Larry Swedroe: Prepare For The Bear

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Random Walker
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Larry Swedroe: Prepare For The Bear

Post by Random Walker » Mon Oct 15, 2018 9:25 am

https://www.etf.com/sections/index-inve ... nopaging=1

Great article: references to Peter Lynch, Benoit Mandelbrot, Buffett, Napoleon Bonaparte,non-normal distribution of returns, recency bias.

Evaluating where you currently are relative to your goals after this long bull market and cooling off the asset allocation is not market timing; it is rational assessment of your need to take risk and acting appropriately. Monte Carlo Simulation can be very helpful in making these decisions. Personally, I’ve found MCS results a bit surprising and anti-intuitive. It’s quite eye opening to see the sensitivity (or lack of) of meeting goals to asset allocation.

Larry also goes into some good detail on nuts and bolts of tax loss harvesting.

Larry doesn’t make any prognostications, but does lay out a plausible scenario where both stocks and bonds do poorly.

Dave

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Re: Larry Swedroe: Prepare For The Bear

Post by edgeagg » Mon Oct 15, 2018 9:54 am

Hi Dave,
Read the article. Larry does make some good points. However, his claims around QRPRX, QSPRX, LENDX, AVRPX and SRRIX are not really testable (by me) in terms of correlation. Best I could find from PV is this. Of course the problem as you see is that QRPRX is new (2017) so who knows what happens in recessionary times.

Are there other ways to test this assertion?
thanks
ea

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Re: Larry Swedroe: Prepare For The Bear

Post by Scott S » Mon Oct 15, 2018 10:00 am

It seems to me that a Boglehead should always be prepared for the bear. :moneybag
My Plan: (Age-10)% in bonds until I reach age 60, 50/50 thereafter. Equity split: 50/50 US/Int'l, Bond split: 50/50 TBM/TIPS.

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Re: Larry Swedroe: Prepare For The Bear

Post by HomerJ » Mon Oct 15, 2018 10:08 am

Random Walker wrote:
Mon Oct 15, 2018 9:25 am
Evaluating where you currently are relative to your goals after this long bull market and cooling off the asset allocation is not market timing; it is rational assessment of your need to take risk and acting appropriately.
This is true. As one gets closer to retirement, one probably should go more conservative (ability to take risk is lowered). As one increases one's wealth and gets closer to one's number, one probably should go more conservative (need to take risk is lowered).

Just note that none of this requires predicting the future, or looking at what the market is doing.
Scott S wrote:
Mon Oct 15, 2018 10:00 am
It seems to me that a Boglehead should always be prepared for the bear. :moneybag
And this is also very true. :)
The J stands for Jay

Random Walker
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Re: Larry Swedroe: Prepare For The Bear

Post by Random Walker » Mon Oct 15, 2018 10:58 am

edgeagg wrote:
Mon Oct 15, 2018 9:54 am
Hi Dave,
Read the article. Larry does make some good points. However, his claims around QRPRX, QSPRX, LENDX, AVRPX and SRRIX are not really testable (by me) in terms of correlation. Best I could find from PV is this. Of course the problem as you see is that QRPRX is new (2017) so who knows what happens in recessionary times.

Are there other ways to test this assertion?
thanks
ea
I don’t know of any specific “test”. All those strategies have been present for a very long time. They’ve been done by banks and hedge funds. Just now open to the public. Certainly always worry that investable by public is a bad sign. I think Larry’s 5 criteria for a factor that he outlines in his factor book can be applied to any potential source of return. I would apply the persistent, pervasive, robust, intuitive, investable criteria to the Stone Ridge Fund’s in the same way I’d apply them to value, carry, trend, etc.

Dave

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Re: Larry Swedroe: Prepare For The Bear

Post by aristotelian » Mon Oct 15, 2018 11:11 am

Too bad he didn't write this article a couple of weeks ago. Could have saved us all a lot of money.

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Taylor Larimore
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AQR, Stone Ridge and DFA funds

Post by Taylor Larimore » Mon Oct 15, 2018 11:21 am

My firm, Buckingham Strategic Wealth, recommends AQR and Stone Ridge funds in constructing client portfolios.
Larry,

I was under the impression that the (140) advisors in your firm recommend DFA funds? Why the change?

Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Larry Swedroe: Prepare For The Bear

Post by garlandwhizzer » Mon Oct 15, 2018 12:00 pm

I think this article by Larry is excellent. After a 9+ year bull market there's considerable investor complacency out there. You may not be prepared should some of the very real risks Larry mentions materialize into a deep bear market. If your asset allocation reflects their true risk tolerance, no action is needed. If not, it may be a good time to take a hard look at it in order to avoid discovering your true risk tolerance in the depths of a bear market with panic selling. The only point where I'm not in full agreement with Larry is the use of alternatives to mitigate risk. That's a personal decision, but I'll stick with US quality bonds for this purpose.

Garland Whizzer

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Re: Larry Swedroe: Prepare For The Bear

Post by larryswedroe » Mon Oct 15, 2018 12:01 pm

Taylor
We recommend Bridgeway, DFA, AQR, Stone Ridge Funds and now Pioneer as another option for reinsurance. We recommend funds we believe add value, and have no incentive to recommend anything else, only one we are paid by, as are all RIAs is the client.

Also note that while I'm here
Re correlations
All the factors in the two AQR Style and Risk premia funds have had low correlations to not only each other but to market beta. That data goes way back. See my factor book for the tables.

Reinsurance clearly just intuitively has no correlation to stocks or bonds

VRP, has some positive correlation to stocks as in bad markets vol spikes. But over long term the correlation is very low, especially as this fund is multi-asset class, AVRPX.

