Increase Equity Allocation Now?

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zero_coupon
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Increase Equity Allocation Now?

Post by zero_coupon »

Suppose you desired a permanent increase in your equity allocation, expecting to improve long-term returns. Also suppose you had some rational economic concerns (potential recession looming, etc.). Would you avoid market timing and implement your new asset allocation immediately? If so, why? Or would you avoid increasing equities now, citing economic concerns and current availability of attractive fixed-income options?

I know the standard Boglehead answer, but current economic condtions do raise concerns. I suppose there are always concerns, and I suppose it's futile to outguess the market's pricing ability. However it seems corporations may struggle in the near future (of course, I have no information the market hasn't already considered).
Lou354
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Re: Increase Equity Allocation Now?

Post by Lou354 »

If not now, when would you increase your allocation to equity? After a market crash and in the depths of a brutal recession? After the market has gone up?

How big of a change are you considering? Maybe phase in the increase gradually over time. That’s probably what I would do.
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zero_coupon
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Re: Increase Equity Allocation Now?

Post by zero_coupon »

Lou354 wrote: Wed Mar 29, 2023 4:33 am If not now, when would you increase your allocation to equity? After a market crash and in the depths of a brutal recession? After the market has gone up?
I suppose that's always the relevant question. Of course, market timers hope to implement such a change after further decline, not after an increase.

I guess there's no good reason to expect either an increase or decrease in the near term. I'm a bit pessimistic about the near-term economic future, but of course I don't know better than the collective opinion expressed via current market prices. It just seems that corporations will struggle as the Fed combats sticky inflation.
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Re: Increase Equity Allocation Now?

Post by chassis »

zero_coupon wrote: Wed Mar 29, 2023 3:52 am Suppose you desired a permanent increase in your equity allocation, expecting to improve long-term returns. Also suppose you had some rational economic concerns (potential recession looming, etc.). Would you avoid market timing and implement your new asset allocation immediately? If so, why? Or would you avoid increasing equities now, citing economic concerns and current availability of attractive fixed-income options?

I know the standard Boglehead answer, but current economic condtions do raise concerns. I suppose there are always concerns, and I suppose it's futile to outguess the market's pricing ability. However it seems corporations may struggle in the near future (of course, I have no information the market hasn't already considered).
Avoid labels and headlines. What do you want? Do you want to increase your equity exposure? If yes, then do it.
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climber2020
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Re: Increase Equity Allocation Now?

Post by climber2020 »

If you're going to buy more stocks, doing so when they're 20% cheaper than they were not that long ago seems like a decent time.
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Re: Increase Equity Allocation Now?

Post by zero_coupon »

climber2020 wrote: Wed Mar 29, 2023 6:12 am If you're going to buy more stocks, doing so when they're 20% cheaper than they were not that long ago seems like a decent time.
Yes, but isn't this just anchoring on an arbitrary high? CAPE is still pretty high. Nevertheless, if we're headed for a deeper drawdown, it would be comforting to buy more equity knowing that some of the drawdown is already behind us.
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Re: Increase Equity Allocation Now?

Post by zero_coupon »

chassis wrote: Wed Mar 29, 2023 6:08 am Avoid labels and headlines. What do you want? Do you want to increase your equity exposure? If yes, then do it.
Seems reasonable. Thanks.
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Re: Increase Equity Allocation Now?

Post by martincmartin »

zero_coupon wrote: Wed Mar 29, 2023 3:52 am Suppose you desired a permanent increase in your equity allocation, expecting to improve long-term returns. Also suppose you had some rational economic concerns (potential recession looming, etc.). Would you avoid market timing and implement your new asset allocation immediately? If so, why? Or would you avoid increasing equities now, citing economic concerns and current availability of attractive fixed-income options?
The rational economic concerns are already priced in. In other words, the equities are cheaper than they would be based just on available data of the companies, such as current and past profits & expsenses.
I know the standard Boglehead answer, but current economic condtions do raise concerns.
They also raise concerns for the person selling you the shares. They're willing to accept less than they would if the expected future were rosy.
I suppose there are always concerns, and I suppose it's futile to outguess the market's pricing ability. However it seems corporations may struggle in the near future (of course, I have no information the market hasn't already considered).
If they struggle just as much as the market expects, then the share price won't change.

Not buying now is a bet that the economy will be worse than expected.

If the economy gets worse from here, but not as bad as expected, then stock prices will go up. And many people will be left scratching their heads: "we had a recession, sure it was milder than we thought but it was still a recession, and stock prices went up! How can stock prices go up when the economy gets worse!" The answer: it was better than expected.
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Re: Increase Equity Allocation Now?

Post by burritoLover »

zero_coupon wrote: Wed Mar 29, 2023 3:52 am Suppose you desired a permanent increase in your equity allocation, expecting to improve long-term returns. Also suppose you had some rational economic concerns (potential recession looming, etc.). Would you avoid market timing and implement your new asset allocation immediately? If so, why? Or would you avoid increasing equities now, citing economic concerns and current availability of attractive fixed-income options?

