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Re: Do you have a portfolio "floor"?
This is an absurd concept and will cause financial damage to anyone who uses it.
If we hit another bear market ala 2008, the plan is to Buy More Equities at bargain prices. This isn't a particularly novel concept around here...
If we hit another bear market ala 2008, the plan is to Buy More Equities at bargain prices. This isn't a particularly novel concept around here...
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Re: Do you have a portfolio "floor"?
I don't know of anyone who is giving advice to have a portfolio floor. I am not even sure what that would mean. OTOH there are many people who advise aiming for a safe floor of retirement income. That, however, is not the same thing as a portfolio floor.
Here is a financial advisor recommending a retirement income floor.
Here is DFA recommending a retirement income floor.
http://www.dfaus.com/managed_dc/intelli ... nning.html
BobK
PS - Yes that smiling face in the first row is David Booth. Sitting in a chair in the building Booth built.
Here is a financial advisor recommending a retirement income floor.
http://www.paulahogan.com/images/FE/cha ... uities.pdfFinancial planners are also updating their best practices. The emerging new best practice
is “first get your flooring.” In other words, in retirement, find a way to get a reasonable level
of lifetime, inflation-protected income to cover at least your base standard of living before
taking on stock market risk.
Here is DFA recommending a retirement income floor.
http://www.dfaus.com/managed_dc/intelli ... nning.html
BobK
PS - Yes that smiling face in the first row is David Booth. Sitting in a chair in the building Booth built.
In finance risk is defined as uncertainty that is consequential (nontrivial). |
The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
Re: Do you have a portfolio "floor"?
No.
Instead, we have a maximum dollar limit for stocks, along with a targeted stock percentage. The maximum dollar amount takes precedent over the targeted percentage. I learned this from Michael LeBoeuf several years ago at one of the Boglehead reunions.
In retirement, our biggest concern is unexpected inflation and the possibility of a long-term down trend in the stock market. By managing the dollar amount in stocks, we know the dollar amount we'd lose if the stock market went to zero. (Extremely unlikely, of course).
We have a healthy portion in TIPS to protect us from unexpected inflation.
Ed
Instead, we have a maximum dollar limit for stocks, along with a targeted stock percentage. The maximum dollar amount takes precedent over the targeted percentage. I learned this from Michael LeBoeuf several years ago at one of the Boglehead reunions.
In retirement, our biggest concern is unexpected inflation and the possibility of a long-term down trend in the stock market. By managing the dollar amount in stocks, we know the dollar amount we'd lose if the stock market went to zero. (Extremely unlikely, of course).
We have a healthy portion in TIPS to protect us from unexpected inflation.
Ed
Re: Do you have a portfolio "floor"?
I know a couple people who historically have had portfolio floors. In 2000 and again in 2008, they moved everything into cash after the market dropped about 25-30%. As one stated, "I have to stop the bleeding!" They were protected against further drop, but then they missed most of the rebound. It was a poor strategy. They are not Bogleheads.
That's what I do: I drink, and I know things. --Tyrion Lannister
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Re: Do you have a portfolio "floor"?
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Re: Do you have a portfolio "floor"?
No necessary correlation at all, actually.letsgobobby wrote:Bobcat, you are right the two are not one and the same, but there could be a strong correlation between the two...
Define your income floor as SS + Pension + Annuity income.
Very little connection with your investment portfolio...
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Re: Do you have a portfolio "floor"?
Ah, the (in)famous Plan B, about which much was written. I always figured if you had a good Plan A, it would incorporate both whatever your Plan B would say and the appropriate triggers for implementing your Plan B. In other words, if your Plan A is all-inclusive, you can't have a Plan B.letsgobobby wrote:I vaguely recall that either Mel or Taylor commented that during the 2008 meltdown, it *could* make sense for an investor to stop the bleeding, if there was a dollar value below which one could not afford to fall.
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Re: Do you have a portfolio "floor"?
I don't know if you would call it a floor or not. But I'm retired so I have several year's worth of living expenses set aside in the TIAA Traditional investment in my TIAA-CREF IRA.
The surest way to know the future is when it becomes the past.
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Re: Do you have a portfolio "floor"?
This is why folks need to take the AA concept seriously, especially as your Human Capital years get fewer.sscritic wrote:Ah, the (in)famous Plan B, about which much was written. I always figured if you had a good Plan A, it would incorporate both whatever your Plan B would say and the appropriate triggers for implementing your Plan B. In other words, if your Plan A is all-inclusive, you can't have a Plan B.letsgobobby wrote:I vaguely recall that either Mel or Taylor commented that during the 2008 meltdown, it *could* make sense for an investor to stop the bleeding, if there was a dollar value below which one could not afford to fall.
A million in stock funds at age 60 is fine, so long as you have 2 million in bonds & CDs for stability...
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Re: Do you have a portfolio "floor"?
I do not have a portfolio floor. But if I did, this is how I would do it.
I would work myself into a state of anxiety, and while in that state I would pick a number to be my floor. Then I would catch a movie, or have a good meal, or take the dog for a long walk—ditching my anxious self along the way. Now, keeping it secret from my anxious self, I would write into my investment policy that should I ever reach that number I would do everything I could to buy up equities. My anxious self is never allowed to interfere with the execution of my investment policies.
So that's how I would do it.