And lendx as a prime only lender has also very low correlation, though correlation rises during periods of high UE. Keep in mind you can have bad markets and no/little rising UE

Larry

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Taylor Larimore
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Re: Larry Swedroe: Prepare For The Bear

Post by Taylor Larimore » Mon Oct 15, 2018 12:38 pm

Larry:

Thank you for your reply.

I am looking forward to reading your new book.

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

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Re: Larry Swedroe: Prepare For The Bear

Post by marcopolo » Mon Oct 15, 2018 12:49 pm

garlandwhizzer wrote:
Mon Oct 15, 2018 12:00 pm
I think this article by Larry is excellent. After a 9+ year bull market there's considerable investor complacency out there. You may not be prepared should some of the very real risks Larry mentions materialize into a deep bear market. If your asset allocation reflects their true risk tolerance, no action is needed. If not, it may be a good time to take a hard look at it in order to avoid discovering your true risk tolerance in the depths of a bear market with panic selling. The only point where I'm not in full agreement with Larry is the use of alternatives to mitigate risk. That's a personal decision, but I'll stick with US quality bonds for this purpose.

Garland Whizzer
I always enjoy reading your thoughtful analysis. I agree with most of what you have written above. I am curious where you are seeing considerable investor complacency. Aside from the recent bravado, and cheer-leading, wishing for a major crash to create a buying opportunity (i suspect much of it from young investors who have never lived through a severe recession), I sense quite opposite.

There seems to be constant hand-wringing here about people afraid of a crash any day now and wanting to get out of the market. Most market predictions (Bogle, Vanguard, Swedroe, et. al.) seem to be calling for very muted equity returns going forward. I do not see any dot com like exuberance (even the recent crypto-currency craze seems to have largely settled down). No sign of Pets.com. I don't see house flipping, people quitting their jobs to day-trade, etc.

Most of the people i hear making the argument for staying invested seem to be saying you should do that because you can't predict when the crash is coming, so always be prepared, NOT making the argument that a crash can't happen because this time it is different.

I do allow for the possibility that I am being complacent in making this observation.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Larry Swedroe: Prepare For The Bear

Post by HomerJ » Mon Oct 15, 2018 3:27 pm

Random Walker wrote:
Mon Oct 15, 2018 10:58 am
I don’t know of any specific “test”. All those strategies have been present for a very long time. They’ve been done by banks and hedge funds. Just now open to the public. Certainly always worry that investable by public is a bad sign.
It's certainly not a good sign. Once a strategy is released to the general public, the easy money is gone. Now they're just milking it for fees.
The J stands for Jay

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Re: Larry Swedroe: Prepare For The Bear

Post by nedsaid » Tue Oct 16, 2018 10:29 am

HomerJ wrote:
Mon Oct 15, 2018 3:27 pm
Random Walker wrote:
Mon Oct 15, 2018 10:58 am
I don’t know of any specific “test”. All those strategies have been present for a very long time. They’ve been done by banks and hedge funds. Just now open to the public. Certainly always worry that investable by public is a bad sign.
It's certainly not a good sign. Once a strategy is released to the general public, the easy money is gone. Now they're just milking it for fees.
Hard to say if we have reached the Bozo stage here, these recommended funds require access through an advisor. Not available to do-it-yourself retail investors.
A fool and his money are good for business.

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Re: Larry Swedroe: Prepare For The Bear

Post by Hulk » Tue Oct 16, 2018 10:34 am

aristotelian wrote:
Mon Oct 15, 2018 11:11 am
Too bad he didn't write this article a couple of weeks ago. Could have saved us all a lot of money.
Not all of us. Someone is always on the other side of that transaction. (I am still in the accumulation phase)

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Re: Larry Swedroe: Prepare For The Bear

Post by bligh » Tue Oct 16, 2018 10:39 am

marcopolo wrote:
Mon Oct 15, 2018 12:49 pm

I always enjoy reading your thoughtful analysis. I agree with most of what you have written above. I am curious where you are seeing considerable investor complacency. Aside from the recent bravado, and cheer-leading, wishing for a major crash to create a buying opportunity (i suspect much of it from young investors who have never lived through a severe recession), I sense quite opposite.

There seems to be constant hand-wringing here about people afraid of a crash any day now and wanting to get out of the market. Most market predictions (Bogle, Vanguard, Swedroe, et. al.) seem to be calling for very muted equity returns going forward. I do not see any dot com like exuberance (even the recent crypto-currency craze seems to have largely settled down). No sign of Pets.com. I don't see house flipping, people quitting their jobs to day-trade, etc.

Most of the people i hear making the argument for staying invested seem to be saying you should do that because you can't predict when the crash is coming, so always be prepared, NOT making the argument that a crash can't happen because this time it is different.

I do allow for the possibility that I am being complacent in making this observation.
That is what I am seeing too. There is no euphoria in this bull market. It is being viewed with suspicion and nervousness every step of the way. I think a lot of investors are still traumatized by the memories of 2008-2009, and the pain of those days still sits in the back of their heads. Only the youngish investors would have no memory of that time, or have a portfolio so small that it made no difference to them. I imagine those in their mid 30s or younger.

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Re: Larry Swedroe: Prepare For The Bear

Post by garlandwhizzer » Tue Oct 16, 2018 1:38 pm

marcopolo wrote:

Most of the people i hear making the argument for staying invested seem to be saying you should do that because you can't predict when the crash is coming, so always be prepared, NOT making the argument that a crash can't happen because this time it is different.
Very valid observation, marcopolo, and I agree with you that investors now aren't really too complacent. This long bear market has been the most mistrusted in history. The only real spell of exuberant animal spirits started with Trump's election but began cooling off in February and has continued to cool off. There is no doubt investors are concerned, me among them. As Larry's article points out there are plenty of strong potential reasons to be concerned. In spite of all these risks and investor concerns, US market valuations remain generous by many measures (PE1, PE10, etc.,) this in spite of very knowledgeable students of the market/gurus suggesting that future returns are going to be low by historical standards. Is there a disconnect between potential risks and the low future returns that many market experts expect on the one hand and current stock prices in the US on the other? Investors are worried, no doubt, but thus far they haven't as a group voted wholesale with their feet and cashed out of stocks which is what has continued to support what by historical standards are generous but not bubble US valuations. Most are worried but holding on to equity which has done so well for so long.

