Moving against a multi-month downturn

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philbee
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Moving against a multi-month downturn

Post by philbee »

I just started investing the end of December 2019. I have 70% Total Stock, 10% Int'l Stock, 20% Total Bonds.

As of today I'm seeing -12.5% total returns, and after looking over all the news about the pandemic I'm convinced I'll be looking at -30% at the bottom. From all the back-testing I've researched, I'm estimating an 11-18 month underwater period.

I know this is total antithesis to this forum's philosophy, but with such a clear long-term event that has nothing to do with market forces, it seems like a good choice to pull-out of the market, even at a loss in order to reduce the downside.

I'm also considering picking up SQQQ in order to recoup some losses, and could easily turn a profit within 5 days if this downtrend continues.

I know these are really risky moves, so just trying to get some balanced thoughts.
BlueMoonXD
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Re: Moving against a multi-month downturn

Post by BlueMoonXD »

Have you considered one of the other 20 or so threads on the topic?

Few here are going to endorse market timing and gambling on a sense that you have some unique insight. Every other investor is seeing and reading the same news you are. But it's your money. If you know the future, go for it.

And I'll just say that while market timing is generally a bad idea, market timing into a 3x leveraged inverse ETF strikes me as a particularly bad idea.
Last edited by BlueMoonXD on Thu Mar 12, 2020 1:04 am, edited 1 time in total.
BoggledHead2
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Re: Moving against a multi-month downturn

Post by BoggledHead2 »

philbee wrote: Thu Mar 12, 2020 12:33 am I just started investing the end of December 2019. I have 70% Total Stock, 10% Int'l Stock, 20% Total Bonds.

As of today I'm seeing -12.5% total returns, and after looking over all the news about the pandemic I'm convinced I'll be looking at -30% at the bottom. From all the back-testing I've researched, I'm estimating an 11-18 month underwater period.

I know this is total antithesis to this forum's philosophy, but with such a clear long-term event that has nothing to do with market forces, it seems like a good choice to pull-out of the market, even at a loss in order to reduce the downside.

I'm also considering picking up SQQQ in order to recoup some losses, and could easily turn a profit within 5 days if this downtrend continues.

I know these are really risky moves, so just trying to get some balanced thoughts.
Pulling out is literally the worst thing you can do now

Your asset allocation is clearly inappropriate for you and your risk tolerance. If you are investing long term - you should be buying up these cheaper shares. The world is not ending.

If you are nearing retirement - you shouldn’t have been so sensitive to equity risk in the first place (more bonds / fixed income)
Money Market
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Re: Moving against a multi-month downturn

Post by Money Market »

What is your contingency plan, if instead, the market drops to a bottom of 22% and then continues to go up from there, at what point will you buy back in?

Or, if the day after you buy SQQQ, the market stops dropping and continues to upwards for the rest of the year? If you're going to do this, you should set some hard percentages to know when to get in and get out so you don't do it based on feelings or emotions.
VTSAX and chill.
Topic Author
philbee
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Re: Moving against a multi-month downturn

Post by philbee »

I'm curious to hear other peoples' experience in the past doing a little active trading in the face of obvious market trends.

What were some benefits and some pitfalls?

It seems pretty obvious that this social health threat is going to last at least a few months before it starts to clear up, and then the economy will take a few months after to recover.

After implementing my allocation I learned about back-testing and discovered that my allocation is very start-date sensitive. I was under the impression from the saying "it's not timing the market, but time in the market" that it didn't matter when I started, but since I lump-sum invested right at the top of the market before a recession, it's actually going to cripple future returns.
Novine
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Re: Moving against a multi-month downturn

Post by Novine »

"it's actually going to cripple future returns."

Only if you have a short-term investment timeline or never plan to add to your current investments. Otherwise, if you have another 30 - 40 years, I doubt you'll notice the difference.
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philbee
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Re: Moving against a multi-month downturn

Post by philbee »

Money Market wrote: Thu Mar 12, 2020 1:32 am What is your contingency plan, if instead, the market drops to a bottom of 22% and then continues to go up from there, at what point will you buy back in?

Or, if the day after you buy SQQQ, the market stops dropping and continues to upwards for the rest of the year? If you're going to do this, you should set some hard percentages to know when to get in and get out so you don't do it based on feelings or emotions.
I'm thinking if the market starts to trend back up at -20% I would buy back, and even if it starts going back down again, at least I've eliminated some of the downside.

