Changing to higher equities allocation during a major crash?

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andrew99999
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Changing to higher equities allocation during a major crash?

Post by andrew99999 »

In 2000 or 2008, say you just retired and were 50/50 and the market has crashed down to 40% off peak, would it be reasonable to buy up big while it's cheap and switch to maybe 75/25 to take advantage?

Or is there a similar strategy where you up your percentage steadily the more the market drops?
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vineviz
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Re: Changing to higher equities allocation during a major crash?

Post by vineviz »

I can't think of any evidence that this would be a reasonable strategy.

For one thing, any strategy like this requires two sides: you'd have to have a rule for moving BACK to 50/50 from 75/25 again, and there is no guarantee that such a rule would trigger quickly. Meanwhile, you've significantly increased the volatility of your portfolio taking on more risk than (by definition) your initial allocation said you should be comfortable with.

Also, just the mechanics would be hard to mange. You'd have to sell 60% of your bonds to get to 75/25 after a crash, in a market where (presumably) bonds have dramatically outperformed stocks. However rational that might seem, even the most hardened investor would have a hard time pulling the trigger on that strategy I suspect.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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k66
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Re: Changing to higher equities allocation during a major crash?

Post by k66 »

Sure -- buying equities when they are cheap(er) is a great plan and often works well in hindsight.

The problem though is knowing when the optimal buying point arrives. For example, the market crashed in (Sept) 2008 but it was actually the summer of 2007 when the peak was achieved. At what point after June 2007 would you execute your strategy? Bear in mind that you have little to no inkling that the fire-sale prices really won't arrive until people start talking about the potential complete collapse of the fiscal system in late 2008 and into 2009.

Why not just rebalance as the differences between equities and bonds unbalance your established AA (i.e. Asset Allocation, which is presumably set according to your need, ability, and willingness to accept risk). Put another way, if your true risk tolerance is 75/25, then why are you at 50/50 now? If your true risk tolerance is 50/50, then why are you pushing yourself to 75/25?
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dwickenh
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Re: Changing to higher equities allocation during a major crash?

Post by dwickenh »

andrew99999 wrote: Wed Oct 24, 2018 8:40 am In 2000 or 2008, say you just retired and were 50/50 and the market has crashed down to 40% off peak, would it be reasonable to buy up big while it's cheap and switch to maybe 75/25 to take advantage?

Or is there a similar strategy where you up your percentage steadily the more the market drops?
What is reasonable is to maintain your allocation as the equities lose value- re-balance to maintain the 50/50 allocation
you have decided to maintain. An IPS(investment policy statement) will keep you on track. You will be selling bonds and buying
equities in a prolonged market decline. It is the simple thing to do, but not easy.

Best to you,

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett
retiredjg
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Re: Changing to higher equities allocation during a major crash?

Post by retiredjg »

I think you'll be busy enough exchanging your bonds into stocks to try to maintain your 50/50 allocation. I suppose you could let it wander higher than 50% stocks if that happens. Not sure that going to 75% would be wise - the market could be preparing to just go down again (a dead cat bounce) and you don't want to be at 75% if that happens.
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Re: Changing to higher equities allocation during a major crash?

Post by Smoke »

Having gone thru 2008 100% allocated to stocks, I am aware that time cures all, if you can afford to ride it out.
That said, now I would just rebalance back to my allocation once per year.
IF another 2008 market came along and S&P was down by over 50%, I would be very tempted to go with a higher allocation in stocks, to the limit of what I could comfortably wait out an extended time frame till it rebounded with moneys that weren't needed for a longer time frame.
Arguing for the sake of arguing is something I am not going to engage in.
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goingup
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Re: Changing to higher equities allocation during a major crash?

Post by goingup »

You'll have to live through a big bear market to see how you react real time.

I remember feeling as though stock funds were on sale in Fall 2008 and bought some beyond normal contributions. Then came Winter 2008 and by March 2009 I felt like we were tossing money into the abyss and the cratering market would never stop. The thing is you have no idea when/if the market will recover. Pundits called 2000-2009 The Lost Decade. Finally in Spring 2009 the market stabilized.

