not really harmful, and if some activity helps you stay the course in the big picture, it might even be beneficial. Everyone's different.

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Re: Larry Swedroe:Better To Face The Correction

Post by nedsaid » Wed Oct 18, 2017 2:02 pm

There is an old saying about being on the train when it leaves the station. Markets move up in short unpredictable bursts, volatility is on the upside as well as the downside. You never know when the market will have its violent upward moves.

Though I am not a believer in market timing, I do believe that investors should keep an eye on valuations. When valuations are relatively high, future expected returns are relatively lower. The market looks expensive to me but bull markets tend to always look expensive. We are eight years into a bull market and interest rates are still very low. So not too surprising.

If you haven't rebalanced your portfolio yet, now is a good time. Perhaps shifting a portion of your US Stocks, I don't know, maybe 10% or 20% of your US Stocks to International seems reasonable here. Or maybe just taking a bit off the top of US Stocks and taking the proceeds to bonds or cash. But certainly I am not an "all in" or "all out" investor. If you are nervous, maybe some modest shifts towards cheaper or less risky asset classes, but I wouldn't go beyond that.

The problem with strategic asset allocation based on valuations is that cheap can remain cheap for a long time and expensive can remain expensive for a long time. So you are taking a chance but long term cheap beats expensive.

What I am doing is continually trimming my US Stocks as the US Stock Market advances, I won't let my stocks get to be more than 67% of my portfolio. So pretty much, selling in small waves. My foreign stocks have not been touched at all. Keep hitting the "sell" button but it seems like I am running in place.
A fool and his money are good for business.

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Re: Larry Swedroe:Better To Face The Correction

Post by HomerJ » Wed Oct 18, 2017 2:13 pm

jjustice wrote:
Wed Oct 18, 2017 1:31 pm
Noted author Peter Bernstein provided this insight: “In the end, what matters is the quality of our decisions in the face of uncertainty.”
I agree with Bernstein. If the decision is full speed ahead with CAPE at 31, I doubt the quality of the decision. Our uncertainty about the dates of corrections does not mean that we should reject the evidence we have about likely returns from here.

John
Pick an AA assuming the market will crash tomorrow and not recover for a few years. Because it could. It could at CAPE 31 and it could at CAPE 15. The chance never goes to zero.

Valuations should not matter when setting an AA. If you are already prepared for a crash tomorrow, it shouldn't matter to you if the chance of it happening is slightly higher then yesterday.
Elm noted that while the CAPE ratio for the U.S. market is currently hovering around two standard deviations above average, there aren’t enough equivalent periods in the historical record to construct a statistically significant data analysis.
Absolutely amazing to me that Swedroe quoted that in his article.

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Re: Larry Swedroe:Better To Face The Correction

Post by garlandwhizzer » Wed Oct 18, 2017 2:17 pm

I think Larry's article makes an excellent point that often gets overlooked: no one can consistently and accurately predict future market action. Period. Larry is IMO a brilliant and accomplished student of the market and this piece offers insight. The opportunity cost of missing out on further market upside is greater on average than the savings generated by cashing out and waiting for the inevitable crash.

Having experienced long bull markets in the past I know personally that I was worried throughout the long upward ride. It just can't keep on going up like this, I told myself. But it did. Over the past 17 years we've been through two massive bear markets which has reinforced ours fears. Our current anxiety, however, is just what a bull market feels like. It's when you finally give up worrying and believe that the market is destined to just keep going up forever--that is the time to get really worried. There has been a lot of skepticism consistently throughout this 8+ year bull market and, ironically, that is what has given the bull the legs to keep on going. That doesn't mean that we won't have a correction, perhaps soon. It is inevitable that at some point, there will be a correction. The higher valuations get, the greater is the potential fall in prices. However, you're unlikely to be able to time it accurately enough to profit from it. Rather the opposite tends to happen.

High valuations may, as some have pointed out, create sufficient anxiety in the investor such that he/she realizes the current asset allocation is too aggressive and inappropriate for emotional well being. In such cases making modest changes in asset allocation seems to me rational. Otherwise, if you have a well-thought out asset allocation, sticking with it is good advice IMO.

