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EdLaFave

Potential crash?

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Having lived through  two major crashes  I can tell you it does effect your emotions and you naturally feel like you need to do something. In my case it made me realize that 75% of my portfolio was in tech stocks!!. I had to get out and I did but I moved the funds to more diversified funds  but still stayed in stocks.  The second great recession taught me a lesson that I should have some money in bonds because even though bonds are boring they add some protection in downturns. Every correction large or small leaves us with a lesson to take forward.  I learned a diversified portfolio is important, not just high flying stocks.I also learned that If you are patient, and do nothing ,you are  more likely to come out ahead. Just keep investing.

I know I repeat but younger folks will be tested if the market turns South in a major way. FIRE advocates might wonder what the heck went wrong. I say time is on your side if you stick to your ultimate goal. Unfortunately, some folks will flip out and start selling out of fear and that could make things worse short term for everybody. Regardless , mathematical calculations might not come out quite like you expect because the market is unpredictable as are people.

My prediction is above in a previous post. I think the  disappointing earnings  reports and tariff uncertainty  are  definitely messing with people's minds . I think a recession is inevitable  sooner or later but I think we still are O.K.  Thank God I listened to John Bogle and kept my international's stock allocation low ( under 20%) because the stocks overseas are hurting much more. Everyone else out there was recommending a very high allocation to international stocks.

 

P.S. Most money currently is being pulled out of bonds in droves. I wonder how smart that is at the moment.

 

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The total US stock market is down 18% since it peaked on September 21st. We’re 2% away from official bear market territory.

The Shiller P/E has fallen to a more reasonable 26.75, I’m not sure where it peaked, maybe 35-ish. I’m somewhat arbitrarily looking for it to get below 25. Either way I’m feeling better about stock valuations now...I think most folks (like Vanguard) acknowledged that stocks were pretty expensive.

So how’s everybody feeling? Personally...

I’ve lost roughly 130k from the peak. For me, that is worth roughly 1.3 years of savings. So if you account for growth during a normal/calm market, I’ve been set back roughly a year by this downturn. I’ve continued to buy stock with every paycheck.

I don’t feel too much negative emotion and I think I’ll have the same disposition if I lose another 130k-250k. However, this feeling isn’t great, waking up each morning and basically expecting another 1% - 2% decline, and then having those expectations met! It isn’t great to have invested roughly 4K yesterday only to lose roughly double that in the market that day. I tend to cope using dark humor among my friends/coworkers. So far I’m proving to be worthy of an extremely aggressive portfolio and that is quite a relief.

A couple years ago I allocated roughly 9% of my portfolio to bonds so I could pay for a home renovation we never did. Each day I’ve shifted closer and closer to abandoning the idea of a renovation altogether. If I haven’t fully abandoned the renovation when/if we hit negative 20%-25% then the temptation to swap bonds for stocks will likely be too great. A two fund portfolio is on the horizon!

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This is looking like an increasingly decent buying opportunity so increase your contributions if you can.You guys saving for retirement are very lucky this is happening. Congratulations. If you keep adding all you possibly can to your portfolio and into Total Stock Market Index or other stock funds you are going to be greatly rewarded down the road. Any current loses remember are only on paper. Ignore the losses. If this turns out to be a full-fledged bear market, history suggests the peak-to-trough decline will be around 35%, so we could have a long way to go. Still,  this correction is a great opportunity. Stay the course but squirrel away even more into your stock funds if you can.

If I can add if you are freaking out and can't sleep at night over this correction than it probably means you need a more conservative allocation. Perhaps more cash and bonds. Also don't think a financial advisor can help you at this moment. They can't and some will take your fear as an opportunity to make a buck off of you. No one knows where we are heading, not even experts. Things could very well rebound. The best thing is to not to fret over the money loss because its not real unless you panic and sell. Then your losses will be realized.  Just stay the course and save more into the market if you can.

 

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I had been hoping for a downturn/bear market sooner rather than later, from my own personal perspective.  I have 3 or 4 years until retirement, and I felt we have been due for some sort of step back after 9 pretty good years.  I don't want a recession for retired folks or job loss for anyone, but 2017 seemed like irrational exuberance that was not sustainable.  So a little dip now in 2018-2019 is not all bad.

 

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As is usual, I have contrarian thoughts. I don’t think we need to spin the truth to argue that things aren’t bad. We should embrace the reality that the market, just like life itself, sometimes sucks! Let’s accept that reality and commit ourselves to not making it worse than it needs to be.

1. Whether or not you sold stock, the loss is 100% real. It’s good to acknowledge and live with that pain, but it doesn’t mean you can or should do something about it. Lick your wounds, they hurt...I know mine do.

2. I don’t think we need to spin a loss as a buying opportunity any more than we’d spin a gain as a selling opportunity. I suspect a boom-bust economy may be inferior to a hypothetical steady as she goes economy. I think we simply accept the pain that a decline brings in the same way we accept the joy a boom brings.

