I Took Some Off.

In Sept 2007, I was talking to a friend out California way and she asked me “what about this market” in a “how ’bout them Cubs” kind of way. That question crystallized my trepidation that had been growing over what I saw as a looming debt crisis. I was long the market quietly trying to recover from the dot.com bust and rebuild my portfolio, By 2007 I had a pretty balanced portfolio in things like S&P 500 & S&P 400 and VOO and cash and bonds. I had studied modern portfolio theory and was on board. It was before all the calculators came online so my portfolio was kind of guesstimated but it wasn’t horrible like my portfolio was in 1999. I told my friend I was scared to death. The debt bubble was obvious, and the coming crash was obvious, I just didn’t know how to play that. I had read some books based in the “men are men and the sheep run scared” mentality of never sell and take your lumps, you chicken shit. I see that bravado on display today in the FIRE community. All I can say is whip it out someone gonna cut it off.

Soon enough I had lost my second million dollars in 8 years playing the stand tough game. I recovered the lost million by dollar cost averaging into the market. after selling the debacle in 2000. In 2000 many things actually went to zero or nearly zero. In other words some of my holding never could or would recover. An example is GE. It peaked around 70 I sold at 20 and today it’s 8. So I managed to have some cash left to reinvest. In 2003 we were headed into war with Iraq and the market had bottomed. I asked my self do you bet with or against the US? Being a Navy Vet I decided WITH and plowed 1M into the market at it’s lowest point in 2003. This paid off and due to the credit bubble. I had made back my lost million plus some.

History was about to repeat in 2008. I could see the crisis on the horizon, it was obvious. You can’t own 2 new cars a boat a McMansion on a cabbies salary, default was a comin’. But I still stood pat and lost another million. This time I didn’t have to sell because companies did not go to zero. The fed stepped in and did some fancy footwork and made what should have been a flat out depression into a multi year recession. It took 7 years for the market to reach the 2007 peak. I made back my million plus a lot more because I had some risk management on-board in 2008. By then I was on the efficient frontier so my loss was muted because my risk was managed, and I was made whole in 2011, 2 years earlier than the 2013 recovery of the stock mavens. I was already compounding when they were just getting even, so my period of compounding for this expansion has bee from 2011-2019 not 2013 – 2019. I have 2 years more compounding.

In the mean time I’ve retired. Being retired requires even better risk management because you are not adding more W2 money to the pile anymore. You instead are spending portfolio money to stay alive. I’ve been listening to videos by some damn smart finance people and not one of them is bullish. They are either neutral aka don’t have a clear conviction or they are all the way to 100% we are headed toward OR ARE ALREADY IN a recession. Dalio thinks we are replaying 1929 . 2008 was the once in a lifetime event just as 1929 was the once in a lifetime event of that century. What followed ’29 was ’37. He thinks were are headed to our version of ’37. Every expert I listened to was either about collapsing risk to the long side (reducing equity exposure) or actually getting ready to short equities (increasing risk to the down side).

In 2007 there weren’t really good ways to buy downside risk against credit swaps, at least I didn’t know how to short that, but today there are plenty of short and levered short ETF’s available so you can trade a crash, but I’m not doing that because I have no W2 to take up the slack if I’m wrong.

Neither am I stupid enough to just stand there and take it because I no longer have a W2 as a backup. So what I did was sell some equities at the top of the longest economic expansion in history. In my case I was able to sell tax free since I have tax efficiency built into my portfolio. Given the impending corporate debt crisis and pension debt crisis and the baby boom underfunded retirement picture and the fact the rest of the world is already in recession I bought long bonds. Germany just today issued 30 years with a negative interest rate. World wide banks have PE’s of about 8. US banks are at 12. That difference has to arbitrage and if Germany is issuing negative debt on all their paper all the way to the 30 year Bund, German banks are sunk and can’t rally, meaning US banks must fall. The FED must therefore cut rates or increase QE or both forcing US 30 years lower, so my 30’s will appreciate. If the US goes negative my 30’s will appreciate a lot. I also bought GLD which tends to rally when it hits the fan. Selling stocks reduces my risk. I sold enough to reduce my risk by 12% and with the other moves may see no change or even positive in my return. My other advantage is I’m living off cash so even though I changed the risk profile the portfolio is closed to SORR, I improved my sequence risk with no SORR risk at least till my cash runs out. SS kicks in 2.5 years from now further improving my cash flow.

