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  • DMFA DMFA 
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    Status: Physician
    Posts: 2011
    Joined: 06/24/2016
    However, no reason not to assess your tolerances and maybe change your allocations accordingly, realizing 100% you may be missing out on some further upside, etc…this is a form of insurance. Also, you should have a rock solid plan on how to change that allocation back once the event is realized and odds shift in the other direction.

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    I think a lot of people thinking about changing their asset allocation are more likely just discovering their risk tolerance.  Dips, corrections, bear markets, recessions, etc are p much a crucible for this sort of realization.

    One should still set a plan for the future without the intent of changing allocations, but I think a lot of young investors like me who didn’t invest through the recession 10 years ago are discovering maybe 100% equities isn’t a great fit for them.  It’s thoughtfulness vs stubbornness (3 repeated consonants?).  I don’t really think realizing one’s risk tolerance is conceptually tantamount to market timing, but practically if it’s the same…idk really, just spitballing.

    However, I just had this conversation on Facebook, and to change allocations now would be selling low…plus if they sold into bonds, and interest rates are rising soon, it’d by buying high as well.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #171895 Reply
    Liked by hatton1
    CM CM 
    Participant
    Status: Physician
    Posts: 883
    Joined: 01/14/2017
    to change allocations now would be selling low

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    What is the meaning of “low” here?

    Valuations (by almost any metric, not just CAPE or Q ratio) are among the highest in history and prospective returns among the lowest (assuming future growth approximates the past).

    Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried bags for Cyd Charisse (gracious). Hosted epic company parties after Friday night rehearsals.

    #171899 Reply
     Antares 
    Participant
    Status: Physician
    Posts: 399
    Joined: 01/20/2016

    Have gone through ‘87, the dot com bust, and 2008. What I have learned is that I do better the less I do. I do not check my accounts when the market is down. What’s the point? My numbers will be down, I won’t like it, and there will be nothing to do about it. One thing I would never do is sell, so better to ride it out as calmly as possible. It’s a lot easier having been through it. My risk tolerance is higher now as a result.

    Of course I could be wrong, and the world could be ending. In that case, I’ll have bigger problems than my retirement accounts.

    One piece of irrationality: I have 8% in cash. For a major dip. Probably dumb, but I’m not perfect.

    #171901 Reply
     Tim 
    Participant
    Status: Accountant
    Posts: 563
    Joined: 09/18/2018
    early retirement for doctors

    I think a lot of people thinking about changing their asset allocation are more likely just discovering their risk tolerance. Dips, corrections, bear markets, recessions, etc are p much a crucible for this sort of realization.

    Click to expand…

    Your risk tolerance should be based upon your financial tolerance, not the emotional fear index of the market’s volitility or direction.

    When stocks go down, should you buy more because it’s a better price or reduce your AA because it may go down more? Regardless of your reasoning, you are guessing the direction. On top of that, when are you going to change back?  The answer is “hold your nose and rebalance”.  The fact is, investing in stocks means you have put money at risk in the belief that eventually it will grow. When? Noone knows in advance.

    By the way, at 60 your plan should be you still have 30 years or so of investing returns to gain.

    #171902 Reply
    Vagabond MD Vagabond MD 
    Participant
    Status: Physician
    Posts: 2742
    Joined: 01/21/2016
    I think a lot of people thinking about changing their asset allocation are more likely just discovering their risk tolerance.  Dips, corrections, bear markets, recessions, etc are p much a crucible for this sort of realization.

    Click to expand…

    I agree. It’s like a dress rehearsal for a major market meltdown. The 100% equity newbies are getting some battle testing.

    to change allocations now would be selling low…plus if they sold into bonds, and interest rates are rising soon, it’d by buying high as well.

