Preparing for a down market

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ER2023
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Preparing for a down market

Post by ER2023 » Fri Nov 15, 2019 7:48 pm

I’m reading how a bear market reduces your portfolio by at least 20%, on average by 33%, and the worst (in recent history during 2007-2009) by 57%. If it takes 25 months to recover from a typical bear market, and 49 months to recover from the 2007-2009 bear, my questions are:
  • Do you keep enough cash in your portfolio specifically to cover your withdraws during a down market?
      If so, do you use the numbers above - for example, should a portfolio have enough cash to cover your expenses for at least 25 months, and ideally 49 months - so you don’t touch your retirement accounts until it recovers?
        If you do plan to use cash when the market drops, how do you plan for it? For example, do you have a specific number in mind, say 20%, that if the market drops by that much you then use your cash for expenses?
          If this is the plan, how do you structure your cash - for example is this a good use of CD laddering?
            Lastly, is the cash allocated for this separate from your emergency fund?

          livesoft
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          Re: Preparing for a down market

          Post by livesoft » Fri Nov 15, 2019 7:53 pm

          No cash, but my portfolio has bond funds, so not 100% equities. If the market drops, I sell bond fund shares and buy equity fund shares to maintain my desired asset allocation which is about 60% equities and 40% bonds. Bond funds should not drop by more than few percent, so if 60% of my portfolio drops by 50%, then my total portfolio would drop only about 30% which is really no big deal.

          Also don't forget that equity funds drop about 10% or so every single year.

          Once again no cash since I want to be prepared for an up market which happens more often than a down market.
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          retired@50
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          Re: Preparing for a down market

          Post by retired@50 » Fri Nov 15, 2019 8:02 pm

          I feel like a sissy compared to livesoft, I keep about two years worth of expenses in cash. I periodically sell, or use dividends, to keep my cash in my comfort range. I would do my best to cut expenses if needed to avoid selling stocks in a down market.

          Regards,

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          Stinky
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          Re: Preparing for a down market

          Post by Stinky » Fri Nov 15, 2019 8:12 pm

          I keep minimal cash.

          But bond funds are available for draw down as needed.
          It's a GREAT day to be alive - Travis Tritt

          GoldenFinch
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          Re: Preparing for a down market

          Post by GoldenFinch » Fri Nov 15, 2019 8:13 pm

          I think Taylor Larimore often quotes someone (I’m not sure who) who says more money is lost preparing for bear markets than is lost in actual bear markets. I’ve found that to be true for me, so I just stick to my general plan of putting X amount of money in every month automatically so I don’t have to think about it. If we were retired I would just scale back our asset allocation to have a bit more bonds, but otherwise I would not hold cash waiting for a drop.

          zengolf2011
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          Re: Preparing for a down market

          Post by zengolf2011 » Fri Nov 15, 2019 8:15 pm

          Like livesoft, I keep a substantial allocation in bonds -- intermediate-term bonds for me. Like retired@50, I keep two years of expenses in cash equivalents. But I also keep three years of expenses in short-term bonds, as recommended by Jane Bryant Quinn. I'm in the decumulation phase, so sequence of returns risk is a big concern. I imagine Taylor's quote is true, but knowing I can weather a five-year bear market greatly improves my sleep and personal ability to stick with my plan.

          averagedude
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          Re: Preparing for a down market

          Post by averagedude » Fri Nov 15, 2019 8:52 pm

          GoldenFinch wrote:
          Fri Nov 15, 2019 8:13 pm
          I think Taylor Larimore often quotes someone (I’m not sure who) who says more money is lost preparing for bear markets than is lost in actual bear markets. I’ve found that to be true for me, so I just stick to my general plan of putting X amount of money in every month automatically so I don’t have to think about it. If we were retired I would just scale back our asset allocation to have a bit more bonds, but otherwise I would not hold cash waiting for a drop.
          I agree with this quote and it is Peter Lynch who said this.

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          TheAccountant
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          Re: Preparing for a down market

          Post by TheAccountant » Fri Nov 15, 2019 9:17 pm

          Portfolio wise I don’t do anything other than make sure my asset allocation is in line with my investment goals.
          Making cents out of every dollar.

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          1789
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          Re: Preparing for a down market

          Post by 1789 » Fri Nov 15, 2019 9:30 pm

          I haven't seen a strong down turn or crash down to 50% yet. We are 35 years old couple and hold around 10% bonds. We include 6 months of expenses in cash and we are on the way to increase this upto 1 year. I really want to have cash upto 2 years if possible . This cash is not included in out AA model and it consists of 2 parts: emergency fund and some money for no specific goal. I think if things go very bad we will use 2nd portion either to pull it out for expenses or use it to buy more stocks. Assumption (or hope) is that we don't lose our jobs which can happen ofc. If it happens then all portions of this cash will be used.
          "My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)

          KlangFool
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          Re: Preparing for a down market

          Post by KlangFool » Fri Nov 15, 2019 9:41 pm

          OP,

          1) I have 1 1/2 years of expense in my emergency fund.

          2) My plan is to never rebalance below 5 years of expense in fixed income.

          3) My AA is 60/40.

