Podcast #30 Show Notes: How to Invest at All-Time Highs
Our topic on the podcast today is how to invest at all-time highs. This is a question I've been hearing a lot lately both in person, via e-mail, and in comments. But in reality, I view it as an investing teenager question. It is not an investing child question because when you're just getting started as an investor, you don't even worry about stuff like this because you don't know it is a problem. You don't really know where the market is at. It's only as you start learning a little bit about investing that you start worrying about things like this. And then as you become an investing adult you realize that worrying about this doesn't do you any good. And so you stop. But in that transitionary period, it is a big concern for a lot of people. So we're going to talk about it today.
You can subscribe and download the podcast from ITunes, Overcast, Stitcher, or Google Play. Or listen to it right here on the blog or if you prefer, just read the transcript at the bottom. Enjoy!
Podcast # 30 Sponsor
[00:00:19] This episode is sponsored by ProAssurance, professional liability insurance for doctors. Their numbers show they close more medical malpractice claims without indemnity payouts. ProAssurance also spends more on defense and less on settlements. You can get the facts about medical liability insurance and strong defense at ProAssurance.com.
Quote of the Day
[00:02:21] “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the treasury; there is not even a patriotic duty to increase one's taxes.” – Judge Learned Hand
Opening
[00:00:43] We had a wonderful time this last month at a couple of conferences. I took the whole White Coat Investor team down to FinCon in Texas where we learned how to be a lot more effective at getting this message of financial literacy out to our target audience.
[00:01:16] It was interesting as we were there we noticed a real trend in the financial content market. Whereas I think five years ago it seemed to be mostly about blogs, over the last few years that's gradually transitioned to podcasts and even to videocassettes and so we're trying to incorporate those things into the program here at the White Coat Investor, so we can stay current and relevant and bring information to you in the way that you like to receive it.
[00:01:45] It was interesting as I then went from there out to DC because I had a speaking gig at the American College of Emergency Physicians scientific assembly. But that night I met I don't know 80 or 100 or 120 of you and it was interesting that almost everybody I talked to thanked me for the podcast, which we always kind of viewed as this little tiny part of what we're doing here at the White Coat Investor. But it seems to be becoming a bigger and bigger part. And so we appreciate you listening and we appreciate you sharing it with others. We appreciate you giving us a rating so that this great podcast can be found by those looking for this information.
Main Topic
[00:02:38] Our topic today is how to invest at all time highs.
[00:04:40] This is not a new question. The market has been going up for a long time and it will eventually go down. And you need an investment plan that can handle that.
[00:07:33] Ben Carlson, CFA, who writes a blog called a Wealth of Common Sense recently addressed this topic.
[00:07:57] To invest at all time highs you need to:
- Have a written investment plan
- Rebalance
- [00:08:55] Avoid complexity.
- [00:09:17] Have enough cash or very safe assets to make it through a rainy year or three.
- [00:09:56] Don't put all your eggs in one basket.
- [00:10:08] Continue to invest.
- [00:11:06] Buy and hold your portfolio.
- [00:11:56] Embrace the momentum.
Q&A from Readers and Listeners
Reader Question #1
[00:14:11] “I have an opportunity to get a STEM MBA during my gap year with costs covered. Is it worth it to gain some financial literacy?”
[00:14:25] Answer: I like MBAs, but not for that reason. More for business skills than personal finance ones. Good use for a gap year though.
Reader Question #2
[00:15:23] “I am married and filing jointly. I do not have any existing IRAs, all have been converted into my solo 401K. My wife quit her job and just started her own business. She should be able to open up her own 401k to rollover funds into because she owns the business. So what follows are these questions:
- Does my wife have to rollover old IRAs (from her previous jobs) to a 401K so that I can do the backdoor Roth per protocol? (because we are filing jointly?)
- Once she does it, I could then fund a backdoor spousal Roth and backdoor Roth for me?
[00:15:57] Answer: All IRA stands for is individual retirement arrangement. It's individual. You do not share an IRA with your spouse. And so when you're trying to determine whether you can do a backdoor Roth IRA it has nothing to do with your spouse's IRAs.
