Stock market scenarios

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vanrico
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Stock market scenarios

Post by vanrico » Tue Sep 18, 2018 8:52 pm

Hi all,

this is my first post, so please let me know if I missed etiquette somewhere.

I was wondering what your investment strategies are under specific stock market scenarios. For me the answer is not about what to do, but more educational to learn more about asset classes, alternatives, etc. I'm only making scenarios about the stock market, so please feel free to add your default assumption for bonds and so forth.

1. The Total Stock Market (TSM) follows the century-long upward trend with unpredictable returns in the short run, but generally positive returns that reverse to the mean.
>> We can skip this as I would say the answer is the investment advice found all over the forum.

2. The TSM experiences a severe recession in the next 2 years, then follows the general upwards trend for a decade.

3. The TSM falls a bit over the next 2 years (say -15%) and then has zero or meager growth rate over the next decade.

For 2. and 3., if for a moment we assume we could know the future, I'm wondering how you would invest your money. (If the amount matters, let's say $100K.)

Cheers!

vanrico

livesoft
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Re: Stock market scenarios

Post by livesoft » Tue Sep 18, 2018 9:41 pm

My IPS says that I will rebalance back to my asset allocation, so all of your scenarios are identical as far as I am concerned.

Since I am retired, my asset allocation probably has nothing to do with yours, but here is mine (roughly):
29% US equities
29% foreign equities
31% US bonds.
the rest in TIAA Real Estate account
Half of US in small-cap value equities
Half of International in small-cap equities.

This has worked for a long time for me and I see no reason to change anything.
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AlohaJoe
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Re: Stock market scenarios

Post by AlohaJoe » Tue Sep 18, 2018 9:49 pm

vanrico wrote:
Tue Sep 18, 2018 8:52 pm
For 2. and 3., if for a moment we assume we could know the future, I'm wondering how you would invest your money. (If the amount matters, let's say $100K.)
If for a moment we assume that I know the future, what lottery numbers would you buy? I don't really understand how the question is helpful. You would invest in the way that perfectly maximises your returns, obviously.

But people don't know the future. I don't see how pretending they do gives us any useful guidelines to behaviour. People don't know the future. They are worried about the future. Or they read dumb popular finance websites written by journalists that make them think they understand the future better than the billionaire investors with teams of dozens of researchers and sophisticated risk management & trading software, paired with proprietary data flows that they pay millions of dollars a year to access.

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oldcomputerguy
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Re: Stock market scenarios

Post by oldcomputerguy » Tue Sep 18, 2018 9:50 pm

livesoft wrote:
Tue Sep 18, 2018 9:41 pm
My IPS says that I will rebalance back to my asset allocation, so all of your scenarios are identical as far as I am concerned.
This. I'm 50/50 stocks/bonds, rebalancing (if needed) twice a year. It doesn't matter which of your three scenarios (or which scenario other than the three you list) happens, the plan of action is the same. Changing my allocation just because the market has moved is market timing, something I stink at, so I don't try it.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

MrBeaver
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Re: Stock market scenarios

Post by MrBeaver » Tue Sep 18, 2018 10:00 pm

vanrico wrote:
Tue Sep 18, 2018 8:52 pm
For 2. and 3., if for a moment we assume we could know the future, I'm wondering how you would invest your money. (If the amount matters, let's say $100K.)
In fairness to the OP, I think the gist of this is whether investment strategies other than TSM / indexing would theoretically be better in prolonged low equity growth rate periods.

I think the answer is no, but some grey beards from the 70s may recall scenarios like this (albeit dividends were higher back then).

sleepdoc
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Re: Stock market scenarios

Post by sleepdoc » Wed Sep 19, 2018 7:42 am

livesoft wrote:
Tue Sep 18, 2018 9:41 pm
29% US equities
29% foreign equities
31% US bonds.
the rest in TIAA Real Estate account
Half of US in small-cap value equities
Half of International in small-cap equities.
Livesoft, for your allocation what do you keep in taxable accounts? I assume the TIAA Real Estate Account is in a 401k. Why did you pick TIAA for a REIT?

livesoft
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Re: Stock market scenarios

Post by livesoft » Wed Sep 19, 2018 8:06 am

1. TIAA Real Estate Account is in an old 403(b) that I have. It is not a REIT. Search the forum.

2. Taxable account currently has Total US Stock Market Index, US Large-cap Index, Large-cap foreign indexes (VEU, VEA), and a small-cap value index (VBR). No new purchases have been made in taxable in a few years now. For instance, no new VBR has been purchased since spring of 2009.

