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Weekend reading: Remembering bear markets

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What caught my eye this week.

Every year the global bull market in equities and bonds continues, it gets harder to convince people that investing isn’t always so breezy.

Sure we had that setback towards the end of 2018. If you squint a bit, it could even be described as a crash. But the whole thing was over in a couple of months!

I read comments in the aftermath of that wobble from younger investors who were pleased they hadn’t sold out in a panic.

Good for them, genuinely.

But as trials go, the 2018 correction was a sprint, not a marathon.

Crash course

A proper prolonged crash will come again. That isn’t a reason not to invest – bear markets are part and parcel of enjoying the gains from shares – but it is a reason to make sure your portfolio is robust to all reasonable scenarios.

This new video created by Robin Powell for financial planner RockWealth provides a good primer for those who don’t know – or have forgotten – what a bear market looks like:

(If you’re reading on email and can’t see the video, please visit the post on Monevator.)

Even I have to remind myself that in the years immediately after I began this website – in the depths of the 2007 to 2009 slump – I was accused of recklessness for suggesting readers continue to put money into shares.

If that’s hard to believe now, think of all those who say today they would never own bonds or REITs or gold – preferring to go all-in on equities.

Sure the expected return from bonds looks lousy (as it has for the past few years).

But if shares lose 30% in a year then you’ll soon hear from others who were delighted they had some money in other assets.

As John Lim – reflecting on the 30-year bear market in Japan – wrote for Humble Dollar this week:

If the Japanese experience teaches us anything, it’s that stocks can be incredibly risky.

A Japanese investor who had some portion of his or her holdings in bonds fared far better than one fully invested in stocks.

If nothing else, it would have allowed him or her to sleep better at night.

Here’s a few more miserable reminders to vaccinate yourself against hubris:

Don’t be too frightened to invest!

But don’t be too invested to avoid getting frightened…

Have a great weekend.

From Monevator

Note: In light of useful reader feedback, The Accumulator has updated and republished Part 3 of his series on optimal use of your tax shelters. If you’re following closely you may want to re-read it.

How to choose an SWR for your ISA and your pension to hit Financial Independence fast – Monevator

From the archive-ator: The Monevator millionaire calculator – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

Energy bills to fall for about 15m households as price cap lowered – Guardian

Brits were ‘significantly’ less satisfied with life last year, ONS reveals – ThisIsMoney

House prices rising at fastest rate in two years, says Halifax – Independent

Spouses to receive an extra £20,000 if partners die without a will [Search result]FT

John Lewis and Waitrose may be forced to ‘close stores and cut jobs’ – ThisIsMoney

[Click to enlarge the sell-off!]

Why coffee is caught up in the coronavirus sell-off [Useful video at bottom too; search result]FT

Products and services

Are you ready to buy and own an electric car? [Podcast]ThisIsMoney

Amazon Choice label is being ‘gamed to promote poor products’ – Guardian

Where first-time buyers hunt for homes: London, Luton, Reading, and Wolverhampton – ThisIsMoney

RateSetter will pay you £20 [and me a cash bonus] within 30 days of your first £10 deposit – RateSetter

Equity release: What are the options for older people? – Guardian

You can now part-own a Ferrari via a tokenised blockchain – Bloomberg via MSN

Direct indexing to kill ETFs? Not so fast – ETF.com

Comment and opinion

The case for FIRR: Financial Independence, Redistribute Retirement – Humble Dollar

Why Mr Motivator gave up on pensions and lives like there’s no tomorrow – ThisIsMoney

Where are we in the property cycle? [Search result]FT

Movie déjà vu: Coronavirus – Investing Caffeine

‘The biggest lie in personal finance’ [On FIRE…lights fuse, stands back]Of Dollars and Data

“For God’s sake, you’re scaring people to death”A Teachable Moment

Now never feels like the right time to invest – The Retirement Field Guide

Trojan horse – Indeedably

Meet America’s ‘Elite With No Savings’ – Summation [hat tip Abnormal Returns]

Graphic of the week: Extra!

[Click to enlarge]

800 years of falling interest rates [PDF]Bank of England

Naughty corner: Active antics

The man who made a killing on the 1929 crash – Novel Investor

Personal Assets Trust: Bear turned up to 11 – IT Investor

Charles D.Ellis: The (easily misunderstood) Yale Model – Institutional Investor

Can Orsted by the first green energy supermajor? [Search result]FT

Why John Kingham sold Aggreko in January – UK Value Investor

Low volatility combined with momentum factor portfolios [Geeky]Alpha Architect

Tesla mini special

Is Tesla’s surge the greatest short squeeze of all-time? – The Reformed Broker

Tesla is a stock-picking nightmare – or is it a dream? – Bloomberg via Yahoo Finance

More: Why is shorting stocks so difficult? – Pragmatic Capitalism

Tesla is nuts. When’s the crash? [Search result]FT

Politics

Mike Pence hints UK’s Huawei decision could jeopardise trade talks – Guardian

Kindle book bargains

Bitcoin Billionaires: A True Story of Genius, Betrayal, and Redemption by Ben Mezrich – £0.99 on Kindle

Zero to One: Notes on Start Ups, or How to Build the Future by Peter Thiel & Blake Masters – £1.99 on Kindle

Walden on Wheels: On the Open Road from Debt to Freedom by Ken Ilgiunsd – £0.99 on Kindle

Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth by T. Harv Eker – £0.99 on Kindle

Off our beat

How Google got its employees to eat their vegetables – One Zero / Medium

Antarctica registers hottest temperature ever – CNBC

Lex in depth: the $900bn cost of ‘stranded energy assets’ [Search result]FT

Again and again and again – Seth Godin

Modern Arks: Designs for the new climate reality [Gallery]Guardian

And finally…

“The fight is won or lost,’ says Muhammad Ali, ‘far away from witnesses – behind the lines, in the gym, and out there on the road, well before I dance under the lights.”
– James Kerr, Legacy

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{ 63 comments… add one }
  • 1 Brod February 8, 2020, 9:04 am

    @TI – a most excellent reminder! Over the last 4/5 months I’ve gone from 100% equities to 70/20/10 equities/bonds/gold as as drawdown nears. I’ve sold my REITS too as they don’t seem to give any diversity benefits and I think the outperformance has been arbitraged away.