I would work myself into a state of anxiety, and while in that state I would pick a number to be my floor. Then I would catch a movie, or have a good meal, or take the dog for a long walk—ditching my anxious self along the way. Now, keeping it secret from my anxious self, I would write into my investment policy that should I ever reach that number I would do everything I could to buy up equities. My anxious self is never allowed to interfere with the execution of my investment policies.
So that's how I would do it.
Re: Do you have a portfolio "floor"?
Sort of?
I'm trying this thing where I have an obscenely long Tips/Ibonds ladder that attempts to liability match on some very crude assumptions. Therefore that is my floor, the rest of the portfolio gets allocated to whatever I feel like at the time. Right now, its holding onto my stocks and paying down debt, perhaps another time its buying stocks and increasing margin. I havent gotten everything worked out just yet, and I have yet to own a TIP or Ibond, but 5 or 6 years from now I'll probbably starting to construct the ladder.
I'm trying this thing where I have an obscenely long Tips/Ibonds ladder that attempts to liability match on some very crude assumptions. Therefore that is my floor, the rest of the portfolio gets allocated to whatever I feel like at the time. Right now, its holding onto my stocks and paying down debt, perhaps another time its buying stocks and increasing margin. I havent gotten everything worked out just yet, and I have yet to own a TIP or Ibond, but 5 or 6 years from now I'll probbably starting to construct the ladder.
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Re: Do you have a portfolio "floor"?
I actually think everyone has a floor, even bogleheads. The difference is they do not look at it from a dollar amount that they try to avoid falling to in worst case situations. Instead they control their volatility through asset allocation. This prevents having to cash out at market bottom.
Good luck.
Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” |
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Re: Do you have a portfolio "floor"?
As the market drops buy,it's like buying things on sale.If market had big drop l am all in(except Ibonds)
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Re: Do you have a portfolio "floor"?
One way to achieve this is to never rebalance by selling bonds to buy stocks (you could still buy stocks with new money).
Re: Do you have a portfolio "floor"?
The dollar loss limits the amount of money that I can lose in the stock market. Without a dollar limit (taking precedence over a percentage target) as your portfolio grows, the amount of money you have allocated to stocks gets higher and higher. With a 35% allocation to stocks, for example, and a portfolio of $1M, I'd have $350k in stocks. As that portfolio grows to $2M, I'd have $700,000 in stocks. By limiting the amount in stocks to, say, $300k, I know that I could only lose $300k in the worst possible case.letsgobobby wrote:I
Rager1, what does "setting a dollar limit for stocks" accomplish for you? Do you see it as limiting dollar losses and therefore psychologically soothing or reassuring?
Ed
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Re: Do you have a portfolio "floor"?
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Re: Do you have a portfolio "floor"?
letsgobobby wrote:I vaguely recall that either Mel or Taylor commented that during the 2008 meltdown, it *could* make sense for an investor to stop the bleeding, if there was a dollar value below which one could not afford to fall. I hope he will correct me with his exact words, as I just don't remember where and when I saw it written. Point is, I do think there have been cases of perfectly sane/smart/educated investors recommending this approach. Bobcat, you are right the two are not one and the same, but there could be a strong correlation between the two.
Rager1, what does "setting a dollar limit for stocks" accomplish for you? Do you see it as limiting dollar losses and therefore psychologically soothing or reassuring?
I'm just going to leave these here ...
Taylor's original thread on Plan B: http://www.bogleheads.org/forum/viewtopic.php?t=30085
Someone's slightly aggro response thread, albeit with good points: http://www.bogleheads.org/forum/viewtopic.php?t=32591
Naw, I can't resist commenting: I think the Plan B scenario doesn't really make sense - you can always shift your needs/wants around, and *selling* equities after they get cheap is a pretty bad play, all in all. I can see rules like 'I won't rebalance into equities, only into bonds' but actively selling the asset class that is suffering is a great way to lock in losses. Imagine you're a normal buy/hold/rebalance person, and you're buying equities as they go down and down then, whoops, you trip a wire, flip a switch, and bam, sell them all at a loss? Doesn't make sense.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: Do you have a portfolio "floor"?
I'm reasonably certain that if stocks go to 0 bonds are likely to go to 0 as well - i.e. it will mean the end of the world as we know it.Rager1 wrote: In retirement, our biggest concern is unexpected inflation and the possibility of a long-term down trend in the stock market. By managing the dollar amount in stocks, we know the dollar amount we'd lose if the stock market went to zero. (Extremely unlikely, of course).
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: Do you have a portfolio "floor"? -- Yes.
LetsGoBobby:
This is what Mr. Bogle said in a NY Times interview:
Best wishes.
Taylor
Yes. Our family learned the hard way. My Grandfather was a multi-millionaire in 1929 with three large estates (New York, Cape Cod and Miami). My parents moved into the Miami mansion (with me) when my dad lost his restaurant early in the "Great Depression." Grandfather was a stock investor (on margin) and lost nearly everything. I remember it well when we were forced to move into a small nearby apartment."Do you have a portfolio floor?"
This is what Mr. Bogle said in a NY Times interview:
http://www.nytimes.com/2008/10/26/busin ... nted=print“Investing isn’t just about probabilities,” he said. “It’s about consequences, and you’ve got to be prepared for them.”
“If you cannot afford to lose another penny, then you simply have no recourse but to get out of the stock market.”
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Do you have a portfolio "floor"? -- Yes.
