Would you be willing to temporarily change your AA?

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Windylotus
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Would you be willing to temporarily change your AA?

Post by Windylotus » Tue May 15, 2018 11:44 am

Hello Bogleheads,

I posted a question some time ago asking about selling my bonds during a market correction.

www.bogleheads.org/forum/viewtopic.php? ... 2#p3724122

The vast response was, this was the whole point of rebalancing. Buying equities at bargain prices while selling your higher value bonds to maintain your desired AA. I get it.

My underlying question was, would you be willing to change your AA? Even if temporarily?

If we had another 2008 type correction, with blood in the streets, stock prices down -50%, would you be willing to sell some, or all of your bond position and just load up on equities? Obviously, this question is based on someone like me with a long 22-year time horizon before retirement.

DW and I have adopted the Boglehead three-fund portfolio and have an 80/20% AA currently. Let’s say If a significant market correction happened, would it make sense to sell the 20% bond fund (or part of it) that we have and buy all equities at the bargain basement prices? Then, all new contributions going forward into our 403b and Roth IRA accounts would be 100% dedicated to rebuilding our 20% bond position back up to our desired AA.

As anyone on this site done something like this? Gone out of their desired AA to load up on bargain equities then rebuild their bond position back up their desired AA? What is the risk side of doing this if you have a longtime time-horizon before retirement? We wouldn’t need to touch this money for 20+ years so it seems there is time to rebuild our bond position back up again. Thanks for your opinions and insights, feel free to let me know if this is a completely stupid idea or not.

~Windy~

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Pajamas
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Re: Would you be willing to temporarily change your AA?

Post by Pajamas » Tue May 15, 2018 11:49 am

Temporarily changing your asset allocation in reaction to changes in the market is market timing.

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willthrill81
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Re: Would you be willing to temporarily change your AA?

Post by willthrill81 » Tue May 15, 2018 11:50 am

What are you proposing is market timing. Bogleheads are generally opposed to it for a variety of reasons.

I personally use a specific form of market timing referred to as trend following. But what you are proposing is subjective timing of the market, and history says that it's very unlikely to perform well for you.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

JoeRetire
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Re: Would you be willing to temporarily change your AA?

Post by JoeRetire » Tue May 15, 2018 11:53 am

Windylotus wrote:
Tue May 15, 2018 11:44 am
My underlying question was, would you be willing to change your AA? Even if temporarily?

If we had another 2008 type correction, with blood in the streets, stock prices down -50%, would you be willing to sell some, or all of your bond position and just load up on equities?
I didn't change my asset allocation in 2008. I wouldn't change it for "another 2008 type correction".

For me, that's what asset allocation is all about - whatever would allow me to stay the course. By definition I wouldn't change it due to temporary market conditions.

I'd even propose that if you would abandon your asset allocation in that scenario, then you have the wrong asset allocation now.

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bligh
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Re: Would you be willing to temporarily change your AA?

Post by bligh » Tue May 15, 2018 11:58 am

That is definitely market timing and frowned upon.

However, if I am honest, if the market were to drop by say 50% from its current level, currently I would want to "over-balance" (as opposed to simply re-balance to hold my current allocations) and drop the bond percentage of my allocation by 5-10%. Of course in the middle of the doom and gloom of the crash who knows how I will react and might just hold onto my bonds with gratitude. Each market crash is experienced a little differently because of the size of your portfolio and where you are in life. Back in 2007-2008, my portfolio was a small fraction of where it is today, and I knew a lot less about investing... but even back then I remember I knew enough to dump as much money as I could into stocks with the money I had at hand.

Definitely market timing though. I would recommend that if you must try to market time, don't go completely in and out of bonds, instead make small adjustments. Such as reduce your bond allocation by a few percent at most.

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Re: Would you be willing to temporarily change your AA?

Post by alex_686 » Tue May 15, 2018 12:01 pm

Windylotus wrote:
Tue May 15, 2018 11:44 am
My underlying question was, would you be willing to change your AA? Even if temporarily?

If we had another 2008 type correction, with blood in the streets, stock prices down -50%, would you be willing to sell some, or all of your bond position and just load up on equities? Obviously, this question is based on someone like me with a long 22-year time horizon before retirement.
The example you gave should not count. There are 2 legs to this argument.

First, one's risk tolerance is tied to one's ability to take risk. If the stock market falls by 50% then your ability to take risks falls which means one should re-balance into bonds. This is fine. I am assuming you have this written down in your Investment Policy Statement (IPS), which was written rationally during a calm time.

Second, If not you are letting your emotions rule you during a time of panic and you are market timing. Both have very poor histories.

Now, let us assume you are talking about tactical reallocation. You believe that equities are overvalued so you make a short term change in your AA. This is semi-defensible. This history here is once again poor. You have to do this before the market drops 50% and predicting that drop is hard.

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HomerJ
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Re: Would you be willing to temporarily change your AA?

Post by HomerJ » Tue May 15, 2018 12:02 pm

Windylotus wrote:
Tue May 15, 2018 11:44 am
If we had another 2008 type correction, with blood in the streets, stock prices down -50%, would you be willing to sell some, or all of your bond position and just load up on equities? Obviously, this question is based on someone like me with a long 22-year time horizon before retirement.
So you'd wait until the market was down 50%? If it was down 35% or 45%, you wouldn't change a thing?

What if turns out to NOT be "another 2008 type correction"? What if you go 100% stocks at 50% down, and the market continues to crash, and it's a Great Depression II, and you lose your job, and it takes 10 years before the market recovers?

"temporarily change your AA" is just another phrase for "market-timing".

Note that rebalancing gives you a lot of the benefits you are looking for here, without having to change your allocation.

