Strategy for stock market correction

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
Thegipper
Veteran Contributor
Veteran Contributor
Posts: 3477
Joined: 14 Mar 2015 16:58

Strategy for stock market correction

Post by Thegipper »

We are in our early 70's. We have combined pensions of 70k including CPP and OAS. We have 900k in registered and TFSAs . Our ratio has reached 60% stocks and the balance is fixed income. Capital preservation is an important thing so I have decided to reduce my stock holdings to 30% over the coarse of the next three months. I intend to make incremental reductions every two weeks until I reach that level by August 15. The proceeds will be parked in Vanguard ST bond ETFS. After a great 8 year run with stocks I believe this is a good strategy to deal with greed. If there was a major stock market correction I would look at increasing my stocks in an incremental manner. I will be primarily focused on selling down my small caps and sticking with the larger cap stocks which pay dividends. I know market timing is mugs game. At age 71 big market downturns are not good for one's health.
User avatar
deaddog
Veteran Contributor
Veteran Contributor
Posts: 3422
Joined: 19 Jan 2008 19:59
Location: Central BC/Arizona

Re: Strategy for stock market correction

Post by deaddog »

I use a trailing stop that will hopefully take me out of the market when the crash/ correction occurs. It worked in 2008 and whip sawed me in 2015/16. You have to be prepared to get out and then get back in at a higher price.

Number One Priority is protection of capital; When I'm in cash there is no market risk. There may be some sellers remorse as the market goes up without me but as I have said before better than having the market drop with me holding stocks.

Once I have sold a position I can choose a new stock with out the ownership bias. I use my method on individual stocks, not the whole market. It has taken me out of some real dogs and allowed me to hold a portfolio with out stocks that don't perform.

Not for everybody but it has served me well.
"And the days that I keep my gratitude higher than my expectations, well, I have really good days" RW Hubbard
Taggart
Veteran Contributor
Veteran Contributor
Posts: 6893
Joined: 05 Dec 2005 07:34

Re: Strategy for stock market correction

Post by Taggart »

I'll just be doing the same as I did in 1987, 2001-02, and 2008-09. Just ride with the flow and invest any cash I happen to have available. Repair any weaknesses in the portfolio and in my mind after the event.
BRIAN5000
Veteran Contributor
Veteran Contributor
Posts: 9063
Joined: 08 Jun 2007 23:27

Re: Strategy for stock market correction

Post by BRIAN5000 »

A quote from my IPS (which was directly copied vastly plagiarized from Libra website)

"Changes to personal circumstances that alter risk tolerance or time horizon should be incorporated in any revision. Market price movements, other than for the purpose of rebalancing are not grounds for revision."

So just the thought there may be a market downturn my not be reason to change but sounds like your risk tolerance has changed?
What are your bequest motives?
How much are you trying to generate for spending per year?

Not sure if answers to some of these may help.
This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed
Thegipper
Veteran Contributor
Veteran Contributor
Posts: 3477
Joined: 14 Mar 2015 16:58

Re: Strategy for stock market correction

Post by Thegipper »

With close to million in investments and given my age a 30/70 split might be appropriate. If a correction occurred a 40/60 or even 50/50 rebalancing would seem okay. I haven't be rebalancing so may-be it's time I did. If I can generate a 40 k income level I would be happy. That put's our retirement income at 110k per annum. With the benefit of income splitting that will give us a after tax income of 8k per month. It is important that I leave my kids a solid inheritance. Tank you for your angle on this topic.
randomwalker
Veteran Contributor
Veteran Contributor
Posts: 2392
Joined: 14 Apr 2005 20:55

Re: Strategy for stock market correction

Post by randomwalker »

Thegipper wrote: 05 Jun 2017 17:37 With close to million in investments and given my age a 30/70 split might be appropriate. If a correction occurred a 40/60 or even 50/50 rebalancing would seem okay. I haven't be rebalancing so may-be it's time I did. If I can generate a 40 k income level I would be happy. That put's our retirement income at 110k per annum. With the benefit of income splitting that will give us a after tax income of 8k per month. It is important that I leave my kids a solid inheritance. Tank you for your angle on this topic.
Stating the obvious but to generate 40k in income using the above mention ratios would seem difficult without taking on a good deal of risk or eating into the 900k.
User avatar
kcowan
Veteran Contributor
Veteran Contributor
Posts: 16033
Joined: 18 Apr 2006 20:33
Location: Pacific latitude 20/49

Re: Strategy for stock market correction

Post by kcowan »

Thegipper
I consider the pensions to be fixed income. So that represents 64% of your target income (of $110k). And you portfolio is about 60/40 so you are already heavily into FI. An SWR of 4% from your portfolio of $900k will give you another $36k. Unless you are trying to build a legacy for some reason, you are where you want to be and do not need to take more risk than you are comfortable with.

