Move towards a higher stock allocation after a crash

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embwbam
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Move towards a higher stock allocation after a crash

Post by embwbam »

So I understand why we should hold bonds: portfolio and income stability, psychology, ability to rebalance, etc. However, for someone currently in retirement and making withdrawals, wouldn't it theoretically make sense to move to a higher equity allocation in a crash?

Quick thought experiment:

Say I have a traditional 60% stocks / 40% bonds. I'm making yearly withdrawals in my retirement. If stocks crash and lose 50% of their value, it's pretty safe to assume they will trend mostly up in the future. If I were to sell all my bonds and buy stocks at that 50% crash, I won't be losing money if I sell those stocks for income in the future, even if they stay down for a long time, because they'd have the same value as the bonds I held or higher.

Obviously this is contrived, the stock market might drop 30%, or it might drop 50% and then continue to drop all the way to 80 or 90%, but I think the point still stands: there's some point where it makes sense to increase your equity allocation during a crash.

Do you think this makes any sense?

If I am interested in something like this (and am willing to accept the risks, etc), can you think of a structured way I could add it to my IPS?
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Re: Move towards a higher stock allocation after a crash

Post by brad.clarkston »

That all hinges on your ability to 100% time the bottom of the crash and start buying back at the front of the pack.

That's typically a Three-card Monte risk level.
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Re: Move towards a higher stock allocation after a crash

Post by hi_there »

It depends on how much cushion your portfolio has for further losses. I suspect that if you were to look back and hypothetically buy stocks in a "crash" situation (VIX at 50+, stocks down 20%, etc.), you would have made better than average gains in the following months or years. However, if that crash has already diminished your portfolio to a dangerous low level, you might not have the freedom to double down by gambling on a game with positive expected return but disastrous consequences if you lose.
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Re: Move towards a higher stock allocation after a crash

Post by 000 »

brad.clarkston wrote: Thu Apr 15, 2021 10:36 pm That all hinges on your ability to 100% time the bottom of the crash and start buying back at the front of the pack.

That's typically a Three-card Monte risk level.
It doesn't have to be done perfectly to be profitable.

Besides, most Bogleheads seem to think 50% is about the maximum stocks can drop so that would seem to be an obvious buying opportunity.
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Re: Move towards a higher stock allocation after a crash

Post by Beensabu »

embwbam wrote: Thu Apr 15, 2021 10:24 pm ...for someone currently in retirement and making withdrawals, wouldn't it theoretically make sense to move to a higher equity allocation in a crash?
See if you can make yourself rebalance first.
...I think the point still stands: there's some point where it makes sense to increase your equity allocation during a crash.
After. During what hopefully looks like a recovery. But it might not be. So there's that.
Do you think this makes any sense?
Yes and no. It can be done, except you have to make yourself do it. And then it might turn out to be a terrible thing to have done once you do it. You might do it too early and give in. You might do it too late and what's the point really. You might do it at the exact perfect time and then the real recovery doesn't actually happen for another 10 years (that's not terrible, but another what's the point really scenario)...
If I am interested in something like this (and am willing to accept the risks, etc), can you think of a structured way I could add it to my IPS?
You can make some rules that you will then almost certainly ignore. Or rewrite. Or rewrite and then ignore.
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Re: Move towards a higher stock allocation after a crash

Post by poker27 »

Sure. Did you buy a bunch of stocks during March of last year? Personally, I thought the economy was going to continue to tank ( well I guess it did, but stocks soared), so I was happy to have some bond allocation.
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Re: Move towards a higher stock allocation after a crash

Post by embwbam »

Ok, fair, some (most?) people will be scared and won't be able to commit to buying during a crash. I don't think I'm one of them. I used all my cash to buy stocks in the covid crash, and I'm very confident when the math is on my side.

But can we ignore the psychology for a little longer and see if we can come up with a sound strategy? Let's assume that we are NOT trying to time the market exactly. We don't know when the bottom is, but we do know that during a 50% crash stocks are relatively much cheaper than they used to be. That knowledge seems like it should be actionable.

