cancel
Showing results for 
Search instead for 
Did you mean: 
     
Highlighted
Frequent Contributor

Re: ideas for downside protection


@chang wrote:

@Intruder wrote:

@Bentley wrote:

Is it just me or does anybody else see the irony in a retiree who promotes a 90/10 allocation giving advice in this thread about how to increase “downside protection?”


Where did I promote 90/10? I said it was my AA but other investors Can pick whatever AA theory are comfortable with. My focus on this thread is that investors can substitute dividend stocks for bonds In whole or in part in their AA because of the low yields of fixed income securities due to Feds 0 interest policy. An investor who is satisfied with the return/security of their fixed income can remain with the bond allocation they have chosen. 

Federal reserve is signaling that 0 rate will extend to end of 2023 which means yields on safe treasury securities will be at or below the rate of inflation.


Can't do both. I can't pick 60/40% stocks/bonds and then substitute dividend stocks for bonds. That will just push my stocks up > 60%. Dividend paying stocks are stocks.

I'm not focused on income. First, I don't need it. Second, I don't believe in it, as I have explained twice already below. My bonds are for ballast. Dividend paying stocks may provide better income, better value, and even better long-term risk adjusted return than bonds, but they do not provide good ballast when stocks go down. It boils down to that.

Having said that, we aren't 180° apart. I've been buying every dip since 2016, and I own divvy payers inside SCHD and Global Wellington (VGWAX) and Wellesley (VWIAX). I probably should have added to SCHD in March ... my bad. I might add to SCHD if I land a job I've applied for and start earning a paycheck again.


Chang

you can do whatever you want to do. If you want to have a 60/40 AA you can allocate 10% of your equities to dividend stocks. If you follow the Malkiel theory that dividend stocks are bond proxies you can substitute dividend stocks for 10% of your bonds. Or you can change the AA to 70/30 with 10% additional invested in dividend stocks.

why are you so hung up on the need for ballast in your portfolio if you don’need additional income if markets drop? As we all know stocks go up as well as down. Stocks went down by 40% this spring but came back higher. So why not substitute growth, tech or momentum stocks for bonds kept as ballast and pocket the higher returns when the market rises?

 

 

 

0 Kudos
Highlighted
Frequent Contributor

Re: ideas for downside protection


@Intruder wrote:

why are you so hung up on the need for ballast in your portfolio if you don’need additional income if markets drop? As we all know stocks go up as well as down. Stocks went down by 40% this spring but came back higher. So why not substitute growth, tech or momentum stocks for bonds kept as ballast and pocket the higher returns when the market rises?


Because the day when I go to 90% equity, and then the market tanks 40%, will be the day it doesn’t come back until after I'm long dead. Take the Nikkei: it peaked at 38,274 on January 5, 1990 and it still has not returned to that level, over 30 years later.

I know, I know; the US isn't Japan. But I simply refuse to subject my financial security to the degree of short-term (and maybe long-term!) volatility that 90% stock would bring. And dividend income streams are not guaranteed—we saw that this year.

If I already have enough to live the rest of my life with no fear of hardship, why should I take any chances with that? You assert that the market always comes back... but how quickly, and how much, is not certain. Why should I subject myself to that scenario?

Highlighted
Explorer ○

Re: ideas for downside protection

Agree with Chang on timeframes for planning allocation, determining how to manage downside risk.  A downturn could last for years/a decade and should be factored in an investor’s plan.

Highlighted
Frequent Contributor

Re: ideas for downside protection

Chang is right that we don't know the future of the stock market (although it would appear that Central Banks around the world are determined to keep the party going for now).

I agree 100% that it's silly for someone nearing retirement, who is already a multi-millionaire, to risk financial disaster. Earning another million or two isn't going to make him much happier, but a 40% loss might well achieve the opposite.. 

Chang has mentioned that he doesn't own a home. Maybe that's a reasonable place to invest now?

N.

0 Kudos
Highlighted
Frequent Contributor

Re: ideas for downside protection


@chang wrote:

@Intruder wrote:

why are you so hung up on the need for ballast in your portfolio if you don’need additional income if markets drop? As we all know stocks go up as well as down. Stocks went down by 40% this spring but came back higher. So why not substitute growth, tech or momentum stocks for bonds kept as ballast and pocket the higher returns when the market rises?


Because the day when I go to 90% equity, and then the market tanks 40%, will be the day it doesn’t come back until after I'm long dead. Take the Nikkei: it peaked at 38,274 on January 5, 1990 and it still has not returned to that level, over 30 years later.