It's really hard to be bold. You'll be doing well just to keep up your normal contributions and not panic. No way was I going to sell the few bonds we had to rebalance.
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Re: Changing to higher equities allocation during a major crash?

Post by Random Walker »

I think we were all spoiled and somewhat deceived by 2007-2009. That was a rapid “V” shaped recovery for the stock markets. My quick look at an S&P 500 chart shows that the market returned to its previous 2008 peak within 4-5 years, 2012-2013. The recovery could have been much slower, protracted, and rocky.

Dave
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Leif
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Re: Changing to higher equities allocation during a major crash?

Post by Leif »

I recall a few people said they were going to 100% equities in 2008-9. I've not read what happened with those people since. Did they dial back once the market recovered to pre-2008 levels?

In 2008-9 I was in my 50s. I did rebalance for a while, but got tired of catching that falling knife. However, I continued to TLH. I'm still using that TLH losses today.

It is market timing, but if I was in my 20-40s I would consider going to 100% (if I was not already 100%). In my 50-60s+ I would consider it too dangerous to play that game. So at retirement, and 50/50, I would not increase my equity allocation.
Last edited by Leif on Wed Oct 24, 2018 9:56 am, edited 1 time in total.
MotoTrojan
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Re: Changing to higher equities allocation during a major crash?

Post by MotoTrojan »

You mention retired; I don't think that would be prudent (but I would rebalance). If I were 10+ years out from retirement though, and say at a 60/40 or 70/30, I wouldn't be that against halving my bond percentage.
chambers136
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Re: Changing to higher equities allocation during a major crash?

Post by chambers136 »

I think that if you were at 50/50 and were not brave enough to be at 80/20 or 90/10 during good times, you'd be hard pressed to develop that appetite for risk as the market tanks.
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HomerJ
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Re: Changing to higher equities allocation during a major crash?

Post by HomerJ »

andrew99999 wrote: Wed Oct 24, 2018 8:40 am In 2000 or 2008, say you just retired and were 50/50 and the market has crashed down to 40% off peak, would it be reasonable to buy up big while it's cheap and switch to maybe 75/25 to take advantage?

Or is there a similar strategy where you up your percentage steadily the more the market drops?
It would probably work out very well for you financially.

But having just retired, it would be monumentally foolish to risk a ton of money that you can't replace on "probably".
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
balbrec2
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Re: Changing to higher equities allocation during a major crash?

Post by balbrec2 »

Stick to your plan (hopefully you have one)
review
rebalance
repeat


Rebalancing according to set rules such as on a calendar schedule
or percentage change in AA is really all you should need to do .

Anything else is market timing, which is much harder to get right.

Stick with proven methods
cheers :sharebeer
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stemikger
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Re: Changing to higher equities allocation during a major crash?

Post by stemikger »

With my entire portfolio in the balanced index fund I never have to worry. I'll always be
60/40. I sleep through corrections.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!
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Artsdoctor
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Re: Changing to higher equities allocation during a major crash?

Post by Artsdoctor »

andrew99999 wrote: Wed Oct 24, 2018 8:40 am In 2000 or 2008, say you just retired and were 50/50 and the market has crashed down to 40% off peak, would it be reasonable to buy up big while it's cheap and switch to maybe 75/25 to take advantage?

Or is there a similar strategy where you up your percentage steadily the more the market drops?
Sure, there's always a potential advantage to buying low and selling high.

However, there are a couple of things to bear in mind. First, you're talking about "just retired"; in fact, when you're in the midst of an excruciating bear market, you can't see where the bottom is and very few retirees would be willing to make a bet on it. But second, you can easily imagine a middle-aged investor with a lot of investing experience having many years of earnings ahead deciding to increase equity exposure after a very large drop. Maintaining your asset allocation would always be preferable in any market swing, but if you are willing and able to take the risk, there would be no problem taking advantage over exceptionally low valuations.
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Re: Changing to higher equities allocation during a major crash?

