How to factor for market crashes to stay "on-track"?

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BogleMelon
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How to factor for market crashes to stay "on-track"?

Post by BogleMelon » Tue Mar 26, 2019 9:35 am

For those who are in the accumulation phase and on-track with retirement savings, will you still be on track when a crash happens in terms of net worth?
Let's say that someone in his 40's have enough to call himself on-track with reasonable asset allocation. He would rebalance during the bear market and wouldn't panic since he has enough bonds to allow him to sleep at night, while keeping contributing to his tax-advantage accounts..etc However, a decrease of 30% or 50% in his assets due to a crash, could throw him back years and would be considered "off-track" due to the market conditions.

To avoid this issue, should we always have 2X what normally considered "on-track" all the time? Example, if I would be on track at my age with $200,000, should I consider this "off-track" unless I am having $400,000 to accommodate for a crash?
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

rkhusky
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Re: How to factor for market crashes to stay "on-track"?

Post by rkhusky » Tue Mar 26, 2019 9:48 am

How would respond to being off track? Increase stock allocation to catch up? Or cut expenses and save more?

Plus you should have a good chunk in bonds, such that you don’t have to worry as much.

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BogleMelon
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Re: How to factor for market crashes to stay "on-track"?

Post by BogleMelon » Tue Mar 26, 2019 9:51 am

rkhusky wrote:
Tue Mar 26, 2019 9:48 am
How would respond to being off track? Increase stock allocation to catch up? Or cut expenses and save more?
Since I am personally already living a frugal life, then I have no more room to cut expenses. I would increase the stock allocation by rebalancing. But that wouldn't fix the fact that I would go back several years in terms of net worth.
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

acegolfer
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Re: How to factor for market crashes to stay "on-track"?

Post by acegolfer » Tue Mar 26, 2019 9:57 am

Estimate the confidence interval of your asset value at investment horizon. If you have a good strategy, a negative setback should not affect your investment goal.

mbasherp
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Re: How to factor for market crashes to stay "on-track"?

Post by mbasherp » Tue Mar 26, 2019 9:58 am

I’ve thought about this before and it always comes back to this:
Do what you can, when you can.

No matter how much we try to plan the future, it may surprise us. We can’t know how much we needed to invest until we have the benefit of hindsight. So just do all you can, and let the crashes happen as they may.

Someday, you’ll probably have enough.

rkhusky
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Re: How to factor for market crashes to stay "on-track"?

Post by rkhusky » Tue Mar 26, 2019 10:00 am

BogleMelon wrote:
Tue Mar 26, 2019 9:51 am
rkhusky wrote:
Tue Mar 26, 2019 9:48 am
How would respond to being off track? Increase stock allocation to catch up? Or cut expenses and save more?
Since I am personally already living a frugal life, then I have no more room to cut expenses. I would increase the stock allocation by rebalancing. But that wouldn't fix the fact that I would go back several years in terms of net worth.
That’s the risk of stock investing. And why many advise decreasing stock as you get closer to retirement. Keep in mind that studies showing how much you need to save usually account for occasional drops (and rises) in the stock market. Set your AA glide path and stick to your plan.

delamer
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Re: How to factor for market crashes to stay "on-track"?

Post by delamer » Tue Mar 26, 2019 10:07 am

If you are in your 40’s and on track then you have to work under the assumption that the stock market will come back in time for your retirement (assuming you are retiring in your 60’s).

The whole premise of the stock market is that you occasionally suffer large losses, but the over the long-run you’ll come out ahead. If you don’t believe that, then dial back (or eliminate) your stock allocation and start saving a lot more — as you suggested in your last sentence. But oversaving and still having a large allocation in the market is a bad solution.

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Re: How to factor for market crashes to stay "on-track"?

Post by Kenkat » Tue Mar 26, 2019 10:17 am

“On track” is going to be somewhat of a moving target. I’ve been tracking annual returns to a target or baseline return since 1999. At the end of 1999, I was ahead of my baseline. Woohoo! Then the tech crash happened and by 2003, I was behind. After the recovery, I was slightly ahead again at the end of 2007. Then the financial crisis in 2008-2009 put me behind again. By the end of 2017, I was caught back up but after 2018, I was behind again. So it’s going to be up and down.

I had always figured depending on how I am doing, I may (or may not) need to work another year or two to get to my goal. Things will also change over time which also impacts your goals - for example, I got a job with a pension in 2004 and have 15 years vested in the pension plan which changes my required “end number”.

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Re: How to factor for market crashes to stay "on-track"?

Post by pasadena » Tue Mar 26, 2019 10:34 am

It also depends on when that crash comes, how far from retirement and how much you have at that time.

I made a few simulations, and at this point, my contributions are still what will matter the most. If I max out everything I can for the next 15 years (which, tbh, is a fairly optimistic assumption), then I should be good, even if we have a couple of years at -30% and -10% in a row, and all the others at 5%. Probably good if we have two of those, 10 years apart.

So I'm more afraid of a recession in which I would lose my job or cut my income, which would not only impact my savings rate, but also my Social Security, than I am of a crash. A crash followed by a recovery over a couple years would move the needle, be the difference between retiring at 60 and retiring at 65, but it wouldn't force me to work until I die.

Note that I forecast having low-ish medical expenses in retirement, as I can always retire in my home country.

Hopefully.

Thesaints
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Re: How to factor for market crashes to stay "on-track"?

