I got an email a few months back that seemed like it would make for an excellent blog post as I think this situation is actually pretty common out there. Here it is, with any possible identifying information redacted or changed.
Q. Should I Get Back Into the Stock Market?
I am 11 years out of residency and have made many of the mistakes you have listed on the site. The primary one was getting OUT of stocks entirely with the 2008 crash. Oi. Now I have all this cash and some bonds and I want to reinvest, slowly, and think the market is overvalued. I hate the thought of getting back into the market, then losing 20+% in the next correction. But also the market is going up up up!
I've maxed all retirement accounts, including my SEP, most years–all the past 10 or so I think but I've lost a lot of it. I'm in solo practice. But most of my cash is currently not in retirement accounts.
I HATE financial advisors and want to do this asset allocation myself. So far I've invested in Vanguard bond funds, REITs, and the rest is in cash right now–way too much to be just sitting around.
On my non-tax protected cash I really want to earn 3-5% on it. Not anything crazy, but definitely safe and steady growth. I was thinking of just using Vanguard tax-exempt bond funds.
Do you have suggestions for those of us out of the market right now? I don't see that on your blog lately. I know you have some simple investment recipes, but none I see addressing scared people who want to eventually get back into stocks–I am thinking of just doing the 500 Index Fund, just something simple with low fees when I do reinvest into stocks.
Don't worry, I also have some real estate, but that is mostly an accident, I actually hate managing real estate but keep the properties so we can use them ourselves once a year or so.
A.
I think getting the response to this post just right is really important. Helping people like this is what I really want to do with this site, rather than just helping someone tweak a nearly perfect portfolio so they can retire 3 days earlier. Sites like this are magnets for people who live and breathe personal finance and don't need all that much help anyway. But this sort of a situation….this is where I can really make a difference. So if you know someone in this situation, please feel free to forward this post on to them.
I'm going to hit the easy stuff first and then deal with the major issue at the end.
There Is No 3-5% Cash Option
First, we would all like to earn 3-5% on our cash. The problem is that you only get to choose from what is available in the market. Back in 2007, I think my Vanguard Prime Money Market Fund was paying 5.25%. That was great. But it hasn't been available since. As I write this in September, it's paying 1.12%. The tax-exempt money market fund is paying 0.75%. Ally Bank, a good example of a high-yield savings account, is paying 1.20%. Maybe you can find a 5 year CD paying 2%. But there's basically nothing cash-like out there paying better than that without a catch like a high-yield checking account with a $25K limit requiring a dozen transactions a month or a whole life insurance policy with negative returns for the first decade.
The market doesn't care what you want. You get to select your risk level. You don't get to select your return. You get the return that comes with a given risk level. With the cash risk level, you get 1%. Not 3-5%. Sorry.
Bonds Aren't Cash
Bonds are a lot less risky than stocks, but they certainly aren't cash. They do go down in value. For example, the Vanguard Intermediate Tax-Exempt Bond Fund lost 1.56% in 2013. It lost 3.28% in the final quarter of 2016. Both bonds and cash can reasonably be used in a retirement portfolio, but they aren't interchangeable.
REITs Are Stocks
You indicate that you got out of stocks in 2008. Then you indicate that you actually own some REITs. REITs are stocks and publicly traded REITs are part of the overall stock market. So you didn't actually get out of and stay out of the stock market in 2008. You just changed your stock asset allocation from a diversified one to a very undiversified one. Now, there may be some good reasons to overweight REITs in your portfolio, but I know of no reputable investment authority who recommends your stock allocation be 100% REITs. I'm actually surprised to see this, since REITS tanked MUCH harder in 2008 than the overall market. I think my REIT fund lost 78% from peak to trough.
SEP-IRAs Are Less Than Ideal
I comment on this every time I see it, but it is a rare doctor for whom a SEP-IRA is a better retirement account than an individual 401(k). You can max out a 401(k) on less income, it allows you to do a Backdoor Roth IRA on the side, and it may get a little better asset protection in some states. The only downside is really a very small amount of additional paperwork and sometimes some very minor additional costs. Nonetheless, I'm glad to hear you're maxing out your retirement accounts (well, excepting a Backdoor Roth IRA.) It turns out at your stage of the game (early to mid-career) that how much you save matters far more than what you invest it in.