(If you want to take some risk, look at Convertible Debentures to get 5% return. They are risky but most (over 95%) have delivered. Once in a while you get a big upside to compensate for the few losers.)
For the fun of it...Keith
User avatar
AltaRed
Veteran Contributor
Veteran Contributor
Posts: 33398
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: Strategy for stock market correction

Post by AltaRed »

I agree $40k is not likely with a 30/70 portfolio of $900k unless there is a shitload of junk bonds and/or unsecured debentures, all of which are at risk in an equity meltdown. I'd suggest this desire be re-visited and/or be prepared to use some prefs and/or some highest quality Reits as an 'in between' asset class. That said, I sense that will be a big adjustment for the Gipper based on my understanding of his past recent history of being aggressive with stock picks (per his own posts).
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom
User avatar
bcjmmac
Contributor
Contributor
Posts: 817
Joined: 07 May 2006 02:28
Location: Lobster Ville, NB (also known as Shediac)

Re: Strategy for stock market correction

Post by bcjmmac »

Still working/building funds but, after a bunch of research & reading, I don't plan on lowering my stock allocation much in retirement - also have a DB pension that I consider FI.
What I do plan on doing is keeping a 2 year "cash" reserve = 2 years planned withdrawals for retirement funding. Many sites/experts recommend a 1 year cash fund, but I'm going for the extra year for peace of mind - worst case scenario (?).
Essentially the goal of the cash reserve to to avoid having to sell during a downturn/recession. Most years you simply sell assets, collect dividends, etc, to meet your funding goal, leaving cash fund intact. During a downturn, you use the cash instead of selling assets. When the markets recover, you replenish the reserve & carry on.
User avatar
AltaRed
Veteran Contributor
Veteran Contributor
Posts: 33398
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: Strategy for stock market correction

Post by AltaRed »

What appears to be different with The Gipper is the stated desire? need? to leave a large legacy. He must have his reasons. I am however surprised, that with the size and breadth of their pension income, why they could not just tighten their belts a bit during an equity swoon. He could still bridge some rough years in the equity market with a larger equity position.Those equities still pay dividends.
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom
Thegipper
Veteran Contributor
Veteran Contributor
Posts: 3477
Joined: 14 Mar 2015 16:58

Re: Strategy for stock market correction

Post by Thegipper »

AltaRed wrote: 05 Jun 2017 22:19 What appears to be different with The Gipper is the stated desire? need? to leave a large legacy. He must have his reasons. I am however surprised, that with the size and breadth of their pension income, why they could not just tighten their belts a bit during an equity swoon. He could still bridge some rough years in the equity market with a larger equity position.Those equities still pay dividends.
I have been using a laddered bond strategy for the past 15 years and it has served me well. It's an nine year ladder and it still yields 4% plus. With interest rates being were they are it creeping toward the 3% zone. I have been averaging 20% plus on my stocks for the past 8 years. Even projecting a 8 or 9 % return on my stock investments going forward I will still have a total yield in the 5.5% range. My strategy is temporary in nature and I would return to a much higher weighting i stocks once a correction has occurred.
OnlyMyOpinion
Veteran Contributor
Veteran Contributor
Posts: 4231
Joined: 24 Jan 2014 23:17

Re: Strategy for stock market correction

Post by OnlyMyOpinion »

Gipper, you mention the $900k is in registered and TSFA's and that you are around age 71.
Seems to me you're a year away from age 72 when you'll have to start taking 5.4% out of your annual RRIF balance. If it is around $800k? to start, that would be $43k to withdraw in the first year.
As much as asset allocation of your portfolio, I'd be planning how you want to provide the liquidity in your RRIF's to provide for the yearly withdrawls.
We burn through $110k a year now but I was planning (hoping?) at 71 to be spending a bit less <gulp>.