If you are 80/20 and stocks crash, you will sell some of your bonds anyway to buy stocks to get back to 80/20. So even sticking with 80/20, you will be selling bonds and buying stocks at a lower point.

But if we end up with the Great Depression again, you'll be happy you kept at least some of your money in bonds. And if we don't, and the market bounces back again, you'll be happy you rebalanced on the way down.

Making an all-in bet on one outcome isn't usually the best plan.
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staythecourse
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Re: Would you be willing to temporarily change your AA?

Post by staythecourse » Tue May 15, 2018 12:05 pm

Windylotus wrote:
Tue May 15, 2018 11:44 am
Hello Bogleheads,

I posted a question some time ago asking about selling my bonds during a market correction.

www.bogleheads.org/forum/viewtopic.php? ... 2#p3724122

The vast response was, this was the whole point of rebalancing. Buying equities at bargain prices while selling your higher value bonds to maintain your desired AA. I get it.

My underlying question was, would you be willing to change your AA? Even if temporarily?

If we had another 2008 type correction, with blood in the streets, stock prices down -50%, would you be willing to sell some, or all of your bond position and just load up on equities? Obviously, this question is based on someone like me with a long 22-year time horizon before retirement.

DW and I have adopted the Boglehead three-fund portfolio and have an 80/20% AA currently. Let’s say If a significant market correction happened, would it make sense to sell the 20% bond fund (or part of it) that we have and buy all equities at the bargain basement prices? Then, all new contributions going forward into our 403b and Roth IRA accounts would be 100% dedicated to rebuilding our 20% bond position back up to our desired AA.

As anyone on this site done something like this? Gone out of their desired AA to load up on bargain equities then rebuild their bond position back up their desired AA? What is the risk side of doing this if you have a longtime time-horizon before retirement? We wouldn’t need to touch this money for 20+ years so it seems there is time to rebuild our bond position back up again. Thanks for your opinions and insights, feel free to let me know if this is a completely stupid idea or not.

~Windy~
Personally, I love the idea, BUT are you sure if that scenario plays out you won't get fired at the same time? Thus not only will you not be able to add back to the bond portion, but you will end up selling some stocks before you see the rebound. Also, are you sure you can execute the plan not knowing AT THAT TIME when the recovery will begin. It is easy to read the 2008 tea leaves as we know the start time, finish time, and the max. drawdown. Just keep in mind at that time NO ONE knew any of the three data points until it was all over.

You are already 80% equities so I think your portfolio is aggressive enough. If you want even more money I would take less risky options such as make more money, save more money, spend less money, etc...

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: Would you be willing to temporarily change your AA?

Post by ThrustVectoring » Tue May 15, 2018 12:13 pm

I don't think a percentage-based asset allocation is necessarily the best choice, just the one that is easiest to explain, follow, and offer as a product. I think something more like a emergency fund -> stocks -> bonds waterfall is better.

Like, my target for a retirement portfolio is 18 years of expenses in stocks + 12 years of expenses in bonds. If I'm at 18/6 and stocks crash by 50%, then I'm at 9/6 afterwards and the cheapest way to buy the portfolio I'll eventually need is by selling all my bonds for stocks and going to 15/0.
Current portfolio: 60% VTI / 40% VXUS

livesoft
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Re: Would you be willing to temporarily change your AA?

Post by livesoft » Tue May 15, 2018 12:14 pm

Windylotus wrote:
Tue May 15, 2018 11:44 am
DW and I have adopted the Boglehead three-fund portfolio and have an 80/20% AA currently. Let’s say If a significant market correction happened, would it make sense to sell the 20% bond fund (or part of it) that we have and buy all equities at the bargain basement prices?
If equities dropped 50%, then one's 20% bond portion would no longer be 20%, so one would have to sell some of it in order to buy equities.

One can do the math right now and see in advance how much one would have to sell.

So the answer is: Of course it would make sense to rebalance from bonds to equities.
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celia
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Re: Would you be willing to temporarily change your AA?

Post by celia » Tue May 15, 2018 12:15 pm

I think this is the same question you previously asked in your other thread. In there, after the markets drop 50%, you said:
Windylotus wrote:
Tue Jan 16, 2018 2:16 pm
Or, do we keep our current AA the same and still sell some of our bond fund positions during the correction. Say for example, during the correction we sell 5% of our bond position. We would now be 85/15 AA. This of course would be hoping were at the bottom of the correction and then as prices rise, return to out desired 80/20 AA? I hope this all makes sense?
It seems there is some faulty math there. If your AA is 80/20 and the stocks fall to half the value, you then have $40 in stocks for every $20 in bonds. That is not a 85/15 AA, but a 67/33 AA. At that point you need to sell 13% of your overall portfolio (selling bonds) to get back to 80/20, not just 5%.

Let's say you do that and the stocks then double. Your 80/20 AA at the low point is now $160 in stocks for every $20 in bonds, which is an 89/11 AA. At that point you would need to sell 9% of your overall portfolio (selling stocks) to get back to an 80/20 AA.

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Re: Would you be willing to temporarily change your AA?

Post by PFInterest » Tue May 15, 2018 12:15 pm

Windylotus wrote:
Tue May 15, 2018 11:44 am
Hello Bogleheads,

I posted a question some time ago asking about selling my bonds during a market correction.

www.bogleheads.org/forum/viewtopic.php? ... 2#p3724122

The vast response was, this was the whole point of rebalancing. Buying equities at bargain prices while selling your higher value bonds to maintain your desired AA. I get it.

My underlying question was, would you be willing to change your AA? Even if temporarily?

