Increase stocks during bear market?

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ThankYouJack
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Increase stocks during bear market?

Post by ThankYouJack » Tue Aug 06, 2019 7:58 am

This seems too simple to be advantageous, but what if one holds 70% socks. After a 20% drop they change to 90% stocks. Once the market gets back to the previous high, they switch back to 70% stocks. I can't see why they wouldn't come out ahead in that approach than just keeping a constant 70/30 allocation.

What are the obvious flaws that I'm missing in this approach?

Silk McCue
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Re: Increase stocks during bear market?

Post by Silk McCue » Tue Aug 06, 2019 8:03 am

That's just market timing and wishful thinking. Rebalancing according to your IPS is the right thing to do.

Going to a higher Equity allocation is just gambling.

Cheers
Last edited by Silk McCue on Tue Aug 06, 2019 9:34 am, edited 1 time in total.

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cheese_breath
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Re: Increase stocks during bear market?

Post by cheese_breath » Tue Aug 06, 2019 8:16 am

If the market drops 20% you no longer hold 70% stocks. Just rebalance back to 70% and be satisfied with it.
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asif408
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Re: Increase stocks during bear market?

Post by asif408 » Tue Aug 06, 2019 8:28 am

What if after the 20% drop, you bump up to 90% then it drops another 20%. Do you do it again? And if so, and it drops another 20%, do you do it again?

This is not a theoretical exercise, it happened in the 2000-2002 bear market. And it didn't reach the high again until 2007. In the 2007-2009 bear market, losses were even greater, but the recovery was slightly faster (by 2013). My understanding is that in the 1929-1932 bear market your suggested strategy would have nearly wiped out all your money, and required a decade or two to recover. I don't think most people have the patience or intestinal fortitude to deal with that, but maybe you do.

You just have to be ready to be very patient (as in waiting at least 5-10 years, and possibly more) and not mind dumping money down the toilet for a few years if you're going to try what you are suggesting.

wolf359
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Re: Increase stocks during bear market?

Post by wolf359 » Tue Aug 06, 2019 8:44 am

This is called "tactical asset allocation." You can google it and see lots of discussions on it and experiences of people trying it.

It makes sense, just like the concept of market timing. In fact, it IS a form of market timing.

Buy low, sell high. What can go wrong?

The problem is that it is extremely difficult to implement in practice. It is hard to tell when you are high and when you are low. If you are low, and you have just adjusted to a higher "risk-on" stance, what happens if the market drops by half again? Read some of the 2008 threads for examples of the fear and uncertainty that was occurring.

It can work if you have a solid income throughout the period in question, but if you've just lost your job, your house is underwater, your industry is collapsing, and major companies are going out of business, it's very difficult to get rid of your bonds (the only thing holding steady) and buy stocks (which have massive losses and no end in sight.)

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ThankYouJack
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Re: Increase stocks during bear market?

Post by ThankYouJack » Tue Aug 06, 2019 8:57 am

Thanks all. If the market dropped again by 20%, I would just hold at 90% stocks and be happy buying extra stocks while they're on "sale". Also, I would have concrete numbers when to shift - right at the first 20% drop, shift to 90% stocks, right when it gets back to the previous high, shift to 70% stocks.

Am I actually going to do this, probably not.
wolf359 wrote:
Tue Aug 06, 2019 8:44 am
This is called "tactical asset allocation." You can google it and see lots of discussions on it and experiences of people trying it.

It makes sense, just like the concept of market timing. In fact, it IS a form of market timing.

Buy low, sell high. What can go wrong?

The problem is that it is extremely difficult to implement in practice. It is hard to tell when you are high and when you are low. If you are low, and you have just adjusted to a higher "risk-on" stance, what happens if the market drops by half again? Read some of the 2008 threads for examples of the fear and uncertainty that was occurring.

