Historic Stock Market Levels

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8Toretirement
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Re: Historic Stock Market Levels

Post by 8Toretirement » 10 Mar 2017 09:35

Mordko wrote:
8Toretirement wrote:
First of all, the odds are in favour of a diversified investor.

Secondly, Bernstein specifically advises that one should not try to time the market.

Yes, he does advise that asset allocation should change as you approach retirement. And the recommended allocation to short-term bonds and TIPs depends on the fund value. For those who "won the game", Bernstein recommends to hold enough in FI to cover many years worth of your expenditure (taking into account various other income streams you have such as CPP). Obviously people with larger funds will have a larger percent allocated to stocks, even after retirement.

Moving everything into FI and cash isn't risk-free either. One is always "in the game" until the light is out.
I think we need to separate the accumulation phase from the Pre and Post retirement phase. It's the Pre and Post retirement phase that interests me at this point.

I have not suggested a complete withdrawal from the equity markets makes sense, however, if you have met your goals for retirement funds it doesn't make sense to continue rolling the dice, especially at these historic market levels. I understand the markets can continue to rise, but on the balance they are tipped toward a decline and if you have met retirement goals you are risking a guaranteed outcome from the perspective of retirement savings goals from earlier years.

Using the current market levels that are at historic highs. For people that are near retirement, and have met or are close to meeting their retirement goals it does make some sense to take profit and adjust the equity portion downward and accept a lesser return to guarantee a long term goal.

After all, if you have met a goal that has taken decades to obtain, why would you continue to roll the dice if the outcome is guaranteed. I should say my retirement income goals do not include future returns at the same rate as historic past when I was in the accumulation phase.

I am willing to accept lower returns, through the lowering of my equity position to secure my retirement funds as the difference of returns will not affect the outcome. Sequence of returns risk is the basis for this re-evaluation. I am 5 years from retirement and there are numerous research papers that have shown that losses immediately prior and post retirement are the greatest risk to a portfolio not returns.
Last edited by 8Toretirement on 10 Mar 2017 09:55, edited 1 time in total.

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GreatLaker
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Re: Historic Stock Market Levels

Post by GreatLaker » 10 Mar 2017 09:38

longinvest wrote: GreatLaker,

Do you mean that inflation would hurt Real Return Bonds (RRBs)?
Hi Longinvest.
It seems my post was like dangling red meat in front of a shark. :oops:

I was not thinking of RRBs. They would fall into my category of assets that have inflation protection.

They are just a little too esoteric to be prominent on my radar screen at this time. But thanks for all your enlightening posts on them. Maybe some day I will get a chance to review them in more depth and decide if they would be a good asset for me.
The first principle in speculating is never give anyone advice to buy or sell shares,
because, where perspicacity is weakened, the most benevolent advice can turn out badly.
Joseph de la Vega

longinvest
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Re: Historic Stock Market Levels

Post by longinvest » 10 Mar 2017 09:42

AltaRed wrote:However, there are many investors who have the acumen and desire to mitigate sequence of returns risk, have the savvy to operate a spreadsheet and re-calculate their VPW for this year, follow the markets and perhaps make a few trades, etc, etc. The world of finance remains a hobby of mine and I will continue to play it rather than go golfing or reading a book on a freaking hot beach. I hate golf by the way as I do broiling in the sun. If and when I tire of managing my portfolio, I hope I have the sense to make it more bulletproof and capable of idling away with no one in the driver's seat before becoming incompetent. Retirement is a long adventure for many and I am not ready to get off this horse just yet.
I'm a big fan of the VPW approach, too.

As I wrote in another thread, I think that using two separate portfolios, a liability matching portfolio (LMP) and a risk portfolio (RP), is a pretty naive* and very expensive approach. While I am a fan of deferring public pensions (OAS and CPP/QPP), I'm not a fan of dumping a big lump sum of money into the pockets of an insurance company, and I find RRBs pretty expensive.

* Except when it is done for psychological reasons (to eliminate the fear of a market crash), which would be a valid justification for maintaining separate portfolios.
Last edited by longinvest on 10 Mar 2017 09:50, edited 3 times in total.
Bogleheads investment philosophy | Simple index portfolios | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Re: Historic Stock Market Levels

Post by gobsmack » 10 Mar 2017 09:48

8Toretirement wrote:I am willing to accept lower returns by lowering my equity position to secure my retirement funds. Sequence of returns risk is the basis for this re-evaluation.
There is nothing controversial about this. Isn't this the argument in favour of increasing bonds allocation as one approaches retirement? It would be perfectly appropriate to reduce equity exposure and increase allocation to bonds. VAB is pretty close to its 52-week low and, even if it goes lower, if you hold it for long enough, you'll make your money back.

