"Stay the course"? Bah humbug!

I saw that in the news. That said, buying a $200 phone is not the same as getting a loan for a home or automobile. The fastest growing part of the economy isn't GDP, it's unemployment. Since our consumers are 70% or so of our economy and they are rapidly shrinking in numbers it wouldn't hurt to balance of a portfolio with a short position. Better to go sideway than to fall off a cliff. Many people are down 50% or so, that requires a 100% gain to break even. I'm not happy about being down 4% this year but the "bah humbug!" factor isn't as severe for me that it is for a lot of people.

Very good point.

There is one thing that I confirmed over the years.

Which is: if you buy and sell based on price, instead of on trend, you will still be wrong about as often as if you bought and sold by the trend.

But, what is important, the mistakes will not cost you nearly as much.

As of now all our retirement accounts are in stocks. Between me and my wife, we used to be 90% in cash prior.

I have no idea if we are going in a small bear market, grizzly bear markey, small bull market or buffalo bull market.

i

Sure! I like this game. I'll be the optimist and say that we just entered a bull market on Friday. I hope my prediction lasts longer than Monday's close...

-Will

william dot trice at ngc dot com

That being the case, the time to get out was before those losses. And the time to get back in will be before the markets start to climb again.

If one wasn't able to predict the former (ie. one was unable to get out before the fall), what makes anyone believe he'll be able to predict the latter any better?

As I've said before, the truth uncovered here is not that the markets can be volatile, nor that it's hard to "stay the course" sometimes. It's that many of us did not correctly assess our actual risk tolerance. So it's not time to time the market or make these predictions about the future, but it is time to really think about risk tolerance and perhaps to rebalance our portfolios to reflect it better.

If one isn't prepared to lose 50%, one isn't prepared to be 100% in stocks. Lots of folks have been saying exactly that all along. Lots of them. Mostly the same ones who continue to say to stay the course. The thing is that the course they've been encouraging folks stay may not be the course some are claiming.

A 60% stock, 40% bond portfolio over the last 12 months (as built from a pair of ETFs) is down about 25%. Over very long periods of time, that portfolio has had something on the order of 80% of the annual return of a 100% stock portfolio, but with only around 60% of the annual volatility - exactly as what we've just seen.

There are probably a lot more folks out there who should be 60/40 rather than 100% stocks. And once they've figured that part out, staying the course should be a lot easier.

A trouble with dollar cost averaging is that people's ability to invest usually does not stay constant over a long period of time. In their early working years, small investors can put away, perhaps, $100 a month or so. But as income and wealth accumulates in later years, they can afford to invest a lot more, sometimes in lump sums all at one time. So chance plays a big role in what is happening during a particular time period.

Some people, including stock brokers who receive commissions, securities analysts, etc, are prone to recommend that NOW is always the best time to invest, regardless of what is going on in the economy, the more money the better. Of course, somewhat different reasons are given, depending on whether the market is high or low.

I keep hearing talk about the auto industry and chapter 11 but I just don't see why _anybody_ would purchase a car from a company in chapter

11 that might not be around to service it or do warrantee work. They would have to offer it at a great discount price to reel me in and deep discounts won't make them the money they need. I think chapter 11 would just make the current situation worse.

Indeed, bankruptcy would be better, because then the productive assets, including employees, would be grabbed by the likes of Toyota, Honda, Nissan, VW, etc. Just like GM and Ford grew by buying failed manufacturers (recently Daweoo and Jaguar), other companies would grow by buying what's left of GM and Ford.

After all, it's not like 1/2 of the car-buying public would not buy cars anymore because GM and Ford are no more. Other manufacturers would be glad to fill the space opened.

Back to the topic...

This would only be true if bottom had been reached, which neither you nor I know. If bottom hasn't been reached yet, now's a good time. Given that it's a bet, hedging might offset the losses... and the gains, depending on where the market goes.

Here's the problem. Let's say Skip is right and the market moves down. Then you get a quick rally. Let's say like the one that just occurred from the 10/27 close to the 11/4 close, market up 18%. Almost a bull market. Do you buy? The market will have recovered most or all of Skip's decline. If you wait, you may be buying back in higher that you got out (if it's not already too late). So using your strategy, you buy. Maybe just to see the market tank again, losing money. But if the market continues up from the rally, then you're no better off than if you had held, in fact you lose the dividends and create trading costs. So what's the point?