Post by Thesaints » Tue Mar 26, 2019 11:03 am

Great confusion derives from assuming that “the track” is a deterministic one, with certain values.
One plans for, let’s say, a 7% average annualized return for 20 years, to take him to his target, but when on year 6 the market plunges 30% realizes that it would take a 10% return going forward to get there. Conclusion: “I was on track, but now I’m not”.

The mistake is that such a track was never there. On year zero the proper forecast should have been that the target can be achieved on year 20, but also there are concrete chances one will be short by 15%, or will overshoot by 20% (again, figures are just an example).
With this proper assessment of “the track”, the bear market on year 6 simply means that chances of being short 15% are a lot higher and chances of overshooting 20% are getting scarce.

Having accepted the spread of possible outcomes at start, a bear market along the way does not cause the same anguish as when true meaning of the track has not been fully appreciated.

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Re: How to factor for market crashes to stay "on-track"?

Post by livesoft » Tue Mar 26, 2019 11:14 am

One can simply change the track instead of doubling one's portfolio. So instead of retiring at age 40, one can retire at age 45, 50, 55, or any time they decide.

Furthermore, suppose one is "on-track" and reaches their goal in terms of time and assets, so one retires ... but then that time is October 2007 or June 2008. One's assets can disappear as fast during decumulation/retirement/withdrawal phase just as fast as during the "on-track"/accumulation phase unless one changes their asset allocation.
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GAAP
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Re: How to factor for market crashes to stay "on-track"?

Post by GAAP » Tue Mar 26, 2019 11:31 am

One way to look at this might be to use a funding ratio. BobK has an excellent series of posts on that topic: viewtopic.php?f=10&t=219878.

Another way to look at this is to discount your track on the assumption that bad stuff will happen. For example, you could assume that the scale of a drop is in proportion to asset prices and then discount your account balances or withdrawal amounts accordingly. Take a look at https://www.starcapital.de/fileadmin/us ... imling.pdf. The discussion and chart on page 12 suggest that the likely drop is roughly proportional to 1/CAPE10.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee

DonIce
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Re: How to factor for market crashes to stay "on-track"?

Post by DonIce » Tue Mar 26, 2019 11:33 am

A crash during one's accumulation phase is about the best thing that can happen. Gives you the opportunity to load up on equities at historically cheap prices.

Long term market returns INCLUDE the crashes and the people who did best are the ones that kept investing right through the crashes.

LiterallyIronic
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Re: How to factor for market crashes to stay "on-track"?

Post by LiterallyIronic » Tue Mar 26, 2019 11:37 am

BogleMelon wrote:
Tue Mar 26, 2019 9:35 am
For those who are in the accumulation phase and on-track with retirement savings, will you still be on track when a crash happens in terms of net worth?

To avoid this issue, should we always have 2X what normally considered "on-track" all the time? Example, if I would be on track at my age with $200,000, should I consider this "off-track" unless I am having $400,000 to accommodate for a crash?
I avoid this issue by not defining "on track" as a function of current net worth. I'm "on track" because I'm currently saving enough every month to reach my retirement amount goal by my retire age goal. I assume a 4% annual return, which should be a low enough average to be okay even when/if crashes occur. I'm "on track" because I'm investing $2,000/month. If I stop doing that, or invest less, then I wouldn't be "on track" any more.

There is the oft-quoted Fidelity chart that shows that a person is "on track" if they have 1x salary saved at 30, 2x salary saved at 35, etc. I am not "on track" according to them.

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Re: How to factor for market crashes to stay "on-track"?

Post by GAAP » Tue Mar 26, 2019 11:45 am

DonIce wrote:
Tue Mar 26, 2019 11:33 am
A crash during one's accumulation phase is about the best thing that can happen. Gives you the opportunity to load up on equities at historically cheap prices.
That might depend upon when in the accumulation phase it happens. The closer you are to distribution, the less time you have to benefit from that crash.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee

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BogleMelon
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Re: How to factor for market crashes to stay "on-track"?

Post by BogleMelon » Tue Mar 26, 2019 11:46 am

LiterallyIronic wrote:
Tue Mar 26, 2019 11:37 am
BogleMelon wrote:
Tue Mar 26, 2019 9:35 am
For those who are in the accumulation phase and on-track with retirement savings, will you still be on track when a crash happens in terms of net worth?

To avoid this issue, should we always have 2X what normally considered "on-track" all the time? Example, if I would be on track at my age with $200,000, should I consider this "off-track" unless I am having $400,000 to accommodate for a crash?
I avoid this issue by not defining "on track" as a function of current net worth. I'm "on track" because I'm currently saving enough every month to reach my retirement amount goal by my retire age goal. I assume a 4% annual return, which should be a low enough average to be okay even when/if crashes occur. I'm "on track" because I'm investing $2,000/month. If I stop doing that, or invest less, then I wouldn't be "on track" any more.

There is the oft-quoted Fidelity chart that shows that a person is "on track" if they have 1x salary saved at 30, 2x salary saved at 35, etc. I am not "on track" according to them.
I'm "on track" because I'm investing $2,000/month
How were you able to come up with this number?
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

elainet7
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Re: How to factor for market crashes to stay "on-track"?

Post by elainet7 » Tue Mar 26, 2019 11:49 am

MURPHY's LAW-if anything bad can happen investing, it will
just remember sequence of returns risk as you near retirement

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Re: How to factor for market crashes to stay "on-track"?

Post by Ben Mathew » Tue Mar 26, 2019 12:00 pm

Oversaving always helps. Plan for more than what you think you'll need. Plan for a lower return than what you think you'll get.