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Re: Historic Stock Market Levels

Post by longinvest » 10 Mar 2017 10:03

GreatLaker wrote: It seems my post was like dangling red meat in front of a shark. :oops:
blue_shark_laughing_vector_566530.jpg
(source: http://all-free-download.com/free-vecto ... 66530.html)

:wink:
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8Toretirement
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Re: Historic Stock Market Levels

Post by 8Toretirement » 10 Mar 2017 10:10

gobsmack wrote:
8Toretirement wrote:I am willing to accept lower returns by lowering my equity position to secure my retirement funds. Sequence of returns risk is the basis for this re-evaluation.
There is nothing controversial about this. Isn't this the argument in favour of increasing bonds allocation as one approaches retirement? It would be perfectly appropriate to reduce equity exposure and increase allocation to bonds. VAB is pretty close to its 52-week low and, even if it goes lower, if you hold it for long enough, you'll make your money back.
Historically there has not been but with interest rates at historic lows we have a potential double threat. I am using GIC's when they go over 2%, and strip bonds within 5 years that are investment grade and over 2% return as the basis of my FI. I also have some funds in a very short term bond fund (0.5 duration) that is throwing out cash until I can increase returns with GIC's and strips. I am still about 30% equity. I have a fair bit of cash I will redeploy if the markets go down.

I am still 5 years out and accumulating, so new funds are piling up as cash until I can see an opportunity to deploy these funds. We don't have any remaining RRSP or TFSA room and it doesn't make sense to deploy taxable funds into FI.

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Re: Historic Stock Market Levels

Post by gobsmack » 10 Mar 2017 10:41

8Toretirement wrote:Historically there has not been but with interest rates at historic lows we have a potential double threat.
OK. Now I see your point. I think there is a bit of a contradiction in the way you put it because you say you are willing to live with lower returns in order to reduce risk. From this point onwards, your FI allocation will not go down. Therefore, you could just buy VAB today and ride it out for 7+ years. You will eventually get your money back+interest no matter what happens in between. The return may not be fantastic but that was not the main goal to begin with. First and foremost, you are trying to make sure you won't risk your retirement plan.

On the other hand, the expectation that the price of VAB will be under pressure in the foreseeable future is not unreasonable. Maybe you should picture your cash position today as a cheap/safe way of shorting VAB?

BTW: No room in registered accounts shouldn't be a problem because you are reducing your equity exposure accordingly. Even if you just want to deploy cash available in a taxable account, you can always sell equity in the registered accounts and buy the same positions in the taxable account (i.e., freeing up funds inside the TFSA/RRSP).

8Toretirement
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Re: Historic Stock Market Levels

Post by 8Toretirement » 10 Mar 2017 10:57

gobsmack wrote:
8Toretirement wrote:Historically there has not been but with interest rates at historic lows we have a potential double threat.

BTW: No room in registered accounts shouldn't be a problem because you are reducing your equity exposure accordingly. Even if you just want to deploy cash available in a taxable account, you can always sell equity in the registered accounts and buy the same positions in the taxable account (i.e., freeing up funds inside the TFSA/RRSP).
When the government lowered the TFSA from 10000 to 5500 it hurt us, and we are not 1% ers.
We make decent cash and have high savings since we focused on debt early on. I just don't see an answer to historic low interest rates and historic equity market levels for new funds in taxable accounts. At these interest levels FI is useless in taxable accounts once you tax it back each year and adjust for risk, and I am completely unwilling to commit new funds at historic market levels. The government has really put the saver in a pickle by keeping interest rates low.

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Re: Historic Stock Market Levels

Post by BRIAN5000 » 10 Mar 2017 12:30

At these interest levels FI is useless in taxable accounts once you tax it back each year and adjust for risk, and I am completely unwilling to commit new funds at historic market levels.
Everyone is in the same boat, breaking even or eeking out a 1-3% real return is all I hope for.
“Sometimes you are going to sell early and wish you would’ve held on, other times you will hold on a
little bit longer and wish you would’ve sold early - this is just part of the game.” - Frank Zorilla via Abnormal Returns

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Re: Historic Stock Market Levels

Post by kcowan » 11 Mar 2017 12:16

ghariton wrote:[I think that you are dealing with two separate issues here.
Agreed. But it is like throwing the chains off. I am no longer tied to these stocks because I paid to get out. Now I have freedom to select a different mix going forward. The first decision is fairly easy, the second not so much.

