Barron's had an article about portfolio issues that potentially confront retirees that was a good read.Included in the article was this table that gives an idea of what it takes to recover from declines of varying magnitudes.
Understanding the numbers is very important but the article overlooked one aspect of this that I have tried to address before which is the snapback.
Taking a volatile example, the iShares Emerging Market Fund (EEM) hit an intra-day high on July 23 at $144.10. At its low, on Aug 16 it went down to $111.41. It closed Friday at $137.17. At its worst it was down 22%. At the close Friday it was down 4.8%. Someone sold at that low tick in a panic.
This adds a layer of human behavior to the Barron's piece. Whatever is going on right now in the market, I doubt it is panic. Now that the panic is over, if this summer taught you that you have too much in emerging markets, for example, now would be the time to lighten up, now that the panic is over. Someone will add 1+1 to get eleven and think I am saying to sell emerging markets. I am not this is about personal tolerances for volatility.
The thing to keep in mind is that most declines are fast declines, the type that are better not to sell. I'll call 22% down in less than a month a fast decline.
The message here don't panic, don't make extreme moves all at once and just stick to whatever your long term defensive strategy is.
The other big point in the article was about what to do if the market takes a big hit right before or right after you plan to retire.
Two ideas that may not be popular, that were touched on in the article that I agree with; keep working and take less money out.
Keep working doesn't have to be stay in the current job you have it can mean find something that can relieve some of the burden off of your portfolio. If you need and can safely afford $5000 per month in retirement but can bring in $1000-$1500 doing something part time that you enjoy, hello! If this idea appeals to you it probably requires a couple of years of planning.
Take less money out is really about living within, or better yet, below your means. This is a very difficult concept. It touches nerves. If you were making $100,000 when you retired but have only saved $1 million you are not going to be able to live a $100,000 lifestyle. A $60,000 lifestyle is probably beyond your reach as well. You can see where that would touch a nerve but that is the cold hard truth.
8 comments:
Thanks for the common sense Roger,
enjoyed reading your thoughts.
Here is a link to common sense
also...http://tinyurl.com/2lmre8
Roger,
A timely commentary for the rather uncertain times we are in.
I had a stock or two that was down 23% recently but that was part of the fast decline which you mention. I knew they were solid stocks, of very high quality, and with excellent EPS. The rebound was just as sharp and the 23% down has turned into positive territory. My point is simple: be wary of what you read. Not having read the Barron's article, I wonder. Does the writer caution the reader that the numbers do not necessarily apply to fast declines?
John
Someone left the link to the Accrued Interest post earlier; it is a good read; agreed.
John they did not address snapbacks at all which was the impetus for the post.
I agree with your comments about snap backs and avoiding panic. However, if your readers took another bit of your advice and sold when EEM went below it's 200 MA (which it did for at least a week), they would have been out of EEM and would have missed the snap back. This is not to knock either piece of advice, but to recognize that there is a problem in circumstances like these.
On another point, Seeking Alpha had a piece yesterday morning about a new ETF that used a private equity fund index as a bogey. I thought to myself that this must mean a top for the PE people, since opening up these sort of areas to "the little people." Five minutes later, I had Gretchen Morgenson's piece on the PE crowd's unethical behavior to it's investors. Her source was the intellectual godfather of PE, Michael Jensen. Interesting read.
http://select.nytimes.com/2007/09/16/business/16gret.html
Norm G.
Norman I have never applied the 200 DMA as a catalyst for an individual holding nor have I advised anyone else do so.
I have said I use the 200 DMA of the broad market as a triggerpoint for defensive action which lately has been more about adding SDS than selling stock, although I did sell SBUX a few weeks ago.
I don't mean to be rude but i have been consistent with this and I believe quite clear.
Interesting retirement analysis, I have used the $100k/$1M analysis in my mind and think its important to add some caveats ( I do know the the annual 4% drawdown guideline) - a $100k salaary actually only puts about $55k in your jeans (Canadian number, scary to Americans I'm sure, but hey, free health care) and if the $1M has a cost base of $1M, then you are in a position of etremely low annual taxes on interest and dividends. Maybe the lifestyle won't be so bad after all...
especially if you live somewhere in BC; amazing part of the world
Roger: Sorry if I misinterpreted your advice, which I continue to appreciate.
Norm
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