I know, I know; the US isn't Japan. But I simply refuse to subject my financial security to the degree of short-term (and maybe long-term!) volatility that 90% stock would bring. And dividend income streams are not guaranteed—we saw that this year.

If I already have enough to live the rest of my life with no fear of hardship, why should I take any chances with that? You assert that the market always comes back... but how quickly, and how much, is not certain. Why should I subject myself to that scenario?


I am not suggesting 90% equities. Since you have an aversion to volatility and fear that the US stock market could become another Nikkei there is nothing further to discuss.

Good night and good luck.

 

 

0 Kudos
Highlighted
Frequent Contributor

Re: ideas for downside protection

@Intruder I wouldn’t put it like that. I prefer to say that I have a desire for capital preservation. I’m about 55% stock (I don’t know exactly) and believe me, I am very heavily invested in the stock market.

@norbertc Right you are. Except we still don’t know where we want eventually to end up. There is a slim chance that I will relocate to another country to take a new job. I’m in the interview process. Pending the outcome of that, it doesn’t make sense to make a RE purchase. While prices may be good in various places, it’s probably premature for us. We expect to rent for a little while longer.

0 Kudos
Highlighted
Frequent Contributor

Re: ideas for downside protection


@norbertc wrote:

Chang is right that we don't know the future of the stock market (although it would appear that Central Banks around the world are determined to keep the party going for now).

I agree 100% that it's silly for someone nearing retirement, who is already a multi-millionaire, to risk financial disaster. Earning another million or two isn't going to make him much happier, but a 40% loss might well achieve the opposite.. 

Chang has mentioned that he doesn't own a home. Maybe that's a reasonable place to invest now?

N.


When I retired in 2010 the economy was just starting to recover from the Great Recession of 2008-9. Many financial Gurus were recommending that retirees reduce equities to 30% and buy bonds to avoid sequence of return risk and gradually increase equities by 1% a year. At that time I had sufficient assets to support my retirement needs. I chose to increase my % in equities to 75% because the economy was growing. If I had taken the advice of Wade Phau and others I would have missed out on the greatest stock market rise in history and a 250% increase in assets.

0 Kudos
Highlighted
Frequent Contributor

Re: ideas for downside protection


@Intruder wrote:

@Bentley wrote:

@Intruder wrote:


Nothing wrong with risk which creates downturns in stocks which gives intelligent investors the opportunity to buy highly valued stocks at a discount after the stocks were bid up. Buying at a 10-20%+ discount allows more shares of outstanding stocks to be purchased than when the stock was at a  higher price.

 

 Sounds easy. Ever wonder why Ichan and Buffett have not been able to outperform VTI over the past decade++? If men with the resources to afford the best of the best managers, inside information, low cost of capital, and possess years of experience and tremendous discipline can't outperform a simple index, maybe, just maybe the markets are too efficient for you to execute your ever-changing strategies. Send Carl and Warren some of your ideas...............:)


Ichan has underperformed because he is 57% invested in industrial companies and 17% invested in energy. Only 11.5% invested in technology. Great! So he underperformed by deviating from a more diversified portfolio. He deviated from a market cap portfolio and overweighted the wrong companies and the wrong industries. And now you pretend to know which companies/industries to overweight and underweight in your attempt to outperform? Buffett has underperformed because he has invested in wide moat value companies that have underperformed in industrial, financial services and insurance sectors which is 31% of BRK market cap. 26% of BRK is cash. Only outstanding investment is AAPL 43% of market cap. Again, unable to match or outperform, on average, for 13 years running simply by overweighting the wrong sectors. Does that not remind you of the MLP crowd of 2015, building concetrated portfolios of high yield products? While they severly underperformed even BRK, they employed the same risky strategy of overweighting the wrong companies and sectors. The reasons you give for the poor performance of investment icons is exactely the reason your portfolio has a high probability of underperforming; choosing investments that look good going forward at the time, but fail to produce going forward. A retiree of modest means allocating 90% of his retirement portfolio is flirting with disaster, IMHO. Buffett's widow is in an entirely different situation than other widows/retirees.

QQQ 10 year return of 20.3% is almost 50% better than 13.77% 10 year TR of VTI. And your point? Your able to find products that outperformed after the fact? Cool.

