What might cause a market correction ( 15-20% ) again

[Mrmetalpole]

2 words - Interest Rates......When rates unexpectedly spiked in Dec. 2018 check how the market did before Powell stepped in. Rates have been held down so low for so long that its a TINA market (there is no alternative). If the dynamic ever changes, it's a whole new ball game. That said, check out the 50-year chart on TNX, 10-year treasury yields.

[abuss368]

As everybody is fretting over new highs, I would like to have a somewhat different take on this. The market has gone up tremendously over the past few months and is close to all time highs. We have had a black swan event last year and hopefully things will get better on that from here on.

So barring another black swan event, what might cause the market to fall in a correction again? Since it is so high already, I am thinking a 15-20 % drop ( rather than 10% )should be called a correction.

We already have the election behind us and it is clear one party will control the govt, so no more surprises there. Any triggers people can think of ? Or will it just chug along this year at very low rate ?

Anything can trigger it. No idea how this year will turn out. Ask Tony, he knows (abuss368).

Dave

Simply put Dave moves the markets! When reading annual reports of many companies, I have noticed that Dave is often noted in the footnotes! When Dave talks, I listen!

Tony

[skor99]

OP,

What is the motivation behind your question? Do you have money to deploy and can't stomach the idea of buying at these high prices and wishing for a drop? Or something else perhaps?

Forgive my cynicism, but many of the regular questions here seems to be from this somewhat darker side.

There's a lot of greed and regret from many in their choices this past year on not jumping in the market when the prices are inviting...all in hindsight, of course.

Klangfool perhaps strikes the right philosophic bent...he neither knows or cares.

Anyone who has money on the side and not deployed in the market is playing a waiting game. It's anyone's guess if that gamble pays off.

I am of the conservative bent and always aim to have some money that I can deploy, but no dark side motives here.

4000 pandemic deaths everyday, an infiltration of one of the most secure buildings in the country and a president being impeached twice would have in my view been enough to cause a correction, but that has been proven wrong.
So just looking out for other things that might cause a correction and be prepared for it if possible

[hi_there]

The Government/Fed is indifferent towards the asset prices of equities (directly). They care about the economy and functional markets.

This point is no longer true. It's only recently that Mr. Powell has admitted that "asset price stability" or something along those lines is a factor of consideration in Fed policy decisions. He is right, since market stability promotes investment and helps create real economic effects. This statement, and others like it, make it more clear that equity prices are used by the Fed to guide and measure the efficacy of their policies in the short term.

In terms of the Federal Government and equity prices... oh boy, that's a big topic. But it seems impossible to me that lawmakers are indifferent to asset prices, given the interests of donors. Also, equity prices are crucial for state and local governments for meeting budgets. San Francisco and New York City were "saved" this year by tax revenue from capital gains. But anyway, I don't want to get too carried away...

[tibbitts]

I think the BH desire is to see a 50% drop. A 15-20% drop will only cause equivocation and all sorts of posts about should I reallocate anxiety. A 50% drop is pretty clear. Who would wait after that sort of drop?

Who? All the people who would be anticipating a 60% or more drop. When the market dropped last March, it's not like a light when on saying it was safe to buy. Same for the drop in 2008-2009. In retrospect of course we have a few Bogleheads who claim the low was obvious and bought in at or very close to the low (to the day!), but there is also survivorship bias here, and we rarely hear from the same number of Bogleheads who sold out at those lows and never got back in.

[David Jay]

The question then arises what can you be defensive in? Stocks are in a bubble and bonds are in a epic bubble. Cash is not king with paltry interest rates. Real estate is getting frothy as well, and also not sure how can you count on the rental income coming in if everything else implodes. What is left ?

Why do you need to "be defensive"? Serious question. If you have established an appropriate AA for yourself, why do you need to be defensive?

To quote Peter Lynch: "Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves."

[Nate79]

OP,

1) I don't know and I do not care.


2) If you need to know and care, you are not prepared.


3) It is more productive to be prepared versus listening to "Noise" pretending to be news.


KlangFool

+1000

Who cares.

[flyingaway]

When the pandemic is gone, people start taking out money for travels and vacations.