Do you see TLH pairs in my answer?
Last edited by livesoft on Wed Sep 19, 2018 8:12 am, edited 1 time in total.
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jharkin
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Re: Stock market scenarios

Post by jharkin » Wed Sep 19, 2018 8:08 am

My answer is the same as Livesoft.. in all cases I re balance and stick with the AA in my IPS. I am ~15 years out from retirement and currently at:
58% TSM
10% total international
32% bonds

And I am diversified across different vendors, 401ks, 403bs, governmental 457s, TIAA annuity, government pensions, and so forth.


It seems to me wither case 1 or 2 means the same thing in the long run... reversion (not reverse ;) ) to the mean. Even #3 does not preclude an eventual reversion to the mean over 20-50 year time horizons, we might have a lost decade then follow by strong growth resuming in the 2030s. who knows?

All a lost decade would mean is I have to either work a couple years longer or reduce my spending expectations in retirement. I have a lot of flexibility for that built into my plan, based on very conservative long term return expectations (3-5% real)

BogleMelon
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Re: Stock market scenarios

Post by BogleMelon » Wed Sep 19, 2018 8:31 am

Welcome to the forum.

Just like most of people here, if and whenever an asset class fall in price, I rebalance.. Meaning: buying more of that asset.

I don't care about a decade from now. I care about my retirement years, and that is why I invest and take risk. My retirement starting should be no less than 25 years from now.

There are over 100 scenario giving that time frame. There is risk involved. But also there is a plan I follow which is to not care about the market conditions other than rebalancing when necessary.

As I get closer to my retirement goal, I will get more conservative in terms of asset allocation. This is also written in my plan.
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

magicrat
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Re: Stock market scenarios

Post by magicrat » Wed Sep 19, 2018 8:56 am

If I knew the future, I would short the market at it's peak and cover the short at it's bottom. But I don't know the future, so I'll follow my IPS, 75% stocks, 25% bonds, 40% of stocks international, and re-balance as necessary.

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Cyclesafe
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Re: Stock market scenarios

Post by Cyclesafe » Wed Sep 19, 2018 9:08 am

OP,

This forum is chock full of intelligent, financially educated, and experienced investors who have concluded over their investing lifetimes that trying to predict the future beyond 1) equities will be more volatile, but will appreciate more than fixed in the indeterminate long term, and 2) the United States as a financial hegemon will continue to support the value of the dollar with its full faith and credit. But they nonetheless also tend to hedge with international and TIPS.

During a particularly bad day in 2008, I remember Jim Cramer describing "buy 'n hold" investors as charring bodies seat-belted into a flaming plummeting airliner. This image scared me very much, but I stayed the course. Doing nothing and sticking to plan can be very difficult at times.

vanrico
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Re: Stock market scenarios

Post by vanrico » Wed Sep 19, 2018 9:10 am

Thanks guys, great responses.

To clarify re AlohaJoe, I meant know the future stochastically (or general trends), not as in what lottery numbers are drawn. See my scenarios, they are vague and only roughly prescribe a course for the TSM and the time frame.

What I'm hearing is that most of you are thinking in longer time scales than a decade and hence wouldn't change anything?

I'm trying to learn what the alternatives to the stock market are, e.g. how bonds might be correlated or whether cash holdings ever make sense.

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galeno
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Re: Stock market scenarios

Post by galeno » Wed Sep 19, 2018 2:04 pm

Any of the scenarios are accounted for in our 40/60 (age in bonds) retirement portfolio.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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