    Click to expand…

    That assumes that equities are not going lower than low and the bond yields will not stay where they are or go down again. My crystal ball is too cloudy to tell…

    "Wealth is the slave of the wise man and the master of the fool.” -Seneca the Younger

    #171903 Reply
    Liked by hatton1, Zaphod
     G 
    Participant
    Status: Physician, Small Business Owner
    Posts: 1095
    Joined: 01/08/2016

    Benjamin Roth’s book really resonated with me as did Affluent Investor by DeMuth.  The first is about a professional who wishes he had some cash to deploy when things are super-cheap, the second is (arguably) about professionals who have predictable high incomes.

    So.  We have no debt and enough in bonds, cash and shiny metals to “survive” a great depression, combined with the fact that I have a skillset that should put food on the table, even if it isn’t filet from Kobe every night.

    As I work less–and my shovel gets smaller–I am looking to increase my bonds and cash so that we “thrive” if we have a big/long pullback.  Unclear if a return to work would be in the cards.

    As others have suggested, if you’re worried, you probably have too much in the market, eh?  I messed around with leveraged stuff during the GFC.  The take-away: I lost less money than if I went to B-school.

    #171907 Reply
    Liked by hatton1
     Anne 
    Participant
    Status: Physician
    Posts: 542
    Joined: 11/07/2017

    Besides WCI’s excellent points, the best protection I have found against recessions is to enjoy my job.

    I do not have a ton of experience, just 2008.  Going into 2008, I had a 5 year investing history.  I had maxed out my 401k and Roth IRA every year since internship in 2003, had started regular monthly contributions to a taxable account as a military GMO in 2004, and had also dumped most of my income into said taxable account during all time spent deployed to Iraq, upwards of a year’s income (with the added benefit of tax free status while serving in combat zone).  All in equity mutual funds which I picked with absolutely no savvy.  Only bonds were whatever G fund I had in my tsp…I think that was set to 10% g fund at the time.  I don’t know how much was in my total portfolio going into 2008…it was somewhere north of 200k.  I also have no idea where it dropped to at its nadir.  I DO remember a conversation I had with a friend while climbing Wheeler Peak in summer 2008.  We were talking about how much we enjoyed medicine and how we would like to do it forever, but with autonomy and eventually a slower pace, maybe job share at some point.  This was right as I was starting residency after completing time as a GMO.  I also distinctly remember the day the news about Lehman brothers broke, but only because it was playing on the TV at the time a personal (non-financial) crisis was unfolding in my own life, and I remember just staring at the TV, trying to divert my mind.  I also remember all the patients I met over the next several months and years who had strokes secondary to their own financial crises and deciding to pay rent over paying for their diabetes and hypertension meds.  I enjoyed my work then and assumed I would forever and never even thought about what was happening to my portfolio, and continued to make monthly contributions, same as always.  I had never considered the words early retirement.

    I still like my job but am not quite as idealistic as I was on Wheeler.  I know at some point I will want to retire, or at least change course.   But I am trying to focus more on ways I can maximize my enjoyment of work, and I think that is my best protection about worry over what my portfolio is doing.

    Oh, and my asset allocation is more conservative now than it used to be, and I am somewhat more savvy about financial matters in general–back in the early 2000s some of the prior posts on this thread would have been pure gibberish to me.  Now I can at least understand them, but still know I don’t have anywhere near the knowledge required to act on them in an intelligent manner, so I will just continue with what I know…buy when it’s up, buy when it’s down, set it and forget it.

    #171914 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
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    All these things are true, and a great basis for long term investing. I feel like “your asset allocation is too risky” is a bit knee jerk and almost patronizing, though I know that no one means it that way (I say it as well). There is absolutely nothing abnormal about not wanting to watch your portfolio shrink. I dont believe in a permanent portfolio, but you should definitely figure out what your positioning is so its not spur of the moment. I confess I dont have mine written down. There has to be a better way to communicate risk or consider some sort of cyclical tactical asset allocation.

    Its impossible to correctly top or bottom tick a market. However, thats entirely different than recognizing the balance between risk and reward. When unemployment has stopped rising, fed is decreasing rates, stocks have dropped and things have started to show some signs of life…long term reward is very very highly in your favor. Being 100% or more stocks is the appropriate position, regardless if things drop a bit more or already started the recovery. I dont think being less than 100% stocks towards the end of the cycle is any less reasonable.

