Fear Y2K type of stock bubble
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Fear Y2K type of stock bubble
We already reached our number at least on paper. The S&P500 PE is around 24-25 now. Housing and Bond price are also very high now. We have been through Y2K .com and 08 housing bubble bust. Paper wealth wipe out 50% and took decade to recover. We are fear about similar things would ever happen again, Plus the inflation number. We are worried about the our paper wealth would lose it paper value plus hyperinflation. How dose BH here prepare for this? Our mortgage has been sold twice during last 3 months. We are thinking about pre-pay our mortgage and reduce 401k and IRA contribution to lock up the paper value we own.
Last edited by WhiteMaxima on Sun Sep 26, 2021 10:18 am, edited 1 time in total.
- Cheez-It Guy
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Re: Fear Y2K type of stock bubble
Keep saving money and be capable of living cheaply and adaptably.
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Re: Fear Y2K type of stock bubble
What is your Asset Allocation? If you are 100% equities, it sounds like that does not suit your risk tolerance.WhiteMaxima wrote: ↑Sun Sep 26, 2021 10:09 am We already reached our number at least on paper. The S&P500 PE is around 24-25 now. Housing and Bond price are also very high now. We have been through Y2K .com and 08 housing bubble bust. Paper wealth wipe out 50% and took decade to recover. We are fear about similar things would ever happen again, Plus the inflation number. We are worried about the our paper wealth would lose it paper value plus hyperinflation. How dose BH here prepare for this? Our mortgage has been sold twice during last 3 months. We are thinking about pre-pay our mortgage and reduce 401k and IRA contribution to lock up the paper value we own.
Re: Fear Y2K stock bubble
Balance.
Some amount of risky stocks, some amount of safe cash/bonds, some also include more tangible non-paper things like a homestead or gold (although I think there is an argument that ones "ownership" of even land and gold is subject to "paper" titles, legal interpretations, and the changing transitory state of everything over time while we're here.)
Some amount of risky stocks, some amount of safe cash/bonds, some also include more tangible non-paper things like a homestead or gold (although I think there is an argument that ones "ownership" of even land and gold is subject to "paper" titles, legal interpretations, and the changing transitory state of everything over time while we're here.)
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Fear Y2K type of stock bubble
We are 70/30 Equity/Cash. Equity is splited 50/50 US/Intl. Cash portion is mostly short-term Bond plus Tip & Real Asset fund (hedge against inflation). We are thing about moving to 50/50 Equity/Real Asset + cash. Split equity portion 50/50 US/Non-US.
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Re: Fear Y2K type of stock bubble
How old are you ? How close to desired retirement ?WhiteMaxima wrote: ↑Sun Sep 26, 2021 10:09 am We already reached our number at least on paper. The S&P500 PE is around 24-25 now. Housing and Bond price are also very high now. We have been through Y2K .com and 08 housing bubble bust. Paper wealth wipe out 50% and took decade to recover. We are fear about similar things would ever happen again, Plus the inflation number. We are worried about the our paper wealth would lose it paper value plus hyperinflation. How dose BH here prepare for this? Our mortgage has been sold twice during last 3 months. We are thinking about pre-pay our mortgage and reduce 401k and IRA contribution to lock up the paper value we own.
An important key to investing is having a well-calibrated sense of your future regret.
Re: Fear Y2K type of stock bubble
Make "your number" two or three times larger than it is now. Simple.WhiteMaxima wrote: ↑Sun Sep 26, 2021 10:09 am... Paper wealth wipe out 50% and took decade to recover. We are fear about similar things would ever happen again, Plus the inflation number. We are worried about the our paper wealth would lose it paper value plus hyperinflation. How dose BH here prepare for this?....
- ruralavalon
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Re: Fear Y2K type of stock bubble
WhiteMaxima wrote: ↑Sun Sep 26, 2021 10:09 am We already reached our number at least on paper. . . . . .
How dose BH here prepare for this? Our mortgage has been sold twice during last 3 months. We are thinking about pre-pay our mortgage and reduce 401k and IRA contribution to lock up the paper value we own.
Continue regular contributions to investing every pay period, and don't skip contributions to IRAs or 401ks. You said that you have "already reached our number" so continuing contributions gives you a margin of safety if the market goes sour.WhiteMaxima wrote: ↑Sun Sep 26, 2021 10:29 am We are 70/30 Equity/Cash. Equity is splited 50/50 US/Intl. Cash portion is mostly short-term Bond plus Tip & Real Asset fund (hedge against inflation). We are thing about moving to 50/50 Equity/Real Asset + cash. Split equity portion 50/50 US/Non-US.
Since you have "already reached [y]our number" establish a more substantial fixed income allocation for portfolio safety. A 50/50 asset allocation would be within the range of what is reasonable in my opinion.
To help stop worrying stop paying attention to any financial news whether TV, radio, print, internet, etc. Do something else like read a book, watch a movie, go for a walk, exercise, do anything else you might enjoy.
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy
Re: Fear Y2K type of stock bubble
People throw around the word "hyperinflation" without understanding what it means. Definitions vary, but it's around 50% per month, or 600% per year. Do you realistically believe this is even a remote possibility?WhiteMaxima wrote: ↑Sun Sep 26, 2021 10:09 am We already reached our number at least on paper. The S&P500 PE is around 24-25 now. Housing and Bond price are also very high now. We have been through Y2K .com and 08 housing bubble bust. Paper wealth wipe out 50% and took decade to recover. We are fear about similar things would ever happen again, Plus the inflation number. We are worried about the our paper wealth would lose it paper value plus hyperinflation. How dose BH here prepare for this? Our mortgage has been sold twice during last 3 months. We are thinking about pre-pay our mortgage and reduce 401k and IRA contribution to lock up the paper value we own.