    Good video but I note that the returns seem nominal. You have to add in the effect of inflation too… And if you’re in drawdown… very nasty.

    I began my investing career in 1999 with a lump sum into an Aberdeen tech fund. That didn’t go too well. I suspect I’m still underwater on that. I then just ignored investing for 5 or 6 years and was pleasantly surprised when I looked again.

  • 2 Simon T February 8, 2020, 9:52 am

    Thank you for the google food link, fascinating read

  • 3 Far_wide February 8, 2020, 9:53 am

    The FIRE article really is a poor one. “Look here, a bunch of graphs that show average spending and how unaffordable life is”. FIRE is not about being average, that’s kind of the whole point.
    This article is just as clickbaity as the snake-oil salesmen articles it professes to be railing against IMV.
    Signed – someone who FIRE’d in his thirties, didn’t win the lottery, not in a tech startup, didn’t work for a FAANG, don’t use a 4% SWR, not in the bottom 10% of earners or in the top, don’t live in a trailer, do eat lentils but also everything else.

  • 4 Far_wide February 8, 2020, 10:00 am

    Ref: the above, with apologies for going on about FIRE. As much as I like it, been done to death recently I think!

  • 5 ChesterDog February 8, 2020, 10:16 am

    Typo: In “Crash Course”, first paragraph, last line.

  • 6 A Betta Investor February 8, 2020, 10:33 am

    Love the BoE graph on interest rates, but I am not sure what the implications are. Will negative rates become the norm or will there be a massive reversion?

    If it means that capital has become progressively cheaper over time then there is no shortage of capital so we can invest in anything and everything with no fear? Or does it mean that conditions will change and capital will become rare and more expensive?

  • 7 Kerry Balenthiran February 8, 2020, 11:29 am

    The FT article is very interesting (and free) but as the comments section points out, it doesn’t answer the question of where we are in the property cycle. One comment says we’re in the middle of the 18 year property cycles. Most people dismiss such things but the RICS website refers to the 18 year property cycle which has been shown to exist for hundreds of years. Fred Harrison’s book Boom Bust and the Banking Depression is an excellent read and it was published before the recent financial crisis. According to Harrison the next peak of the property cycle will occur in 2025 so we’re about to hit the blow off phase after having just been through the mid cycle wobble.

    Regarding bull/bear markets, short sharp 10-20% corrections are an annual occurrence during a secular bull market and it’s not uncommon to have sideways markets lasting a couple of years as we’ve just has in 2017/18. But the gut wrenching 30-50% crashes that take years to recover happen during secular bear markets like the 30s, 70s or 00s. There’s a17/18 year stock market cycle too, so it’s important to know roughly where we are in that.

    Of course the most important cycle is where we are in our own personal lifecycle, but having an awareness of these other cycles is important to factor into decision making. I’m not saying trade these cycles, just be aware of them so you don’t spend years going nowhere like the lady in the FT article.

    PS – none of my friends have been interested in equities in the last 10 years. Now they are dipping their toes into the market. There is still too much fear of a crash imho, although maybe not with youngsters. Once it’s the subject of every office/dinner party conversation then we’re in a bubble and in trouble.

    PPS – I’m late to finding Monevator but I love it. Thanks for the great content.

  • 8 Vanguardfan February 8, 2020, 11:46 am

    Happy weekend everyone.
    @brod, my first investments were lump sums in 1999 and 2000….that put me off for a while! Finally realised regular investment was the way to go and restarted investing around 2005/6- but those first lump sums hadn’t recovered their value 10 years later…
    I’m still pretty cautious. 50% equities. Still don’t really know how I’ll feel when the next big crash happens. We’ve definitely got complacent I think.

  • 9 Adam February 8, 2020, 12:33 pm

    I am a cautious diversified investor too. But think the environment has changed due to near zero interest rates. In 2008 you could put you money in the bank and beat inflation. Not anymore. To have a big sell off investors would need to put large amounts in cash below inflation. Not sure they’d do that now. I think instead they’d switch to defensive stocks and higher grade bonds. So you might get mini sell offs but I’d be surprised by a 30% correction like we had in the past.

  • 10 Vanguardfan February 8, 2020, 12:47 pm

    I think you should prepare to be surprised.
    Investors can go to gold, or to safe haven bonds (yields can go negative).
    All we need is some kind of black swan to domino through the markets, anything that spooks traders and feels like a game changer. Even the coronavirus could do it, if China grinds to a halt. Of course, it may not. But that’s the nature of these things – they happen unpredictably and markets panic.

  • 11 Al Cam February 8, 2020, 1:26 pm

    @A Betta Investor:
    The full (PDF) BoE report is available at the link provided.
    It is an interesting (& rather long) read that includes a lot of details and commentary.
    The report also has a conclusions section that may (or may not) help?

  • 12 Buzzz February 8, 2020, 2:16 pm

    As a separate thought, is it time to discuss crypto again?

    While virtually everything is down from their all time highs (ETH is $225 vs $1,433 in Jan 2018). The are some interesting developments in Decentralized Finance (DeFi).

    Over $1 Billion worth of crypto is locked into DeFi contracts https://defipulse.com/

    One interesting DeFi application is DAI. This is a crypto back stable coin that tries to match 1 USD (it has been +/- 5c over last 3 months).

