Why Bull Markets Are Dangerous

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Rick Ferri
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Why Bull Markets Are Dangerous

Post by Rick Ferri » Sat Sep 08, 2018 7:58 pm

This is a true story..

My 86-year old mother called out of the blue today to complain about one of her investments. "It’s not earning enough," she said. Her portfolio is composed of two funds: 50 percent in a US total market index fund and 50 percent in an intermediate-term bond index fund. She has owned these two funds in the same 50/50 allocation for almost 20 years.

I asked, “Mom, why the sudden interest in how you’re invested? You’ve owned these funds for a long-time and never complained.”

“Rick, I know, I know, just listen to me. I’ve been watching these two funds very closely for a few months. The stock fund does much better than the other fund. It always seems to do better. It just seems silly to own the bond fund when stocks make so much more.”

We then had “the talk” about periods when stocks don’t always perform well. Remember 2001? Remember 2008? She finally acquiesced, but not before adding, “You’re going to get it all anyway, so you do what’s best.”

And there you have it - why prolonged bull markets are dangerous. People forget what a bear market looks like and feels like. My mother, bless her soul, has it in her head that stocks are not risky anymore. They just keep going up.

Joe Kennedy was the father of former president John F. Kennedy. He made millions in the stock market in the roaring 20s and got out before the Great Depression. How did he know? According to Fortune magazine, "Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day's financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929."

I'm not saying this is the end of the bull market. I'm saying I did the right thing and advised my mother to stay the course. Any adviser who is worth a darn would have said the same thing even if it means losing a client if stocks continue higher. That’s where I have an advantage. My mother can be mad, but she can’t fire me as her son.

Rick Ferri
Last edited by Rick Ferri on Sun Sep 09, 2018 2:02 pm, edited 2 times in total.
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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nedsaid
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Re: Why Bull Markets Are Dangerous

Post by nedsaid » Sat Sep 08, 2018 8:18 pm

Yes, RIck, bull markets make us all overconfident. I just laugh when people post here and say they have a high risk tolerance. That just tells me they haven't felt the pain from a bear market.

In late 1999, I felt pretty smart. In mid-2002, I wondered what the heck I was doing. Pretty much went from champ to chump.

Your mom is an indication that we might be getting too confident. But so far, I haven't heard of people quitting their jobs to day trade as they did during the late 1990's. I am not seeing the market euphoria out there but certainly optimism has increased.

I have joked a lot about the "freefall" thread and the "soar" thread. The "soar" thread popped up and almost on cue, the US Stock Market stalled. It seemed that when the "freefall" thread popped up that the markets would rally. Don't get me wrong, Boglehead threads don't move the markets. But I am making a point about market sentiment. If your 86 year old mom is feeling pretty confident about stocks, that is worrisome.
A fool and his money are good for business.

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Re: Why Bull Markets Are Dangerous

Post by Beehave » Sat Sep 08, 2018 9:13 pm

I've faced bear markets in the past with confidence, never selling. During the last bear market go rounds I've rebalanced cash into stock as the market tanked and was happy to be buying low.

The difference between now and then is that I'm now retired, and while I don't think I would panic if there were another crash, I'm, not sure whether I would have the same outlook of confidence and relative comfort. My current stock-to-cash/bond ratio today exceeds my plan, and I've started rebalancing, and because of age I am also both simplifying and planning to slightly reduce the stock proportion.

The collective wisdom on the bogleheads site has been very helpful to me and my already great appreciation for its setup, administration, and contributors continues to increase steadily. Best wishes to all.

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Re: Why Bull Markets Are Dangerous

Post by JBTX » Sat Sep 08, 2018 9:17 pm

It does seem like the overall confidence level has increased. People who have sat on cash for years now want in. People rethinking their asset allocations to 100% equities. I'm not sure it has hit the full blown froth stage but that may not be far away.

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FIREchief
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Re: Why Bull Markets Are Dangerous

Post by FIREchief » Sat Sep 08, 2018 9:56 pm

Rick Ferri wrote:
Sat Sep 08, 2018 7:58 pm
That’s where I have an advantage. My mother can be mad, but she can’t fire me as her son.