I know the standard Boglehead answer, but current economic condtions do raise concerns. I suppose there are always concerns, and I suppose it's futile to outguess the market's pricing ability. However it seems corporations may struggle in the near future (of course, I have no information the market hasn't already considered).
Let's imagine you go with a 50/50 stock/bond position and don't contribute further or rebalance. Imagine hitting a period like the one below. Can you handle that without capitulating? 17 years for your stock allocation to break even with your bond allocation? And there's no guarantee that this is the worst period that will present itself in the future. Equities are highly risky.

Image
Logan Roy
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Re: Increase Equity Allocation Now?

Post by Logan Roy »

zero_coupon wrote: Wed Mar 29, 2023 3:52 am Suppose you desired a permanent increase in your equity allocation, expecting to improve long-term returns. Also suppose you had some rational economic concerns (potential recession looming, etc.). Would you avoid market timing and implement your new asset allocation immediately? If so, why? Or would you avoid increasing equities now, citing economic concerns and current availability of attractive fixed-income options?

I know the standard Boglehead answer, but current economic condtions do raise concerns. I suppose there are always concerns, and I suppose it's futile to outguess the market's pricing ability. However it seems corporations may struggle in the near future (of course, I have no information the market hasn't already considered).
I don't think it's ever been more difficult to get a sense of where this market's going.. There's a delicate balance between tightening and letting inflation run, and as they were just saying on Bloomberg, you don't know what's coming one day to the next, there could be a slew of banks failing and a major economic crisis; we could have a decade of markets going sideways, with no real direction; or we could be back to easing.

I would say one (non-Boglehead) middle-ground in such a scenario is to buy defensive equity ETFs.. Consumer Staples and Healthcare, maybe some Utilities. Personally, I'm overweighting US and European Staples and Healthcare. These were being bought up for this scenario a while ago, so there's likely not much upside. It's more a case of them being able to weather a potential storm. Personally I have these large defensive overweights, but also hold some recovery plays: US Value, Europe, UK, EM, S&P500.

I think TIPS *may* make more sense than stocks, over the next decade, in some of the more pessimistic scenarios. Gold may be worth holding. I don't think you can do anything more than being very balanced in this kind of market. Or, just stick with broad market stocks and bonds. I aim for absolute returns – not necessarily beating the market; just trying to play a stronger defence. In principle, I think one can always substitute bonds with defensive equity ETFs, so long as you've backtested enough to get an idea of the difference.
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Re: Increase Equity Allocation Now?

Post by rockAction »

In Vanguard’s 2023 market outlook, they suggested that in current conditions one could get the same expected return with less risk by increasing one’s fixed income holdings (going 50/50 instead of 60/40). Of course, that is market timing, but it seems you are somewhat open to that.

Personally, I would not increase equities right now, but if want to do that I would do it gradually, as suggested above. Another option to increase long term expected returns is to increase bond duration (which is what I did), but that’s an entirely different discussion.
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Re: Increase Equity Allocation Now?

Post by mega317 »

The feelings-free rational move would be to change your allocation to what you want right now. A possibly more rational move would be to realize that humans are not feelings-free, and you especially based on this post. So it could make sense to make the change more gradually.

I wonder what is the longest stretch that Bogleheads has not seen a post worried about and imminent recession, excepting the times there is an ongoing recession. There is always a recession looming.
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Re: Increase Equity Allocation Now?

Post by delamer »

Virtually everyone reading this forum has vivid memories of 9/11, when our whole world was turned upside down.

I always think of that when posters get fixated on the Fed or the national debt or whatever economic news is making headlines.

Admit that you don’t know what’s around the corner in the short run, and invest according to your long-term plans.
Last edited by delamer on Wed Mar 29, 2023 11:30 am, edited 1 time in total.
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Re: Increase Equity Allocation Now?

Post by jjj_22 »

The question you asked is phrased in a way that presumes that if you want more equities, because you want higher returns, then you should definitely have more equities, and you're asking when to make that change.

But wanting more equities, because you want higher returns, doesn't necessarily mean that you should have more equities. Everyone would prefer higher returns, but you need to make a personal assessment of the risk tradeoff.

https://www.bogleheads.org/wiki/Assessi ... _tolerance

It could be that you've already done this, and I'm being overly nitpicky in how I'm reading your question. But it's easy to formulate questions that make implicit assumptions that push you down a path without realizing it. So I'm trying to point that out that possibility, just in case. :beer
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Re: Increase Equity Allocation Now?

Post by Johm221122 »

zero_coupon wrote: Wed Mar 29, 2023 3:52 am However it seems corporations may struggle in the near future
But your investing for the long term
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Re: Increase Equity Allocation Now?

Post by zero_coupon »

martincmartin wrote: Wed Mar 29, 2023 6:45 am Not buying now is a bet that the economy will be worse than expected.
Market prices sometimes exhibit an irrational degree of optimism. Not sure if that's the case now.
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Re: Increase Equity Allocation Now?