Stay safe

"Bulls make money, bears make money, pigs get slaughtered."  90% equity for a retiree is inappropriate, IMHO.


 

0 Kudos
Highlighted
Frequent Contributor

Re: ideas for downside protection


@Bentley wrote:

@Intruder wrote:

@Bentley wrote:

@Intruder wrote:


Nothing wrong with risk which creates downturns in stocks which gives intelligent investors the opportunity to buy highly valued stocks at a discount after the stocks were bid up. Buying at a 10-20%+ discount allows more shares of outstanding stocks to be purchased than when the stock was at a  higher price.

 

 Sounds easy. Ever wonder why Ichan and Buffett have not been able to outperform VTI over the past decade++? If men with the resources to afford the best of the best managers, inside information, low cost of capital, and possess years of experience and tremendous discipline can't outperform a simple index, maybe, just maybe the markets are too efficient for you to execute your ever-changing strategies. Send Carl and Warren some of your ideas...............:)


Ichan has underperformed because he is 57% invested in industrial companies and 17% invested in energy. Only 11.5% invested in technology. Great! So he underperformed by deviating from a more diversified portfolio. He deviated from a market cap portfolio and overweighted the wrong companies and the wrong industries. And now you pretend to know which companies/industries to overweight and underweight in your attempt to outperform? Buffett has underperformed because he has invested in wide moat value companies that have underperformed in industrial, financial services and insurance sectors which is 31% of BRK market cap. 26% of BRK is cash. Only outstanding investment is AAPL 43% of market cap. Again, unable to match or outperform, on average, for 13 years running simply by overweighting the wrong sectors. Does that not remind you of the MLP crowd of 2015, building concetrated portfolios of high yield products? While they severly underperformed even BRK, they employed the same risky strategy of overweighting the wrong companies and sectors. The reasons you give for the poor performance of investment icons is exactely the reason your portfolio has a high probability of underperforming; choosing investments that look good going forward at the time, but fail to produce going forward. A retiree of modest means allocating 90% of his retirement portfolio is flirting with disaster, IMHO. Buffett's widow is in an entirely different situation than other widows/retirees.

QQQ 10 year return of 20.3% is almost 50% better than 13.77% 10 year TR of VTI. And your point? Your able to find products that outperformed after the fact? Cool.

Stay safe

"Bulls make money, bears make money, pigs get slaughtered."  90% equity for a retiree is inappropriate, IMHO.


 


As Kenny Rogers reminds us, Investors have to know when to hold ‘em, know when to fold ‘em. Know when to walk away. Buffet and Ichan have not changed their investment strategies and this is the result. I will continue to invest in tech, recovery stocks and large cap growth funds. 

 

0 Kudos
Highlighted
Frequent Contributor

Re: ideas for downside protection


@Intruder wrote:

@Bentley wrote:

@Intruder wrote:

@Bentley wrote:

@Intruder wrote:


Nothing wrong with risk which creates downturns in stocks which gives intelligent investors the opportunity to buy highly valued stocks at a discount after the stocks were bid up. Buying at a 10-20%+ discount allows more shares of outstanding stocks to be purchased than when the stock was at a  higher price.

 

 Sounds easy. Ever wonder why Ichan and Buffett have not been able to outperform VTI over the past decade++? If men with the resources to afford the best of the best managers, inside information, low cost of capital, and possess years of experience and tremendous discipline can't outperform a simple index, maybe, just maybe the markets are too efficient for you to execute your ever-changing strategies. Send Carl and Warren some of your ideas...............:)


Ichan has underperformed because he is 57% invested in industrial companies and 17% invested in energy. Only 11.5% invested in technology. Great! So he underperformed by deviating from a more diversified portfolio. He deviated from a market cap portfolio and overweighted the wrong companies and the wrong industries. And now you pretend to know which companies/industries to overweight and underweight in your attempt to outperform? Buffett has underperformed because he has invested in wide moat value companies that have underperformed in industrial, financial services and insurance sectors which is 31% of BRK market cap. 26% of BRK is cash. Only outstanding investment is AAPL 43% of market cap. Again, unable to match or outperform, on average, for 13 years running simply by overweighting the wrong sectors. Does that not remind you of the MLP crowd of 2015, building concetrated portfolios of high yield products? While they severly underperformed even BRK, they employed the same risky strategy of overweighting the wrong companies and sectors. The reasons you give for the poor performance of investment icons is exactely the reason your portfolio has a high probability of underperforming; choosing investments that look good going forward at the time, but fail to produce going forward. A retiree of modest means allocating 90% of his retirement portfolio is flirting with disaster, IMHO. Buffett's widow is in an entirely different situation than other widows/retirees.