Here's a poor strawman: start at 60/40 (adjust for risk tolerance), during a crash of 30% or higher, rebalance to 70/30, at 40%, rebalance to 80/20, etc. So at a 50% crash you'd be 90/10, and a 60% crash would be 100% stocks.
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Re: Move towards a higher stock allocation after a crash

Post by flyingaway »

How about the market only drop 49%?
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Re: Move towards a higher stock allocation after a crash

Post by embwbam »

flyingaway wrote: Thu Apr 15, 2021 11:11 pm How about the market only drop 49%?
Right, how can we make this more sophisticated so it works with a smaller (or bigger) crash?
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Re: Move towards a higher stock allocation after a crash

Post by brad.clarkston »

embwbam wrote: Thu Apr 15, 2021 11:07 pm Ok, fair, some (most?) people will be scared and won't be able to commit to buying during a crash. I don't think I'm one of them. I used all my cash to buy stocks in the covid crash, and I'm very confident when the math is on my side.
I'm not saying it's a dumb idea but you will not know how scared you can be until you actually experience a real crash. Covid was barely a bounce, I didn't even notice it. I'll admit I did buy some REIT's at a discount but it was part of my overall plan and not outside my norm I just got a better price.

I'm not sure everyone in this thread is talking the same thing. When I think about what you are saying it's about re-balancing my 3-fund out of bonds and into well priced total stock or small cap value. I might even buy a few blue chip divi stocks for my Roth but that's about it.

I suspect what your talking about is buying 100% stock not index funds ?
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Re: Move towards a higher stock allocation after a crash

Post by watchnerd »

embwbam wrote: Thu Apr 15, 2021 10:24 pm wouldn't it theoretically make sense to move to a higher equity allocation in a crash?

If I am interested in something like this (and am willing to accept the risks, etc), can you think of a structured way I could add it to my IPS?
Yes, it theoretically makes sense when it comes to risk/reward.

My IPS has tactical asset allocation rules that are optional overlays on the default AA portfolio size goals.

The the shifts are +/- 10% in/out adjustments to equities based upon valuations, as opposed to market drops, although they are related.

"Market timing is an investment sin, and for once I recommend that you sin a little." -- Paul Samuelson

The November 2015 issue of Institutional Investor has an article on the topic worth reading, although I differ from the larger moves used in their model.

Suggested supplemental material, which delves into the valuation model used by Vanguard in their outlook reports:

https://mebfaber.com/wp-content/uploads ... ecasts.pdf
Last edited by watchnerd on Fri Apr 16, 2021 12:06 am, edited 1 time in total.
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steve roy
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Re: Move towards a higher stock allocation after a crash

Post by steve roy »

flyingaway wrote: Thu Apr 15, 2021 11:11 pm How about the market only drop 49%?
Round up.
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Re: Move towards a higher stock allocation after a crash

Post by Beensabu »

embwbam wrote: Thu Apr 15, 2021 11:07 pm But can we ignore the psychology for a little longer and see if we can come up with a sound strategy? Let's assume that we are NOT trying to time the market exactly. We don't know when the bottom is, but we do know that during a 50% crash stocks are relatively much cheaper than they used to be. That knowledge seems like it should be actionable.

Here's a poor strawman: start at 60/40 (adjust for risk tolerance), during a crash of 30% or higher, rebalance to 70/30, at 40%, rebalance to 80/20, etc. So at a 50% crash you'd be 90/10, and a 60% crash would be 100% stocks.
Sure. I'll play!

How about smaller increments? Like 2-3% shifts in AA while trying to catch that knife and do a cool flippy twist toss thing with it. Then you're less likely to end up watching it keep falling and being all out of the stuff you need to catch it and just sitting there watching your balance drop not knowing when it's going to end.

How about setting a dollar amount for a bond floor (since you're theoretically retired -- what in the name of the universe would you be doing going to 100% stocks during a crash while retired, that's crazy unless you have a bazillion dollars)?

How about just rebalancing to your actual AA when bands are triggered until stocks actually crash 50% and only making a 5% shift in AA then? Then another 5% for every additional 10% down from high? Plus a bond floor. That would be gut wrenching enough.

How about running all the different kinds of strategies you can think of with an actual starting $ amount. See how that $ amount would change as you follow the theoretical plan(s). There will come a $ amount where you go "No! Thus far and no further!" You liquidate. Stocks recover. Ouch.