If we had another 2008 type correction, with blood in the streets, stock prices down -50%, would you be willing to sell some, or all of your bond position and just load up on equities? Obviously, this question is based on someone like me with a long 22-year time horizon before retirement.

DW and I have adopted the Boglehead three-fund portfolio and have an 80/20% AA currently. Let’s say If a significant market correction happened, would it make sense to sell the 20% bond fund (or part of it) that we have and buy all equities at the bargain basement prices? Then, all new contributions going forward into our 403b and Roth IRA accounts would be 100% dedicated to rebuilding our 20% bond position back up to our desired AA.

As anyone on this site done something like this? Gone out of their desired AA to load up on bargain equities then rebuild their bond position back up their desired AA? What is the risk side of doing this if you have a longtime time-horizon before retirement? We wouldn’t need to touch this money for 20+ years so it seems there is time to rebuild our bond position back up again. Thanks for your opinions and insights, feel free to let me know if this is a completely stupid idea or not.

~Windy~
Rebalance yes.
Timing no.

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jhfenton
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Re: Would you be willing to temporarily change your AA?

Post by jhfenton » Tue May 15, 2018 12:20 pm

Windylotus wrote:
Tue May 15, 2018 11:44 am
If we had another 2008 type correction, with blood in the streets, stock prices down -50%, would you be willing to sell some, or all of your bond position and just load up on equities? Obviously, this question is based on someone like me with a long 22-year time horizon before retirement.
We were 100% equities from the '90's through late 2015--even when I lost my job in December 2008. We're now age 48 and about 80/20. If we had another correction similar to 2008, I would indeed "over-rebalance" back into equities. At each point from -20%, -30%, -40%, to -50%, I would move my fixed-income allocation target 5%. At -50%, we would be essentially back to 100% equities (except emergency funds).
HomerJ wrote:
Tue May 15, 2018 12:02 pm
So you'd wait until the market was down 50%? If it was down 35% or 45%, you wouldn't change a thing?
I would not wait. I have intermediate targets, because for me, the challenge would be to not dump everything in on the way down. When the market crashes, every instinct tells me to buy.
HomerJ wrote:
Tue May 15, 2018 12:02 pm
What if turns out to NOT be "another 2008 type correction"? What if you go 100% stocks at 50% down, and the market continues to crash, and it's a Great Depression II, and you lose your job, and it takes 10 years before the market recovers?
If there's a Great Depression II, our retirement is probably going to be delayed beyond our target of 2032 (age 62) anyway. Keeping 20% of a 50% portfolio in fixed income isn't going to help us much if the market doesn't eventually recover.

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Re: Would you be willing to temporarily change your AA?

Post by mega317 » Tue May 15, 2018 12:28 pm

HomerJ wrote:
Tue May 15, 2018 12:02 pm
So you'd wait until the market was down 50%? If it was down 35% or 45%, you wouldn't change a thing?
Yes this, and then also when do you go back to your original or preferred AA? So you have to be right twice.

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Re: Would you be willing to temporarily change your AA?

Post by sport » Tue May 15, 2018 12:45 pm

I will give a different opinion: Most market corrections are of the "ordinary" kind, just due to economic cycles and lower expected earnings for most companies. However, 2008 was very different, IMO. Our economic system was coming apart at the seems with major companies going bankrupt. Lehman Brothers is on example. The insurance industry was in a shambles. General Motors went broke. It is only because of some judicious government involvement that we did not have a catastrophic meltdown. It is easy to say in hindsight that we should have "backed up the truck" and bought stocks at "bargain prices". At the time, it was not so clear what was going to happen and a recovery anytime soon was most doubtful. In other words, we "dodged a bullet". It could have been much worse. With market conditions like this, buying stocks was not obviously the thing to do. Personally, it was all I could do to not sell the stocks I already had.

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Re: Would you be willing to temporarily change your AA?

Post by HomerJ » Tue May 15, 2018 12:48 pm

jhfenton wrote:
Tue May 15, 2018 12:20 pm
HomerJ wrote:
Tue May 15, 2018 12:02 pm
What if turns out to NOT be "another 2008 type correction"? What if you go 100% stocks at 50% down, and the market continues to crash, and it's a Great Depression II, and you lose your job, and it takes 10 years before the market recovers?
If there's a Great Depression II, our retirement is probably going to be delayed beyond our target of 2032 (age 62) anyway. Keeping 20% of a 50% portfolio in fixed income isn't going to help us much if the market doesn't eventually recover.
I submit it could help a great deal. Having hundreds of thousands of dollars in bonds during a Great Depression II would make a huge difference for most families.
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HomerJ
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Re: Would you be willing to temporarily change your AA?

Post by HomerJ » Tue May 15, 2018 12:51 pm

sport wrote:
Tue May 15, 2018 12:45 pm
I will give a different opinion: Most market corrections are of the "ordinary" kind, just due to economic cycles and lower expected earnings for most companies. However, 2008 was very different, IMO. Our economic system was coming apart at the seems with major companies going bankrupt. Lehman Brothers is on example. The insurance industry was in a shambles. General Motors went broke. It is only because of some judicious government involvement that we did not have a catastrophic meltdown. It is easy to say in hindsight that we should have "backed up the truck" and bought stocks at "bargain prices". At the time, it was not so clear what was going to happen and a recovery anytime soon was most doubtful. In other words, we "dodged a bullet". It could have been much worse. With market conditions like this, buying stocks was not obviously the thing to do. Personally, it was all I could do to not sell the stocks I already had.
I agree with this. I fear many people took the wrong lesson from 2008. That stock market crashes always recover quickly. It is actually true that the stock market "usually" recovers quickly, but it's certainly not "always". 2008 could have been a LOT worse.
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Re: Would you be willing to temporarily change your AA?