QQQ 10 year return of 20.3% is almost 50% better than 13.77% 10 year TR of VTI. And your point? Your able to find products that outperformed after the fact? Cool.

Stay safe

"Bulls make money, bears make money, pigs get slaughtered."  90% equity for a retiree is inappropriate, IMHO.


 


As Kenny Rogers reminds us, Investors have to know when to hold ‘em, know when to fold ‘em. Know when to walk away.

 


 

How apt that you picked lyrics from "The Gambler" as investment advice. I wish you and your 90% equity portfolio good luck.

0 Kudos
Highlighted
Frequent Contributor

Re: ideas for downside protection


@Intruder wrote:

@norbertc wrote:

Chang is right that we don't know the future of the stock market (although it would appear that Central Banks around the world are determined to keep the party going for now).

I agree 100% that it's silly for someone nearing retirement, who is already a multi-millionaire, to risk financial disaster. Earning another million or two isn't going to make him much happier, but a 40% loss might well achieve the opposite.. 

Chang has mentioned that he doesn't own a home. Maybe that's a reasonable place to invest now?

N.


When I retired in 2010 the economy was just starting to recover from the Great Recession of 2008-9. Many financial Gurus were recommending that retirees reduce equities to 30% and buy bonds to avoid sequence of return risk and gradually increase equities by 1% a year. At that time I had sufficient assets to support my retirement needs. I chose to increase my % in equities to 75% because the economy was growing. If I had taken the advice of Wade Phau and others I would have missed out on the greatest stock market rise in history and a 250% increase in assets.


That was a very good call. 

At present, however, 50% equities is more than enough for me.

N.

0 Kudos
Highlighted
Frequent Contributor

Re: ideas for downside protection

Works for me. Wish you luck with VTI.

0 Kudos
Highlighted
Frequent Contributor

Re: ideas for downside protection


@norbertc wrote:

@Intruder wrote:

@norbertc wrote:

Chang is right that we don't know the future of the stock market (although it would appear that Central Banks around the world are determined to keep the party going for now).

I agree 100% that it's silly for someone nearing retirement, who is already a multi-millionaire, to risk financial disaster. Earning another million or two isn't going to make him much happier, but a 40% loss might well achieve the opposite.. 

Chang has mentioned that he doesn't own a home. Maybe that's a reasonable place to invest now?

N.


When I retired in 2010 the economy was just starting to recover from the Great Recession of 2008-9. Many financial Gurus were recommending that retirees reduce equities to 30% and buy bonds to avoid sequence of return risk and gradually increase equities by 1% a year. At that time I had sufficient assets to support my retirement needs. I chose to increase my % in equities to 75% because the economy was growing. If I had taken the advice of Wade Phau and others I would have missed out on the greatest stock market rise in history and a 250% increase in assets.


That was a very good call. 

At present, however, 50% equities is more than enough for me.

N.


Whatever floats your boat. I worked for one of the TBTF banks that survived the 2008 crash.

0 Kudos
Highlighted
Frequent Contributor

Re: ideas for downside protection


@norbertc wrote:

@Intruder wrote:

@norbertc wrote:

Chang is right that we don't know the future of the stock market (although it would appear that Central Banks around the world are determined to keep the party going for now).

I agree 100% that it's silly for someone nearing retirement, who is already a multi-millionaire, to risk financial disaster. Earning another million or two isn't going to make him much happier, but a 40% loss might well achieve the opposite.. 

Chang has mentioned that he doesn't own a home. Maybe that's a reasonable place to invest now?

N.


When I retired in 2010 the economy was just starting to recover from the Great Recession of 2008-9. Many financial Gurus were recommending that retirees reduce equities to 30% and buy bonds to avoid sequence of return risk and gradually increase equities by 1% a year. At that time I had sufficient assets to support my retirement needs. I chose to increase my % in equities to 75% because the economy was growing. If I had taken the advice of Wade Phau and others I would have missed out on the greatest stock market rise in history and a 250% increase in assets.


That was a very good call. 

At present, however, 50% equities is more than enough for me.

N.


I'm working towards a lower equity percentage going into next year. It's been hard for me exchanging equities for bond funds. I like very conservative and simple bond funds with low risk.