Reader Question #3
[00:17:18] “Which brokers do you use and what funds do you use? I went over your 150 portfolios where you go in-depth with ticker symbols. What allocation do you use? Also have you tried Dan Wieners newsletter?”
[00:17:37] Answer: I use a lot of brokerages. I've got a Vanguard brokerage account, a Fidelity brokerage account, a T.D. Ameritrade brokerage account, and a Charles Schwab brokerage account. I think they're all fine if you want to use any of those brokerages.
[00:18:23] We use Vanguard funds. We tend to use index funds like the Total Stock Market Index Fund, the Total International Stock Market Index Fund, the Small Value Index Fund, and the REIT Index Fund. We buy them at T.D. Ameritrade, Charles Schwab, and Vanguard brokerages. You can buy these anywhere you want to go.
[00:19:22] Any of those portfolios are reasonable portfolios. The purpose of that post, 150 Portfolios Better Than Yours is to show you what a reasonable portfolio might look like and I go over the rules for what's reasonable.
[00:20:23] Dan Wiener is a guy who has been writing a Vanguard mutual fund newsletter for years and years. He has two things that he does with that newsletter, talks about some of the changes in the funds and recommends portfolios. I think if you want to subscribe to that, it is fine.
Ending
Be sure to give this podcast a rating. Sign up for the newsletter and get our new 12-Step financial boot camp series emailed directly to your e-mail box all for free.
Full Transcription:
[00:00:00] This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here's your host Dr. Jim.
[00:00:19] Welcome to podcast #30: How to Invest at all time highs. This episode is sponsored by ProAssurance, professional liability insurance for doctors. Their numbers show they close more medical malpractice claims without indemnity payouts. ProAssurance also spends more on defense and less on settlements. You can get the facts about medical liability insurance and strong defense at ProAssurance.com.
[00:00:43] We had a wonderful time this last month at a couple of conferences. I took the whole white coat investor team down to FinCon in Texas where we learned how to be a lot more effective at getting this message of financial literacy out to our target audience. We also learned how better to run our business and be a little bit more efficient and even make more money. And so that was a wonderful time to be able to have a little bit of a retreat and and step back and really learn how to sharpen the saw in the classic words of business texts.
[00:01:16] It was interesting as we were there we noticed a real trend in the financial content market. Whereas I think five years ago it seemed to be mostly about blogs over the last few years that's gradually transitioned to podcasts and even to videocassettes and so we're trying to incorporate those things into the program here a White Coat Investor, so we can stay current and relevant and bring information to you in the way that you like to receive it.
[00:01:45] It was interesting as I then went from there out to DC because I had a speaking gig at the American College of Emergency Physicians scientific assembly. But that night I met I don't know 80 or 100 or 120 of you and it was interesting that almost everybody I talked to thanked me for the podcast which we always kind of viewed as this little tiny part of what we're doing here at White Coat Investor. But it seems to be becoming a bigger and bigger part. And so we appreciate you listening and we appreciate you sharing it with others. We appreciate you giving us a rating so that this great podcast can be found by those looking for this information.
[00:02:21] Our quote of the day today comes from Judge Learned Hands. Who said anyone may so arrange his affairs that his taxes shall be as low as possible. He is not bound to choose that pattern which will best pay the Treasury. There is not even a patriotic duty to increase one's taxes.
[00:02:38] Our topic today is how to invest at all time highs. This is a question I've been hearing a lot lately both in person and via e-mail and in comments and so on and so forth. But in reality I view it as an investing teenager question. It is not an investing child question because when you're just getting started as an investor you don't even worry about stuff like this because you don't know it's a problem. You don't really know where the market is at. It's only as you start learning a little bit about investing and that you start worrying about things like this. And then as you become an investing adult you realize that worrying about this doesn't do you any good. And so you kind of stop. But in that transitionary period it's a big concern for a lot of people. So we're going to talk about it today.
[00:03:23] I find it interesting that people that ask this question they think this is new, right. They're like oh it's 2017 the market's been going up for so long surely it's going to crash at any moment. Surely I should be investing differently because of it. But they don't realize that. I've been getting this question for six or seven years. The market has been at all time highs since 2012. You know it's very interesting coming out of the crash in 2008 and early 2009.