Post by dkturner » Tue May 15, 2018 12:54 pm

sport wrote:
Tue May 15, 2018 12:45 pm
I will give a different opinion: Most market corrections are of the "ordinary" kind, just due to economic cycles and lower expected earnings for most companies. However, 2008 was very different, IMO. Our economic system was coming apart at the seems with major companies going bankrupt. Lehman Brothers is on example. The insurance industry was in a shambles. General Motors went broke. It is only because of some judicious government involvement that we did not have a catastrophic meltdown. It is easy to say in hindsight that we should have "backed up the truck" and bought stocks at "bargain prices". At the time, it was not so clear what was going to happen and a recovery anytime soon was most doubtful. In other words, we "dodged a bullet". It could have been much worse. With market conditions like this, buying stocks was not obviously the thing to do. Personally, it was all I could do to not sell the stocks I already had.
Excellent commentary. I couldn’t pull the trigger and rebalance into equities in late 2018 or early 2019 either. The best I could do was to sell my government bonds and buy investment grade corporates. Fortunately that worked out very well. I am still holding corporates, except for the governments in my investment grade bond fund.

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Re: Would you be willing to temporarily change your AA?

Post by MnD » Tue May 15, 2018 2:29 pm

In 2008/09, just getting back to my AA of 25% fixed income required me to undertake two rounds of selling 6-figures worth of bonds and buying equities, in an exercise that at the time felt like shoveling a small mountain of cash into the opening of a hot-burning wood stove.

Many people were completely overwhelmed and unable to re-balance under those circumstances. Some were paralyzed and just kept their now much-higher allocation in fixed income, while others did the exact opposite of re-balancing by selling equity following severe equity price declines.

Maintaining your AA during market declines provides a rational course and strict discipline for action - and it's still not easy.
Over-rebalancing goes into the murk of speculation and gambling, and I noted that during the 2008/09 panic that over-rebalancer types were not in abundance. :mrgreen:

Just re-balancing to your tried and true AA provides plenty of excitement when the market is down 50% - trust me......
MnD wrote:
Sun Mar 19, 2017 3:23 pm
I was 50% stock going in to Oct 1987, 75% in 2000/02 and 75% in 2007/09 and rebalanced back to my allocation each time. The 2nd and last six-figure rebalancing into equity in spring 2009 was tough. As I was about walking out the door to work I looked at the markets (Dow down another 600 I think) and my rebalancing bands were blown through AGAIN. Decided to take a 1/2 day off from work to calculate and do the trades in various accounts in a tax-smart way. By 11am or so I was done and had completely soaked through my work dress shirt in stress-sweat. Had to take a 2nd shower and a fresh change of clothes before going to work. I remember muttering throughout that morning - "This had better (bad word) work!" :shock:

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Re: Would you be willing to temporarily change your AA?

Post by raven15 » Tue May 15, 2018 8:27 pm

dkturner wrote:
Tue May 15, 2018 12:54 pm
I couldn’t pull the trigger and rebalance into equities in late 2018 or early 2019 either.
I see your point. I haven't been able to do that myself.


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bottlecap
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Re: Would you be willing to temporarily change your AA?

Post by bottlecap » Tue May 15, 2018 8:43 pm

Your strategy is very risky. It first assumes you'll have the guts to buy when there is blood in the streets. Second, it assumes that even if you have the guts, you will choose the correct exit and reentry points.

Many have tried. The overwhelming majority have failed. Perhaps you will be the exception.

My answer is "no."

JT

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Re: Would you be willing to temporarily change your AA?

Post by celia » Wed May 16, 2018 2:02 am

bottlecap wrote:
Tue May 15, 2018 8:43 pm
Your strategy is very risky. It first assumes you'll have the guts to buy when there is blood in the streets. Second, it assumes that even if you have the guts, you will choose the correct exit and reentry points.
You don't have to guess the optimal exit and reentry points. I like how someone above stated that they re-balanced when their stocks were down 20% [from their high], again at down 30%, again at down 40%, etc. If the market stops dropping at down 45%, they have re-balanced 3 times. That is better than not re-balancing at all, IMO. And there was no guesswork involved since they are just following their IPS, which was written in a calmer atmosphere.

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Re: Would you be willing to temporarily change your AA?

Post by randomizer » Wed May 16, 2018 2:09 am

Just say your usual allocation is 75:25 and the market drops and it's time to rebalance. Your math tells you that you should sell $50k of bonds and buy $50k of equities, but you decide that because they're "on sale" you want to exchange $75k or $100k instead. Now your AA will be more aggressive than your original one of 75:25.

You could call this market timing, but provided you're not exceeding your need, willingness, and ability to take risk, I think this is a pretty innocuous form of it. I think the main reason people argue against tactical changes in asset allocation in response to market events is that they can often mask behavioral errors (like panic selling AKA buying high and selling low). But in this case, you're not making that behavioral error. You could definitely make the argument that you're rationally responding to new information; in fact, if you wanted to be immune to charges of impulsiveness and market timing, you could even write this up in your IPS ahead of time (something to the effect that if the market drops by X%, instead of just rebalancing you'll actually set a new AA that you define ahead of time as an adjustment of Y%).
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Re: Would you be willing to temporarily change your AA?

Post by IlliniDave » Wed May 16, 2018 3:23 am

A 50% drop in equities would change my AA with no action whatsoever from me. To restore my AA to plan (undo the change brought on by circumstance) would require moving money into stocks.

In general I have no qualms about moderately adjusting my AA on occasion though fortunately perhaps I am rather lazy about it.
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Re: Would you be willing to temporarily change your AA?