Garland Whizzer

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Re: Larry Swedroe:Better To Face The Correction

Post by WhyNotUs » Wed Oct 18, 2017 4:05 pm

alpine_boglehead wrote:
Wed Oct 18, 2017 11:12 am

Same for emerging markets (ok, these are expected to be more volatile). The catch is that when there's a crash in the making, it's not that the market crashes just because. There's a reason (or at least some narrative). We've seen quiet times over the last year, general economic recovery, combined with low interest rates - no major wars, no industries collapsing etc. (oil/resources recovered a bit, no banks going down). So why should there be a crash, or a correction?
A lot of "experts" will tell you afterward. Some will say that they told you so. There are sell signals every day and buy signals as well.
I own the next hot stock- VTSAX

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Random Walker
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Re: Larry Swedroe:Better To Face The Correction

Post by Random Walker » Wed Oct 18, 2017 4:22 pm

For someone in their 20’s or 30’s, I’d say just stick with the plan. For someone within a decade of retirement, I think it makes a lot of sense to look at where he is relative to goals and possibly cool off the AA some. The arbitrary glide paths based on age of target date funds I believe can be improved upon. This isn’t magic. Instead it’s a function of knowing one’s self, one’s financial goals, having an ability to roughly estimate future expected returns, the potential dispersion of returns, some knowledge of financial history. I strongly recommend William Bernstein’s short e-book The Ages Of The Investor: A Critical Look At Life Cycle Investing.

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Re: Larry Swedroe:Better To Face The Correction

Post by Fallible » Wed Oct 18, 2017 4:26 pm

garlandwhizzer wrote:
Wed Oct 18, 2017 2:17 pm
I think Larry's article makes an excellent point that often gets overlooked: no one can consistently and accurately predict future market action. Period. Larry is IMO a brilliant and accomplished student of the market and this piece offers insight. The opportunity cost of missing out on further market upside is greater on average than the savings generated by cashing out and waiting for the inevitable crash.

Having experienced long bull markets in the past I know personally that I was worried throughout the long upward ride. It just can't keep on going up like this, I told myself. But it did. Over the past 17 years we've been through two massive bear markets which has reinforced ours fears. Our current anxiety, however, is just what a bull market feels like. It's when you finally give up worrying and believe that the market is destined to just keep going up forever--that is the time to get really worried. There has been a lot of skepticism consistently throughout this 8+ year bull market and, ironically, that is what has given the bull the legs to keep on going. That doesn't mean that we won't have a correction, perhaps soon. It is inevitable that at some point, there will be a correction. The higher valuations get, the greater is the potential fall in prices. However, you're unlikely to be able to time it accurately enough to profit from it. Rather the opposite tends to happen.

High valuations may, as some have pointed out, create sufficient anxiety in the investor such that he/she realizes the current asset allocation is too aggressive and inappropriate for emotional well being. In such cases making modest changes in asset allocation seems to me rational. Otherwise, if you have a well-thought out asset allocation, sticking with it is good advice IMO.
Garland Whizzer
I enjoyed your post.

There are indeed times when changing an allocation is justified. Pro Boglehead Rick Ferri listed those nicely in his book, All About Asset Allocation, 2nd ed. They include correcting mistakes made when setting an allocation such as taking on too much risk (more likely for those without market-crash experience), and responding to life changes. In fact, he wrote a chapter about it, "When to Change Your Asset Allocation."

I think it's most difficult to determine when to change an allocation based on risk tolerance, which is never easy to know precisely. For example, how anxious does an investor have to be before it's time to lower equities? Some anxiety would seem to be just part of investing, but how much is too much? The best answer seems to be whether one can sleep nights. But one sleepless night or many? Some who felt panic in the '08 crash still held, while some needed to lower risk, and others bailed out. In the end, it depends mainly on individuals knowing what is right for them, on knowing themselves, and it's never easy.
John Bogle on his often bumpy road to low-cost indexing: "When a door closes, if you look long enough and hard enough, if you're strong enough, you'll find a window that opens."

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Re: Larry Swedroe:Better To Face The Correction

Post by frontline » Wed Oct 18, 2017 4:45 pm

JBTX wrote:
Wed Oct 18, 2017 9:23 am
While I agree with just about everything he has said here, I take a bit of exception to a couple of notable omissions he engages in to bolster his point.

He references the CAPE10 as being very high. He doesn’t discuss that returns over the next 10 hears on average tend to be very muted. I agree trying to time the market to avoid a “correction” is a fools errand. Overvalued markets can stay that way a long time. I think Greenspan, one of the smartest people out there coined the phrase “irrational exuberance” in the mid 90s. The S&P was about 766. It took another 4 years before the market fully “corrected” with the S&P basically doubling. In fact even after correcting it never got below around 840, and that excludes dividends.

So if the guy everybody thought was the smartest financial mind in the world couldn’t predict a crash then what makes us think we can?