Post by Fallible »

goingup wrote: Wed Oct 24, 2018 9:17 am You'll have to live through a big bear market to see how you react real time. ...
This is true - as far as it goes. Living through one bear market will tell you how you reacted in THAT bear, but maybe not the next one because they all differ.
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
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Nate79
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Re: Changing to higher equities allocation during a major crash?

Post by Nate79 »

The problem is knowing when to time it. It looks easy in hindsight but reality is much different. You don't know ahead of time how low the market will drop, whether you are at the bottom or not, and how long or the shape of the recovery.
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midareff
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Re: Changing to higher equities allocation during a major crash?

Post by midareff »

I might nibble at 40% down.... although that would still leave the S&P over historical averages. .. so maybe not.
ThankYouJack
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Re: Changing to higher equities allocation during a major crash?

Post by ThankYouJack »

This is a pretty similar argument as holding extra cash / fixed income waiting for a big crash. While you're 50/50 or holding onto the extra cash, you're most likely missing out on some major gains. Tony Robbins does a good explaining why it's not a great idea (especially at 6 minutes):

https://youtu.be/9O8haH2tHWY?t=218
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goingup
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Re: Changing to higher equities allocation during a major crash?

Post by goingup »

Fallible wrote: Wed Oct 24, 2018 5:29 pm
goingup wrote: Wed Oct 24, 2018 9:17 am You'll have to live through a big bear market to see how you react real time. ...
This is true - as far as it goes. Living through one bear market will tell you how you reacted in THAT bear, but maybe not the next one because they all differ.
I agree, but there's something to be said for being battle tested. Experience being the best teacher (I'm hoping) :D .
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Artsdoctor
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Re: Changing to higher equities allocation during a major crash?

Post by Artsdoctor »

Fallible wrote: Wed Oct 24, 2018 5:29 pm
goingup wrote: Wed Oct 24, 2018 9:17 am You'll have to live through a big bear market to see how you react real time. ...
This is true - as far as it goes. Living through one bear market will tell you how you reacted in THAT bear, but maybe not the next one because they all differ.
Yes, and the irony is that even if you did everything beautifully through one bear market when you were 35, you may not behave so beautifully when you're 60. There's far, far more to lose when the future paychecks are fewer in number and people's psyches changes with time as well.
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Re: Changing to higher equities allocation during a major crash?

Post by grabiner »

There are two factors at work, psychological and financial.

When the market crashes, you have a better understanding of your risk tolerance; this may be a good reason to increase your stock allocation, because you now know you won't panic. My first bear market was 2000-2002, and I started with 80% stock and had the risk of 100% stock soon afterwards.

But your ability to take risk hasn't changed. In 2002, I was 34, so I still had the ability to take a lot of risk despite having lost more than a quarter of my portfolio. If you are retired, increasing your stock allocation in a bear market increases the risk of a much lower standard of living if the market declines.

Therefore, it's probably reasonable to increase your stock allocation in your first bear market after getting significantly into the stock market; you should still be young at that time, as bear markets happen every few years.
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Re: Changing to higher equities allocation during a major crash?

Post by Laika »

I did this.

I had entered the market in early 2008 with 40% equities (my intended long-term position). During the ensuing crash, however, I "bought all the way down" until I was about 85% equities.

My last purchase was three days before the bottom. It was excruciating. My thoughts of early retirement were gone. I had lost more money than I could hope to save during the rest of my career. And yet, my memory of that last purchase wasn't just of the losses I was experiencing, but possibly worse was the recognition that I was out of ready funds with which to buy more stock!

After breaking even, which felt as if a miracle had occurred, I slowly started selling until I reached 50% equities. I stopped at that point since I had run out of tax losses to recoup.

One could say I was foolish, that I ignored my plan, that I bought too soon on the way down, and sold too soon on the way up. All this would be true. It did turn out in my favor, but the horror was almost unbearable.