I highlighted the most critical word in this snippet from Mr. Bogle.Taylor Larimore wrote: This is what Mr. Bogle said in a NY Times interview:
“Investing isn’t just about probabilities,” he said. “It’s about consequences, and you’ve got to be prepared for them.”
“If you cannot afford to lose another penny, then you simply have no recourse but to get out of the stock market.”
We are fortunate in the present day to have some perspective both in the stock market and in the mental process of dealing with it.
What were people thinking back in the roaring 20's?
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Re: Do you have a portfolio "floor"?
"Portfolio floor" is too euphemistic. Let's call it "breaking point."
Yes and no. In principle I believe that stocks can go to zero. In principle I believe there is such a thing as "cannot afford to lose a penny more." In practice I have seen people lose their whole retirement account at a high-tech company because the only retirement plan was company stock*, they could not accept the idea of selling at a humongous loss, and they kept their retirement savings in the stock while the stock price went from $40 to $14 to $8 to $3 to bankruptcy. For this to happen to the stock market as a whole is the kind of unthinkable thing that sometimes happens. You will think "it could really happen" ten times for every time it actually happens, but, sure, it could happen.
I would say that there could come a time when it would be prudent for my wife and I to set, write down, and stick with a planned breaking point at which we would sell and take (say) a 50% loss rather than lose one more penny. The right time would not be now, when it is just a silly dark fantasy, and would not be at the time when our nerves are already stretched to the breaking point. But whenever it's done, it's important to write it down, because that is better than acting impulsively on intuition under stress.
In reality, our asset allocation is so conservative that if we had such a breaking point, we would not reach it if stocks went to zero. So the scenario in which it would happen is so extreme that by the time we reached the breaking point and sold all of our securities, it would be very unclear what if anything we could buy.
(*The nineties. They added a "normal" 401(k) plan just about the time I started working for them so I wasn't in the stock-only plan. I believe it was free grants of stock from the company and cost employees nothing, so easy come, easy go, but employees expected it to be their retirement money.)
Yes and no. In principle I believe that stocks can go to zero. In principle I believe there is such a thing as "cannot afford to lose a penny more." In practice I have seen people lose their whole retirement account at a high-tech company because the only retirement plan was company stock*, they could not accept the idea of selling at a humongous loss, and they kept their retirement savings in the stock while the stock price went from $40 to $14 to $8 to $3 to bankruptcy. For this to happen to the stock market as a whole is the kind of unthinkable thing that sometimes happens. You will think "it could really happen" ten times for every time it actually happens, but, sure, it could happen.
I would say that there could come a time when it would be prudent for my wife and I to set, write down, and stick with a planned breaking point at which we would sell and take (say) a 50% loss rather than lose one more penny. The right time would not be now, when it is just a silly dark fantasy, and would not be at the time when our nerves are already stretched to the breaking point. But whenever it's done, it's important to write it down, because that is better than acting impulsively on intuition under stress.
In reality, our asset allocation is so conservative that if we had such a breaking point, we would not reach it if stocks went to zero. So the scenario in which it would happen is so extreme that by the time we reached the breaking point and sold all of our securities, it would be very unclear what if anything we could buy.
(*The nineties. They added a "normal" 401(k) plan just about the time I started working for them so I wasn't in the stock-only plan. I believe it was free grants of stock from the company and cost employees nothing, so easy come, easy go, but employees expected it to be their retirement money.)
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.
Re: Do you have a portfolio "floor"? -- Yes.
Taylor:Taylor Larimore wrote: My Grandfather was a multi-millionaire in 1929 with three large estates (New York, Cape Cod and Miami). My parents moved into the Miami mansion (with me) when my dad lost his restaurant early in the "Great Depression." Grandfather was a stock investor (on margin) and lost nearly everything. I remember it well when we were forced to move into a small nearby apartment.
You bring up family memories that I didn't live, but only heard about. My great grandfather was in the liquor business in Oregon, which passed state wide prohibition in 1914.
My great grandfather told the family, "I just lost $1 million today" (without going to an inflation calculator, I can say that's a lot). Everyone moped around, so he said, "who wants to go to the theater?" Only his daughter-in-law, my grandmother, said yes, so off to the theater the two of them went.On November 3, 1914, five years prior to national prohibition, the voters of Oregon passed an amendment to the state constitution prohibiting the manufacture, sale or advertisement of intoxicating liquor (see related proclamation above left). In 1915 the Legislative Assembly, via the Anderson Act, enacted legislation implementing statewide prohibition. The law became effective on January 1, 1916.
My mother also had to move several times during the depression and (as I have previously mentioned) had herself dropped off several blocks from school so her friends wouldn't see what an old car they had (one of the possible effects of having money then losing it: your sense of entitlement to what you once had).
Thanks for reminding me of my family history.
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Re: Do you have a portfolio "floor"?
I keep a minimum floor - it represents 2-3 years of living expenses. Some call it an emergency fund, isn't that what a floor is?
After seeing the events of 2008-2009 and it's sharp after-effects, I use the floor to enable me to sleep well at night, and not be forced to liquidate investments at exactly the wrong time. I suspect many of us who claim to have no floor, really do maintain one.