As for SQQQ I would sell after 5 days, it's not a long hold. I would use it just to recoup some of the downside of my stock allocation.
dru808
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Re: Moving against a multi-month downturn

Post by dru808 »

Heck yeah, great idea, better yet, triple short qqq you’ll be 3x richer.
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philbee
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Re: Moving against a multi-month downturn

Post by philbee »

Novine wrote: Thu Mar 12, 2020 1:49 am "it's actually going to cripple future returns."

Only if you have a short-term investment timeline or never plan to add to your current investments. Otherwise, if you have another 30 - 40 years, I doubt you'll notice the difference.
I would like to be able to shift to an income portfolio within 10 years and potentially have the opportunity for financial independence, so trying to make the best of a growth strategy.

I have 600k and would like to get it to 1m and do 3% withdrawal. Even a 6% annual growth rate would do it for me, but with such a poor start date the CAGR would be gimped to 4%.
Last edited by philbee on Thu Mar 12, 2020 2:08 am, edited 1 time in total.
Topic Author
philbee
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Re: Moving against a multi-month downturn

Post by philbee »

dru808 wrote: Thu Mar 12, 2020 1:52 am Heck yeah, great idea, better yet, triple short qqq you’ll be 3x richer.
I wouldn't want to do a short sell since it has an unlimited downside risk.
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DrPayItBack
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Re: Moving against a multi-month downturn

Post by DrPayItBack »

philbee wrote: Thu Mar 12, 2020 1:51 am
Money Market wrote: Thu Mar 12, 2020 1:32 am What is your contingency plan, if instead, the market drops to a bottom of 22% and then continues to go up from there, at what point will you buy back in?

Or, if the day after you buy SQQQ, the market stops dropping and continues to upwards for the rest of the year? If you're going to do this, you should set some hard percentages to know when to get in and get out so you don't do it based on feelings or emotions.
I'm thinking if the market starts to trend back up at -20% I would buy back, and even if it starts going back down again, at least I've eliminated some of the downside.

As for SQQQ I would sell after 5 days, it's not a long hold. I would use it just to recoup some of the downside of my stock allocation.
You aren’t going to know it’s ‘trending back up’ until it’s already happened and you’ve missed the boat. Do you think there is a signal that goes ‘ding ding ding,I’m trending up!’?
quantAndHold
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Re: Moving against a multi-month downturn

Post by quantAndHold »

In a market like this I wouldn’t use triple leveraged anything. That’s just asking the school bully for a beating.

I’m guessing since you’ve just started investing, you’re young. Just put the money in the market and wait. By the time you need the money, everything that’s happening now will just be the tiniest, barely noticeable wiggle on the stock chart.
Yes, I’m really that pedantic.
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philbee
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Re: Moving against a multi-month downturn

Post by philbee »

DrPayItBack wrote: Thu Mar 12, 2020 2:01 am You aren’t going to know it’s ‘trending back up’ until it’s already happened and you’ve missed the boat. Do you think there is a signal that goes ‘ding ding ding,I’m trending up!’?
I would keep a look out for a slow down in new covid-19 cases. Currently we are experiencing exponential spread rates.
dru808
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Re: Moving against a multi-month downturn

Post by dru808 »

Forget trending up, just buy back in at the lowest point.
sptm | vigi | xbt/eth
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DrPayItBack
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Re: Moving against a multi-month downturn

Post by DrPayItBack »

philbee wrote: Thu Mar 12, 2020 2:04 am
DrPayItBack wrote: Thu Mar 12, 2020 2:01 am You aren’t going to know it’s ‘trending back up’ until it’s already happened and you’ve missed the boat. Do you think there is a signal that goes ‘ding ding ding,I’m trending up!’?
I would keep a look out for a slow down in new covid-19 cases. Currently we are experiencing exponential spread rates.
And surely you would be in a privileged position to do that vs the other million goofballs trying to time this. You aren’t gonna get ahead of this watching cable news and twitter
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philbee
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Re: Moving against a multi-month downturn

Post by philbee »

dru808 wrote: Thu Mar 12, 2020 2:07 am Forget trending up, just buy back in at the lowest point.
It doesn't need to be the lowest point, just a point lower than I'm at right now.

