Investment Mistakes & Bear Market memories

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guest42
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Investment Mistakes & Bear Market memories

Post by guest42 »

This forum has a vast array of both young and old invesors, both US and non-US. Some of us have memories of other Bear Markets, some of us do not. Some of us have made investing mistakes (and may be willing to share, in case it helps someone else not make the same mistake) - I suppose others may have made mistakes, but wish to forget them. All of us at times, have had emotional reactions either to the market at large, or perhaps a particular investment. We all have different time horizons, and undoubtedly, collectively - our means for investing are varied and wide.

I thought it might be useful to share some of these things, in the odd chance one persons experience, might shed light on anothers.

Here is what I feel like sharing this morning:

The Bear Market of 2000-2002, my age was 45-47 at the time.

As that market fell, my investing increasingly got more aggressive. I hated my losses, and gosh - look at the great price I can get so&so stock (or index) at! I rebalanced as frequently as every month. I threw good money after bad.

Lesson learned: Don't throw good money after bad. I remember CNBC back then, joking about waiting for 3 up days in a row (which I don't believe happened for years, or if it did, it was temporary)

It is this lesson learned, that is holding my trigger hand, at the moment. I was correctly asset allocated balanced at the beginning of this mess. Yes, the current prices look terrific. But I am going to wait for those 3 up days in a row, before rebalancing. I learned my lesson. Getting aggressive in a Bear Market was not a very good idea.

I hope this is useful for at least one someone else.
rm42
Last edited by guest42 on Sun Dec 07, 2008 10:56 am, edited 1 time in total.
leonard
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Post by leonard »

room42 wrote:But I am going to wait for those 3 up days in a row, before rebalancing.
Perhaps I am not quite understanding your post. Waiting for 3 up days in a row at least sounds like trying to implement a market timing signal. Rebalancing (I assume to your target asset allocation) is part of the buy and hold philosophy - you periodically rebalance based on a time period or rebalance bands to your asset allocation.

But, it appears you are using "rebalance" as a synonym for any sort of trade.

So, can you clarify what you mean by rebalance?

Thanks.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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guest42
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Post by guest42 »

leonard wrote:So, can you clarify what you mean by rebalance?
Thanks.
My target allocation is 40% equities / 60% Fixed Income (I prefer FDIC insured CD's).

The current market mess has dropped my equity allocation to 33%. This is more then a classic 5% band for rebalancing, so by mathmatics alone - it is time to rebalance.

However, I am waiting - because of what I learned (my personal experience) in the 2000-2002 Bear Market, where I needed to rebalance nearly monthly, by mathmatics alone. While each succesive rebalance, did accomplish rebalancing (and purchased more shares at ever decreasing prices) --- ever decreasing prices was a constant reality for most of 3 years (non-specific, I haven't looked). This was in my opinion, was throwing good money after bad (mine you, I must note - I wasn't working, so had no regular employee contributions going in).

I am waiting for 3 up days in a row, and then I will rebalance. Sure, I might miss a dramatic 10% up move (who cares, I do have shares in the market, and these would go up), but on the other hand, I will also miss a perpetual slow bleed, that got me nowhere in the 2000-2002 Bear Market. I learned this lesson. It is a lesson for me, but by no means would apply too everyone. I offer it up, as one persons viewpoint.

Is this market timing? I don't think so. I'd prefer to call it "Listening to the message of the markets". One can blindly rebalance, or one can choose what seems like a good day, versus what is obviously a bad day. I listen to the "message of the markets". I learned my lesson, or at least this lesson, the hard way.

rm42
Last edited by guest42 on Sun Dec 07, 2008 10:56 am, edited 1 time in total.
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ryuns
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Post by ryuns »

room42 wrote:
Is this market timing? I don't think so. I'd prefer to call it "Listening to the message of the markets". One can blindly rebalance, or one can choose what seems like a good day, versus what is obviously a bad day. I listen to the "message of the markets". I learned my lesson, or at least this lesson, the hard way.

Linda-room42
If your "rule" is to rebalance at 5% thresholds and you decide NOT to because of "how you feel about the market", that's market timing.

Ryan
An inconvenience is only an adventure wrongly considered; an adventure is an inconvenience rightly considered. -- GK Chesterton
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Post by Hemispheres »

room42 wrote:Is this market timing? I don't think so. I'd prefer to call it "Listening to the message of the markets".
Don't worry about the "purists" out there, you're playing this smart based on experience.
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Post by ddb »

room42 wrote:Is this market timing? I don't think so. I'd prefer to call it "Listening to the message of the markets". One can blindly rebalance, or one can choose what seems like a good day, versus what is obviously a bad day. I listen to the "message of the markets". I learned my lesson, or at least this lesson, the hard way.
Based on your 2002 experience, wouldn't you be even BETTER off by selling out of stocks altogether at this point? In other words, why obey the "message of the markets" just halfway?