And if they make the new tax rates effective from the date of the budget, then the math changes.
For the fun of it...Keith

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Re: Historic Stock Market Levels

Post by bolt » 16 Nov 2017 22:41

I always refer to the many older & wiser than I whom advocate that "The market can remain irrational longer than I can remain solvent", so I rebalance my riskier positions annually or more often considering market levels i'm comfortable with. :thumbsup:

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Re: Historic Stock Market Levels

Post by milton » 20 Dec 2017 16:39

8Toretirement wrote:
09 Mar 2017 13:50
I think what Bernstein is trying to project through his research is that investing is a risk, that compounds over time.
Bernstein is always a good read. Is this from his book Against the Gods: The Remarkable Story of Risk? Here's a link to an academic paper from the Journal of Finance by two Wharton School professors, Pastor and Stambaugh. It supports Bernstein's sort of contrarian position that stock market risk grows instead of lessens over time. The name of the article is "Are Stocks Really Less Volatile in the Long Run?"

http://onlinelibrary.wiley.com/doi/10.1 ... 722.x/full

Here's the abstract:
According to conventional wisdom, annualized volatility of stock returns is lower over long horizons than over short horizons, due to mean reversion induced by return predictability. In contrast, we find that stocks are substantially more volatile over long horizons from an investor's perspective. This perspective recognizes that parameters are uncertain, even with two centuries of data, and that observable predictors imperfectly deliver the conditional expected return. Mean reversion contributes strongly to reducing long-horizon variance but is more than offset by various uncertainties faced by the investor. The same uncertainties reduce desired stock allocations of long-horizon investors contemplating target-date funds.
In this article, they argue that risk grows over time because there are "unknown unknowns" out there. If you hold on to stocks for a day, or a month, you don't really have to worry about the "unknown unknowns." But the longer you hold on to stocks (we're talking decades), the more susceptible you are to both positive and negative "unknown unknowns." Or so they argue. It's an interesting idea pitting the "reversion to the mean" versus "uncertainty."

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Re: Historic Stock Market Levels

Post by SoninlawofGus » 23 Dec 2017 14:25

milton wrote:
20 Dec 2017 16:39
8Toretirement wrote:
09 Mar 2017 13:50
I think what Bernstein is trying to project through his research is that investing is a risk, that compounds over time.
Bernstein is always a good read. Is this from his book Against the Gods: The Remarkable Story of Risk? Here's a link to an academic paper from the Journal of Finance by two Wharton School professors, Pastor and Stambaugh. It supports Bernstein's sort of contrarian position that stock market risk grows instead of lessens over time. The name of the article is "Are Stocks Really Less Volatile in the Long Run?"
Peter vs. William Bernstein. I don not believe that William would support the idea that stock market risk, in general, grows over time. (Which is not to say that the current market levels aren't making me a bit nervous.)

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Re: Historic Stock Market Levels

Post by milton » 27 Dec 2017 00:49

SoninlawofGus wrote:
23 Dec 2017 14:25
Peter vs. William Bernstein. I don not believe that William would support the idea that stock market risk, in general, grows over time. (Which is not to say that the current market levels aren't making me a bit nervous.)
Right you are!--thanks for pointing out. The risk that grows over time must be what William Bernstein refers to as 'deep risk'. He advertises an ebook on the topic on his Efficient Frontier website: http://www.efficientfrontier.com/IFA/ifa3.htm

Here's the blurb on his book Deep Risk from his website:
In this third e-book, I examine the nature of risk. The major premise is that short-term volatility of financial assets, commonly measured as standard deviation, is a lousy measure of the actual long-horizon perils faced by real-world investors, who are subject to the vicissitudes of financial and military history. These risks have names -- inflation, deflation, confiscation, and devastation -- and any useful discussion of portfolio design must incorporate their probabilities, consequences, and costs of mitigation.
It looks interesting.

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SoninlawofGus
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Re: Historic Stock Market Levels

Post by SoninlawofGus » 27 Dec 2017 09:39

I have that book. It's one of a series of three very short books -- all good reads and not entirely covered in his other books. With deep risk, you're getting into things like government bond failure due to the kinds of things mentioned above. It's risk that cannot be entirely dismissed, however unlikely it may seem. Stocks tend to be on the shallower risk end of the spectrum. Much higher volatility, but holding, say, German stocks throughout that country's war and hyperflation years would have been a much better choice than bonds. Edge cases, but interesting food for thought, and arguably makes a case for even the most conservative investor keeping a percentage in equities -- there is no "risk-free" investment.

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