What did I give up? The market will probably rally some in the short term and become more volatile. I’ll miss out on some of that rally but also more of the volatility. I calculated my loss of return:loss of volatility ratio to be 0.4:1 meaning for every 10 bucks I lose if the market crashes I only lose 4 bucks of return since my return is not strictly dependent on the market but diversified. If the diversity was a good bet I may loose nothing in return as the alternatives (30 yr and GLD) pay off. It’s very non bogglehead approach, to sell some but I did not cash out only managed my AA to a lower risk. I moved to a AA I can afford to hold for the long term which is a bit different than market timing risk on risk off. I own cash but I didn’t add to cash so my portfolio is still risked, just less risked. I have enough money and a short enough retirement horizon and a small enough WR, I can easily afford to live with less risk.

18 Replies to “I Took Some Off.”

  1. I had to laugh at the “men are men and the sheep run scared” mentality of never sell and take your lumps. That was me! During the 2000 Bear I was approaching peak earnings early in my career so I just kept plowing money into the market. I was lucky that I was a little wary of the tech stock hype so they were only a modest fraction of my portfolio. But with a much larger net worth in 2008, I finally understood that there is risk in the market. In what turned out to be about the half-way mark of the decline I chickened out. I had been gravitating towards dividend growth investing so I sold anything that didn’t pay a dividend, about 1/3 of what remained. After the election, I figured the worst was over so I put the cash back to work although now with a heretofore non-existant bond position. I did get to experience a dead cat bounce but the market finally hit bottom in the spring 2009. Peak-to-trough I was down $1.4M. Ouch. Now thanks to the Bull run lasting over a decade, it makes sense to take some risk off the table. Thanks for your many thoughts on the subject as I apply some of the lessons to my own portfolio. I appreciate your alternative view as a reality check.

    1. Tnx Gasfire,

      it’s a bet but not much of a bet. When you play the odds, probable things probably happen. But then buy and hold is playing the odds too. Th echo chamber works right up to the minute 1M evaporates. It works if the companies you own remain solvent and profitable. In 2018 50 companies of the S&P accounted for about half the growth. Roughly 50% were actually underwater. What happens to growth when 50 become 25? What happens when BBB debt goes junk? Can you even still be in the S&P if your debt is junk? How is only 50/500 consistent with diversity? If All of the opinion I reviewed didn’t have 1 bull and they all had extremely relevant concern, probable things probably happen. Did I mention the yield curve has flashed recession 3 times? A 12% reduction in risk is a moderate move. I really don’t need more return, just a little enough to keep up with inflation plus maybe 1.5-2%. I’ll let someone else be a hero. Instead I’ll be the guy who sleeps soundly.

  2. I’ve been watching the videos you have been including in previous posts and they have been truly eye-opening for me. Rauol Paul was one that just laid out fact and it was hard to ignore. The timing may be off when it does go down but the fact of the matter is it will at one point.

    I know as you decrease stock% it causes you to be more conservative but even with a 60/40 portfolio doesn’t that still have a pretty good risk?

    Say a hypothetical drop of 50% stock occurs. If you are 80/20 in a 1M portfolio you just lost $400k. If you are 60/40, you lost $300k. Granted $100k is a lot but the loss is still quite a hit. I guess you can say 20% stock reduction gave you 25% less of a loss so that’s a bit of a win.

    1. Your analysis is correct but presumes the market will recover. If the market doesn’t recover that extra 100K is a lot more valuable. Instead of 600K to spend on retirement you have 700K. If the market roars back you miss out on a little bit of return. I calculated a 5% loss of return so your 1M would recover to 995K. If you own gold and gold explodes you might not loose anything because exploding gold counters collapsing equities. If you own 10% gold and gold triples your 30% equity loss is covered. If you own bonds and interest collapses you make money while the equity suckers are loosing their shirts. This is how non correlated diversity works.

      You might dare to ask will the market recover? Ray Dalio thinks we are cycling like the ’29 ’37 recessions. What got the world out of ’37 was WW2. WW2 was ended when we got nukes. Who has nukes? France has nukes. England has nukes. We have nukes. Israel has nukes. NK has nukes Russia has nukes. China has nukes. Likely Iran has nukes. India and Pakistan have nukes. Something like WW2 is not going to do the trick, too many nukes. There is ONE reason to have a strong military. Trump gets it. If you have a strong military you can kick somebody’s ass if they come to steal your gold like Germany did in WW2. If you have a weak military you give them the gold. Why do you think India and Pakistan have nukes? It’s the only way they can maintain separate identities and not get their gold stole. Why do you think Israel has nukes? They don’t want their gold stole. The geopolitical system is precarious and far more deadly than 1942. Ask yourself what happens to the nukes if someone unfriendly gets control of say France or England?