Just take your 60/40 example with a $1m portfolio and assume the fixed income portion isn't affected by the market at all (since it makes the math so much easier). With your perfectly acceptable fun and games first scenario:

At a 30% crash, you have $420k/$400 (you're down to $820k) -- you decide to change your AA to 70/30, so now you're at $574k/$246k. The crash keeps going... At 40% off highs (or ~14% down from the last spot), you have $494k/$246k (you're down to $740k) -- you decide to change your AA to 80/20, so now you're at $592k/$148k. It keeps going... At 50% off highs (or ~17% down from the last spot), you have $491k/$148k (you're down to $639k) -- you decide to change your AA to 90/10, so now you're at $575k/$64k. It keeps going... At 60% off highs (or 20% down from the last spot), you have $460k/$64k (you're down to $524k) -- you decide to change your AA to 100/0, so now you're at $524k/$0. If it keeps going, then at 70% off highs (or 25% down from the last spot), you have $393k/$0. I would be sick. You would be sick. How many people could even make that first move and shove $154k from bonds into stocks after a 30% drop and who knows where it will end?
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Re: Move towards a higher stock allocation after a crash

Post by Watty »

You are making this too complicated.

If you have a fixed stock and bond asset allocation then you will automatically be selling bonds to buy stocks after a stock market crash.
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Re: Move towards a higher stock allocation after a crash

Post by Stef »

embwbam wrote: Thu Apr 15, 2021 11:14 pm
flyingaway wrote: Thu Apr 15, 2021 11:11 pm How about the market only drop 49%?
Right, how can we make this more sophisticated so it works with a smaller (or bigger) crash?
Make rules like:

-10%: Rebalance back to 60/40
-20%: 70/30
-30%: 80/20
-40%: 90/10
-50%: 100/0
-55%: 110/0/-10
-60%: 120/0/-20
-65%: 140/0/-40
-70%: 160/0/-60
-75%: 180/0/-80
-80%: 200/0/-100
-85%: 250/0/-150
-90%: 300/0/-200
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Re: Move towards a higher stock allocation after a crash

Post by RXfiles »

Shoulds like you need a more aggressive AA. You'll already be selling bonds and buying stocks in a market crash.
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Re: Move towards a higher stock allocation after a crash

Post by bog007 »

Maybe could go years without a 30% crash. Maybe, maybe not

https://www.yardeni.com/pub/sp500corrbear.pdf
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Re: Move towards a higher stock allocation after a crash

Post by Doc7 »

Investing in market downturns is already built into buy and rebalance strategy.
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Re: Move towards a higher stock allocation after a crash

Post by mr_brightside »

embwbam wrote: Thu Apr 15, 2021 10:24 pm
Do you think this makes any sense?
makes total sense. many will immediately jump in with 'timing the market... blah blah blah'. i get it.

but its exactly what i did in FEB - MAR of last year and have been rewarded for it.

now i don't move large percentages in and out. but from my cash position -- if the market dips 20% for example you bet I'm buying some VTI, VUG, RSP VXF, etc

and the flip side to that coin is : i am trimming some equity into cash currently with markets at all time highs. (in tax deferred accounts -- no trading fees / tax implications). people can get the buy low / sell high part of investing wrong :happy

again i am largely a set it forget it -- have been for decades (a bunch of my $$ is in a 'boring' Target Date Fund which is a permanent holding) -- but when opportunity avails itself i am not averse at all to moving money. ymmv

--------------------------------------------
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Re: Move towards a higher stock allocation after a crash

Post by KlangFool »

What is your current rebalancing rule?

Did you follow the rule?

All you need is the 5/25 rebalancing rule and you don't have to change your AA.

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Re: Move towards a higher stock allocation after a crash

Post by rascott »

All bear markets aren't crashes. Some are just an ongoing grind lower for years. See 2000-2002 that lasted almost 3 years.

Last year was an extreme anomaly
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Re: Move towards a higher stock allocation after a crash

Post by embwbam »

RXfiles wrote: Fri Apr 16, 2021 1:17 am Shoulds like you need a more aggressive AA. You'll already be selling bonds and buying stocks in a market crash.
Good point, AA already accomplishes a lot of this. I have been following my rebalancing rules carefully.

I arrived at this idea because my rebalancing strategy is McClung's Prime Harvesting, which already has my bond allocation float. I started at 75/25, and my strategy is happily buying bonds, taking me to about 70/30.

With McClung, you never buy stocks again (it works because you only ever sell bonds for income, giving your stocks a long time to recover). I would like to modify it, if I can do so in a rigorous and advantageous way, to buy stocks when markets are low enough.

