If you are early in retirement, you want and perhaps truly need a positive real return.
Failure to meet the minimum return is a real risk, whereas a transient fall in prices isn’t.
What do you think of a couple year’s expenses in cash to be spent only if your otherwise all-equity portfolio falls 20% or more?
As the Cash Bucket described here: https://earlyretirementnow.com/2018/05/23/the-ultimate-guide…
Thanks, Jim.
“It [the Nasdaq] is down 12.5% from its November high, and still trading at 37x earnings.”
My question is not what to do with QQQ or QQQE. I definitely wouldn’t buy those right now. They will fall farther imo. My question is what to do with an individual stock like INTC. By both my estimate and Morningstar’s estimate INTC is 20% undervalued. What would be the best strategy if I wanted to buy INTC? Buy now? Average in? Wait for the NASDAQ to bottom? Other?
Elias, why will people’s mortgages be underwater when they’ve borrowed at incredibly low rates and housing prices have gone way up? I don’t understand your comment.
If I remember correctly, in 2005 -2007 the accepted belief was that housing prices never fell. That was shortly proven wrong, and, in part because of falling housing prices, in 2009 the financial markets stopped functioning at one point. Banks were merged, investment firms were merged, AIG lost something like $100 billion in one year and nearly failed. If we have a bubble again, housing is overpriced, in at least some cases. The value of some houses will fall below their mortgage amount. The housing purchase prices went way up before their market value went way down.
A diversified retirement portfolio should never fall by half. If it does, that’s your fault and no one else’s.
OK, what are you going to diversify into today? There has been more than one time in my lifetime when the stock market averages fell by 50%. Are you going to diversify into bonds? With interest rates at all-time lows, bond prices are at all-time highs. If you want to scare yourself, look at how much a 30 year, 3% bond would get marked down with a 100, 200 or 300 basis point increase in rates.
For the seasoned investor, volatility can be a friend. For the vast majority of people who can barely distinguish a stock from a bond, they go by what they are told, understanding it or not. Does society have any obligation to protect its citizens’ financial affairs? When I talk to my friends and relatives I can see they have only a very shallow understanding of investing, even in their 401-ks that they count on for retirement income. I don’t know what to tell them because I can’t tell them enough to impart the knowledge they need to properly financially protect themselves. The subject is too difficult. Is it their fault for not being financially savvy enough to navigate today’s market?
For the vast majority of people, a rather stable market environment where they can periodically invest new funds, earn some return, and then have a dignified retirement is optimal. They buy what they can, which is mostly stocks and bonds. They believe that they are doing the right thing, unaware that the Fed is manipulating assets prices so high that regardless of what they do, they are set up for a big fail when the bubble bursts.
There are three possible outcomes currently waiting us. One is a quick, huge reset of asset prices. Another is a 12 to15 year period with almost zero returns on today’s existing assets. The third is some combination of both. Which one of those do Mr. and Mrs. John Doe deserve?
IMHO there is no place to hide but cash, but most feel that they need to be invested and won’t take that option.
<<There are three possible outcomes currently waiting us. One is a quick, huge reset of asset prices. Another is a 12 to15 year period with almost zero returns on today’s existing assets. The third is some combination of both. Which one of those do Mr. and Mrs. John Doe deserve?
There is another possibility: the value of US dollar comparing to other currencies especially the Chinese will drop significantly, resulting in rising import price and inflation.
The cyclical nature of things is important to consider and I think Grantham to some degree (for years I read his stuff but now I don’t because it is redundant to my own thinking) is going to plug a lot of stuff into his valuation model. When I’m thinking cyclical some things come to mind:
Saul’s board: Not sure how many reading and investing understand how dramatically cyclical and secular hyper growth stock investing is. Not only do people chase and run in groups, they also most often choose to chase different things after those that formerly were chased fell from grace. There’s just so many Amazon’s and such, those that sustain from one euporic chase to the next (before eventually now being chased any longer).
For reference: In the mid 1990’s my investment club bought EMC, the data storage stock. We bought for a split adjusted $1.50 and put $20,000 into it. The stock ran to $105…nobody wanted to sell! Along the way all the members of the club (25 of us) except me bought EMC stock personally. In the end we, the club, sold EMC for $7 making a solid 15% annual return. All 24 other members of the club? They ALL lost money on EMC because they bought at a later time than the club. EMC the business? It just marched along fine, growth slowly fell from 50%, to 35%, to 25%, to 10%…and so forth. Dell bought out the stock eventually.