During a crash, having a forward looking perspective will also help a lot. If markets fall because of a rise in interest rates or risk premia (i.e. not because of lower expected future earnings), then you are getting a higher expected return, and it might well balance out depending on how far out you are to retirement. Focusing on expected earnings yields and valuations rather than short term returns helps with that.

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Re: How to factor for market crashes to stay "on-track"?

Post by LiterallyIronic » Tue Mar 26, 2019 1:08 pm

BogleMelon wrote:
Tue Mar 26, 2019 11:46 am
LiterallyIronic wrote:
Tue Mar 26, 2019 11:37 am
BogleMelon wrote:
Tue Mar 26, 2019 9:35 am
For those who are in the accumulation phase and on-track with retirement savings, will you still be on track when a crash happens in terms of net worth?

To avoid this issue, should we always have 2X what normally considered "on-track" all the time? Example, if I would be on track at my age with $200,000, should I consider this "off-track" unless I am having $400,000 to accommodate for a crash?
I avoid this issue by not defining "on track" as a function of current net worth. I'm "on track" because I'm currently saving enough every month to reach my retirement amount goal by my retire age goal. I assume a 4% annual return, which should be a low enough average to be okay even when/if crashes occur. I'm "on track" because I'm investing $2,000/month. If I stop doing that, or invest less, then I wouldn't be "on track" any more.

There is the oft-quoted Fidelity chart that shows that a person is "on track" if they have 1x salary saved at 30, 2x salary saved at 35, etc. I am not "on track" according to them.
I'm "on track" because I'm investing $2,000/month
How were you able to come up with this number?
I worked backwards. I want to retire in 2033 with $600,000. It's currently 2019 and I have $76,000. If I multiply that number by 1.04 and add $18,000 for the remaining nine months of the year, that gets me to $97,000 at the end of the year. Then for 2020, multiply the $97k by 1.04 and add $24,000 ($2,000/month), and that takes me to $125k. Repeat the process and I end up with $600,000 in 2033. This is a conservative estimate, because it assumes only a 4% annual return and it doesn't count any returns on investments until the next that (that is to say, it's calculated as if I saved up the $24,000 and stuck it all in the market on December 31 rather than spreading it out throughout the year).

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Re: How to factor for market crashes to stay "on-track"?

Post by BogleMelon » Tue Mar 26, 2019 1:17 pm

LiterallyIronic wrote:
Tue Mar 26, 2019 1:08 pm
BogleMelon wrote:
Tue Mar 26, 2019 11:46 am
LiterallyIronic wrote:
Tue Mar 26, 2019 11:37 am
BogleMelon wrote:
Tue Mar 26, 2019 9:35 am
For those who are in the accumulation phase and on-track with retirement savings, will you still be on track when a crash happens in terms of net worth?

To avoid this issue, should we always have 2X what normally considered "on-track" all the time? Example, if I would be on track at my age with $200,000, should I consider this "off-track" unless I am having $400,000 to accommodate for a crash?
I avoid this issue by not defining "on track" as a function of current net worth. I'm "on track" because I'm currently saving enough every month to reach my retirement amount goal by my retire age goal. I assume a 4% annual return, which should be a low enough average to be okay even when/if crashes occur. I'm "on track" because I'm investing $2,000/month. If I stop doing that, or invest less, then I wouldn't be "on track" any more.

There is the oft-quoted Fidelity chart that shows that a person is "on track" if they have 1x salary saved at 30, 2x salary saved at 35, etc. I am not "on track" according to them.
I'm "on track" because I'm investing $2,000/month
How were you able to come up with this number?
I worked backwards. I want to retire in 2033 with $600,000. It's currently 2019 and I have $76,000. If I multiply that number by 1.04 and add $18,000 for the remaining nine months of the year, that gets me to $97,000 at the end of the year. Then for 2020, multiply the $97k by 1.04 and add $24,000 ($2,000/month), and that takes me to $125k. Repeat the process and I end up with $600,000 in 2033. This is a conservative estimate, because it assumes only a 4% annual return and it doesn't count any returns on investments until the next that (that is to say, it's calculated as if I saved up the $24,000 and stuck it all in the market on December 31 rather than spreading it out throughout the year).
I avoid this issue by not defining "on track" as a function of current net worth
It's currently 2019 and I have $76,000
:?
Yes, you've just defined on track as a function of your current net worth!
What happens if the market dropped this year and your $76,000 became $30,000? Or what if 10 years from now the same happened and your $200,000 became $100,000? Will the $2000/mo still be enough?
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

ohai
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Re: How to factor for market crashes to stay "on-track"?

Post by ohai » Tue Mar 26, 2019 1:21 pm

It would be great if everyone was 2x "on track", but it's usually not a choice to be twice as wealthy.

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Re: How to factor for market crashes to stay "on-track"?

Post by magneto » Tue Mar 26, 2019 2:02 pm

BogleMelon wrote:
Tue Mar 26, 2019 9:35 am
For those who are in the accumulation phase and on-track with retirement savings, will you still be on track when a crash happens in terms of net worth?
The net worth is just the figure buyers in the market are prepared to pay for the portfolio on a particular day.
No one will rob the investor of their shares, or siphon off the dividends.
But sufficient defensives does allow the investor to take advantage of such Stock slumps.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

LiterallyIronic
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Re: How to factor for market crashes to stay "on-track"?