Real Estate Can Be A Great Investment
Teach them risk tolerance at a young age. It's a valuable skill.
You mention your real estate investments. Real estate can be a very profitable investment and is the usual refuge for smart investors who have an inordinate fear of the volatility of the stock market with its daily repricing. However, it is usually only a good option for those who love it and are interested in working in it. If you simply see the value of an investment with a solid return and low correlation with the overall market, you may wish to explore some other ways of investing in real estate that don't involve landlording. These include REITs, crowdfunding sites, syndicated shares, or even buying real estate directly and hiring a management team. But I see little reason for you to be investing directly into real estate and managing it yourself when you hate doing it. Sure, the vacation perk once a year is nice, but you can just rent a place for that week with far less hassle than you are having managing a rental property. Chances are good that you aren't even charging market rental rates for that property if you hate it and your renters gladly accommodate your annual vacation. You probably need a change there, whether it is hiring a good property manager or simply selling it and reallocating that money elsewhere in the portfolio.
The Value of an Advisor
It is unlikely that anyone will ever accuse me of being the most pro-financial advisor blogger on the planet. I do have a few financial advisor sponsors, but to be honest, the sum total of everything I get from financial advisors represents a tiny percentage of the WCI Empire's revenue. The main reason I sell ads to financial advisors and maintain a list of recommended advisors is because for some doctors, maybe even the majority of doctors, they provide a service with a value that outweighs their substantial cost. One of the areas where an advisor can help the most is to help us to stay the course with a good plan. In fact, even if you pay 1% a year to an advisor for your entire 30 year career, that total cost adds up to less than what you could lose with just one instance of doing what you did- buying high and selling low. Take a look at the math:
Consider an investor who invests $50K a year for 30 years and the investment makes 8%. She pays an advisor 1%, so it's really like the investments compound at 7%. After 30 years, she has $4.7M.
If she had not used an advisor, and so got to keep the entire 8%, she would have ended up with $5.6M, or 20% more. But if she sold low in a bad bear market after 20 years and lost 40% of the nest egg, and then left the money in cash earning 1% for that last 10 years, she would end up with $2 Million, just 43% of what she would have had if she had used an advisor in the first place.
I'm not saying you need to use an advisor, and I certainly don't use one myself, but if an advisor could have kept you from making your previous two mistakes (selling low and staying out) they would have been well worth their fees.
Fear and Greed
Now, let's address the elephant in the room. The Big Kahuna. The reason you're writing me in the first place.
Why did people sell out of stocks in 2008 at the market bottom? One reason. Fear.
Why did people stay out of stocks for years afterward despite excellent (i.e. low) valuations and excellent recent returns? One reason. Fear.
Why did those same people feel a need to get back into stocks 8+ years into a bull market with high valuations and many worries about returns in the near future? One reason. Greed.
Your problem is not that investing money in the market right now is a good thing to do or a bad thing to do. It's not how you invest that money into the market. The problem is that if you haven't fixed the problem that led to the original mistakes, you're highly likely to do the same thing again in the next bear market. And the one after that. And the one after that. In fact, if I were you, I'd expect your portfolio to pass through 5+ more bear market during the remainder of your investing career. You need to fix your behavior first or you're going to be unsuccessful as an investor no matter what you do this year. I cannot emphasize this enough.
Fixing Behavior
There are a few strategies that others have used to fix their bad investing behavior. Hopefully they will work for you.
# 1 Education
I think the first place to start is with education. Lots of investors are surprised when the financial world goes to hell in a handbasket. So they react to it. But even an elementary knowledge of financial history would tell you that the world goes to hell in a handbasket on average about once every 3-4 years. From 1900-2013, there were 123 market corrections (drop of 10%+) and 32 bear markets (drop of 20%+). On average, a bear market lasts 15 months and involves a drop in value of 32%. When you know this happens every few years, you know you need a plan that dictates what you are going to do in a bear market. Your investing career is probably going to involve passing though not just one or two, but more than a dozen bear markets.