          4) Realistically, I see money as the least of my problem if the recession lasted more than 4 years. I will move on to my plan B, C, and D way before that.

          KlangFool

          J295
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          Re: Preparing for a down market

          Post by J295 » Fri Nov 15, 2019 10:04 pm

          Our allocation, including cash, was dependent upon our life situation. It is materially different in retirement than it was when I was working full-time.

          Wish I could be of more help, but like most things I supposed to real answer is, for you, “it depends.”

          Prettyfrtnt
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          Re: Preparing for a down market

          Post by Prettyfrtnt » Fri Nov 15, 2019 10:18 pm

          KlangFool wrote:
          Fri Nov 15, 2019 9:41 pm
          OP,

          1) I have 1 1/2 years of expense in my emergency fund.

          2) My plan is to never rebalance below 5 years of expense in fixed income.

          3) My AA is 60/40.

          4) Realistically, I see money as the least of my problem if the recession lasted more than 4 years. I will move on to my plan B, C, and D way before that.

          KlangFool
          What is Klangfools B,C, or D options in a severe 5 year plus once in a century type financial explosion?

          KlangFool
          Posts: 14167
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          Re: Preparing for a down market

          Post by KlangFool » Fri Nov 15, 2019 10:28 pm

          Prettyfrtnt wrote:
          Fri Nov 15, 2019 10:18 pm
          KlangFool wrote:
          Fri Nov 15, 2019 9:41 pm
          OP,

          1) I have 1 1/2 years of expense in my emergency fund.

          2) My plan is to never rebalance below 5 years of expense in fixed income.

          3) My AA is 60/40.

          4) Realistically, I see money as the least of my problem if the recession lasted more than 4 years. I will move on to my plan B, C, and D way before that.

          KlangFool
          What is Klangfools B,C, or D options in a severe 5 year plus once in a century type financial explosion?
          B) Food and water in the pantry.

          C) Cash on hand

          D) Use Gold jewelry to get myself and my family to someplace safe.

          <<once in a century type financial explosion?>.

          1) The Asian Currency Crisis was bad enough in those Asian countries. And, it was not long ago.

          2) Capital Area Foodbank is supplying food to about 10% of the DC population now. Officially, we are not in a recession yet.

          https://www.capitalareafoodbank.org/about-us/

          <<Together, we provide 30 million meals to almost half a million area residents, every year.>>

          KlangFool

          MathIsMyWayr
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          Re: Preparing for a down market

          Post by MathIsMyWayr » Fri Nov 15, 2019 11:25 pm

          To review finances (expenses vs. income) and get ready for serious Roth conversion.

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          willthrill81
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          Re: Preparing for a down market

          Post by willthrill81 » Sat Nov 16, 2019 1:11 am

          Burning through cash in order to avoid selling stock or bonds is market timing, plain and simple. Being a timer myself, I don't have an inherent problem with it, but I'm not sure that such a strategy is a very good one. Most such strategies I've seen did not backtest well at all; a fixed allocation has generally been superior in terms of maximizing long-term wealth.

          I'm not a big cash proponent, although I must admit that high-yield savings accounts aren't paying much less than TBM these days. I believe that a CD ladder and TIPS are at least as useful as short- and intermediate-term bonds.

          But when it comes to counter-balancing stocks, long-term Treasuries are hard to beat. Many don't like their volatility, but they have actually been better at reducing portfolio volatility, which is what really matters, than shorter term bonds.
          “It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

          Darwin
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          Re: Preparing for a down market

          Post by Darwin » Sat Nov 16, 2019 1:43 am

          KlangFool wrote:
          Fri Nov 15, 2019 10:28 pm
          Prettyfrtnt wrote:
          Fri Nov 15, 2019 10:18 pm
          KlangFool wrote:
          Fri Nov 15, 2019 9:41 pm
          OP,

          1) I have 1 1/2 years of expense in my emergency fund.

          2) My plan is to never rebalance below 5 years of expense in fixed income.

          3) My AA is 60/40.

          4) Realistically, I see money as the least of my problem if the recession lasted more than 4 years. I will move on to my plan B, C, and D way before that.

          KlangFool
          What is Klangfools B,C, or D options in a severe 5 year plus once in a century type financial explosion?
          B) Food and water in the pantry.

          C) Cash on hand

          D) Use Gold jewelry to get myself and my family to someplace safe.

          <<once in a century type financial explosion?>.

          1) The Asian Currency Crisis was bad enough in those Asian countries. And, it was not long ago.

          2) Capital Area Foodbank is supplying food to about 10% of the DC population now. Officially, we are not in a recession yet.

          https://www.capitalareafoodbank.org/about-us/

          <<Together, we provide 30 million meals to almost half a million area residents, every year.>>

          KlangFool
          I think this philosophy could be called "you cope". Something that gets forgotten quite often is that, ultimately, if the s____ hits the fan, we'll have a lot of company. The best we can do is not be needlessly foolish.
          No planet, no business. Earth bats last.