Post by Savio » Wed May 16, 2018 3:56 am

My answer to the original question is....

YES!

I follow most of the BH advice. My asset allocation is 80/20 favoring stocks. The next time we lose 40-50% equities values, I will sell all of my bonds and buy diversified stocks.

I imagine doing this no more often than once every 10 years or so.

Doesn't matter if you find the exact bottom. As long as you get some gains, it should be good.

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Re: Would you be willing to temporarily change your AA?

Post by nisiprius » Wed May 16, 2018 6:52 am

Windylotus wrote:
Tue May 15, 2018 11:44 am
...If we had another 2008 type correction, with blood in the streets, stock prices down -50%, would you be willing to sell some, or all of your bond position and just load up on equities? Obviously, this question is based on someone like me with a long 22-year time horizon before retirement...
1) I didn't do that in 2008. I didn't buy stocks, I didn't sell stocks, and I didn't rebalance. (I should have rebalanced, but see comments later).

2) People are not very good at saying what they would or would not be "willing" to do in a crash. Unfortunately, just as people who have been swindled don't like to talk about it afterwards, people who've panic-sold during a decline don't like to talk about it afterwards. One respected expert, financial advisor, and book author Dan Solin, admitted to selling during 2008-2009 even though he was telling his clients not to. The co-author of a book on behavioral economics, Cass Sunstein, admitted to selling during the 2011 correction even though he talked to his co-author before doing it and his co-author told him not to. Within my circle of acquaintances I had a work colleague who sold everything in his 401(k) and put it all in the money market mutual fund option in September of 2008, and another whose husband told me that she'd had an aggressive allocation and told during the downturn... but it's not anything I'm going to discuss with her.

3) When people about buying stocks during a downturn, or rebalancing, there's a mental trap. You almost can't avoid hindsight, and fantasizing that you would have bought close to the bottom. In real life, the big decline has little advances within it, the little advances have smaller declines with them, and so forth. In real life, some downward lurch will trick you into buying, then a much bigger downward lurch makes you realize that you missed the big opportunity to buy low, etc.

Without a crystal ball, trying to time the market by buying during a downturn is just yet another gamble that might or might not pay off.

Rebalancing is not the big magic some people seem to think it is, but I think I'll start another thread about that. The problem, again, is that people fantasize that the rebalancing rule will buy near the bottom, but like other market timing rules, it often doesn't. Rebalancing procedures that rebalance frequently produce many purchases and sales, and when you pair every purchase with a sale, there will be both profit pairs and loss pairs and it does not add up to a big win. Rebalancing rules that fire infrequently are just another way of adding a random gamble on top of buy-and-hold, and much depends on the luck of the draw of when they fire during any particular dip. Because rebalancing changes risk as well as return, you cannot judge the effectiveness of any rebalancing regime solely on return. This helps explain why one of the endless unresolved debates in the forum is whether or not there is a "rebalancing bonus."
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Re: Would you be willing to temporarily change your AA?

Post by whodidntante » Wed May 16, 2018 7:04 am

If you want to market time, use trend following. You gut is really bad at market timing.

Overrebalancing can also juice returns a bit but is a different system of market timing.

Either approach is going to produce worse outcomes some of the time.

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Re: Would you be willing to temporarily change your AA?

Post by retiredjg » Wed May 16, 2018 7:08 am

Your question indicates that you have not fully realized you will probably have to sell your bonds to maintain your desired stock to bond ratio. You will also likely have to send a greater portion of your contributions (maybe even all of your contributions) to stocks just to keep your stock allocation up to the 80% you want.

This is not market timing. This is maintaining your chosen stock to bond ratio, AKA "rebalancing".

As for your title question, yes I would be willing to temporarily change my AA by probably 5% or so just to juice it a little. In other words, I'd probably go from 50% stocks to 55% stocks without worrying. I believe this is called either strategic or tactical asset allocation,not sure which.
If I were younger, I might go up to 10%.

Yes, this would be market timing, but I do not believe that all market timing is a bad thing. I do believe that the way most people try to time the market is harmful and should be avoided.

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Re: Would you be willing to temporarily change your AA?

Post by Rolyatroba » Wed Apr 17, 2019 1:41 pm

Sorry to bump an oldish thread, but just ran across this, and I have a different opinion than most.

I'd suggest it is not market timing, as long as you have a plausible belief that equities will recover in the 22 years until your retirement (well 21 now, I suppose).

I know, Japan, Japan, Japan. Well even if the U.S. equity markets never recover from such a downturn, I'd guess the yield on bonds won't exceed the yield on equities over that time (much like it has been since '09), so I really don't see a downside to trying to profit from the discount.

A few years ago, we were far enough from retirement (and my DW would work another ten years from now if I agreed), so I decided to try and profit from just this scenario. Four times since Oct of 2014, during corrections, I sold a significant percentage of our FI allocation. These 4 transactions added 6% to the value of our portfolio (plus subsequent compounding), which wouldn't be there if we hadn't done this.

As long as bonds are not yielding significantly more than equities, as it is now, after any 9.5% equities correction I will move 30% of FI into equities. After a 14.5% correction, another 30%. And finally another 30% after a 19.5% correction. I just don't mind being at 95/5 as long as yield doesn't suffer too much, especially since there are some levers we can pull if an equities recovery takes more than a few years.

And to be clear this is done entirely with index funds. And the math is undeniable, as long as equities recover.

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Re: Would you be willing to temporarily change your AA?

Post by Doc » Thu Apr 18, 2019 6:29 pm

Rolyatroba wrote:
Wed Apr 17, 2019 1:41 pm
Sorry to bump an oldish thread, but just ran across this, and I have a different opinion than most.