[00:03:49] Throughout the rest of 2009 everybody was talking about the double dip, about how the market was about to crash again, despite the fact that you could buy stocks at the lowest price you've been able to buy them at for years at the best valuations you'd seen in decades and everyone was worried about a double dip. Right. So people always think the market is about to crash. You know in 2010 the market would down a little bit and mid-year and everyone's like well here's the double dip you know. It's going to crash out again and it never got anywhere near the previous lows in 2009. In 2011 we actually had a bear market. You may not have noticed it. It was very quick but we had a drop of just over 20 percent in the market that year. But in looking back nobody even thinks about that. But basically since 2012 we've been at market highs every year.
[00:04:40] Is the market going go down eventually? You better believe it. There is a market crash coming. I don't know when it's going to come but it's coming. And you need an investment plan that can handle that and you need a disposition that can stick with your investment plan. The investor is far more important than the investment.
[00:05:00] Here's the truth of the matter. If you look historically at how often we get bear markets it's way more frequently than you think. A couple of times a decade is pretty standard. I mean you basically ought to expect a 10 percent correction in your portfolio every year and a 20 percent correction approximately once every three years. And so you know historically that's the case. And so if you're looking forward going how do I need to design my plan? What does my plan need to be able to withstand?
[00:05:31] Well what you need to do is realize that your plan if you're going to be investing for 30 years during your career and 30 years during your retirement. This plan of yours is going to have to go through approximately 20 bear markets. This isn't something that just happens every now and then. It happens all the time. And your plan has to be ready for it.
[00:05:53] And so the plan I have adopted from my own portfolio is what I call a fixed asset allocation and what that means I put a certain percentage into every given asset class and set up how much risk I'm going to take at the beginning of the year. And then throughout the year, you know one asset class does better than others and you get to the end of the year and something's out of balance. And so you simply rebalance back to those percentages. This forces you to continually be selling high and buying low or the equivalent just directing your new investments to what hasn't done as well in your portfolio over the last year. But the nice thing about that plan is it doesn't require a working crystal ball. I can be completely agnostic about future returns. And be able to stick with the plan that way.
[00:06:43] Now it doesn't mean that valuations don't matter. You know obviously buying stocks at today's valuations is not as good a deal as it was to buy them in spring of 2009. That's just the way it is. But the question is what should you do about it. Well let's go back a year right. When valuations were high. The stock market was at all time highs. What should you have done?
[00:07:07] Well it turns out the right answer was to stick with your plan because look at the market this year, everybody thought oh Trump got elected the whole market's going to tank and everything is going to be awful. But what happened? Well we had spectacular returns so far this year. And so you want to not try to predict the future, not try to time the market, not try to listen to the talking heads.
[00:07:33] Ben Carlson, CFA, who writes a blog called a Wealth of Common Sense. Recently addressed this topic. You know how to invest at all time highs on his blog. He provided some reasonable recommendations. And basically when you look at all these, it really comes down to stay in the course with your plan. So if you don't have a written plan make sure you get one.
[00:07:57] But here's what he recommends you do first rebalance. You know if you're worried about where the market's at, Make sure that you have your portfolio where you want your portfolio to be. And that means that the percentages in your portfolio are equal to the percentages you wrote down in your written investment plan. If you don't have a written investment plan you need to make one. In fact he said you could even over rebalance if you're really nervous about stocks. I'm not a big fan of this over rebalancing as basically just market timing right, but it's just a little bit of market timing. So if your portfolio is calling for 70 percent stocks and you worry the market's really high you put 65 percent stocks in your portfolio. OK fine. That's not going to kill you.
[00:08:39] If that helps you to stay the course and not end up selling low when the market goes down great. It's a relatively minor change. It's not going to hurt you that much. But the truth of the matter is you time in the market with a small percentage your portfolio instead of a large percentage.
[00:08:55] Ben also recommends that you avoid complexity. Well I agree that there's little benefit to complexity just for complexities sake but you also don't want to go the other route. You know I think it was Einstein who said, Make everything as simple as possible but not simpler. So you don't necessarily just want to make your entire portfolio Apple even though that would avoid a lot of complexity.