Wouldn’t that actually boost the economy ? So the net effect might be zero or even positive

No. That will cause inflation.

[KlangFool]

The question then arises what can you be defensive in? Stocks are in a bubble and bonds are in a epic bubble. Cash is not king with paltry interest rates. Real estate is getting frothy as well, and also not sure how can you count on the rental income coming in if everything else implodes. What is left ?

Why do you need to "be defensive"? Serious question. If you have established an appropriate AA for yourself, why do you need to be defensive?

To quote Peter Lynch: "Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves."

David Jay,

+1,000.


If someone knows that he/she cannot predict the future, then, the AA should be prepared for a market drop at any time. Only someone that is not prepared has to do something special or out of ordinary.


KlangFool

[Triple digit golfer]

OP,

1) I don't know and I do not care.


2) If you need to know and care, you are not prepared.


3) It is more productive to be prepared versus listening to "Noise" pretending to be news.


KlangFool

+1000

Who cares.

Exactly!

[flyingaway]

I think the BH desire is to see a 50% drop. A 15-20% drop will only cause equivocation and all sorts of posts about should I reallocate anxiety. A 50% drop is pretty clear. Who would wait after that sort of drop?

Who? All the people who would be anticipating a 60% or more drop. When the market dropped last March, it's not like a light when on saying it was safe to buy. Same for the drop in 2008-2009. In retrospect of course we have a few Bogleheads who claim the low was obvious and bought in at or very close to the low (to the day!), but there is also survivorship bias here, and we rarely hear from the same number of Bogleheads who sold out at those lows and never got back in.

Yes. I was the one waiting for a 50% drop to buy some stocks and I did not get that chance.

On the other hand, I did not sell any stocks on the way down. So I pretend to be a true boglehead who stayed the course. But I wished to see the 50% drop. (My AA before the drop was between 68/32 and 65/35, I did not check every day though).

[KlangFool]

OP,

I am prepared for a market drop more severe than that and no recovery for 8 years. How about you?

KlangFool

[OldBallCoach]

OP,

1) I don't know and I do not care.


2) If you need to know and care, you are not prepared.


3) It is more productive to be prepared versus listening to "Noise" pretending to be news.


KlangFool

100% spot on...I also think that Alabama not making the football playoffs could cause a huge pull back.

[rockstar]

Irrational fear.

[H-Town]

I am of the conservative bent and always aim to have some money that I can deploy, but no dark side motives here.

4000 pandemic deaths everyday, an infiltration of one of the most secure buildings in the country and a president being impeached twice would have in my view been enough to cause a correction, but that has been proven wrong.
So just looking out for other things that might cause a correction and be prepared for it if possible

Okay, can you list out the steps you have done to prepare for a correction and/or a big crash? Just assume that it will happen on Monday next week.

[000]

The actual straw that breaks the camel's back will probably be unknowable until it actually happens.

[abuss368]

The actual straw that breaks the camel's back will probably be unknowable until it actually happens.

Well said. We can not control the markets but only develop an asset allocation between stocks and bonds that allows us to achieve our goals in our timeframe and sleep well at night.

Tony

[Coburn]

OP,

What is the motivation behind your question? Do you have money to deploy and can't stomach the idea of buying at these high prices and wishing for a drop? Or something else perhaps?

Forgive my cynicism, but many of the regular questions here seems to be from this somewhat darker side.

There's a lot of greed and regret from many in their choices this past year on not jumping in the market when the prices are inviting...all in hindsight, of course.

Klangfool perhaps strikes the right philosophic bent...he neither knows or cares.

Anyone who has money on the side and not deployed in the market is playing a waiting game. It's anyone's guess if that gamble pays off.

I am of the conservative bent and always aim to have some money that I can deploy, but no dark side motives here.

4000 pandemic deaths everyday, an infiltration of one of the most secure buildings in the country and a president being impeached twice would have in my view been enough to cause a correction, but that has been proven wrong.
So just looking out for other things that might cause a correction and be prepared for it if possible

Fair enough. No one has a crystal ball...maybe we get a mild drop before it surges again, who can say?

But the market isn't the economy.