EMC, once it fell? Never was it chased again! The club voted down one members recommendation to put “all our money into it” when it fell to $35. Thank goodness rational thought prevailed!
Homes/contractors/home builders/Lowes/Home Depot: I have owend Lowes since it came public, it was from my area and we all knew about Lowes. I’ve been selling Lowes and even sold down to the price it sells for today. In 2015 you could buy it all day long for $60. We used to say here, “When the contractors are all buying new trucks it is time to get out.” Well, the contractors here not only have been buying new trucks every year since 2014 (about when housing here began to sustain in a really solid manner) …they now routinely buy $75,000 Ford trucks with features made for space travel (kidding of course). Lowes doesn’t look expensive on a PE basis; Lowes IS expensive.
Re property.
In the UK we have help to buy.
Government backed deposits for first time buyers.
Buyer provides 5%, Gov 20% with a 75% mortgage and they’re borrowing upto 5 x joint incomes buying overinflated new builds upto £600k cap (c$800k),the housebuilders are all signed up.
In London the cap has been increased to 40% backed by the Government.
https://en.m.wikipedia.org/wiki/Help_to_Buy
This was their answer to an already inflated housing market to help FTB’s. Lunacy IMO.
Lessons learnt from the Finaicial Crisis, non it seems?
OK, what are you going to diversify into today?
Small Value, Emerging Markets, Energy.
The UK situation was a disgrace. You can look at the house price chart and see when it started - prices move significantly up from thereon in. Any chancellor of the exchequer worth their salt should have resigned rather than agree to it.
The British are obsessed by their house prices… television is full of property related refurb and investment programmes. A put under prices is a vote winner, it’s also a good money spinner (taxation)… until the music stops playing that is…
The private house builders are cautious, the Plc’s are still aggressively buying land and overpaying. They carry on and will Issue shares at the bottom to shore themselves up, management awarding share options for the recovery and the cycle repeats…
“The British are obsessed by their house prices… television is full of property related refurb and investment programmes.”
Same in the USA. HGTV seems to be the go to channel in my house.
We do frequently watch a UK based show. Property hunters thing.
“Escape to the Country” my kid tells me.
Makes us want to buy a holiday cottage there, but the prices, yikes!
My neighbor, who works for Teledyne, and I enjoyed a conversation about 2 months ago with the contractor who rebuilt my neighbors pier. This contractor has been around a long time as he began doing pier work just out of college and has stuck with it since. He loves to chat!
He says, “Right now? I am 2 years behind…seriously I am taking jobs with 2 years out scheduling!” That comment was interesting enough but he followed with this: “The more stupid, the more insanely expensive the project? Well, you can bet that THAT is the theme today over and over again.” He went on by saying, “I am adding on to my house because the bigger and more outrageous you make something right now the more it will sell for a stupidly high price!” The he finished with, “My wife and I want to downsize, we have the lake lot and my home will be on the market within a month and it will sell immeditately.”
His house did sell at a price above his listing price…for cash.
At the end of the above conversation we all discussed together that most of those on his list for 2 years out will decide to delay once the blistering bubble mentality is extinguished.
Are you going to diversify into bonds? With interest rates at all-time lows, bond prices are at all-time highs.
Of course I own bonds in my retirement portfolio. And, no, IR are not close to all-time lows. But they could keep rising, yes.
If you want to scare yourself, look at how much a 30 year, 3% bond would get marked down
I started working in fixed income in 1994, so I’m well aware of how duration works. But why are you insisting a retirement portfolio would have to be only in the longest-duration bonds in the FI portion?
Is it their fault for not being financially savvy enough to navigate today’s market?
Diversification is the only free lunch the market offers, that is not hard to understand. If most of your friends put it all in the S+P, then they get that risk, and as you pointed out the market just dropped 50% from 2007-09, so it’s not like no one remembers that.
There are three possible outcomes currently waiting us. One is a quick, huge reset of asset prices. Another is a 12 to15 year period with almost zero returns on today’s existing assets. The third is some combination of both.
This is simply not correct. And I feel you have said the same things before, but I look at where the markets are now compared to 2007 and they are nicely higher.
‘If you invested $100 in the S&P 500 at the beginning of 2007, you would have about $453.83 at the beginning of 2022, assuming you reinvested all dividends. This is a return on investment of 353.83%, or 10.61% per year.’