And if you do, why in the world would you prepay your mortgage? If inflation gets even as high as 6% per year, the debt will be worth half of what it is now. But if your mortgage rate is higher than what the bond funds are returning right now, there is an argument to be made that prepaying your mortgage can be a good move.
If you've met your number, sure, then it's time to stop playing the game. Going to somewhere between 20/80 and 30/70 should let your portfolio keep up with inflation.
Going to all cash is a great way to lose long term to even normal inflation. At 2%, you lose about 1/5 of your purchasing power every 10 years.
Stop reading the news. They exist to sell you advertising.
Re: Fear Y2K type of stock bubble
What does reaching your number mean to you?
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Re: Fear Y2K type of stock bubble
There is a confusion there? If you prepay your mortgage you increase your illiquid investment in your home.WhiteMaxima wrote: ↑Sun Sep 26, 2021 10:09 am We already reached our number at least on paper. The S&P500 PE is around 24-25 now. Housing and Bond price are also very high now. We have been through Y2K .com and 08 housing bubble bust. Paper wealth wipe out 50% and took decade to recover. We are fear about similar things would ever happen again, Plus the inflation number. We are worried about the our paper wealth would lose it paper value plus hyperinflation. How dose BH here prepare for this? Our mortgage has been sold twice during last 3 months. We are thinking about pre-pay our mortgage and reduce 401k and IRA contribution to lock up the paper value we own.
That's entirely separate from selling stocks and having more liquidity.
If you want to sell stocks and have more housing equity, and less liquidity, that's fine. Just as long as you keep the 2 decisions separate in your mind.
To lock up the paper value that you own, cutting your contributions to 401k and IRA doesn't do it.
You have to buy more fixed income investments, and sell stocks (cash, CDs, bonds). Change your asset allocation in effect.
Whether you move there immediately or by changing your monthly contributions is up to you.
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Re: Fear Y2K type of stock bubble
Beware. A lot of Real Asset funds have turned out to be quite volatile. Precious metals. Commodities. Real Estate. etc. Track those through 2008-09 and 2020. Do they look contracyclical to equities to you? (depends on the fund, of course).WhiteMaxima wrote: ↑Sun Sep 26, 2021 10:29 am We are 70/30 Equity/Cash. Equity is splited 50/50 US/Intl. Cash portion is mostly short-term Bond plus Tip & Real Asset fund (hedge against inflation). We are thing about moving to 50/50 Equity/Real Asset + cash. Split equity portion 50/50 US/Non-US.
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Re: Fear Y2K type of stock bubble
Cash pays negative real return but give us option to purchase depressed asset in the future. Current it is 10% of my AA. Real asset fund is to hedge against inflation. It consists of Tip, real estate, commodity, energy. it is 10% of my AA now. Long term, I think equity is best to hedge against inflation.Valuethinker wrote: ↑Sun Sep 26, 2021 12:47 pmBeware. A lot of Real Asset funds have turned out to be quite volatile. Precious metals. Commodities. Real Estate. etc. Track those through 2008-09 and 2020. Do they look contracyclical to equities to you? (depends on the fund, of course).WhiteMaxima wrote: ↑Sun Sep 26, 2021 10:29 am We are 70/30 Equity/Cash. Equity is splited 50/50 US/Intl. Cash portion is mostly short-term Bond plus Tip & Real Asset fund (hedge against inflation). We are thing about moving to 50/50 Equity/Real Asset + cash. Split equity portion 50/50 US/Non-US.
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Re: Fear Y2K type of stock bubble
For my own edification ... what is the significance of this?WhiteMaxima wrote: ↑Sun Sep 26, 2021 10:09 am Our mortgage has been sold twice during last 3 months.
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Re: Fear Y2K type of stock bubble
this reminds me of revisionist history. people also say things like "it took 16 years to recover from the 1929 crash" which it didn't. The 29 crash recovered by 1936. Unfortunately, there was another crash in 1937, just three months after the market recovered. then the market didn't recover from the 1937 crash until 1945. So it looked like 16 years but it was really two prolonged back to back crashes with one lasting 7 years and one lasting 8 years.
Similary, it's not really true that it took a decade to recover from the crash that started in 2000. If you look at portfolio visualizer (link below) you see that an all US stock market index fund recovered from the decline in 2000 by the end of Nov 2004. And the market continued to go up until Oct 2007.
Problem was, then in Nov 2007 the decline began again.
Thing is, your investment (which began in 2000) then recovered by the end of Sept 2009 (and hasn't looked back, even though there was another decline in 2011. You still would have been positive then, never falling below your starting investment).
also, holding international helped do better than an ALL US portfolio (see for yourself) and a balanced index fund outperformed both and was a somewhat smoother ride:
https://www.portfoliovisualizer.com/bac ... ion3_3=100
when returns are bad, you can only work longer (or return to work), decrease expenses, etc.
hindsight is 20/20.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions |
Re: Fear Y2K type of stock bubble
Pay off the mortgage before retiring, then direct the entire payment amount into savings, so you do not ever spend more than you are now.