          MathIsMyWayr
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          Re: Preparing for a down market

          Post by MathIsMyWayr » Sat Nov 16, 2019 7:03 am

          willthrill81 wrote:
          Sat Nov 16, 2019 1:11 am
          Burning through cash in order to avoid selling stock or bonds is market timing, plain and simple. Being a timer myself, I don't have an inherent problem with it, but I'm not sure that such a strategy is a very good one. Most such strategies I've seen did not backtest well at all; a fixed allocation has generally been superior in terms of maximizing long-term wealth.
          If we include cash as a part of asset, why not?, the relative value of cash increases in a down market. You advocate maintaining a fixed allocation (last statement). We achieve it by selling appreciated asset, i.e., cash, aka burning cash (first statement). However, you condemn burning cash as a capital offense in investing "market timing, plain and simple." Isn't there a self-contradicting fault in logic?

          KlangFool
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          Re: Preparing for a down market

          Post by KlangFool » Sat Nov 16, 2019 7:10 am

          Folks,

          Cash is an asset class too. It hedges against deflation.

          Diversification is the best defense.

          KlangFool

          GoldenFinch
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          Re: Preparing for a down market

          Post by GoldenFinch » Sat Nov 16, 2019 7:23 am

          averagedude wrote:
          Fri Nov 15, 2019 8:52 pm
          GoldenFinch wrote:
          Fri Nov 15, 2019 8:13 pm
          I think Taylor Larimore often quotes someone (I’m not sure who) who says more money is lost preparing for bear markets than is lost in actual bear markets. I’ve found that to be true for me, so I just stick to my general plan of putting X amount of money in every month automatically so I don’t have to think about it. If we were retired I would just scale back our asset allocation to have a bit more bonds, but otherwise I would not hold cash waiting for a drop.
          I agree with this quote and it is Peter Lynch who said this.
          Thank you! :happy

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          JoeRetire
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          Re: Preparing for a down market

          Post by JoeRetire » Sat Nov 16, 2019 7:27 am

          ER2023 wrote:
          Fri Nov 15, 2019 7:48 pm

          Do you keep enough cash in your portfolio specifically to cover your withdraws during a down market?
          I do.
          If so, do you use the numbers above - for example, should a portfolio have enough cash to cover your expenses for at least 25 months, and ideally 49 months - so you don’t touch your retirement accounts until it recovers?
          I keep 2 years worth of expenses in an Ally account.
          Don't be a lemming.

          UpperNwGuy
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          Re: Preparing for a down market

          Post by UpperNwGuy » Sat Nov 16, 2019 7:42 am

          I don't prepare separately for down markets. My asset allocation is based on my willingness to take risk over the long term, and that includes all types of markets (up, down, and sideways). For fixed income, I prefer holding bonds to holding money market funds or certificates of deposit.

          Shallowpockets
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          Re: Preparing for a down market

          Post by Shallowpockets » Sat Nov 16, 2019 7:54 am

          Have enough resources to get you through the 27 months to recover from the down market.
          Pretty simple.
          Suppose you had this attitude of maybe getting out at the start of 2019. You would have missed the 23% rise. Now, if there is something that creates a 40% drop in the market, you lose 40%. If you stayed in the market you only lose 17%.

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          willthrill81
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          Re: Preparing for a down market

          Post by willthrill81 » Sat Nov 16, 2019 10:57 am

          MathIsMyWayr wrote:
          Sat Nov 16, 2019 7:03 am
          willthrill81 wrote:
          Sat Nov 16, 2019 1:11 am
          Burning through cash in order to avoid selling stock or bonds is market timing, plain and simple. Being a timer myself, I don't have an inherent problem with it, but I'm not sure that such a strategy is a very good one. Most such strategies I've seen did not backtest well at all; a fixed allocation has generally been superior in terms of maximizing long-term wealth.
          If we include cash as a part of asset, why not?, the relative value of cash increases in a down market. You advocate maintaining a fixed allocation (last statement). We achieve it by selling appreciated asset, i.e., cash, aka burning cash (first statement). However, you condemn burning cash as a capital offense in investing "market timing, plain and simple." Isn't there a self-contradicting fault in logic?
          Based on the OP's description, my take is that they are planning on spending through all of their cash during a market downturn in order to avoid trying to sell stocks and/or bonds to cover their spending needs. That's a 'dynamic AA' strategy, and it's market timing.
          “It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

          longinvest
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          Re: Preparing for a down market

          Post by longinvest » Sat Nov 16, 2019 11:07 am

          ER2023 wrote:
          Fri Nov 15, 2019 7:48 pm
          I’m reading how a bear market reduces your portfolio by at least 20%, on average by 33%, and the worst (in recent history during 2007-2009) by 57%. If it takes 25 months to recover from a typical bear market, and 49 months to recover from the 2007-2009 bear, my questions are:
          • Do you keep enough cash in your portfolio specifically to cover your withdraws during a down market?
              If so, do you use the numbers above - for example, should a portfolio have enough cash to cover your expenses for at least 25 months, and ideally 49 months - so you don’t touch your retirement accounts until it recovers?
                If you do plan to use cash when the market drops, how do you plan for it? For example, do you have a specific number in mind, say 20%, that if the market drops by that much you then use your cash for expenses?
                  If this is the plan, how do you structure your cash - for example is this a good use of CD laddering?
                    Lastly, is the cash allocated for this separate from your emergency fund?
                  A portfolio fluctuates. Always. There's nothing special to it. One can dampen fluctuations by adopting a portfolio that's broadly-diversified across stocks and bonds, and across domestic and international securities like the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) or the iShares Core Growth Allocation ETF (AOR).