A floor should be viewed as a stream of income or readily turned into income with minimal or no loss of principal. A pension, social security or other government benefit, investment grade fixed income with a known and stated maturity date, cash, T-Bills, T-Notes, T-Bonds, I bonds, EE bonds. I don't view real estate as a floor because it could be income producing today only to lose its tenant and then become non-producing tomorrow. Only those who truly place all of their assets at risk are without a floor.
Similar to a pension fund, pension funds are not fully invested - they maintain a minimum pension liability amount in cash/cash like equivalents to meet known near-term liabilities, the remainder of the fund is then invested in an appropriate asset allocation scheme.
After seeing the events of 2008-2009 and it's sharp after-effects, I use the floor to enable me to sleep well at night, and not be forced to liquidate investments at exactly the wrong time. I suspect many of us who claim to have no floor, really do maintain one.
A floor should be viewed as a stream of income or readily turned into income with minimal or no loss of principal. A pension, social security or other government benefit, investment grade fixed income with a known and stated maturity date, cash, T-Bills, T-Notes, T-Bonds, I bonds, EE bonds. I don't view real estate as a floor because it could be income producing today only to lose its tenant and then become non-producing tomorrow. Only those who truly place all of their assets at risk are without a floor.
Similar to a pension fund, pension funds are not fully invested - they maintain a minimum pension liability amount in cash/cash like equivalents to meet known near-term liabilities, the remainder of the fund is then invested in an appropriate asset allocation scheme.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: Do you have a portfolio "floor"?
It may or may not be, but this is unrelated to the original post.GRT2BOUTDOORS wrote:I keep a minimum floor - it represents 2-3 years of living expenses. Some call it an emergency fund, isn't that what a floor is?
The Original Post asked what you would do if your Stock Portfolio declined in value significantly.
If your stock portfolio consisted of $500K of Polaroid stock and nothing else (the example Nisi gave us) then YES, you probably should have set a sell-out floor on that. Smart individual stock investors try to keep less than 4% of assets in any single stock, I believe, but sometimes "smart" doesn't come until you've learned from experience.
A typical Boglehead, OTOH, has his $500K in assorted index funds and is immune to specific company risk. The Boglehead has NO SELL-OUT FLOOR for his/her stock portfolio. Rather, he/she transfers funds into stocks as their prices are low and makes out like a bandit when stock prices rebound...
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Re: Do you have a portfolio "floor"?
Liability match on very crude assumptions.(the concept of liabiliTy matching a single humans life is interesting assumption wise)Snowjob wrote:Sort of?
I'm trying this thing where I have an obscenely long Tips/Ibonds ladder that attempts to liability match on some very crude assumptions. Therefore that is my floor, the rest of the portfolio gets allocated to whatever I feel like at the time. Right now, its holding onto my stocks and paying down debt, perhaps another time its buying stocks and increasing margin. I havent gotten everything worked out just yet, and I have yet to own a TIP or Ibond, but 5 or 6 years from now I'll probbably starting to construct the ladder.
Obscenely long tips ladder.
Wow. So you actually doing this in reality? Would love to see you do a seperate post on this if you get it figured out.
Re: Do you have a portfolio "floor"?
I have a point where I'll stop rebalancing bond money into stocks, but no point where I'll sell stocks.
Say I have a million invested at 50/50 with a 50k emergency fund. And I'm 42 with 15 planned years of work ahead of me.
Assuming I keep my job:
If the market drops 10%-20%, I'll change all my new contributions to stocks
If the market drops 20%-30%, I'll rebalance 10% of my bonds into stocks
If the market drops 30%-50%, I'll rebalance 20% of my bonds into stocks
If the market drops 50%-80%, I'll rebalance 30% of my bonds into stocks.
This is all based on how I re-acted in the 2008 crash. It was very easy to change all new contributions to 100% stocks. It was tougher to rebalance, but I did do it (but not enough to bring me fully back to my AA - it was too scary - but I never sold stocks, only bought them during the crash)
So I guess my floor in that situation would be to keep at least $350k in bonds (and my $50k emergency fund)
Assuming I lose my job?
Probably wouldn't rebalance any of my bonds into stocks, but I would not sell stocks no matter how low they went.
Say I have a million invested at 50/50 with a 50k emergency fund. And I'm 42 with 15 planned years of work ahead of me.
Assuming I keep my job:
If the market drops 10%-20%, I'll change all my new contributions to stocks
If the market drops 20%-30%, I'll rebalance 10% of my bonds into stocks
If the market drops 30%-50%, I'll rebalance 20% of my bonds into stocks
If the market drops 50%-80%, I'll rebalance 30% of my bonds into stocks.
This is all based on how I re-acted in the 2008 crash. It was very easy to change all new contributions to 100% stocks. It was tougher to rebalance, but I did do it (but not enough to bring me fully back to my AA - it was too scary - but I never sold stocks, only bought them during the crash)
So I guess my floor in that situation would be to keep at least $350k in bonds (and my $50k emergency fund)
Assuming I lose my job?
Probably wouldn't rebalance any of my bonds into stocks, but I would not sell stocks no matter how low they went.
Re: Do you have a portfolio "floor"?
Apparently that same poster occasionally makes a troll account to harass Taylor from time to time about this concept. If you're an early-mid accumulator (as I am), I don't think the concept has much merit. However, if you're in or nearing retirement, I can see the validity.Noobvestor wrote:letsgobobby wrote:I vaguely recall that either Mel or Taylor commented that during the 2008 meltdown, it *could* make sense for an investor to stop the bleeding, if there was a dollar value below which one could not afford to fall. I hope he will correct me with his exact words, as I just don't remember where and when I saw it written. Point is, I do think there have been cases of perfectly sane/smart/educated investors recommending this approach. Bobcat, you are right the two are not one and the same, but there could be a strong correlation between the two.