My logic was that it kind of makes sense if you already accept Prime Harvesting, and realize that buying stocks with your bonds at an extreme low is the same as holding your existing stocks and bonds (the bonds become stocks at the low cost but they don't go down any more).
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Re: Move towards a higher stock allocation after a crash

Post by embwbam »

Beensabu wrote: Fri Apr 16, 2021 12:08 am
embwbam wrote: Thu Apr 15, 2021 11:07 pm But can we ignore the psychology for a little longer and see if we can come up with a sound strategy? Let's assume that we are NOT trying to time the market exactly. We don't know when the bottom is, but we do know that during a 50% crash stocks are relatively much cheaper than they used to be. That knowledge seems like it should be actionable.

Here's a poor strawman: start at 60/40 (adjust for risk tolerance), during a crash of 30% or higher, rebalance to 70/30, at 40%, rebalance to 80/20, etc. So at a 50% crash you'd be 90/10, and a 60% crash would be 100% stocks.
Sure. I'll play!

How about smaller increments? Like 2-3% shifts in AA while trying to catch that knife and do a cool flippy twist toss thing with it. Then you're less likely to end up watching it keep falling and being all out of the stuff you need to catch it and just sitting there watching your balance drop not knowing when it's going to end.

How about setting a dollar amount for a bond floor (since you're theoretically retired -- what in the name of the universe would you be doing going to 100% stocks during a crash while retired, that's crazy unless you have a bazillion dollars)?

How about just rebalancing to your actual AA when bands are triggered until stocks actually crash 50% and only making a 5% shift in AA then? Then another 5% for every additional 10% down from high? Plus a bond floor. That would be gut wrenching enough.

How about running all the different kinds of strategies you can think of with an actual starting $ amount. See how that $ amount would change as you follow the theoretical plan(s). There will come a $ amount where you go "No! Thus far and no further!" You liquidate. Stocks recover. Ouch.

Just take your 60/40 example with a $1m portfolio and assume the fixed income portion isn't affected by the market at all (since it makes the math so much easier). With your perfectly acceptable fun and games first scenario:

At a 30% crash, you have $420k/$400 (you're down to $820k) -- you decide to change your AA to 70/30, so now you're at $574k/$246k. The crash keeps going... At 40% off highs (or ~14% down from the last spot), you have $494k/$246k (you're down to $740k) -- you decide to change your AA to 80/20, so now you're at $592k/$148k. It keeps going... At 50% off highs (or ~17% down from the last spot), you have $491k/$148k (you're down to $639k) -- you decide to change your AA to 90/10, so now you're at $575k/$64k. It keeps going... At 60% off highs (or 20% down from the last spot), you have $460k/$64k (you're down to $524k) -- you decide to change your AA to 100/0, so now you're at $524k/$0. If it keeps going, then at 70% off highs (or 25% down from the last spot), you have $393k/$0. I would be sick. You would be sick. How many people could even make that first move and shove $154k from bonds into stocks after a 30% drop and who knows where it will end?
This is great, thanks for the illustration.

I think a big part of the reason why we have such a strong psychological component is that we use portfolio value as a poor abstraction of lifetime income. Portfolio value doesn't matter. It's just a score we think approximates our income.

I'm a big believer of Amortization Based Withdrawals, and while I love seeing my nest egg tick higher, the real number I look at is my yearly income.

Would the emotional component change if you had an income number that was ticking UP as you executed a strategy like this, even while the portfolio value was down?

(Because, in your example, valuations are so good that future rate of return is really high, so at each of those steps, making the move into stocks increases it)
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Re: Move towards a higher stock allocation after a crash

Post by BolderBoy »

Beensabu wrote: Thu Apr 15, 2021 10:58 pm
embwbam wrote: Thu Apr 15, 2021 10:24 pm ...for someone currently in retirement and making withdrawals, wouldn't it theoretically make sense to move to a higher equity allocation in a crash?
See if you can make yourself rebalance first.
+1. This.
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Re: Move towards a higher stock allocation after a crash

Post by embwbam »

rascott wrote: Fri Apr 16, 2021 6:59 am All bear markets aren't crashes. Some are just an ongoing grind lower for years. See 2000-2002 that lasted almost 3 years.