However the example above does show that at the point of “irrational exuberance” the following 10 years returns were muted. Jumping out of the market would have been stupid. But adjusting your allocation downward to optimize the risk/reward tradeoff may have been rational, especially if you are anywhere approaching retirement. You probably can’t increase your long term returns by market timing. Most likely you will hurt them. But you may be able to optimize the risk/reward tradeoff by tweaking your allocation based upon CAPE10.

I also find Swedroes Grantham quote a bit irritating as he took it out of context somewhat. JG surely said that, but LS fails to mention that in spite of that, JG said that he doesn’t make short term market predictions but if he had to guess the market would go up MORE. His rationale was that most recent bubbles seem to pop when they are 3 sigmas over the long term mean, and at that time the US stock market was just under 2 sigma and didn’t meet his (admittedly somewhat arbitrary) criteria of being a bubble. But he repeatedly said the market could decrease the next day or continue to increase for years. In fact after he said that many publications quoted him out of context the other way and said he predicted the S&P will reach 2100-2200.

GMO did some reasearch to try to see if you could smooth returns by using various macro indicators such as CAPE10. I think their conclusion was you can but it isn’t easy to do and takes a great deal of fortitude.
+1... Very Good insight
As you indicate, it is worst to get out of the market 'while anticipating' correction because almost certainly (per market history) low returns will follow after the 'eventual correction' - whenever it happens. Stay invested and use these defense methods - adjust AA if circumstances dictate and re-balance

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Re: Larry Swedroe:Better To Face The Correction

Post by David Jay » Wed Oct 18, 2017 5:15 pm

ERMD wrote:
Wed Oct 18, 2017 7:37 am
Random Walker wrote:
Wed Oct 18, 2017 7:03 am
Excellent article by Larry. He shows that it is more wise to stay in the market than to try to time a correction when equities seem over valued or generously valued.
This is probably the least news-worthy thing to post in this particular forum. :D
I don't know - I have been involved in 3 "going to cash" discussions here in the last couple of weeks (I admit, they were newcomers. But still...)
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: Larry Swedroe:Better To Face The Correction

Post by CULater » Wed Oct 18, 2017 8:01 pm

Don't forget one of the main reasons to stay the course: "Nobody knows nuttin'". I would have been out of market years ago because of overvaluation but I didn't know enough to get out. I still don't.
On the internet, nobody knows you're a dog.

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Re: Larry Swedroe:Better To Face The Correction

Post by hale2 » Wed Oct 18, 2017 8:11 pm

carofe wrote:
Wed Oct 18, 2017 12:41 pm
Riley15 wrote:
Wed Oct 18, 2017 12:28 pm
alpine_boglehead wrote:
Wed Oct 18, 2017 11:12 am
Grt2bOutdoors wrote:
Wed Oct 18, 2017 10:34 am
Nonsense - when the oil market was tanking about two years ago, oils sold off like they were going out of business
+1
Same for emerging markets (ok, these are expected to be more volatile). The catch is that when there's a crash in the making, it's not that the market crashes just because. There's a reason (or at least some narrative). We've seen quiet times over the last year, general economic recovery, combined with low interest rates - no major wars, no industries collapsing etc. (oil/resources recovered a bit, no banks going down). So why should there be a crash, or a correction?

As of now, I hear many people saying "you have to invest, there's no return elsewhere", and some more waiting to buy the dip. But that's only the current situation. If there were major political/economic upheaval, the tune would be different.
Things have been quiet? By what measure. Relatively speaking, we've had one of the most volatile years with Brexit and the Presidential election, two world changing events that were not priced into the market and had the potential to derail the markets and start a correction. But it did not happen. This year has been marked by an unstable administration, trade agreements in jeopardy, unprecedented debt levels, threats from north korea.
Seems pretty volatile to me. Yet the markets did not react, complacence? maybe but it could also be that investors know better and won't be driven by emotion anymore. This combined with that there is no "other" better option.
The rebound of the market after the 2008 crisis has caused a lot of confidence in people as it has been the perfect case for "why you should stay the course and ignore the news". It will take many years and maybe a whole generation to forget the aftermath of 2008.

The V shaped stock market recovery from 2008-2009 has many current investors thinking any large drop will be quickly recovered. People forget that the market doesn't always go straight up from the bottom. Looking at the S&P 500 chart, Oct 1968 it was around 750, dropping to 462 in June 1970 before heading back up to 685 in Dec 1972. If you followed today's "common knowledge" you would have dumped everything into stocks. Less than 2 years later it was about 310. It took until around Sept 1987 to hit 685 again. Combined with high inflation during that period, a 50 year old who followed this thinking in 1972 wasn't looking at much of a retirement fund at 65, and had to deal with a lot of worry and stress during that time. 2000 - 2014 time period is similar.