Very little dry powder on the side for me ATM...I suppose that's a blessing.

[checkyourmath]

People forget that companies are more ethical now and unemployment numbers don't matter. Enron and Lehman Brothers and AIG and Worldcom are a thing of the past. Tesla is the standard for innovation I just hope the rest of the companies can follow suit.

[abuss368]

People forget that companies are more ethical now and unemployment numbers don't matter. Enron and Lehman Brothers and AIG and Worldcom are a thing of the past. Tesla is the standard for innovation I just hope the rest of the companies can follow suit.

Makes a lot of sense and that is why we will never know in advance which companies will prosper over the long term. We can invest in the total markets at the lowest cost over the long term.

Tony

[qwertyjazz]

People forget that companies are more ethical now and unemployment numbers don't matter. Enron and Lehman Brothers and AIG and Worldcom are a thing of the past. Tesla is the standard for innovation I just hope the rest of the companies can follow suit.

I know, human nature has changed. Greed is bad and people never look for untoward advantage. The pandemic has made us only think of the common good.

[skor99]

OP,

I am prepared for a market drop more severe than that and no recovery for 8 years. How about you?

KlangFool

That is amazing especially considering you were laid off and are looking for another job ( read in some other thread). I have read some of your other threads as well and believe you haven’t exactly had the smoothest of work life.

You should share for the benefit of all how you managed to be in such an enviable position despite all the work/job challenges you have faced.

[skor99]

People forget that companies are more ethical now and unemployment numbers don't matter. Enron and Lehman Brothers and AIG and Worldcom are a thing of the past. Tesla is the standard for innovation I just hope the rest of the companies can follow suit.

I know, human nature has changed. Greed is bad and people never look for untoward advantage. The pandemic has made us only think of the common good.

Is it Opposite Day today ?

[skor99]

People forget that companies are more ethical now and unemployment numbers don't matter. Enron and Lehman Brothers and AIG and Worldcom are a thing of the past. Tesla is the standard for innovation I just hope the rest of the companies can follow suit.

I know, human nature has changed. Greed is bad and people never look for untoward advantage. The pandemic has made us only think of the common good.

Is it Opposite Day today ?

[TheTimeLord]

People forget that companies are more ethical now and unemployment numbers don't matter. Enron and Lehman Brothers and AIG and Worldcom are a thing of the past. Tesla is the standard for innovation I just hope the rest of the companies can follow suit.

My impression is Musk is pretty ruthless in regards to his workforce.

[KlangFool]

OP,

I am prepared for a market drop more severe than that and no recovery for 8 years. How about you?

KlangFool

That is amazing especially considering you were laid off and are looking for another job ( read in some other thread). I have read some of your other threads as well and believe you haven’t exactly had the smoothest of work life.

You should share for the benefit of all how you managed to be in such an enviable position despite all the work/job challenges you have faced.

skor99,


It is very simple.


I save 1 year of current annual expenses every year that I am employed. Do this long and frequent enough, you would be FI.


KlangFool

[flyingaway]

OP,

I am prepared for a market drop more severe than that and no recovery for 8 years. How about you?

KlangFool

I can survive if the down turn only lasts for 8 years.

[BolderBoy]

The question then arises what can you be defensive in? Stocks are in a bubble and bonds are in a epic bubble.

Hmmmm. Is your AA set correctly "for you"? Need to stay in stocks to fight off inflation. Not much else to do there.

To protect yourself in bonds, consider shortening up the duration. For example, at Vanguard VBIRX is a short-term version of VBTLX (sort of). You could exchange half your VBTLX for VBIRX to give some protection to your bond-side component (at the expense of some interest).

Getting out of the market entirely to avoid perceived bubbles isn't a good idea.

[TheTimeLord]

OP,

I am prepared for a market drop more severe than that and no recovery for 8 years. How about you?

KlangFool

I can survive if the down turn only lasts for 8 years.

Doesn't 25x at 60/40 mean 10 years of Fixed Income?

[bog007]

when everything is good again. sell the news, as in vaccine

[KlangFool]

OP,

I am prepared for a market drop more severe than that and no recovery for 8 years. How about you?