Rager1, what does "setting a dollar limit for stocks" accomplish for you? Do you see it as limiting dollar losses and therefore psychologically soothing or reassuring?
I'm just going to leave these here ...
Taylor's original thread on Plan B: http://www.bogleheads.org/forum/viewtopic.php?t=30085
Someone's slightly aggro response thread, albeit with good points: http://www.bogleheads.org/forum/viewtopic.php?t=32591
Naw, I can't resist commenting: I think the Plan B scenario doesn't really make sense - you can always shift your needs/wants around, and *selling* equities after they get cheap is a pretty bad play, all in all. I can see rules like 'I won't rebalance into equities, only into bonds' but actively selling the asset class that is suffering is a great way to lock in losses. Imagine you're a normal buy/hold/rebalance person, and you're buying equities as they go down and down then, whoops, you trip a wire, flip a switch, and bam, sell them all at a loss? Doesn't make sense.
Retirement investing is a marathon.
Re: Do you have a portfolio "floor"?
I do not understand this poll. Is this just asking if you have a "plan B"?
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Re: Do you have a portfolio "floor"?
If (equity) prices go down, I will save/invest more. I did that in 08/09. I just wish I did more!
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Re: Do you have a portfolio "floor"?
If you have no assets or source of income/capital you will not be able to save/invest more. If your portfolio went down to 10% of the original value prior to collapse, what you you do then?fareastwarriors wrote:If (equity) prices go down, I will save/invest more. I did that in 08/09. I just wish I did more!
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: Do you have a portfolio "floor"?
Below is the OP's original question, I fail to see the part about how the topic relates only to the portion of Stock Portfolio.The Wizard wrote:It may or may not be, but this is unrelated to the original post.GRT2BOUTDOORS wrote:I keep a minimum floor - it represents 2-3 years of living expenses. Some call it an emergency fund, isn't that what a floor is?
The Original Post asked what you would do if your Stock Portfolio declined in value significantly.
If your stock portfolio consisted of $500K of Polaroid stock and nothing else (the example Nisi gave us) then YES, you probably should have set a sell-out floor on that. Smart individual stock investors try to keep less than 4% of assets in any single stock, I believe, but sometimes "smart" doesn't come until you've learned from experience.
A typical Boglehead, OTOH, has his $500K in assorted index funds and is immune to specific company risk. The Boglehead has NO SELL-OUT FLOOR for his/her stock portfolio. Rather, he/she transfers funds into stocks as their prices are low and makes out like a bandit when stock prices rebound...
In keeping with the general thought on this forum, a portfolio is viewed in totality. I include all net assets in my portfolio, including my floor or e-fund. Therefore, in my fully invested scenario, there is always a certain amount of dry powder available at all times - this may detract from overall absolute returns, but the value provided is non-quantifiable and is immeasurable. That dry powder represents my floor. So for example, if my allocation was 60/30/10 (eq/fi/cash), equities hit the skid and drop to zero, fi goes to zero, the absolute bottom I would allow my portfolio to be valued at would be that remaining 10% in cash.
Reading the various Bodie threads, I wonder how many investors have established a dollar amount below which they will not permit their portfolio to decline. If you have such a dollar figure in mind, how do you protect it? For example, if your 'absolute minimum floor' is $500k, do you own $500k in TIPS/TIPS funds and everything else in stocks? Or do you maintain a given AA and then, if we hit a real bear market a la 2008, you sell equities if the total portfolio value approaches $500k? Or some other strategy?
Or please indicate if you do not have such a figure in mind or otherwise do not utilize this concept.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: Do you have a portfolio "floor"?
Hmm,
I do not have a floor in the sense of bailing on stocks I already own. 2008 confirmed that for me. I am stubborn that way.
I do have a floor in my ability to keep rebalancing into stocks in a severe drop. In 2008 drop, I just about reached the limits of my ability to continue to rebalance. 2008 taught me there is likely a personal limit to re-balancing. I had no problem putting new money into equities. Dumping bonds into equities and essentially compounding and magnifying a loss is way more difficult. I did it but I also had basically reached my limit, luckily somewhere near the bottom. The death spiral of a bad bear market is more scary than it theoretically seems. I don't think I had "enough" in the game to learn that in 2000.
So my logic is not consistent. In general, I strive to maintain an asset allocation. In a severe drop my ability to maintain that allocation by rebalancing into equities may falter. Not ideal, but such is my psychological makeup. This is the theoretical advantage of balanced or target based retirement funds.
At least that is what I learned about myself in 2008. Maybe next time I will have enough that a bad drop wont even seem to make a difference. Laughs at self.......
I do not have a floor in the sense of bailing on stocks I already own. 2008 confirmed that for me. I am stubborn that way.
I do have a floor in my ability to keep rebalancing into stocks in a severe drop. In 2008 drop, I just about reached the limits of my ability to continue to rebalance. 2008 taught me there is likely a personal limit to re-balancing. I had no problem putting new money into equities. Dumping bonds into equities and essentially compounding and magnifying a loss is way more difficult. I did it but I also had basically reached my limit, luckily somewhere near the bottom. The death spiral of a bad bear market is more scary than it theoretically seems. I don't think I had "enough" in the game to learn that in 2000.