      What about the global economy? Globalism has prevailed since WW2, probably WW1. The globalists have turned the crank and wrung every dollar to be wrung out of the world economy, which has caused severe worker dislocation. Your Maytag was made in Mexico not Dayton. This has pissed off the middle class. In England they voted Brexit because they are pissed off. They are sick of Brussels fleecing them while they toil. In France that idiot Macron was lucky they didn’t pull out the guillotine. In America every prez except maybe Reagan and Trump has sold out the people. Trump is in office because the peeps are pissed off, really pissed off. In Europe they are paying banks to hold their money. Think about that. Buy a $1000 bond and then pay you an additional 5 bucks so you get $995 back at maturity. Japan is off the rails. That society is dying demographically and so xenophobic there is no chance of immigration. They have aborted themselves out of existence. Dead economy walking. Russia is going no where. Too many drunks and too much corruption. Australia is in recession. China is trying to loot Hong Kong. Why do you think there are so many protesters? The peeps understand a money grab when they see it. I’ve been to Hong Kong a few, times very cool place, too bad it’s dying. The fact China is looting it’s one legitimate connection to world commerce is an indication of how desperate they are. China is falling apart. Argentina is in default. Norway is in default. Universal health care bankrupted Norway, and Sweden and Denmark are soon to follow. Buying Greenland isn’t so far fetched if you’re going bankrupt. Greenland has rare earth. Of course Denmark won’t sell Greenland has rare earth!

      So where is the growth engine?

      We have witnessed the “middle-classing” of the world over the last say 50 years. Country after country that were once hand to mouth now have a middle class. Funny thing about a middle class once they get a little money they get uppity and expect their government to serve them instead of vis versa. They don’t mind working hard but you better make sure they have a job and get paid or they’re going to be pissed off. We are living in a world where the new and old middle classes are PISSED OFF. I don’t think that world ever existed before. I don’t think the old methods of ripping people off are going to work any more. Witness France and Hong Kong. It’s hard to have an economy with a pissed off middle class. If you kill them there is no one to do the work. What to do? what to do? How about open boarders!! Just import a bunch of workers willing to work for beer and chips and let the middle class try that on for size! Let that “market economy” of cheap labor shut them up! Open boarders is the ruling class trying to take back control from the middle class. It has nothing to do with Dems and Repubs

      What that says to me is we are likely to grind lower for a very long time. If we are lucky we will go sideways. Reversion to the mean is a real thing, and a pissed off middle class is a real thing. It’s the reason the tax code has become so progressive. Up to 100K MFJ they pretty much leave you alone, 12% no cap gains. Whole lot of voters live in that space. I intend to live in that space as long as I can. The reason they burned down Paris is Macron touched that nerve. Once you get out of the 100K MFJ range you are rich and liable to being soaked. If you own “max out your pretax money” soon enough you will cross the line and start getting soaked. The population is pretty OK with that but they won’t be OK with getting $666 on an expected $1000. That’s a stake in the heart of the economy. Much is written about geographic arbitrage. The real deal is tax arbitrage. You want a happy life? Learn to live less than 100K/yr MFJ life and have some means to keep yourself in that population. That’s tax arbitrage. The middle class will be protected, every body else gets hosed. Dare to be middle class. In my retirement therefore I don’t see much happening for a long time once the leverage damn breaks. The dynamics of that situation is: own a big relatively unleveraged pile of money and have a short period retirement, a small SWR, and quick access to SS and Medicare. The whole FIRE thing only works in a market of “ever expansion”. It doesn’t work very well in a market of reversion to the mean. If we go socialist put all your money in BTC, and move to Thailand or Viet Nam.

  3. All I know is that my best investments were always made when few wanted the asset. This applied to RE and commodities. I bet it is the same with equities.

    I am putting an amount in this market. But we plan to have adequate back up plans if this goes south quickly. Like keep working since we are still in our 50s.

    I really appreciate your candidness with your plan. Because this is how most of us who actually care about dealing with all this will think.

    I only read for plans. Because I am sculpting my own plans accordingly. ?

    1. Hi MB

      The rule is buy low sell high. The other rule is sell high buy low. There are no other rules. The “problem” is if you buy hi sell low. We are in the longest economic expansion ever. I already bought low, time to sell some high and pocket some profit, or at least store that value in something that improves my safety, and is low like gold. If gold goes hi I’ll sell it high according to the rule.