    Its a bit of the opposite now, not saying we’re for sure headed for a soft patch or recession, but I think risk is much higher weighted than reward at this point. Housing has at least paused for over a year and its usually the first one to show stress. UE is still great. Auto sales peaked a while back. Rates are now at the lower level of neutral and theyll raise them this month they say, which may be the straw that breaks our back. Yields are trending towards full term structure inversion. They are pulling out 50-100B of liquidity per month from the market. No matter any fundamentals that makes markets more volatile. Profit margins are still highly elevated but q3/4 might have been peak cycle and comps will be tough next year, and many companies fear at least a slow down next year. We’re also below 200 dma, and have been for a while, the biggest moves happen down here, in both directions.

    I know people say if you miss the best 10 days, blah blah, but they fail to tell you those come just after the 10 worst days and missing the whole week you’d have been better off.

    Im thinking/hoping soft patch like 2015-16, but that really depends on how the fed/admin handle things, and lets just say I do not have confidence they can do it without adding volatility to the situation given their behavior to date. If you’re as nerdy and into finance as those of us on this forum, I dont find much issue in paying attention to the cycle and moderating your portfolio according to where we are, risk vs. reward, etc…Worst you can do is realize how wrong you are and better off you’d be not messing with it.

    As far as buying high/low in regards to bonds/stocks its much more about relative value and how much further they can go in their current path. I obviously could be egregiously wrong, but stocks have a lot more to lose vs. bonds, and bonds may not lose much of anything depending on duration and so far peaked in September though I think we moved a bit far fast to today, people seem to be piling back into duration greater than seems warranted.

    However, I’d be getting into duration over time as that will provide the most negative correlation and appreciation. I dont think we can (without major policy changes from current admin) raise much more without breaking the system. This far into the hiking regime Im not as worried about bonds as I once was. My plan this year was to flip to mostly bonds after the december hike, but Im already back to full cash and just going to take some trend shots here and there for now. We’re still stuck in a range with no definitive direction right now.

    I dont think we’d be this far in the cycle without the tax cuts and of course the trade war greatly accelerating things. If we get some easing of the trade war that will reverse a lot of harm, mostly in sentiment and that can be a nice save. Obviously, as the data changes I’d flip my positions 180 in a split second. Sentiment is pretty rough out there, price changes narrative. We have unemployment numbers Friday, which should be very interesting, could be read any which way. Low numbers…very bad. High numbers, also could be interpreted bad since Fed will see as needing to hike more, etc…

    #171920 Reply
    Liked by hatton1, q-school
     Dr.V. Investor 
    Participant
    Status: Physician
    Posts: 124
    Joined: 03/12/2017
    You sound to me like you have too much money in stocks. I would suggest a less aggressive asset allocation and of course, a higher savings rate/longer career/lower nest egg goal.

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    thank you for your responses.  I am actually quite the opposite.  I have known my risk tolerance from the beginning and I have been very conservative.  I believe we are in a gigantic bubble- everything bubble, housing, student loan, auto loan.  Over the past years, I have been increasing my stable fund position.  It is not really market timing, more of risk adjusted returns.  So instead of riding the bull market, we tried to increase savings rate, create business/es outside our fields to diversify income, invested in a private business that is outside publicly traded market.  yes, we have shiny objects.  I have yet to learn about real estate so we have not dabbled into that.

    #171942 Reply
    Liked by G
     Tim 
    Participant
    Status: Accountant
    Posts: 563
    Joined: 09/18/2018

    “There has to be a better way to communicate risk or consider some sort of cyclical tactical asset allocation.”