I'd suggest it is not market timing, as long as you have a plausible belief that equities will recover in the 22 years until your retirement (well 21 now, I suppose).

I know, Japan, Japan, Japan. Well even if the U.S. equity markets never recover from such a downturn, I'd guess the yield on bonds won't exceed the yield on equities over that time (much like it has been since '09), so I really don't see a downside to trying to profit from the discount.

A few years ago, we were far enough from retirement (and my DW would work another ten years from now if I agreed), so I decided to try and profit from just this scenario. Four times since Oct of 2014, during corrections, I sold a significant percentage of our FI allocation. These 4 transactions added 6% to the value of our portfolio (plus subsequent compounding), which wouldn't be there if we hadn't done this.

As long as bonds are not yielding significantly more than equities, as it is now, after any 9.5% equities correction I will move 30% of FI into equities. After a 14.5% correction, another 30%. And finally another 30% after a 19.5% correction. I just don't mind being at 95/5 as long as yield doesn't suffer too much, especially since there are some levers we can pull if an equities recovery takes more than a few years.

And to be clear this is done entirely with index funds. And the math is undeniable, as long as equities recover.
You keep talking about yield. Asset allocation is generally aimed at controlling risk not maximizing returns.

If you increase your bond allocation you are expecting lower returns but lower risk. If you increase your equity allocation you are expecting higher returns but higher risk.

The decision between the two is often considered "market timing". Your assertion that you are far from retirement is valid because you are able to take on more risk in the short term with the expectation that you will come out ahead in the long run. I would sugest that you have changed your risk assessment. Maybe you were wrong about your risk/return assumptions at the start. Or maybe you just can't invest as much as you assumed.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: Would you be willing to temporally change your AA?

Post by depressed » Thu Apr 18, 2019 6:57 pm

Darn it! I misread your title and got all excited about your time machine. But just so as you know, I'd definitely be willing to temporally change my AA. :beer

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Re: Would you be willing to temporarily change your AA?

Post by Sandtrap » Thu Apr 18, 2019 7:02 pm

Investing Behavior Pitfalls
https://www.bogleheads.org/wiki/Behavioral_pitfalls

The downside is that the losses from potential behavioral reactivity may far outweigh any gains you may make by market timing.

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Re: Would you be willing to temporarily change your AA?

Post by Taylor Larimore » Thu Apr 18, 2019 7:21 pm

Bogleheads:

I have been through 9 bear markets since I started investing in 1950 at the age of 26. I worried and sold (big mistake) during earlier bear markets. Eventually it got through my thick skull to Stay-the-Course (thank you, Mr. Bogle).

I now trust my asset allocation and easily went through the last bear markets without losing a moments sleep.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Would you be willing to temporarily change your AA?

Post by aristotelian » Thu Apr 18, 2019 7:37 pm

willthrill81 wrote:
Tue May 15, 2018 11:50 am
What are you proposing is market timing. Bogleheads are generally opposed to it for a variety of reasons.

I personally use a specific form of market timing referred to as trend following. But what you are proposing is subjective timing of the market, and history says that it's very unlikely to perform well for you.
To be fair, he is also proposing a rule based system (market crash >50%). It may be flawed but it's not purely subjective.

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Re: Would you be willing to temporarily change your AA?

Post by willthrill81 » Thu Apr 18, 2019 7:51 pm

aristotelian wrote:
Thu Apr 18, 2019 7:37 pm
willthrill81 wrote:
Tue May 15, 2018 11:50 am
What are you proposing is market timing. Bogleheads are generally opposed to it for a variety of reasons.

I personally use a specific form of market timing referred to as trend following. But what you are proposing is subjective timing of the market, and history says that it's very unlikely to perform well for you.
To be fair, he is also proposing a rule based system (market crash >50%). It may be flawed but it's not purely subjective.
What are his rules?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Would you be willing to temporarily change your AA?

Post by aristotelian » Thu Apr 18, 2019 8:23 pm

willthrill81 wrote:
Thu Apr 18, 2019 7:51 pm
aristotelian wrote:
Thu Apr 18, 2019 7:37 pm
willthrill81 wrote:
Tue May 15, 2018 11:50 am
What are you proposing is market timing. Bogleheads are generally opposed to it for a variety of reasons.

I personally use a specific form of market timing referred to as trend following. But what you are proposing is subjective timing of the market, and history says that it's very unlikely to perform well for you.
To be fair, he is also proposing a rule based system (market crash >50%). It may be flawed but it's not purely subjective.
What are his rules?
"2008 type crash, stocks down 50%"

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Re: Would you be willing to temporarily change your AA?

Post by KlangFool » Thu Apr 18, 2019 8:31 pm

Windylotus wrote:
Tue May 15, 2018 11:44 am

Obviously, this question is based on someone like me with a long 22-year time horizon before retirement.
Windylotus,

ON 1/1/2009, my employer laid off 50% of its employees at my location. If you worked at my location, would you consider changing your AA?

KlangFool

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WoodSpinner
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Re: Would you be willing to temporarily change your AA?

Post by WoodSpinner » Thu Apr 18, 2019 8:47 pm

All,

I don’t want to hijack this thread and will be happy to create a new one ....

The question asked makes some big assumptions about the investor, namely how long they are to retirement (OP indicated 22 years).

I think the answer would be different for someone like me who retired last year and needs to fund the next 30 years.

So, new post or should we continue the discussion here with more details.

Thanks

WoodSpinner

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Re: Would you be willing to temporarily change your AA?

Post by abuss368 » Thu Apr 18, 2019 9:48 pm

I don’t. Have been through bear markets and used to sell, thinking we had to do something! Only in hindsight did we realize that was foolish. The last financial crisis we stayed the course and that was very wise.