Rick Ferri
Good story. Unfortunately, while mothers (and fathers) can't fire their kids, they most certainly can decide to ignore their advice. :annoyed
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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patrick013
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Re: Why Bull Markets Are Dangerous

Post by patrick013 » Sat Sep 08, 2018 9:59 pm

Well if I rebalance when PE's are over 25 what to do when PE's
are over 30 ? I hope they don't have that much optimism and
confidence.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Why Bull Markets Are Dangerous

Post by Elysium » Sat Sep 08, 2018 10:12 pm

It;s coming.. I can sense it. There are discussions everywhere about FAANG stocks and how sky is the limit for companies like AMZN. Someone was arguing the other day, P/E multiples don't really matter when it comes to companies like AMZN, it's all about growth and there is no limit. It is their retirement strategy to just follow the big FAANG stocks, and when I asked if you trust these companies to be do well, the answer was absolutely and without question. There are others watching their tech stocks everyday and even taking time off work to trade, may be this is a minority, but it is happening.

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Re: Why Bull Markets Are Dangerous

Post by pkcrafter » Sat Sep 08, 2018 10:26 pm

Thanks Rick, posting this was a great reality check. Most investors do get swept up in the thrill of good returns and the agony of big losses. Investors also have every short time frames, they think in dog years. :happy

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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Re: Why Bull Markets Are Dangerous

Post by Compound » Sat Sep 08, 2018 10:41 pm

What a great post! Thank you for sharing. Nice reminder to stay the course.

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Re: Why Bull Markets Are Dangerous

Post by asset_chaos » Sat Sep 08, 2018 10:49 pm

I had to have a similar talk with my mother, but a while ago and in the opposite direction. Around 2003 or 2004 she called me to complain that stocks did nothing but go down. She had been 30:70 stocks:bonds for the previous 8 or 9 years. I finally convinced her that she had enough to do everything she enjoyed, even if stocks lost a bit. Eventually she was convinced not to worry or at least didn't bring it up again.

I'm not sure these anecdotes are bell weathers, but it might be interesting to perform some kind of sentiment analysis (https://en.wikipedia.org/wiki/Sentiment_analysis) on social media and/or regular media comments to see if anything correlates with market booms and busts, and if so, with what kind of lead time. Some one must have done that already. And yes, of course someone has; google "sentiment analysis correlates with stock market" returns some 2 million hits. I'm not going to look through the literature on this one; my sentiments are that I've got other things to do.
Regards, | | Guy

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Re: Why Bull Markets Are Dangerous

Post by mrspock » Sat Sep 08, 2018 10:57 pm

Wow, seniors wanting to push “all in”.... if my Starbucks barista starts giving me hot stock tips I’m selling everything.

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Re: Why Bull Markets Are Dangerous

Post by Ron Scott » Sat Sep 08, 2018 11:34 pm

The tendency toward overconfidence is chilling, or laughable, depending on your perspective.

Worse than believing in bulls is the belief that American markets have seen all possible events, thereby allowing historical databases to predict future returns with trusted confidence bands.

Just yesterday, in a related post, a guy here described his plans for FI: a 5% real return on his equity-heavy portfolio for 10 years. From your lips my friend...but a better approach is to a) realize that the most valuable asset you have is your ability to earn by working, and b) structure your retirement finances as best you can so you will not need to sell equities in a downturn.

So, yes, “Stay the course”, but with a caveat: Better to get out while the going is good—or stay the course and leave equities to your heirs—than needing to sell low when the going gets rough.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

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Re: Why Bull Markets Are Dangerous

Post by gmaynardkrebs » Sun Sep 09, 2018 12:13 am

I thought I read that retail investors were pulling out of stocks? I'm not sure how they would know that, but it seems that it's really professional money managers who are going all in, probably because the ones who haven't gone all in are now out of business.

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Re: Why Bull Markets Are Dangerous

Post by hdas » Sun Sep 09, 2018 2:22 am

nedsaid wrote:
Sat Sep 08, 2018 8:18 pm
Your mom is an indication that we might be getting too confident. But so far, I haven't heard of people quitting their jobs to day trade as they did during the late 1990's. I am not seeing the market euphoria out there but certainly optimism has increased.
Perhaps not wise too look for the exact same signs as 20 years ago. Markets are dynamic ecosystems. We already had warning signs last year: Selling Vol Trade, crypto_craze. The market hit a momentum extreme in Jan/18, keep that reference in mind.