There is always a wall of worry in the markets. Bulls occur when investors as a group decide to climb that wall which they have been doing for 9+ years. Many potential risks which Larry's article outlines well could in the near term future become pivotal events and investors' collective sentiment could change from concern/worry to fear/panic. Instead of climbing the wall of worry they could run from it. Sentiment is fickle and can change on a dime. There are as always a number of risks that, if they actually turn bad, could upset that delicate balance. For the record, I'm not selling any equity now but at the end of the year rebalancing, I'm going to at last change my equity heavy portfolio to 60/40 and start acting like a mature adult. The expected long term return difference between stocks and bonds continues to narrow as interest rates rise and the chances for an equity market reversal are increasing as time passes IMO. I simply don't believe that US equity returns over the next 2 years will be like the last 2 years but like all predictions mine could be wrong. If your portfolio accurately reflects your risk tolerance/goals you don't need to do any adjustments but, if not, it's a good time to take a hard look at it IMO.

Garland Whizzer

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Re: Larry Swedroe: Prepare For The Bear

Post by goodenyou » Tue Oct 16, 2018 1:56 pm

There is a vibe that this market is one bad hair day from a nervous breakdown. I don't subscribe, but the large swings may indicate that there is some substance to the fear. The wounds of 2008--2009 were very deep, and haven't completely healed (if ever). Having conviction on the direction of the market may cause one to compound the error by doubling down on a possible incorrect strategy. The "don't just do something, stand there" admonition comes to mind.
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

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Re: Larry Swedroe: Prepare For The Bear

Post by heyyou » Tue Oct 16, 2018 4:10 pm

Allocating is merely the last step of bear market prep.
Delay SS for more from a steady income source, and keep your necessary expenses low in spite of your soaring portfolio balance, since those steps reduce the need for future higher portfolio withdrawals. Expecting to spend from only your bond fund holdings when equities have fallen, is prepping your mind for the bear's visit.

ETA: Owning your own residence is a buffer to spending more on housing in retirement, if it is sized for retirees, not for parents and several kids.

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Re: Larry Swedroe: Prepare For The Bear

Post by Random Walker » Tue Oct 16, 2018 9:33 pm

So after this 10 year bull (and 10 years aging for all of us too), what sorts of steps, if any, have some people taken to prepare for a potential bear? 10 years is a substantial portion of both one’s accumulation phase and of one’s investing lifetime.

Dave

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Re: Larry Swedroe: Prepare For The Bear

Post by Scott S » Tue Oct 16, 2018 9:43 pm

Random Walker wrote:
Tue Oct 16, 2018 9:33 pm
So after this 10 year bull (and 10 years aging for all of us too), what sorts of steps, if any, have some people taken to prepare for a potential bear? 10 years is a substantial portion of both one’s accumulation phase and of one’s investing lifetime.

Dave
Over the last ten years, my AA has gone from about 82/18 stocks/bonds to its present 72/28. Not because I think I can time the next bear, just following the plan. :)
My Plan: (Age-10)% in bonds until I reach age 60, 50/50 thereafter. Equity split: 50/50 US/Int'l, Bond split: 50/50 TBM/TIPS.

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Re: Larry Swedroe: Prepare For The Bear

Post by smectym » Tue Oct 16, 2018 11:54 pm

Scott S wrote:
Mon Oct 15, 2018 10:00 am
It seems to me that a Boglehead should always be prepared for the bear. :moneybag
To the extent that the correct boglehead reaction to a bear market is to “tune out the noise” and do nothing while the portfolio principal melts away (“staying the course”), not clear what preparation you refer to: zen yoga?

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Re: Larry Swedroe: Prepare For The Bear

Post by smectym » Wed Oct 17, 2018 12:28 am

goodenyou wrote:
Tue Oct 16, 2018 1:56 pm
There is a vibe that this market is one bad hair day from a nervous breakdown. I don't subscribe, but the large swings may indicate that there is some substance to the fear. The wounds of 2008--2009 were very deep, and haven't completely healed (if ever). Having conviction on the direction of the market may cause one to compound the error by doubling down on a possible incorrect strategy. The "don't just do something, stand there" admonition comes to mind.
“Don’t just do something, stand there” has its kernel of potential, contingent, tactical truth; but like many another seductive aphorisms, the investor must ruthlessly demystify all such precepts. There’s no magic sauce: anywhere, ever. Instead, the investor—often responsible for the welfare of other family members—must always and again make tough capital allocation decisions.

That could mean taking on more risk, or less; or “just standing there,” or “doing something.” There’s no smug all-weather call, and while twitchy, news-feed-driven trading is no doubt a loser, watch out also for the bovine self-complacency of those who’ve spent the last decade lapping up the largesse of the Fed.

Smectym

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Re: Larry Swedroe: Prepare For The Bear

Post by Ari » Wed Oct 17, 2018 12:36 am

As assets grow, the need to take risk decreases, but the ability increases. So it's a wash, really. Just up to your personal preference (willingness). To me, the "need" part always seemed strange to count as part of "risk tolerance". The fact that I need to take risks doesn't mean my tolerance is higher.

So to me, the higher the bull market goes, the higher my risk tolerance.
All in, all the time.