I'm not saying that people should have anticipated what happened during those times and stayed out of stocks, but it's easy to say you'll go all in and assume that something similar won't happen again.

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Re: Larry Swedroe:Better To Face The Correction

Post by james22 » Wed Oct 18, 2017 9:49 pm

garlandwhizzer wrote:
Wed Oct 18, 2017 2:17 pm
Larry is IMO a brilliant and accomplished student of the market and this piece offers insight.
I have great respect for Larry, but believe he's gone round the bend and this piece will one day be evidence of that.

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Re: Larry Swedroe:Better To Face The Correction

Post by wrongfunds » Thu Oct 19, 2017 11:35 am

If it does fall 85% over the next year, I am going to beat Warren Buffett to the front of the line - buying with whatever cash I have on me.
Buy when there is blood on the streets.
Really? What if it only falls 80%? Would you wait until it hits 85%?

Or even better, what if it falls 10% every month. Tell me when will you pull the trigger.

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Re: Larry Swedroe:Better To Face The Correction

Post by WanderingDoc » Thu Oct 19, 2017 4:09 pm

rustymutt wrote:
Wed Oct 18, 2017 7:17 am
Yeah, like he said. Can't take it with me when I go anyway. Leave it invested. That's how I see it myself. Can't do any better or any worst than the markets allow for. Take the positive long term slope, and live within your means.
"Can't take it with me when I go..." is not an argument for staying invested. Its an argument for spending more money now, and in the near and far future - the latter of which I definitely agree with for a lot of people.

And you can do better than the markets allow for. Pick an investment vehicle where you can inject control as you see fit :D
I'm not looking to get rich quick (stocks), I'm not looking to get rich slow (indexing), I'm looking to get rich, for sure (real estate) | Don't wait to buy real estate. Buy real estate.. and wait.

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Re: Larry Swedroe:Better To Face The Correction

Post by hoops777 » Thu Oct 19, 2017 4:37 pm

Riley15 wrote:
Wed Oct 18, 2017 12:28 pm
alpine_boglehead wrote:
Wed Oct 18, 2017 11:12 am
Grt2bOutdoors wrote:
Wed Oct 18, 2017 10:34 am
Nonsense - when the oil market was tanking about two years ago, oils sold off like they were going out of business
+1
Same for emerging markets (ok, these are expected to be more volatile). The catch is that when there's a crash in the making, it's not that the market crashes just because. There's a reason (or at least some narrative). We've seen quiet times over the last year, general economic recovery, combined with low interest rates - no major wars, no industries collapsing etc. (oil/resources recovered a bit, no banks going down). So why should there be a crash, or a correction?

As of now, I hear many people saying "you have to invest, there's no return elsewhere", and some more waiting to buy the dip. But that's only the current situation. If there were major political/economic upheaval, the tune would be different.
Things have been quiet? By what measure. Relatively speaking, we've had one of the most volatile years with Brexit and the Presidential election, two world changing events that were not priced into the market and had the potential to derail the markets and start a correction. But it did not happen. This year has been marked by an unstable administration, trade agreements in jeopardy, unprecedented debt levels, threats from north korea.
Seems pretty volatile to me. Yet the markets did not react, complacence? maybe but it could also be that investors know better and won't be driven by emotion anymore. This combined with that there is no "other" better option.
Just curious as to why investors are so much smarter than say 10 years ago?
K.I.S.S........so easy to say so difficult to do.

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Re: Larry Swedroe:Better To Face The Correction

Post by technovelist » Thu Oct 19, 2017 4:41 pm

hoops777 wrote:
Thu Oct 19, 2017 4:37 pm
Riley15 wrote:
Wed Oct 18, 2017 12:28 pm
alpine_boglehead wrote:
Wed Oct 18, 2017 11:12 am
Grt2bOutdoors wrote:
Wed Oct 18, 2017 10:34 am
Nonsense - when the oil market was tanking about two years ago, oils sold off like they were going out of business
+1
Same for emerging markets (ok, these are expected to be more volatile). The catch is that when there's a crash in the making, it's not that the market crashes just because. There's a reason (or at least some narrative). We've seen quiet times over the last year, general economic recovery, combined with low interest rates - no major wars, no industries collapsing etc. (oil/resources recovered a bit, no banks going down). So why should there be a crash, or a correction?