Added: I just see your laddered bond comment. That probably handles the issue of annual liquidity - you can ignore my comment above.
User avatar
ghariton
Veteran Contributor
Veteran Contributor
Posts: 15954
Joined: 18 Feb 2005 18:59
Location: Ottawa

Re: Strategy for stock market correction

Post by ghariton »

OnlyMyOpinion wrote: 05 Jun 2017 23:35I'd be planning how you want to provide the liquidity in your RRIF's to provide for the yearly withdrawls.
A topic that I seldom see discussed. I'm greatly interested, as I turned 71 this April.

RRIF withdrawal is based on your balance at the close of the previous calendar year. If you plan to make the withdrawal at the end of the next year, i.e. the latest possible moment, you have two choices. Either (a) you can start accumulating cash, or have a GIC that matures in time, or (b) you can stay invested in equities for the entire year and plan on selling something just before the withdrawal date. (Combinations of the two are also possible of course). Under the first course, you are sacrificing part or all of a year's return on equities. Under the second course, you incur the risk that there will be a downturn in equities market just as you have to sell.

One solution is to make your withdrawal, not at the end of the year, but rather than at the beginning of the year. You then invest the proceeds in equities in a non-registered account. This eliminates both of the problems mentioned above. However, it does introduce a new risk, i.e. your financial position next April when you will finally have to pay your taxes (that part over and above the mandatory installments, which you have to pay under any scenario). It seems to me that this risk is small compared to the other possibilities.

So I'm thinking of withdrawing the minimum at the start of 2018, rather than at the end. Comments?

George
The juice is worth the squeeze
Taggart
Veteran Contributor
Veteran Contributor
Posts: 6893
Joined: 05 Dec 2005 07:34

Re: Strategy for stock market correction

Post by Taggart »

Found this over at Stingy Investor.

Waiting for the Market to Crash is a Terrible Strategy

"In my experience, investors sitting on a lot of cash are usually worried about equity valuations or the economy, and tell themselves and others that they're going to buy gobs of stock after a crash. The strategy sounds prudent and has commonsense appeal—everyone knows that one should be fearful when others are greedy, greedy when others are fearful. But historically waiting for the market to fall has been an abysmal strategy, far worse than buying and holding in both absolute and risk-adjusted terms."
pmj
Veteran Contributor
Veteran Contributor
Posts: 3412
Joined: 27 Feb 2005 18:15
Location: Ottawa

Re: Strategy for stock market correction

Post by pmj »

OnlyMyOpinion wrote: 05 Jun 2017 23:35I'd be planning how you want to provide the liquidity in your RRIF's to provide for the yearly withdrawals.
We have withdrawn from RRSPs a couple of times by just transferring equities or MFs to another account. Can assets not similarly be withdrawn from RRIFs? Cash is reqd to pay the taxes, if it's an RRSP withdrawal, but this wouldn't apply to minimum withdrawals from RRIFs.
Last edited by pmj on 06 Jun 2017 08:11, edited 1 time in total.
Peter

Patrick Hutber: Improvement means deterioration
Stan
Contributor
Contributor
Posts: 214
Joined: 23 Aug 2005 14:14
Location: Toronto

Re: Strategy for stock market correction

Post by Stan »

ghariton wrote: 06 Jun 2017 00:10
OnlyMyOpinion wrote: 05 Jun 2017 23:35I'd be planning how you want to provide the liquidity in your RRIF's to provide for the yearly withdrawls.
A topic that I seldom see discussed. I'm greatly interested, as I turned 71 this April.

RRIF withdrawal is based on your balance at the close of the previous calendar year. If you plan to make the withdrawal at the end of the next year, i.e. the latest possible moment, you have two choices. Either (a) you can start accumulating cash, or have a GIC that matures in time, or (b) you can stay invested in equities for the entire year and plan on selling something just before the withdrawal date. (Combinations of the two are also possible of course). Under the first course, you are sacrificing part or all of a year's return on equities. Under the second course, you incur the risk that there will be a downturn in equities market just as you have to sell.