    You can currently earn 8.75% pa on this crypto token that tracks the USD but this fluctuates to try and manage supply and demand:
    DATE ACTIVATED RATE
    February 4th 2020 8.75%
    January 26th 2020 7.75%
    January 8th 2020 6.00%
    December 6th 2019 4.00%
    November 18th 2019 2.00%

    https://ethereumprice.org/guides/article/dai-savings-rate-explained/

    I should note that I’m long on ETH (and under water) and I have some play DAI earning interest. Both have risks attached.

  • 13 Matthew February 8, 2020, 3:56 pm

    I think japan teaches more about the importance of diversifying geographically than diversifying into bonds, whats the longest its taken a global equities bear market to recover? You could say the whole world could become Japan but all the time we have emerging economies in the world, can we really say that?

    I see bonds as a good thing to have shortly before/in drawdown especially if youre not planning on buying an annuity, but while we’re very much working our risk tolerance can be higher, and if youre insecure in drawdown choose an annuity instead – a better one hopefully from having more risk earlier on. Having bonds during the earlier stages of accumulation is more about maintaining discipline for people who dont truely believe that markets recover

  • 14 Jaygti February 8, 2020, 6:50 pm
  • 15 AncientI February 8, 2020, 8:37 pm

    Where we are in the property cycle is irrelevant because the supply just isnt there. While they are building millions of new flats in london no-one wants them as they are leasehold and sitting on the other end of that lease is a malevolent freeholder who has no interest in maintaining the premises and just wants to bleed you dry.

    I can see the demand and prices of freeholds eventually skyrocketing as the government shows no signs of tackling the leasehold injustice.

  • 16 The Borderer February 9, 2020, 2:46 am

    Like almost all things in life, your perspective and attitude depends upon where you are in your FIRE journey.

    Now I am in de-accumulation, my focus is on safety. So is the long forecast crash coming; is the coronovirus scare turn into a global pandemic; has Trump gone crazy?

    Too many what ifs for my timid soul. Come Monday, getting out of equities.

  • 17 Marco February 9, 2020, 10:21 am

    This is my personal thought:
    – need to take risk – low
    – willingness to take risk – high
    – ability to take risk – high
    – excess knowledge of short term market moves – zero
    – confidence that markets will be much higher in 20 years upwards (all world) – very high

    So I’ll just stay 100% equities and take what comes – apart from my 50k on premium bonds to deploy in event of 30 – 50% correction

    PS intelligence and logic do not help predict crashes. If lots of intelligent monevator readers think a crash is imminent then the opposite is just as likely

  • 18 Adam February 9, 2020, 10:59 am

    @Marco, like your logic there, which I agree, except 50k in bonds, means you don’t have 100% equity. Also many keep 3 mths emergency cash as a min.

  • 19 Matthew February 9, 2020, 11:33 am

    Re emergency cash, really depends what you consider an emergency, what you can live without, if you have access to 0%cards instead (kicking the can down the road with nalance transfers), and if you can accept selling investments at a loss instead, bearing in mind the opportunity cost of cash

    Biggest one I can imagine is having to pay for a funeral, I could live without my car or boiler or shower

  • 20 AC February 9, 2020, 12:44 pm

    Just to add (as most may be aware) that equity beta varies across different equity sectors.

    A broad basket of utilities and gold mining stocks with lowly levered balance sheets can add ballast to a portfolio when things turn south.

  • 21 Marked February 9, 2020, 5:10 pm

    Shame news feeds about pension raids and mansion tax were a day after the list of articles was compiled.

    So Mr Javid thinks levelling the income tax relief at 20% is a good idea huh? Yeah, apart from adding more complexity to an insanely complex system already how do they think this is a good idea? Some people in comments elsewhere think that taxes rich, but it depends where you think rich is. That is after £110k , known as the threshold income, this becomes ugly! So does it affect “the rich”? Not in my interpretation, more the middle or higher middle incomes.

    I wonder if this will move people to go to ISA’s more seriously? After all by just getting basic rate I dont see the logic of pensions unless the personal allowance becomes a lot higher. That is this becomes a total deferral of tax above PA opposed to a benefit. You may as well throw it in ISA’s and have the extra flexibility.

    Thoughts?

  • 22 Marked February 9, 2020, 5:14 pm

    Oh of course the pensions raid at 20% could be fake news by the govt, where they then replace it with a universal 30% that helps basic rate tax payers, and wont steer higher earners away from pensions too much.

    That is load up the Tory newspapers with horrid news then make it not as bad as projected so there is a sigh of relief by higher rate pension contributors despite it still being bad.

  • 23 Marked February 9, 2020, 5:37 pm

    @Kerry

    As a hobbyist property investor in the south east I’ve been interested in house prices and their cycle probably since the age of 8 and seen it all from buying a house in 1990 just at the start of that recession.

    One thing that I believe is about these cycles as well as the older ideas put upon them (such as in my day it was meant to be a mortgage is 3 times your salary or 2.5 times joint) is the current regional constraints. So demand, at least in the SE, is huge and supply less so. There are a number of big changes in the social fabric of this country which makes house prices very different which a number of articles don’t square away. The big ones off the top of my head are

    Expectations of dual income.
    Back in the 70’s a couple buying a house typically had one income generator. That has changed with both earning incomes and thankfully governments pushing for salary parity between the sexes. This has a big difference against traditional measures pre-2000.

    The divorcees

    I see a number of single income buyers that have been through marriage and have either the cash or a hefty deposit to purchase. Indeed I just built a row of townhouses and 60% was this demographic.

    The leveller to bring back to historical calculations may well be the BOE forced Mortgage review from 2014 limiting the number of big mortgages banks can give.