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Re: Larry Swedroe: Prepare For The Bear

Post by smectym » Wed Oct 17, 2018 1:04 am

Swedroe’s article disingenuously offers that “there is an old saying” that “there is a time for every activity...” etc. (pre-lapsarians may recall the literate version of Ecclesiastes 3.1,”To everything there is a season; and a time to every purpose under heaven.”)

This is Swedroe stealth quoting from the Bible. His abysmal taste in Bible translations (NIV, Larry? Really?) perhaps calls into question his broader judgment. But my main point is this: if you want to quote the Bible, then cite the Bible; if you don’t consider the Bible a valid authority, or don’t wish to be seen as citing it, then don’t cite it.

Perhaps this post is headed for the memory hole, but I would argue that as a critique of Swedrovian obfuscation (an “old saying” Larry copies directly from a translation of the Bible without attribution? Come on) should be allowed to stand.

Smectym

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Re: Larry Swedroe: Prepare For The Bear

Post by james22 » Wed Oct 17, 2018 1:51 am

Larry wrote:If you are thinking about selling, you might ask yourself what you know that Buffett doesn’t.
Why is Buffett sitting on ~$110B in cash?
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

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Re: Larry Swedroe: Prepare For The Bear

Post by Sinsji » Wed Oct 17, 2018 2:36 am

james22 wrote:
Wed Oct 17, 2018 1:51 am
Larry wrote:If you are thinking about selling, you might ask yourself what you know that Buffett doesn’t.
Why is Buffett sitting on ~$110B in cash?
Money was cheap, and stocks considering the long term prospects not so much anymore in his opinion I guess:)

So what to do? Stocks have high valuation and bonds are 'risky' because interest is relatively low. What is the alternative? TIPS, short-term treasury, cash?

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Re: Larry Swedroe: Prepare For The Bear

Post by Valuethinker » Wed Oct 17, 2018 4:46 am

james22 wrote:
Wed Oct 17, 2018 1:51 am
Larry wrote:If you are thinking about selling, you might ask yourself what you know that Buffett doesn’t.
Why is Buffett sitting on ~$110B in cash?
In insurance you get premiums from policy holders, and then you don't pay out for years. But you have to set aside reserves for each $1 of policy that is written, and what you can hold as reserves (bonds, stocks etc.) is highly regulated.

So that's Buffett's "float" and it's a key to his business success. In effect, his insurance money is costing him very little, but in return gives him a very low cost of leverage.

Buffett, now, needs to buy billions of dollars of a company to have a meaningful impact on his bottom line. Thus buying electric utilities - buy them with money that costs you say 2-3% but generates a return of 7-9% - a safe return because he only buys in regulated markets (wires businesses). As long as you can keep doing that, you have an infinite money machine. Same with railways although i doubt he would be allowed to buy another railway.

His great missed opportunity was Microsoft. Bill Gates is one of his closest friends, but the reality is MSFT has evolved (particularly since Balmer's departure) into a very stable business with a near monopoly, generating huge cash flow, which it returns to shareholders. Buffett could have bought say 10% of MSFT and be sitting on a nice little earner.

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Re: Larry Swedroe: Prepare For The Bear

Post by oldcomputerguy » Wed Oct 17, 2018 5:06 am

james22 wrote:
Wed Oct 17, 2018 1:51 am
Larry wrote:If you are thinking about selling, you might ask yourself what you know that Buffett doesn’t.
Why is Buffett sitting on ~$110B in cash?
Perhaps because he's "won the game" and doesn't need to take so much risk?

If I had $110B to my name, it certainly would not be in the stock market.
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.

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Re: Larry Swedroe: Prepare For The Bear

Post by goblue100 » Wed Oct 17, 2018 6:12 am

Random Walker wrote:
Tue Oct 16, 2018 9:33 pm
So after this 10 year bull (and 10 years aging for all of us too), what sorts of steps, if any, have some people taken to prepare for a potential bear? 10 years is a substantial portion of both one’s accumulation phase and of one’s investing lifetime.

Dave
This is the real question, what can / should the average investor be doing to prepare? Larry didn't really say, though he alluded to his alternative funds. I've changed my AA from 80/20 to 65/35 (actually the 35% bonds is 28% intermediate bond and 7% cd's / cash) over the last 7 or 8 years as I'm probably two years away from pulling the plug. Not sure what else I can or should do? Buy gold? Buy real estate? Neither of those hold much appeal for me.
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: Larry Swedroe: Prepare For The Bear

Post by Sinsji » Wed Oct 17, 2018 7:21 am

goblue100 wrote:
Wed Oct 17, 2018 6:12 am
Random Walker wrote:
Tue Oct 16, 2018 9:33 pm
So after this 10 year bull (and 10 years aging for all of us too), what sorts of steps, if any, have some people taken to prepare for a potential bear? 10 years is a substantial portion of both one’s accumulation phase and of one’s investing lifetime.

Dave
This is the real question, what can / should the average investor be doing to prepare? Larry didn't really say, though he alluded to his alternative funds. I've changed my AA from 80/20 to 65/35 (actually the 35% bonds is 28% intermediate bond and 7% cd's / cash) over the last 7 or 8 years as I'm probably two years away from pulling the plug. Not sure what else I can or should do? Buy gold? Buy real estate? Neither of those hold much appeal for me.
Had a similar question: if both stocks and bonds (due to relatively low current interest rate) are 'not optimal'. Then what is?
TIPS, short term treasuries, high-dividend paying stocks, cash?

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Re: Larry Swedroe: Prepare For The Bear

Post by Valuethinker » Wed Oct 17, 2018 7:32 am

Sinsji wrote:
Wed Oct 17, 2018 7:21 am
goblue100 wrote:
Wed Oct 17, 2018 6:12 am
Random Walker wrote:
Tue Oct 16, 2018 9:33 pm
So after this 10 year bull (and 10 years aging for all of us too), what sorts of steps, if any, have some people taken to prepare for a potential bear? 10 years is a substantial portion of both one’s accumulation phase and of one’s investing lifetime.