KlangFool

I can survive if the down turn only lasts for 8 years.

Doesn't 25x at 60/40 mean 10 years of Fixed Income?

Yes, but in my case, I plan to rebalance down to 5 years of fixed income if the stock market drop. That plus 3 years of emergency fund gives me 5+3 = 8 years.


KlangFool

[dmcmahon]

My top three:

1. Rising interest rates as the market sniffs out inflation.

2. A large tax increase.

3. Rising geopolitical tensions, especially US v. China in the Pacific region.

[H-Town]

OP,

I am prepared for a market drop more severe than that and no recovery for 8 years. How about you?

KlangFool

I can survive if the down turn only lasts for 8 years.

To be honest, with a paid off house, paid off car, and very low fixed cost, I can survive for 30-40 years if not more. I worked all types of jobs in high school and college, so I have no issues getting those jobs to put food on the table. Heck, if I were to lose all of the asset over night, it's really not a big deal. I just count my blessings every morning I wake up, roll up my sleeves, and get at it.

[UncleLeo]

4000 pandemic deaths everyday, an infiltration of one of the most secure buildings in the country and a president being impeached twice would have in my view been enough to cause a correction.

Why? Why should any of that move the stock market lower?
People shop more online in a pandemic - more profits for e-commerce companies.
Vaccine and therapeutic development - more profits for those companies.
People spend more time at home - consume more streaming services, spend more time on FB, etc. more profits for those companies.

Do some people suffer? Lose their job? Yes, and that's unfortunate. but the stock market is not the economy.

Say an investor is considering an alternative... but there is none! interest rates are at 0. yields on bonds are low. Real estate at ATH. Crypto at ATH. No other game in town.

And what about all the newly created money supply? 20% (or so, don't quote me on that) of the total money supply was created in 2020. where would that money go? HYSA with 0.6% annual return? If you do the calculation - S&P is undervalued.

Just so I could laugh at myself later, I'll put my prediction for 2021 here:
Unless Fed changes course or hints in that direction (and the only thing that will make them do that, IMO, is higher than expected inflation) We'll see S&P500 at 4200 this year. those high valuations might spook the markets and result in 10-15% correction. from there the things will only get higher.

[Triple digit golfer]

OP,

I am prepared for a market drop more severe than that and no recovery for 8 years. How about you?

KlangFool

I can survive if the down turn only lasts for 8 years.

Doesn't 25x at 60/40 mean 10 years of Fixed Income?

Yes, but in my case, I plan to rebalance down to 5 years of fixed income if the stock market drop. That plus 3 years of emergency fund gives me 5+3 = 8 years.


KlangFool

Are you saying 5 years is your minimum fixed income, or that you'd overbalance down to 5 years to capitalize on low stock prices? I think the former.

On another note, why are people so afraid to sell stocks? If one's AA is 60/40 and the market crashes, many people make it sound like they'd sell ALL their bonds before ever selling a single share of equity. But wouldn't the prudent thing be to remain at 60/40 and therefore sell whatever is required to stay at 60/40? That would require selling bonds initially, but if you keep selling bonds you'd eventually have more than 60% in equities.

[GoldenFinch]

Any panic, rational or irrational, will cause an attention getting market drop.

[atdharris]

Tax increases, especially if the corporate tax cuts are rolled back may cause a drop, although it seems like the market may be expecting it. Otherwise, rising interest rates will likely drag equities down, especially if the Fed begins hiking rates. No one really knows anything

[KlangFool]

OP,

I am prepared for a market drop more severe than that and no recovery for 8 years. How about you?

KlangFool

I can survive if the down turn only lasts for 8 years.

Doesn't 25x at 60/40 mean 10 years of Fixed Income?

Yes, but in my case, I plan to rebalance down to 5 years of fixed income if the stock market drop. That plus 3 years of emergency fund gives me 5+3 = 8 years.


KlangFool

Are you saying 5 years is your minimum fixed income, or that you'd overbalance down to 5 years to capitalize on low stock prices? I think the former.