Last year was an extreme anomaly
Right, but something like this would work very well in a long bear market. If stocks stay down for 10 years, and you buy them with your bonds, it's the same as holding on to your bonds the entire time.
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Re: Move towards a higher stock allocation after a crash

Post by BolderBoy »

embwbam wrote: Thu Apr 15, 2021 11:07 pmHere's a poor strawman: start at 60/40 (adjust for risk tolerance), during a crash of 30% or higher, rebalance to 70/30, at 40%, rebalance to 80/20, etc. So at a 50% crash you'd be 90/10, and a 60% crash would be 100% stocks.
What you are describing is not rebalancing in the BH philosophy sense.
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Re: Move towards a higher stock allocation after a crash

Post by KlangFool »

OP,

You may want to check out this thread.

viewtopic.php?t=335902
"PSA: Fixed AA with 5/25 rebalancing works!"

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Re: Move towards a higher stock allocation after a crash

Post by climber2020 »

If you do this, write down your exact plan so when the time comes there are clear instructions on what to do.

One consideration is to have a floor of bonds that you don't touch for rebalancing/over-rebalancing purposes so that if the bear market lasts longer than expected, you still have some safe assets to draw from to pay the bills.
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Re: Move towards a higher stock allocation after a crash

Post by Beensabu »

embwbam wrote: Fri Apr 16, 2021 8:46 am Portfolio value doesn't matter. It's just a score we think approximates our income.
Oh yes it does. It definitely does if you're not working anymore.
I'm a big believer of Amortization Based Withdrawals, and while I love seeing my nest egg tick higher, the real number I look at is my yearly income.

Would the emotional component change if you had an income number that was ticking UP as you executed a strategy like this, even while the portfolio value was down?
I'd imagine so, for certain people. It's a different world when you're in accumulation vs. retirement. If you make enough money that your portfolio value doesn't matter to you while you're working, then... good for you I guess.
(Because, in your example, valuations are so good that future rate of return is really high, so at each of those steps, making the move into stocks increases it)
Maybe. Or maybe at some point in that example, they've simply normalized. Or perhaps, forward earnings prospects become poor for whatever reason even as share price plummets.

Here's the assumption I think you're making that you might want to think about: When stocks crash, they will recover eventually (even if it takes several years) and eventually reach new all time highs. It's the same assumption people make when they're 100% equities. It might turn out to be true. It might not.
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Re: Move towards a higher stock allocation after a crash

Post by embwbam »

Beensabu wrote: Fri Apr 16, 2021 1:16 pm Here's the assumption I think you're making that you might want to think about: When stocks crash, they will recover eventually (even if it takes several years) and eventually reach new all time highs. It's the same assumption people make when they're 100% equities. It might turn out to be true. It might not.
Oh, definitely, this whole idea is based on that assumption. Do you think making that assumption is a mistake? Do you think that an assumption-breaking bear market worse than the any in history is worth spending any energy on?
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Re: Move towards a higher stock allocation after a crash

Post by KlangFool »

embwbam wrote: Fri Apr 16, 2021 2:14 pm
Beensabu wrote: Fri Apr 16, 2021 1:16 pm Here's the assumption I think you're making that you might want to think about: When stocks crash, they will recover eventually (even if it takes several years) and eventually reach new all time highs. It's the same assumption people make when they're 100% equities. It might turn out to be true. It might not.
Oh, definitely, this whole idea is based on that assumption. Do you think making that assumption is a mistake? Do you think that an assumption-breaking bear market worse than the any in history is worth spending any energy on?
embwbam,

I had planned and prepared for it. So, whether it will happen or not, it won't matter to me. Hope for the best and plan for the worst.

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Re: Move towards a higher stock allocation after a crash

Post by 1789 »

embwbam wrote: Thu Apr 15, 2021 11:07 pm Ok, fair, some (most?) people will be scared and won't be able to commit to buying during a crash. I don't think I'm one of them. I used all my cash to buy stocks in the covid crash, and I'm very confident when the math is on my side.

But can we ignore the psychology for a little longer and see if we can come up with a sound strategy? Let's assume that we are NOT trying to time the market exactly. We don't know when the bottom is, but we do know that during a 50% crash stocks are relatively much cheaper than they used to be. That knowledge seems like it should be actionable.

Here's a poor strawman: start at 60/40 (adjust for risk tolerance), during a crash of 30% or higher, rebalance to 70/30, at 40%, rebalance to 80/20, etc. So at a 50% crash you'd be 90/10, and a 60% crash would be 100% stocks.