My same answer but to a previous different question:
In retirement, I'm currently using the RMD spending method because it is a slowly growing percentage of each recent annual portfolio value, plus spending dividends and interest. I expect to adapt to my variable income during retirement. Spending the interest income is a helpful but limited buffer for inflation, while the slowly rising percentage of portfolio is a guide for spending less after a stock market crash.
The 4% SWR method is overly sensitive to very high inflation early in retirement, since it does not ever slow its inflation adjustments, but you will be monitoring your spending versus your expected longevity. As a Boglehead, you will not be blindly overspending after a stock market crash, nor during hyper-inflation so you will do better than many other retirees.
My parents were veterans of the Great Depression so they spent conservatively and knew how to adapt to very low income if necessary. The future has always been full of risks but wise retirees do have some inflation buffered SS payments (at least for awhile), and a paid off house, and a history of living below their means. No one item is the total solution, but expecting to muddle through will be possible for those who have always been savers who lived below their means.
My same answer but to a previous different question:
In retirement, I'm currently using the RMD spending method because it is a slowly growing percentage of each recent annual portfolio value, plus spending dividends and interest. I expect to adapt to my variable income during retirement. Spending the interest income is a helpful but limited buffer for inflation, while the slowly rising percentage of portfolio is a guide for spending less after a stock market crash.
The 4% SWR method is overly sensitive to very high inflation early in retirement, since it does not ever slow its inflation adjustments, but you will be monitoring your spending versus your expected longevity. As a Boglehead, you will not be blindly overspending after a stock market crash, nor during hyper-inflation so you will do better than many other retirees.
My parents were veterans of the Great Depression so they spent conservatively and knew how to adapt to very low income if necessary. The future has always been full of risks but wise retirees do have some inflation buffered SS payments (at least for awhile), and a paid off house, and a history of living below their means. No one item is the total solution, but expecting to muddle through will be possible for those who have always been savers who lived below their means.
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Re: Fear Y2K type of stock bubble
You lost me at "fear." It's a terrible way to manage your future. Adjust your asset allocation until "fear" is out of the equation.
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Re: Fear Y2K type of stock bubble
Hyperinflation combined with stock market crash would be a Black Swan type of event. If the US government remained solvent TIPS would probably be the best option in that scenario. Maybe pay off the mortgage and dial back to 60/40 with 10% in TIPS?
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Re: Fear Y2K type of stock bubble
If the bubble pops, then you won't have the above problem!WhiteMaxima wrote: ↑Sun Sep 26, 2021 1:01 pmfuture RMD + pension + SS tax bracket >=current tax bracket
I do not quite understand the sentiment. One either worries about not having enough income in retirement or one worries about having too much income in retirement. You are doing both at the same time!
Re: Fear Y2K type of stock bubble
I would be wary about mortgage buy-outs. You should confirm with each previous mortgage holder that your mortgage was sold and to whom before you pay the new company.WhiteMaxima wrote: ↑Sun Sep 26, 2021 10:09 am Our mortgage has been sold twice during last 3 months. We are thinking about pre-pay our mortgage. . .
Pre-paying a mortgage just saves you some interest in the long run and shortens the number of months left to pay it off. Even if you pay ‘x’ months of payments now, you will still need to make another payment in a month, and the month after that. . . If there’s any chance of a job loss, you shoud instead be holding onto more cash than usual.
It also sounds like you need a larger emergency fund. Do you have two years of living expenses held in cash that you can easily access? That would be the first thing that would calm me down while the world goes crazy.
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Re: Fear Y2K type of stock bubble
That's all we talk about in the investing news/theory forum all day long. In the last year, I bet you can find 40 threads somebody started that are titled "what's the best hedge against inflation?" And in the current circumstances, it might still be stocks, because the earnings can inflate with the inflation. But I admit stocks are very high, and the cost of capital affects that.
You could consider:
An ordinary balanced portfolio (like 60/40 stocks/bonds US)
international diversification on the equity side
international diversification on the bond side
value tilt on the equity side
shift bonds away from long term and get tips instead
Some gold
local real estate/businesses
Personally I don't think "commodities" really belong lumped together. A lot of consumable commodities are deflating all the time due to innovation and changing tastes. Personally I'm hesitant about telling somebody they are inflating.
This time is the same
Re: Fear Y2K type of stock bubble
Is that even possible?Californiastate wrote: ↑Sun Sep 26, 2021 5:15 pm Adjust your asset allocation until "fear" is out of the equation.
Fear of inflation -- stock heavy
Fear of market crash -- cash heavy
I think OP has both fears (and so do I).
Re: Fear Y2K type of stock bubble
I think most people are worried about high inflation. I think we are already close to or beyond 6% depending on what you actually spend on, as opposed to the CPI.exodusNH wrote: ↑Sun Sep 26, 2021 11:33 am People throw around the word "hyperinflation" without understanding what it means. Definitions vary, but it's around 50% per month, or 600% per year. Do you realistically believe this is even a remote possibility?
And if you do, why in the world would you prepay your mortgage? If inflation gets even as high as 6% per year, the debt will be worth half of what it is now. But if your mortgage rate is higher than what the bond funds are returning right now, there is an argument to be made that prepaying your mortgage can be a good move.
With inflation, debt for normal folks won't get inflated away unless incomes keep up. I don't think they will. My income hasn't kept up and I know many people that have take pay cuts over the years.