It can work if you have a solid income throughout the period in question, but if you've just lost your job, your house is underwater, your industry is collapsing, and major companies are going out of business, it's very difficult to get rid of your bonds (the only thing holding steady) and buy stocks (which have massive losses and no end in sight.)
Great post. We've had solid income and job security, no debt and we could take on more risk if we wanted. Would I be willing to do it in a bear market? I'm not sure, probably not. But was still curious about some of the positives and negatives with it.

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Sandtrap
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Re: Increase stocks during bear market?

Post by Sandtrap » Tue Aug 06, 2019 9:13 am

ThankYouJack wrote:
Tue Aug 06, 2019 7:58 am
This seems too simple to be advantageous, but what if one holds 70% socks. After a 20% drop they change to 90% stocks. Once the market gets back to the previous high, they switch back to 70% stocks. I can't see why they wouldn't come out ahead in that approach than just keeping a constant 70/30 allocation.

What are the obvious flaws that I'm missing in this approach?
There's an in depth study of this in William Bernstein's "Rational Expectations".
https://smile.amazon.com/Rational-Expec ... 192&sr=8-1
Rebalancing is more about controlling risk than maximizing returns . . . over the long haul.

You are correct, there are no large flaws.
And, yes, depending on the data used, letting the allocation "ride out" the storm can result in an increase.
The problem, on a practical application basis, is behavioral. How many can indeed ride out a heavy storm when thier portfolio value falls to the ground.

Highly suggest you read Bernstein's work on this. (tiny book).
j
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ThankYouJack
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Re: Increase stocks during bear market?

Post by ThankYouJack » Tue Aug 06, 2019 12:38 pm

Sandtrap wrote:
Tue Aug 06, 2019 9:13 am
ThankYouJack wrote:
Tue Aug 06, 2019 7:58 am
This seems too simple to be advantageous, but what if one holds 70% socks. After a 20% drop they change to 90% stocks. Once the market gets back to the previous high, they switch back to 70% stocks. I can't see why they wouldn't come out ahead in that approach than just keeping a constant 70/30 allocation.

What are the obvious flaws that I'm missing in this approach?
There's an in depth study of this in William Bernstein's "Rational Expectations".
https://smile.amazon.com/Rational-Expec ... 192&sr=8-1
Rebalancing is more about controlling risk than maximizing returns . . . over the long haul.

You are correct, there are no large flaws.
And, yes, depending on the data used, letting the allocation "ride out" the storm can result in an increase.
The problem, on a practical application basis, is behavioral. How many can indeed ride out a heavy storm when thier portfolio value falls to the ground.

Highly suggest you read Bernstein's work on this. (tiny book).
j
Thanks, I'll add it to my reading list.

I can see why shifting AA doesn't make sense because it's similar to keeping dry powder. Part of me wants to become more aggressive with my AA, but I
want to wait until a bear market to make sure I still feel the same then :) I guess if I do feel the same, I'll post back to see what people recommend in terms of a good asset allocation

livesoft
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Re: Increase stocks during bear market?

Post by livesoft » Tue Aug 06, 2019 12:45 pm

An extra 20% in stocks when stocks go up 10% gooses one's return by 2% provided bonds stay flat. The spread of performances of regular ol' 60/40 portfolios is around 2% as evidenced by the YTD returns of the following 60/40 balanced funds: VSMGX, VBIAX, DGSIX. Of course, that's in a perfect world, so say one's timing and the market gives one only 50% of max possible. Then the goosing just becomes 1%. That 1% could be in the noise level of performances, so no one will believe that changing AA does anything. We had a discussion about all this in this past thread:
What does 20% extra of portfolios allocated to equities get you?

So given the OP's scenario and similar scenarios, it has to come true because otherwise no one would advocate for higher equity allocations for the higher possible performances. People can hand-wave all they want about gambling, market timing, or whatever, but it does work. Just don't expect to make a big killing in performance by doing it.