Post by zero_coupon »

jjj_22 wrote: Wed Mar 29, 2023 10:06 am But wanting more equities, because you want higher returns, doesn't necessarily mean that you should have more equities. Everyone would prefer higher returns, but you need to make a personal assessment of the risk tradeoff.
Should one maximize expected returns by holding as much equities as one knows one can tolerate? (Also considering worst-case scenarios, future cash flow needs, etc., of course.)
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Re: Increase Equity Allocation Now?

Post by zero_coupon »

rockAction wrote: Wed Mar 29, 2023 8:06 am In Vanguard’s 2023 market outlook, they suggested that in current conditions one could get the same expected return with less risk by increasing one’s fixed income holdings (going 50/50 instead of 60/40). Of course, that is market timing, but it seems you are somewhat open to that.
Yes, TINA has given way to TARA (there are real alternatives).
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Re: Increase Equity Allocation Now?

Post by Ocean77 »

zero_coupon wrote: Wed Mar 29, 2023 3:52 am but current economic condtions do raise concerns. I suppose there are always concerns, and I suppose it's futile to outguess the market's pricing ability. However it seems corporations may struggle in the near future (of course, I have no information the market hasn't already considered).
This would be an argument for doing your change now. If there is such thing as timing the market, you generally want to invest when the situation is dire, as in a war or recession, rather than at times when everybody is euphoric.
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Re: Increase Equity Allocation Now?

Post by rushrocker »

"Now" is and will always be as good of a time as ever, except maybe in the case of extreme valuations.

Today, the market is sitting sitting just slightly above historical PE and CAPE ratios according to JP Morgan guide to the markets.

I think maybe starting with a lump sum and then dollar cost averaging over the next year in is a good way to stem the fears around investing it all right now and having it go down immediately.
Last edited by rushrocker on Wed Mar 29, 2023 7:30 pm, edited 3 times in total.
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Re: Increase Equity Allocation Now?

Post by zero_coupon »

Ocean77 wrote: Wed Mar 29, 2023 7:20 pm
zero_coupon wrote: Wed Mar 29, 2023 3:52 am but current economic condtions do raise concerns. I suppose there are always concerns, and I suppose it's futile to outguess the market's pricing ability. However it seems corporations may struggle in the near future (of course, I have no information the market hasn't already considered).
This would be an argument for doing your change now. If there is such thing as timing the market, you generally want to invest when the situation is dire, as in a war or recession, rather than at times when everybody is euphoric.
The problem is that there may be a general underestimation of impending corporate struggles. Econoimist Nancy Lazar (Piper Sandler) has been discussing this. It is important to pay close attention to the talking heads, ha ha.
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Re: Increase Equity Allocation Now?

Post by Apathizer »

If anything I'd allocate more to bonds assuming you don't need the money within the next couple years. Bonds seem like a screamin deal right now.
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Re: Increase Equity Allocation Now?

Post by whodidntante »

You can get Bogleheads to advise you to market time. You just have to call it rebalancing. :twisted:
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Re: Increase Equity Allocation Now?

Post by whodidntante »

Apathizer wrote: Wed Mar 29, 2023 7:37 pm If anything I'd allocate more to bonds assuming you don't need the money within the next couple years. Bonds seem like a screamin deal right now.
I freaking hate bonds! And even I bought some. :P
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Re: Increase Equity Allocation Now?

Post by UpperNwGuy »

whodidntante wrote: Wed Mar 29, 2023 7:37 pm You can get Bogleheads to advise you to market time. You just have to call it rebalancing. :twisted:
Not always. I've seen quite a few posts where someone describes a change to AA as rebalancing, and someone else flags it as market timing.
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Re: Increase Equity Allocation Now?

Post by zero_coupon »

Logan Roy wrote: Wed Mar 29, 2023 7:44 am I would say one (non-Boglehead) middle-ground in such a scenario is to buy defensive equity ETFs.. Consumer Staples and Healthcare, maybe some Utilities. Personally, I'm overweighting US and European Staples and Healthcare. These were being bought up for this scenario a while ago, so there's likely not much upside. It's more a case of them being able to weather a potential storm. Personally I have these large defensive overweights, but also hold some recovery plays: US Value, Europe, UK, EM, S&P500.
Nancy Lazar said something similar, but emphasizes that she's an economist, not an investment advisor. I'd prefer to stick to broad markets.
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Re: Increase Equity Allocation Now?

Post by zero_coupon »

Apathizer wrote: Wed Mar 29, 2023 7:37 pm If anything I'd allocate more to bonds assuming you don't need the money within the next couple years. Bonds seem like a screamin deal right now.
What variety and duration?
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Re: Increase Equity Allocation Now?