[00:09:17] He also recommends that you have enough cash or very safe assets to make it through a rainy year or three. And I think that is great advice. For example people who retired in 2000 saw a huge bear market right as they went into retirement. But if they had enough cash to get through three years worth of their spending the market was heading back up by 2003. And so you just want to have enough that you're not forced to sell low. In reality you really don't want any money that you know you're going to need in the next five years invested in stocks anyway. Ben also recommends that you DCA or dollar cost average and diversify your portfolio. Well diversification is a no brainer.
[00:09:56] Don't put all your eggs in one basket. That helps you to stay the course because generally when one asset class goes down there's usually something that's going up or at least not going down as much. So diversification helps.
[00:10:08] What does he mean when he's saying DCA here, is he means continue to invest. You know it's interesting. I had someone put a comment on the blog the other day. You know and he was advocating for whole life insurance. No big surprise I get a lot of comments like that. But his point was you know if you invested money in 2000 your returns weren't very good over the next 17 years. And while that's pretty true it's also terribly terribly cherry pick time period. The truth of the matter is the typical investor does not just invest all his money in 2000 and let it ride. He invests in 2000, 2001, and 2002, and 2003. And if you had done that over the years your return would be far better than the person who just put it all in in 2000 and let it ride. So do periodically invest your money. That will help you to basically get the average valuations and get the average returns over that time period.
[00:11:06] Ben also recommends you buy and hold your portfolio. I agree. Are there lots of criticism of a buy and hold. Absolutely there are. I think Winston Churchill said something that can be applied to this, if you warp it a little bit. Buy and hold is basically the worst investment strategy except for all the others. You know I think Winston Churchill said that about capitalism or democracy or something like that. But it applies to investing as well. It's not great. There are problems.
[00:11:34] You've got to be able to hold on with these 30 and 40 and 50 percent stock market losses. But it's still better than all these other ways to invest. It's not that you can't find a way that back tests better. It's just that people are far more able to stick with this plan than these other plans that they try to follow.
[00:11:56] The other thing that Ben recommends is that you embrace the momentum. Remember that momentum has been proven to be a factor in returns of the stock market. And what I mean by momentum is there is a certain effect that what stock markets have done in the recent past they will continue to do in the near future. And so when things have been going up they tend to continue to go up. And if you embrace that you get to ride the whole ride up. Whereas if you bail out early you miss out on that. For example think about the late 90s. Right.
[00:12:31] The chairman of the Fed was saying, hey you know, this is you know a little bit exuberant, this seems bubbly, and that was in 96. If you had bailed out at that point you would've missed the spectacular returns of 97, 98, 99, and not gotten those. And that was like. Altogether it was close to 100 percent return and you would have missed out on that because you didn't embrace the momentum.
[00:12:54] Far better to just stick with it and take what the market will give you. You know the truth is, I bet there were a lot of people that bailed out in 96 and then got back in 99 just because they couldn't take being out of the market only to not only missed the run up but then they still suffered the crash, far better off just sticking with a long term plan.
[00:13:16] You know it's interesting that people are worried about being able to you know what they should do with their portfolio up market highs. You usually think that the difficulty in sticking with your plan is at market lows. But the truth of the matter is it's just as hard to stay the course at market highs as it is at lows. But you still need to do, it is just as important.
[00:13:35] Remember that the market is usually, you know, often, at all time highs. This shouldn't be a surprise when the market's at all time highs. You expect it to be at all time highs. Part of that is because you know the economy is becoming more efficient over the years and the economy's becoming bigger and these companies are really making more profits each year. But don't forget that part of it is because the highs are nominal numbers, right. The stock market goes up with inflation. So beware the money illusion, just because you have more money doesn't mean you actually have more purchasing power, due to inflation.
[00:14:11] All right let's move into some of the questions we've gotten recently. This one came in via Twitter. I have an opportunity to get a stem MBA during my gap year with costs covered. Is it worth it to gain some financial literacy?