One solution is to make your withdrawal, not at the end of the year, but rather than at the beginning of the year. You then invest the proceeds in equities in a non-registered account. This eliminates both of the problems mentioned above. However, it does introduce a new risk, i.e. your financial position next April when you will finally have to pay your taxes (that part over and above the mandatory installments, which you have to pay under any scenario). It seems to me that this risk is small compared to the other possibilities.

So I'm thinking of withdrawing the minimum at the start of 2018, rather than at the end. Comments?

George
I started to take RRIF this year. I took at beginning of year. Invested some in non-registered account and kept some for tax time. I have benefit that my spouse is quite a bit younger so the "hit" is not as bad as it could have been.
User avatar
SoninlawofGus
Veteran Contributor
Veteran Contributor
Posts: 1284
Joined: 21 Aug 2007 12:10
Location: Ottawa

Re: Strategy for stock market correction

Post by SoninlawofGus »

Taggart wrote: 06 Jun 2017 03:31 "But historically waiting for the market to fall has been an abysmal strategy, far worse than buying and holding in both absolute and risk-adjusted terms."
And a corollary to this is the notion that one will actually buy loads as the market is reaching new lows. In 2008-9, there was a lot of gloom on the FWF board, but not a lot of people talking about buying truckloads of stocks. Back then, I nibbled some, mostly just not to be wrong about not buying at new lows, but I did not have the courage to back up the truck. Everyone tries to pick the bottom. When it did finally hit bottom, I don't think anyone here thought we were there yet.

Upthread gipper mentions leaving an inheritance. I suppose the number of children is a factor. Our plan is to leave only the house to our two kids. Anything beyond that is gravy.
Taggart
Veteran Contributor
Veteran Contributor
Posts: 6893
Joined: 05 Dec 2005 07:34

Re: Strategy for stock market correction

Post by Taggart »

SoninlawofGus wrote: 06 Jun 2017 08:01
Taggart wrote: 06 Jun 2017 03:31 "But historically waiting for the market to fall has been an abysmal strategy, far worse than buying and holding in both absolute and risk-adjusted terms."
And a corollary to this is the notion that one will actually buy loads as the market is reaching new lows. In 2008-9, there was a lot of gloom on the FWF board, but not a lot of people talking about buying truckloads of stocks. Back then, I nibbled some, mostly just not to be wrong about not buying at new lows, but I did not have the courage to back up the truck. Everyone tries to pick the bottom. When it did finally hit bottom, I don't think anyone here thought we were there yet.

I've never been in a position in life to have truckloads of cash, but I did have some cash on hand in the taxable account before the crash, then used it all up pretty quickly. All I could use afterwards over these two years came from whatever cash was produced from pension savings and dividends over that time period. Not all buys in Canadian common stocks I made during that time period were good selections, although thankfully none imploded. I don't look for market bottoms. I never have. Have cash, will purchase. Bull or bear market.
longinvest
Veteran Contributor
Veteran Contributor
Posts: 3956
Joined: 10 Sep 2012 17:26
Location: QC

Re: Strategy for stock market correction

Post by longinvest »

BRIAN5000 wrote: 05 Jun 2017 15:49 Market price movements, other than for the purpose of rebalancing are not grounds for revision.
+1 :thumbsup:
Variable Percentage Withdrawal (finiki.org/wiki/VPW) | One-Fund Portfolio (VBAL in all accounts)
OnlyMyOpinion
Veteran Contributor
Veteran Contributor
Posts: 4231
Joined: 24 Jan 2014 23:17

Re: Strategy for stock market correction

Post by OnlyMyOpinion »

Like others note, swinging from E/FI of 60/40 to 30/70 with the intention of going back (even to 50/50) after a market correction sounds like market timing. It's up to you to decide whether you are good at that.

If your projected income needs are being met, I'd be more inclined to stay the course, especially since you mention wanting to leave a "solid inheritance". Hopefully that means another 15 years or more in the market where your selling and then repurchasing will have become a small 'blip'.