Perhaps in retrospect Fidelity Zero announcement will look ominous.

Cheers

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randomizer
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Re: Why Bull Markets Are Dangerous

Post by randomizer » Sun Sep 09, 2018 2:50 am

This is a bad sign. Bracing for my first real bear soon.
87.5:12.5, EM tilt — HODL the course!

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Re: Why Bull Markets Are Dangerous

Post by z3r0c00l » Sun Sep 09, 2018 6:00 am

That kind of everyday euphoria was pretty apparent in bitcoin last year. Still have not seen it in stocks just yet.

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Re: Why Bull Markets Are Dangerous

Post by sillysaver » Sun Sep 09, 2018 6:36 am

According to one of the newsletter writers I follow, we are in the beginning of the last great "Melt-Up" before stocks peak. So, watch the charts of the FAANG's for a blow-off top like the one in 2000.

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Re: Why Bull Markets Are Dangerous

Post by Call_Me_Op » Sun Sep 09, 2018 6:50 am

Rick,

Perhaps time for a Lifestrategy fund.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Why Bull Markets Are Dangerous

Post by lostdog » Sun Sep 09, 2018 6:51 am

Noise. No one knows nothing. Stick to your plan and stay the course. Bye.

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Re: Why Bull Markets Are Dangerous

Post by exoilman » Sun Sep 09, 2018 7:17 am

Beehave wrote:
Sat Sep 08, 2018 9:13 pm
I've faced bear markets in the past with confidence, never selling. During the last bear market go rounds I've rebalanced cash into stock as the market tanked and was happy to be buying low.

The difference between now and then is that I'm now retired, and while I don't think I would panic if there were another crash, I'm, not sure whether I would have the same outlook of confidence and relative comfort. My current stock-to-cash/bond ratio today exceeds my plan, and I've started rebalancing, and because of age I am also both simplifying and planning to slightly reduce the stock proportion.

The collective wisdom on the bogleheads site has been very helpful to me and my already great appreciation for its setup, administration, and contributors continues to increase steadily. Best wishes to all.
+1

< 40% stocks, balance in cash and bond funds

Sam, age 74, retired 15 years

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stemikger
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Re: Why Bull Markets Are Dangerous

Post by stemikger » Sun Sep 09, 2018 7:29 am

Great story Rick and thanks for the reminder. Greed and fear and of course ourselves are the biggest obstacles to overcome when it comes to staying the course.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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Re: Why Bull Markets Are Dangerous

Post by InvestingGeek » Sun Sep 09, 2018 7:44 am

Counterintuitively, all this talk of top has me checking and rechecking my portfolio, to see if I need to move some of my stock allocation to bonds or if it's already at my desired 80:20 allocation. (As an aside, reading the amazing book, Four Pillars of Investing, Bernstein apparently only considers short-term bonds (< 5 years duration) and cash when he talks about 'bond' allocation, safety being the primary concern for this allocation, not returns.)

Not that it's relevant to anything I do, but I have a vague feeling this market still has a couple more years of upside before stalling. Economy's doing well, company fundamentals are good, inflation is a threat especially with tarriffs on the horizon, and we're nowhere close to the craziness of Y2K or 2006-2008.

Also not relevant to my actions since I only do total stock, but I'm not too sure that the FAANGs are going to fall too hard. They all seem to have good fundamentals and their PEs don't seem all that high. They might start to go sideways but I don't see them dropping much. Will be fun to watch as a spectator, popcorn in hand and see what they actually do.

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Re: Why Bull Markets Are Dangerous

Post by dwickenh » Sun Sep 09, 2018 8:08 am

Call_Me_Op wrote:
Sun Sep 09, 2018 6:50 am
Rick,

Perhaps time for a Lifestrategy fund.
+1
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

student
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Re: Why Bull Markets Are Dangerous

Post by student » Sun Sep 09, 2018 8:16 am

I think even if one did stomach the drop in 2008-2009, one may not be able to do it again as circumstances have changed. I pretty much did not care about the drop as I was much younger at the time but I may behave differently under the same scenario if I still had the same asset allocation.