                  Instead of trying to predict the timing and length of future down fluctuations, a retiree can simply adopt a sensible withdrawal method with a balanced portfolio containing both stocks and bonds, and be ready at all times for stocks to lose -50% of their value using the approach illustrated in this thread: A Simple Bogleheads Retirement Using Variable Percentage Withdrawals (VPW Forward Test).
                  Last edited by longinvest on Sat Nov 16, 2019 1:16 pm, edited 2 times in total.
                  Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

                  Lee_WSP
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                  Re: Preparing for a down market

                  Post by Lee_WSP » Sat Nov 16, 2019 12:28 pm

                  If I were retired or near to it, I'd just have an asset allocation that didn't drop to fifty percent. Ten or fifteen percent maximum.

                  Then I'd tax lost harvest my expenses and rebalance back into equities, probably catching the falling knife on the way down.

                  RetireBy55
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                  Re: Preparing for a down market

                  Post by RetireBy55 » Sat Nov 16, 2019 2:08 pm

                  OP - there are plenty of times throughout the history of the market where it took FAR longer than 25 (or even 49) months to recover.

                  You might want to consider this rather sobering chart if you haven't seen it previously:

                  Image

                  Note that the longest recovery period from peak to trough was TWENTY-NINE YEARS.

                  Of course, if that happens again, we're all in a heap of trouble. But I manage my portfolio expecting that we'll probably see another period like the late 60s to early 80s sometime in my lifetime.

                  MotoTrojan
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                  Re: Preparing for a down market

                  Post by MotoTrojan » Sat Nov 16, 2019 2:53 pm

                  The trinity study includes results for retirees with 100% equity. They were able to maintain a 30 year retirement with a 4% inflation adjusted SWR in some of the worst times in history to retire. Selling equities when the market is down isn’t fun, but it isn’t a portfolio bomb either. Toss some bonds in the mix and you can see why having a huge cash pile isn’t really necessary. Just spend dividends and sell to maintain your allocation if you need more.

                  Random Walker
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                  Re: Preparing for a down market

                  Post by Random Walker » Sat Nov 16, 2019 3:03 pm

                  averagedude wrote:
                  Fri Nov 15, 2019 8:52 pm
                  GoldenFinch wrote:
                  Fri Nov 15, 2019 8:13 pm
                  I think Taylor Larimore often quotes someone (I’m not sure who) who says more money is lost preparing for bear markets than is lost in actual bear markets. I’ve found that to be true for me, so I just stick to my general plan of putting X amount of money in every month automatically so I don’t have to think about it. If we were retired I would just scale back our asset allocation to have a bit more bonds, but otherwise I would not hold cash waiting for a drop.
                  I agree with this quote and it is Peter Lynch who said this.
                  I agree too, with a caveat. I started taking risk off the table in 2017 when valuations were high. Obviously I’d have a lot more if I had maintained the same equity allocation. For the individual investor though, the right thing to do is maximize likelihood of achieving reasonable goals, not necessarily maximizing potential terminal wealth. So, depending on stage of investing life, preparing for the next bear can be reasonable approach. I don’t advocate market in and out timing. But do agree with sort of opportunistically unidirectional customizing one’s glide path to the retirement portfolio.

                  Dave

                  Random Walker
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                  Re: Preparing for a down market

                  Post by Random Walker » Sat Nov 16, 2019 3:13 pm

                  RetireBy55 wrote:
                  Sat Nov 16, 2019 2:08 pm
                  OP - there are plenty of times throughout the history of the market where it took FAR longer than 25 (or even 49) months to recover.

                  You might want to consider this rather sobering chart if you haven't seen it previously:

                  Image

                  Note that the longest recovery period from peak to trough was TWENTY-NINE YEARS.

                  Of course, if that happens again, we're all in a heap of trouble. But I manage my portfolio expecting that we'll probably see another period like the late 60s to early 80s sometime in my lifetime.
                  Boy that is an eye opener!

                  Dave

                  MotoTrojan
                  Posts: 6903
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                  Re: Preparing for a down market

                  Post by MotoTrojan » Sat Nov 16, 2019 3:15 pm

                  Random Walker wrote:
                  Sat Nov 16, 2019 3:13 pm
                  RetireBy55 wrote:
                  Sat Nov 16, 2019 2:08 pm
                  OP - there are plenty of times throughout the history of the market where it took FAR longer than 25 (or even 49) months to recover.

                  You might want to consider this rather sobering chart if you haven't seen it previously:

                  Image

                  Note that the longest recovery period from peak to trough was TWENTY-NINE YEARS.

                  Of course, if that happens again, we're all in a heap of trouble. But I manage my portfolio expecting that we'll probably see another period like the late 60s to early 80s sometime in my lifetime.
                  Boy that is an eye opener!