I don't think I would do it again.
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Re: Changing to higher equities allocation during a major crash?

Post by 2015 »

Random Walker wrote: Wed Oct 24, 2018 9:25 am I think we were all spoiled and somewhat deceived by 2007-2009. That was a rapid “V” shaped recovery for the stock markets. My quick look at an S&P 500 chart shows that the market returned to its previous 2008 peak within 4-5 years, 2012-2013. The recovery could have been much slower, protracted, and rocky.

Dave
Absolutely. The V recovery was one of many possible alternate realities. Nature plays no favorites, luck has no moral dimension, and in the normal course of events reality will do more to thwart our goals than support them.

This recovery had made many bold, many overconfident and many blind to how punishing reality can be (as it applies to investing) can be and that can't possibly be a good thing.
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Re: Changing to higher equities allocation during a major crash?

Post by msk »

I am 100% stocks but I do have a COLA pension (18 years retired) to cover all my needs. Consider that as my "bonds". I gift away 3.5% of my stocks portfolio annually. My plan for another great recession is, do nothing till there is a 30% drop from a recent peak. At that time my $ gifting will become 5%, so I will continue gifting at the same $ rate. I plan to buy one-year Calls on ACWI (my stock holdings are worldwide by market weight so ACWI is a better match than SPY=SP500). I use margin at IB so the interest rate is very low. The Calls cost around $50k per million $ worth of ACWI or SPY. Stocks drop further to 35% below peak? I cut back gifts to stay at <5% of portfolio, spend another $50k for another bunch of one-year Calls. Drop another 5%? Repeat. And keep repeating until I have Calls equal to my then shrunk portfolio, and wait for a recovery. This strategy worked for me during the last two collapses since 2000 and I made a good dollop of $ through each one. Third time unlucky? Who knows?

What you need. Nerves of steel, patience and to be familiar with options BEFORE the coming market collapse. And of course LUCK!
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HomerJ
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Re: Changing to higher equities allocation during a major crash?

Post by HomerJ »

2015 wrote: Wed Oct 24, 2018 11:56 pm
Random Walker wrote: Wed Oct 24, 2018 9:25 am I think we were all spoiled and somewhat deceived by 2007-2009. That was a rapid “V” shaped recovery for the stock markets. My quick look at an S&P 500 chart shows that the market returned to its previous 2008 peak within 4-5 years, 2012-2013. The recovery could have been much slower, protracted, and rocky.

Dave
Absolutely. The V recovery was one of many possible alternate realities. Nature plays no favorites, luck has no moral dimension, and in the normal course of events reality will do more to thwart our goals than support them.

This recovery had made many bold, many overconfident and many blind to how punishing reality can be (as it applies to investing) can be and that can't possibly be a good thing.
I agree as well. Too many people think 2000 and 2008 are the only ways stock market crashes play out.

Big drop, quick recovery.

Well, it's not guaranteed to always work that way, and one should be prepared.

If you've "just retired" (as the OP asks), selling your safe bonds and buying stocks that keep going down, that may take 10 years to recover, all at the SAME TIME you are WITHDRAWING money each year to buy food is a dangerous move.

It probably will work out. It likely will work out. But it might not work out.

When you are spending money from your portfolio each year, you may end up with too little when the recovery happens, and your losses can be PERMANENT.

If you "just retired", you already had enough money. How much will your life change by making more? You had enough to pay your bills and never work another day in your life. But you want to risk that money to make more?

How much will your life change if you're down 50% 10 years in retirement? Where your original 4% withdrawals are now 10% a year (with inflation) of your remaining portfolio?
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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HomerJ
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Re: Changing to higher equities allocation during a major crash?

Post by HomerJ »

msk wrote: Thu Oct 25, 2018 4:07 am What you need. Nerves of steel, patience and to be familiar with options BEFORE the coming market collapse. And of course LUCK!
No, what you need is a COLA pension that covers all your needs so your entire portfolio is basically play money.
I do have a COLA pension (18 years retired) to cover all my needs.
Check. :)
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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