I'm also thinking options trading is probably a good choice, but I'm still trying to wrap my head around it.
Last edited by philbee on Thu Mar 12, 2020 2:29 am, edited 1 time in total.
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philbee
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Re: Moving against a multi-month downturn

Post by philbee »

DrPayItBack wrote: Thu Mar 12, 2020 2:08 am
philbee wrote: Thu Mar 12, 2020 2:04 am
DrPayItBack wrote: Thu Mar 12, 2020 2:01 am You aren’t going to know it’s ‘trending back up’ until it’s already happened and you’ve missed the boat. Do you think there is a signal that goes ‘ding ding ding,I’m trending up!’?
I would keep a look out for a slow down in new covid-19 cases. Currently we are experiencing exponential spread rates.
And surely you would be in a privileged position to do that vs the other million goofballs trying to time this. You aren’t gonna get ahead of this watching cable news and twitter
I'm not looking to be ahead of everyone else, just ahead of myself from not doing anything.
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philbee
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Re: Moving against a multi-month downturn

Post by philbee »

delete
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unclescrooge
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Re: Moving against a multi-month downturn

Post by unclescrooge »

philbee wrote: Thu Mar 12, 2020 12:33 am I just started investing the end of December 2019. I have 70% Total Stock, 10% Int'l Stock, 20% Total Bonds.
How old are you? How much have you contributed?
How much do you think you will contribute over your career?
sambb
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Re: Moving against a multi-month downturn

Post by sambb »

philbee wrote: Thu Mar 12, 2020 12:33 am I just started investing the end of December 2019. I have 70% Total Stock, 10% Int'l Stock, 20% Total Bonds.

As of today I'm seeing -12.5% total returns, and after looking over all the news about the pandemic I'm convinced I'll be looking at -30% at the bottom. From all the back-testing I've researched, I'm estimating an 11-18 month underwater period.

I know this is total antithesis to this forum's philosophy, but with such a clear long-term event that has nothing to do with market forces, it seems like a good choice to pull-out of the market, even at a loss in order to reduce the downside.

I'm also considering picking up SQQQ in order to recoup some losses, and could easily turn a profit within 5 days if this downtrend continues.

I know these are really risky moves, so just trying to get some balanced thoughts.
The best time to rebalance based on increased risk to your portfolio was jan or feb. Lots of threads here on it, as risk had increased substanitally. Now, it is far more murky. We might go down, we might go up. Hard to say. One thing for sure, the virus is going to spread more and there will be more bad news. I would adjust to your personal risk tolerance, never take too much or too little risk.
todaysBob
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Re: Moving against a multi-month downturn

Post by todaysBob »

philbee wrote: Thu Mar 12, 2020 12:33 am I just started investing the end of December 2019. I have 70% Total Stock, 10% Int'l Stock, 20% Total Bonds.

As of today I'm seeing -12.5% total returns, and after looking over all the news about the pandemic I'm convinced I'll be looking at -30% at the bottom. From all the back-testing I've researched, I'm estimating an 11-18 month underwater period.

I know this is total antithesis to this forum's philosophy, but with such a clear long-term event that has nothing to do with market forces, it seems like a good choice to pull-out of the market, even at a loss in order to reduce the downside.

I'm also considering picking up SQQQ in order to recoup some losses, and could easily turn a profit within 5 days if this downtrend continues.

I know these are really risky moves, so just trying to get some balanced thoughts.
If it makes you feel any better, I started my boglehead journey with a lump sum purchase of $600k as well(most of my savings) on 02/19 :oops: :D

Sitting on unrealized losses of $120k(and if futures are any indication, another $25k tomorrow) - all in sweet and short span of 3 weeks!

Not planning to sell a single stock though, hopefully for many years to come.
Last edited by todaysBob on Thu Mar 12, 2020 2:08 pm, edited 1 time in total.
rossington
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Re: Moving against a multi-month downturn

Post by rossington »

OP:
You chose 80/20 less than 3 months ago. You determined you could handle a high exposure to stocks. I assume you UNDERSTOOD these things can happen at anytime.
You are working (hopefully), have 20% in bonds, and have an emergency fund (hopefully).
Don't go screwing around with things when you should not.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
BlueMoonXD
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Re: Moving against a multi-month downturn

Post by BlueMoonXD »

From reading your responses in this thread, it's pretty clear that whether you are right or wrong in this particular case, your psychology is going to cause you financial harm in the long term if you do not force yourself to stay the course.

You speak with an irrational confidence about unknowable market behavior - phrases like "obvious market trends", "easily turn a profit", "seems pretty clear" are red flags to me. You've been in the market for a few months and you're already convinced you can outsmart it by market timing and shifting your investments into riskier short term hedges?

What you are doing is gambling. Watching your investments decline sucks, and you're convincing yourself that if you just do a few obvious things you are guaranteed to come out ahead. You aren't. There is no free lunch and if active trading was so reliably profitable this community would not exist.