Post by whodidntante »

UpperNwGuy wrote: Wed Mar 29, 2023 7:44 pm
whodidntante wrote: Wed Mar 29, 2023 7:37 pm You can get Bogleheads to advise you to market time. You just have to call it rebalancing. :twisted:
Not always. I've seen quite a few posts where someone describes a change to AA as rebalancing, and someone else flags it as market timing.
Maybe I didn't set up the joke right. :P
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Re: Increase Equity Allocation Now?

Post by rockstar »

The economy doesn't matter. What matters is when you need to sell. The longer you can wait to sell the more sense equities make to hold.
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Re: Increase Equity Allocation Now?

Post by arcticpineapplecorp. »

zero_coupon wrote: Wed Mar 29, 2023 3:52 am I know the standard Boglehead answer, but current economic condtions do raise concerns. I suppose there are always concerns, and I suppose it's futile to outguess the market's pricing ability. However it seems corporations may struggle in the near future (of course, I have no information the market hasn't already considered).
1. remember the market is not the economy:

headline from 1980:
"Coming on Fast. The Slump of 1980 Will be Severe"

actual performance of S&P500 in 1980: +32%

2 headlines from 2009:
"Worst Crisis since '30s, With No End in Sight"
"US Unemployment Rate Hits 10.2%, Highest in 26 years"

actual performance of S&P500 in 2009: +26%

2. I think Warren Buffett has said he doesn't read economic forecasts and doesn't factor them in to his investment decisions. He invests in busineses that he believes will produce value over time. "In the short term the market's a voting machine but in the long term it's a weighing machine."--Benjamin Graham.

3. Markets go down every single year, not just in years you believe there will be "economic conditions":

Image

Source

problem is you didn't know when all those intrayear declines were going to occur, nor how bad or not bad they'd be, nor how long they'd last.

you're trying to act based on imperfect (unknown) information.

why do that?

the answers to your market timing questions are:

Q: When do I buy?
A: When you have the money

Q: When do I sell?
A: When you need the money

anything else is guessing. Since you can't know what will be the right thing to do ahead of time, you can't kick yourself for something you do if it doesn't turn out well, right? If you knew what would have been the right thing to do you'd do that.

4. what caused the change in AA?
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Re: Increase Equity Allocation Now?

Post by arcticpineapplecorp. »

zero_coupon wrote: Wed Mar 29, 2023 3:52 am Suppose you desired a permanent increase in your equity allocation, expecting to improve long-term returns. Also suppose you had some rational economic concerns (potential recession looming, etc.).
how do you know it will be permanent if you are on the fence about having that "permanent" increase right now?

in other words, let's say we're either in a period of calm or let's say it's 2021 (up 25.67% and max drawdown for the year was only -4.46%, source) and then you wanted a "permanent" increase in equity allocation.

How would you feel about your "permanent" increase in equity allocation today?
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Charles Joseph
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Re: Increase Equity Allocation Now?

Post by Charles Joseph »

burritoLover wrote: Wed Mar 29, 2023 7:10 am
zero_coupon wrote: Wed Mar 29, 2023 3:52 am Suppose you desired a permanent increase in your equity allocation, expecting to improve long-term returns. Also suppose you had some rational economic concerns (potential recession looming, etc.). Would you avoid market timing and implement your new asset allocation immediately? If so, why? Or would you avoid increasing equities now, citing economic concerns and current availability of attractive fixed-income options?

I know the standard Boglehead answer, but current economic condtions do raise concerns. I suppose there are always concerns, and I suppose it's futile to outguess the market's pricing ability. However it seems corporations may struggle in the near future (of course, I have no information the market hasn't already considered).
Let's imagine you go with a 50/50 stock/bond position and don't contribute further or rebalance. Imagine hitting a period like the one below. Can you handle that without capitulating? 17 years for your stock allocation to break even with your bond allocation? And there's no guarantee that this is the worst period that will present itself in the future. Equities are highly risky.

Image
A 50/50 investor during that time period would have had a CAGR of 5.48% - not too terrible for getting yourself through the tech bubble crash and the GFC and coming out the other side.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
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Re: Increase Equity Allocation Now?

Post by Samosa22 »

rockstar wrote: Wed Mar 29, 2023 8:20 pm The economy doesn't matter. What matters is when you need to sell. The longer you can wait to sell the more sense equities make to hold.
The economy doesn't matter. What matters is when printer will go burrrrr.
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Re: Increase Equity Allocation Now?

Post by nisiprius »

For the relationship between the economy and the stock market, I loved:

The stocks are up but the economy's down
JOSH BROWN: Now I'm going to give you my favorite analogy. So a woman is walking through Central Park, and she's got a dog. What's a very active kind of dog?

VANEK SMITH: Oh, like a Jack Russell terrier or something like that.

BROWN: Fine. Jack Russell terrier is great. If you just looked at her, what is she doing? She's taking normal steps. She's going in a straight line. She's, you know, walking upright at a moderate pace, nothing terribly exciting. Then let your eyes pan down a little bit. Look at the dog. The dog is going crazy. It's chasing birds. It's digging up clumps of mud. It's running at trees. It's [marking territory] all over the place. The dog is the stock market. The woman is the economy....