So my logic is not consistent. In general, I strive to maintain an asset allocation. In a severe drop my ability to maintain that allocation by rebalancing into equities may falter. Not ideal, but such is my psychological makeup. This is the theoretical advantage of balanced or target based retirement funds.
At least that is what I learned about myself in 2008. Maybe next time I will have enough that a bad drop wont even seem to make a difference. Laughs at self.......
TINSTAAFL
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Re: Do you have a portfolio "floor"?
This part of the OP talks about STOCKS and whether you're likely to panic-sell them as their value declines...GRT2BOUTDOORS wrote:...Or do you maintain a given AA and then, if we hit a real bear market a la 2008, you sell equities if the total portfolio value approaches $500k?
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Re: Do you have a portfolio "floor"?
Okay, well the OP asked 3 questions, I answered the first one.The Wizard wrote:This part of the OP talks about STOCKS and whether you're likely to panic-sell them as their value declines...GRT2BOUTDOORS wrote:...Or do you maintain a given AA and then, if we hit a real bear market a la 2008, you sell equities if the total portfolio value approaches $500k?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: Do you have a portfolio "floor"?
Sounds like you did fine.Trebor wrote:So my logic is not consistent. In general, I strive to maintain an asset allocation. In a severe drop my ability to maintain that allocation by rebalancing into equities may falter. Not ideal, but such is my psychological makeup.
You didn't say your age or AA, but younger folks who are 70/30 might indeed have some difficulty if stocks fall 50%.
Take a $100K portfolio with $70K stocks, $30K bonds. Stocks drop 50% overnight and you only have $35K stocks. Move $10K from bonds --> stocks and you're back close to 70/30 again ($45K/$20K).
But the process becomes "easier" for older folks with a 30/70 allocation even though they would move a similar $10K to maintain a 30/70 AA...
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Re: Do you have a portfolio "floor"?
The wizard wrote "You didn't say your age or AA, but younger folks who are 70/30 might indeed have some difficulty if stocks fall 50%.
Take a $100K portfolio with $70K stocks, $30K bonds. Stocks drop 50% overnight and you only have $35K stocks. Move $10K from bonds --> stocks and you're back close to 70/30 again ($45K/$20K).
But the process becomes "easier" for older folks with a 30/70 allocation even though they would move a similar $10K to maintain a 30/70 AA"
Thanks and Very good point!
Take a $100K portfolio with $70K stocks, $30K bonds. Stocks drop 50% overnight and you only have $35K stocks. Move $10K from bonds --> stocks and you're back close to 70/30 again ($45K/$20K).
But the process becomes "easier" for older folks with a 30/70 allocation even though they would move a similar $10K to maintain a 30/70 AA"
Thanks and Very good point!
TINSTAAFL
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Re: Do you have a portfolio "floor"?
In general this is a very poor idea, that said I'm not sure how well I'd handle another 1929 style crash where stocks went down over 90% in value. I'd like to think I'd do the right thing and rebalance all the way down, but I'd certainly be pretty stressed. I do my best to make sure I don't have all my wealth tied up in stocks so that helps limit the pain and tempers the urge to panic.
Re: Do you have a portfolio "floor"?
The day I make my first Ibond / Tip purchase I will start the thread. Hopefully your still poking around the forums at that point hah, could be a while as I mentioned =PLH wrote:Liability match on very crude assumptions.(the concept of liabiliTy matching a single humans life is interesting assumption wise)Snowjob wrote:Sort of?
I'm trying this thing where I have an obscenely long Tips/Ibonds ladder that attempts to liability match on some very crude assumptions. Therefore that is my floor, the rest of the portfolio gets allocated to whatever I feel like at the time. Right now, its holding onto my stocks and paying down debt, perhaps another time its buying stocks and increasing margin. I havent gotten everything worked out just yet, and I have yet to own a TIP or Ibond, but 5 or 6 years from now I'll probbably starting to construct the ladder.
Obscenely long tips ladder.
Wow. So you actually doing this in reality? Would love to see you do a seperate post on this if you get it figured out.
Re: Do you have a portfolio "floor"?
I don't have a floor now, but plan to by the time I reach retirement. My plan is to have enough in safe assets (like TIPS and the TIAA traditional account) to purchase an SPIA that will cover the gap between Social Security and our basic living expenses. If the concept of a "floor" covers planning so that one can ignore a market crash without having to change one's asset allocation or compromise one's standard of living, then, yes, we'll have a floor as we approach retirement. That is, we'll have a set amount of money that (barring the end-of-the-world senario) we can't lose. But that's not our "plan B." That's plan A.
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Re: Do you have a portfolio "floor"?
I'm new to this so am not sure I'm replying correctly. My question is about 'investment grade fixed income with a known and stated maturity date". If one's FI is in VG Total Bond Fund, my understanding is that that's considered 'safe' relative to one's equity allocation, but would it be safe in terms of a floor? I hope my question makes sense.GRT2BOUTDOORS wrote:I keep a minimum floor - it represents 2-3 years of living expenses. Some call it an emergency fund, isn't that what a floor is?