    I guess what Im trying to say is the property cycle of 18 years or so has a huge amount of changing factors that makes it hard to deduce. Just look at the bay area in California. I remember my boss who lived in Cupertino telling me their house went up 45% in 1 year in 2012 and it’s all because of the IPO’s and employees getting huge windfalls in shares. You can’t 2nd guess stuff like that, but you’d think the Bay Area will eventually be in for a big nose dive. Hasn’t happened yet … It will eventually but the old property cycles when most of the bay area was fruit trees don’t apply!!!

  • 24 Faustus February 9, 2020, 6:07 pm

    Indeed, Javid’s proposed slashing of the tax relief on pension contributions comes just in time to wreak havoc on TA’s carefully worked through calculations in his ongoing ISA vs Pension series!

    Will probably make LISAs (unless, of course, this wretched Government decides to demolish those as well) look more attractive vis-a-vis pensions for those who are likely to be taxpayers in retirement.

  • 25 ZXSpectrum48k February 9, 2020, 6:16 pm

    In the 2010-15 government, Osborne got very close to replacing pensions with a pension ISA with 25% tax relief. He was dissuaded at the last minute by backbenchers who feared losing their seats in 2015.

    Pensions are costing well over £40bn in lost revenue now to the Exchequer (vs. < £5bn for ISAs). It's too tempting a target. It's only ever been a question of finding a government that has enough of a majority to not be bothered about the Torygraph/Daily Mail backlash.

  • 26 David February 9, 2020, 10:00 pm

    Based on my experience of trying to explain the concept of tax relief on pension contributions to colleagues, I should think replacing the current system with a well marketed “free money” flat rate version will be a vote winner. Even among many higher rate taxpayers who won’t appreciate what’s being taken away because they never understood it in the first place.

  • 27 tom_grlla February 9, 2020, 11:18 pm

    Thanks – I’d just been thinking about this recently. I was wondering how many FIRE people had started in 2009 or later, providing the possibility of ‘age bias’.

    I don’t know the best way of getting a sense of what it was like investing in 2008, but hearing some people’s reports of the fear they felt when they bravely bought something ‘super cheap’ only to see it keep going down was fascinating – I don’t know if TI can shed more on this.

    Separately, the Coronavirus has also been a good reminder of ‘unknown unknowns’, and the pointlessness of professional forecasts of the year ahead.

  • 28 Matthew February 9, 2020, 11:34 pm

    @marked – even a basic rate taxpayer’s pension beats (a regular) isa after the personal allowance and tax free lump sum, and by putting money into pension it’s protected from means testing and bankruptcy
    Although it doesnt matter whether you apply your tax uplift now or later vs isa, apart from the fact you probably cant transfer between 2 different wrappers in specie (youll have to sell and be out of the market briefly so perhaps best done earlier rather than later)

    Although an isa is of course much more liquid. If you dont plan on drawing a pension before 60 i suggest using a lifetime isa first, then at 60 to pension as much of it as you can, and recycle as much lump sum as hmrc will let you get away with (no more than 7500 a year i believe)

  • 29 The Investor February 10, 2020, 10:47 am

    @tom_grlla: Morning! You write:

    hearing some people’s reports of the fear they felt when they bravely bought something ‘super cheap’ only to see it keep going down was fascinating – I don’t know if TI can shed more on this.

    Well there’s quite a bit on the site from those times, buried in the depths. 🙂 There’s the 2008 article I link to above, which begins:

    I am not a professional trader. I’m a private investor, like most of my readers.

    Why then am I buying in a bear market?

    After all, as private investors our investing directly affects our quality of life.

    We can spend spare money on shares, or instead we can go on holiday or buy a new TV.

    There’s no money made just by playing the game for us, unlike for a salaried fund manager.

    Yet despite not being paid to do so, this morning I purchased shares in a FTSE 100 ETF when the market was at 5360.

    As I type this post, it looks a brilliant move – the market has moved 300 points higher. But by tonight it could seem folly if the market crashes lower.

    How are you supposed to invest at times like these?

    My approach at all times is to be ‘fearfully greedy’.

    The market kept falling for a year after that one, including passing through the failure of Lehman Brothers / merger of HBOS/Lloyds ‘heart attack’ moment when I couldn’t even log into my accounts (overwhelmed by demand). Scary stuff at the time.

    You might like this too, from February 2009, which begins:

    I accept it’s normal to feel frustrated, angry, or even downright stupid when you lose money on your investments.

    But what about guilt?

    My portfolio’s fall from its peak value in summer 2007 to a low in October 2008 represents a big loss for a 30-something private investor like me: at least a couple of years of after-tax income in cash terms.

    More importantly, the losses meant I had fewer options in October 2008 than the year before.

    https://monevator.com/coping-with-the-guilt-of-losing-money/

    Basically in early 2009 I felt, vaguely, on a bad day — and it’s *very* hard to explain now — like a working-class chancer who’d overplayed his hand at a ‘rich person’s game’ and should have stuck to saving into cash and paying off my mortgage like my dad.

    My net worth had pretty much halved peak-to-trough, and it was money that was very hard won (c. a 50% savings rate on almost every year as a then less than higher-rate tax payer salary) that could have bought me the flat (before crash!) that I was initially saving for outright.

    I didn’t lose it and that second post is full of tips and reflections, but it was an experience for sure.

    The next one will be different and still bad, for different reasons (e.g. I’m pretty much FI now by my definition but I wouldn’t feel that way if my portfolio halved, whatever the maths / long run stats said!)

  • 30 Aidan Williams February 10, 2020, 11:49 am

    Just semi-skimmed that BoE article (boy is it long)…and thinking maybe now isn’t such a bad time to buy bonds after all? Or at least some gold….