GARCIA: Yeah, Josh's point is that the stock market and the economy usually end up in the same place just like the lady and her crazy dog, but that there are times when they do not act or look the same at all.
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Re: Increase Equity Allocation Now?

Post by InvestorHowie »

nisiprius wrote: Wed Mar 29, 2023 9:06 pm For the relationship between the economy and the stock market, I loved:

The stocks are up but the economy's down
JOSH BROWN: Now I'm going to give you my favorite analogy. So a woman is walking through Central Park, and she's got a dog. What's a very active kind of dog?

VANEK SMITH: Oh, like a Jack Russell terrier or something like that.

BROWN: Fine. Jack Russell terrier is great. If you just looked at her, what is she doing? She's taking normal steps. She's going in a straight line. She's, you know, walking upright at a moderate pace, nothing terribly exciting. Then let your eyes pan down a little bit. Look at the dog. The dog is going crazy. It's chasing birds. It's digging up clumps of mud. It's running at trees. It's [marking territory] all over the place. The dog is the stock market. The woman is the economy....

GARCIA: Yeah, Josh's point is that the stock market and the economy usually end up in the same place just like the lady and her crazy dog, but that there are times when they do not act or look the same at all.
I love this too - thanks for sharing. This strikes a chord with me.
Time is your friend; impulse is your enemy. --John C. Bogle
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burritoLover
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Re: Increase Equity Allocation Now?

Post by burritoLover »

Charles Joseph wrote: Wed Mar 29, 2023 8:42 pm
burritoLover wrote: Wed Mar 29, 2023 7:10 am
zero_coupon wrote: Wed Mar 29, 2023 3:52 am Suppose you desired a permanent increase in your equity allocation, expecting to improve long-term returns. Also suppose you had some rational economic concerns (potential recession looming, etc.). Would you avoid market timing and implement your new asset allocation immediately? If so, why? Or would you avoid increasing equities now, citing economic concerns and current availability of attractive fixed-income options?

I know the standard Boglehead answer, but current economic condtions do raise concerns. I suppose there are always concerns, and I suppose it's futile to outguess the market's pricing ability. However it seems corporations may struggle in the near future (of course, I have no information the market hasn't already considered).
Let's imagine you go with a 50/50 stock/bond position and don't contribute further or rebalance. Imagine hitting a period like the one below. Can you handle that without capitulating? 17 years for your stock allocation to break even with your bond allocation? And there's no guarantee that this is the worst period that will present itself in the future. Equities are highly risky.

Image
A 50/50 investor during that time period would have had a CAGR of 5.48% - not too terrible for getting yourself through the tech bubble crash and the GFC and coming out the other side.
That’s after the pain is subsiding after 17 years and you finally break even with bonds. You have to look at the ride along the way, especially for someone like the OP that is already getting antsy after a couple of bad years.
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Re: Increase Equity Allocation Now?

Post by Doc7 »

arcticpineapplecorp. wrote: Wed Mar 29, 2023 8:27 pm
3. Markets go down every single year, not just in years you believe there will be "economic conditions":

Image

Source

My first 401K deposit was made on my first post college pay check that I was eligible, in August 2007.

Honestly, until seeing those chart, I had no idea how bad my older coworkers close to retirement had it (at the time) in that period. Of course, any who retired in the few years following that period (the plant shut down shortly after I was transferred out a year or two later) probably had a really good run for their Go Go retirement years, but at the time… a 49% decline must have absolutely horrifying!

As my BH post history very clearly details, I had read 4 Pillars and Random Walk and started off 60/40 with a note in an actual written IPS stating, “AA is 60/40 until I have seen a downturn and understand my risk tolerance”. I wrote this in Mid Feb 2010:

Doc7 wrote: Sat Feb 13, 2010 1:50 pm Hello all,

My investment plan from age 22 and a half until my 25th birthday was to be 60/40 stocks/bonds. I wrote then at that time I would go to 70/30 if I had been able to stomach volatility.

I made it through 2.5 years of what to me seems like a really volatile market and I happily put in my max Roth IRA and max match 401(k) deposits with each paycheck. So today, on the rebalancing date which happens to fall 2 days before my birthday, i'm going to 70/30. This time it's till age 30.
viewtopic.php?t=50332

13 years after writing that, I’m still happily 70/30 and rebalancing across all accounts at each annual backdoor Roth deposit.


OP -
Pick something you’re going to have for a decade or more. Until you’re comfortable with that idea, don’t just do something, stand there!
rockstar
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Re: Increase Equity Allocation Now?