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Re: Why Bull Markets Are Dangerous

Post by 2pedals » Sun Sep 09, 2018 8:22 am

randomizer wrote:
Sun Sep 09, 2018 2:50 am
This is a bad sign. Bracing for my first real bear soon.
...or worse a bear son -- financial advisor.

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Re: Why Bull Markets Are Dangerous

Post by midareff » Sun Sep 09, 2018 8:35 am

sillysaver wrote:
Sun Sep 09, 2018 6:36 am
According to one of the newsletter writers I follow, we are in the beginning of the last great "Melt-Up" before stocks peak. So, watch the charts of the FAANG's for a blow-off top like the one in 2000.
Of course the real problem is that could have started last week and you won't know until the chart says the last five years of your retirement are gone.

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Re: Why Bull Markets Are Dangerous

Post by nytesky » Sun Sep 09, 2018 8:48 am

Part of the issue is that we have had short bear markets — stocks always rebound within about 4-5 years, so you get investors like PP who see a bear market as a buying opportunity.

But it’s not guaranteed to rebound that fast, look at the ‘Death of Equities’ from the 70s; people have to invest and balance enough to handle the risk that a prolonged slump can happen.

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Re: Why Bull Markets Are Dangerous

Post by Nowizard » Sun Sep 09, 2018 8:50 am

As you know who said, be fearful when the market has made a sustained rise and greedy when declining.

Tim

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Re: Why Bull Markets Are Dangerous

Post by goblue100 » Sun Sep 09, 2018 8:53 am

I think the best part of the story is your 86 year old mom cares enough to check her investments. You should have let her move 5% to emerging markets! 8-)
Can't take it with you when you're gone | But I want enough to get there on - Rollin with the flow - Jerry Hayes

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Re: Why Bull Markets Are Dangerous

Post by staythecourse » Sun Sep 09, 2018 8:59 am

Mr. Ferri,

The most amazing part of your story is your parent actually listened to you. In my experience no matter how successful you are your parent always treats you like an idiot. Being an accomplished author must help though. :D

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

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Rick Ferri
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Re: Why Bull Markets Are Dangerous

Post by Rick Ferri » Sun Sep 09, 2018 9:22 am

Call_Me_Op wrote:
Sun Sep 09, 2018 6:50 am
Rick,

Perhaps time for a Lifestrategy fund.
To much in capital gains to do that.
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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nedsaid
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Re: Why Bull Markets Are Dangerous

Post by nedsaid » Sun Sep 09, 2018 9:53 am

hdas wrote:
Sun Sep 09, 2018 2:22 am
nedsaid wrote:
Sat Sep 08, 2018 8:18 pm
Your mom is an indication that we might be getting too confident. But so far, I haven't heard of people quitting their jobs to day trade as they did during the late 1990's. I am not seeing the market euphoria out there but certainly optimism has increased.
Perhaps not wise too look for the exact same signs as 20 years ago. Markets are dynamic ecosystems. We already had warning signs last year: Selling Vol Trade, crypto_craze. The market hit a momentum extreme in Jan/18, keep that reference in mind.

Perhaps in retrospect Fidelity Zero announcement will look ominous.

Cheers
A good sign is that the US Stock Market has cooled off. We are below the January highs. 10% correction and recovery but not quite back to the January highs. So we are drifting now and that is a good thing.

I think crypto currencies have cooled off too. Facebook had a big correction, I think 20% in one day. Even local real estate showed signs of cooling off. It might be that the bull market ends with a whimper and not a bang.

But thinking back, bear markets don't arrive because someone warns us and announces them. It seems like an unexpected event comes in and kicks the can over. The fact people are warning us about bear markets is another good sign.

This doesn't have the feeling of euphoria.
A fool and his money are good for business.

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Re: Why Bull Markets Are Dangerous

Post by Dottie57 » Sun Sep 09, 2018 9:54 am

Too many with 100% stocks and very glib. Don’t know when the correction happens but am at the right AA for me.