- DDB
"We have to encourage a return to traditional moral values. Most importantly, we have to promote general social concern, and less materialism in young people." - PB
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Post by InvestingMom »

Linda,
I believe you are doing a bit of market timing. However, I would not fault you as I don't think waiting for 3 days of up markets is much of a trigger and I don't see how anyone can be faulted in a market like this for waiting. After all, who rebalances every day! Many folks (90% per the latest poll I saw on this board) say they are staying the course. Technically I think this means they are staying to their plan and so I wonder really how many of them have rebalanced this week and or in the last couple of weeks...so we are all somewhat guilty of it. For those who are really buying right now...you have guts of steel.

I think the 3 day rule is a good one. BTW: I used to apply this to my stock options. As they became vested, I would wait for 3 down days before I sold figuring that I would miss the top anyway, and why sell when there is upward momentum...but that was in the late 90s :wink:

Well now I really do sound like a market timer.
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Post by jaxbmw »

My bear market memory from the '74 market was the total fear in the economy that things would NOT get better. I was so glad I had a job. No one wanted stocks at any price.

I lived beneath what I could afford and continued to buy through payroll deduction. It proved to be the right decision.
dayzero
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Post by dayzero »

room42 wrote:
leonard wrote:So, can you clarify what you mean by rebalance?
Thanks.
My target allocation is 40% equities / 60% Fixed Income (I prefer FDIC insured CD's).

The current market mess has dropped my equity allocation to 33%. This is more then a classic 5% band for rebalancing, so by mathmatics alone - it is time to rebalance.

However, I am waiting - because of what I learned (my personal experience) in the 2000-2002 Bear Market, where I needed to rebalance nearly monthly, by mathmatics alone. While each succesive rebalance, did accomplish rebalancing (and purchased more shares at ever decreasing prices) --- ever decreasing prices was a constant reality for most of 3 years (non-specific, I haven't looked). This was in my opinion, was throwing good money after bad (mine you, I must note - I wasn't working, so had no regular employee contributions going in).

I am waiting for 3 up days in a row, and then I will rebalance. Sure, I might miss a dramatic 10% up move (who cares, I do have shares in the market, and these would go up), but on the other hand, I will also miss a perpetual slow bleed, that got me nowhere in the 2000-2002 Bear Market. I learned this lesson. It is a lesson for me, but by no means would apply too everyone. I offer it up, as one persons viewpoint.

Is this market timing? I don't think so. I'd prefer to call it "Listening to the message of the markets". One can blindly rebalance, or one can choose what seems like a good day, versus what is obviously a bad day. I listen to the "message of the markets". I learned my lesson, or at least this lesson, the hard way.

Linda-room42
You're fine - 33% is still within 20% of your target (80%*40%=32%). Once it hits 32%, I suggest restoring it halfway, to 36%. I saw the same things you did in 00-02, but I'm sticking to my plan. Don't let emotions rule you.
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Post by jeffyscott »

jaxbmw wrote:My bear market memory from the '74 market was the total fear in the economy that things would NOT get better. I was so glad I had a job. No one wanted stocks at any price.

I heard (read) something similar from someone else who was buying then. He said something like he felt it was either the buying opportunity of a lifetime or the end of capitalism.
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
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Post by Eureka »

I'm starting a new timing letter based on The Three-Day Rule. I hope to pick up some people dropping Brinker's letter -- assuming they have any money left.

I'd love to see this rule back-tested.
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Post by guest42 »

Eureka wrote:I'm starting a new timing letter based on The Three-Day Rule. I hope to pick up some people dropping Brinker's letter -- assuming they have any money left.

I'd love to see this rule back-tested.
I think I understand the viewpoint from which you make this remark, but I am going to defend myself.

I am not seeking optimal gains. I am not seeking to time anything. I am intending to stay out of the way of this freight train headed south. So what if I miss, or don't miss, some optimal gain. My intention is merely to not throw good money after bad. To adhere strictly to mathmatics or arbitrary dates for the sake of academic ideology, is inflexible, to say the least.