Post by LiterallyIronic » Tue Mar 26, 2019 3:45 pm

BogleMelon wrote:
Tue Mar 26, 2019 1:17 pm
LiterallyIronic wrote:
Tue Mar 26, 2019 1:08 pm
BogleMelon wrote:
Tue Mar 26, 2019 11:46 am
LiterallyIronic wrote:
Tue Mar 26, 2019 11:37 am
BogleMelon wrote:
Tue Mar 26, 2019 9:35 am
For those who are in the accumulation phase and on-track with retirement savings, will you still be on track when a crash happens in terms of net worth?

To avoid this issue, should we always have 2X what normally considered "on-track" all the time? Example, if I would be on track at my age with $200,000, should I consider this "off-track" unless I am having $400,000 to accommodate for a crash?
I avoid this issue by not defining "on track" as a function of current net worth. I'm "on track" because I'm currently saving enough every month to reach my retirement amount goal by my retire age goal. I assume a 4% annual return, which should be a low enough average to be okay even when/if crashes occur. I'm "on track" because I'm investing $2,000/month. If I stop doing that, or invest less, then I wouldn't be "on track" any more.

There is the oft-quoted Fidelity chart that shows that a person is "on track" if they have 1x salary saved at 30, 2x salary saved at 35, etc. I am not "on track" according to them.
I'm "on track" because I'm investing $2,000/month
How were you able to come up with this number?
I worked backwards. I want to retire in 2033 with $600,000. It's currently 2019 and I have $76,000. If I multiply that number by 1.04 and add $18,000 for the remaining nine months of the year, that gets me to $97,000 at the end of the year. Then for 2020, multiply the $97k by 1.04 and add $24,000 ($2,000/month), and that takes me to $125k. Repeat the process and I end up with $600,000 in 2033. This is a conservative estimate, because it assumes only a 4% annual return and it doesn't count any returns on investments until the next that (that is to say, it's calculated as if I saved up the $24,000 and stuck it all in the market on December 31 rather than spreading it out throughout the year).
I avoid this issue by not defining "on track" as a function of current net worth
It's currently 2019 and I have $76,000
:?
Yes, you've just defined on track as a function of your current net worth!
What happens if the market dropped this year and your $76,000 became $30,000? Or what if 10 years from now the same happened and your $200,000 became $100,000? Will the $2000/mo still be enough?
Doesn't matter. As long as I average 4% annual growth, I'll still make it, regardless of the market happens to drop this year taking me to $30,000. Because the market will make it all back plus 4% annually, if it's going to average 4% annually. If I get 4% annually, the $2,000/month will always be enough. I will always be "on track", no matter what the market does, as long it averages 4% annually.

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Re: How to factor for market crashes to stay "on-track"?

Post by pward » Tue Mar 26, 2019 4:28 pm

You do realize that you can use diversification to protect your downside and still get a good return? You don't need to expose yourself to all of that risk, even in accumulations. Matter of fact, there are some portfolios that have a very low maximum drawdown and time to recover, yet still accumulate very well.

For instance, compare the max drawdowns chart, financial independence chart, and safe withdrawal rate calculator on this site for each of the following (all calculated by looking at every single possible outcome for every start year from 1970-today, so no start date bias):

Golden Butterfly: https://portfoliocharts.com/portfolio/golden-butterfly/
Max yearly drawdown: 11%,
Max time to recover: 2 years,
Time to financial independence with a 50% savings rate: 11-14 years,
Safe withdrawal rate: 6.5%

Total stock market: https://portfoliocharts.com/portfolio/t ... ck-market/
Max yearly drawdown: 49%,
Max time to recover: 13 years,
Time to financial independence with a 50% savings rate: 11-21 years,
Safe withdrawal rate: 4.3%

3 fund 60/40: https://portfoliocharts.com/portfolio/t ... portfolio/
Max yearly drawdown: 32%,
Max time to recover: 10 years,
Time to financial independence with a 50% savings rate: 14-20 years,
Safe withdrawal rate: 4.6%

It seems to me with data like this, taking a more conservative approach makes more sense than doubling your goal in order to protect yourself.
Last edited by pward on Tue Mar 26, 2019 4:36 pm, edited 1 time in total.

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Re: How to factor for market crashes to stay "on-track"?

Post by Thesaints » Tue Mar 26, 2019 4:36 pm

pward wrote:
Tue Mar 26, 2019 4:28 pm
Golden Butterfly: https://portfoliocharts.com/portfolio/golden-butterfly/
Max yearly drawdown: 11%, max time to recover: 2 years, time to financial independence with a 50% savings rate: 11-14 years, safe withdrawal rate: 6.5%
Looks like free money. I wonder why everyone is NOT investing butterfly-like !!!
Markowitz would be rolling in his grave, were not he still alive.

pward
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Re: How to factor for market crashes to stay "on-track"?

Post by pward » Tue Mar 26, 2019 4:43 pm

Thesaints wrote:
Tue Mar 26, 2019 4:36 pm
pward wrote:
Tue Mar 26, 2019 4:28 pm
Golden Butterfly: https://portfoliocharts.com/portfolio/golden-butterfly/
Max yearly drawdown: 11%, max time to recover: 2 years, time to financial independence with a 50% savings rate: 11-14 years, safe withdrawal rate: 6.5%
Looks like free money. I wonder why everyone is NOT investing butterfly-like !!!
Markowitz would be rolling in his grave, were not he still alive.
The reason that not everyone invests with a fully diversified MPT portfolio like this is because people tend to get too hung up on individual assets and miss the forest for the trees. They don't realize that in a diversified portfolio you will always have some assets not doing well. People have a hard time purchasing assets that have been beaten down, or that they feel logically must go down in the future. They fail to realize that the biggest losers today are generally tomorrows biggest winners. They also fail to realize that by buying these beaten down assets (or controversial assets like long term treasuries and gold) that they are creating a portfolio that is greater than the sum of its parts. It is also hard for people to put their biases aside. It will never be a popular way to invest, regardless how well it continues to perform in the future. That's ok by me though, I kind of like going against the grain.