After seeing the events of 2008-2009 and it's sharp after-effects, I use the floor to enable me to sleep well at night, and not be forced to liquidate investments at exactly the wrong time. I suspect many of us who claim to have no floor, really do maintain one.
A floor should be viewed as a stream of income or readily turned into income with minimal or no loss of principal. A pension, social security or other government benefit, investment grade fixed income with a known and stated maturity date, cash, T-Bills, T-Notes, T-Bonds, I bonds, EE bonds. I don't view real estate as a floor because it could be income producing today only to lose its tenant and then become non-producing tomorrow. Only those who truly place all of their assets at risk are without a floor.
Similar to a pension fund, pension funds are not fully invested - they maintain a minimum pension liability amount in cash/cash like equivalents to meet known near-term liabilities, the remainder of the fund is then invested in an appropriate asset allocation scheme.
Re: Do you have a portfolio "floor"? -- Yes.
This is not helpful advice from Mr. Bogle -- it's just a tautology that if you can't stay in then you have to get out.Taylor Larimore wrote:“If you cannot afford to lose another penny, then you simply have no recourse but to get out of the stock market.”
In these days when most have Social Security, it's unlikely that anyone is actually going to reach this hypothetical state of not being able to stand the loss of another penny. No floor for me.
Greg, retired 8/10.
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Re: Do you have a portfolio "floor"?
Cash and very safe fixed income (TIPS, treasuries/index fund) are valuable not simply because they permit those inclined to do so, to rebalance in a crisis--but perhaps more importantly, because they are robust in a crisis.
To paraphrase Napolean (or maybe it was Patton?): "Plans go out the window once the first cannon is fired." Or as Mike Tyson said something similar, "Everyone has a plan until they get punched in the face."
What this means is if we are really planning effectively, we have to plan ahead for our possible inability to act, out of paralysis, if the crisis is bad enough. As a matter of fact we should try to plan so that a paralysis reaction is our "default" rather than--due to panic--making a bad situation worse (i.e. selling out at the bottom).
We should plan for our own fallibility in a severe financial crisis. We should plan so that in the event of severe crisis, doubt and uncertainty, we will tend towards doing nothing, towards hunkering down and waiting things out, rather than doing something to make things worse. "Don't do something, just sit there."
When a nuclear bomb is about to hit the best approach is to head for the bomb shelter and wait things out. Not to poke our heads out among the fallout and chaos and see if we can somehow make a profit from the chaos (while getting exposed to the fallout and rioting). We need to have a good stockpile of food, water, ammo and first aid supplies. Then hunker down. And wait for better times. To survive.
The defining characteristic of a crisis is "instability." Therefore it can be a mistake to focus on guesses about near term directionality and trying to take advantage of those guesses.
There is a reason we have the term "deer in the headlights." Or "playing possum." When animals are faced with a severe threat--a survival-level threat--a common response is to FREEZE. Remain motionless. Do nothing. Wait until the threat situation recedes. We are evolutionarily constrained by the exact same instinct even if the crisis happens to be a financial one (which if severe enough can be just as existential in nature as any other serious threat). This instinct has been preserved in us because it has evolutionary survival value.
Unless survival is assured, there can be no question of profit. Failure to survive the crisis means there will be no profit.
In a severe financial crisis such as 08/09, correlations increase. Yes equities are or seem to be "cheap" but maybe we are at risk of income reduction or even job loss because of the bad economic conditions. If so then we need to be more conservative, to conserve our stash of acorns in a very safe hole.
This has been addressed elsewhere, but the way things have played out so far since March 2009 didn't have to be that way. What if instead of the rebound we had had a few more quarters of severe economic slow down or decline? What if we had aggressively rebalance into equities only to be confronted with further losses, combined with a job loss, combined with some other black swan personal crisis such as an unanticipated serious illness or disability?
This is not mere speculation. This stuff happens. And it's unpredictable.
I don't know about anyone else, but I did not want to risk not being able to pay my mortgage, feed my family, pay for my health insurance, for the sake of getting a little too aggressive in fall '08/spring '09. Yes in hindsight I kick myself a little bit (or sometimes a lot depending on my mood) for not being "aggressive" enough, because when it was all happening, I intellectually perceived that the blood was running in the streets so in theory was a great time to be going all-in. Those who did, did very well indeed.
To paraphrase Napolean (or maybe it was Patton?): "Plans go out the window once the first cannon is fired." Or as Mike Tyson said something similar, "Everyone has a plan until they get punched in the face."
What this means is if we are really planning effectively, we have to plan ahead for our possible inability to act, out of paralysis, if the crisis is bad enough. As a matter of fact we should try to plan so that a paralysis reaction is our "default" rather than--due to panic--making a bad situation worse (i.e. selling out at the bottom).
We should plan for our own fallibility in a severe financial crisis. We should plan so that in the event of severe crisis, doubt and uncertainty, we will tend towards doing nothing, towards hunkering down and waiting things out, rather than doing something to make things worse. "Don't do something, just sit there."
When a nuclear bomb is about to hit the best approach is to head for the bomb shelter and wait things out. Not to poke our heads out among the fallout and chaos and see if we can somehow make a profit from the chaos (while getting exposed to the fallout and rioting). We need to have a good stockpile of food, water, ammo and first aid supplies. Then hunker down. And wait for better times. To survive.
The defining characteristic of a crisis is "instability." Therefore it can be a mistake to focus on guesses about near term directionality and trying to take advantage of those guesses.