    “very low real rates can be expected to become a permanent and protracted monetary policy problem”

  • 31 The Austrian February 10, 2020, 12:59 pm

    A strategy for dealing with losses is so important. Many people striving for FI, or even just a decent pension pot, are all-in passive equities and that is so dangerous. Diversification across asset types is key. We are in an extraordinary economic experiment, with ZIRP and NIRP across developed economies and the slightest change in central banks’ wording on interest rates swinging markets. The next serious fall in equity markets may well not look like 2008, but like the Wall Street Crash or Japan in the 80s – ‘bath shaped’ not V shaped, with generation-long capital loss. Much of the rise in equities is purely speculative, after a decade of super-cheap borrowing. If uncertainty on home loans caused 2008, where ultimately nearly everyone did in fact carry on paying their mortgage, what will happen when the main driver of corporate earnings and share price increases – the cheapest borrowing in history – stops and reverses?

  • 32 Matthew February 10, 2020, 2:16 pm

    @austrian – i think a good strategy for dealing with losses is to allow them to happen and ride them out, losses are the price of gains, so keeping losses down just means watering down your experience. Fear and speculation are always there but in the long term companies will pay dividends, and ride inflation, and central banks try to preserve stability, they wont throw up interest rates lightly without reason (and without much government interference its not likely)

    Risk is part of life, for no risk by all means pay down mortgage/buy annuity

  • 33 Brod February 10, 2020, 2:22 pm

    @tom_grlla – Yeah, it was nasty. The media full of “end of capitalism” stories. And there were some genuinely scary moments – Northern Rock, Halifax/Lloyds, Lehmans…

    I was lucky. By happenstance I was switching SIPP providers and out of the market when the fall began. From memory, it still took me over a year after the bottom to dare to buy again but ultimately I got about a 25% bonus on my units when I finally screwed up my courage. The market was well off the bottom, which usefully provided me with a lesson that I can’t time the market. Which long term has been pretty valuable.

    Like The Austrian says, it was a brief V-shaped market recession. No mass unemployment so saved from widespread home repossessions. The effects, though, are still warping the markets. My prediction, for what it’s worth (not a lot!), is best case we’re going to have a managed long, slow grind of low returns as QE is reversed.

    Or the Coronavirus or something else will completely hammer the market and send us all into a tail-spin again… Let’s just hope it doesn’t become another Spanish Flu.

  • 34 tom_grlla February 10, 2020, 3:37 pm

    Thanks for the replies.

    I’d forgotten Monevator had been going for that long (it’s coming back now, as I was always impressed that you bought RIII pretty much at the bottom!).

    But this is great stuff – I think human psychology makes us so casual after such a long bull market, so it’s great to have a first-hand reminder.

    A 50% drawdown must be brutal, especially not knowing how many years it will take to make it back…

    I’m still pretty much stuck on 60/40, and while it’s been frustrating seeing SMT etc. shoot up again, and people are starting to think Klarman has lost it, this is a reminder to me of why you never know when it’s good to have some liquidity at hand for bargains, so you always need some.

    As someone smart said, you can’t predict but you can prepare.

    I haven’t looked at Montier’s Behavioural stuff for a long time, but I’m sure there’s lots of good stuff about how to cope when things go wrong.

  • 35 Vanguardfan February 10, 2020, 3:45 pm

    I was just listening to JLCollins on what it felt like in 2009. He said it wasn’t so much that you were looking at a 50% loss. It was the fact that, at the time as you live through it, you don’t know it’s the bottom. The fear was that it would keep going down – many commentators were suggesting a further loss of 90% of what was left. That’s what makes people bail out in panic – ‘I’ve lost half, and that’s enough, I don’t want to lose everything, I’ll get out now…’

    It’s very easy to sit and think ‘oh it’s obvious you should sit tight’ but I am sure it is very far from obvious when it is actually happening.

    Here’s a link to some thoughts in 2011 from the US. Unfortunately I couldn’t find the thread from 2009…
    https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939

  • 36 Vanguardfan February 10, 2020, 3:51 pm

    And also, on ‘keeping cash for bargains’. How on earth do you decide when to buy during a major drawdown? Let’s say you decide to dive in on a 20% correction. Then you watch everything, including your precious cash, carry on losing another third of its value…. you’ve no more ‘dry powder’, and worse, you’ve no safe assets to actually live on. You’ve just squandered your cash/bond allocation on assets that have fallen in value.
    I suspect it will be sufficiently difficult to just sit tight, and stick to your planned schedule for new purchases or rebalancing. That’s why I think a written investment strategy is really important.

  • 37 The Investor February 10, 2020, 4:07 pm

    @Vanguardfan — All good points. If I was another sort, I’d have be selling a product based entirely around this post:

    https://monevator.com/who-isnt-buying-the-market-right-now/

    …which was posted on the day the market bottomed pretty much!

    However!

    (1) When I read it now I wish I was more adamant and it wasn’t full of caveats. The reason it was is because it was far from clear at the time — it was frightening! And obviously entirely lucky to be posted at the bottom. My argument was basically ‘if markets are going to come back some day then now is as good a time as any to buy, given the panic and fear is now embedded’ rather than ‘I’ve dissected a chicken and seen that this is the day!’

    (2) As is clear from my post to @tom above (and to your point) I had continued to buy all the way down, buying and only seeing it go down further. By March 2009 I had virtually no cash left, but I was selling everything I didn’t love on eBay etc to buy more shares (e.g. I sold a bunch of SLR stuff and accessories that I decided I wasn’t going to use again. I’d guess that tranche of money has roughly five-bagged since then.)