Post by rockstar »

burritoLover wrote: Wed Mar 29, 2023 9:31 pm
Charles Joseph wrote: Wed Mar 29, 2023 8:42 pm
burritoLover wrote: Wed Mar 29, 2023 7:10 am
zero_coupon wrote: Wed Mar 29, 2023 3:52 am Suppose you desired a permanent increase in your equity allocation, expecting to improve long-term returns. Also suppose you had some rational economic concerns (potential recession looming, etc.). Would you avoid market timing and implement your new asset allocation immediately? If so, why? Or would you avoid increasing equities now, citing economic concerns and current availability of attractive fixed-income options?

I know the standard Boglehead answer, but current economic condtions do raise concerns. I suppose there are always concerns, and I suppose it's futile to outguess the market's pricing ability. However it seems corporations may struggle in the near future (of course, I have no information the market hasn't already considered).
Let's imagine you go with a 50/50 stock/bond position and don't contribute further or rebalance. Imagine hitting a period like the one below. Can you handle that without capitulating? 17 years for your stock allocation to break even with your bond allocation? And there's no guarantee that this is the worst period that will present itself in the future. Equities are highly risky.

Image
A 50/50 investor during that time period would have had a CAGR of 5.48% - not too terrible for getting yourself through the tech bubble crash and the GFC and coming out the other side.
That’s after the pain is subsiding after 17 years and you finally break even with bonds. You have to look at the ride along the way, especially for someone like the OP that is already getting antsy after a couple of bad years.
What was the starting yield for total bond at the beginning?
Apathizer
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Re: Increase Equity Allocation Now?

Post by Apathizer »

zero_coupon wrote: Wed Mar 29, 2023 7:49 pm
Apathizer wrote: Wed Mar 29, 2023 7:37 pm If anything I'd allocate more to bonds assuming you don't need the money within the next couple years. Bonds seem like a screamin deal right now.
What variety and duration?
BNDW. Nice and simple.
ROTH: 50% AVGE, 10% DFAX, 40% BNDW. Taxable: 50% BNDW, 40% AVGE, 10% DFAX.
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zero_coupon
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Re: Increase Equity Allocation Now?

Post by zero_coupon »

burritoLover wrote: Wed Mar 29, 2023 9:31 pm You have to look at the ride along the way, especially for someone like the OP that is already getting antsy after a couple of bad years.
I appreaciate your warning that stocks are risky, but you have misunderstood my motivation. I am not "antsy after a couple of bad years." I am simply discussing the sensibility of increasing equity at this time, supposing a permanent increase will be implemented at some time. The increase has nothing to do with recent equity returns.
xxd091
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Re: Increase Equity Allocation Now?

Post by xxd091 »

There is no satisfactory answer to your initial question
Your Asset Allocation should have been set in the “stable” times to suit your personal needs and risk tolerance
It should have been set to deal with times like these -downturns are a regular occurrence (as are upturns )
You should then hang in there and stay the course
This is not the time to be changing horses in midstream in the middle of a flood!
If you are not happy then it suggests your initial Asset Allocation is not right for you
Its maybe your first time riding the “maelstrom “ and a lesson has been leaned
Our first downturn in the stockmarket is a learning experience for all investors-we’ve all had to go through it
You learn what your actual sustainable stomach acid levels are in the real world
You then can reset your chosen Asset Allocation to one you can sustain through thick and thin-the Boglehead way!
Let us know what you decide to do
xxd091
invest4
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Re: Increase Equity Allocation Now?

Post by invest4 »

If you have a strong belief in CAPE, one potential option would be to set a simple threshold where you are no longer willing to invest new monies (CAPE 30 for example).

Ultimately, the challenge that remains is that investors may push CAPE well beyond your threshold, which may last for years. You may ultimately prove to be correct, but it could be a lonely and frustrating wait…if it comes at all.
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burritoLover
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Re: Increase Equity Allocation Now?

Post by burritoLover »

rockstar wrote: Wed Mar 29, 2023 10:11 pm
burritoLover wrote: Wed Mar 29, 2023 9:31 pm
Charles Joseph wrote: Wed Mar 29, 2023 8:42 pm
burritoLover wrote: Wed Mar 29, 2023 7:10 am
zero_coupon wrote: Wed Mar 29, 2023 3:52 am Suppose you desired a permanent increase in your equity allocation, expecting to improve long-term returns. Also suppose you had some rational economic concerns (potential recession looming, etc.). Would you avoid market timing and implement your new asset allocation immediately? If so, why? Or would you avoid increasing equities now, citing economic concerns and current availability of attractive fixed-income options?

I know the standard Boglehead answer, but current economic condtions do raise concerns. I suppose there are always concerns, and I suppose it's futile to outguess the market's pricing ability. However it seems corporations may struggle in the near future (of course, I have no information the market hasn't already considered).
Let's imagine you go with a 50/50 stock/bond position and don't contribute further or rebalance. Imagine hitting a period like the one below. Can you handle that without capitulating? 17 years for your stock allocation to break even with your bond allocation? And there's no guarantee that this is the worst period that will present itself in the future. Equities are highly risky.