There is a reason we have the term "deer in the headlights." Or "playing possum." When animals are faced with a severe threat--a survival-level threat--a common response is to FREEZE. Remain motionless. Do nothing. Wait until the threat situation recedes. We are evolutionarily constrained by the exact same instinct even if the crisis happens to be a financial one (which if severe enough can be just as existential in nature as any other serious threat). This instinct has been preserved in us because it has evolutionary survival value.
Unless survival is assured, there can be no question of profit. Failure to survive the crisis means there will be no profit.
In a severe financial crisis such as 08/09, correlations increase. Yes equities are or seem to be "cheap" but maybe we are at risk of income reduction or even job loss because of the bad economic conditions. If so then we need to be more conservative, to conserve our stash of acorns in a very safe hole.
This has been addressed elsewhere, but the way things have played out so far since March 2009 didn't have to be that way. What if instead of the rebound we had had a few more quarters of severe economic slow down or decline? What if we had aggressively rebalance into equities only to be confronted with further losses, combined with a job loss, combined with some other black swan personal crisis such as an unanticipated serious illness or disability?
This is not mere speculation. This stuff happens. And it's unpredictable.
I don't know about anyone else, but I did not want to risk not being able to pay my mortgage, feed my family, pay for my health insurance, for the sake of getting a little too aggressive in fall '08/spring '09. Yes in hindsight I kick myself a little bit (or sometimes a lot depending on my mood) for not being "aggressive" enough, because when it was all happening, I intellectually perceived that the blood was running in the streets so in theory was a great time to be going all-in. Those who did, did very well indeed.
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Re: Do you have a portfolio "floor"? -- Yes.
You are conflating two different things--maintaining a subsistence level of survival in retirement vs. achieving a reasonable approximation of pre-retirement standard of living.GregLee wrote:This is not helpful advice from Mr. Bogle -- it's just a tautology that if you can't stay in then you have to get out.Taylor Larimore wrote:“If you cannot afford to lose another penny, then you simply have no recourse but to get out of the stock market.” -- Jack Bogle
In these days when most have Social Security, it's unlikely that anyone is actually going to reach this hypothetical state of not being able to stand the loss of another penny. No floor for me.
It sounds like you are pursuing a barbell strategy in that you are content with either a relatively low standard of living in retirement (if your portfolio craters at the wrong time) vs. a relatively high standard of living in retirement (if your portfolio achieves the high implied expected returns). But what I think you may be forgetting is the non-linearity of the marginal utility of the dollars your portfolio might generate above and beyond the zero/subsistence level.
The distribution of your possible portfolio outcomes in retirement is likely to be skewed towards "zero or less than would be desirable to live the lifestyle I would prefer" or "too much to really make any difference in my lifestyle" and miss the middle range "just right."
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Re: Do you have a portfolio "floor"?
We have a portfolio floor. I determined the least amount we could comfortably live on when supplemented by SS, then I figured out how much it would take in order for 3.5% withdrawal rate to produce that amount each year (adjusting yearly for inflation). This became our floor. I then set our asset allocation so that 50% drop in the equity allocation would leave us with enough money to meet our original needs/withdrawal. It's not a totally fixed rule, but it's a good rule of thumb for us. We actually used last year a 1.5% withdrawal rate, so I think we're in a relatively safe and conservative zone.
Re: Do you have a portfolio "floor"?
If people feel they need to guarantee a portfolio floor, why not guarantee the even better living offered by raising the floor to the current value of the portfolio?
Re: Do you have a portfolio "floor"?
We don't have a set floor, however due to a low need need to take risk, our allocation to stocks is fairly small for our age (40% age 40). As an additional safety measure, I don't sell bonds to buy stocks should stocks decrease in values. If anything, I would only rebalance using new money.
Re: Do you have a portfolio "floor"? -- Yes.
I don't think that's what I'm doing. I'm thinking about the large costs that may be required for "achieving a reasonable approximation of pre-retirement standard of living". You're thinking that your costs in old age will be pretty much what they are now; I'm doubting that will be true. I've had some experience visiting a nursing home where most were on Medicaid. No one was smiling. Maybe you're too young to take a realistic view of your prospects, or you're willing to trust to luck that your good health will continue. But yesterday, I turned 70, and I don't like trusting to luck.PreserveCapital wrote:You are conflating two different things--maintaining a subsistence level of survival in retirement vs. achieving a reasonable approximation of pre-retirement standard of living.
Greg, retired 8/10.
Re: Do you have a portfolio "floor"? -- Yes.
There are a fair number who insist that one must stay the course (rebalance into equities) no matter what. For those people, Mr Bogle's statement is not only not a tautology, it's heresy.GregLee wrote:This is not helpful advice from Mr. Bogle -- it's just a tautology that if you can't stay in then you have to get out.Taylor Larimore wrote:“If you cannot afford to lose another penny, then you simply have no recourse but to get out of the stock market.” -- Jack Bogle
And if your minimum expenses are higher than Social Security?GregLee wrote:In these days when most have Social Security, it's unlikely that anyone is actually going to reach this hypothetical state of not being able to stand the loss of another penny. No floor for me.
Re: Do you have a portfolio "floor"? -- Yes.
Many retired people live on their Social Security income. Are you special?richard wrote:And if your minimum expenses are higher than Social Security?
Greg, retired 8/10.