IMHO there is no place to hide but cash, but most feel that they need to be invested and won’t take that option.
And coming full circle, holding no cash and all stocks is what may allow your portfolio to drop 50%, which is then on the person making that decision AND NO ONE ELSE.
But if you truly are a long-term investor, stocks will recover as they did after 1987 and 2000-02 and 2007-09, and 1982, and 1973-4, et al.
There are three possible outcomes currently waiting us. One is a quick, huge reset of asset prices. Another is a 12 to15 year period with almost zero returns on today’s existing assets. The third is some combination of both.
Tom Lee would disagree: https://www.youtube.com/watch?v=VJBt17yBSss
When people say things are different, 20 percent of the time they are right. John Templeton
Bloomberg interview with Jeremy Grantham yesterday:
He’s still crying wolf.
https://www.youtube.com/watch?v=JlEGU2ypr1Q
Remember that Charlie was also saying recently that the market is nutz:
Munger didn’t mince words when he said earlier this month that he considers today’s stock market environment “even crazier than the dot-com era.”
“I just can’t stand participating in these insane booms,” Munger said at the Sohn Hearts & Minds Investment Leaders Conference. “There’s no great company that can’t be turned into a bad investment just by raising the price.”
https://www.yahoo.com/now/charlie-munger-market-even-crazier…
Bloomberg interview with Jeremy Grantham yesterday
Grantham says 2500 is on trend for S&P500, down about 50% from the peak.
“He’s still crying wolf.”
It’s not crying wolf if it’s true. Or maybe you didn’t mean to suggest that it wasn’t true. The NASDAQ is down 17.5% from its high. At what point do we say that we’re in a bear market? 3-sigma is a big overvaluation.
There are a number of other interesting topics in the interview besides the overvaluation of the US stock market, too, such as the decline in fertility and sperm count in the US, and the lower upward mobility in the US versus the UK, just the opposite of the way it was of years ago.
"It’s not crying wolf if it’s true. Or maybe you didn’t mean to suggest that it wasn’t true.
He may be right, it’s just that the wolf (or is it bear) hasn’t shown up at our door steps yet.
I think Grantham makes a pretty good case that valuations are stretched.
It’s not just Grantham. Recall our own Charlie Munger last month expressing concerns about valuations:
(Bloomberg) – Berkshire Hathaway Inc.’s Charlie Munger told a conference Friday that markets are wildly overvalued in places and that the current environment is “even crazier” than the dotcom boom of the late 1990s that subsequently led to a bust.
https://www.bloombergquint.com/markets/berkshire-s-munger-sa…
I’m 90% invested, 50% in Berkshire, 40% in BABA and only 10% in cash. Wondering if I should sell some BRK to raise my cash level.
“I’m 90% invested, 50% in Berkshire, 40% in BABA and only 10% in cash. Wondering if I should sell some BRK to raise my cash level.”
Selling is never an easy decision, especially if one has to pay capital gains tax. Eight days ago I sold INTC, which was in an IRA. I liked the company and the price, but I was concerned about it becoming collateral damage in a NASDAQ selloff. My investment horizon is pretty short. INTC is down 12% since I sold, so I guess it worked out, but that doesn’t mean that my logic was correct. I haven’t sold BRKB, which is in a taxable account. We can never be sure if we’re making the right decision. We just have to do our best. Good luck to you.
You guys may want to consider Munger and Grantham’s portfolio actions as well as what they state.
Bloomberg interview with Jeremy Grantham yesterday:
He’s still crying wolf.
https://www.youtube.com/watch?v=JlEGU2ypr1Q
An interesting snip from that:
"I think the peak of crazy behaviour is behind us. I think we’re now in the buy-the-dip mode,
which the super bubbles specialize in. You don’t have two years of buying frenzy dying overnight, typically"
Consistent with that, I just read that small US retail accounts were net buyers of both US equities and equity ETFs every trading day so far this year.
And all but two of those days were at higher dollar rates of buying than the 2021 average.
I’ve always liked this graph.
I’m sure much of it is dangerous oversimplification, but it’s easy to see bits of truth in it.
https://en.wikipedia.org/wiki/Jean-Paul_Rodrigue#/media/File…
In effect, the comment above suggests that the retail hordes are getting lined up for the bull trap.
Jim