Or the realization that you have no idea which way the market will go in the short term.

-Will

william dot trice at ngc dot com

Count me as someone who continues to invest in the market, and I intend to dramatically increase my savings rate shortly (though this would have happened regardless of market conditions...).

-Will

william dot trice at ngc dot com

One point is that when markets come off a bottom, they go up like a rocket. The average gain in the year after the last 10 bears has been 44%. Now, someone will point out that does not restore what the bear ate. That's true. But forgoing those gains by being out of the market is even worse.

When markets are stable and rising for a long time, people start to think that is normal. People are willing to assume more risk and get paid less for it. In many ways that was what caused the current troubles. "Housing always goes up, so we are not taking a risk with this subprime loan."

While I think we are near the bottom, one big risk out there is the auto companies going Chapter 7. If even one ceases operations, that will be a whole new ball game.

-- Doug

What duration for the bond part? From what I've read, one would want to use short-term bonds (duration of 2-5 years) for bond portion because generally the yield curve isn't steep enough for the extra yield to compensate for the extra annual volatility of longer duration bonds.

And which bond ETF(s), and why ETF(s) over bond funds from a Vanguard or Fidelity? (who are both good and pretty cheap on bond funds).

-- Rich Carreiro snipped-for-privacy@rlcarr.com

Doug, keep in mind that high probability of this is already "priced in".

"Rich Carreiro" wrote

I'm using PRTIX. Average duration is about 5.5 years. It's up about 9% year to date. For ETF's I would have chosen IEI or ITE. IEI is doing the best.

For this example, for simplicity, I chose Vanguard Total Bond and Total Stock ETFs, which track, respectively, the Lehman Agg and the MSCI US Broad Indices.

The Agg has a duration now of about 4.5yrs which is roughly a third fixed-rate conforming MBS securities, roughly a third in Treasuries and other Gov't related debt and about

20% corporates, the rest made of other mortgage backed stuff.

No particular reason other than convenience to look up at the moment. Any low-cost well run index funds off of similar indices should behave almost identically. The point here was not specific funds but rather about asset allocation.

Some folks recommend short and intermed-term treasury-only funds rather than the Agg due to somewhat different correlations. When the universe goes to crap, folks buy up treasuries and often do so in flight away from both mortgages and corporates. When folks are under- pricing risk, they often do so in both corporate bonds as well as the stock market. I don't have current numbers handy though, comparing longer term behaviour of a

60/40 with the Agg vs an all Treasury fund of similar duration. However, in the last year, this exact difference of behavior is well demonstrated. Replace that 40% of Lehman Agg with 40% in either of the iShares Lehman 3-7 or 7-10yr treasury ETFs, both of which have returned more than 10% over the last year, and the 60/40 portfolio would have gone down about 21% instead of the 25% I noted above. And, in fact, when the stock portion of that portfolio starts to do well again, I would expect the bond portion - in all treasuries - to underperform the broader bond market and somewhat offset the stocks - ie. they'd do exactly what they are supposed to do - temper the volatility.

(the durations of those two all-treasury funds are about 4 yrs and about 6.5yr respectively, btw - I'd be inclined towards that 3-7 yr fund for this exercise)

It would be a good approach if you can tell when it happens. But I can't. For example, is the current big rally the start of the recovery or just more volatility?

-- Doug

(repost from 11/21, last didn't make it but I had a typo anyway!)

S&P's total return data for the S&P 500:

1927 +37.5% 1928 +43.6% 1929 -8.4% 1930 -24.9% 1931 -43.3% 1932 -8.2% 1933 +54.0% 1934 -1.4% 1935 +47.7% 1936 +33.9% 1937 -35.0% 1938 +31.1%

It's interesting that as of this morning the S&P 500 has lost ~52% since its peak close in October 2007, not factoring in dividends. Compounding the figures above, the cumulative loss from 1929-32 was ~64%, including dividends.

Meaning the stock market decline of the past year, half of which happened in just the past 2 weeks, is comparable to the cumulative losses during the worst stock-market period of the Great Depression - a period that spanned four years.

Another interesting data point: the dividend yield on the entire US stock market is a bit south of 4% at the moment, subject of course to changes in dividend payout (up & down). The 30-year Treasury bond yield is about 3.7%.

-Tad