Do yourself a favor and stop checking your brokerage account. Stay the course and invest regularly and stop trying to outsmart the market.
Caduceus
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Re: Moving against a multi-month downturn

Post by Caduceus »

philbee wrote: Thu Mar 12, 2020 1:41 am I'm curious to hear other peoples' experience in the past doing a little active trading in the face of obvious market trends.
I think it's very human to identify patterns and attribute skill when luck is involved. As Warren Buffett has noted, if you are able to just pick out when stocks are going to fall and then buy back at the correct price just a few times in a lifetime, you'd probably be richer than he is. It is not possible.

Some investors will remember the calls that they made right. You'll see many posters here who got out just before the crash, and the fact that this happened confirms for them that they have been able to predict what's coming. But in all likelihood, they are forgetting the many predictions they've made that were wrong.

I've done some active trading - and I'm happy to share the story since they've all gone against me and I like publicizing failures.

I took a huge position in a stock I knew to be undervalued, but sold 15% of that position to buy back in at $0.10 lower. I mean - how difficult can it be to buy back at $0.10 lower? Honestly? Well, what happened was that when it went down by $0.10, I was sure it was going to go down more. When it went down by $1, the news had changed - people were writing about how this stock was going to tank, etc. It didn't change my assessment of its true value, which was three times as much. But I listened to the financial pornographers and thought "heck, it's only 15% of my position in this stock - let's wait a week before buying back in" - well, a week later, the stock rose by 5%. I didn't want to recognize the loss then - buying back in 5% more expensive than I did. So I waited, and waited, and waited, and waited .... you can probably guess how the story turns out. My original position nearly tripled in price. So I lost out on 3x profits on 15% of my original investment by hoping to buy back in at $0.10 less than my cost basis. If that's not sheer stupidity, I don't know what is.

You know, at any point in time, I could have bought back the stock at a higher price than I sold it for, and it woud still have made me money. But I was psychologically "locked" into the "loss" I had suffered - my refusal to re-enter the market cost me much, much more than my initial bad decision to actively trade in the hopes of recognizing a small cost-basis reduction.

The phrase "obvious market trends" is very deceptive. Keep an investment journal and write down your thoughts to what you think the markets will do - you'll find yourself very surprised over time.
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philbee
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Re: Moving against a multi-month downturn

Post by philbee »

todaysBob wrote: Thu Mar 12, 2020 2:57 am If it makes you feel any better, I started my boglehead journey with a lump sum purchase of $600k as well(most of my savings) on 02/19 :oops: :D

Sitting on unrealized losses of $120(and if futures are any indication, another $25k tomorrow) - all in sweet and short span of 3 weeks!

Not planning to sell a single stock though, hopefully for many years to come.
Oh man, that hurts! Yea the thing that I didn't know when I started was start date sensitivity.

Here's my portfolio starting around an equivalent time in 2008 compared to starting 1 year later:

Image

That's over a 50% difference after 10 years. I kept reading in these forums "time in the market, not timing the market," but the reality is the market times you.

Even if I'm looking at a 20% less performance over 10 years that's too much, but nobody mentions that when they talk about risk tolerance they just say high risk or medium risk and make it sound like if you wait long enough it will be only 10% difference in the end.
AlexanderTheMediocre
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Re: Moving against a multi-month downturn

Post by AlexanderTheMediocre »

philbee wrote: Thu Mar 12, 2020 7:57 am
Oh man, that hurts! Yea the thing that I didn't know when I started was start date sensitivity.

Here's my portfolio starting around an equivalent time in 2008 compared to starting 1 year later:

Image

That's over a 50% difference after 10 years. I kept reading in these forums "time in the market, not timing the market," but the reality is the market times you.

Even if I'm looking at a 20% less performance over 10 years that's too much, but nobody mentions that when they talk about risk tolerance they just say high risk or medium risk and make it sound like if you wait long enough it will be only 10% difference in the end.
Are you investing for things needed in the next 10 years? Retirement income? If so, a 70/30 allocation may have been too aggressive for you if you're having all of these doubts.

And yes, you are right that dates matter for investing. That's why we continue to pour in money every paycheck no matter the market state. What else can you do? Generally, YOU as an investor do not have privileged or unique information that makes a difference over random chance.
chevca
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Re: Moving against a multi-month downturn

Post by chevca »

So, you just started investing 3 months ago, and now you think you know how to handle this situation? That makes sense....