# 2 A Written Plan
Now that you know what you're up against, you can write down a plan of what you are going to do. My Investing Policy Statement actually says we won't sell stocks in a bear market. I suggest you put that in yours too. In the depths of the next one, go back and review your written plan and it will help you remember why you set things up like you did, and hopefully, help you avoid bad investing behavior.
# 3 A Less Aggressive Asset Allocation
The best indicator of your risk tolerance (i.e. your ability to lose money in a bear market without selling low) is your past behavior in bear markets. In this respect, you've shown at least one thing- you couldn't tolerate going through a bear market with your previous asset allocation and level of education. We already mentioned the education bit, but it would probably be a good idea to hit the asset allocation side too. If you gave up with a 90% stock allocation, maybe you should trim it back to 50/50 or 60/40. If you bailed out with a 60/40 allocation, maybe a 25/75 portfolio is right for you. Likewise, if you are a new investor and have never been through a bad bear market like many new attendings, I would recommend you err on the conservative side until you go through your first bear. Don't worry, it won't be that long before it happens and at this stage savings rate matters more anyway. If you find it easy to stay the course, then you can ramp up your risk level in the depths of the bear market and really make a killing.
# 4 An Advisor
As mentioned above, an advisor might be able to help you avoid bad investment behavior. Of course, there's always the risk that you'll have to control the advisor's behavior too, but in general it is much easier to tolerate investment losses with a philosophical and theoretical mindset when it isn't your money. And the good advisors you should be hiring generally have high levels of financial education and risk tolerance.
# 5 Elimination of Financial Pornography
Financial pornography is basically anything that you can watch on TV, listen to on the radio, read in the newspaper, read in a magazine, or hear at the water cooler. Avoid it, particularly in a bad bear market. Those poor folks have to publish something every day, so they do. But 99% of it doesn't matter. Even worse, it is likely to lead you to have a short-term perspective that can be very dangerous in a bear market. Turn it off. In fact, you don't even have to open your investment statements in a bear market if you don't want to. That might make it hard to rebalance, but avoiding selling low matters even more than properly rebalancing.
# 6 Controls
As a last ditch effort, you might try placing some controls in your way to prevent you from selling low. Maybe it is only letting your spouse know the logins for your investment accounts. Maybe it is deleting those links from your toolbar. Maybe it is just setting your 401(k) up on autopilot. Just like freezing a credit card in a block of ice (or freezing your credit) keeps you from going into debt, making it harder to see what your investments are doing on a daily or monthly basis and harder to do anything about it can promote good investor behavior.
What Now?
Okay, so what should you do now? Don't do anything quickly. Start educating yourself with some good books. Come up with a written investing plan. If you need help, hire an hourly or flat rate financial advisor to help you make one. Make sure your asset allocation is significantly less aggressive than it was in 2008. Most importantly, stop allowing fear and greed to dictate how you invest.
Some advocate for a dollar cost averaging approach. If that mental crutch helps you, then feel free to do that. But sooner or later, you'll be 100% invested anyway, and every day after that is exactly like you lump summed into your portfolio that day. So I would just lump sum your money into the market now, but do so in a less aggressive asset allocation. If you are nervous to lump sum into your asset allocation, it is too aggressive.
Remember that although a less aggressive approach is comforting, it might not reach your financial goals. You NEED to take at least some market risk. If you cannot do that with frequently revalued assets like publicly traded stocks, you should cultivate an interest in real estate, where the value of investments at least seems less volatile.
Remember the words of Phil Demuth in this respect:
Even if risk tolerance existed and could be measured accurately, why would it be an important factor to consult when considering how to invest? You should invest in the way that has the greatest prospect to fulfill your investment goals. That might mean taking more or less risk than you would prefer. If you are a sensitive soul who can brook no paper losses, the solution is to get a grip, not to invest “safely” if that locks in running out of money when you are old.
If you're one of those who sold out in 2008 and never got back in, I hope this post has been helpful to you.
What do you think? Did you sell in 2008? Know someone who did? What advice would you give them? Comment below!
I did not sell anything in 2008 when my portfolio was essentially all stocks and stock mutual funds. I was 44 years old and had a 20+ year horizon. My retirement accounts dropped by more than 40%.
I had been managing my own money at Fidelity from 1995 to 2010 and my average rate of return to that point was about the same as the market and was about 1% higher than the market average in my main account.