[00:14:25] Well I like MBA. I think MBA can be useful in your career. They can certainly give you some alternative career options and open a lot of doors for you. But I don't like MBA just to boost your financial literacy. That's really not what they cover in an MBA. It's not about budgeting. It's not about building investment portfolio. You know it's not about, you know, dealing with insurance agents. You know you can learn those skills from places like blogs and books but you don't learn from an MBA.
[00:14:55] In an MBA you learn business skills. And there's a little bit overlap there but for the most part if your goal is just to boost your personal financial literacy I don't think an MBA is the way to do it. I do think it's a great use for a gap year though. If you're not going to be able to get into medical school this year anyway you know it makes your application a little bit more impressive and gives you you know the opportunity to have a little bit more education and hopefully that education that you use throughout your career.
[00:15:23] All right the next question came in via e-mail. This is from a doc I'm married and filing jointly. I do not have any existing IRAs. They've all been converted into a solo 401k. My wife quit her job and started her own business. She should be able to open her own 401k to rollover funds into it because she owns a business.
[00:15:40] So I have these questions. Does my wife have to roll over old IRAs from previous jobs to a 401k so that I can do the backdoor Roth per protocol because we're filing jointly. And then once she does it, I could then fund the backdoor spousal Roth and backdoor Roth for me.
[00:15:57] Ok. I think we probably need to go over a couple of things here with backdoor Roth IRAs. First of all IRA stands for individual retirement arrangement. It's individual. You do not share an IRA with your spouse. And so when you're trying to determine whether you can do a backdoor Roth IRA it has nothing to do with your spouse's IRAs. It's all about your own. And so if you don't have any other IRAs you can do the backdoor Roth IRA. No matter what your spouse has. Likewise if your spouse has some old IRAs and wants to do the backdoor Roth IRA he or she needs to get rid of those IRAs and your two options are to convert it to a Roth IRA and pay the taxes on it.
[00:16:40] And that's a good option if it's relatively small. Or to roll it into a 401k either at your employer or into an individual 401k if you're self-employed and you don't need much income. I mean you've got $10 for surveys you can open an individual 401K and roll your IRAs in there. But you can't roll in your spouse's IRA and it doesn't affect your spouse's back door Roth IRA.
[00:17:04] Remember that when you report the backdoor Roth IRA on your taxes you do that on form 8606 and that form has to be filled out one for each spouse because their individual retirement arrangements.
[00:17:18] Next question also came in by e-mail. I recently found your blog and thank you for the information. Thank you for keeping us updated. Which brokers do you use and what funds do use? I went over your 150 portfolios where you go in-depth with ticker symbols. What allocation do you use? Also have you tried Dan Wieners newsletter?
[00:17:37] All right a lot of questions there. You know like many of the questions I get just reading the question I can see that the person asking it doesn't understand a few important concepts and so I try to flush those out when I interact with them and we'll do that today. For example this person is asking what brokerage do you use. Well I use a lot of brokerages. I mean I've got a vanguard brokerage account. I've got a Fidelity brokerage account. I've got a T.D. Ameritrade brokerage account. I've got a Charles Schwab brokerage account. I think they're all fine if you want to use any of those brokerages. I don't have a problem with that. They all have relatively low expenses. Lots of different investment options and do a good job with keeping your money secure and your paperwork simple so I don't think it really matters what brokerage you use.
[00:18:23] And then the questioner asks what funds do you use. Well I've written about that various times over the years on the Web site. It doesn't really change very frequently for the most part. We use Vanguard funds. We tend to use index funds like the Total Stock Market Index Fund, the total international stock market index fund, The small value index fund, the REIT index fund. You know I use their inflation indexed bond fund you know for the most part we're using Vanguard funds and we buy them at T.D. Ameritrade and Charles Schwab and Vanguard brokerages. You can buy these anywhere you want to go.
[00:19:04] Now sometimes it's cheaper to buy the ETF version of the fund. So we do that usually when we're not at the vanguard brokerage but it's really the same fund whether you use the ETF or whether you use the mutual fund.
[00:19:17] Questioner asked I went over 150 portfolios, do you use the same?