Re: Fear Y2K type of stock bubble
Ben Carlson has a recent post “The Consequences of a Market Correction” on his A Wealth of Common Sense site. To quote:
“… My point here is market corrections are going to happen whether you know the reason or not. It’s not an if, but a when.
And since no one can figure out the when with consistency, the only thing you can do is recalibrate your portfolio or expectations ahead of time.
Either you learn to live with volatility or make your portfolio durable enough to better withstand the bursts of volatility.“
“… My point here is market corrections are going to happen whether you know the reason or not. It’s not an if, but a when.
And since no one can figure out the when with consistency, the only thing you can do is recalibrate your portfolio or expectations ahead of time.
Either you learn to live with volatility or make your portfolio durable enough to better withstand the bursts of volatility.“
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Re: Fear Y2K type of stock bubble
There is also the anchoring effect of market peaks that doesn't reflect the way people actually invest. How many are really unlucky enough to go all in at the market peak? Very few I'm guessing. What people actually do is contribute on a regular basis as they earn money (at least the boggleheads do that). So our 1929 bogglehead investor would have continued to contribute in 1930, 1931, 1932 at much lower levels. By 1936, they would not just have broken even, but have been ahead of their 1929 numbers because they would have had new contributions at the lows that would have gained handsomely.arcticpineapplecorp. wrote: ↑Sun Sep 26, 2021 1:55 pmthis reminds me of revisionist history. people also say things like "it took 16 years to recover from the 1929 crash" which it didn't. The 29 crash recovered by 1936. Unfortunately, there was another crash in 1937, just three months after the market recovered. then the market didn't recover from the 1937 crash until 1945. So it looked like 16 years but it was really two prolonged back to back crashes with one lasting 7 years and one lasting 8 years.
Similary, it's not really true that it took a decade to recover from the crash that started in 2000. If you look at portfolio visualizer (link below) you see that an all US stock market index fund recovered from the decline in 2000 by the end of Nov 2004. And the market continued to go up until Oct 2007.
Problem was, then in Nov 2007 the decline began again.
Thing is, your investment (which began in 2000) then recovered by the end of Sept 2009 (and hasn't looked back, even though there was another decline in 2011. You still would have been positive then, never falling below your starting investment).
also, holding international helped do better than an ALL US portfolio (see for yourself) and a balanced index fund outperformed both and was a somewhat smoother ride:
https://www.portfoliovisualizer.com/bac ... ion3_3=100
when returns are bad, you can only work longer (or return to work), decrease expenses, etc.
hindsight is 20/20.
You are only really running the risk of not returning to market peaks if you retire right now. That's where having a plan that accounts for sequence of return risk is crucial.
Re: Fear Y2K type of stock bubble
Then double it one more time for good measure. Tried and true BH formula.livesoft wrote: ↑Sun Sep 26, 2021 11:14 amMake "your number" two or three times larger than it is now. Simple.WhiteMaxima wrote: ↑Sun Sep 26, 2021 10:09 am... Paper wealth wipe out 50% and took decade to recover. We are fear about similar things would ever happen again, Plus the inflation number. We are worried about the our paper wealth would lose it paper value plus hyperinflation. How dose BH here prepare for this?....
Re: Fear Y2K type of stock bubble
It happens. I have no numbers to point to, but plenty of anecdotal stories of people I knew who changed their asset allocations, and some that moved their previously conservatively invested retirement funds into leveraged option positions just before the dot-com bust. There often seems to be a lot more media buzz at the peaks and troughs as well, in the past people have noted a Time or Newsweek magazine effect, where it seems some market trend will hit the cover of the magazine with uncanny timing to the peak (or trough.)alfaspider wrote: ↑Mon Sep 27, 2021 7:54 am... How many are really unlucky enough to go all in at the market peak? Very few I'm guessing...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Fear Y2K type of stock bubble
WhiteMaxima wrote: ↑Sun Sep 26, 2021 10:09 am We already reached our number at least on paper. The S&P500 PE is around 24-25 now. Housing and Bond price are also very high now. We have been through Y2K .com and 08 housing bubble bust. Paper wealth wipe out 50% and took decade to recover. We are fear about similar things would ever happen again, Plus the inflation number. We are worried about the our paper wealth would lose it paper value plus hyperinflation. How dose BH here prepare for this? Our mortgage has been sold twice during last 3 months. We are thinking about pre-pay our mortgage and reduce 401k and IRA contribution to lock up the paper value we own.
You have indeed reached a position of safety ("reached your number") for retirement purposes.WhiteMaxima wrote: ↑Sun Sep 26, 2021 1:01 pmfuture RMD + pension + SS tax bracket >=current tax bracket
This just reinforces my view that you should: (1) continue regular contributions every pay period to all of your tax-advantaged accounts; and (2) shift some investments from higher risk to lower risk, stocks to fixed income.
Are any good bond funds offered in your employer's 401k plan? Is a good Stable Value Fund or Guaranteed Income Fund offered in the 401k plan? If so then that may be the best account to use to bulk up your fixed income allocation.
I will add that if your employer's 401k plan permits Roth contributions then you should make Roth 401k contributions. Also consider backdoor Roth IRA contributions.