After that debacle, I started paying an advisor $1000 a year at the request of my spouse. Within two years, his relentless pursuit of my money led to me turning some of my money over to Ameriprise Financial (for a 0.75% AUM fee). After the account did well for two years, I turned over the whole chunk (over half a million). Within 4 years, she had changed her mind and asked me to “get rid of the advisor” when the $1000 fee came up that year. He did help us with some good advice early on and then I did not see the value anymore. He tried to sell me an $300,000 annuity at 7% simple and some other investment with poor liquidity and high fees/commission and I did not like either idea.
In his defense, he did advise me against changing from a moderate risk option to a moderately conservative risk option when Trump was elected as I thought he was unpredictable and that the market would tank by 20% in 2017 (wrong on the market and wrong as to the “priced in” tax cut getting passed). This “market timing” flip flop from 65% stock to 65% bonds from November 2016 to October 2017 cost me quite a chunk in lost returns, (perhaps 10%).
I luckily left my usual allocation in place in several of my smaller retirement accounts, but fear of a correction that was born in 2008, was the driver for this stupidity.
I took my accounts and control of my destiny back in October 2017 and used the WCI allocation modified for my age (now almost 54) and stepped back in to the market from my foolish market timing 30% stock allocation that leaned heavily on bonds. My portfolio now has an overall expense ratio of about 0.3% with the bulk in Fidelity Premium index funds and low expense Index ETF’s. Some of the funds are in 457 plans and 401K plans via employers that offer no funds with very low expenses.
My current dilemma is that I have a lot of trouble putting “market trends” out of my mind and am dissatisfied with the ~25% bond position I have taken (20% broad U.S. and 4% International). I see the “financial porn” on Bloomberg and they talk of the “flattening yield curve” and the “bond market heading into bear territory” and I see my losses on my bond holdings (despite their yield) as interest rates rise and continue to rise…
My current portfolio is a bit more aggressive, but like many folks, I wish I had a better “safe” place than bonds. The historical return for bonds (about 5.3%) mirrors their historical risk (5.8%). Bond fund returns have been lower the past decade and have dropped, and keep dropping. It seems like now, you get 3% returns for 5.8% risk. People who are looking for a safer 4%-5% are getting into “alternatives” like higher risk bonds (seems foolish to chase 1-2% extra with bonds), REIT funds, Floating rate loan funds (seems sketchy with increasing interest rates).
My boss said he owns no bonds and instead buys Berkshire Hathaway B suggesting it is like a “preferred stock” and has lower risk than the market but better returns than bonds. I’m sure it has more than 5% downside risk. It has advanced from $150 a share to $210 a share in about a year.
I wish I did not have 25% in bonds and 7% in “alternatives”, but I am 54 years old and will need some of this money within the decade as I drop to half time at age 58 and work as sporadically as I wish by age 60. Are bonds the place for your non-equity monies now, or is that the wrong question. Sticking with and allocation despite the tides of increasing interest rates and the new tax law, both fairly rare changes, is quite a challenge but I have my “Trump effect” change to remind me of why it may be smart.
Do you have a written investment plan? What does it say you should do in response to events like these you worry about? What does it say about your use of bonds?
A written investment plan:
1) double my money in a decade
2) don’t mess this up.
Just kidding. I have an asset allocation. I guess my quandary is whether bonds are “what they used to be” in the context of a once in three decades tax rewrite and in the context of the fed tightening 3-4 times a year until they cause a recession…
Only the tax deal is new. The Fed Is the Fed.
I wouldn’t change my plan based on the tax deal, recent Fed changes, or current bond yields.
Sure, it would be great if bonds were yielding 8%, but they’re not.
If your goal is really to double your money in a decade, I hope you’re investing aggressively. Per the rule of 72, and assuming no new contributions, that requires a 7.2% real return, or about 10%. You’re going to need a portfolio that is all or mostly stocks and/or real estate. So maybe you should go light on bonds given this need to take risk to meet your goal.
But bear in mind that going for goal # 1 could potentially cause you to miss goal # 2, especially if you can’t tolerate the potential loss without selling low.