Dave
This is the real question, what can / should the average investor be doing to prepare? Larry didn't really say, though he alluded to his alternative funds. I've changed my AA from 80/20 to 65/35 (actually the 35% bonds is 28% intermediate bond and 7% cd's / cash) over the last 7 or 8 years as I'm probably two years away from pulling the plug. Not sure what else I can or should do? Buy gold? Buy real estate? Neither of those hold much appeal for me.
Had a similar question: if both stocks and bonds (due to relatively low current interest rate) are 'not optimal'. Then what is?
TIPS, short term treasuries, high-dividend paying stocks, cash?

High dividend paying stocks are stocks, and behave like stocks. They are not equity substitutes. Nisiprius is great with graphs, and can show you that: 1. dividends get cut, and did get cut in 2008-09 by a lot 2. dividend/ income stock funds behaved just as badly or worse than Vanguard Total Stock Market during the Crash. And don't even think about preferred stock funds - there are a huge number of reasons to avoid these (these days Preferred Stock is mostly issued by financial companies as a form of capital to satisfy regulators, thus, in a financial crisis the shareholders will be obliterated**.

There is a reasonable case that REITs are not quite stocks - in the long run real estate rental income should be more stable than stocks, more bond-like. However their share prices behave like geared stocks, not like the underlying asset of Commercial RE.

In the US you get a half decent yield on Treasury Bonds now (3.something per cent at the 10 year). TIPS pay a positive real yield. Both are low by historic standards but actually within the normal range of Treasury Bonds over the *really* long term.

For Gilt (UK) and Eurozone investors of course the situation is a lot lot worse.

I (shrug) am holding a lot of very short term gilts (effective yield of about 0). That seems better than holding the gilt index (duration 13 years) with an average YTM of something like 1.6%. That's a lot of interest rate risk. Indexed Linked gilts (I.e. TIPS) are paying -1.5% real yield and that seems really painful. If the Opposition is elected at the next General Election (being far to the left of any UK government since 1979) then it will look to have been cheap ;-).

** nowadays a non financial company, even a sub investment grade one, can tap bond markets -- that wouldn't have been true 40 years ago. Since interest is tax deductible, that's a better thing to do from a shareholder point of view. In the case of GE & Goldman Sachs during the Crisis, they issued preferred equity to Warren Buffett (with a 10% coupon, and convertible to ordinary stock at his option) because they needed to show the market that they had more equity capital to back their financial services businesses.

If a financial services company is liquidated, preference shareholders rank behind all the debts of the business, and there's not usually much left over for equity holders of any kind.
Last edited by Valuethinker on Wed Oct 17, 2018 7:41 am, edited 2 times in total.

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Re: Larry Swedroe: Prepare For The Bear

Post by Elysium » Wed Oct 17, 2018 7:35 am

This is all sound and fury that signifies nothing. Bogleheads should ignore all market pundits including Larry who needs to fill a column every week or so, it's his job to represent his WM firm with 150+ advisors who all need to be paid. Think about it, they need to promote the idea that they bring value and for that the market should do something or investors need to feel they need to do something, and that advice will come up supposedly pundits writing columns.

Stay with your plan and you will end up with more money that you will have, and prepare for bear by changing your asset allocation when not needed and you'll end up with much less.

I have secret to share on how I survived through 2008-09 recession without selling anything and instead of it buying at the bottoms. I barely participated in this forum even though I was an active member, and that meant less time to read the pundits and keep changing this and that.

Follow Jack Bogle's advice as always and stay the course.

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Re: Larry Swedroe: Prepare For The Bear

Post by Nicolas » Wed Oct 17, 2018 7:43 am

oldcomputerguy wrote:
Wed Oct 17, 2018 5:06 am
james22 wrote:
Wed Oct 17, 2018 1:51 am
Larry wrote:If you are thinking about selling, you might ask yourself what you know that Buffett doesn’t.
Why is Buffett sitting on ~$110B in cash?
Perhaps because he's "won the game" and doesn't need to take so much risk?

If I had $110B to my name, it certainly would not be in the stock market.
But it's not really his money, it's Berkshire Hathaway's and therefore its shareholders' money. He's beholden to the shareholders to add value. So as for this $110B he hasn't won the game, he still needs to grow it. Now as for his personal fortune, he has won the game, as he's a major shareholder in the same company, but this is a different pile of money.

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Re: Larry Swedroe: Prepare For The Bear

Post by packer16 » Wed Oct 17, 2018 8:40 am

Larry has done a good job at communicating how the market price has reduced future returns for stock & bonds but has not provided similar data for some of the alternatives. IMO you need to look at these alternatives similarly. The data in some cases are hard to come by however for alternative lending where the returns are pretty well known by the yields on these loans & the current returns of 5 to 6% from LENDX. This IMO appears to be a good alternative bet today.

On the other hand, I think re-insurnace is not as clear. Larry has stated & correctly so that yields historically have provided equity like returns. From the chart below we can see this was the case in the early 2010s.

https://insurancelinked.com/primary-market-pricing/

However as the decade wore on this risk premium shrank as more money not only entered the market but established mechanisms to quickly absorb excess demand (high pricing) after a series of cat events. After last years bad cat year, prices did not firms up as expected as the these new mechanisms took hold. So what does this mean in terms of risk premium. The premium over bonds has decline from almost 5.5% over LIBOR in 2012 (at the 0.5% loss level (about equal to a A bond loss level)) to 2.3% over LIBOR in 2018. This is lower premium is reflected in last years decline in SRRIX in addition to this year's returns of about 3% YTD.