On another note, why are people so afraid to sell stocks? If one's AA is 60/40 and the market crashes, many people make it sound like they'd sell ALL their bonds before ever selling a single share of equity. But wouldn't the prudent thing be to remain at 60/40 and therefore sell whatever is required to stay at 60/40? That would require selling bonds initially, but if you keep selling bonds you'd eventually have more than 60% in equities.

Triple digit golfer,

1) 5 years is the minimum balance.


2) Do you assume that the stock market will eventually recover? If the answer is yes, why would you sell the stock when it had been down for X years?

Let's say that the stock market had stayed down for 5 years and your AA is 60/40 now.

You have a choice

A) Sell as per 60/40.


B) Sell the bond for as long as possible.


Do you believe that the stock market had been down for 5 years and it is more likely to recover soon, you choose (B). You do not want to lock in your losses. If you believe that, the stock market could stay down no matter how long that it had been down, you choose (A).

What do you believe?

KlangFool

[Triple digit golfer]

I can survive if the down turn only lasts for 8 years.

Doesn't 25x at 60/40 mean 10 years of Fixed Income?

Yes, but in my case, I plan to rebalance down to 5 years of fixed income if the stock market drop. That plus 3 years of emergency fund gives me 5+3 = 8 years.


KlangFool

Are you saying 5 years is your minimum fixed income, or that you'd overbalance down to 5 years to capitalize on low stock prices? I think the former.

On another note, why are people so afraid to sell stocks? If one's AA is 60/40 and the market crashes, many people make it sound like they'd sell ALL their bonds before ever selling a single share of equity. But wouldn't the prudent thing be to remain at 60/40 and therefore sell whatever is required to stay at 60/40? That would require selling bonds initially, but if you keep selling bonds you'd eventually have more than 60% in equities.

Triple digit golfer,

1) 5 years is the minimum balance.


2) Do you assume that the stock market will eventually recover? If the answer is yes, why would you sell the stock when it had been down for X years?

Let's say that the stock market had stayed down for 5 years and your AA is 60/40 now.

You have a choice

A) Sell as per 60/40.


B) Sell the bond for as long as possible.


Do you believe that the stock market had been down for 5 years and it is more likely to recover soon, you choose (B). You do not want to lock in your losses. If you believe that, the stock market could stay down no matter how long that it had been down, you choose (A).

What do you believe?

KlangFool

I am not a market timer. I hold an asset allocation and maintain it. If I sell bonds for as long as possible, I'm allowing my AA to drift to a more aggressive AA. Why would anybody recommend that? Just as you recommend buying the lagging asset class, why wouldn't you recommend selling the heavy asset class?

If I have $600k in stocks and $400k in bonds and the stock market crashes 30%, I now have $420k in stocks and $400k in bonds. I'd sell the first $120k in bonds, which would then get me to $420k/$280k, which is back to 60/40. At that point, I'd sell stocks and bonds equally. If I continue selling bonds, I'd drift more aggressive than 60/40. Why would I do that? In that case, I don't have a 60/40 AA at all.

[KlangFool]

Doesn't 25x at 60/40 mean 10 years of Fixed Income?

Yes, but in my case, I plan to rebalance down to 5 years of fixed income if the stock market drop. That plus 3 years of emergency fund gives me 5+3 = 8 years.


KlangFool

Are you saying 5 years is your minimum fixed income, or that you'd overbalance down to 5 years to capitalize on low stock prices? I think the former.

On another note, why are people so afraid to sell stocks? If one's AA is 60/40 and the market crashes, many people make it sound like they'd sell ALL their bonds before ever selling a single share of equity. But wouldn't the prudent thing be to remain at 60/40 and therefore sell whatever is required to stay at 60/40? That would require selling bonds initially, but if you keep selling bonds you'd eventually have more than 60% in equities.

Triple digit golfer,

1) 5 years is the minimum balance.


2) Do you assume that the stock market will eventually recover? If the answer is yes, why would you sell the stock when it had been down for X years?

Let's say that the stock market had stayed down for 5 years and your AA is 60/40 now.

You have a choice

A) Sell as per 60/40.


B) Sell the bond for as long as possible.


Do you believe that the stock market had been down for 5 years and it is more likely to recover soon, you choose (B). You do not want to lock in your losses. If you believe that, the stock market could stay down no matter how long that it had been down, you choose (A).