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Re: How to factor for market crashes to stay "on-track"?

Post by Thesaints » Tue Mar 26, 2019 5:06 pm

I was being ironic. I don't think any portfolio can offer a +2% withdrawal rate over an other one while simultaneously being a lot less volatile.

pward
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Re: How to factor for market crashes to stay "on-track"?

Post by pward » Tue Mar 26, 2019 5:08 pm

Thesaints wrote:
Tue Mar 26, 2019 5:06 pm
I was being ironic. I don't think any portfolio can offer a +2% withdrawal rate over an other one while simultaneously being a lot less volatile.
Generally speaking, less volatile portfolios have higher safe withdrawal rates. It's the big down years that kill safe withdrawal rates, as they are entirely based on the worst possible outcome. Tyler has posted a lot of in depth articles on that site as well describing how he calculates the SWR, so you can feel free to go and read it. He also is a member here, and is always open to people asking questions about his data and calculations.

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Re: How to factor for market crashes to stay "on-track"?

Post by DonIce » Tue Mar 26, 2019 5:19 pm

pward wrote:
Tue Mar 26, 2019 4:43 pm
The reason that not everyone invests with a fully diversified MPT portfolio like this is because people tend to get too hung up on individual assets and miss the forest for the trees. They don't realize that in a diversified portfolio you will always have some assets not doing well. People have a hard time purchasing assets that have been beaten down, or that they feel logically must go down in the future. They fail to realize that the biggest losers today are generally tomorrows biggest winners. They also fail to realize that by buying these beaten down assets (or controversial assets like long term treasuries and gold) that they are creating a portfolio that is greater than the sum of its parts. It is also hard for people to put their biases aside. It will never be a popular way to invest, regardless how well it continues to perform in the future. That's ok by me though, I kind of like going against the grain.
So I went over to portfolio visualizer to compare the golden butterfly and try to simplify it. First, I didn't like splitting up holdings between TSM and SCV, so I just combined it all into TSM. I also prefer LTT over STT so I went all in on LTT. Then I wanted to see what happened if I took out gold.

So Portfolio 1 in the below is the standard golden butterly (20% TSM 20% SCV 20% LTT 20% STT 20% gold).
Portfolio 2 is 40% TSM 40% LTT 20% gold.
Portfolio 3 is 50% TSM 50% LTT.

It doesn't seem like much is lost by simplifying the portfolio from 5 funds to 2.

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Re: How to factor for market crashes to stay "on-track"?

Post by nisiprius » Tue Mar 26, 2019 5:20 pm

Stuff happens. The stock market is risky. It may be a calculated risk, it may be an acceptable risk, it may be a risk that most retirement savers should be willing to take, there may not be anything better--but there is a risk. Either you accept it or you don't.

What being risky means is that there are market conditions which can put you off track--permanently.

To believe anything else is to believe that stocks are not actually risky as a retirement savings vehicle.

They are risky. They are risky in "the long run." They are definitely risk over the time periods during which you are saving for retirement.

It should be noted that although the title of Jeremy Siegel's book is Stocks for the Long Run, there are several things he did not say. He did not say that stocks are not risky in the long run. And he did not say that stocks become less risky over long holding times. All he said was that if you hold stocks for a long period of time, there is enough mean reversion that the risk over longer periods of time is partly offset by mean reversion. Over longer and longer holding periods, stock risk grows; it just doesn't grow as quickly as it would grow if stocks were a random walk.

There is no "track." There is no guarantee of "staying on track." To believe that there is always a way to get back on track is to believe that there is a way of eliminating the risk of stocks.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: How to factor for market crashes to stay "on-track"?

Post by jebmke » Tue Mar 26, 2019 5:22 pm

We never had a wealth "track." We had a savings and investment plan and we worked to stay "on track" with that. I just assumed that over the long run, things would work out.
When you discover that you are riding a dead horse, the best strategy is to dismount.

pward
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Re: How to factor for market crashes to stay "on-track"?

Post by pward » Tue Mar 26, 2019 5:24 pm

DonIce wrote:
Tue Mar 26, 2019 5:19 pm
pward wrote:
Tue Mar 26, 2019 4:43 pm
The reason that not everyone invests with a fully diversified MPT portfolio like this is because people tend to get too hung up on individual assets and miss the forest for the trees. They don't realize that in a diversified portfolio you will always have some assets not doing well. People have a hard time purchasing assets that have been beaten down, or that they feel logically must go down in the future. They fail to realize that the biggest losers today are generally tomorrows biggest winners. They also fail to realize that by buying these beaten down assets (or controversial assets like long term treasuries and gold) that they are creating a portfolio that is greater than the sum of its parts. It is also hard for people to put their biases aside. It will never be a popular way to invest, regardless how well it continues to perform in the future. That's ok by me though, I kind of like going against the grain.
So I went over to portfolio visualizer to compare the golden butterfly and try to simplify it. First, I didn't like splitting up holdings between TSM and SCV, so I just combined it all into TSM. I also prefer LTT over STT so I went all in on LTT. Then I wanted to see what happened if I took out gold.