It was good of you to come here and ask, but it seems your mind is made up. Good luck to you.
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philbee
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Re: Moving against a multi-month downturn

Post by philbee »

unclescrooge wrote: Thu Mar 12, 2020 2:44 am How old are you? How much have you contributed?
How much do you think you will contribute over your career?
I'm 40, I invested $270k end of Dec'19. 70% VTI, 20% BND, 10% IXUS.

I don't make enough to contribute regularly, I'm managing an inherited IRA that was all cash (it's now $240k).

I have an additional $300k cash from a recent home sale.

There's an additional $10k emergency fund. I live in a small house that is paid off.

My goal would be to have a portfolio with an 8% CAGR and 10% stdev that I can comfortably withdraw 3% from annually.
chevca
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Re: Moving against a multi-month downturn

Post by chevca »

With all that cash, you're a lot further away from the 70/20/10 portfolio you list than you think. You're closer to 70% cash and bonds. What are you worried about again?
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philbee
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Re: Moving against a multi-month downturn

Post by philbee »

When I originally looked at inverse ETF's I only saw leveraged securities. How about $PSQ? Has anybody ever taken a simple inverse ETF to hedge against volatility?
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philbee
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Re: Moving against a multi-month downturn

Post by philbee »

Caduceus wrote: Thu Mar 12, 2020 5:05 am I took a huge position in a stock I knew to be undervalued, but sold 15% of that position to buy back in at $0.10 lower. I mean - how difficult can it be to buy back at $0.10 lower? Honestly? Well, what happened was that when it went down by $0.10, I was sure it was going to go down more. When it went down by $1, the news had changed - people were writing about how this stock was going to tank, etc. It didn't change my assessment of its true value, which was three times as much. But I listened to the financial pornographers and thought "heck, it's only 15% of my position in this stock - let's wait a week before buying back in" - well, a week later, the stock rose by 5%. I didn't want to recognize the loss then - buying back in 5% more expensive than I did. So I waited, and waited, and waited, and waited .... you can probably guess how the story turns out. My original position nearly tripled in price. So I lost out on 3x profits on 15% of my original investment by hoping to buy back in at $0.10 less than my cost basis. If that's not sheer stupidity, I don't know what is.
Thank you for taking the time to share your story, that's what I'm asking for, is other peoples' experiences when trying to take corrective action. I appreciate it!
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philbee
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Re: Moving against a multi-month downturn

Post by philbee »

chevca wrote: Thu Mar 12, 2020 8:17 am With all that cash, you're a lot further away from the 70/20/10 portfolio you list than you think. You're closer to 70% cash and bonds. What are you worried about again?
I'm not worried, I'm trying to have an open discussion about possible actions to compensate for incoming losses. I'm looking for other peoples' experiences on the matter because I know we've all made mistakes, or had good luck and knew when to cut out ahead.
MotoTrojan
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Re: Moving against a multi-month downturn

Post by MotoTrojan »

These types of posts give me faith that the equity premium will persist well into the future. I think it is important for us true Bogleheads to remember that the market requires this sort of behavior to maintain a strong advantage over the risk-free rate.

OP, good luck.
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Re: Moving against a multi-month downturn

Post by MotoTrojan »

philbee wrote: Thu Mar 12, 2020 8:31 am
chevca wrote: Thu Mar 12, 2020 8:17 am With all that cash, you're a lot further away from the 70/20/10 portfolio you list than you think. You're closer to 70% cash and bonds. What are you worried about again?
I'm not worried, I'm trying to have an open discussion about possible actions to compensate for incoming losses. I'm looking for other peoples' experiences on the matter because I know we've all made mistakes, or had good luck and knew when to cut out ahead.
People have gotten lucky with timing moves. You just started investing, do you really want to establish a habit of trying to time the market? Sure you may get lucky every now and again, but in the long run you will lose (just like how the casino house wins int he long run).

You should be buying as many stocks as you can right now, not selling or investing in SQQQ...
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philbee
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Re: Moving against a multi-month downturn

Post by philbee »

MotoTrojan wrote: Thu Mar 12, 2020 8:32 am I think it is important for us true Bogleheads to remember that the market requires this sort of behavior to maintain a strong advantage over the risk-free rate.
I've heard this term risk-free rate before, what exactly did you mean by that here? Isn't it supposed to be the rate of return that carries no risk after inflation or something like that? Over a 10 year period I'm guessing it's got to be something like 3-4% at best, maybe as low as 1%.