If you wish to remain inflexable - go for it. It is your money and your life. But I have done that gig once before, and found that it was a huge stupid mistake for me. Therefore, I won't do that again.

respectfully,
rm42
Last edited by guest42 on Sun Dec 07, 2008 10:57 am, edited 1 time in total.
cjking
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Post by cjking »

The reason for setting rules for rebalancing (such as once a year or when x% away from a target level) are to minimise switching costs. Once those criteria are met, I believe there is no harm in trying to time the switch. It's a 50:50 call whether rebalancing on any give day is going to leave you better off than doing it a week or a month later. (Though if it were me, I would just rebalance immediately the rule says, as to do otherwise is to incur the anxiety of decision making with no positive expected return to reward me for my trouble.) Waiting for three up days is, in theory, no better or worse than obeying the rule immediately, or letting the toss of a coin decide. So it's perfectly OK to do, from the point of view of expected returns.
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Post by pkcrafter »

Linda wrote:
But I have done that gig once before, and found that it was a huge stupid mistake for me. Therefore, I won't do that again.

Fair enough. The lesson I learned in 2000-20002 was I had an AA that was too high for me. It was 50/50, and I made an adjustment down to 40/60, which I am still holding.

I would not say that rebalancing now is throwing good money after bad, but I can see why you want to wait a bit. This thing is not finished putting us through the wringer. The problem is if people do not rebalance in these down markets they sacrifice a lot of gain in the recovery. But, I don't think we're going to miss that in the next few weeks.



Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Post by btenny »

What about the academic literature that says rebalancing more often than once every year or two is counter productive? Too many trades costs taxes and trade expenses and so forth. Plus you lose the gains of big run ups and the missed pain of big run downs. Now don't ask me to find the paper because I can't and I am not an academic but Larry or Rick or Mel or Gummy can I am sure.

Bill
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Post by jeffyscott »

There are no costs if you are trading mutual funds in a tax deferred account.
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
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Post by btenny »

My personal bear market memories.

I completely missed the 1974 bear in stocks as I was just staring out and did not invest that way in those days. But I did make a good profit by buying real estate at 50% off the going price in 1975 (a house) and 1976 (a condo) after the meltdown. Those both yielded 3-10X price improvement over time.

I sold out some stocks in the 1987 meltdown due to the bear that year. Because of work and kid pressures I missed the run back up and did not buy back in with those funds. I did not sell everything but none the less I missed out on some of it by going to cash. Very bad and stupid on my part.

In 1987 I owned some junk bonds that crashed. They were the rage at that time and I owned a lot. I sold some of them when the market crashed because prices went down so much. I guess I did not completely learn my lesson as I owned some bad bonds in 2002 that lost money and I still own a small amount of bad bonds now. So I think I am finally getting the point about owning only good bonds and taking risks in stocks.

Now regarding the 2000-03 crash. I retired in early 99 because I thought the company I worked for was in for hard times ahead and that their stock was way over valued. I got some parachute money that I kept in bonds and cash. I cashed in my options in late 99 and took the cash. Similarly I sold my old big house and downsized in 2002. During the whole market run down I stayed about 50-60% in cash and bonds so I missed a lot of the carnage. But my broker did like junk bonds (along with high priced mutual funds) so he bought some for me and they promptly lost money so I fired him. I got back in the market in 2003 (pure luck) when I fired my broker and started doing it myself by reading and learning more about mutual funds and Vanguard and so forth.

So will this time be different? Who knows the future? But I sure do know that something that seems so simple like bonds can be so complicated and just as risky as stocks. So beware out there...

Bill

PS: For those that believe government bonds are so good. Go look at TIP the Inflation bond fund price for the last week or two.
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Post by btenny »

Jeffery....

Do you really think the mutual fund you sold so fast did not incur expenses for your sale in order to give you cash that they did not charge you in the fund expense ratio?

Similarly do you think that creating of X new units of the mutual fund you bought did not cost something to set up?

This cost of changing stuff is why Vanguard is so rigid about frequent trades and will kick out customer if they see patterns of frequent trading of funds.

Bill
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Post by jeffyscott »

There is no costs charged to the person making the trade. My comment was a response to yours: Too many trades costs taxes and trade expenses and so forth.

The point is that is, in general, not a reason for not rebalancing in a 401k or other retirement account.

Many (most? all?) fund companies have restrictions on frequent trading these days, that is not unique to vanguard.
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
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Post by btenny »

My point on monthly rebalancing or similar approach like suggested above was that it might trip the mutual fund frequent trade rules. Or at least you might if you are not adding new money to charge the various accounts and do the rebalancing that way. Does anyone know if this would happen?