                  Dave
                  People would panic a lot more if we lived in a world without inflation, and this was reflected in nominal portfolio values.

                  Broken Man 1999
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                  Re: Preparing for a down market

                  Post by Broken Man 1999 » Sat Nov 16, 2019 3:18 pm

                  Our retirement portfolio is 50% bonds/bond funds (vast majority in treasuries) and 50% equities (vast majority in index funds).

                  Included in our retirement portfolio is a Vanguard Variable Annuity that could be used if needed. No surrender fees, various options available to receive distributions. Currently majority of VA is in bond fund.

                  We hold no cash, save a bit that is generated and moved to our CU monthly for expenses. We only convert enough to cash for the upcoming month's expenses.

                  I don't foresee (could be totally wrong) having any issue weathering a severe down market.

                  We have $300,000-$315,000 worth of equity we could tap either via mortgage, Reverse Mortgage, HELOC, no mortgage of any type at this time.

                  I SWAN (sleep well at night) with our current AA.

                  Nothing is guaranteed, though.

                  Broken Man 1999
                  “If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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                  willthrill81
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                  Re: Preparing for a down market

                  Post by willthrill81 » Sat Nov 16, 2019 3:20 pm

                  RetireBy55 wrote:
                  Sat Nov 16, 2019 2:08 pm
                  OP - there are plenty of times throughout the history of the market where it took FAR longer than 25 (or even 49) months to recover.

                  You might want to consider this rather sobering chart if you haven't seen it previously:

                  Image

                  Note that the longest recovery period from peak to trough was TWENTY-NINE YEARS.

                  Of course, if that happens again, we're all in a heap of trouble. But I manage my portfolio expecting that we'll probably see another period like the late 60s to early 80s sometime in my lifetime.
                  I'm pretty sure that that chart is wrong. The data from DQYDJ, which include returns of U.S. stocks going back to 1871, indicate that the worst 21 year period had a real return of +0.365%. I'll almost certainly bet that the makers of that graph ignored dividends, which is often a strategy used by those trying to make stocks look worse than they've actually been (e.g. those selling insurance products).

                  EDIT: That graph is definitely wrong. It shows that it took 16 years for stocks to recover from the drawdown falling the drop in the year 2000, but the market fully recovered in real dollars by 2013.
                  Last edited by willthrill81 on Sat Nov 16, 2019 4:19 pm, edited 1 time in total.
                  “It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

                  prioritarian
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                  Re: Preparing for a down market

                  Post by prioritarian » Sat Nov 16, 2019 4:15 pm

                  In this low-inflation "secular stagnation" environment I expect bonds to continue to be negatively correlated with stocks. Given my ~40% bond allocation with a long-treasury tilt, I expect bear markets to be buffered by counter-cyclical treasury bull markets.

                  MotoTrojan
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                  Re: Preparing for a down market

                  Post by MotoTrojan » Sat Nov 16, 2019 4:17 pm

                  prioritarian wrote:
                  Sat Nov 16, 2019 4:15 pm
                  In this low-inflation "secular stagnation" environment I expect bonds to continue to be negatively correlated with stocks. Given my ~40% bond allocation with a long-treasury tilt, I expect bear markets to be buffered by counter-cyclical treasury bull markets.
                  Mind sharing more or pointing to reasons that low inflation would result in negative correlation? Just because there are no strong forces pushing yields up, regardless of equity market conditions?

                  heyyou
                  Posts: 3572
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                  Re: Preparing for a down market

                  Post by heyyou » Sat Nov 16, 2019 4:17 pm

                  Preparing for a down market:

                  Having retired in late 2005, I am a veteran of the 2008 Crash.
                  60/40 allocation and McClung suggests spending from bonds first (10+ years of withdrawals), to buffer the equity sequence risk of retiring near a market high
                  Spending a somewhat fixed percentage (longevity adjusted) of each recent portfolio balance (using RMD % on the entire portfolio)
                  My pension may fail if this 10 year bull market is followed by a 10 year bear market, but not immediately after the initial crash.
                  The bull market has helped me to delay SS to age 70, and SS won't be cut for another 10-15 years.
                  Expenses can be cut as the portfolio value drops further. More than once, I've purchased a used Toyota at just over 100K miles, then driven them another 100K miles.

                  Each of the above is not a sole solution, but the aggregate is. Wasn't a Marine, but their "Evaluate, Adapt, Overcome" can be applied to the topic, as well as the biologists' "Adapt or Perish."