My goal is 8% with 10% stdev.
Last edited by philbee on Thu Mar 12, 2020 8:39 am, edited 1 time in total.
chevca
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Re: Moving against a multi-month downturn

Post by chevca »

philbee wrote: Thu Mar 12, 2020 8:31 am
chevca wrote: Thu Mar 12, 2020 8:17 am With all that cash, you're a lot further away from the 70/20/10 portfolio you list than you think. You're closer to 70% cash and bonds. What are you worried about again?
I'm not worried, I'm trying to have an open discussion about possible actions to compensate for incoming losses. I'm looking for other peoples' experiences on the matter because I know we've all made mistakes, or had good luck and knew when to cut out ahead.
Your energy would be much better spent on figuring out what you want to do with the $300k cash, rather than try to guard against losses of what's already invested.
MotoTrojan
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Re: Moving against a multi-month downturn

Post by MotoTrojan »

philbee wrote: Thu Mar 12, 2020 8:39 am
MotoTrojan wrote: Thu Mar 12, 2020 8:32 am I think it is important for us true Bogleheads to remember that the market requires this sort of behavior to maintain a strong advantage over the risk-free rate.
I've heard this term risk-free rate before, what exactly did you mean by that here? Isn't it supposed to be the rate of return that carries no risk after inflation or something like that? Over a 10 year period I'm guessing it's got to be something like 3-4% at best, maybe as low as 1%.

My goal is 8% with 10% stdev.
8% nominal or real (after inflation)? Nominal could be reasonable, especially with the reduced valuations we are seeing now. Many people conservatively expect 3-4% real returns from here, but 6-7% would be the norm and I would be thrilled to get. That is 100% equity though. If you are trying to time the market you are ensuring your expected return is less than this (and the market) though.

https://www.investopedia.com/terms/r/risk-freerate.asp

Usually treasury bills are considered the risk-free rate. Note that this is a nominal return and has nothing to do with inflation. Once you purchase a treasury bill your return won't change based on inflation, but you can bet you'll get the return you bought in to, and if you don't then you have much bigger problems to worry about.
alex_686
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Re: Moving against a multi-month downturn

Post by alex_686 »

philbee wrote: Thu Mar 12, 2020 1:41 am I'm curious to hear other peoples' experience in the past doing a little active trading in the face of obvious market trends.

What were some benefits and some pitfalls?

It seems pretty obvious that this social health threat is going to last at least a few months before it starts to clear up, and then the economy will take a few months after to recover.

After implementing my allocation I learned about back-testing and discovered that my allocation is very start-date sensitive. I was under the impression from the saying "it's not timing the market, but time in the market" that it didn't matter when I started, but since I lump-sum invested right at the top of the market before a recession, it's actually going to cripple future returns.
Obvious trends rarely play out as you think. Backtesting is a pack of lies. I will follow up with more info latter, but I would ignore the news for now.

This is coming from somebody who has not checked their balance this month, has live through a fee major downturns, works in the industry, has CNBC blaring in the background, and needs to get back to their Bloomberg terminal.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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philbee
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Re: Moving against a multi-month downturn

Post by philbee »

MotoTrojan wrote: Thu Mar 12, 2020 8:44 am 8% nominal or real (after inflation)? Nominal could be reasonable, especially with the reduced valuations we are seeing now. Many people conservatively expect 3-4% real returns from here, but 6-7% would be the norm and I would be thrilled to get. That is 100% equity though. If you are trying to time the market you are ensuring your expected return is less than this (and the market) though.

https://www.investopedia.com/terms/r/risk-freerate.asp

Usually treasury bills are considered the risk-free rate. Note that this is a nominal return and has nothing to do with inflation. Once you purchase a treasury bill your return won't change based on inflation, but you can bet you'll get the return you bought in to, and if you don't then you have much bigger problems to worry about.
Yes 8% nominal, I'm not being greedy. Aren't long-term treasury bills under 1% right now?
MotoTrojan
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Re: Moving against a multi-month downturn

Post by MotoTrojan »

philbee wrote: Thu Mar 12, 2020 9:00 am
MotoTrojan wrote: Thu Mar 12, 2020 8:44 am 8% nominal or real (after inflation)? Nominal could be reasonable, especially with the reduced valuations we are seeing now. Many people conservatively expect 3-4% real returns from here, but 6-7% would be the norm and I would be thrilled to get. That is 100% equity though. If you are trying to time the market you are ensuring your expected return is less than this (and the market) though.