Moving more into FI now, along with your current FI that is maturing during the current low rate environment is likely to reduce your overall returns over the next 5, 10 or 15 years.
User avatar
AltaRed
Veteran Contributor
Veteran Contributor
Posts: 33398
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: Strategy for stock market correction

Post by AltaRed »

I tend to agree with OMO. ISTM the OP is betting on his ability to time (or beat) the market. Maybe yes, maybe not. I'd stay the course and potentially slowly increase FI allocation over time to be more certain* of a specific legacy value. That would seem to be a less risky strategy than market timing now.

* By more certain, I mean a situation where there is an equity market swoon about the time the testator dies. An executor/administrator has capital preservation resonsibilities so normally would unlikely allow a large equity allocation to continue post-death...pending distribution. A conversion of equity to FI during a market swoon would thus obviously impact/deny the ability of the estate to recover its equity market losses. Obviously if the executor(s) and beneficiaries are the same, then it is a much easier choice to decide how to handle the estate's capital while the estate is being settled, but most estates are not that simple, i.e. more beneficiaries involved and/or are at arm's length.

The point really is that none of us know when we are going to pass on. What risks does one want to take with the value of that legacy by continuing with a large equity allocation as we get older?
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom
couponstrip
Contributor
Contributor
Posts: 552
Joined: 14 Jan 2007 15:20

Re: Strategy for stock market correction

Post by couponstrip »

SoninlawofGus wrote: 06 Jun 2017 08:01
Taggart wrote: 06 Jun 2017 03:31 "But historically waiting for the market to fall has been an abysmal strategy, far worse than buying and holding in both absolute and risk-adjusted terms."
And a corollary to this is the notion that one will actually buy loads as the market is reaching new lows. In 2008-9, there was a lot of gloom on the FWF board, but not a lot of people talking about buying truckloads of stocks. Back then, I nibbled some, mostly just not to be wrong about not buying at new lows, but I did not have the courage to back up the truck. Everyone tries to pick the bottom. When it did finally hit bottom, I don't think anyone here thought we were there yet.
In fact, as the market was roaring back from the lows in March '09, most here were predicting new lows in the not too distant future. There was an entire thread called "the great false rally of 2009" or something like that*. Then through April, the market was going up 2% day after day after day and most here were still decrying equity.

It's very hard to buy equity in the middle of a storm like that, but easy to see what should have been done the next day when the sun is shining.

An imprecise current day analogy is oil stocks. No one is going near these. Pessimism is incredibly high. Seemingly good news results in new, soul-crushing lows for oil and the equities dependent on oil price. Trading volumes are trending lower. People are throwing in the towel. Maximum pessimism is close at hand. Any rally will be discounted as a "sucker rally" and many gains will be made before most believe it is real.

Is anyone interested in sinking money into a small or medium sized oil company right now?

*Edit - Here is that thread from 2009
Last edited by couponstrip on 06 Jun 2017 20:52, edited 1 time in total.
Thegipper
Veteran Contributor
Veteran Contributor
Posts: 3477
Joined: 14 Mar 2015 16:58

Re: Strategy for stock market correction

Post by Thegipper »

I have been convinced to limit my rebalancing to a level of 50% stocks. Thank you for your thoughts.
Taggart
Veteran Contributor
Veteran Contributor
Posts: 6893
Joined: 05 Dec 2005 07:34

Re: Strategy for stock market correction

Post by Taggart »

Investing has been a constant learning experience for myself. I was always trying to figure out, what works and what doesn't work in the market. I don't worry about market conditions I can't prevent. Two of my greatest teachers back in the 80's regarding market timing and how it's all just a waste of time were Joe Granville and Charles Allmon. So, I've refrained from making market predictions since these two gentlemen were on the scene. All I know is that eventually there will be another major downturn sometime in the near or distant future. I just don't know when, but on the bright side, at least I'll be able to test out the newly redesigned portfolios I initiated in 2010 after the last financial storm. I may learn a little bit in bull markets, but I learn a lot in bear territory.
Thegipper
Veteran Contributor
Veteran Contributor
Posts: 3477
Joined: 14 Mar 2015 16:58

Re: Strategy for stock market correction

Post by Thegipper »

After thought. You have some cash on the sideline for that day that there is blood in the streets. Do you keep it in cash or do you keep it in a government short term bond ETF? My experience with such ETFs is they are very liquid and you can get a good return in a financial meltdown. They did very well in 08/09. Just a thought.
Post Reply