Image
A 50/50 investor during that time period would have had a CAGR of 5.48% - not too terrible for getting yourself through the tech bubble crash and the GFC and coming out the other side.
That’s after the pain is subsiding after 17 years and you finally break even with bonds. You have to look at the ride along the way, especially for someone like the OP that is already getting antsy after a couple of bad years.
What was the starting yield for total bond at the beginning?
Not sure what the yield was on total bond but a 10-yr treasury was around 6% in 2000 and around 3.5% in 2010 (or about where it is today).
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arcticpineapplecorp.
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Re: Increase Equity Allocation Now?

Post by arcticpineapplecorp. »

zero_coupon wrote: Thu Mar 30, 2023 2:04 am
burritoLover wrote: Wed Mar 29, 2023 9:31 pm You have to look at the ride along the way, especially for someone like the OP that is already getting antsy after a couple of bad years.
I appreaciate your warning that stocks are risky, but you have misunderstood my motivation. I am not "antsy after a couple of bad years." I am simply discussing the sensibility of increasing equity at this time, supposing a permanent increase will be implemented at some time. The increase has nothing to do with recent equity returns.
but the premise of changing one's allocation "at this time" does beg the question...if you're wondering if it might NOT be a good time to increase equity position ("at this time") then why would you continue to even hold your current equity position if you fear this may not be a good time for more equities? You're protecting the new money to be launched in equities, but why are your current equities immune from this possible bad time coming up? In fact, if you think there may be a not so good time coming up, why wouldn't you sell everything you currently have in equities and dollar cost average back in. As Larry Swedroe puts it...
Here is another way to think about DCA. Assume that staying fully invested in equities is suboptimal, meaning you should sell all your equities and then DCA back into the market. At the next investment period you have some money in the stock market already. While you planned to periodically reinvest in the market, you also determined that staying fully invested is suboptimal. You run into this difficulty: Do you continue to buy equities, sell your existing holdings, or do both? Logicaly, DCA cannot be effective...

While DCA is not an optimal investment strategy, it has value when facing the "lesser of two evils," that is, when an investor simply cannot "take the plunge" and invest all at once for fear of what could happen to the stock market. Fear causes paralysis. If the market rises after they delay, they think, "How can I buy now at even higher prices?" If the market falls, "I can't buy now. That bear market I was afraid of is here." Once deciding not to buy, how do you decide to ever buy again?

The Only Guide You'll Ever Need for the Right Financial Plan, by Larry Swedroe, page 182, appendix B
Last edited by arcticpineapplecorp. on Thu Mar 30, 2023 7:18 am, edited 2 times in total.
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burritoLover
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Re: Increase Equity Allocation Now?

Post by burritoLover »

zero_coupon wrote: Thu Mar 30, 2023 2:04 am
burritoLover wrote: Wed Mar 29, 2023 9:31 pm You have to look at the ride along the way, especially for someone like the OP that is already getting antsy after a couple of bad years.
I appreaciate your warning that stocks are risky, but you have misunderstood my motivation. I am not "antsy after a couple of bad years." I am simply discussing the sensibility of increasing equity at this time, supposing a permanent increase will be implemented at some time. The increase has nothing to do with recent equity returns.
A more nuanced answer can be provided if you provided more information (what's your current allocation, what's your proposed allocation, what are you invested in, what is your investing history, how many years to retirement), but, working from comments from you like the following:
zero_coupong wrote:I'm a bit pessimistic about the near-term economic future,...It just seems that corporations will struggle as the Fed combats sticky inflation.
That strikes me as someone who should not increase their equity allocation. But, let's say your nerves are steely enough for the increased equity allocation - you are more just wondering about timing it. Active traders are all trying to do the same thing - maximize return while minimizing risk. Any obvious risk (and even other risks not so obvious) are already priced in given the market's estimate of the probability of that happening. That is still a guess but it is about as good of a guess as it gets. It would be like putting 1,000 of the world's top climate scientists into a room to predict the number of hurricanes next year and you making a bet that you can beat the average of their predictions. Now, you might get lucky one year, but long-term, unless you have some special ability to predict this, you will almost certainly lose.
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Re: Increase Equity Allocation Now?

Post by HeavyChevy »

Charles Joseph wrote: Wed Mar 29, 2023 8:42 pm
burritoLover wrote: Wed Mar 29, 2023 7:10 am
zero_coupon wrote: Wed Mar 29, 2023 3:52 am Suppose you desired a permanent increase in your equity allocation, expecting to improve long-term returns. Also suppose you had some rational economic concerns (potential recession looming, etc.). Would you avoid market timing and implement your new asset allocation immediately? If so, why? Or would you avoid increasing equities now, citing economic concerns and current availability of attractive fixed-income options?

I know the standard Boglehead answer, but current economic condtions do raise concerns. I suppose there are always concerns, and I suppose it's futile to outguess the market's pricing ability. However it seems corporations may struggle in the near future (of course, I have no information the market hasn't already considered).
Let's imagine you go with a 50/50 stock/bond position and don't contribute further or rebalance. Imagine hitting a period like the one below. Can you handle that without capitulating? 17 years for your stock allocation to break even with your bond allocation? And there's no guarantee that this is the worst period that will present itself in the future. Equities are highly risky.