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The S&P500 is officially in bear market territory, VTSAX (Vanguard Total Stock Market) is down approximately 20.15% since 9/21/2018, and the Schiller PE ratio is now at 26.02. For context, from 2011 to 2016 the Shiller PE ratio was usually pretty close to the 22-24 range.

From the close on 12/3 to closing today, VTSAX is down roughly 15%! This rapid December decline is unsettingling and makes me wonder if the market is entering an overly negative emotional state and will therefore keep declining well past a "reasonable" price.

I guess we'll see what happens. Good luck to everyone out there!

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On 12/24/2018 at 2:41 PM, EdLaFave said:

This rapid December decline is unsettingling and makes me wonder if the market is entering an overly negative emotional state and will therefore keep declining well past a "reasonable" price.

2

Ed, you are a numbers guy so you must be petrified but this might be the time to stop looking at them. Look for the sell-off to accelerate next week as panic sets in. Remember the market oversells so it will eventually rebind and if you leave it alone other than investing more you will come out ahead long term. I still maintain that this should not distress you. Just do what you have been doing and turn a blind eye to all the noise and news. During the last recessions and downturns some folks panicked, pulled their portfolios out of stocks never to return. They truly made a horrendous mistake as the last ten years have been great. Now for those depending on their retirement portfolios to provide income right now this probably should /could be a concern to them. Overall I don't think the economy is in bad shape so it makes me optimistic that this is/could just be a blip on the radar screen and very psychological in nature. Once you start seeing job layoffs in mass than, I would be more worried. 

I think Trump is making things worse by questioning the fed chairman's move to raise interest rates today.  His trade war rhetoric and actions are also of concern to overseas nations This will only cause more emotional selling. Trump's economic acumen and knee-jerk reactions do not inspire confidence or optimism although shaking things up as he has may have a positive outcome.

I am curious how those of you who have yet to see a downturn are reacting to this downfall. Also I am interested in seeing if this turns out to be a major downturn , how it changes the FIRE advocates philosophies and lifestyle. Will they adjust their retirement date?

After writing all this I realize that   I am making predictions and that is most foolish of me.   In investing you must accept the good and bad. Patience though is key after you have done your due diligence towards the things you can control like fees , diversification, and investment choices.

And, I'm sure Santa Claus is still delivering  his presents tonight so its all good.

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This is my first bear market with significant assets. Cold logic is winning over emotion and it isn’t even close. So I am happy that I properly assessed my psychology before the crash. However, this is absolutely painful...I cringe thinking about the possibility of losing another year or two worth of wealth.

I began my career in early 2007 and I basically just hit the financial ceiling, which means my salary tracked the stock market those years. Therefore, most of my money was invested during the back half of the bull market. I cringe thinking about the possibility of losing every penny of profit and eventually going negative overall.

But such is the stock market and whenever the next bull market comes, I’ll have a large enough portfolio to truly benefit (something I didn’t really have last time).

I basically hit my FIRE number earlier this year. I considered retiring in mid-September (when I was switching jobs), but the new job offer was too good and I felt foolish contemplating retirement at the tail end of a record setting bull market without having experienced a single bear with significant assets. Plus the FIRE movement tells you sequence of returns is critical and starting retirement in a bear market is really bad news.

So I’m still a firm believer in FIRE, but it gives me real heartburn to see how my true FIRE date is getting pushed back each time the market opens. I want independence and I no longer believe I have it. Had I retired at the actual peak...I’d either be losing my mind or I’d be back at work already.

Overall I feel good about the economy. Sure we have stupid self inflicted headwinds like the trade war (which hopefully ends in 2020 with a new President), but I haven’t read of anything structural like the dot com crash or the housing bubble. So as things stand now I consider this to be nothing more than a return to sane prices, but I guess we will see. Who knows?

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I'm just glad I changed my asset allocation at the beginning of this year to 85/15 equity/bond.  If the market goes down more next week, I'm moving half of my bonds over to equities.  If it continues going down, I'll move the other half of my bonds to equities.  I'm in the process of maxing out my ROTH IRA for this year.  Just waiting for the money to transfer over any day now.  Then, hoping the market continues to go down, will max it out again for 2019.  For young folks, this is a great time to buy as it is going down.  Love to buy when it's cheaper.

To quote Warren Buffett, "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

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I used to be 100% stock for years until a year or two ago when I switched over to 90/10.  I moved over to 85/15 since the bull market was going on for too long and I just felt cautious.  I just wanted to be prepared in case what's happening now happens.  Plus, I'm getting older and a year closer to retirement.  😉

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Dk

You have got the right idea but a 15% allocation to bonds isn't enough to keep you from feeling the impact of a major downturn. While no need to follow Bogle's age in bonds formula exactly its still a pretty good guideline to follow for downward protection. Of course if you will be getting a pension upon retiring than you will probably be fine as your pension can be considered part of your bond allocation.  Keep saving though because a major recession could very well cause certain states in financial distress to alter or change their pension plans but most likely for future retirees and not you. Still keep your eyes wide open.

 

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