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Re: Why Bull Markets Are Dangerous

Post by bertilak » Sun Sep 09, 2018 9:56 am

Rick, thanks for a reminder.

I recently find myself wondering if my 50/50 is too timid and slow. I know in my heart 50/50 is about right, but 60/40 is also about right and 70/30 is not very different from 60/40 so why not go for it?

Your post reminded me that 50/50 is all I need. If I want excitement I tell myself that half my portfolio is 100% stocks and that half could get real exciting! If things comes crashing down, the other half is 100% bonds that will keep kicking out dividends and probably do OK. 50/50 it is!

So with the strong market my urge is to get more aggressive but the more I think about it (or read stories like yours) the more I feel 50/50 is the magic balance.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

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Re: Why Bull Markets Are Dangerous

Post by siamond » Sun Sep 09, 2018 9:58 am

I don't know... Maybe the old lady is a bit wiser than her son is giving her credit for... Quite clearly, she's been primarily investing for him and his time horizon ("You’re going to get it all anyway, so you do what’s best.”). Quite clearly, she's been following his advice for a long time (same quote + well-know financial adviser son + 20 years of using such AA, etc). The old lady has a loooong life of experience (86 years old, and clearly still trying hard to think on her own) and her observation that stocks earned much more is obviously based on much more than a few months or years of watching the market (" It always seems to do better").

There is very little question that a sound risk/reward assessment in such context would indicate that a higher stock exposure would have been a better decision, once you go past the usual non-sense that risk==volatility and use the proper time horizon (the next generation, not hers) to think about it. Maybe she was simply expressing some frustration that she could have done better for a bequest goal if she had followed her instincts decades ago. And she would have, irrespective of the recent bull market. The wisdom of my own grandfather (who lived till 99), who had been burned by bonds after WW-II and then the oil crisis, and held a diverse portfolio of stocks for his entire life, impressed me very much. I would never dismiss the wisdom of some old folks. Maybe her son should listen to her a little bit more carefully.
Last edited by siamond on Sun Sep 09, 2018 10:00 am, edited 1 time in total.

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Re: Why Bull Markets Are Dangerous

Post by Broken Man 1999 » Sun Sep 09, 2018 9:59 am

Thanks for the post, Rick!

Sounds like your mother has a smart financial advisor, and listens to him. A great combination. :)

FWIW, wife and I have a 50% equity and 50% bond portfolio as well. Not exactly the same holdings, but pretty close. Very comforting holdings in retirement.

We didn't sell anything in the last couple of declines, in fact bought. But that was then and this is now. We have a robust moat of bonds around the casa, and should fare well in most any turndown, barring a catastrophic event of one type or another.

Though my crystal ball is cloudy, I don't think there is enough euphoria in the markets yet, so my bold prediction is another couple of years of life for this bull market. If not, I'll wait for the next one to arrive. Bull markets are so fickle. They come, people fall in love with them, then poof: They leave!

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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Re: Why Bull Markets Are Dangerous

Post by Elysium » Sun Sep 09, 2018 10:15 am

siamond wrote:
Sun Sep 09, 2018 9:58 am
once you go past the usual non-sense that risk==volatility and use the proper time horizon (the next generation, not hers) to think about it.
If only it was true that risk is volatility.

Fallacy of Time Diversification:
https://www.slcg.com/pdf/practicenotes/ ... 0_2005.pdf

It seems like Rick's mothers portfolio is following the age in bonds rule based on her son's age and not hers. So after all I guess he knows what he is doing.

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SquawkIdent
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Re: Why Bull Markets Are Dangerous

Post by SquawkIdent » Sun Sep 09, 2018 10:25 am

Maybe suggest she watch this...

https://www.youtube.com/watch?v=QljG9g3pZ4A

Mr.BB
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Re: Why Bull Markets Are Dangerous