    That is the crux of the AA debate.
    Meb Faber has written research papers that are academically sound. Many brilliant and disciplined people have spent their lives in pursuit of the “holy grail“. The problem is determining the direction. Short, medium and long it’s easy to model “favorable” and “unfavorable”. It’s counterintuitive, it works until it doesn’t. Then you need to adjust. Unfortunately it was working and you should have stayed the course.

    The “academic” and reality is the no one has been able actually do it over a long period that avoids under performing buy and hold. By no means does that indicate a blowup, simply under performance.

    If it was possible, I would have expected a group of funds or PM’s to have adopted the approach. Crickets!

    If you find the “holy grail “ , please pm me!

    #171963 Reply
     Dont_know_mind 
    Participant
    Status: Physician
    Posts: 566
    Joined: 11/21/2017

    I understand that this group is mostly indexers who embrace buy and hold strategy.  However, knowing stock market history, it is best to look  at this proactively rather than retrospectively.  what precautions have you taken to protect yourself?

    I also believe that if one’s net worth is slashed to 50%, it can cause stomach turning and it may lead to wrong decision making.

    for those more experienced,  from the past bear markets, what % have you lost and how long did it take you to recover it?

    I only have very little back in 2008, by end of 2009, I was already positive.

    I am attaching an article that I assume financial professionals look at- inversion of the yield curve.

    An inverted yield curve means that short-term interest rates are higher than longer-term ones. The inverted yield curve is what happens when investors are bidding for longer-term bonds — thus driving down their yields — because they are pessimistic about the short-term prospects for the economy.

    On December 3, the yield curve inverted a little bit — the first time since the 2008 recession. The yield on the five-year note of 2.83 was 1 basis point (100 basis points = 1%) lower than the yield of 2.84 on the three-year note.

    This is investors’ way of saying that the economy will be a little better in 2023 than it will be in 2021.

    The Treasury yield curve has been a good predictor of recessions in the past — offering warnings of the recessions of 2000, 1991, and 1981.

     

    https://www.forbes.com/sites/jimcollins/2018/12/04/the-yield-curve-just-inverted-sort-of-and-that-is-a-sell-signal-for-stocks/#30259d6f3eaa

    Click to expand…

    The current cycle feels very old but it is very hard to know how much further it will go.

    From capacity utilization perspective, it could go into the mid 2020’s. Also, if you extrapolate the degree of negative rate suppression on the resultant overvaluation, I can’t see why valuations could not go beyond 2000 levels. in 1997-9 they had negative real rates for 3 years. Given real rates have been more negative for 6 years, why couldn’t we end up with another melt up, worse than the late 90’s ?

    One other thing you have to overlay is the effect of the Fed’s decisions on the outcome. In 2000, they made a policy error by not easing more quickly after the dotcom bubble burst. The Fed funds rate (FFR) peaked at 6.5% in Nov 2000. They were more proactive in 2007-8 and started dropping FFR in late 2007.

    In terms of Yield-Curve (Y-C) inversion, the mechanism is people moving to longer duration in anticipation of a recession. I think it is still a valid indicator but there is now a much more pro-active Fed in the picture. Y-C inversion may well occur in 2019 if the Fed continues to raise rates with slowing indicators, but I doubt they will do that. So Y-C if it does occur may be fleeting. They may well delay further hikes as a curve steepening manouvre. Powell has indicated this recently (hence talk of the ‘Powell put’).

    Personally, I have moved from a 110% risk position (I had 10% leverage, or a 1M loan) to 90% 12 months ago. I cashed in 20% of my property investments and discharged some debt. The remaining 10% I realized was too high a cash allocation for me given where I thought we were in the cycle. My main fear was a melt up and participating very late stage. So I chose to participate at a late but not too late stage (hopefully) and allocated 5% to index funds just before the recent hiccup. I intend to sell these in about a year if we reach new highs. But if we have seen the top, then I am happy to hold them long term. I hope to build a cash position of around 10% by the time a peak occurs, but if it is 5% that is ok with me also. I’ve moved some illiquid real estate to more liquid investments in the last year.