It is NOT the same as this "dry powder" thing because presumably one moves bond fund money to equities and not idle cash sitting around.
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Topic Author
ThankYouJack
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Re: Increase stocks during bear market?

Post by ThankYouJack » Tue Aug 06, 2019 1:50 pm

livesoft wrote:
Tue Aug 06, 2019 12:45 pm

It is NOT the same as this "dry powder" thing because presumably one moves bond fund money to equities and not idle cash sitting around.
But by shifting your AA you essentially have extra bond fund money sitting around. So I wouldn't consider it a cash reserve, but a bond reserve.

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firebirdparts
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Re: Increase stocks during bear market?

Post by firebirdparts » Tue Aug 06, 2019 2:08 pm

This is just ordinary market timing. It seems like it should work, but believe me, everybody else has certainly thought of it.

Maintaining a constant asset allocation is similar, of course. Rebalancing a quality low cost 2 or 3 fund portfolio works pretty darn well. If you backtest, one thing you'll see about a constant asset allocation is that you don't want to rebalance too fast. The big moves in the market take a few months, and so you may find that people here study that and the results of it are pretty consistent. Once a month is considered fast. Like last fall, the market fell 20% and it took 3 months. Obviously, with hindsight, you'd buy at the bottom, but you can't use hindsight. In the moment, you just have to be satisfied to rebalance once a quarter and take some of the pie. When the market recovered, that also took a few months. I assume the same would apply to tactical asset allocation.

There has been a lot of discussion here about using leverage to make more money whilst rebalancing to a constant AA. PV also supports the idea of target volatility and risk parity rather than constant AA. It remains to be seen whether these strategies are best, but they all do work without using a crystal ball.
Last edited by firebirdparts on Tue Aug 06, 2019 2:16 pm, edited 1 time in total.
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jdilla1107
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Re: Increase stocks during bear market?

Post by jdilla1107 » Tue Aug 06, 2019 2:11 pm

The flaw is that it would have been "better" (following your definition of better) to just have been 90% equities the whole time.

Let's say 2 years pass from when you shift from 70/30 to 90/10. Are you really going to say to yourself: "That day two years ago was a really special day that I need to anchor myself to". When does the anchor point change?

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firebirdparts
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Re: Increase stocks during bear market?

Post by firebirdparts » Tue Aug 06, 2019 2:27 pm

I was 100% equities in 2000 and 2008, all the way down. I do see that having something like a 60/40 allocation would have put me way ahead for a long, long 15 years. That's a long time. However, 100% stocks would have taken the lead and stocks are ahead today. FWIW.
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Lee_WSP
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Re: Increase stocks during bear market?

Post by Lee_WSP » Tue Aug 06, 2019 4:08 pm

jdilla1107 wrote:
Tue Aug 06, 2019 2:11 pm
The flaw is that it would have been "better" (following your definition of better) to just have been 90% equities the whole time.

Let's say 2 years pass from when you shift from 70/30 to 90/10. Are you really going to say to yourself: "That day two years ago was a really special day that I need to anchor myself to". When does the anchor point change?
I was going to quote wolf 329 and say you need to be correct twice as Bogle said, but this answer is even better.

pdavi21
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Re: Increase stocks during bear market?

Post by pdavi21 » Tue Aug 06, 2019 4:38 pm

Yes. It's a good plan although there a major flaws you've alluded to.

Your idea is that when you consider stocks to generally be trading significantly below their fair value, you would consider them less risky and want to hold more.

There are two main direct risks here. Assuming your preferred stock allocation is around 75-80%, One risk is staying at 70% while the market explodes higher. Another is ratcheting up to 90% too early and compounding your losses.

There are many indirect risks here as well. One is Psychological risk. You are more likely to change your strategy or implement it incorrectly if it includes subjectivity (when is the market undervalued?). Another is the the risk of being forced to sell stocks low due to other factors (layoff, etc) after you have increased to 90%.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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