Post by Mr.BB » Sun Sep 09, 2018 10:45 am

Good reminder story Rick
I remember in June of 2006 we went to Mexico for a vacation. Everyone, and I mean everyone was trying to get us to go to a time-share meeting. The parking lot attendant, the grocery clerk, (people that would not normally approach you with that subject), if one more person was going to ask me about a time share I was going to go ballistic. Of course in hindsight it was a great warning sign. I really haven't seen such signs with this bull market yet (in terms of any form of equity); certain sectors my be overvalued, but their isn't that general public frenzy; yet. However,I don't think you have to have it so obvious before a bull market ends.
Last edited by Mr.BB on Sun Sep 09, 2018 11:39 am, edited 4 times in total.
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Re: Why Bull Markets Are Dangerous

Post by Mr.BB » Sun Sep 09, 2018 10:52 am

SquawkIdent wrote:
Sun Sep 09, 2018 10:25 am
Maybe suggest she watch this...

https://www.youtube.com/watch?v=QljG9g3pZ4A
+1
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."

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Re: Why Bull Markets Are Dangerous

Post by flyingaway » Sun Sep 09, 2018 11:07 am

nedsaid wrote:
Sat Sep 08, 2018 8:18 pm
Yes, RIck, bull markets make us all overconfident. I just laugh when people post here and say they have a high risk tolerance. That just tells me they haven't felt the pain from a bear market.

In late 1999, I felt pretty smart. In mid-2002, I wondered what the heck I was doing. Pretty much went from champ to chump.

Your mom is an indication that we might be getting too confident. But so far, I haven't heard of people quitting their jobs to day trade as they did during the late 1990's. I am not seeing the market euphoria out there but certainly optimism has increased.

I have joked a lot about the "freefall" thread and the "soar" thread. The "soar" thread popped up and almost on cue, the US Stock Market stalled. It seemed that when the "freefall" thread popped up that the markets would rally. Don't get me wrong, Boglehead threads don't move the markets. But I am making a point about market sentiment. If your 86 year old mom is feeling pretty confident about stocks, that is worrisome.
People use index funds these days. They don't quit their jobs to day trade. But they do quit their jobs to "early retire". Haven't you read many articles these days about "retiring in their 30s with $1 million"? If you read these people's blogs carefully, you will see that most of them are 100% (or close) in stock funds and claim that they can handle the market downturns.

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Re: Why Bull Markets Are Dangerous

Post by flyingaway » Sun Sep 09, 2018 11:24 am

z3r0c00l wrote:
Sun Sep 09, 2018 6:00 am
That kind of everyday euphoria was pretty apparent in bitcoin last year. Still have not seen it in stocks just yet.
I felt the market euphoria in January this year and everyone was saying that there was no euphoria. I did not do anything as I was vacationing in Mexico.

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Re: Why Bull Markets Are Dangerous

Post by WhiteMaxima » Sun Sep 09, 2018 11:49 am

for 80 years, 50/50 is a perfect AA. Capture both, well balanced.

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Re: Why Bull Markets Are Dangerous

Post by keepingitsimple » Sun Sep 09, 2018 12:37 pm

I have a close friend who knows very little about investing and has historically made very poor financial decisions. Last week they told me about a co-worker they have that has made a lot of money from the stock market and was encouraging my friend to invest. My friend spoke very highly of this co-worker and said they really seem to know a lot about investing and they were seriously considering following their co-workers advice. It made me wonder, is my friend the equivalent of the Kennedy shoe shine boy story?

The reason crashes are so difficult to predict is because an environment conducive to a crash must first exist. However, the mere existence of said environment is not sufficient, as an additional "unknown" catalyst must also present itself. It's this unknown catalyst that causes forecasts of forthcoming crashes to be inaccurate. The point...maintain your asset allocation and be very realistic with yourself regarding your tolerance for risk. The simple definition I follow for "risk tolerance" is simply how much do I feel I can tolerate losing for an undetermined length of time.

Random Walker
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Re: Why Bull Markets Are Dangerous

Post by Random Walker » Sun Sep 09, 2018 12:51 pm

pkcrafter wrote:
Sat Sep 08, 2018 10:26 pm
Thanks Rick, posting this was a great reality check. Most investors do get swept up in the thrill of good returns and the agony of big losses. Investors also have every short time frames, they think in dog years. :happy

Paul
Just read recent Cliff Asness essay referenced above. What you call dog years, he refers to as “time dilation”, mostly with regard to the tough times.