What do you believe?

KlangFool

I am not a market timer. I hold an asset allocation and maintain it. If I sell bonds for as long as possible, I'm allowing my AA to drift to a more aggressive AA. Why would anybody recommend that? Just as you recommend buying the lagging asset class, why wouldn't you recommend selling the heavy asset class?

If I have $600k in stocks and $400k in bonds and the stock market crashes 30%, I now have $420k in stocks and $400k in bonds. I'd sell the first $120k in bonds, which would then get me to $420k/$280k, which is back to 60/40. At that point, I'd sell stocks and bonds equally. If I continue selling bonds, I'd drift more aggressive than 60/40. Why would I do that? In that case, I don't have a 60/40 AA at all.

Triple digit golfer,

"I am not a market timer. "


So, essentially, you do not believe in the recession cycle. Since 2018, I have been telling folks that historically, there is a US recession every 10 years. The longer we are away from the 2008/2009 recession, we are more likely to have a recession. Then, it happened in 2020. Ditto, the longer that the recession is, it is more likely that the recovery is coming soon.

I do not consider this as market timing. There is an inherent cycle within the system.


KlangFool

[Triple digit golfer]

Yes, but in my case, I plan to rebalance down to 5 years of fixed income if the stock market drop. That plus 3 years of emergency fund gives me 5+3 = 8 years.


KlangFool

Are you saying 5 years is your minimum fixed income, or that you'd overbalance down to 5 years to capitalize on low stock prices? I think the former.

On another note, why are people so afraid to sell stocks? If one's AA is 60/40 and the market crashes, many people make it sound like they'd sell ALL their bonds before ever selling a single share of equity. But wouldn't the prudent thing be to remain at 60/40 and therefore sell whatever is required to stay at 60/40? That would require selling bonds initially, but if you keep selling bonds you'd eventually have more than 60% in equities.

Triple digit golfer,

1) 5 years is the minimum balance.


2) Do you assume that the stock market will eventually recover? If the answer is yes, why would you sell the stock when it had been down for X years?

Let's say that the stock market had stayed down for 5 years and your AA is 60/40 now.

You have a choice

A) Sell as per 60/40.


B) Sell the bond for as long as possible.


Do you believe that the stock market had been down for 5 years and it is more likely to recover soon, you choose (B). You do not want to lock in your losses. If you believe that, the stock market could stay down no matter how long that it had been down, you choose (A).

What do you believe?

KlangFool

I am not a market timer. I hold an asset allocation and maintain it. If I sell bonds for as long as possible, I'm allowing my AA to drift to a more aggressive AA. Why would anybody recommend that? Just as you recommend buying the lagging asset class, why wouldn't you recommend selling the heavy asset class?

If I have $600k in stocks and $400k in bonds and the stock market crashes 30%, I now have $420k in stocks and $400k in bonds. I'd sell the first $120k in bonds, which would then get me to $420k/$280k, which is back to 60/40. At that point, I'd sell stocks and bonds equally. If I continue selling bonds, I'd drift more aggressive than 60/40. Why would I do that? In that case, I don't have a 60/40 AA at all.

Triple digit golfer,

"I am not a market timer. "


So, essentially, you do not believe in the recession cycle. Since 2018, I have been telling folks that historically, there is a US recession every 10 years. The longer we are away from the 2008/2009 recession, we are more likely to have a recession. Then, it happened in 2020. Ditto, the longer that the recession is, it is more likely that the recovery is coming soon.

I do not consider this as market timing. There is an inherent cycle within the system.


KlangFool

Sorry, that is market timing. Expecting a recovery after a crash and modifying AA to be more aggressive, expecting an increase, is market timing.

[KlangFool]

Are you saying 5 years is your minimum fixed income, or that you'd overbalance down to 5 years to capitalize on low stock prices? I think the former.

On another note, why are people so afraid to sell stocks? If one's AA is 60/40 and the market crashes, many people make it sound like they'd sell ALL their bonds before ever selling a single share of equity. But wouldn't the prudent thing be to remain at 60/40 and therefore sell whatever is required to stay at 60/40? That would require selling bonds initially, but if you keep selling bonds you'd eventually have more than 60% in equities.