    (3) If we were Japan, that post would now be a huge embarrassment. And while I still think we won’t be Japan (see this post from 2010: https://monevator.com/japanese-lost-decade/) it’s not unreasonable to argue they have been the canary in the coal mine for quite a lot of what we’ve seen one way or another in other developed markets a few years later (e.g. low/zero rates, zombie companies, bad banks, failing demographics).

  • 38 Seeking Fire February 10, 2020, 4:19 pm

    tom_grlla.

    I started investing in 1999. Knew nothing but thought I knew everything as the market rose. Then saw 2 serious bear markets over the next decade where equities went up / down but ultimately in real terms did nothing. 20 years in financial markets career wise, dozens of books later, I guess I know something but not very much.

    I remember reading this book and wondering how on earth the author was predicting nominal returns of around 10% for a balanced portfolio.

    https://www.gibsoncapital.com/we-wrote-book-asset-allocation

    Then I saw the assumed returns he’d used and thought they were fantasy compared to real life. Why because my experience of equities was nothing like what occurred from 1999 – 2008. We are all substantially affected by our background

    Now we’ve had around a decade of good returns and slowly but surely investors are becoming sated to the belief that the norm is the average and the average is the norm. it is not, markets don’t care what age you are at and about your future plans. They’ll give and take away through volatility of returns.

    We might have 20 years of negative real returns meaning discussions about FIRE and SWR will change to is it worth investing in equities or another 20 years of positive real returns and the next generation will all be talking about earlier and earlier FIRE. If you see my point.

    Nothing you can do about it but to acknowledge and prepare as best as you can either through psychological training (reading / mentally cutting your assets in half) or asset allocation, which I do between equities / real estate and liquidity.

  • 39 Vanguardfan February 10, 2020, 4:22 pm

    My post was really aimed at how the typical person might react 😉
    And of course, we all think we’re atypical (and above average!)

    But if you are someone who thinks they are desperate for a crash so that they can make some easy money while all the fools around them are losing their heads, I still think it’s a good idea to write the plan down in advance (e.g. how much you’ll spend at what point).

    I’m just assuming I’ll be a fool like everyone else, so my plan tells me ‘if in doubt, do nothing’.

  • 40 The Investor February 10, 2020, 4:49 pm

    We might have 20 years of negative real returns meaning discussions about FIRE and SWR will change to is it worth investing in equities or another 20 years of positive real returns and the next generation will all be talking about earlier and earlier FIRE. If you see my point.

    To this point, I read the following page after a reader (might have even been you! 🙂 ) posted the link recently:

    What if you retired in January 2000?

    If you happened to retire in January 2000, the last eighteen years haven’t been pleasant. Only the Warren Buffett portfolio has a value appreciably exceeding its $100,000 starting balance. The 100% fixed income portfolio is underwater while the MPT portfolio, Larry Swedroe Portfolio, Harry Browne Portfolio, and Harry Dent Portfolio are all 13% to 21% in the black. The other two portfolios both show losses. The worst performer was the 75% S&P500/25% fixed income portfolio which is now closing in on one-half of its starting value . In hindsight, buying the 30-year TIPS in 2000 wouldn’t have been a bad idea. You’d have a 4% inflation-adjusted yield and the $100,000 bond would be worth about $130,000 as of year end 2018 — only Berkshire Hathaway beat that. The chart below illustrates this performance.

    What to conclude from these results? There’s a reason Warren Buffett is regarded as the most successful stock market investor of all time. But even someone with a fairly pedestrian 60% S&P500/40% fixed income portfolio, who retired in 2000 at the market top, still has more than 80% of his starting value after 18 years of inflation-adjusted withdrawals, the bursting of the stock market and housing bubbles, and the economic collapse in the waning days of the Bush Admininstration. Pretty amazing.

    https://retireearlyhomepage.com/reallife19.html

    I suspect whether you think it’s terrifying or amazing depends on how you see your average 50% occupied glass. It scares the life out of me, but then I’m a half-glass full kind of guy, big picture. (I’m only optimistic as an asset allocator, by force! 😉 )

    Of course that was using a starting point of 2000 — a terrible starting point for most assets — so those who see a glass half full have a great perspective, too.

    But anyway, as you say the tenor of the chat is definitely partly price/performance-driven. That’s human.

  • 41 The Investor February 10, 2020, 4:52 pm

    p.s. Should have stated for benefit of those that don’t follow the link that this was until 31 December 2018, so clearly a fair bit of bounceback since then!

  • 42 Al Cam February 10, 2020, 5:49 pm

    @TI:
    Glad you liked that link. IMO, JPG is a bit of a star!
    John seems to update the charts around April/May – so give it a few months and we should be able to see the 2019 recovery.
    Lastly, and just to be clear, the portfolio values quoted by JPG above are in nominal dollars – ie not inflation adjusted.

  • 43 SeekingFire February 10, 2020, 6:35 pm

    TI – nice link
    Al Cam – that was my reading too. So if you’ve chosen 75:25 equities / bond split as a prominent US blogger above recommends ‘to smooth the ride’ you are now down roughly 50 per cent nominal and 75 per cent in real terms. And if we had been in a period where earnings growth was higher than inflation growth then relative to your citizens it’s worse (unusual period this last twenty years).

    So you need to earn more / live less / don’t be unlucky when you retire / have a healthy buffer.

    The link evidences that you are probably fine for a 30 year retirement at 4% based on historic data (which doesn’t tell you much but it’s largely all we have). What a ride though – I would have been psychologically pretty depressed no matter how many times mmm had told me it was all fine!

    And I am a glass half full person.

    Increasingly feel if you have a 50 year time period – and don’t forget if you retired at 50 that’s quite reasonable based on mortality statistics (one of you and your partner assuming male / female have a circa 1.10 chance of living to a hundred) traditional swr analysis is v limited. Am ok with 30 years as less chance for serious damage – 1999 is about as bad as we’ve ever seen for retirement cohort.