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy
Re: Fear Y2K type of stock bubble
As we reach retirement or "Our number," things change, and our concerns move toward preservation and away from accumulation. That is a time when we often begin to educate ourselves on strategies for the differing approach. One of those is to consider risk tolerance since it is a time when that may rationally change significantly. You may be in the cauldron of knowing you want to preserve, not as confident about how to go about it as you have become with the accumulation side, and not ideally wanting to discontinue investing in what has been a successful manner so far. In short there is the anxiety about the market conditions combined with your personal circumstances. When in doubt, doing nothing or taking advice from others is probably the best answer even though there will be different opinions expressed about becoming more conservative or not in your circumstance and how to go about it. In short take the advice and put it into your own circumstances is the approach we took at a similar point in time.
Tim
Tim
Re: Fear Y2K type of stock bubble
Delete: double submit
Re: Fear Y2K type of stock bubble
You wrote the post below 2 weeks ago. Maybe it would be good to slow down and be very deliberate in your next moves. It's also hard to reconcile what your AA really is. Are you 70/30 or 90/10?WhiteMaxima wrote: ↑Sun Sep 26, 2021 10:29 am We are 70/30 Equity/Cash. Equity is splited 50/50 US/Intl. Cash portion is mostly short-term Bond plus Tip & Real Asset fund (hedge against inflation). We are thing about moving to 50/50 Equity/Real Asset + cash. Split equity portion 50/50 US/Non-US.
My Buy n Hold AA
post by WhiteMaxima » Fri Sep 10, 2021 6:19 pm
Vanguard Total Stock Market-VTSAX-15%
Vanguard Value Index-VVIAX-15%
Vanguard Small Cap Index-VSMAX-15%
Vanguard Small Value-VSIAX-15%
Vanguard Developed-VTMGX-15%
Vanguard Emerging-VEMAX-15%
Vanguard Total Bond-VBTLX-10%
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Re: Fear Y2K type of stock bubble
Find a place where you can live without overwhelming fear. What elevates this fear? Do you doubt your ability to navigate in troubled times? If so, a managed portfolio might be in your best interests. Give somebody else the reins and stop following clickbait financial tabloid sites.anoop wrote: ↑Sun Sep 26, 2021 10:21 pmIs that even possible?Californiastate wrote: ↑Sun Sep 26, 2021 5:15 pm Adjust your asset allocation until "fear" is out of the equation.
Fear of inflation -- stock heavy
Fear of market crash -- cash heavy
I think OP has both fears (and so do I).
- arcticpineapplecorp.
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Re: Fear Y2K type of stock bubble
only if you were 100% in stocks did you lose 50%.
pick a different allocation if you only are willing to lose a smaller amount (numbers below are from 1973-1974 bear market):
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Re: Fear Y2K type of stock bubble
It sounds to me like you have either not reached a number that your are truly comfortable with or are not using an asset allocation that provides you the peace of mind that you seek. The best Boglehead-way for me is to design a robust portfolio that provides the resilience to crises such as Dot-Com, Stagflation or GFC. If the portfolio is robust enough to have withstood those in the past, it is rational to assume that it has a good chance of being robust enough in the future. I am pessimistic enough to expect crises and optimistic enough to avoid believing in doomsday scenarios.
I am a data-driven person and putting historical data into context helps me mitigate fear away. Maybe this approach can help you, too.
First, please note that besides US Large Caps and US Growth, equities do not seem to be at price-earnings multiples that are extraordinarily high:
International equities of developed and emerging markets are not very expensive. Granted, they are not cheap either. Small Caps are close to or at historical norms. Note that Small Cap Value looks particularly cheap compared to other options. Your outlook should be much better if you have allocated not just to US Large Caps or US Growth. That said, I don't think that should drive you to redistribute your assets because of fear. Never react to fear. If you feel fear right now because a subset of the equity market appears expensive, you may not have chosen an asset allocation that truly suits your needs.
Second, let's look into how a mix of different assets would have performed in prior decades going back to 1972. I like to half-jokingly say that every asset class is horrible to invest in. That is, of course, only if you look at them in isolation. Note: all of the below data is adjusted for inflation and represents real growth, not nominal.
Looking into periods of historical investing crises since 1972, some equities lost almost 2/3rd of their value, some assets had periods of losses that exceeded decades. Interestingly enough treasuries and gold had among the longest drawdowns. So much about safe assets. So many things that could make one fearful. But it should not. Because we should look at our investments through the lens of portfolio behavior, not of that of individual assets:
With a typical 60/40 allocation, there was only one event to worry about. 1970s Stagflation. Other periods seemed to be OK with recovery durations of less than 5 years. Now, how likely is it that a 1970s Stagflation event will occur again with the same order of magnitude (i.e. inflation and interest rates persistently increasing to 15%) in our investment life cycle? I don't think it is very likely. But it could happen. And if it could, the portfolio should be able to withstand it, right?
Gold did well during that period. People argue if that was because of peculiarities of that time (i.e. abandoning the Gold Standard) or because of intrinsic characteristics of Gold (i.e. preferable risk-adjusted return characteristics when negative real yields persist). That said, adding Gold to a portfolio would have helped a lot during that period. Please see the 20/20/20/20/20 portfolio that includes 20% each of US Large+Mid Caps, US Small Caps, exUS Large+Mid Caps, Treasuries, and Gold. But now we have added an asset class that has had a negative real return since the early 1980s. That surely must have hurt the portfolio badly, right? Nope. OK, for the period from 1980 to 1985 60/40 performed better. But in the 35 years since then the difference between a typical 60/40 portfolio and the 20/20/20/20/20 portfolio in CAGR was negligible and, in fact, the latter had more consistent return characteristics.