Thank you Mr. Bogle.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Would you be willing to temporarily change your AA?

Post by willthrill81 » Thu Apr 18, 2019 10:41 pm

aristotelian wrote:
Thu Apr 18, 2019 8:23 pm
willthrill81 wrote:
Thu Apr 18, 2019 7:51 pm
aristotelian wrote:
Thu Apr 18, 2019 7:37 pm
willthrill81 wrote:
Tue May 15, 2018 11:50 am
What are you proposing is market timing. Bogleheads are generally opposed to it for a variety of reasons.

I personally use a specific form of market timing referred to as trend following. But what you are proposing is subjective timing of the market, and history says that it's very unlikely to perform well for you.
To be fair, he is also proposing a rule based system (market crash >50%). It may be flawed but it's not purely subjective.
What are his rules?
"2008 type crash, stocks down 50%"
That doesn't seem very "rule based" to me. What is a "2008 type crash?" Are any two crashes alike? What if it's a slow descent, like from 2000-2003? What if stocks fall by 40% How will the decline be precisely measured?

A rule-based system certainly be crafted, but it doesn't seem like there's enough detail yet to the OP's plan.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Would you be willing to temporarily change your AA?

Post by willthrill81 » Thu Apr 18, 2019 10:50 pm

abuss368 wrote:
Thu Apr 18, 2019 9:48 pm
I don’t. Have been through bear markets and used to sell, thinking we had to do something! Only in hindsight did we realize that was foolish. The last financial crisis we stayed the course and that was very wise.
Was it wise or just a bit lucky? What if stock prices around the globe went for a decade or longer without much of a recovery? Did anyone know that stocks would rebound so well? If so, then why did stock prices fall so precipitously in 2008, for instance?

This is my problem with buy-and-hold. It's easy to say with hindsight that it was great because we know the outcome. But what if the future is much less rosy and much more grim for a long while? There's no law preventing global markets from falling by 50% or more and staying there for years on end; that's precisely what has happened in many individual nations. Diversification may help with that, but it's not a magic bullet.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Would you be willing to temporarily change your AA?

Post by fennewaldaj » Fri Apr 19, 2019 3:31 am

I wouldn't market time but I could see speeding up my glidepath down to less stocks if valuations got absurd (like tech bubble ish or greater). That would be a permanent change early though not a temporary change.

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Re: Would you be willing to temporarily change your AA?

Post by Windylotus » Fri Apr 19, 2019 5:55 am

KlangFool wrote:
Thu Apr 18, 2019 8:31 pm
Windylotus wrote:
Tue May 15, 2018 11:44 am

Obviously, this question is based on someone like me with a long 22-year time horizon before retirement.
Windylotus,

ON 1/1/2009, my employer laid off 50% of its employees at my location. If you worked at my location, would you consider changing your AA?

KlangFool
Klang, I'm not really sure I'm following your question. Are you asking if I feared losing my job, would that sway my decision to to change my AA? There would be some variables that would need to be considered such as, portfolio size, emergency fund size, years until retirement, risk appetite. I think I would consider changing my AA slightly. And what I mean by slightly is, I would be willing to overbalance say an additional 5% to juice things a bit. Selling all my fixed income to get equities on a fire sale wouldn't be very smart.

My questioning behind my original post was, it would have been an exceptional buying opportunity for equities. Who would't wan't to buy more equity's at a 40-50% discount? However, the reality is I would have been rebalancing at various points during the down market.

At the beginning of January this year, I invested a nice chunk of new money into my equity side. Did this temporarily change my AA? Yep, it sure did. But going forward, my new bi-monthly contributions were now going to my fixed income side and bringing my AA back into balance. Could the market have continued to drop in January? Of course it could of and this would have created another buying opportunity.

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Re: Would you be willing to temporarily change your AA?

Post by columbia » Fri Apr 19, 2019 6:31 am

KlangFool wrote:
Thu Apr 18, 2019 8:31 pm
Windylotus wrote:
Tue May 15, 2018 11:44 am

Obviously, this question is based on someone like me with a long 22-year time horizon before retirement.
Windylotus,

ON 1/1/2009, my employer laid off 50% of its employees at my location. If you worked at my location, would you consider changing your AA?

KlangFool
If one loses their job, then tapping into retirement funds becomes a real possibility.

I think a person could rationally decide to reduce their equity exposure while unemployed.

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Re: Would you be willing to temporarily change your AA?

Post by abuss368 » Fri Apr 19, 2019 6:52 am

willthrill81 wrote:
Thu Apr 18, 2019 10:50 pm
abuss368 wrote:
Thu Apr 18, 2019 9:48 pm
I don’t. Have been through bear markets and used to sell, thinking we had to do something! Only in hindsight did we realize that was foolish. The last financial crisis we stayed the course and that was very wise.
Was it wise or just a bit lucky? What if stock prices around the globe went for a decade or longer without much of a recovery? Did anyone know that stocks would rebound so well? If so, then why did stock prices fall so precipitously in 2008, for instance?

This is my problem with buy-and-hold. It's easy to say with hindsight that it was great because we know the outcome. But what if the future is much less rosy and much more grim for a long while? There's no law preventing global markets from falling by 50% or more and staying there for years on end; that's precisely what has happened in many individual nations. Diversification may help with that, but it's not a magic bullet.
I have always believed in Jack Bogle quote “Invest you must”. He would also discuss market timing and the risk of being right twice: knowing when to get out and knowing when to get back in.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Would you be willing to temporarily change your AA?