https://www.investopedia.com/terms/r/risk-freerate.asp

Usually treasury bills are considered the risk-free rate. Note that this is a nominal return and has nothing to do with inflation. Once you purchase a treasury bill your return won't change based on inflation, but you can bet you'll get the return you bought in to, and if you don't then you have much bigger problems to worry about.
Yes 8% nominal, I'm not being greedy. Aren't long-term treasury bills under 1% right now?
Treasury bills range from a few weeks to 1-year; anything larger is a bond. I don't believe long-term bonds (30 year) are under 1% but they sure are close. The 10-year bond is the most frequently cited value and it has been dancing around 0.5% which is unprecedented (went under 1% for the 1st time in history not long ago).
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philbee
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Re: Moving against a multi-month downturn

Post by philbee »

chevca wrote: Thu Mar 12, 2020 8:39 am Your energy would be much better spent on figuring out what you want to do with the $300k cash, rather than try to guard against losses of what's already invested.
Yes, I'm happy to have that discussion. Personally I feel like waiting until health concerns stabilize and the market settles before buying anymore positions makes sense.

I'm really attracted to the Golden Butterfly, tracking its performance through this downturn is showing good stability and it fulfills my 8% cagr 10% stdev goal well in back-tests.

I'm also considering a high-growth portfolio for a couple years at most, then transition to a GB in order to give it a little boost. If I can produce a little extra gains now, it would help a lot to create a sense of security in the long-run.
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philbee
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Re: Moving against a multi-month downturn

Post by philbee »

MotoTrojan wrote: Thu Mar 12, 2020 9:12 am Treasury bills range from a few weeks to 1-year; anything larger is a bond. I don't believe long-term bonds (30 year) are under 1% but they sure are close. The 10-year bond is the most frequently cited value and it has been dancing around 0.5% which is unprecedented (went under 1% for the 1st time in history not long ago).
Right, my mistake long-term Treasury bonds.

So if the risk-free rate is ~1%, what does it mean to maintain a strong advantage over the risk-free rate?
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Re: Moving against a multi-month downturn

Post by MotoTrojan »

philbee wrote: Thu Mar 12, 2020 9:18 am
MotoTrojan wrote: Thu Mar 12, 2020 9:12 am Treasury bills range from a few weeks to 1-year; anything larger is a bond. I don't believe long-term bonds (30 year) are under 1% but they sure are close. The 10-year bond is the most frequently cited value and it has been dancing around 0.5% which is unprecedented (went under 1% for the 1st time in history not long ago).
Right, my mistake long-term Treasury bonds.

So if the risk-free rate is ~1%, what does it mean to maintain a strong advantage over the risk-free rate?
The risk-free rate is currently closer to 0% than 1%; it is often based on the 3-month bill, not the long-term bond.

https://www.investopedia.com/terms/e/eq ... remium.asp

The equity risk premium is historically quite similar to the real return of equities as the 3-month t-bill is usually in the realm of inflation.
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philbee
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Re: Moving against a multi-month downturn

Post by philbee »

alex_686 wrote: Thu Mar 12, 2020 8:57 am Obvious trends rarely play out as you think. Backtesting is a pack of lies. I will follow up with more info latter, but I would ignore the news for now.

This is coming from somebody who has not checked their balance this month, has live through a fee major downturns, works in the industry, has CNBC blaring in the background, and needs to get back to their Bloomberg terminal.
I would be very interested to hear your experiences. I've heard it mentioned before back-testing is worthless, but I still don't understand that logic as a blanket statement. If you don't consider the start & end dates and put into context the corresponding economic environment, then I agree it's worthless, but I've been back-testing many different time periods when comparing allocations to try and understand the nature of their performance under different conditions. Is that useless?

I also use it to sort of role-play my emotions during different sets of downturns, how would I feel if my portfolio took a 40% loss and spent 24 months underwater. I've concluded that yes it means after 2 years I haven't lost any money, but it also means it averages out to a 0% return after 2 years. Some allocations can result in 4 year underwater periods. So the underwater period has a significant effect on the cagr. Finding allocations that demonstrate short underwater periods throughout all economic conditions I imagine is good to know. That's just one example of how I've used back-testing, but I would really like to know if that information is actually useless or not.

I'm also glad to hear from someone in the financial industry, and your reply raises many questions for me.

Obviously you are doing something actively in investing if you're sitting at a terminal, and yet you say you don't make any moves or look at your balance.