In a nutshell: As long as you are properly diversified over asset types, geographies, and capitalization ranges, you will not have to fear the future. Yes, bad events may happen. But after ~5 years you will be back on track. You will be fine. But you do need to ensure that your allocation is robust to those events. And don't fiddle with such a robust allocation either because of fear or greed. It will likely lead to behavioral errors that will make be detrimental to your investments.
Edit: forgot the word not at a crucial location.
I am a data-driven person and putting historical data into context helps me mitigate fear away. Maybe this approach can help you, too.
First, please note that besides US Large Caps and US Growth, equities do not seem to be at price-earnings multiples that are extraordinarily high:
International equities of developed and emerging markets are not very expensive. Granted, they are not cheap either. Small Caps are close to or at historical norms. Note that Small Cap Value looks particularly cheap compared to other options. Your outlook should be much better if you have allocated not just to US Large Caps or US Growth. That said, I don't think that should drive you to redistribute your assets because of fear. Never react to fear. If you feel fear right now because a subset of the equity market appears expensive, you may not have chosen an asset allocation that truly suits your needs.
Second, let's look into how a mix of different assets would have performed in prior decades going back to 1972. I like to half-jokingly say that every asset class is horrible to invest in. That is, of course, only if you look at them in isolation. Note: all of the below data is adjusted for inflation and represents real growth, not nominal.
Looking into periods of historical investing crises since 1972, some equities lost almost 2/3rd of their value, some assets had periods of losses that exceeded decades. Interestingly enough treasuries and gold had among the longest drawdowns. So much about safe assets. So many things that could make one fearful. But it should not. Because we should look at our investments through the lens of portfolio behavior, not of that of individual assets:
With a typical 60/40 allocation, there was only one event to worry about. 1970s Stagflation. Other periods seemed to be OK with recovery durations of less than 5 years. Now, how likely is it that a 1970s Stagflation event will occur again with the same order of magnitude (i.e. inflation and interest rates persistently increasing to 15%) in our investment life cycle? I don't think it is very likely. But it could happen. And if it could, the portfolio should be able to withstand it, right?
Gold did well during that period. People argue if that was because of peculiarities of that time (i.e. abandoning the Gold Standard) or because of intrinsic characteristics of Gold (i.e. preferable risk-adjusted return characteristics when negative real yields persist). That said, adding Gold to a portfolio would have helped a lot during that period. Please see the 20/20/20/20/20 portfolio that includes 20% each of US Large+Mid Caps, US Small Caps, exUS Large+Mid Caps, Treasuries, and Gold. But now we have added an asset class that has had a negative real return since the early 1980s. That surely must have hurt the portfolio badly, right? Nope. OK, for the period from 1980 to 1985 60/40 performed better. But in the 35 years since then the difference between a typical 60/40 portfolio and the 20/20/20/20/20 portfolio in CAGR was negligible and, in fact, the latter had more consistent return characteristics.
In a nutshell: As long as you are properly diversified over asset types, geographies, and capitalization ranges, you will not have to fear the future. Yes, bad events may happen. But after ~5 years you will be back on track. You will be fine. But you do need to ensure that your allocation is robust to those events. And don't fiddle with such a robust allocation either because of fear or greed. It will likely lead to behavioral errors that will make be detrimental to your investments.
Edit: forgot the word not at a crucial location.
Have a great day. |
Asset allocation: 70% Stocks, 15% Treasuries, 15% Gold (all ETFs)
- AnnetteLouisan
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Re: Fear Y2K type of stock bubble
“The hawk knows many things.Californiastate wrote: ↑Sun Sep 26, 2021 5:15 pm You lost me at "fear." It's a terrible way to manage your future. Adjust your asset allocation until "fear" is out of the equation.
But the fieldmouse knows one *big* thing.”
Re: Fear Y2K type of stock bubble
If you have reached your number and if the market has you nervous, a more conservative portfolio might be in order. Your gut might be telling you that you are taking too much risk.WhiteMaxima wrote: ↑Sun Sep 26, 2021 10:09 am We already reached our number at least on paper. The S&P500 PE is around 24-25 now. Housing and Bond price are also very high now. We have been through Y2K .com and 08 housing bubble bust. Paper wealth wipe out 50% and took decade to recover. We are fear about similar things would ever happen again, Plus the inflation number. We are worried about the our paper wealth would lose it paper value plus hyperinflation. How dose BH here prepare for this? Our mortgage has been sold twice during last 3 months. We are thinking about pre-pay our mortgage and reduce 401k and IRA contribution to lock up the paper value we own.
Keep in mind that the news is always bad. The financial press is mostly negative in its viewpoint. The world has been going to Hades in a handbasket since I can remember. I remember reading about the death of the U.S. Dollar back in 1984. Then there were two books by Ravi Batra concerning the next Great Depression. Sex scandals. Money scandals. Sex and money scandals, and if that weren't bad enough, money and sex scandals. You have to tune a lot of that out or you would never invest.
Also remember that we have had a powerful bull market trend since 2009. When stocks go up, and go up a lot, they look expensive. So the combination of the world going to Hades in a handbasket and expensive stocks and bonds make us worry. But didn't we want our financial assets to go up in value in the first place? Now we are complaining after they went up.
Your concerns are legitimate, I have them too.