Yes, well I am still pumping money in at the rate of about $54000 a year. I currently have access to a 401K at work and my SEP IRA on side money. I will be opening a solo 401 in 2018 but will still be putting $10,000 in the W2 work 401K as it will have a $10,000 match.
So, assume I will be putting in as much as legal for at least a couple of years (lets say max will go in for three years to my age 57, and then trickle in a bit from age 57 to age 59.5) and so least $200,000 more will go in.
I am currently at about 65% stock (US 46%, International 19%) and bonds (14% US and 2.5% international), and about 7% REIT/alternatives. I have $80,000 to deploy. I am considering my options.
PersonalCapital’s software says my “historical return” on my mix with the $80,000 in cash is 8.0% and risk of 11.8%. When the $80,000 was in a bond index fund, the numbers were 8.4% return and 10% risk. I could just re-buy the bond index fund I sold last week and stop my “market timing” and “market trends” mindset…
If you mean that you have half of “enough” now, and you’re still making contributions, you should be able to get there in a decade with an even lower return.
Don’t put too much faith into retrospective data. Past performance is no indication and all that.
And yes, chances are good that if you quit trying to time the market, you’ll come out ahead. But who knows? Maybe you’re a skilled market timer. Maybe you’ll get lucky. Maybe both!
BRK-B worst years:
2008 -32%
2011 – 4.75%
2015 – 12%
Both the S&P 500 and BRK-B took until 2011, about 3 years to recover. BRK-B beats the 1 yr, 5yr, and 15 yr total return of the S&P 500 and beats “Insurance Diversified” at 1, 3, 5, 10, and 15 years.
$10,000 investment in Berkshire Hathaway stock in 1965 would be worth $88 million today. After adjusting for inflation, this means that Warren Buffett took enough money to buy a mid-level BMW and turned it into generational wealth for early shareholders. The same investment in the S&P 500 would be worth $1.3 million.
Phil DeMuth advocates for BRK.B since it pays no dividend. You get the growth but pay no taxes (unless you sell it). From his postings I know POF owns it as well. I owned it in the distant past. The stock has an obvious problem with Buffet in his 80s. The WSJ had a recent article about the promotion of two co-presidents. I believe Charlie Munger is even older than Buffet. There is no question that BRK has made a lot of people rich. The other problem is diversification. Some would argue that BRK is a diversified conglomerate. I used to hear this about GE also.
Yes, and if I had bought bit coin for $10,000 couple of years ago, how much would that be today, inflation adjusted and all. I get a good laugh from cherry pickers.
Too bad you can’t buy past performance eh?
huckleberry:
It seems you dont want any or little risk, but with good returns. Bond are not just for income, even with expected increase in rates, they provide hedge against stocks volatility. You will recover all of you money in 18 months if interest rates go up by 1% this year in a global bond fund.
Based on your age, it is too late to buy WLI. Should have done it in your 20’s – early 40’s with you bond portion allocation, and you would be doing pretty good by now.
You can buy whole life later if you for some crazy reason wanted to. That’s nonsense to say “it’s too late.” In fact, in a lot of ways, buying it later in life is better because you’ll have a much better idea as to whether you have one of the very few niche reasons for owning a policy. Most people will realize they don’t and avoid it all together.
The break-even on a bond fund depends on the duration. But if a fund has a duration of 18 months, then 18 months after an interest rate rise you’ve broken even.
White coat investor:
When is your blog on crowd funded real estate coming out. Do you plan to do any comparison with traded REIT’s, since they have underperformed significantly over past 2 yrs due to fear of spike in interest rate. Yet their dividends keep growing. Basically, would it be better to buy depresses public REIT’s at this point of the cycle, since direct real estate / and syndicated real estate is selling at premium. I own both.
8 days. Can’t publish all 150 posts for the year on a single day and I’m surely not going to write 2000 of them a year.
I also own both. I have no idea which will do better in the near or long term future. Crystal ball so cloudy.
We stayed the course. We only buy individual stocks. My husband started in 1987. Went through October 19. HIs only mistake at the time was he declined a few years later to buy BRK.A. He just didn’t want to fork out 5K at the time (bad call). I started a few years later. Went through all of 2000s bear times. If anything we were DCA money into various stocks each week. Those years were the best sales ever. Who doesn’t love a sale? Our egg has now grown that even if we were to take an 80% hit on equities, we still have what most people are trying to get to for FI. So we still haven’t changed course. Probably don’t plan on it. I’ll be the little old lady still buying equities…..waiting for a sale…….