The one overarching competitor to these alternatives is the ultimate alternative, bonds. Now you can buy intermediate investment grade corporate bonds for a yield of 4%. So IMO the real question is do you want what appears to be alternative returns that are not that much higher than IG corp bonds with risk that they may not work out as well (i.e., if we have a cat year like 2017 next year you will probably incur a loss)?

Packer
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Re: Larry Swedroe: Prepare For The Bear

Post by marcopolo » Wed Oct 17, 2018 8:49 am

packer16 wrote:
Wed Oct 17, 2018 8:40 am
... for alternative lending where the returns are pretty well known by the yields on these loans & the current returns of 5 to 6% from LENDX. This IMO appears to be a good alternative bet today.
In the context of preparing for a bear market, and likely a recession to go with it, is there data on how these type of alternative lending funds performed during 2008/2009, or other recessions? The 5 to 6% yield is nice, but not if the default rate spikes. I am not sure where to find the data, but I have a hunch the default rates increased when a lot people started losing their jobs?
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Larry Swedroe: Prepare For The Bear

Post by packer16 » Wed Oct 17, 2018 8:58 am

You are correct about a spike & I do not how these will perform in a credit tightening event, we don't have the data. The one thing about a spike is the loans are amoritizing so you have a pretty good idea of when defaults are happening & the visibility into loss rates is pretty robust (i.e. the data is good to track this info) & presumably the loan selection criteria can be adjusted to reduce the probability of loss. So you have these unknowns as a factor to determine if the 1 to 1.5% premium over IG bonds is favorable enough to invest. IMO this may be a favorable tradeoff when you include the diversification benefit & low probability of principle loss versus re-insurance or stocks.

Packer
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Re: Larry Swedroe: Prepare For The Bear

Post by Random Walker » Wed Oct 17, 2018 9:19 am

Ari wrote:
Wed Oct 17, 2018 12:36 am
As assets grow, the need to take risk decreases, but the ability increases. So it's a wash, really. Just up to your personal preference (willingness). To me, the "need" part always seemed strange to count as part of "risk tolerance". The fact that I need to take risks doesn't mean my tolerance is higher.

So to me, the higher the bull market goes, the higher my risk tolerance.
Of course every individual is different. But on average, I don’t think this describes most individuals. Behavioral finance has shown that the pain of a loss is twice as much as the happiness derived from an equal sized gain. And I believe that 2:1 ratio increases steeply as one’s net worth increases. So I think for most people it’s not a wash. All of us should do the mind experiment of imagining how our life would change if our portfolios were doubled or if they were cut in half. I think that’s a worthwhile exercise for determining one’s AA.

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Re: Larry Swedroe: Prepare For The Bear

Post by larryswedroe » Wed Oct 17, 2018 9:42 am

Few thoughts to be helpful
First, re consumer loans during 2008, which was highest UE in post Depression era, saw losses about double from defaults. So with leverage we estimate fund would have lost about 6-7% or so. Have to remember that even at 10% employment since these are prime only loans they are made to people who are less likely to be unemployed (more stable income gets you higher credit rating). Now compare that to 60% drawdown in stock market. Also note the fund has almost no inflation risk and while it will likely be up about 6% for the year,despite rate increases, intermediate bond funds are down several percent. Note even in 2008 credit cards made banks money. And for small business loans, direct business lending index was down about 7% in 2008 (Clliffwater).

Second, re CAT bonds. what's missing from the analysis by Packer is that CAT bond liquidity dramatically increased for a few reasons, including demand, and better quality collateral, and that increased liquidity drove down the premium (plus increased demand). At same time all premiums had fallen, both ERP and bond yields. So have to consider relative returns. I would add CAT bonds are very small holding for SRRIX which holds risk mostly in quota shares which are much more diversified and don't give away the liquidity premium lost in liquid CAT bonds. Yes expected returns in reinsurance are now lower than they were a decade ago, but relative to US equity expected returns IMO they are very similar, if not higher, and with about half the volatility, much less tail risk, and no correlation, and certainly higher expected returns than bonds without any inflation risk.

Note the whole point of my blog was to
a)advise people to ignore forecasters of markets
b) make sure people are prepared for inevitable future bear markets

Larry

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Re: Larry Swedroe: Prepare For The Bear

Post by Random Walker » Wed Oct 17, 2018 9:59 am

marcopolo wrote:
Wed Oct 17, 2018 8:49 am
packer16 wrote:
Wed Oct 17, 2018 8:40 am
... for alternative lending where the returns are pretty well known by the yields on these loans & the current returns of 5 to 6% from LENDX. This IMO appears to be a good alternative bet today.
In the context of preparing for a bear market, and likely a recession to go with it, is there data on how these type of alternative lending funds performed during 2008/2009, or other recessions? The 5 to 6% yield is nice, but not if the default rate spikes. I am not sure where to find the data, but I have a hunch the default rates increased when a lot people started losing their jobs?
Yes, Larry has made the point that unemployment spike will hurt LENDX. I’ve, perhaps naively, assumed that LENDX will be an excellent diversifier for perhaps a year or so into an equity bear associated with recession. I assume that unemployment would only start to increase, and affect LENDX, later into an extended recession.

Dave

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Re: Larry Swedroe: Prepare For The Bear

Post by packer16 » Wed Oct 17, 2018 10:02 am

Larry,

I agree with you on re-insurance & equity premiums being similar but IMO the biggest difference is fees. You can gain access to the equity market at 10bp while access to re-insurance markets is closer to 200bp. I agree that there is some illiquidity premium on quota share but how much is it when alot of cat is single year coverage. If the premiums becomes too big, then will not insurers just issue cat bonds as lower cost of financing? Is it anywhere near the 190bp fee difference?

So on a pre-fee basis re-insurance is interesting if you are willing to deal with a few bad loss years like 2017 but after fees I think equities will come out ahead in the long run (10 years plus). As to tail risk, if I want to ensure against tail risk I am going to use bonds especially with the current tight spreads to both equities and re-insurance. In other words, the incremental return for unit risk is pretty low for both equity and re-insurance & decreasing by the day as interest rates rise.