  • 44 Brod February 10, 2020, 7:09 pm

    Matthew – “a good strategy for dealing with losses is to allow them to happen and ride them out”. Well yes, except you don’t allow bear markets to happen. They damn well happen to you whatever your strategy is.

    I’ve been lucky – I didn’t have anything invested to sell out and all I had was to manage my fear getting back in. God knows if I’d been watching my life’s savings draining away And I’ve ridden the boom all the way up 100% equities. But as FI has approached I’ve dialled back to 65/25/10 equities/bonds/gold.

    How did you cope in the GFC?

  • 45 ZXSpectrum48k February 10, 2020, 8:32 pm

    I think that what really makes the last decade stand out is not just that returns from equity markets like the S&P500 have been so stellar. It’s also that return volatility has been so subdued. The Sharpe ratio (return/return volatility) of the S&P500 has been well over 1 in the last decade. Historically, most asset classes don’t generate a ratio better than 0.3-0.6. So you’ve been getting 2-3x the return per unit volatility. Essentially, you’ve got the returns without feeling more than a fraction of the normal risk.

    I’d also say that while the 2008/09 crash was violent, the speed of the recovery was also anomalous. If you look at the SPXT (S&P total return index) in GBP terms, it went from 1150 in Sep-08 (just before Lehman) to 800 in Mar-09. That’s a 30% drawdown (it went down 50% in USD terms but the move in GBP/USD reduced the pain for UK investors). It got back to 1150 by Oct-09. So it was a violent 12 month trip, but you were back to flat in just a year.

    I’d compare that the start of my own personal investing experience when I joined an investment bank in 1997/98. I received stock as part of my bonus from 1999 onwards. This came with a multi-year vesting period so I couldn’t sell. The stock priced dropped over 60% during 2000-03. By 2008 it had finally dragged itself 10-20% over the 2000 price and then it went down 60% again in a flash. Just brilliant!

    Every time I got a vesting I sold, whatever the price just to get out of the stuff (I was always going to get more). I stuck the money in something that made reliable returns: mainly USD cash, long-duration government bonds, sometimes with EM bonds or equities for a bit of spice. I bought a house in London. Just not the S&P. To be fair, the result was that I was well positioned to take advantage of 2008 but I’d wore pain for a decade. I was overdue some payback.

    This is where I think the people can come unstuck. It’s an extended stagnation in prices after the drop that causes problems. It’s when you think the price is never coming back up, that the loss is permanent. Moreover, such a stagnation from the current starting point would be especially hard because the alternatives will look far worse than in prior bear markets. Cash isn’t at 5%, govt and corporate bonds yields are on the floor. Even property doesn’t yield that much net of costs. If that also happens in a very low volatility environment, you also won’t even get the usual benefit of rebalancing gains. That’s sort of where Japanese assets have been for decades.

    Financial represssion has made investing easy in the last decade but I think people are naive to think that it doesn’t come without long term side effects and costs.

  • 46 Matthew February 10, 2020, 9:54 pm

    @brod – i was saving up cash for a house at the time of the gfc, i was disappointed that it didnt make property more affordable than it did, I didnt understand equities back then but didnt feel worried about my job. My sipp is seperate to my DB pension so my true overall allocation could be though of as much more cautious, which is what makes me more brave, as well as not really wanting to retire so much as to afford posh nosh every day and cruises, I am flexable about what year I retire, in a way I do it purely for sport, just for the fun of making money, a little volatility excitement in an otherwise very DB life

  • 47 Edward February 10, 2020, 10:13 pm

    I’m 49 and rather than conquering, the video has reinvigorated my fear of a crash/ prolonged bear market.

    I need to average 7% pa over the next six years to hit my target, assuming I can continue to contribute at my current rate, so I’m all in equities.

    But if/when that correction comes could ruin it all…

  • 48 Al Cam February 10, 2020, 11:31 pm

    This Ern post from a few months back provides a pretty forensic (or, if you prefer, parameterised) analysis of significant bears, albeit from a US perspective:
    https://earlyretirementnow.com/2019/10/30/who-is-afraid-of-a-bear-market/

    The “anatomy of the average bear market” diagram towards the end of the post provides some food for thought.

    The 150+ comments to the blog may also be worth reading through.

  • 49 Brod February 10, 2020, 11:48 pm

    @AlCam – yes, when I read that it really brought it home to me. Scary. And I think we’ve brought forward 10 or 20 years of returns in our bull market and the solution to the GFC – free money – is still in the system except it’s now the potential problem.

    @Matthew – so you had no skin in the game? And you’ve got a DB pension too? So your comments to Austrian were, um… theoretical then?

  • 50 Naeclue February 11, 2020, 11:18 am

    I ran my 60/40 global equities/gilts portfolio right through the financial crisis and don’t recall getting particularly agitated by it. I rebalance every January, just after year end and my Jan 2009 spreadsheet shows the equity portfolio down about 11% over the previous year (including dividends, but excluding investments made during the year), but gilts were up a similar amount (including coupons). In contrast 2001 and 2002 were much worse, with my equities portfolio down 19% and 28% respectively and gilts up only about 1% over 2001 (gilt prices actually fell) and 9% over 2002.

    Admittedly this paints a very rosy view of the the financial crisis as I only record once per year and missed the drama in 2009 as share prices continued to fall. Even so, share prices ended 2009 26% up over the year.

    The drop in the pound in the financial crisis was a big help in cushioning the drop in global equity prices, with the GBP/USD rate going from around $2 to below $1.50 over 2008. In the 2000 to 2003 period, the exchange rate went the other way and so exacerbated share price losses.