Maybe I have (had) less time than you all to check my balances, maybe because I read the books before I had much money to invest? Also my dad was telling college aged me about his pension fund’s 25% loss in one of those corrections without any panic and assuring me when I asked if that was a disaster that it had rebounded well from several similar contractions in the past. My main error is fearing a dip right after investing and then kicking myself for the loss. Of course y’all are saying here that the -20% won’t matter in 10 years, but that I just can’t trust. So if I had the $2 million to invest I’d slowly put it in the market maybe $10K a month. Might miss some growth but I’d miss that less than a sudden drop.
Actually my motto to spouse has been “We haven’t lost anything until we sell” which means even a great stock now and for the next 20 years might turn out to be a real error by the time we need that money in 30 years, and that we won’t know how much our house purchase cost us in nominal rent until we sell and move (and we keep agreeing that if the sale price would be too low we just won’t move).
$2M at $10K a month would take over a decade to get the money invested.
Hello WCI. Good article. Was referred through Oblivious Investor email digest. Please sign me up for your newsletter.
Done.
We have been living for quite a while in a time of very little inflation. I think that tends to allow people into complacency about holding a great deal of their assets in cash. There are many worrisome trends in the policies of the current government that are likely to lead to much more inflation in coming years if unchecked.
Over the past 2 to 3 years, I have pulled back my equity allocation a good bit, and I’m now at 50-50 stocks-bonds. Even at that, the annual return on my portfolio will be quite nice if the current upward continues, and when/if a big crash comes, I feel less exposed than when I was at a higher equity allocation. I’d like to retire soon, and don’t want to blow it all by being greedy now. However, a big upturn in the inflation rate could have a more devastating effect then a market correction.
Financial advisors are not a panacea. In late 2008, my advisor pretty much panicked, told me “this time, it’s different…we don’t know where the bottom is…” and advised that I sell all my downtrodden mutual funds and stash everything, literally everything, into bonds. I did not agree and said instead we should stay the course and, in fact, take cash off the sidelines and buy aggressive funds that were now deeply discounted. He took great umbrage at this, pressuring me by saying “all my other clients are taking this advice.” I almost caved, but thankfully hung in there after talking to a couple of money savvy friends. We agreed to part company, though he did help me harvest losses and then buy stock-heavy ETFs which have done and continue to do very well. So, you’ve gotta be educated and have a point of view, as this author rightly says, and don’t out-source all of your financial responsibilities.
You missed the whole point. Never said Financial Advisers are the panacea. In fact, I said there are good ones and bad ones, just like docs. Furthermore, never said one word about delegating or not delegating all financial responsibilities. A healthy relationship can, should and is for millions a true collaborative partnership. Again, check your ego at the door.
A good post, and very interesting comments.
We are now retired, but about 30 years ago we dealt with a bad advisor. He sold us a package that took me about 5 months to figure out why it was a rotten deal. Further, it took about 4 years to unwind that with not too much damage.
At that point I did a binge education.
My wife had a health issue and retired in 2009; I was no longer working. At a few months short of 65, we applied for SS, and I consolidated all our money into Vanguard Funds, spreading the money, but with about 70% stocks. Then relaxed and watched.
Over the past year or so the stock part grew and I felt the need to rebalance. I’d switch several thousand dollars to a bond fund, and 3 days later the asset mix was back to over 70%. That’s both a good feeling, and a little scary.
We have to do a RMD. That’s been going into a broad based fund. This past week I looked at this issue and decided to put this money (monthly) into Vanguard’s REIT. That will add more diversification, and this seems to be one area that has not gone up rapidly along with the rest of the markets.
We are still, and have been, much more aggressive than many recommend. However, we can live through the -10% or -20% markets, and did. I simply go volunteer to build and repair hiking trails in the Cascade Mountains of Washington.
I will be knocking the stock part down some more. Sell high. Works for me.
Thanks for the posts. This is a new destination for me.