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Re: Larry Swedroe: Prepare For The Bear

Post by nedsaid » Wed Oct 17, 2018 10:02 am

smectym wrote:
Wed Oct 17, 2018 1:04 am
Swedroe’s article disingenuously offers that “there is an old saying” that “there is a time for every activity...” etc. (pre-lapsarians may recall the literate version of Ecclesiastes 3.1,”To everything there is a season; and a time to every purpose under heaven.”)

This is Swedroe stealth quoting from the Bible. His abysmal taste in Bible translations (NIV, Larry? Really?) perhaps calls into question his broader judgment. But my main point is this: if you want to quote the Bible, then cite the Bible; if you don’t consider the Bible a valid authority, or don’t wish to be seen as citing it, then don’t cite it.

Perhaps this post is headed for the memory hole, but I would argue that as a critique of Swedrovian obfuscation (an “old saying” Larry copies directly from a translation of the Bible without attribution? Come on) should be allowed to stand.

Smectym
I don't get this criticism. Those of us raised in a religious environment are pretty familiar with the Bible and there are many common expressions in our language that come from the Bible, particularly the King James Version. The Bible gets quoted or at least alluded to quite often in spoken or written discussion. Larry's faith tradition might use different translations than what others are used to. What Larry has done is perfectly acceptable and is common form in writing and in speech. He is using things that are commonly known so that others can better relate to his article. I have done similar things countless times here. I have found Larry's writings to be pretty clear and precise.
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Re: Larry Swedroe: Prepare For The Bear

Post by Angst » Wed Oct 17, 2018 11:27 am

nedsaid wrote:
Wed Oct 17, 2018 10:02 am
I don't get this criticism. Those of us raised in a religious environment are pretty familiar with the Bible and there are many common expressions in our language that come from the Bible, particularly the King James Version. The Bible gets quoted or at least alluded to quite often in spoken or written discussion. Larry's faith tradition might use different translations than what others are used to. What Larry has done is perfectly acceptable and is common form in writing and in speech. He is using things that are commonly known so that others can better relate to his article. I have done similar things countless times here. I have found Larry's writings to be pretty clear and precise.
+1
Not to pile on here, but my reaction was similar although I wasn't sure how to put it into words. Thank you nedsaid.
Last edited by Angst on Wed Oct 17, 2018 11:31 am, edited 1 time in total.

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Re: Larry Swedroe: Prepare For The Bear

Post by james22 » Wed Oct 17, 2018 11:31 am

Sinsji wrote:
Wed Oct 17, 2018 2:36 am
james22 wrote:
Wed Oct 17, 2018 1:51 am
Larry wrote:If you are thinking about selling, you might ask yourself what you know that Buffett doesn’t.
Why is Buffett sitting on ~$110B in cash?
Money was cheap, and stocks considering the long term prospects not so much anymore in his opinion I guess:)

So what to do? Stocks have high valuation and bonds are 'risky' because interest is relatively low. What is the alternative? TIPS, short-term treasury, cash?
Larry suggests Buffett knows better than to time the market as evidenced by his not selling. I'm arguing his holding an every increasing amount of cash is better evidence he *is* market (valuation) timing.
Valuethinker wrote:
Wed Oct 17, 2018 4:46 am
In insurance you get premiums from policy holders, and then you don't pay out for years. But you have to set aside reserves for each $1 of policy that is written, and what you can hold as reserves (bonds, stocks etc.) is highly regulated.

So that's Buffett's "float" and it's a key to his business success. In effect, his insurance money is costing him very little, but in return gives him a very low cost of leverage.
Buffett is actually sitting on ~$130B in cash, I've set aside the $20B he sets aside as reserves.
Valuethinker wrote:
Wed Oct 17, 2018 4:46 am
Buffett, now, needs to buy billions of dollars of a company to have a meaningful impact on his bottom line.
He could buy the S&P 500 index if he thought was attractively valued. He doesn't.
oldcomputerguy wrote:
Wed Oct 17, 2018 5:06 am

Perhaps because he's "won the game" and doesn't need to take so much risk?

If I had $110B to my name, it certainly would not be in the stock market.
What Nicolas said.
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

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Re: Larry Swedroe: Prepare For The Bear

Post by Toons » Wed Oct 17, 2018 11:32 am

Poorly?
Poorly =Opportunity.
Why Not decide to be an optimist.
:mrgreen:
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Re: Larry Swedroe: Prepare For The Bear

Post by goodenyou » Wed Oct 17, 2018 11:37 am

smectym wrote:
Wed Oct 17, 2018 12:28 am
goodenyou wrote:
Tue Oct 16, 2018 1:56 pm
There is a vibe that this market is one bad hair day from a nervous breakdown. I don't subscribe, but the large swings may indicate that there is some substance to the fear. The wounds of 2008--2009 were very deep, and haven't completely healed (if ever). Having conviction on the direction of the market may cause one to compound the error by doubling down on a possible incorrect strategy. The "don't just do something, stand there" admonition comes to mind.
“Don’t just do something, stand there” has its kernel of potential, contingent, tactical truth; but like many another seductive aphorisms, the investor must ruthlessly demystify all such precepts. There’s no magic sauce: anywhere, ever. Instead, the investor—often responsible for the welfare of other family members—must always and again make tough capital allocation decisions.

That could mean taking on more risk, or less; or “just standing there,” or “doing something.” There’s no smug all-weather call, and while twitchy, news-feed-driven trading is no doubt a loser, watch out also for the bovine self-complacency of those who’ve spent the last decade lapping up the largesse of the Fed.

