I am currently having trouble assessing what is really going on with sentiment over the last couple of days.
It is not crucial to the way I do the job at hand but it opens the door to an interesting line of thought that to some will seem insensitive but could be very constructive in terms of getting through the current bear market and could help with future bear markets.
The context will be for diversified portfolios.
For anyone feeling a sense of fear now at any point previously or at anytime before this bear ends, what exactly are you afraid of? Not being a wise-guy, in your fear you are assigning some probability to an outcome that is not acceptable to you.
Losing all of your money, literally going to zero, is not acceptable to anyone. Nor is it in the realm of possibility (remember, diversified portfolios). How many stocks do you own that have gone to zero? Do you even use stocks or do you use indexes?
From the peak the S&P 500 is down 24% (add in dividends if you care to). If you have a reasonably diversified portfolio and took no defensive action you are down something similar in the equity portion of your portfolio, maybe a little better maybe a little worse but close.
How low do you fear the market will go? 100% is off the table. I have yet to read anywhere that makes a compelling case for this being worse than the great depression, so that would take 80% down off the table. Earlier in the decade the market cut in half with a starting PE ratio in the mid thirties (charted above). Based on the chart the PE at the peak on this go around was in the teens. I am not a fan of PE ratios for predicting anything but at a minimum it contributes to the case for the market not cutting in half in this bear phase.
Even if it does cut in half what will happen after that? After it bottoms, regardless of the level or the date, what will happen? You know the answer because you have lived through this before it will turn up. Bear markets end with new bull markets. You know this will happen but don't know when.
When the last bear bottomed it took five years to make a new high. At some point we will look at the bottom of this bear and say it took X years to make new high.
Another dimension to the fear is "I won't have enough money when I retire." Assuming proper asset allocation (that is important) and a diversified portfolio your fate in this regard will not be determined by one bear market.
If you are 60 and you retire today you have two outcomes, you either live a long time or you do not. If you live a long time you need the portfolio to grow to keep up with inflation (assuming a prudent withdrawal rate) for a long time. If you get hit by lightning carrying your box of stuff out to the car on your last day you don't need any money but you might leave a spouse who will face the same thing; living a long time or not, same worries about inflation or not.
If you dropped all 50% in the last bear market what have you done about it since? Save more? Take out less (if you are retired)? Seek out defensive a strategy? Something else? In all likelihood you did something (even if not in the portfolio) that otherwise mitigates at least some of the setback of cutting in half a few years ago.
The reason people run out of money (again assuming a diversified portfolio and not total mismanagement of a bear market like selling out at the low and buying back after a 20% lift) is they spend too much money or manage debt poorly one way or another (the two are obviously related). If the portfolio drops 25% and at the same time you take out 10% you're going to have a problem. That magic four point whatever percent withdrawal rate is such that it can withstand big drops. Bigger withdrawals; not so much.
As kind of a repeat theme, the numbers work a certain way. One way to mitigate the fear of not having enough; don't bet you can outsmart the numbers.
6 comments:
Hey Roger.
I'm conflicted. You're obviously right about the fear (boy, I'm afraid,) but some of the greatest investors might characterize this as a time when fortunes could be made. Blood in the streets, being greedy when others are panicking, and all that.
I'm still a little short of the kind of bucks that Buffett just ponied up for GS, but I've got a few bingo bucks to risk and I don't live as close to Vegas as you do. I know my question is contrary to how you manage money, but could I ask if you see opportunity for a small blood in the streets kind of bet?
Thanks, if you can.
The 'world economy' is said to be shrinking back some. The environment is changing drastically, and there will be more N.O.'s and Houstons being wrecked. The Eastern Seaboard is vulnerable.
And now I am newly reading Matt Simmons words. Oh boy.
The New York Stock Exchange was created when the USA was young and growing. The USA is still rich and strong, but it is also bloated with debt, and the debt problems almost lead to a meltdown a few days ago. America's wealth has drained quickly and drastically away to the Chinese and the Arabs in only a few years. Twenty five thousand dollars a night for a hotel room???
I believe this is a Bear that will end someday, but perhaps not with a Bull.
Enough for now, I can be really long winded, hey? Roger, your the best! I check this blog every day.
Cheers,
Melissa
anon,
the short asnwer is yes there are things right here right now that if bot will make folks a lot of money.
picking a stock that is down 50% (assuming it survives) is far from the dumbest thing you could do however another 20% drop in that name first is also a reasonable expectation so you have to know thyself.
Melissa, you are raising the point (I think) of systemic versus cyclical. If this is systemic then we need to invest more in countries where it just cyclical.
Roger, one of your best posts!
It's just a matter of how wealth is viewed. Once I read that the British view wealth in terms of how much a person's assets earn. Americans are chiefly concerned with how much their assets are worth.
A divsersified portfolio's income stream has been relatively unaffected by the stock market downturn. Dividend yields have increased and for the most part bond interest payments have been paid uninterrupted.
Personally, this gives me great comfort.
Anon in C.G.
thank you CG
I don't think in terms of "not enough when I retire", as retirement age is a function of cash flow needs vs. portfolio horsepower. I look at it as "at what age can I retire comfortably?" an from that angle, my number has bumped up a few years this year. Not unreasonable given the market.
My fears fall roughly into two buckets. First is that we've got a way to go yet (housing market not bottomed, and the tailwinds that drove the last two bubbles aren't going to be there this time). 80% seems unlikely I agree, but down 40-50% doesn't seem out of reach to me. The prospect of adding 3 more years to my retirement age is not one I enjoy.
Second fear is that, as a novice investor, I will fail to get it right. I haven't found anyone I trust more than myself to do asset allocation, but I'm definitely still learning. I watch friends hand their savings over to mutual funds or institutional money managers and it scares the heck out of me. I came into most of my savings by selling a house at the peak, put a big chunk of that (say half) into the market in one way or another, and that's down 20%. I went in right at the peak, so I am a little irked for not seeing this coming.
Thanks for the Zen koan post, very helpful!
Post a Comment