So Portfolio 1 in the below is the standard golden butterly (20% TSM 20% SCV 20% LTT 20% STT 20% gold).
Portfolio 2 is 40% TSM 40% LTT 20% gold.
Portfolio 3 is 50% TSM 50% LTT.

It doesn't seem like much is lost by simplifying the portfolio from 5 funds to 2.

Image
There is indeed more than one way to get a great return with minimum drawdowns and time to recover. Placing volatile non-correlated assets with each other can make good things happen. The catch being that you started at 1978, which leaves out the stock and bond bear market of the 70s from the data. I would go back to at least 1974 (golds first correction after the once in a lifetime price discovery) to get a little bit better data including the bond and stock bear market, and also click the "inflation adjusted returns" if it's not selected to see the full picture. Unfortunately, the 70s is the only backtestable data we have for a bond bear market, so until we have the next bond bear it is a decade that kind of needs to be included. The dates chosen are going to be heavily biased to the once in a lifetime bond bull market from 1983 to present. The one thing I really like about portfolio charts vs portfolio visualizer is that it weights each potential start date equally, so it doesn't have start date bias. It also shows all data in real inflation adjusted terms, which makes a lot more sense.

pward
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Re: How to factor for market crashes to stay "on-track"?

Post by pward » Tue Mar 26, 2019 5:38 pm

DonIce wrote:
Tue Mar 26, 2019 5:19 pm
pward wrote:
Tue Mar 26, 2019 4:43 pm
The reason that not everyone invests with a fully diversified MPT portfolio like this is because people tend to get too hung up on individual assets and miss the forest for the trees. They don't realize that in a diversified portfolio you will always have some assets not doing well. People have a hard time purchasing assets that have been beaten down, or that they feel logically must go down in the future. They fail to realize that the biggest losers today are generally tomorrows biggest winners. They also fail to realize that by buying these beaten down assets (or controversial assets like long term treasuries and gold) that they are creating a portfolio that is greater than the sum of its parts. It is also hard for people to put their biases aside. It will never be a popular way to invest, regardless how well it continues to perform in the future. That's ok by me though, I kind of like going against the grain.
So I went over to portfolio visualizer to compare the golden butterfly and try to simplify it. First, I didn't like splitting up holdings between TSM and SCV, so I just combined it all into TSM. I also prefer LTT over STT so I went all in on LTT. Then I wanted to see what happened if I took out gold.

So Portfolio 1 in the below is the standard golden butterly (20% TSM 20% SCV 20% LTT 20% STT 20% gold).
Portfolio 2 is 40% TSM 40% LTT 20% gold.
Portfolio 3 is 50% TSM 50% LTT.

It doesn't seem like much is lost by simplifying the portfolio from 5 funds to 2.
FWIW I also plugged in the data in portfolio charts to see how these would have been. So keep all data the same for comparison with my earlier posted portfolios:

50/50 total stock / long term treasury
Max yearly drawdown: 35%,
Max time to recover: 13 years (any start date 1970-1974 on the heat map were all 10 years or longer time to recover),
Time to financial independence with a 50% savings rate: 14-19 years,
Safe withdrawal rate: 4.1%

40/40/20 total stock / long term treasury / gold
Max yearly drawdown: 17%,
Max time to recover: 5 years,
Time to financial independence with a 50% savings rate: 14-16 years,
Safe withdrawal rate: 5.5%
Last edited by pward on Tue Mar 26, 2019 5:47 pm, edited 1 time in total.

DonIce
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Re: How to factor for market crashes to stay "on-track"?

Post by DonIce » Tue Mar 26, 2019 5:44 pm

pward wrote:
Tue Mar 26, 2019 5:24 pm
There is indeed more than one way to get a great return with minimum drawdowns and time to recover. Placing volatile non-correlated assets with each other can make good things happen. The catch being that you started at 1978, which leaves out the stock and bond bear market of the 70s from the data. I would go back to at least 1974 (after golds first correction after the price discovery) to get a little bit better data including the bond and stock bear market, and also click the "inflation adjusted returns" if it's not selected to see the full picture. The one thing I really like about portfolio charts vs portfolio visualizer is that it weights each potential start date equally, so it doesn't have start date bias. It also shows all data in real inflation adjusted terms, which makes a lot more sense.
True, I guess I should spend some more time on portfolio charts. I've gotten a lot more comfortable with the interface on portfolio visualizer.

pward
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Re: How to factor for market crashes to stay "on-track"?

Post by pward » Tue Mar 26, 2019 5:53 pm

DonIce wrote:
Tue Mar 26, 2019 5:44 pm
pward wrote:
Tue Mar 26, 2019 5:24 pm
There is indeed more than one way to get a great return with minimum drawdowns and time to recover. Placing volatile non-correlated assets with each other can make good things happen. The catch being that you started at 1978, which leaves out the stock and bond bear market of the 70s from the data. I would go back to at least 1974 (after golds first correction after the price discovery) to get a little bit better data including the bond and stock bear market, and also click the "inflation adjusted returns" if it's not selected to see the full picture. The one thing I really like about portfolio charts vs portfolio visualizer is that it weights each potential start date equally, so it doesn't have start date bias. It also shows all data in real inflation adjusted terms, which makes a lot more sense.
True, I guess I should spend some more time on portfolio charts. I've gotten a lot more comfortable with the interface on portfolio visualizer.
Yeah I use both, as well as the Simba spreadsheet. They all are great tools. But the more I've gotten to know the calculators on portfolio charts the more fond of it I've grown. There's a lot of nuance missing when you only look at total return, CAGR, st. dev., and max drawdown in isolation. That doesn't really give you a true feel for what it would have been like to invest in the portfolio year after year. You really can get a feel for what it was like to be a real investor in those portfolios over the years with the combined tools at portfolio charts.