Dave

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Re: Why Bull Markets Are Dangerous

Post by flyingaway » Sun Sep 09, 2018 1:06 pm

keepingitsimple wrote:
Sun Sep 09, 2018 12:37 pm
I have a close friend who knows very little about investing and has historically made very poor financial decisions. Last week they told me about a co-worker they have that has made a lot of money from the stock market and was encouraging my friend to invest. My friend spoke very highly of this co-worker and said they really seem to know a lot about investing and they were seriously considering following their co-workers advice. It made me wonder, is my friend the equivalent of the Kennedy shoe shine boy story?

The reason crashes are so difficult to predict is because an environment conducive to a crash must first exist. However, the mere existence of said environment is not sufficient, as an additional "unknown" catalyst must also present itself. It's this unknown catalyst that causes forecasts of forthcoming crashes to be inaccurate. The point...maintain your asset allocation and be very realistic with yourself regarding your tolerance for risk. The simple definition I follow for "risk tolerance" is simply how much do I feel I can tolerate losing for an undetermined length of time.
Good point.

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Re: Why Bull Markets Are Dangerous

Post by pkcrafter » Sun Sep 09, 2018 2:00 pm

Random Walker wrote:
Sun Sep 09, 2018 12:51 pm
pkcrafter wrote:
Sat Sep 08, 2018 10:26 pm
Thanks Rick, posting this was a great reality check. Most investors do get swept up in the thrill of good returns and the agony of big losses. Investors also have every short time frames, they think in dog years. :happy

Paul
Just read recent Cliff Asness essay referenced above. What you call dog years, he refers to as “time dilation”, mostly with regard to the tough times.

Dave
Thanks Dave. I do think this is an important concept to understand. Investors who see something underperforming for a few years--factors, international, and so on, tend to get very impatient and change their portfolio. I mean it is very difficult to move from TSM to something more exotic then watch it underperform what you used to hold.

I was not aware of "time dilation," but I've been bringing up dog years for awhile now. The concept is pretty much the same. When Taylor says buy AND HOLD, he means hold for long term and that is much longer than 3,5,7 years... Investors seeing an underperforming fund feel as if 1 year is like 7 years, (dog years).

I will also add that holding total market is much easier than holding something like small or factors, because with the market fund you will always get the market return. With other strategies you get tracking error, which is like the box of chocolates--you never know what your gonna get (Forrest Gump).

Time Dilation

https://alphaarchitect.com/2015/11/02/c ... decisions/

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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Earl Lemongrab
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Re: Why Bull Markets Are Dangerous

Post by Earl Lemongrab » Sun Sep 09, 2018 2:48 pm

I've mentioned before that I got my portfolio devised and implemented in fall of 2007, right before the fun began. However, I had not only determined the portfolio but the plan. The latter was the more important part. So during 2008 and 2009 I was doing TLH and rebalancing, along with investing new money to the asset allocation. It wasn't fun, but the quick recovery (which all should understand is not guaranteed either) actually helped me achieve my goals.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

Random Walker
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Re: Why Bull Markets Are Dangerous

Post by Random Walker » Sun Sep 09, 2018 3:07 pm

Regarding dog years and time dilation,
It’s easy to look at graphs of the market over decades, appreciate the overall trend, and think the little downward blips don’t look so bad. But those blips are frequently years in length. When we’re living in the middle of them they feel like forever. With regard to financial data 10 years is only noise. With regard to investor risk tolerance and behavior 3 years feels like 10 years.

Dave

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Re: Why Bull Markets Are Dangerous

Post by Engineer250 » Sun Sep 09, 2018 4:01 pm

InvestingGeek wrote:
Sun Sep 09, 2018 7:44 am
Not that it's relevant to anything I do, but I have a vague feeling this market still has a couple more years of upside before stalling. Economy's doing well, company fundamentals are good, inflation is a threat especially with tarriffs on the horizon, and we're nowhere close to the craziness of Y2K or 2006-2008.
This is my feeling as well. I am worried about high inflation (and not sure about what effect that will have on the stock market). I don't see another crash coming until 2020 at the soonest. But it's not changing anything I do. Just a hunch.
Where the tides of fortune take us, no man can know.

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