Weekend reading: Remembering bear markets

@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.

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.

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

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.

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.

@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?

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

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.

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

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

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?

@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!!!

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.

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.

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?

@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.

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

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’.

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.

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.

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…

@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?

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.

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.

@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

@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…

@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.

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?

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.