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BogleMelon
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Re: How to factor for market crashes to stay "on-track"?

Post by BogleMelon » Wed Mar 27, 2019 7:51 am

nisiprius wrote:
Tue Mar 26, 2019 5:20 pm
Stuff happens. The stock market is risky. It may be a calculated risk, it may be an acceptable risk, it may be a risk that most retirement savers should be willing to take, there may not be anything better--but there is a risk. Either you accept it or you don't.

What being risky means is that there are market conditions which can put you off track--permanently.

To believe anything else is to believe that stocks are not actually risky as a retirement savings vehicle.

They are risky. They are risky in "the long run." They are definitely risk over the time periods during which you are saving for retirement.

It should be noted that although the title of Jeremy Siegel's book is Stocks for the Long Run, there are several things he did not say. He did not say that stocks are not risky in the long run. And he did not say that stocks become less risky over long holding times. All he said was that if you hold stocks for a long period of time, there is enough mean reversion that the risk over longer periods of time is partly offset by mean reversion. Over longer and longer holding periods, stock risk grows; it just doesn't grow as quickly as it would grow if stocks were a random walk.

There is no "track." There is no guarantee of "staying on track." To believe that there is always a way to get back on track is to believe that there is a way of eliminating the risk of stocks.
Very wise and well put together! I always appreciate your comments. Thank you :beer
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

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Re: How to factor for market crashes to stay "on-track"?

Post by tennisplyr » Wed Mar 27, 2019 6:46 pm

This calculator lets you simulate market crashes....supposedly.

www.retirementsimulation.com
Those who move forward with a happy spirit will find that things always work out.

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Re: How to factor for market crashes to stay "on-track"?

Post by MotoTrojan » Wed Mar 27, 2019 7:22 pm

A crash for a 40 year old could be followed by a monster bull that ends up netting 7% CAGR from the pre-crash peak. That would be a far better situation than stable 3% CAGR with no crash. It is even better than stable 7% CAGR with no crash (during the crash you got to buy more shares for you same savings rate).

Nobody knows anything. Save as much as you can and you'll do as best as you can.

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Re: How to factor for market crashes to stay "on-track"?

Post by pward » Wed Mar 27, 2019 7:41 pm

MotoTrojan wrote:
Wed Mar 27, 2019 7:22 pm
A crash for a 40 year old could be followed by a monster bull that ends up netting 7% CAGR from the pre-crash peak. That would be a far better situation than stable 3% CAGR with no crash. It is even better than stable 7% CAGR with no crash (during the crash you got to buy more shares for you same savings rate).

Nobody knows anything. Save as much as you can and you'll do as best as you can.
Key word "could". Results may vary. After the 1929 peak the Dow did not hit a new high for 25 years. It's better to be prepared and diversified than sorry, imo. Because you are very correct, nobody knows anything, thus anything can happen.

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Re: How to factor for market crashes to stay "on-track"?

Post by arcticpineapplecorp. » Wed Mar 27, 2019 7:43 pm

Read this article by Don MacDonald titled, "Bears Aren't So Bad":

https://www.realinvestingjournal.com/re ... 3A51%3A00Z
Mark Hulbert from Marketwatch recently crunched the numbers for US equities since 1900 and found that it hasn’t taken as long as many believed to recover from bear markets in the past.

He looked back at the 36 bear markets since 1900 (118 years) taking into account both dividends and inflation to determine how long it took the stock market to recover back to its pre-bear market high.

He was shocked to discover that the average recovery time for those three dozen bear markets was just 3.2 years. And, bear in mind, that was the average.

When he calculated the median recovery time (that is the number halfway between the longest recovery and the shortest) it was a hair less than two years.

Yes, but what about that nasty worst case historic scenario? Not anywhere near the horrible terms bandied about by desperate salespeople who neglect to add in dividends. Even after adjusting for the negative effects of inflation, the longest time a past investor would have ever had to wait to get back to the previous market was 5.4 years. Most of you have already survived the worst, as that worst case recovery was from October of 2007 to March of 2013....

That 5.4 year recovery period was for a portfolio of 100% US stocks. A properly balanced portfolio would have recovered faster.

source:
https://www.realinvestingjournal.com/re ... 3A51%3A00Z
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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Re: How to factor for market crashes to stay "on-track"?

Post by arcticpineapplecorp. » Wed Mar 27, 2019 7:48 pm

pward wrote:
Wed Mar 27, 2019 7:41 pm
Key word "could". Results may vary. After the 1929 peak the Dow did not hit a new high for 25 years. It's better to be prepared and diversified than sorry, imo. Because you are very correct, nobody knows anything, thus anything can happen.
New high on the Dow? You realize the Dow doesn't take into consideration the reinvestment of dividends? It's merely a price chart. Not a GROWTH chart, which is what matters. The Dow stocks paid dividends (some healthy double digit years) in some of those years. In addition, we had deflation, not inflation following the great depression which meant prices went down (value of dollars went up). Read more here ("The Road Back From the '29 Crash Wasn't So Bad Afterall") by Mark Hulbert for the NY Times:

https://www.nytimes.com/2009/04/26/your ... 6stra.html

Stop worrying about the Dow. It's a worthless measure. Here's why (NPR planet money stories, multiple):

https://www.google.com/search?client=fi ... ngless+NPR
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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Re: How to factor for market crashes to stay "on-track"?