Post by KlangFool » Fri Apr 19, 2019 7:33 am

columbia wrote:
Fri Apr 19, 2019 6:31 am
KlangFool wrote:
Thu Apr 18, 2019 8:31 pm
Windylotus wrote:
Tue May 15, 2018 11:44 am

Obviously, this question is based on someone like me with a long 22-year time horizon before retirement.
Windylotus,

ON 1/1/2009, my employer laid off 50% of its employees at my location. If you worked at my location, would you consider changing your AA?

KlangFool
If one loses their job, then tapping into retirement funds becomes a real possibility.

I think a person could rationally decide to reduce their equity exposure while unemployed.
columbia,

Let's assume that your AA is 60/40. On 1/1/2009, the employer laid off 50 of its employee at your location. The stock market had dropped by 50%. Your AA is now 43/57. Your equity exposure had dropped due to the market drop. What would you do next?

KlangFool

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Re: Would you be willing to temporarily change your AA?

Post by KlangFool » Fri Apr 19, 2019 7:41 am

Windylotus wrote:
Fri Apr 19, 2019 5:55 am
KlangFool wrote:
Thu Apr 18, 2019 8:31 pm
Windylotus wrote:
Tue May 15, 2018 11:44 am

Obviously, this question is based on someone like me with a long 22-year time horizon before retirement.
Windylotus,

ON 1/1/2009, my employer laid off 50% of its employees at my location. If you worked at my location, would you consider changing your AA?

KlangFool
Klang, I'm not really sure I'm following your question. Are you asking if I feared losing my job, would that sway my decision to to change my AA?
Windylotus,

What is your portfolio size in term of your annual expense? What is the size of your emergency fund?

Let's assume that your emergency fund is 6 months. And, your portfolio size is 5 years and your AA is 60/40. The market had dropped by 50%. So, your portfolio is down to 3.5 years. You can last 3.5 + 0.5 = 4 years. Would you rebalance back to 60/40? If you do, another 50% drop will cut you down to 3 years of the buffer.

Unless you have complete job security, short-term unemployment is always possible. Can you last long enough until the recovery?

You have to survive in order to succeed.

KlangFool

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Re: Would you be willing to temporarily change your AA?

Post by Windylotus » Fri Apr 19, 2019 8:08 am

KlangFool wrote:
Fri Apr 19, 2019 7:33 am
columbia wrote:
Fri Apr 19, 2019 6:31 am
KlangFool wrote:
Thu Apr 18, 2019 8:31 pm
Windylotus wrote:
Tue May 15, 2018 11:44 am

Obviously, this question is based on someone like me with a long 22-year time horizon before retirement.
Windylotus,

ON 1/1/2009, my employer laid off 50% of its employees at my location. If you worked at my location, would you consider changing your AA?

KlangFool
If one loses their job, then tapping into retirement funds becomes a real possibility.

I think a person could rationally decide to reduce their equity exposure while unemployed.
columbia,

Let's assume that your AA is 60/40. On 1/1/2009, the employer laid off 50 of its employee at your location. The stock market had dropped by 50%. Your AA is now 43/57. Your equity exposure had dropped due to the market drop. What would you do next?

KlangFool
What would you do KlangFool?

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Re: Would you be willing to temporarily change your AA?

Post by james22 » Fri Apr 19, 2019 8:27 am

I'm a fan of valuation timing, but a) I'll have bought as the market fell to half, and b) the market can fall further:

So Ben Graham almost went bankrupt in the ‘30s, and this is an interesting point, I keep thinking about this all the time, so Ben Graham was reflecting in the ‘30s and he writes, if you were not bearish, if you're not concerned about the economy in 1925, not in 1927, 28, 29, but in 1925, there was only a 1/100 chance that you survived the depression, because what'd you have looked at was if you were not bearish in 1925, you'd have seen the crash in 1929, drop 50%, and you'd have come right in and thought of it as an opportunity, because the Dow Jones dropped from 400 to 200, went back up to 300, and the second leg after that was a killer, dropping about 90%!!

http://www.gurufocus.com/news/146628/gu ... prem-watsa
25% BRK l 25% BAM l 8% SV (VSIAX) l 8% EM (VEMAX) l 4% FNMA/FMCC l 4% FNMAS/FMCKJ l 25% Stable Value

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Re: Would you be willing to temporarily change your AA?

Post by KlangFool » Fri Apr 19, 2019 8:27 am

Windylotus wrote:
Fri Apr 19, 2019 8:08 am
KlangFool wrote:
Fri Apr 19, 2019 7:33 am
columbia wrote:
Fri Apr 19, 2019 6:31 am
KlangFool wrote:
Thu Apr 18, 2019 8:31 pm
Windylotus wrote:
Tue May 15, 2018 11:44 am

Obviously, this question is based on someone like me with a long 22-year time horizon before retirement.
Windylotus,

ON 1/1/2009, my employer laid off 50% of its employees at my location. If you worked at my location, would you consider changing your AA?

KlangFool
If one loses their job, then tapping into retirement funds becomes a real possibility.

I think a person could rationally decide to reduce their equity exposure while unemployed.
columbia,

Let's assume that your AA is 60/40. On 1/1/2009, the employer laid off 50 of its employee at your location. The stock market had dropped by 50%. Your AA is now 43/57. Your equity exposure had dropped due to the market drop. What would you do next?

KlangFool
What would you do KlangFool?
Windylotus,

What I did. My portfolio was 50% Wellington Fund (65/35) and 50% Lifestrategy Moderate Growth Fund (60/40). My funds rebalanced for me without me having to do anything.

Now, my portfolio has 40% in the Wellington fund (65/35) fund. The stock market has to drop 30% or more in order to trigger the 5/25 rebalancing band. Anything less than that, the portfolio will rebalance itself with the new contributions.

KlangFool

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