Image
A 50/50 investor during that time period would have had a CAGR of 5.48% - not too terrible for getting yourself through the tech bubble crash and the GFC and coming out the other side.
That was also a period over which the 10 year treasury yield dropped from something like 5% to 2%, juicing bond total returns.

(Edit: Sorry, I missed above post from BL).
"It's not the best move, but it is a move." - GMHikaru
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burritoLover
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Re: Increase Equity Allocation Now?

Post by burritoLover »

HeavyChevy wrote: Thu Mar 30, 2023 8:05 am
Charles Joseph wrote: Wed Mar 29, 2023 8:42 pm
burritoLover wrote: Wed Mar 29, 2023 7:10 am
zero_coupon wrote: Wed Mar 29, 2023 3:52 am Suppose you desired a permanent increase in your equity allocation, expecting to improve long-term returns. Also suppose you had some rational economic concerns (potential recession looming, etc.). Would you avoid market timing and implement your new asset allocation immediately? If so, why? Or would you avoid increasing equities now, citing economic concerns and current availability of attractive fixed-income options?

I know the standard Boglehead answer, but current economic condtions do raise concerns. I suppose there are always concerns, and I suppose it's futile to outguess the market's pricing ability. However it seems corporations may struggle in the near future (of course, I have no information the market hasn't already considered).
Let's imagine you go with a 50/50 stock/bond position and don't contribute further or rebalance. Imagine hitting a period like the one below. Can you handle that without capitulating? 17 years for your stock allocation to break even with your bond allocation? And there's no guarantee that this is the worst period that will present itself in the future. Equities are highly risky.

A 50/50 investor during that time period would have had a CAGR of 5.48% - not too terrible for getting yourself through the tech bubble crash and the GFC and coming out the other side.
That was also a period over which the 10 year treasury yield dropped from something like 5% to 2%, juicing bond total returns.

(Edit: Sorry, I missed above post from BL).
It still took ~12.5 years to break even with cash (just barely broke even earlier but that wasn't long lived) and ~13.5 years to break even with ST treasuries. Better, but still really painful.

Image
Nowizard
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Re: Increase Equity Allocation Now?

Post by Nowizard »

A primary question is what is the length of holding? If for longer periods of time to invest at a higher equity allocation, do it now. It is pretty clear statistically that not being in the market is the biggest long-term risk and that the often quoted greater concern for "losses" than "gains" is a reason people often do not invest in the market. Any losses now would be on paper, though there are those who enjoy discussing whether a paper loss is a real loss or not. Think of it this way: If you are concerned about short-term, paper losses to the extent that you would not invest, does extending that mean you should never invest in equities or anything that has a risk? Hopefully, the answer to that is a resounding "NO?"

Tim
simpleisbest
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Re: Increase Equity Allocation Now?

Post by simpleisbest »

I would DCA slowly over the course of a year. You won't miss out on many gains, but you dodge the risk of having bought at the peak.

I made a major equity investment in January 2022 and it burned. I had been saving piles of cash all 2021 and then dumped it all in January 2022. Then the market crashed, big time. If I had been DCA over 2022 (or ideally sooner in 2021, but that was the past) I could have avoided such sudden big losses.

Buy a little, see how it goes. Make small adjustments and take small steps. Avoid the dopamine rush of diving all-in at once.
rockstar
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Re: Increase Equity Allocation Now?

Post by rockstar »

burritoLover wrote: Thu Mar 30, 2023 6:59 am
rockstar wrote: Wed Mar 29, 2023 10:11 pm
burritoLover wrote: Wed Mar 29, 2023 9:31 pm
Charles Joseph wrote: Wed Mar 29, 2023 8:42 pm
burritoLover wrote: Wed Mar 29, 2023 7:10 am
Let's imagine you go with a 50/50 stock/bond position and don't contribute further or rebalance. Imagine hitting a period like the one below. Can you handle that without capitulating? 17 years for your stock allocation to break even with your bond allocation? And there's no guarantee that this is the worst period that will present itself in the future. Equities are highly risky.

Image
A 50/50 investor during that time period would have had a CAGR of 5.48% - not too terrible for getting yourself through the tech bubble crash and the GFC and coming out the other side.
That’s after the pain is subsiding after 17 years and you finally break even with bonds. You have to look at the ride along the way, especially for someone like the OP that is already getting antsy after a couple of bad years.
What was the starting yield for total bond at the beginning?
Not sure what the yield was on total bond but a 10-yr treasury was around 6% in 2000 and around 3.5% in 2010 (or about where it is today).
So the CAGR for bonds in that chart is really function if starting yield and rates dropping, right? In order to repeat, you’ll need the same conditions? I always assume bonds only return their YTM if not called.
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