[00:19:22] I have no idea what they're referring to there. I mean I don't use 150 different portfolios. No. But any of those portfolios are reasonable portfolios. The purpose of that post, which is entitled 150 portfolios better than yours if you want to go check it out on the blog, is to show you what a reasonable portfolio might look like and I go over kind of the rules for what's reasonable. You know it needs to be diversified, needs to involve multiple asset classes. In general there needs to be more than one mutual fund holding although there are some exceptions to that, particularly with a fund of funds, where you own a bunch of different mutual funds by owning just one.
[00:20:02] But the point is you need a portfolio that is simple, that you can stick with, and that is right for you. And it's difficult for me to tell everybody what their ideal portfolio is but if you're not sure just pick one of those basic ones and stick with it while you learn more and then you can make changes down the road if you want to. Nothing's permanent.
[00:20:23] Questioner also asked about Dan Wiener's newsletter. Dan Wiener is a guy who's been writing a Vanguard mutual fund newsletter for years and years and he has kind of two things that he does with that newsletter. What he talks about some of the changes in the Funds which I think some people find interesting. But he also recommends portfolios. He has recommendations for various kinds of portfolios including hot hands fund which is basically the mutual fund did the best last year as well as you know actively managed mutual funds and index mutual fund portfolio.
[00:20:57] And so I think it's if you want to subscribe to that that's fine.
[00:21:00] You can certainly learn a lot about mutual funds by reading his newsletter. There's a cost to it. I want to say it's a couple of hundred bucks a year. I certainly don't think it's necessary and I don't think the Dan Wiener can predict the future any better than the rest of us. You know Vanguard actively managed mutual funds have a big advantage over most actively managed mutual funds in that they're low cost and it becomes pretty obvious that the most significant reason the index funds outperform actively managed mutual funds is because they're low cost. So if you can get low cost actively managed mutual funds you've got a lot better chance of beating an index fund than you would if you're using one of these crappy front loaded 1.5 percent expense ratio mutual funds that mutual fund salesmen masquerading as financial advisors like to use.
[00:21:53] But if you want to try actively managed funds certainly I think a lot of the ones that Vanguard are excellent and I think Dan Wiener can give you a lot of information about that. Personally I don't like thinking about actively managed mutual funds and their managers. I just buy index mutual funds and then I don't have to think about it. I mean I literally am using the same mutual funds I was using 15 years ago. And they still work. You don't need to be swapping around all the time when you're using an index mutual fund because you've gotten the opportunity to just get the market returns and the market returns are good enough for me to reach my financial goals.
[00:22:28] This episode is sponsored by ProAssurance professional liability insurance for doctors. Their numbers show they close more medical malpractice claims without indemnity payouts. ProAssurance also spends more on defense and less on settlements. You can get the facts about medical liability insurance and strong defense and ProAssurance.com. Be sure to give this podcast a rating. Hopefully a good one, and you can read the show notes on the web site. While you're there be sure to sign up for the newsletter and get our new 12-Step financial boot camp series email directly to your e-mail box all for free.
[00:23:02] Head up shoulders back. You can do this. We can help. See you next time.
1- glad to hear ProAssurance is your sponsor. Working with them right now as I consider starting a nonmilitary job.
2- market timing: In 1982 my mathematician dad mentioned on the phone that he’d just lost $200K (or did he say 30 or 40%? Whatever, it was a lot) in his TIAA CREF fund. I was surprised at how lightly he said it, and told him so. He asserted that it didn’t make a difference, it would grow back soon enough and of course it did. I recall that every time we’re told of a recession or bear market, and in fact relish updating my portfolio spreadsheet and telling husband “We’re down $X thousand this month from our max” and later on “We’re at 105% of what we had BEFORE the market dip”.
Sadly not everyone has this to recall. My best friend took my advice once, to buy Vanguard funds, but thinks I’m worthless since she sold out a year or two later with a loss. Whereas my husband thought I was a finance genius since he did the same once with a 20% gain and for a few years kept asking me to put our money in that fund that pays 20% a year. And maybe I learned to tell people to build their cash/ emergency fund before they invest in stock mutual funds.