As of now, I hear many people saying "you have to invest, there's no return elsewhere", and some more waiting to buy the dip. But that's only the current situation. If there were major political/economic upheaval, the tune would be different.
Things have been quiet? By what measure. Relatively speaking, we've had one of the most volatile years with Brexit and the Presidential election, two world changing events that were not priced into the market and had the potential to derail the markets and start a correction. But it did not happen. This year has been marked by an unstable administration, trade agreements in jeopardy, unprecedented debt levels, threats from north korea.
Seems pretty volatile to me. Yet the markets did not react, complacence? maybe but it could also be that investors know better and won't be driven by emotion anymore. This combined with that there is no "other" better option.
Just curious as to why investors are so much smarter than say 10 years ago?
Oh, that's easy.

The answer: A 9-year bull market.
In theory, theory and practice are identical. In practice, they often differ.

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Re: Larry Swedroe:Better To Face The Correction

Post by hoops777 » Thu Oct 19, 2017 5:34 pm

technovelist wrote:
Thu Oct 19, 2017 4:41 pm
hoops777 wrote:
Thu Oct 19, 2017 4:37 pm
Riley15 wrote:
Wed Oct 18, 2017 12:28 pm
alpine_boglehead wrote:
Wed Oct 18, 2017 11:12 am
Grt2bOutdoors wrote:
Wed Oct 18, 2017 10:34 am
Nonsense - when the oil market was tanking about two years ago, oils sold off like they were going out of business
+1
Same for emerging markets (ok, these are expected to be more volatile). The catch is that when there's a crash in the making, it's not that the market crashes just because. There's a reason (or at least some narrative). We've seen quiet times over the last year, general economic recovery, combined with low interest rates - no major wars, no industries collapsing etc. (oil/resources recovered a bit, no banks going down). So why should there be a crash, or a correction?

As of now, I hear many people saying "you have to invest, there's no return elsewhere", and some more waiting to buy the dip. But that's only the current situation. If there were major political/economic upheaval, the tune would be different.
Things have been quiet? By what measure. Relatively speaking, we've had one of the most volatile years with Brexit and the Presidential election, two world changing events that were not priced into the market and had the potential to derail the markets and start a correction. But it did not happen. This year has been marked by an unstable administration, trade agreements in jeopardy, unprecedented debt levels, threats from north korea.
Seems pretty volatile to me. Yet the markets did not react, complacence? maybe but it could also be that investors know better and won't be driven by emotion anymore. This combined with that there is no "other" better option.
Just curious as to why investors are so much smarter than say 10 years ago?
Oh, that's easy.

The answer: A 9-year bull market.
:D
K.I.S.S........so easy to say so difficult to do.

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Re: Larry Swedroe:Better To Face The Correction

Post by HomerJ » Thu Oct 19, 2017 6:35 pm

wrongfunds wrote:
Thu Oct 19, 2017 11:35 am
If it does fall 85% over the next year, I am going to beat Warren Buffett to the front of the line - buying with whatever cash I have on me.
Buy when there is blood on the streets.
Really? What if it only falls 80%? Would you wait until it hits 85%?

Or even better, what if it falls 10% every month. Tell me when will you pull the trigger.
Yep, that's the problem. People are always like, "Oh, NEXT time, I'm going all in at the bottom".

Well, sometimes the bottom is a 20% drop, sometimes a 50% drop, sometimes more. Pretty hard to spot the bottom when you're in it.

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Re: Larry Swedroe:Better To Face The Correction

Post by Johm221122 » Thu Oct 19, 2017 7:24 pm

wrongfunds wrote:
Thu Oct 19, 2017 11:35 am
If it does fall 85% over the next year, I am going to beat Warren Buffett to the front of the line - buying with whatever cash I have on me.
Buy when there is blood on the streets.
Really? What if it only falls 80%? Would you wait until it hits 85%?

Or even better, what if it falls 10% every month. Tell me when will you pull the trigger.
When your investment plan and asset allocation tell you

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Re: Larry Swedroe:Better To Face The Correction

Post by SeeMoe » Thu Oct 19, 2017 8:41 pm

BLACK MONDAY, 19 October 1987 stories today gave me the cold chills along with worries by pundits concerning this long, long bull market. That said, I think exchanging 2%-3% of equities to tax exempt bonds is in our interest now as the AA is a bit stock heavy of late. Like taking some pure cream off the top before the jug is shook up,...kinda.

SeeMoe.. :shock:
"By gnawing through a dike, even a Rat can destroy a nation ." {Edmund Burke}

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