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                  dogagility
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                  Re: Preparing for a down market

                  Post by dogagility » Sat Nov 16, 2019 4:25 pm

                  willthrill81 wrote:
                  Sat Nov 16, 2019 3:20 pm
                  RetireBy55 wrote:
                  Sat Nov 16, 2019 2:08 pm
                  OP - there are plenty of times throughout the history of the market where it took FAR longer than 25 (or even 49) months to recover.
                  You might want to consider this rather sobering chart if you haven't seen it previously:
                  Image
                  Note that the longest recovery period from peak to trough was TWENTY-NINE YEARS.
                  Of course, if that happens again, we're all in a heap of trouble. But I manage my portfolio expecting that we'll probably see another period like the late 60s to early 80s sometime in my lifetime.
                  I'm pretty sure that that chart is wrong. The data from DQYDJ, which include returns of U.S. stocks going back to 1871, indicate that the worst 21 year period had a real return of +0.365%. I'll almost certainly bet that the makers of that graph ignored dividends, which is often a strategy used by those trying to make stocks look worse than they've actually been (e.g. those selling insurance products).
                  EDIT: That graph is definitely wrong. It shows that it took 16 years for stocks to recover from the drawdown falling the drop in the year 2000, but the market fully recovered in real dollars by 2013.
                  Agree. The chart also likely doesn't take into account deflation during the Great Depression.
                  Taking "risk" since 1995.

                  prioritarian
                  Posts: 71
                  Joined: Tue Jul 16, 2019 6:00 pm

                  Re: Preparing for a down market

                  Post by prioritarian » Sat Nov 16, 2019 4:25 pm

                  MotoTrojan wrote:
                  Sat Nov 16, 2019 4:17 pm
                  prioritarian wrote:
                  Sat Nov 16, 2019 4:15 pm
                  In this low-inflation "secular stagnation" environment I expect bonds to continue to be negatively correlated with stocks. Given my ~40% bond allocation with a long-treasury tilt, I expect bear markets to be buffered by counter-cyclical treasury bull markets.
                  Mind sharing more or pointing to reasons that low inflation would result in negative correlation? Just because there are no strong forces pushing yields up, regardless of equity market conditions?
                  Low inflation environments are generally bullish for bonds for obvious reasons.

                  I also see continued unwillingness to address this long-term secular trend in developed economies:

                  Image

                  MotoTrojan
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                  Re: Preparing for a down market

                  Post by MotoTrojan » Sat Nov 16, 2019 4:27 pm

                  prioritarian wrote:
                  Sat Nov 16, 2019 4:25 pm
                  MotoTrojan wrote:
                  Sat Nov 16, 2019 4:17 pm
                  prioritarian wrote:
                  Sat Nov 16, 2019 4:15 pm
                  In this low-inflation "secular stagnation" environment I expect bonds to continue to be negatively correlated with stocks. Given my ~40% bond allocation with a long-treasury tilt, I expect bear markets to be buffered by counter-cyclical treasury bull markets.
                  Mind sharing more or pointing to reasons that low inflation would result in negative correlation? Just because there are no strong forces pushing yields up, regardless of equity market conditions?
                  Low inflation environments are generally bullish for bonds for obvious reasons.

                  I also see continued unwillingness to address this long-term secular trend in developed economies:

                  Image
                  Gotcha. So what you really mean is that bond yields will continue to go down, and because equity generally goes up this will result in negative correlation?

                  prioritarian
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                  Joined: Tue Jul 16, 2019 6:00 pm

                  Re: Preparing for a down market

                  Post by prioritarian » Sat Nov 16, 2019 4:32 pm

                  heyyou wrote:
                  Sat Nov 16, 2019 4:17 pm
                  The bull market has helped me to delay SS to age 70, and SS won't be cut for another 10-15 years.
                  Given the significant percentage of people in the "boomer" cohort that lack adequate savings, I believe the most likely scenario is that SS benefits will increase in coming decades.

                  prioritarian
                  Posts: 71
                  Joined: Tue Jul 16, 2019 6:00 pm

                  Re: Preparing for a down market

                  Post by prioritarian » Sat Nov 16, 2019 4:36 pm

                  MotoTrojan wrote:
                  Sat Nov 16, 2019 4:27 pm
                  Gotcha. So what you really mean is that bond yields will continue to go down, and because equity generally goes up this will result in negative correlation?
                  Yeah...bond yields in the USA are an outlier. I expect them to slowly normalize with the rest of the world in the coming decade or so.

                  PS: I don't think secular stagnation is written in stone but the fiscal and monetary stimulus required to kick us out of low-inflation seems unlikely to me. I hope I'm wrong.

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                  bengal22
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                  Re: Preparing for a down market

                  Post by bengal22 » Sat Nov 16, 2019 5:14 pm

                  I have an asset allocation(55/45) that I can live with through thick or thin. I am 67. I do not keep cash that I won't spend in the next 4 weeks. An emergency fund is a lost opportunity. I have a pension and a spousal SSA until I hit 70. Then I will claim my SSA. During an up market I sell taxable mutual funds to make up difference in expenses and income. I will use the same strategy for a down market. I am ready.
                  "Earn All You Can; Give All You Can; Save All You Can." .... John Wesley

                  MathIsMyWayr
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                  Location: CA

                  Re: Preparing for a down market

                  Post by MathIsMyWayr » Sat Nov 16, 2019 5:23 pm

                  The irony is that a down market is a blessing for savers and a curse for spenders. For a retiree, SS+pension+RMD+dividends/interests from taxable exceed expenses, a down market is not necessarily bad at least for now. For a pre-retiree, a down market offers an opportunity for investing cheap as long as he can keep his job with a steady income.

                  illumination
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                  Re: Preparing for a down market

                  Post by illumination » Sat Nov 16, 2019 5:30 pm

                  I really have been open to the idea that a bad downmarket is around the corner...for the last 10 years. I'm just pointing out how wrong I've been. We've seen 2 bear markets, but the "smart" play would have been to just weather through both of them without trying to time it.