As usual, you hit the ball out of the ballpark on this one. Yet another post I can refer my clients to. There is a phenomenal book entitled “Bull, A History of the Boom and Bust, 1982 to 2004.” It is written by Maggie Mahar. Your podcast is a summary of the book. In 1982 and beyond, they kept saying the market is too high, why invest at an all time high, etc…The Dow started below 1000, and then went to over 11,000. An investor in 1982 that got nervous in 1993 missed out big time. It just kept going and going. “Bull” might be a good book for next year’s CFE.
Love that quote by Churchill
Granted all portfolios should include total stock total intl stock total bond. Total intl bond
small cap index. Reits. And emerging mets
L
It’s Judge Learned Hand, not Hands.
Enjoyed the podcast, though.
The state of our knowledge does seem to be a bit frustrating and confounding: While high market valuations do correlate with lower long-term real returns going forward, they don’t provide enough information to allow someone to time the market effectively. See: https://uk.finance.yahoo.com/news/robert-shiller-interprets-what-the-cape-ratio-says-about-the-market-today-102737135.html
So you are right. The advice remains the same — invest in a diversified portfolio on a buy-and-hold long term basis, and carry on as usual.
For someone in the middle of his working and wealth accumulation years, that’s all well enough. His current nest egg was bought at various valuations in the past, and he’ll continue to buy for some years going forward at various other valuations. Long term returns in the stock market generally work out in his favor. But for someone at the cusp of retirement, the question is a little different. That person has a nest egg of whatever size, as of that certain date. No new wages will be earned and no new investments made. Once drawdown begins, even dividends won’t be re-invested as they’ll start to come off the top to pay for living expenses, and we can also expect the average retiree to dip into capital appreciation / principal to meet his cash flow needs. If Professor Shiller is right (and I’m giving him the benefit of the doubt here), a person about to push the button on retirement should take a good long look at market valuation metrics when thinking about his retirement budget, the margin for error on his safe withdrawal rate, and the implications on his sequence-of-returns risk. See: https://www.kitces.com/blog/should-equity-return-assumptions-in-retirement-projections-be-reduced-for-todays-high-shiller-cape-valuation/
Thinking about this now, perhaps the lesson is that you can’t effectively time the markets by moving money in and out of various investment vehicles by reference to your crystal ball — even a crystal ball informed by valuation metrics — but you can time your retirement by reference to them. That is, if you’ve just barely hit your target nest egg that you think will provide you with the cash flow you want, using assumptions based on long-term average market behavior, and you notice that the cyclically adjusted price-earnings ratio on your proposed retirement date is up around 30, when the long term average for that value is usually around 15, you might want to re-run your cash flow projections using substantially more conservative assumptions, which might cause you to delay your retirement by a couple more years — either spend more time at full throttle adding to the nest egg, or opt for part-time work instead of no-work to reduce the number of years of expenses that the fund is expected to cover.
So — don’t time your investments relative to the market. But you might want to time your retirement relative to the market.
Thanks! You’re right of course. Apologies to the Learned Hand family.
If you have less need to take risk, then take less risk.
The wisest course in retirement is to adjust as you go. If you run into serious sequence of returns risk (i.e. poor returns early on) better dial back the spending or perhaps even go back to work.
I agree with your fundamental point, but in some professions (e.g. law, medicine) it is a lot easier and/or lucrative to decide, on the cusp of retirement, to postpone the plans and keep working that extra year or two, rather than find yourself — five years down the line — looking to move back into work out of a sense of financial need. The standard of practice moves on, skills atrophy, contacts and reputation fade, etc.
For that reason, I find it interesting to think about what kind of forecasting tools we have, and how useful they are for planning purposes. I think the clear consensus is that there aren’t good, sure-fire diagnostic tools you can use to execute classic market timing effectively (i.e. strategically shift allocations between stocks and bonds to ride the equity market upswings and then step into bonds with perfect timing to ride out the equity market downswings).
But I think there may be tools that we can use to time the retirement decision advantageously: If you think that, as of today, you’ve just barely put enough money into an equity-heavy portfolio to see you through a retirement that starts at age 40, you might want to look at the cyclically adjusted price/earnings ratio — which are current levels would tell you to plan with a greater safety margin than average, and thus delay retirement by a bit.
Fair enough.