You start your 2nd round with 90/10. Now how will you dial it back down? Market can go up 10-15 years?
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Re: Move towards a higher stock allocation after a crash

Post by gblack »

How about the opposite scenario when stocks increase nearly 50% in the past year (like it has). Would you argue for moving to a more conservative asset allocation. Does not all the same logic apply?
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Re: Move towards a higher stock allocation after a crash

Post by as9 »

I’m 100% stocks and plan to stay that way for awhile. I have started mentally preparing for moving some money into UPRO after a drop of 20%+. Haven’t figured out exactly how much and at what intervals.

It would need to account for the possibility of dropping a further 30%+ and lasting multiple years.
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Re: Move towards a higher stock allocation after a crash

Post by stocknoob4111 »

embwbam wrote: Thu Apr 15, 2021 10:24 pm then continue to drop all the way to 80 or 90%
The market isn't dropping 80%, not even close, it probably isn't even dropping 30%, that is just wishful thinking. Think about it this way... we had the greatest PANIC in 100 years last March 2020 and the market still dropped only 35%. Now, things are much much better and the market will drop 80%? That makes no logical sense.

Also forward earnings for the SPX are estimated at 185 and it may even come in at 200, that puts forward PE at 22. This may be historically high but not absurd at all, especially given interest rates.
secondopinion
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Re: Move towards a higher stock allocation after a crash

Post by secondopinion »

as9 wrote: Fri Apr 16, 2021 3:26 pm I’m 100% stocks and plan to stay that way for awhile. I have started mentally preparing for moving some money into UPRO after a drop of 20%+. Haven’t figured out exactly how much and at what intervals.

It would need to account for the possibility of dropping a further 30%+ and lasting multiple years.
I did increase my stocks in March 2020 (I was not 100% stocks before or even after); but I did so understanding it could take 5+ years to come out of a hole. Obviously, it did recovered very fast; but I never plan to win in the short-term on my moves, unless it is something like massive ETF discounts in March 2020, which made considerable short-term profits (or at worst would have a cushion of possible losses).
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
invest2bfree
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Re: Move towards a higher stock allocation after a crash

Post by invest2bfree »

stocknoob4111 wrote: Fri Apr 16, 2021 4:41 pm
embwbam wrote: Thu Apr 15, 2021 10:24 pm then continue to drop all the way to 80 or 90%
The market isn't dropping 80%, not even close, it probably isn't even dropping 30%, that is just wishful thinking. Think about it this way... we had the greatest PANIC in 100 years last March 2020 and the market still dropped only 35%. Now, things are much much better and the market will drop 80%? That makes no logical sense.

Also forward earnings for the SPX are estimated at 185 and it may even come in at 200, that puts forward PE at 22. This may be historically high but not absurd at all, especially given interest rates.

Wow what a comment, trying to extrapolate causation by just one event.

There are many countries like Turkey\Brazil who wants to print money but they cannot because currency will go to trash. so they tighten belts and take the chops as they come.

If we keep printing 20% of GDP on every crisis then a time will come where stocks could drop 70% and still the US government cannot do a thing.
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Re: Move towards a higher stock allocation after a crash

Post by stocknoob4111 »

invest2bfree wrote: Fri Apr 16, 2021 5:11 pm If we keep printing 20% of GDP on every crisis then a time will come where stocks could drop 70% and still the US government cannot do a thing.
What has printing money got to do with how much the market dropped? The printing was in response to the drop and did not occur before it. Yes, we can extrapolate something which is market panic response in relationship to a systemic shock. My point was that to cause a 50% drop in the market there has to be a wave of tremendous panic.

What factors do you see at the moment that would cause such a panic? There are at the moment none. Can some black swan show up? Sure. Anything can happen.

But at the moment to surmise that there is going to be an imminent crash simply because the market has risen seems erroneous to me.
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Beensabu
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Re: Move towards a higher stock allocation after a crash

