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This comes up all the time. No one is immune from the question because the future is unknown.
HOWEVER, if we consider what the past has shown, there's a decent defensive position to take where you don't have to sell it all and hide under your blankets.
Some Background Perspective:
The biggest crashes in the U.S. have taken approximately 3 to 4 years to turn around. Average might be somewhere in the 2 to 3 year range. These are not exact, merely approximates. The market has always come back...eventually. It takes time, sometimes more time than anticipated, but markets have eventually turned around for every crash. Note I'm not considering foreign markets like Japan or anywhere else.
With That Knowledge:
Assuming future crashes will also eventually turn around, it's about buying time and safety. Arm yourself against the panic that can arise by putting yourself in a good position to ride out a crash.
1. Make sure you have an emergency fund and make sure it's liquid. How much? Variable. For some people that will be $1K - $2K. For others $3K to $5K. And for others $10K or even $15K. Those just starting out generally won't need as much in their emergency fund. Those close to retirement may want or need $10k+. I don't know what the exact right amount is, but everyone should have an emergency fund for life's Murphy's Law times. (examples: an appliance suddenly dies and you need to replace it, a family member is suddenly ill, you get in an accident, or there's a death in your family and you need to travel ASAP).
2. Have somewhere between 6 months and 5 years in low or lower risk investments. 6 months or so if you're young and many years away from retiring, 2 to 3 years if you're near retirement, 4 to 5 years if you're in retirement. Could be a CD ladder. Could be bonds or bond funds, could be treasuries, could be a combo of different investments. Overall this should be money that won't go poof because of a crash in the markets. Feel like that's too many years or too much money in safe or safer investments? No problem. Pick an amount you want to keep safe, that will keep you from selling your equities in a down market and that you can withdraw as needed. The above are guidelines I've seen in my own research, there's no one exact right answer, but in general having a buffer of some kind, at least a year, is a good idea, especially for those getting closer to or entering retirement.
3. For monies you won't need for 4 or 5+ years out let your investments rock 'n roll. Pick a decent allocation, something 50% or more, whatever you're comfortable with. Be diversified.
4. Specifically for monies you do not expect to touch until long after retirement (could be 15 to 30 years after retirement), take the most risk, whatever maximum risk you can handle. For some people that might be 70% equities. For others it might be 80% or higher. This is where time is on your side to recover from any corrections and crashes.
5. Re-allocate into the buckets each year, so you maintain to the levels you've decided for each. See how it goes, adjust as needed.
6. If you have money to invest, then invest it! Decide if it's going into a shorter term or longer term bucket (see #2 - #4 above). Doesn't matter what the market is doing, it only matters that you are in the market and you are appropriately diversified and allocated.
Note: These techniques are already being used by some C-D members; this is not something new. For those who are feeling unsure and possibly nervous or wanting to sell it all and go hide, here's at least a more moderate approach to consider. You don't have to be in retirement to apply this strategy to your own portfolio.
Last edited by lottamoxie; 06-19-2017 at 12:25 PM..
There is a lot of press that we are at the cusp of a correction and it is long overdue, with this knowledge is it wise to invest now or just wait it out?
There is a lot of press that we are at the cusp of a correction and it is long overdue, with this knowledge is it wise to invest now or just wait it out?
(Please no one post the overused and over-posted Peter Lynch quote. It's already posted dozens of times.).
There's no reason not to invest in the market, the things to determine first are, "do I have my emergency fund and shorter term needs covered?" and "can I commit to not selling if I intend these investments for the longer term?"
No one in the world can tell you exactly when markets will crash or correct or by how much or on what day. We only know it will happen because markets go in cycles and that's just the way it is, and the timing of the cycles is not exact.
(If you're a day trader or swing trader or are timing the market with some of your monies that's different).
Last edited by lottamoxie; 06-19-2017 at 12:14 PM..
just sit in a defensive portfolio for a while if you are uncomfortable . you can profit up or down . there are a few of them out there . just about any of them should reduce the draw down from a drop or even be positive . personally i would not go to cash instruments with the majority of my money . i would want to be able to still profit up or down .
it is when you make these 100% switches that you get burned when you guess wrong .
when you think it is safe to stick your toe back in the water then gradually sell off the defensive model and switch back to your norm .
i did that when i was uncomfortable with the up coming election and spent about 6 months in a more defensive model ..
Last edited by mathjak107; 06-19-2017 at 01:14 PM..
If you are drawing down due to RMD, and most of your investments are in equities, would you sell to keep the profits and preserve capital?
Long question, but I'm facing that right now. IRA and savings in equities. Many are up over 50%. I'd hate to lose those profits if there is a big drop.
But, the market continues to go up each day. Should one take the 50%, 70%, 100% profits. How much further can tech rise? Maybe better to take profits even if losing a few percentages as the market keeps going up.
I watched my oil investments drop and lost all my profits plus capital.
studies show even if you choose to spend down from 100% equities you would have always done just fine .
the higher gains in the up markets cushion the extra spending in the down markets .
we all think it is some horrible thing if we spend equities when they are down but we forget we would not even be at the level we are at without those equities .
it is a mental thing we all have about spending from high equity positions not a mathematical one .
50/50 did a fraction better at 30-35 years but 100% equities did better going out on longer retirements . when we say better we are talking about a percent or 2 in success rate.
all in all it is a comfort judgement call , not a retirement saving one so pick a general allocation you are happy with and just stay put .
personally i find 45-50% equities good for me . i just run 3 different optimized portfolio's based on the time frame i will need the money to live on which act as buckets
likely no mathematical advantage but it is just easier to work with for us . the whole thing taken as a whole varies between 45-50% equities .
more money has been lost or left on the table in preparation for the next downturn then has actually been lost in any down turn .
Last edited by mathjak107; 06-20-2017 at 03:20 AM..
One thing is that the US has not experienced a prolonged recession in decades or the citizens have had to endure long periods of sacrifice such as the great depression thru the 1940's when people had to ration goods & foods. The 1970's had a spell but from then on other than potential troughs have been avoided between Fed QE policies and Congressional bail out's paid by taxpayers most can easily say that equity markets "always come back'. There could come a day when bail out's etc. will not be enough that true growth will be needed to reflect equity prices.
anything can happen but that does not mean we should plan around the" what if " scenarios we can envision in our heads.
as long as corporate revenues and profits grow there is no reason stock prices shouldn't .
The question is how much do you pay for those corporate revs and profits? Are the equity prices already reflecting the rosiest of scenarios....I'm not saying not to invest, I'm just saying to mindful of what one is paying for and that manipulation may not continue to save the equity markets.
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