Loved the podcast. I think one of the reasons physicians get caught in this market timing thinking trap is that in medicine we love narratives. There is always a good narrative about how the market is going to crash and they are ubiquitous because fear sells. Your bringing people back to the evidence and bigger picture helps counter that problem kind of like an evidence based approach to medicine. Thanks!
The other mental narrative that I keep to fight narrative against narrative is that if there were ever a real financial armaggedon, then money won’t matter anyway. Probably just ammo, toilette paper, and who has the best squirrel stew recipe.
Interesting that podcast are generating so much interest. They have always struck me as low data rate, so this must be a lifestyle issue (e.g., listening on the move).
Anyway, a question if I may. (Not sure if it is a teenager question or not.) It occurred to me while reading this that my target retirement funds may not make the most sense at the top of a market. More specifically, in a market pullback, if I wanted to redeploy bonds to equities, I couldn’t because the fund of fund lumps all of the investments together. But if I broke the investment into the component funds (say, total stock market and total bond market) at the same ratios, during a down turn I could rebalance by shifting some of the bond allocation to stocks. Does that make sense to you?
I think you misunderstand “rebalance.” Rebalancing is shifting the portfolio back to your desired asset allocation. Target Retirement funds do this automatically. They are the ultimate set it and forget it portfolio. The fund manager takes care of all the rebalancing.
What you are describing is called market timing, i.e trying to be in bonds when the market falls and in stocks when the market rises. Shifting your asset allocation like that is tempting, but it turns out it is extremely difficult to do, especially after tax and other transaction costs. You have to be right not just once, but twice for every market change, and over the 5 or 6 decades you’ll be an investor, that’s a tall order. Far better to just pick a fixed asset allocation and rebalance back to it every year no matter what the market does.
You are right, of course. I said one thing and described another, so I obviously was not thinking about it the right way. I really had this in mind for the scenario where I’m near retirement and the market takes a dive. I was thinking the bonds could be protected and that I might put them to use in, wait for it…market timing. I’ll just stick with my plan to build up two years worth of living expenses in cash as I approach retirement. Glad I asked though, thanks.
Market timing vs market valuation. Hmmm.. This is messy and complicated. At least in my mind.
I would feel much more comfortable with 100% equities in 2009 than in 2017. Maybe that makes me a market timer. I think I’m just cheap and enjoy buying stocks when they cost less. This philosophy also kept me from being 100% equities in 1999/2000 also. The market was overvalued then and now by many measures. If you believe pure EMH, then prices are always correct no matter what. I’m just not sure that is right.
Sure you would. In retrospect. But think back to how you felt in early March 2009 after you’d lost hundreds of thousands of dollars only to recover some of it and then have it crater again. The news is talking about money markets breaking the buck, government is propping up banks, Bogleheads are going to “Plan B” etc. We all think we’ll be lined up to buy at those times, but there’s was no guarantee that this 9 year recovery would happen like it did, nor even that it would do it so quickly.
I recall phoning my broker in early 2009:
Me: “I think now is a good time to get into stocks.”
Broker: “Some people are saying that…”
Me: “Take all my free cash and invest it across the S&P 500 and NASDAQ index funds.”
That worked out well.
2009 was easy for me. All my investments were in either Vanguard Index 500 or total stock market. In both retirement accounts and taxable I just kept up my monthly contributions and reinvesting dividends. In taxable I sold all the index 500 and bought total stock market to lock in the capital loss, which was a great tax savings for several more years. But it was easy because I had another 15-20 years before I needed the money. Next time I will be closer to retirement, so I am just thinking through the best way to position. With the help of a WCI reality check I think it is pretty clear; that is, I can set it up so that I don’t have to worry about market cycles by keeping several years of expenses in cash or near cash, then leave everything else in the asset allocation I choose as age appropriate.
wade pfau has written a comprehensive book on ret plan spending; not easy reading
most will go conservative when they reach critical mass as capital preservation is paramount
even a 20% equity portfolio will guarantee not outliving your money after 30yrs
BUT the odds of living 30yrs to age 95 is 1.8%
Michael kitces says a blended approach to ret plan spending is ideal-taxable, tax deferred, and roth conversions