Some basic advice. We are still near all-time highs for the U.S. Stock Market. It is okay to take some profits, better to "panic" at all-time highs than at the bottom after the market has crashed. This is a matter of trimming your stocks and not selling them altogether. If you haven't rebalanced your portfolio to your model asset allocation for a while, this is a great time to rebalance. Seeing that you have reached your number, perhaps it is time to rethink your investments and go for a more conservative portfolio.
A fool and his money are good for business.
Re: Fear Y2K type of stock bubble
This quote looked interesting so I had to duckduckgo it.AnnetteLouisan wrote: ↑Mon Sep 27, 2021 9:25 pm“The hawk knows many things.Californiastate wrote: ↑Sun Sep 26, 2021 5:15 pm You lost me at "fear." It's a terrible way to manage your future. Adjust your asset allocation until "fear" is out of the equation.
But the fieldmouse knows one *big* thing.”
What came up is something about a fox and hedgehog.
But it's not clear how this applies so this situation.
Can you share what it means for you?
- AnnetteLouisan
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Re: Fear Y2K type of stock bubble
It means to me — and I mean no disrespect and don’t want to come off as hostile or cynical at all — that people who have amassed a lot of assets, cultural capital, social capital, confidence, strong families, backup plans, connections, trust, faith, ability to navigate institutions and education, perhaps without much experience of loss, failure and brutality in their day to day lives can take a broad perspective and do one thing with their money based on theory and those without or with fewer of those things will just keep on iron grip on money out of fear of getting cheated. In other words, for many, mere survival is job 1. This is NOT a criticism of the better off half, or an implication that they are cheating the worse off half, just an illustration of an outlook in which fear is a part.anoop wrote: ↑Mon Sep 27, 2021 9:56 pmThis quote looked interesting so I had to duckduckgo it.AnnetteLouisan wrote: ↑Mon Sep 27, 2021 9:25 pm“The hawk knows many things.Californiastate wrote: ↑Sun Sep 26, 2021 5:15 pm You lost me at "fear." It's a terrible way to manage your future. Adjust your asset allocation until "fear" is out of the equation.
But the fieldmouse knows one *big* thing.”
What came up is something about a fox and hedgehog.
But it's not clear how this applies so this situation.
Can you share what it means for you?
Another one you might like is
“The Day does not know the Night’s darkness.”
My point is simply that fear is not irrational in our world, given the past. I don’t mean anything sinister by this, I just think there are enough examples of folks losing it all that it’s not beyond the pale for an ordinary investor to be concerned about his own investments and circumstances. I mean, remember LTCM. Wise folks have failed before. A bit of fear may even be healthy with the stakes so high. Also, just because stocks may outperform other asset classes in the long run doesn’t mean I don’t have to read the State Street stock index prospectus or think about what happens if the fund goes bust, merges or winds down, does it?
But I agree with your point that fear often drives poor decisions and a central BH tenet is fortitude in line with risk tolerance.
And yes, my familiarity with small burrowing prairie animals is not quite up to par.
Last edited by AnnetteLouisan on Fri Jan 07, 2022 2:34 pm, edited 1 time in total.
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Re: Fear Y2K type of stock bubble
how do you come up with the numbers for max loss?! in case of 50% stocks crash,a 50/50 portfolio would lose 25%?arcticpineapplecorp. wrote: ↑Mon Sep 27, 2021 1:56 pmonly if you were 100% in stocks did you lose 50%.
pick a different allocation if you only are willing to lose a smaller amount (numbers below are from 1973-1974 bear market):
- arcticpineapplecorp.
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Re: Fear Y2K type of stock bubble
bonds helped reduce the losses somewhat in the bear market of 1973-1974 as they did in 2008 as well...Copernicus wrote: ↑Wed Sep 29, 2021 12:15 amhow do you come up with the numbers for max loss?! in case of 50% stocks crash,a 50/50 portfolio would lose 25%?arcticpineapplecorp. wrote: ↑Mon Sep 27, 2021 1:56 pmonly if you were 100% in stocks did you lose 50%.
pick a different allocation if you only are willing to lose a smaller amount (numbers below are from 1973-1974 bear market):
In 2008 stocks lost 38% in so by your logic you'd say a 50/50 portfolio would have lost 19%. That's not how it went...
because the total bond market index fund gained 5% in 2008. Therefore a 50/50 portfolio in 2008 would not have lost half of 38% (or 19%) but rather just 16.5% because (-.38 X .50) + (.05 X .50) = -16.5%
you have to look at what's happening on each side of the portfolio multiply those gains or losses by the percentage you hold in each and add them together.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions |
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Re: Fear Y2K type of stock bubble
Can you give the formula for bond going up when stock goes down? Thanks for your insight!
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Re: Fear Y2K type of stock bubble
[/quote]
bonds helped reduce the losses somewhat in the bear market of 1973-1974 as they did in 2008 as well...
In 2008 stocks lost 38% in so by your logic you'd say a 50/50 portfolio would have lost 19%. That's not how it went...
because the total bond market index fund gained 5% in 2008. Therefore a 50/50 portfolio in 2008 would not have lost half of 38% (or 19%) but rather just 16.5% because (-.38 X .50) + (.05 X .50) = -16.5%
[/quote]
Thanks. Of course, yes. I did not know that you used historical data, not calcuated numbers.
bonds helped reduce the losses somewhat in the bear market of 1973-1974 as they did in 2008 as well...