                  There's really not ever going to be a time where you can't make a case for doom and gloom. If the stock market goes into a free fall, the same people will be saying it has further down to go, or any uptick is just a dead cat bounce, etc and not to invest.

                  If you stay on the sidelines for several years waiting for a down market, usually the actual opportunity to get in "cheap" is just not that great anyway versus just staying invested and taking the hit.

                  Trader Joe
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                  Re: Preparing for a down market

                  Post by Trader Joe » Sat Nov 16, 2019 5:33 pm

                  ER2023 wrote:
                  Fri Nov 15, 2019 7:48 pm
                  I’m reading how a bear market reduces your portfolio by at least 20%, on average by 33%, and the worst (in recent history during 2007-2009) by 57%. If it takes 25 months to recover from a typical bear market, and 49 months to recover from the 2007-2009 bear, my questions are:
                  • Do you keep enough cash in your portfolio specifically to cover your withdraws during a down market?
                      If so, do you use the numbers above - for example, should a portfolio have enough cash to cover your expenses for at least 25 months, and ideally 49 months - so you don’t touch your retirement accounts until it recovers?
                        If you do plan to use cash when the market drops, how do you plan for it? For example, do you have a specific number in mind, say 20%, that if the market drops by that much you then use your cash for expenses?
                          If this is the plan, how do you structure your cash - for example is this a good use of CD laddering?
                            Lastly, is the cash allocated for this separate from your emergency fund?
                          For myself, I am well aware of history. Therefore, I have chosen an asset allocation that I can live with, given this historical knowledge.

                          My investment portfolio is very simple. I invest 100% in either VFIAX or VFTAX (they are interchangeable).

                          My emergency fund is parked in VMMXX.

                          I am 100% prepared for anything that comes.

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                          grabiner
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                          Re: Preparing for a down market

                          Post by grabiner » Sat Nov 16, 2019 5:52 pm

                          willthrill81 wrote:
                          Sat Nov 16, 2019 3:20 pm
                          RetireBy55 wrote:
                          Sat Nov 16, 2019 2:08 pm
                          OP - there are plenty of times throughout the history of the market where it took FAR longer than 25 (or even 49) months to recover.

                          You might want to consider this rather sobering chart if you haven't seen it previously:

                          Image

                          Note that the longest recovery period from peak to trough was TWENTY-NINE YEARS.

                          Of course, if that happens again, we're all in a heap of trouble. But I manage my portfolio expecting that we'll probably see another period like the late 60s to early 80s sometime in my lifetime.
                          I'm pretty sure that that chart is wrong. The data from DQYDJ, which include returns of U.S. stocks going back to 1871, indicate that the worst 21 year period had a real return of +0.365%. I'll almost certainly bet that the makers of that graph ignored dividends, which is often a strategy used by those trying to make stocks look worse than they've actually been (e.g. those selling insurance products).
                          Part of the difference is that the graph uses daily or monthly rather than end-of-year returns. The longest end-of-year to end-of-year period in which the US market underperformed inflation is 1966-1982, but the mid-year high in 1965 was not quite reached in 1983, so we have 1966-1989 as a 23-year down market in this chart. The chart does say "total return", which implies that it includes dividends.

                          But it still doesn't check, at least with monthly returns. I used this calculator and couldn't find any month in 1965 with a negative inflation-adjusted return through December 1983, nor even through January 1983. I also get a positive real return from September 1929 through January 1945, which shows as a loss of almost 50% in the table.
                          Wiki David Grabiner

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                          willthrill81
                          Posts: 13991
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                          Re: Preparing for a down market

                          Post by willthrill81 » Sat Nov 16, 2019 5:58 pm

                          grabiner wrote:
                          Sat Nov 16, 2019 5:52 pm
                          willthrill81 wrote:
                          Sat Nov 16, 2019 3:20 pm
                          RetireBy55 wrote:
                          Sat Nov 16, 2019 2:08 pm
                          OP - there are plenty of times throughout the history of the market where it took FAR longer than 25 (or even 49) months to recover.

                          You might want to consider this rather sobering chart if you haven't seen it previously:

                          Image

                          Note that the longest recovery period from peak to trough was TWENTY-NINE YEARS.

                          Of course, if that happens again, we're all in a heap of trouble. But I manage my portfolio expecting that we'll probably see another period like the late 60s to early 80s sometime in my lifetime.
                          I'm pretty sure that that chart is wrong. The data from DQYDJ, which include returns of U.S. stocks going back to 1871, indicate that the worst 21 year period had a real return of +0.365%. I'll almost certainly bet that the makers of that graph ignored dividends, which is often a strategy used by those trying to make stocks look worse than they've actually been (e.g. those selling insurance products).
                          Part of the difference is that the graph uses daily or monthly rather than end-of-year returns. The longest end-of-year to end-of-year period in which the US market underperformed inflation is 1966-1982, but the mid-year high in 1965 was not quite reached in 1983, so we have 1966-1989 as a 23-year down market in this chart. The chart does say "total return", which implies that it includes dividends.