Triple digit golfer,

1) 5 years is the minimum balance.


2) Do you assume that the stock market will eventually recover? If the answer is yes, why would you sell the stock when it had been down for X years?

Let's say that the stock market had stayed down for 5 years and your AA is 60/40 now.

You have a choice

A) Sell as per 60/40.


B) Sell the bond for as long as possible.


Do you believe that the stock market had been down for 5 years and it is more likely to recover soon, you choose (B). You do not want to lock in your losses. If you believe that, the stock market could stay down no matter how long that it had been down, you choose (A).

What do you believe?

KlangFool

I am not a market timer. I hold an asset allocation and maintain it. If I sell bonds for as long as possible, I'm allowing my AA to drift to a more aggressive AA. Why would anybody recommend that? Just as you recommend buying the lagging asset class, why wouldn't you recommend selling the heavy asset class?

If I have $600k in stocks and $400k in bonds and the stock market crashes 30%, I now have $420k in stocks and $400k in bonds. I'd sell the first $120k in bonds, which would then get me to $420k/$280k, which is back to 60/40. At that point, I'd sell stocks and bonds equally. If I continue selling bonds, I'd drift more aggressive than 60/40. Why would I do that? In that case, I don't have a 60/40 AA at all.

Triple digit golfer,

"I am not a market timer. "


So, essentially, you do not believe in the recession cycle. Since 2018, I have been telling folks that historically, there is a US recession every 10 years. The longer we are away from the 2008/2009 recession, we are more likely to have a recession. Then, it happened in 2020. Ditto, the longer that the recession is, it is more likely that the recovery is coming soon.

I do not consider this as market timing. There is an inherent cycle within the system.


KlangFool

Sorry, that is market timing. Expecting a recovery after a crash and modifying AA to be more aggressive, expecting an increase, is market timing.

https://en.wikipedia.org/wiki/List_of_r ... ted_States


Your portfolio, your choice. The above is a list of the US recessions and the duration of each recession.


KlangFool

[Triple digit golfer]

Triple digit golfer,

1) 5 years is the minimum balance.


2) Do you assume that the stock market will eventually recover? If the answer is yes, why would you sell the stock when it had been down for X years?

Let's say that the stock market had stayed down for 5 years and your AA is 60/40 now.

You have a choice

A) Sell as per 60/40.


B) Sell the bond for as long as possible.


Do you believe that the stock market had been down for 5 years and it is more likely to recover soon, you choose (B). You do not want to lock in your losses. If you believe that, the stock market could stay down no matter how long that it had been down, you choose (A).

What do you believe?

KlangFool

I am not a market timer. I hold an asset allocation and maintain it. If I sell bonds for as long as possible, I'm allowing my AA to drift to a more aggressive AA. Why would anybody recommend that? Just as you recommend buying the lagging asset class, why wouldn't you recommend selling the heavy asset class?

If I have $600k in stocks and $400k in bonds and the stock market crashes 30%, I now have $420k in stocks and $400k in bonds. I'd sell the first $120k in bonds, which would then get me to $420k/$280k, which is back to 60/40. At that point, I'd sell stocks and bonds equally. If I continue selling bonds, I'd drift more aggressive than 60/40. Why would I do that? In that case, I don't have a 60/40 AA at all.

Triple digit golfer,

"I am not a market timer. "


So, essentially, you do not believe in the recession cycle. Since 2018, I have been telling folks that historically, there is a US recession every 10 years. The longer we are away from the 2008/2009 recession, we are more likely to have a recession. Then, it happened in 2020. Ditto, the longer that the recession is, it is more likely that the recovery is coming soon.

I do not consider this as market timing. There is an inherent cycle within the system.


KlangFool

Sorry, that is market timing. Expecting a recovery after a crash and modifying AA to be more aggressive, expecting an increase, is market timing.

https://en.wikipedia.org/wiki/List_of_r ... ted_States


Your portfolio, your choice. The above is a list of the US recessions and the duration of each recession.


KlangFool

This surprises me from you.

