Should you sell stocks in fear of a coming crash?

[WealthyDoc]

I'm still considering a comment I made and the response from WCI.  I suspect he is right - since so far- he almost always is.  But still, I went from millions to not millions in 2008 and I didn't enjoy that experience one bit.  Also my fees skyrocketed since my accounts dwarfed below required minimums.  Why take such risk again when I don't have to?  Thoughts?

WealthyDoc | November 8, 2017 at 7:17 am MST

Ken,
There are a lot of bond-haters commenting on this blog, but I’m not one of them. I actually just sold a ton of stock and bought bonds. Timing the market isn’t something I recommend, but it was time for me to cash in some chips after a long rise in the stock market. I have municipal bonds in a tax-free bond fund that seems to be performing well. I don’t have individual bonds, but am open to learning more about that option.

Reply

The White Coat Investor | November 8, 2017 at 12:37 pm MST

Amazing how many people hate bonds 8+ years into a bull market.

I think “cash in chips” implies something you don’t actually mean. There’s kind of a market timing flavor to that phrase. I think what you really mean is you’ve made your asset allocation less aggressive now that you have less need and ability to take market risk. Unless you’re planning on getting more aggressive again later with your portfolio. In which case you’re just timing the market.

Reply

[Dr. Mom]

Sounds to me like you are making an appropriate asset allocation change as you near retirement.  See article from Kitces below on bond tents:

https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

As you pass your sequence of returns risk timeframe and if you want to change asset allocation to more stocks then, I would not consider that to be market timing but appropriate asset allocation also.

[Kamban]

WealthyDoc wrote:

I went from millions to not millions in 2008 and I didn’t enjoy that experience one bit. Also my fees skyrocketed since my accounts dwarfed below required minimums. Why take such risk again when I don’t have to? Thoughts?

Click to expand...

What I have done is to diversify. I lost quite a bit in the 2000 and 2008 crashes but left the stocks untouched. By using a dividend reinvestment strategy I have bought stocks both when they were low and high, and they have now reached new lofty levels. I know they will go down but they will also go up.

What I did to protect myself was to diversify in commercial real estate / hotel business. That is also cyclical but not always in sync with the stock market. And the distributions from them will keep me going along with my cash savings until the market recovers.

[WealthyDoc]

Kamban wrote:

WealthyDoc wrote:

I went from millions to not millions in 2008 and I didn’t enjoy that experience one bit. Also my fees skyrocketed since my accounts dwarfed below required minimums. Why take such risk again when I don’t have to? Thoughts? 

Click to expand…

What I have done is to diversify. I lost quite a bit in the 2000 and 2008 crashes but left the stocks untouched. By using a dividend reinvestment strategy I have bought stocks both when they were low and high, and they have now reached new lofty levels. I know they will go down but they will also go up.

What I did to protect myself was to diversify in commercial real estate / hotel business. That is also cyclical but not always in sync with the stock market. And the distributions from them will keep me going along with my cash savings until the market recovers.

Click to expand...

Good point.  Yes I have done some of this too.  I invested in two private companies, commercial real estate, an imaging center, and 2 surgery centers.  I'm now purchasing single family homes that should provide some cash flow and perhaps appreciation eventually.

[FIREshrink]

If the stock market drops 50% how much would you really lose? I would lose less than 30% of my portfolio and less than 20% of net worth. I can live with that.

[VagabondMD]

Dr. Mom wrote:

Sounds to me like you are making an appropriate asset allocation change as you near retirement.  See article from Kitces below on bond tents:

https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

As you pass your sequence of returns risk timeframe and if you want to change asset allocation to more stocks then, I would not consider that to be market timing but appropriate asset allocation also.

Click to expand...

Great article! I intuitively arrived at the same place (a bond tent), as I start to wind down the medical career.

I also have been well-versed in the marginal utility of additional wealth effect, which I would not have appreciated in the first ten years of my career, but in the last ten years, it is quite apparent.

[NJDoc]

Kamban wrote:

WealthyDoc wrote:

I went from millions to not millions in 2008 and I didn’t enjoy that experience one bit. Also my fees skyrocketed since my accounts dwarfed below required minimums. Why take such risk again when I don’t have to? Thoughts? 

Click to expand…

What I have done is to diversify. I lost quite a bit in the 2000 and 2008 crashes but left the stocks untouched. By using a dividend reinvestment strategy I have bought stocks both when they were low and high, and they have now reached new lofty levels. I know they will go down but they will also go up.

What I did to protect myself was to diversify in commercial real estate / hotel business. That is also cyclical but not always in sync with the stock market. And the distributions from them will keep me going along with my cash savings until the market recovers.

Click to expand...

Agreed , I have done this as well. After 2008, I educated myself and pulled a large chunk out of the equities market into commercial real estate, mainly multifamily, but with some office, and a skosh of land development, in addition to my surgery ctr. investment. Not a fan of single family homes, been there , done that and it wasn't good. Way too much vacancy risk for my taste. Haven't done the hotel thing and probably won't.

In the current interest rate envirnoment  I am not a fan of bonds, although I wholeheartedly agree that the Kitces article is logical. However, there are other methodologies to protect against sequence of return risk including the verboten word amongst the Boglehead crowd: momentum. Even the revered Bernstein states, " As much as it pains me to admit it, momentum exists".

Lots of different ways to stay ahead.

 

 

[ajm184]

Slightly conflicting message imo.  If I look at the title of the post, I see the words 'sell' and 'fear' and this implies putting emotion before a logicial/data driven decision.  In looking at the actual post though and response by WCI, your actions appears consistent with either re-balancing or a change in asset allocation.  I think you hit on the head with the understanding you don't need to take the equity risk, an enviable position most people will never know.