Plus if you are selling on the way up (like from 2003 -2007) in taxable accounts you are generating real taxable gains that must be paid along the way rather than just holding on and letting them run. I see that as a big penalty and so does Warrent Buffett.

Bill
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Post by jeffyscott »

I didn't realize someone had suggested monthly, I don't have a set schedule myself I do it when things get far enough off target.

I did increase my bands after I got in trouble from T. Rowe for a round trip in less than 90 days in emerging markets in summer/fall of 2007.
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
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Post by G12 »

My learning experience taken from the past 18-months (been investing since 1987) is that when officials say "The subprime issue is contained" run for the hills. Sell all equity with no exception, don't allow lying morons to alter your decision. Taking gains and paying taxes > taking losses with no gains to offset, applying 3k reduction to income is a joke in comparison when you start talking 6-figure losses.

In the best Dana Carvey dialogue regarding a current US official from Texas responding to Kim Jong-il regarding nuclear weapons, "Let me tell ya something right now. Fool me twice, once on shame. Fool me again and twice and once."

Classic, but it sums up the intellect of the man.

When challenged with the decision of paying off your mortgage or investing in risky assets my decision would now be to pay off the mortgage. But I am still sitting on the cash waiting to determine my investing course of action. Cheaper equity prices don't necessarily constitute bargains.
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Post by gbs »

Recent event: convinced a fried to rebalance over the phone. Next thing I know he's at my house... I had to rebalance for him. If was to painful for him to even look at the portfolio!

gbs
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Post by BlueEars »

OK Linda, I'll share some data I have from previous recessions I've lived through. I put this up in another thread so it may look familiar.

Code: Select all

1973  down 38%  in 21 months  (understated because of inflation)		
1980  down 27%  in 13 months		
1990  down 19%  in  3 months		
2000  down 49%  in 31 months		
2007  down 42%  in 12 months to Oct 9, 2008		
Now where are we at in this recession? Officially the NBER has not even started it yet! Let's say we are 2 months into it. Here is how long it took for the SP500 to hit the bottom in the previous recessions above after the "start" that was declared for those recessions:

Code: Select all

1973 in 11 months
1980 in 13 months		
1990 in  3 months		
2000 in 19 months	
So if we take those and average then we get about 12 months to the SP500 bottom after the start of this recession. But of course this is based on an average of only 4 instances in about 35 years. Not statistically anything you can hang your hat on. However, it might suggest some tactics to avoid loosing more money.

The lessons I've taken out of this and my own particular experiences of 35 years of investing are: If I rebalance it will be after the recession start has been declared and some months into the pain that will be inflicted on the real economy. I may be late but at least the FI part of my portfolio will be safe. I may miss the rebalance bonus but in this particular crisis it doesn't appear to be a big issue. Capital preservation seems to be the biggist issue today. Changes I make will be to keep risk somewhat a constant -- neither more nor less risk.

P.S. Good luck with that 3 day timing rule. Sounds a little too much like what worked in the last war -- recency. My data spans multiple wars but you could argue that every bear market is different and I would have no defense.
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Post by btenny »

Les I agree with you. I think we are at least a year to three years minimum from a real bottom. And maybe we are 5-10 years from real inflation adjusted growth in the markets. This time line is based on lots of data that says it takes 10-15 years or more for a country to reform itself from previous problems. See the US in 1929 to 1950 and 1969 to 1980. Same with other countries.

It takes a long time to reform people and government systems and get bad companies out of the way and good companies to replace them before the economy really starts growing good stuff again. And today the US is laging lots of other countries in the good stuff like universal health care (no matter how mediocre the resulting system) and a sound banking system and electic cars and battery technology and alternate energy solutions and energy conservation and green things in general. Heck Norway is 50% converted to wind power and Brazil runs 80% of their cars on home grown ethanol, and France uses 80% nuclear power and all of Europe has great train transportation. And as far as I can tell the Swiss missed the banking issues so we may not even be the best at that either. And 35 of 38 developed countries has better educated undergraduate students. So I just do not see us getting out of our mess very soon.

Yes we have some good things going for us like a growing population due to all those illegal immagrants and a great college and university system (if we can figure out how to get the foreign graduates to stay here) and we have a great open democratic society and laws and a constitution that forces us to fix problems. Plus the US is still one of the best if not the best place to live in the world so lots of smart people still want to live here including me.

So I think we have lot of good stuff but we need lots of things changed in both business and social systems and a lot more personal responsibility before this really gets better.... And that takes time.

And unfortunitely I do not count much of the last 8 years of bad market performance and time against a 10 year clock to fix stuff.....

Bill
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