In 2008 stocks lost 38% in so by your logic you'd say a 50/50 portfolio would have lost 19%. That's not how it went...
because the total bond market index fund gained 5% in 2008. Therefore a 50/50 portfolio in 2008 would not have lost half of 38% (or 19%) but rather just 16.5% because (-.38 X .50) + (.05 X .50) = -16.5%
[/quote]
Thanks. Of course, yes. I did not know that you used historical data, not calcuated numbers.
Re: Fear Y2K type of stock bubble
There is none. We have no idea how much (or if) bonds will go up when stocks go down.wrongfunds wrote: ↑Wed Sep 29, 2021 7:00 pm Can you give the formula for bond going up when stock goes down? Thanks for your insight!
And the table is actually wonky. I'm not so sure it's actually based on past data. There's an assumption in the table that no matter what the allocation to bonds, it will result in +5% to reduce the drawdown of the stock allocation. The table is just to give a general idea of what to expect with each AA in a 50% equities drawdown, so you can get a feel for how that would make you feel and get yourself somewhere in the range of appropriate feels for you.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
- sf_tech_saver
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Re: Fear Y2K type of stock bubble
Human capital is the ultimate hedge. Invest in yours.
VTI is a modern marvel
Re: Fear Y2K type of stock bubble
Keep AA — keep working (assuming you was young and gainfully employed). Save and Invest !! Time and disciplined investing will cure many of worriesWhiteMaxima wrote: ↑Sun Sep 26, 2021 10:09 am We already reached our number at least on paper. The S&P500 PE is around 24-25 now. Housing and Bond price are also very high now. We have been through Y2K .com and 08 housing bubble bust. Paper wealth wipe out 50% and took decade to recover. We are fear about similar things would ever happen again, Plus the inflation number. We are worried about the our paper wealth would lose it paper value plus hyperinflation. How dose BH here prepare for this? Our mortgage has been sold twice during last 3 months. We are thinking about pre-pay our mortgage and reduce 401k and IRA contribution to lock up the paper value we own.
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Re: Fear Y2K type of stock bubble
That was the point! anyway, if you want to make a chart like that, you either have to have 3 dimensional chart with both stock up/down and bond up/down to show how it will affect your total portfolio. Otherwise, one has to assume bond up/down percentage to come up with a two dimensional chart. However, I always challenge presented data, especially it is being parroted all over without disclosing all the built in assumptions.Beensabu wrote: ↑Wed Sep 29, 2021 9:55 pmThere is none. We have no idea how much (or if) bonds will go up when stocks go down.wrongfunds wrote: ↑Wed Sep 29, 2021 7:00 pm Can you give the formula for bond going up when stock goes down? Thanks for your insight!
And the table is actually wonky. I'm not so sure it's actually based on past data. There's an assumption in the table that no matter what the allocation to bonds, it will result in +5% to reduce the drawdown of the stock allocation. The table is just to give a general idea of what to expect with each AA in a 50% equities drawdown, so you can get a feel for how that would make you feel and get yourself somewhere in the range of appropriate feels for you.
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Re: Fear Y2K type of stock bubble
It's like the elevator operator who advised Bernard Baruch to buy stocks in 1929 ... (the nature of the profession changes depending on anecdote source)... it's impossible to find an elevator operator now, let alone one who invests in stocks.JoMoney wrote: ↑Mon Sep 27, 2021 8:08 amIt happens. I have no numbers to point to, but plenty of anecdotal stories of people I knew who changed their asset allocations, and some that moved their previously conservatively invested retirement funds into leveraged option positions just before the dot-com bust. There often seems to be a lot more media buzz at the peaks and troughs as well, in the past people have noted a Time or Newsweek magazine effect, where it seems some market trend will hit the cover of the magazine with uncanny timing to the peak (or trough.)alfaspider wrote: ↑Mon Sep 27, 2021 7:54 am... How many are really unlucky enough to go all in at the market peak? Very few I'm guessing...
So in the same way we are going to have trouble explaining to younger people in the future what "Time" and "Newsweek" were, and why they mattered?
Even "magazine" as in a paper object is going to be problematic. I would guess over half the magazines I used to see on newsstands have ceased publication in the last 20 years. And well over half the newsstands have ceased to exist (more like 70-80%). Airports and train stations seem to be the last survivors.
Re: Fear Y2K type of stock bubble
They post their information using this suggested format as a guideline to get comments and suggestions about what people think they should do next.
viewtopic.php?f=1&t=6212
What other people do does not really matter since their situation may be different. The "Should I pay off the mortgage?" question is a good example since there is no one right answer that is right for everyone.
Diversification is also a good thing to have since you could be perfectly right about your concerns but your timing could be off by years and it could play out in expected ways. For example Alan Greenspan made it famous "irrational exuberance" quote about the dot com bubble only to have the stock market keep raising for several more years.
Re: Fear Y2K type of stock bubble
You have valid concerns and the market does go up and down. You need to account for that. Too many people are overly concerned with fixed income returns so they switch to equities thinking they can handle it. This is a risky move for many people.
We reduced our AA a few years into retirement and hold cash for Roth conversions. We are have automated purchases with spare cash. If the market did crash hard, we have room to increase our equity purchases. The key is to be able to pay your bills and be willing to cut back in hard times.
We reduced our AA a few years into retirement and hold cash for Roth conversions. We are have automated purchases with spare cash. If the market did crash hard, we have room to increase our equity purchases. The key is to be able to pay your bills and be willing to cut back in hard times.
"I started with nothing and I still have most of it left."