Bonds are one of those things that can be created to emphasize certain characteristics (rates, liquidity, convertibility, repayment, etc.).  Most individuals see a bond mutual fund price that doesn't move around much, but depending upon the bond mutual fund, it maybe a Stephan King lake of horrors beneath the tranquil surface.

Allan Roth wrote a pretty good article on the muni-bond illusion, and appears applicable to bond mutual funds more general. https://blogs.wsj.com/totalreturn/2013/04/04/beware-the-muni-bond-illusion/

I don't know about anyone else, but in 2008, I didn't take the loses overnight (rather over 5 quarters) and stayed consistent in my asset allocations (95%+ equity/ 5% bonds).

[Hank]

That was an excellent article (as usual) by Michael Kitces.

Another approach is to look at what your spending needs (not wants) are per year and then subtract guaranteed income from pensions, social security, etc. When you get within five years of retirement, set aside two to five years worth of the difference between guaranteed income and minimal needed spending. Put the money in a risk free ladder of CDs, multiple savings accounts below FDIC limits, ultrashort bond fund or similar.

Most bear markets are pretty short lived. You could have several decades in retirement. Don’t permanently shift to too conservative of an asset allocation.

[WallStreetPhysician]

WealthyDoc,

I think investors generally become more conservative as their assets grow. When it's millions at stake instead of thousands, and you are closer to retirement, you become more risk-averse, and worry more about the big dips.

http://www.wallstreetphysician.com/asset-allocation-change-wealthier/

Essentially, you aren't alone in worrying that you might "lose everything you've gained in the last 8 years" and are naturally switching your asset allocation to something you are more comfortable with. Nothing wrong with that.

-WSP

[ajm184]

WallStreetPhysician wrote:

WealthyDoc,

I think investors generally become more conservative as their assets grow. When it’s millions at stake instead of thousands, and you are closer to retirement, you become more risk-averse, and worry more about the big dips.

http://www.wallstreetphysician.com/asset-allocation-change-wealthier/

Essentially, you aren’t alone in worrying that you might “lose everything you’ve gained in the last 8 years” and are naturally switching your asset allocation to something you are more comfortable with. Nothing wrong with that.

-WSP

Click to expand...

Interesting point made to have threshold investment assets as a mechanism to change a bond asset allocations higher over time (and growth of said assets hopefully).  It provides additional flexibility versus an age based mindset with the potential drawback of not saving aggressively (either in % or absolute terms) enough early on because 'equity investment growth' will solve all ills.

[olivertwist]

WealthyDoc wrote:

I’m still considering a comment I made and the response from WCI.  I suspect he is right – since so far- he almost always is.  But still, I went from millions to not millions in 2008 and I didn’t enjoy that experience one bit.  Also my fees skyrocketed since my accounts dwarfed below required minimums.  Why take such risk again when I don’t have to?  Thoughts?

WealthyDoc | November 8, 2017 at 7:17 am MST

Ken,
There are a lot of bond-haters commenting on this blog, but I’m not one of them. I actually just sold a ton of stock and bought bonds. Timing the market isn’t something I recommend, but it was time for me to cash in some chips after a long rise in the stock market. I have municipal bonds in a tax-free bond fund that seems to be performing well. I don’t have individual bonds, but am open to learning more about that option.

Reply

The White Coat Investor | November 8, 2017 at 12:37 pm MST

Amazing how many people hate bonds 8+ years into a bull market.

I think “cash in chips” implies something you don’t actually mean. There’s kind of a market timing flavor to that phrase. I think what you really mean is you’ve made your asset allocation less aggressive now that you have less need and ability to take market risk. Unless you’re planning on getting more aggressive again later with your portfolio. In which case you’re just timing the market.

Reply

Click to expand...

As other suggested, you could move 3-5 years of living expenses to guaranteed accounts, e.g. moving 1-2 years of expenses to a MMA or high-interest savings account, and money you'd need 3-5 years out into a CD ladder. Current CD rates for 5 years are 2.3-2.5% APY, which isn't too shabby if you're concerned about market volatility in the coming years.

Regarding bond returns, currently yields are on par with CD rates. Just be sure you have your stuff placed efficiently for tax purposes. That 2.5% CD APY can fall to <2% after taxes are taken (regular income rates, not capital gains, even if it's a 1+ year CD).

[StarTrekDoc]

One should constantly be balanced for whatever long term plans and anticipated fluctuations in the market.  That said, we are long overdue for a market correction.  We are also due for a large earthquake here in California -- plan accordingly.

We simply can't time it and shouldn't be out of the equities just because we're overdue for a correction (or a crash).

Risk diversify as to what fits for you.

For us; 50% of net worth is in directed equities (ie, not counting pensions since we have no control over that).  the rest is real estate across multiple properties - diverse locations and SES.

 

[artemis]

I don't think stocks (or any other asset, for that matter) should be sold off based on fear of what might be coming in the near future - but I do think that if the thought of a bear market makes a person's stomach churn, that may be a sign that his or her asset allocation may be too heavy in equities for his or her risk tolerance.  Everyone should look at their overall asset allocation every 5-10 years and ask whether it's still appropriate or needs some tweaking.

[Dreamgiver]

I know a couple of colleagues who sold a lot of equities when Trump got elected for fear of an upcoming recessions. You know how that story ends. I don’t care how you call it. This is timing the markets. Long term it does not work in your favor. Bonds will insure that you will not even keep up with inflation.