I always thought you were a stickler for AA and always maintained it. Help me understand exactly what you do. In my scenario above, where your $600k/$400k stock/bond drops to $420k/$400k, you'd spend all $400k in bonds before touching the $420 in stocks all the way up until you ended up with 100% stocks?

[KlangFool]

I am not a market timer. I hold an asset allocation and maintain it. If I sell bonds for as long as possible, I'm allowing my AA to drift to a more aggressive AA. Why would anybody recommend that? Just as you recommend buying the lagging asset class, why wouldn't you recommend selling the heavy asset class?

If I have $600k in stocks and $400k in bonds and the stock market crashes 30%, I now have $420k in stocks and $400k in bonds. I'd sell the first $120k in bonds, which would then get me to $420k/$280k, which is back to 60/40. At that point, I'd sell stocks and bonds equally. If I continue selling bonds, I'd drift more aggressive than 60/40. Why would I do that? In that case, I don't have a 60/40 AA at all.

Triple digit golfer,

"I am not a market timer. "


So, essentially, you do not believe in the recession cycle. Since 2018, I have been telling folks that historically, there is a US recession every 10 years. The longer we are away from the 2008/2009 recession, we are more likely to have a recession. Then, it happened in 2020. Ditto, the longer that the recession is, it is more likely that the recovery is coming soon.

I do not consider this as market timing. There is an inherent cycle within the system.


KlangFool

Sorry, that is market timing. Expecting a recovery after a crash and modifying AA to be more aggressive, expecting an increase, is market timing.

https://en.wikipedia.org/wiki/List_of_r ... ted_States


Your portfolio, your choice. The above is a list of the US recessions and the duration of each recession.


KlangFool

This surprises me from you.

I always thought you were a stickler for AA and always maintained it. Help me understand exactly what you do. In my scenario above, where your $600k/$400k stock/bond drops to $420k/$400k, you'd spend all $400k in bonds before touching the $420 in stocks all the way up until you ended up with 100% stocks?

Triple digit golfer,


To me, this is more theoretical than any real possibility. I do not see how we could have any stable society if the recession lasting more than 5 years. I would have to move somewhere else after 5 years. Then, I do not need 60K per year.

<<In my scenario above, where your $600k/$400k stock/bond drops to $420k/$400k, you'd spend all $400k in bonds before touching the $420 in stocks all the way up until you ended up with 100% stocks?>>


If the 600K/400K drop to 420K/400K, in order to maintain 60/40, you would have to sell 72K of the bond to buy the stock. Then, you end up with 492K/328K. After that, you spend down the 328K.

KlangFool

[striker79]

This is also a TINA market to me. I'm not afraid of anything (like most other investors), until we have interest rates moving up again which isnt happening for years. Sure we could have corrections of 10-15%, but it's all the same game to me - go all in on stocks.

Once the fed starts to hint of increasing rates, thats when I will change course and get out of my current 100% stock allocation.

[TheTimeLord]

I was temporarily terrified this morning when I confused the Poshmark IPO with The RealReal. But once I realized it wasn't The RealReal my fears subsided.

[bugleheadd]

was the Q4 2018 correction of about 20% caused by the increase in interest rates?

[Soon2BXProgrammer]

was the Q4 2018 correction of about 20% caused by the increase in interest rates?

causation is different the correlation. The Q4 2018 correction is correlated with the rising rates at the time.

[jhsu802701]

Why would a market correction need any cause or triggering mechanism? Even with 20-20 hindsight, nobody can explain why the NASDAQ bubble peaked in March of 2000 and not a few months or a year earlier or later. There's no clear explanation about what triggered the 1987 crash or the 1929 crash.

[HomerJ]

You guys realize the Fed increased short-term interest rates 17 times from 6/2004 to 6/2006 from 1.25% to 5.25%, right?

4% in 2 years....

VTSAX (Total Stock Market Index) gained 22% over that 2 year period.
VBTLX (Total Bond Market Index) gained 6% over that 2 year period.

Even the bond fund went up while interest rates were rising! (That's because the Fed doesn't control ALL interest rates)

Fed interest rates are one variable, but it's hard to make predictions based on them.