    Something missing from a peak here is euphoria or optimism. I tend to think a peak is further off because there is so much anticipation of it currently. I could be wrong but it seems like there is still too much cash on the sidelines. Please tell us when you deploy your cash !

    During the last cycle I bought too heavily in 2006 and found it hard to get through the volatility. If I use myself as an indicator and my timing is the same as last cycle, we are around 1.5 years from the peak. My parents bought a property recently too and last cycle they did this a year out from the peak. I wonder if there is still time for a small EM rally before things fall over. Central banks are so good at saving the day in this era, I wonder what will be needed to bring on the next bear market. It will be interesting.

     

    #171965 Reply
     Dont_know_mind 
    Participant
    Status: Physician
    Posts: 566
    Joined: 11/21/2017

    If the market drops by 50% tomorrow, it’s valuation will be around the long-term average but still far above past secular bear market bottoms.

    Perhaps the valuation will never fall substantially again, but if you can’t tolerate even a 50% drop with equanimity then you should reduce your equity allocation now (and never raise it so high again). Much worse outcomes are possible.

    (Note this applies to broad market indexers, but not necessarily to active investors with small portfolios.)

    Click to expand…

    Bonds and stock valuations do not mean revert in a way that is useful to scale for human time-frame investment.

    Also it depends on your perspective. If you take 1929 as the worst economic event of the last 600 years (wheat was at it’s lowest real price for 600 years at the bottom), then valuations from 1929-1970 were recovering from a nuclear blast. Quite a lot of bad things happened in that era: WW2, Nazism, Fascism, communism, cold war. The world is a lot more mellow place now, so unless there is a large scale war, valuations may keep going up and interest rates down.

    #171966 Reply
     Dont_know_mind 
    Participant
    Status: Physician
    Posts: 566
    Joined: 11/21/2017
    Splash Refinancing Bonus

    I think a lot of people thinking about changing their asset allocation are more likely just discovering their risk tolerance. Dips, corrections, bear markets, recessions, etc are p much a crucible for this sort of realization.

    Click to expand…

    Your risk tolerance should be based upon your financial tolerance, not the emotional fear index of the market’s volitility or direction.

    When stocks go down, should you buy more because it’s a better price or reduce your AA because it may go down more? Regardless of your reasoning, you are guessing the direction. On top of that, when are you going to change back?  The answer is “hold your nose and rebalance”.  The fact is, investing in stocks means you have put money at risk in the belief that eventually it will grow. When? Noone knows in advance.

    By the way, at 60 your plan should be you still have 30 years or so of investing returns to gain.

    Click to expand…

    When they say they have a high risk tolerance, people mean they have a desire to make high returns. Everyone thinks high risk=high returns, so they think, I have a high risk tolerance because I want high returns. It’s very non-predictive of how people will respond in a bear market.

    #171967 Reply
     Dont_know_mind 
    Participant
    Status: Physician
    Posts: 566
    Joined: 11/21/2017

    I believe we are in a gigantic bubble- everything bubble, housing, student loan, auto loan.

    Click to expand…

    I don’t think we are in a bubble. Perhaps overvalued, but what is valuation ? A bubble I think of as a specific phenomena that has a very high chance of popping, Like tech stocks in 2000 or Bitcoin recently. I don’t think any of the 3 you mention are bubbles to me at the current time. They could correct periodically but continue to be on an uptrend for a while.

    #171970 Reply
     ajm184 
    Participant
    Status: Other Professional
    Posts: 472
    Joined: 07/14/2017
    When they say they have a high risk tolerance, people mean they have a desire to make high returns.

    Click to expand…

    Interesting point about risk tolerance and one I can certainly envision a lot of people making.  The issue with risk tolerance at the individual level is that is it is difficult to a. define and b. changes over time.  Actual experience also appears to be a large influencer of how individuals determine their risk tolerance.

    I define risk tolerance as my willingness to experience price/valuation volatility and potentially losses for the opportunity to earn a long term return that exceeds the risk free rate of return.

    #171985 Reply

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