Post by iamlucky13 » Wed Mar 27, 2019 7:51 pm

BogleMelon wrote:
Tue Mar 26, 2019 1:17 pm
What happens if the market dropped this year and your $76,000 became $30,000? Or what if 10 years from now the same happened and your $200,000 became $100,000? Will the $2000/mo still be enough?
If my track was based on having $76,000 at that point in time, I would be off-track.

But I don't measure my track based on market extremes at single, present points in time. I measure it based on anticipated savings value at a future point in time, based on the lower end of historical market returns projected over my accumulation phase. What market returns I should count on is something I honestly need to revisit in more detail in the near future, but my ideal would probably be to navigate a track with a 90% success rate based on historical data for retiring without a decrease in quality of life.

That future savings level is itself based on the lower end of historical returns projected over my drawdown phase, at a lower rate of return based on holding less volatile investments.

In this context recessions and bubbles are mostly noise in the data, aside from the fact that I also need to incorporate a buffer to deal with the fact that during recessions, my withdrawals will consume a higher percentage of my portfolio than planned.

If I end up off track in the long run, I will have to switch to a different track that involves lower spending and/or a later retirement.

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Re: How to factor for market crashes to stay "on-track"?

Post by arcticpineapplecorp. » Wed Mar 27, 2019 7:52 pm

Always be prepared for "crashes" or" corrections". They happen more often then you think. The good news is crashes usually pave the way for the next stage of recovery and/or growth. Look at all the corrections that occurred during some of the greatest returns in market history (1980-1999) and beyond:

Image

source: https://am.jpmorgan.com/blob-gim/138340 ... cale=en_US
Last edited by arcticpineapplecorp. on Wed Mar 27, 2019 7:52 pm, edited 1 time in total.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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Re: How to factor for market crashes to stay "on-track"?

Post by pward » Wed Mar 27, 2019 7:52 pm

arcticpineapplecorp. wrote:
Wed Mar 27, 2019 7:48 pm
pward wrote:
Wed Mar 27, 2019 7:41 pm
Key word "could". Results may vary. After the 1929 peak the Dow did not hit a new high for 25 years. It's better to be prepared and diversified than sorry, imo. Because you are very correct, nobody knows anything, thus anything can happen.
New high on the Dow? You realize the Dow doesn't take into consideration the reinvestment of dividends? It's merely a price chart. Not a GROWTH chart, which is what matters. The Dow stocks paid dividends (some healthy double digit years) in some of those years. In addition, we had deflation, not inflation following the great depression which meant prices went down (value of dollars went up). Read more here ("The Road Back From the '29 Crash Wasn't So Bad Afterall") by Mark Hulbert for the NY Times:

https://www.nytimes.com/2009/04/26/your ... 6stra.html

Stop worrying about the Dow. It's a worthless measure. Here's why (NPR planet money stories, multiple):

https://www.google.com/search?client=fi ... ngless+NPR
I don't worry about the Dow these days. But it was the best measurement we had in the 1930's.

Also, before you even begin to say anything about the Great Depression "not being so bad" you should read this free e-book from Ray Dalio on debt crisis that does an in depth study into the Great Depression as well as a few other dept crisis. There's no amount of fluff in the world that can minimize the great depression. It really was that bad after all: https://www.bridgewater.com/big-debt-crises/

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arcticpineapplecorp.
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Re: How to factor for market crashes to stay "on-track"?

Post by arcticpineapplecorp. » Wed Mar 27, 2019 7:54 pm

pward wrote:
Wed Mar 27, 2019 7:52 pm
arcticpineapplecorp. wrote:
Wed Mar 27, 2019 7:48 pm
pward wrote:
Wed Mar 27, 2019 7:41 pm
Key word "could". Results may vary. After the 1929 peak the Dow did not hit a new high for 25 years. It's better to be prepared and diversified than sorry, imo. Because you are very correct, nobody knows anything, thus anything can happen.
New high on the Dow? You realize the Dow doesn't take into consideration the reinvestment of dividends? It's merely a price chart. Not a GROWTH chart, which is what matters. The Dow stocks paid dividends (some healthy double digit years) in some of those years. In addition, we had deflation, not inflation following the great depression which meant prices went down (value of dollars went up). Read more here ("The Road Back From the '29 Crash Wasn't So Bad Afterall") by Mark Hulbert for the NY Times:

https://www.nytimes.com/2009/04/26/your ... 6stra.html

Stop worrying about the Dow. It's a worthless measure. Here's why (NPR planet money stories, multiple):

https://www.google.com/search?client=fi ... ngless+NPR
I don't worry about the Dow these days. But it was the best measurement we had in the 1930's.

Also, before you even begin to say anything about the Great Depression "not being so bad" you should read this free e-book from Ray Dalio on debt crisis that does an in depth study into the Great Depression as well as a few other dept crisis. Needless to say, it really was that bad after all: https://www.bridgewater.com/big-debt-crises/
thanks. will have a look see. it will take me a while to get back to you. The pdf is 480 pages and I'm still in the middle of reading Zweig's "Your Money and Your Brain", so it'll have to go in the que as they say.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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