  • 51 weenie February 11, 2020, 2:43 pm

    I only started investing around 2011 (though buying funds marketed by HL probably doesn’t really qualify as real investing…) so I’ve yet to experience any sort of real market correction or downturn.

    Easy for me to say that when it happens, I’ll probably ‘keep calm and carry on investing’ but I’m more or less halfway to FI(RE) now so like @Edward (comment 47) a big pull-back could ruin it all (or just means that I work longer than planned).

    I like the idea of having cash on hand to be ‘greedy when others are fearful’ but will likely just continue on a monthly basis.

  • 52 Edward February 11, 2020, 4:04 pm

    Thanks Al Cam – Kind of wish I hadn’t read Ern’s blog now!!

  • 53 tom_grlla February 11, 2020, 4:40 pm

    More thanks to all – very interesting debate.

    Good points about how swift (while brutal) 08/09 was.

    And buying on the way down – this is an argument I suppose for ALWAYS having a bit of a cash buffer, as things can ALWAYS get cheaper. I will have to re-read the TI archives, as it sounds like a masterclass in overcoming fear and buying at the right, if not perfect, time.

    2000-03, being longer, must have been psychologically tougher, and as zxspectrum says – for many investors in the late 90s, it wasn’t unrealistic to not break even until about 2010 – unimaginable now!

    With apologies for going active, but I do know that in 1999 there were ‘options’ e.g. defensive stocks were relatively cheap, which is not really the case now (er… except maybe Russia, Energy, Japan Net-Nets?).

    But it does feel that if you stick to companies with conservative leadership (e.g. with super-strong balance sheets) and decent management shareholdings, then you’ll own things where even if the share price plummets with everything else (correlation seems to be stronger on the way down), they will be in a better position to take advantage (e.g. buying up competitors etc.) and bounce back faster.

    And I still favour Capital Gearing as a protective option, as a partial ‘diversification’ from bonds with low interest rates. However hard I try, I struggle to truly believe in the other ‘all-weather’ people like PNL and RICA.

  • 54 Sparschwein February 11, 2020, 8:57 pm

    Has anyone looked into whether these government plans of slashing pension tax relief could hit in the *current* fiscal year? Is it certainly beyond them to change the rules retroactively?

  • 55 Matthew February 11, 2020, 10:06 pm

    @brod – you have skin in the game when you are short 1 house and prices rise faster than you can save – a bull market can be distressing in that way -losing money to the inflated price youll have to pay, which is why I started investing, because I needed to keep up with/outpace house prices

  • 56 Naeclue February 12, 2020, 12:25 am

    @tom_grlla, when you are accumulating, bear markets are a very good thing. Why would you want to pay a high price for shares? High prices are only a good thing when you are decumulating.

  • 57 Edward February 12, 2020, 9:35 am

    @Naeclue
    Surely it’s all about timing. A bear market now could ruin my plans because my DC fund wouldn’t hit the number I need by 55. Granted all my contributions would buy more shares in the next six years, so swings and roundabouts…

  • 58 Kerry February 12, 2020, 9:57 am

    @Marked #23

    There are definitely regional factors which influence house prices. I first got interested in house price cycles as a youngster during the 80s after reading about 7 year cycles. I believe that these broad cycles hold true, but where we are in our own life cycle relatively to these cycles is the thing we have no control over (i.e. when we are born). Awareness is the key imho.

    Regards,

    Kerry

  • 59 Brod February 12, 2020, 3:00 pm

    @Matthew – I think you’re conflating to different issues here – stock market crash and high house possibly getting away from you.

    I would query, though, if the stock market is the right savings vehicle to use for money needed in under 10 years. If we’d have not had a V-shaped crash, primarily helped by the world’s central banks throwing free money around, but a more typical crash (the 2000 crash took about 3 times as long to get back to it’s real, inflation-adjusted peak as opposed to 2008) your might only just be evens now.

  • 60 Matthew February 12, 2020, 5:24 pm

    @brod – luckily i have the house now but regarding usibg equities to save for a house, the best mitigation there is to be flexible about when, which I had to be, and although that method involves risk, there sure is risk (odds on) saving in cash chasing something that historically rose 5% a year

    I felt like what I needed was to be buying more bricks!
    The whole experience was an education that I carry forward to sipp investing now

  • 61 Edward February 20, 2020, 10:19 am

    Although most fund managers are predicting a flat-low growth year, this article is really worrying me about the bear market that will surely come sooner rather than later.

    Who here would forego the predicted 5-10% increase over the next year or two for the security of (inflation-eroded) cash and sleep more soundly, and who is flying blindly into the storm?

  • 62 ZXSpectrum48k March 9, 2020, 1:38 pm

    This is making Lehman look mild! Oil futures were down 30% at one point today. HY credit is getting destroyed given the impact that will have on shale producers. You can sell by appointment only. Yes, COVID-19 is the underlying driver, but no one saw the Saudis and Russians not being able to come to some agreement on oil production. The 2016 OPEC+ agreement is in tatters.

    S&P future is limit down. So we wait for the US cash open. It’s bonds though that consistently amaze me. The 30-year USTs is down 38bp on the day at the moment… that’s an 8% positive return in just one day. I sold VGLT (UST long-duration bond tracker) and IUSA (S&P 500 tracker) on Friday to reduce my portoflio VAR. Yet, today the gain on VGLT is again greater than the loss on IUSA. Long-duration govt bonds have been the saviour here for any passive portfolio.

  • 63 Hare April 15, 2020, 2:40 pm

    I’ve been catching up, and reading this on 15th April has given a rather interesting new outlook on the post and comments.

    I quote:
    ‘But if shares lose 30% in a year’

    It was 6 weeks until the fastest bull market in history.

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