Smectym
I am not adept at ruthlessly demystifying or making tough capital allocation decisions. I am aware of my limitations, and I am responsible for a family. I choose to take no action in turbulent times because my investment strategy allows me to weather guaranteed storms. It's not for everyone and I don't proselytize as though it should be. The future results of past easy money policy will be determined.
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

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Re: Larry Swedroe: Prepare For The Bear

Post by larryswedroe » Wed Oct 17, 2018 12:24 pm

Packer

The difference is that the reinsurance premium, expected returns, is about equity return AFTER fees. Not in liquid CAT bonds, but in illiquid quota shares.
Re safe bonds as tail risk protection, that comes at cost of giving up the ERP and also if intermediate taking on inflation risk. SRRIX has equity like expected returns and zero inflation risk as collateral return rises with interest rates. So SRRIX expected returns are now higher than say a year ago, even if premiums are unchanged from year ago.

Smectym
Think you need to get a life. Really sad that you have nothing better to do then make absurd comments

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Re: Larry Swedroe: Prepare For The Bear

Post by HomerJ » Wed Oct 17, 2018 12:26 pm

larryswedroe wrote:
Wed Oct 17, 2018 9:42 am
First, re consumer loans during 2008, which was highest UE in post Depression era, saw losses about double from defaults. So with leverage we estimate fund would have lost about 6-7% or so. Have to remember that even at 10% employment since these are prime only loans they are made to people who are less likely to be unemployed (more stable income gets you higher credit rating).
Those consumer loan default rates include all consumer loans, including the people who got traditional loans from banks, right? THOSE people didn't default too terribly during the 2008 recession it's true.

But LENDX focuses on people who are NOT getting traditional loans. From it's prospectus.
Alternative lending, which is sometimes referred to as peer-to-peer lending, online lending or marketplace
lending, is a method of financing in which an alternative lending platform facilitates the borrowing and lending
of money while generally not relying on deposits for capital to fund loans. It is considered an alternative to more
traditional debt financing done through a bank.
There is no return without risk. For LENDX to make you good money (AFTER 2% fees), it seems it must be buying loans that have higher interest rates and more risk than normal.

People with good credit ratings get normal loans. People with poor and okay credit get the higher interest-rate loans which LENDX can buy and be profitable.

LENDX does indeed avoid sub-prime loans and probably avoids people with poor credit ratings, but it's not making decent returns off people with high credit ratings. Those people are getting loans from a bank.

So there is risk in the next downturn. The people who can't get loans from a bank may be in a tighter, more precarious financial situation, and the risk is higher that they would default during a recession. The risk may not be that high, but it's not as low as the TOTAL consumer loan environment either.

And LENDX using leverage isn't going to help if there's a recession either.

At least, that's my uninformed opinion.
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Re: Larry Swedroe: Prepare For The Bear

Post by larryswedroe » Wed Oct 17, 2018 12:55 pm

Homer
All I would say is you should avoid making statements of fact that you have literally no clue what you are talking about, And I don't have time to explain why virtually everything you say is so often wrong. And it's one of reasons I don't post. Old saying, it's not what a man doesn't know that gets him in trouble, but what he knows for sure but is not so.
And note I ignore all posts by you anyway---but this was so filled with misinformation thought was worth pointing out

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Re: Larry Swedroe: Prepare For The Bear

Post by HomerJ » Wed Oct 17, 2018 12:58 pm

duplicate
Last edited by HomerJ on Wed Oct 17, 2018 1:14 pm, edited 2 times in total.
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Re: Larry Swedroe: Prepare For The Bear

Post by HomerJ » Wed Oct 17, 2018 1:00 pm

This is from the LENDX prospectus.

I don't think I was completely off base. I could still be wrong, but I certainly don't think I was just making stuff up from thin air.
Risk of Unsecured Loans. Many of the Fund’s investments are associated with loans that are unsecured
obligations of borrowers. This means that they are not secured by any collateral, not insured by any third party,
not backed by any governmental authority in any way and, except in the case of certain loans to businesses, not
guaranteed by any third party.
The default history for alternative lending borrowing arrangements is limited. Future defaults may be higher than
historical defaults and the timing of defaults may vary significantly from historical observations. As described
further under “Credit/Counterparty Risk,” the credit profile and interest rates available to certain borrowers who
seek credit through alternative lending platforms may result in a higher rate of default for alternative lending related
securities as compared with the debt instruments associated with more traditional lending models, such as
banks
, although pursuant to the Fundamental Investment Restrictions, the Fund may not invest in loans that are
of subprime quality at the time of investment.
Borrowings obtained through alternative lending platforms may not limit borrowers from incurring additional
debt. If a borrower incurs additional debt obligations after obtaining a loan through an alternative lending
platform, the borrower’s creditworthiness may diminish and any additional obligations could cause the borrower
to experience financial distress, insolvency or bankruptcy, all of which would impair the borrower’s ability to
repay the loan underlying the Fund’s investment.
Furthermore, the ability of secured creditors to pursue remedies
against the collateral of the borrower may impair the borrower’s ability to repay its unsecured loan or it may
impair the platform’s or loan servicer’s ability to collect on the loan upon default. The loans in which the Fund
invests generally do not include any cross-default provisions. Cross-default provisions render a default on one
outstanding debt obligation an automatic default on another debt obligation of the borrower, which permits
creditors to react more quickly to take steps to protect their interests. In contrast, the loans in which the Fund
invests typically will be placed in default or referred to collection only if there are independent defaults on such
loans, irrespective of whether the borrower has defaulted on a different debt obligation. Not only will the Fund
not benefit from such protective provisions, the Fund also generally will not be made aware of any additional
debt incurred by a borrower or whether such debt is secured or unsecured.
Last edited by HomerJ on Wed Oct 17, 2018 1:04 pm, edited 1 time in total.
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