Under what conditions do you make active moves? Are you just filling orders for other people? Why have the news on at all?
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philbee
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Re: Moving against a multi-month downturn

Post by philbee »

MotoTrojan wrote: Thu Mar 12, 2020 9:25 am The risk-free rate is currently closer to 0% than 1%; it is often based on the 3-month bill, not the long-term bond.

https://www.investopedia.com/terms/e/eq ... remium.asp

The equity risk premium is historically quite similar to the real return of equities as the 3-month t-bill is usually in the realm of inflation.
Okay, so my asking for help about understanding the risks of certain investment activities is what helps people like you maintain real returns in equities. Did I get that right?
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Re: Moving against a multi-month downturn

Post by MotoTrojan »

philbee wrote: Thu Mar 12, 2020 9:50 am
MotoTrojan wrote: Thu Mar 12, 2020 9:25 am The risk-free rate is currently closer to 0% than 1%; it is often based on the 3-month bill, not the long-term bond.

https://www.investopedia.com/terms/e/eq ... remium.asp

The equity risk premium is historically quite similar to the real return of equities as the 3-month t-bill is usually in the realm of inflation.
Okay, so my asking for help about understanding the risks of certain investment activities is what helps people like you maintain real returns in equities. Did I get that right?
No you did not. I am saying that people putting together a prudent investment plan, and then abandoning it as soon as the going gets rough, is what keeps the equity premium high. The less risky the market is, the lower the premium should/will be. If everyone was a good Boglehead and just kept buying stocks day after day and never panicked, then volatility would fall, valuations would inflate, and expected returns would be much more subdued (even if the risk-adjusted return was the same).
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philbee
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Re: Moving against a multi-month downturn

Post by philbee »

sambb wrote: Thu Mar 12, 2020 2:47 am The best time to rebalance based on increased risk to your portfolio was jan or feb. Lots of threads here on it, as risk had increased substanitally. Now, it is far more murky. We might go down, we might go up. Hard to say. One thing for sure, the virus is going to spread more and there will be more bad news. I would adjust to your personal risk tolerance, never take too much or too little risk.
What were the discussions you are referring to? I can't find them. Also what were the triggers for increased risk in Jan/Feb?

Was it a threshold on high valuations?

If you're referencing first news of covid-19, then why would news about the virus then be more valid than news about it now?

Looking at the facts & numbers, it's has to be 90%+ that this will be multiple months in the US. There might be a rally in late Spring/Early summer, but you can almost guarantee the markets are going down for the next couple weeks.

These are just my words, I'll be glad to revisit them in a couple months to see if I'm right or wrong.
Last edited by philbee on Thu Mar 12, 2020 10:19 am, edited 1 time in total.
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philbee
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Re: Moving against a multi-month downturn

Post by philbee »

MotoTrojan wrote: Thu Mar 12, 2020 9:56 am No you did not. I am saying that people putting together a prudent investment plan, and then abandoning it as soon as the going gets rough, is what keeps the equity premium high. The less risky the market is, the lower the premium should/will be. If everyone was a good Boglehead and just kept buying stocks day after day and never panicked, then volatility would fall, valuations would inflate, and expected returns would be much more subdued (even if the risk-adjusted return was the same).
I would appreciate more helpful feedback like this.

MotoTrojan wrote: Thu Mar 12, 2020 8:32 am These types of posts give me faith that the equity premium will persist well into the future. I think it is important for us true Bogleheads to remember that the market requires this sort of behavior to maintain a strong advantage over the risk-free rate.

OP, good luck.
Thanks, for the well wishes.
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Re: Moving against a multi-month downturn

Post by eye.surgeon »

Stick to your investment plan. Your asset allocation was reasonable 3 months ago and it's still reasonable now. You have little to no chance of guessing the low in the market. Be grateful you're young, this will be a good thing for you but only if you stick to sound investing principles, the foremost being don't sell at market lows.
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett
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Re: Moving against a multi-month downturn

Post by watchnerd »

philbee wrote: Thu Mar 12, 2020 12:33 am I just started investing the end of December 2019. I have 70% Total Stock, 10% Int'l Stock, 20% Total Bonds.

As of today I'm seeing -12.5% total returns, and after looking over all the news about the pandemic I'm convinced I'll be looking at -30% at the bottom. From all the back-testing I've researched, I'm estimating an 11-18 month underwater period..
Markets can be down or sideways for the better part of a decade.

You need to be thinking in 10 year timeframes, not months, to get your fully risk-adjusted returns.
60% Global Market Stocks (VT,FM) | 38% Global Market Bonds | 2% crypto & securitized gold || LMP TIPS/STRIPS || RSU + ESPP
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