                          But it still doesn't check, at least with monthly returns. I used this calculator and couldn't find any month in 1965 with a negative inflation-adjusted return through December 1983, nor even through January 1983. I also get a positive real return from September 1929 through January 1945, which shows as a loss of almost 50% in the table.
                          Right. The chart says that there were three periods over 20 years long where stocks lagged inflation, but I can only see one. It definitely doesn't pass the sniff test.
                          “It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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                          Will do good
                          Posts: 871
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                          Re: Preparing for a down market

                          Post by Will do good » Sat Nov 16, 2019 6:05 pm

                          grabiner wrote:
                          Sat Nov 16, 2019 5:52 pm
                          willthrill81 wrote:
                          Sat Nov 16, 2019 3:20 pm
                          RetireBy55 wrote:
                          Sat Nov 16, 2019 2:08 pm
                          OP - there are plenty of times throughout the history of the market where it took FAR longer than 25 (or even 49) months to recover.

                          You might want to consider this rather sobering chart if you haven't seen it previously:

                          Image

                          Note that the longest recovery period from peak to trough was TWENTY-NINE YEARS.

                          Of course, if that happens again, we're all in a heap of trouble. But I manage my portfolio expecting that we'll probably see another period like the late 60s to early 80s sometime in my lifetime.
                          I'm pretty sure that that chart is wrong. The data from DQYDJ, which include returns of U.S. stocks going back to 1871, indicate that the worst 21 year period had a real return of +0.365%. I'll almost certainly bet that the makers of that graph ignored dividends, which is often a strategy used by those trying to make stocks look worse than they've actually been (e.g. those selling insurance products).
                          Part of the difference is that the graph uses daily or monthly rather than end-of-year returns. The longest end-of-year to end-of-year period in which the US market underperformed inflation is 1966-1982, but the mid-year high in 1965 was not quite reached in 1983, so we have 1966-1989 as a 23-year down market in this chart. The chart does say "total return", which implies that it includes dividends.

                          But it still doesn't check, at least with monthly returns. I used this calculator and couldn't find any month in 1965 with a negative inflation-adjusted return through December 1983, nor even through January 1983. I also get a positive real return from September 1929 through January 1945, which shows as a loss of almost 50% in the table.
                          That goodness for all the smart kids in BH. Thank you for the fact check.

                          Topic Author
                          ER2023
                          Posts: 100
                          Joined: Mon Jun 24, 2013 10:14 am

                          Re: Preparing for a down market

                          Post by ER2023 » Sun Nov 17, 2019 5:51 am

                          willthrill81 wrote:
                          Sat Nov 16, 2019 1:11 am
                          Burning through cash in order to avoid selling stock or bonds is market timing, plain and simple. Being a timer myself, I don't have an inherent problem with it, but I'm not sure that such a strategy is a very good one. Most such strategies I've seen did not backtest well at all; a fixed allocation has generally been superior in terms of maximizing long-term wealth.

                          I'm not a big cash proponent, although I must admit that high-yield savings accounts aren't paying much less than TBM these days. I believe that a CD ladder and TIPS are at least as useful as short- and intermediate-term bonds.

                          But when it comes to counter-balancing stocks, long-term Treasuries are hard to beat. Many don't like their volatility, but they have actually been better at reducing portfolio volatility, which is what really matters, than shorter term bonds.
                          It never occurred to me this would be considered market timing, but I now understand your point. I have too much in cash right now ($300k+ in CDs), and then my AA is 40/60. It has been my SWAN factor for over 5 years for various reasons, but I certainly lost quite a bit by doing so. Regarding the returns on the cash, I figured it was better to park the money in CDs and HYS - to your point because those accounts are paying somewhat similar to TBM and they are guaranteed returns.
                          Last edited by ER2023 on Sun Nov 17, 2019 6:11 am, edited 1 time in total.

                          sambb
                          Posts: 2607
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                          Re: Preparing for a down market

                          Post by sambb » Sun Nov 17, 2019 6:05 am

                          Fear is interesting. If market drops 60% we would have severe problems in the USA (war, pestilence, depression, etc). So one's 60/40 portfolio would be down 30%, but that would be the least of the problems.

                          minimalistmarc
                          Posts: 509
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                          Re: Preparing for a down market

                          Post by minimalistmarc » Sun Nov 17, 2019 6:26 am

                          Random Walker wrote:
                          Sat Nov 16, 2019 3:13 pm
                          RetireBy55 wrote:
                          Sat Nov 16, 2019 2:08 pm
                          OP - there are plenty of times throughout the history of the market where it took FAR longer than 25 (or even 49) months to recover.

                          You might want to consider this rather sobering chart if you haven't seen it previously:

                          Image

                          Note that the longest recovery period from peak to trough was TWENTY-NINE YEARS.

                          Of course, if that happens again, we're all in a heap of trouble. But I manage my portfolio expecting that we'll probably see another period like the late 60s to early 80s sometime in my lifetime.
                          Boy that is an eye opener!

                          Dave
                          I know, it would be amazing to have had the opportunity to accumulate over that 20 year period.

                          Post Reply