0 Kudos
Highlighted
Frequent Contributor

Re: ideas for downside protection

There is no perfect fund/ETF you can buy and do nothing and why I made one for myself.

This is my recipe for downside protection.

1) The VIX. When VIX > 25 and rising get ready and maybe act. When VIX > 30 I sell 25% of my portfolio, VIX > 35 = 50% cash, VIX > 40 = 75% cash, VIX > 45 = 100% and I buy back in reverse.   You can select different numbers to sell.

2) A clear Trend up when to buy.

3) General market conditions: I look at bonds first (treasuries vs HYG, BND and others), bonds reflect market conditions better than stocks.  Global conditions (pandemic, wars). 

In a market meltdown I'm more sensitive, especially when the problems still exist based on my interpretation and how much I made so far and where we are going.  The Fed is your biggest clue.

The above doesn't always match the reality.  Our portfolio needs to make just 4% average annually including inflation for another 40+ years and my goals is to make 6% average annually without losing more than 3% from any last top.  With that in mind, I'm more aggressive.  I don't mind spending several days out and be wrong.

Examples:

In 2/28 I was at 90% in cash (VIX>40), days later at 99+%(VIX stays high and spiked again).  I started buying in the middle of April, VIX was  going down steadily from 80  to under 40 + a clear trend up.

Sept 3-4 sold all because VIX>35.  June 9 bought back all (just 2 days out) because VIX<30.  The more I made and the more it's unlikely to make more short term the bigger % I sell.

It's not complicates to sell just 2-3 funds.

0 Kudos
Highlighted
Participant ○○

Re: ideas for downside protection

The only condition under which the question of downside protection can be answered is with hindsight. So prepping needs to be framed around regret.

0 Kudos
Highlighted
Frequent Contributor

Re: ideas for downside protection

@FD1001 sounds like a workable plan,  but I can't do that,  I have mutual funds that I have held since the 1970s and have done e very well over the years. All I can manage is to change my stock/bond balance over time to reflect my current needs, which is a bit more conservative. 

I know you are a trader, but I cannot imagine tradind as many funds as I currently hold and at best attempt to reduce my amount of funds for future generations.  I personally don't have any difficulty managing many funds.

0 Kudos
Highlighted
Frequent Contributor

Re: ideas for downside protection

@FatKat

That's your own choice to own many funds.  It's one of my long term goals and what I recommend for others.  More funds don't get you better risk/reward, diversification or any other benefit that I can see.  In most cases the results are worse.

There is a good reason why most investment books,articles,expers talk about very simple portfolio.  The rest is up to you and if you are not there it's because it was your decision.  It's pretty easy to prove it, if a friend asks for your advice or spouse/heirs manage this portfolio I'm sure you will not tell him/her to use many funds.

Timing is not recommended for most either, I have been using it for downside protection for my specific goals mainly in retirement because I can't find anything better and I have been looking for years and the results are good too.

It can be done very easy with just one fund unless you own many funds, each with less than 10%.  Example: Suppose you have 60/40 and 20% or more invested in SPY/VTI.  You can use the VIX starting from 30+ to reduce it by 5%, VIX>30 go to 15% VTI,  VIX>35 go to 10% VTI and so on.

 

0 Kudos
Highlighted
Participant ○

Re: ideas for downside protection

FD, this is an interesting strategy using the VIX to guide allocation.  While I'm comfortable doing puts and calls on the VIX, I view myself as a "small fish in a big pond" with VIX trading and worry that the options market is highly manipulated.  Do you have any concerns that the VIX will not remain as predictive as you expect and may lose its "helpfulness" over time with guiding allocation decisions?  Also, if you happen to have any resources you relied upon to feel comfortable with this strategy, please let me know as my google search fell a little flat.  I'm always open to exploring new strategies to see if they could fit my portfolio management.

0 Kudos
Highlighted
Frequent Contributor

Re: ideas for downside protection [$VIX]

$VIX has been low [under 20] for years except for occasional high values. High VIX in 2020 is unusual and so are any trading rules related to it. 

Keep in mind that normal daily stock volatility % is VIX/19 and unusual volatility can easily be 2x-3x that.

As for the topic of this thread, downside protection can be bought but is expensive. One has to know when to buy it ahead.

https://stockcharts.com/h-sc/ui?s=%24VIX&p=D&st=2007-01-01&id=p04219059110

Screenshot 2020-09-18 06.18.16.png

YBB
0 Kudos
Announcements