Post by Beensabu »

embwbam wrote: Fri Apr 16, 2021 2:14 pm
Beensabu wrote: Fri Apr 16, 2021 1:16 pm Here's the assumption I think you're making that you might want to think about: When stocks crash, they will recover eventually (even if it takes several years) and eventually reach new all time highs. It's the same assumption people make when they're 100% equities. It might turn out to be true. It might not.
Oh, definitely, this whole idea is based on that assumption. Do you think making that assumption is a mistake? Do you think that an assumption-breaking bear market worse than the any in history is worth spending any energy on?
I do. I'm fairly certain I will see it while I'm still working. And maybe it will make retirement a pipe dream for me. Many (most, probably) do not agree with me. They might be right. But I am not in the category of people to whom portfolio value does not matter. And I am not in the category of people who can rely on the power of huge future contributions to offset major losses in portfolio value. I'm also not the only one, no matter how it seems on this forum. I'm not naysaying your idea entirely. But there are conservative ways of implementing aggressive strategies. I myself am absolutely a market timer. I have X amount that I must try to turn into Y amount by a certain point in time. And while I will never cease contributions, I am fully aware that they will not have the ability to make up for major losses. Your situation sounds very different. But that doesn't mean you can't implement an aggressive strategy in a conservative way.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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Beensabu
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Re: Move towards a higher stock allocation after a crash

Post by Beensabu »

stocknoob4111 wrote: Fri Apr 16, 2021 5:28 pm
invest2bfree wrote: Fri Apr 16, 2021 5:11 pm If we keep printing 20% of GDP on every crisis then a time will come where stocks could drop 70% and still the US government cannot do a thing.
What has printing money got to do with how much the market dropped? The printing was in response to the drop and did not occur before it. Yes, we can extrapolate something which is market panic response in relationship to a systemic shock. My point was that to cause a 50% drop in the market there has to be a wave of tremendous panic.

What factors do you see at the moment that would cause such a panic? There are at the moment none. Can some black swan show up? Sure. Anything can happen.

But at the moment to surmise that there is going to be an imminent crash simply because the market has risen seems erroneous to me.
Tools become duller with use. Is what I think they're saying.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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Re: Move towards a higher stock allocation after a crash

Post by Trader Joe »

embwbam wrote: Thu Apr 15, 2021 10:24 pm So I understand why we should hold bonds: portfolio and income stability, psychology, ability to rebalance, etc. However, for someone currently in retirement and making withdrawals, wouldn't it theoretically make sense to move to a higher equity allocation in a crash?

Quick thought experiment:

Say I have a traditional 60% stocks / 40% bonds. I'm making yearly withdrawals in my retirement. If stocks crash and lose 50% of their value, it's pretty safe to assume they will trend mostly up in the future. If I were to sell all my bonds and buy stocks at that 50% crash, I won't be losing money if I sell those stocks for income in the future, even if they stay down for a long time, because they'd have the same value as the bonds I held or higher.

Obviously this is contrived, the stock market might drop 30%, or it might drop 50% and then continue to drop all the way to 80 or 90%, but I think the point still stands: there's some point where it makes sense to increase your equity allocation during a crash.

Do you think this makes any sense?

If I am interested in something like this (and am willing to accept the risks, etc), can you think of a structured way I could add it to my IPS?
Yes, this definitely makes sense.

The stock market goes up and it goes down. The long term trend is always very clearly up.

Ride the wave and never panic.
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Re: Move towards a higher stock allocation after a crash

Post by ram »

Theoretically yes. I believe there is a article published in a respectable financial journal which shows the benefit of this strategy. ( Do not have it handy)

I would be too scared to do this in my retirement accounts once I have no ability to make money (retired).

However I have a modest size 529 account where I did exactly as you propose and in terms of percentage returns got handsome returns over the last 1 year. But this account is a small fraction of my investible assets.

Also of note my kids have most likely completed their education and these 529 funds will most likely be used by the as yet not born next generation. In other words this 529 account could go down to zero without any significant consequences for me.
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Re: Move towards a higher stock allocation after a crash

Post by bugleheadd »

Beensabu wrote: Fri Apr 16, 2021 12:08 am
embwbam wrote: Thu Apr 15, 2021 11:07 pm But can we ignore the psychology for a little longer and see if we can come up with a sound strategy? Let's assume that we are NOT trying to time the market exactly. We don't know when the bottom is, but we do know that during a 50% crash stocks are relatively much cheaper than they used to be. That knowledge seems like it should be actionable.

Here's a poor strawman: start at 60/40 (adjust for risk tolerance), during a crash of 30% or higher, rebalance to 70/30, at 40%, rebalance to 80/20, etc. So at a 50% crash you'd be 90/10, and a 60% crash would be 100% stocks.
Sure. I'll play!

How about smaller increments? Like 2-3% shifts in AA while trying to catch that knife and do a cool flippy twist toss thing with it. Then you're less likely to end up watching it keep falling and being all out of the stuff you need to catch it and just sitting there watching your balance drop not knowing when it's going to end.

How about setting a dollar amount for a bond floor (since you're theoretically retired -- what in the name of the universe would you be doing going to 100% stocks during a crash while retired, that's crazy unless you have a bazillion dollars)?

How about just rebalancing to your actual AA when bands are triggered until stocks actually crash 50% and only making a 5% shift in AA then? Then another 5% for every additional 10% down from high? Plus a bond floor. That would be gut wrenching enough.

How about running all the different kinds of strategies you can think of with an actual starting $ amount. See how that $ amount would change as you follow the theoretical plan(s). There will come a $ amount where you go "No! Thus far and no further!" You liquidate. Stocks recover. Ouch.

Just take your 60/40 example with a $1m portfolio and assume the fixed income portion isn't affected by the market at all (since it makes the math so much easier). With your perfectly acceptable fun and games first scenario:

At a 30% crash, you have $420k/$400 (you're down to $820k) -- you decide to change your AA to 70/30, so now you're at $574k/$246k. The crash keeps going... At 40% off highs (or ~14% down from the last spot), you have $494k/$246k (you're down to $740k) -- you decide to change your AA to 80/20, so now you're at $592k/$148k. It keeps going... At 50% off highs (or ~17% down from the last spot), you have $491k/$148k (you're down to $639k) -- you decide to change your AA to 90/10, so now you're at $575k/$64k. It keeps going... At 60% off highs (or 20% down from the last spot), you have $460k/$64k (you're down to $524k) -- you decide to change your AA to 100/0, so now you're at $524k/$0. If it keeps going, then at 70% off highs (or 25% down from the last spot), you have $393k/$0. I would be sick. You would be sick. How many people could even make that first move and shove $154k from bonds into stocks after a 30% drop and who knows where it will end?
Stocks go back up. Stocks always go back to all time highs. Stocks always going past all time highs.
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Beensabu
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Re: Move towards a higher stock allocation after a crash

Post by Beensabu »

bugleheadd wrote: Fri Apr 16, 2021 7:35 pm US stocks have gone back up. Stocks have always gone back to all time highs. Stocks have always going gone past all time highs.
Fixed it for you.

You ever notice how right when everyone figures out how best to take advantage of a strategy based on historical performance suddenly it doesn't work the same way anymore?
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Re: Move towards a higher stock allocation after a crash

Post by JBTX »

flyingaway wrote: Thu Apr 15, 2021 11:11 pm How about the market only drop 49%?
In March I decided I was going to buy some if the market dropped 40% from the top. Eventually I pulled the trigger. Only later had I figured out that the market hadn't quite dropped 40% and not sure it ever did.

Thank goodness for my error.

In the end it probably mostly amounted to an aggressive rebalance.
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Re: Move towards a higher stock allocation after a crash

Post by watchnerd »

gblack wrote: Fri Apr 16, 2021 3:23 pm How about the opposite scenario when stocks increase nearly 50% in the past year (like it has). Would you argue for moving to a more conservative asset allocation. Does not all the same logic apply?
If you're using valuation-based logic (as opposed to drop/gain percentages), it should apply in both directions.
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Re: Move towards a higher stock allocation after a crash

Post by watchnerd »

bugleheadd wrote: Fri Apr 16, 2021 7:35 pm
Stocks go back up. Stocks always go back to all time highs. Stocks always going past all time highs.
Verifiably false.

You seem to be ignorant of the Nikkei.

Image
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Re: Move towards a higher stock allocation after a crash

Post by Doc7 »

watchnerd wrote: Fri Apr 16, 2021 8:17 pm
bugleheadd wrote: Fri Apr 16, 2021 7:35 pm
Stocks go back up. Stocks always go back to all time highs. Stocks always going past all time highs.
Verifiably false.

You seem to be ignorant of the Nikkei.

Image
I’ll take that bet
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Re: Move towards a higher stock allocation after a crash

Post by bubbadog »

Watty wrote: Fri Apr 16, 2021 12:35 am You are making this too complicated.

If you have a fixed stock and bond asset allocation then you will automatically be selling bonds to buy stocks after a stock market crash.
+1 Exactly!
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watchnerd
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Re: Move towards a higher stock allocation after a crash

Post by watchnerd »

Doc7 wrote: Fri Apr 16, 2021 10:36 pm I’ll take that bet
Was there a bet being discussed?
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