    1. Hi Tex-Mex I bought EDV. My bond portfolio is now 10 years, EDV, in IRA’s and cash in 2.4% government protected accounts. If the market keeps going up I’ll probably siphon off some more profit on a % basis, re-balancing into lower risk, and spread it between the bond assets. If the crash comes I’ll ride it down and Roth convert a bigger percentage of the IRA’s at a lower tax basis, hunker down and pray for rain. If I make money on the bonds and gold I’ll sell high and buy stocks low.

      1. Makes sense going all the way to EDV (24-year duration LT Treasuries) since they are the strongest hedge among bonds in “flight to quality” (like today is turning out).

        You said “If I make money on the bonds and gold I’ll sell high and buy stocks low.” Will this be in your IRA or in your brokerage?

        1. I have several hundred K of tax loss harvested and if the market dives I
          will tax loss harvest more so it won’t matter. My bonds are presently in a TIRA (except cash) I’m converting everything but bonds and a small stock contingent to Roth so the bonds will stay in the TIRA which I will slowly RMD once I hit 70 or 72. (depending on if SECURE gets passed). If the market dumps I will draw more from that account to cover expenses and close the stock account to withdrawal defeating SORR, but I have about 700K in cash right mow so I can live a good long time making 2.4% while things recover. By then I’ll be on SS and need to re-imagine my future withdrawals anyway based on finances available then.

  4. If you were 15-20 years away from retiring would you still be de-risking ? Ie do you feel we will see a permanent decrease in equity values?

    1. I can’t answer that for you. The way you loose money is to sell low. The S&P is 2923 this morning. Let’s say you bought in t an average of 2000 If it dropped to 1500 in 3 days you’d be down 500 points on the average and about 50% from the peak, If you freaked and sold you’d loose money. If you didn’t freak and held, you’d still be under water on the 4th day. So the question is what happens next. If it’s 2008 in America you’d be made whole in 2013 for that kind of drop and you owned no global. If you owned a lot of global, the global would still not be whole today because EU is a total basket case and Japan is dying and China is a mercantilist fraud.

      More than a few think we are replaying 1929, 1937. In 29 it crashed recovered and crashed again in 37, THE WHOLE WORLD like today. Germany decided to go on a shopping spree and took over France Italy Poland etc. England was on the menu, and then it would be our turn plus Canada and South America. It took WW2 to end that expansionism. Crashes are often geopolitical not just monetary. So the question is this: 37 or is it run of the mill dip? I’ve looked at proponents of both camps and I’ve moved to the ’37 camp. If it is 37 you do not have 15 years to retirement or even 20. Double that. If it is 37 you’ll be lucky to have a job and a place to live.

      There is a book called Nomadland that looks at what happened to a segment of the population in 2008. These were solid middle class to upper middle that lost everything. They had 401K’s and houses with mortgages. The job went, the savings went, the house went, they moved into their cars. They would make money traveling around to Amzn fulfillment centers for seasonal work, or signing up to tend camp sites in the summer or pick sugar beets in the fall, for minimum to 10 bucks an hour. These gigs were seasonal so they didn’t have steady 10 bux an hour. Often they would crash at their kids places between gigs.

      The problem with the FIRE movement is nobody ever fails. You’ve never read about a failure. Everybody is the smartest guy in the room full of bravado and flimsy side gigs. What happens to a blog if the advertising goes away? Advertising is the first ting cut in recession. It’s all happy talk all the time.

      The way you make money is to sell SOME high before the crash. You don’t sell everything just take some profit and invest in something not likely to crash in a crash. Taking profit is like putting on a seat belt. Taking profit can slow down accumulation if the recession is shallow and in the FIRE community RETURN is all people think about. It’s like a pecker measuring contest. I’m 80/20!! HA I’m 90/10!!! Buncha weenies I’m 100% !!!!. Wen the market drops in half who’s the weenie? All of them. 100% is the weeniest. Not a contest I’d like to win. Neither am I interested in living in a car or picking beets in October. I made a lot of money since 2008. I started selling some stock in 2017 because the market had been good and I needed money to Roth convert. The point is the market was up and I had a need. That’s what my portfolio is for to satisfy my need. I took some more off in 2018 because once again the market went nuts. I got lucky and sold in Sept 2018. There are likely changes to the tax law and I wanted to position myself for those changes. I sold because it was defensive and I had a plan. This week I took more off and stashed it in alternative assets. If the market doesn’t crash my alternatives will make less than the market but my portfolio is large enough I could go to cash and pay for my retirement plus someone else’s, so my goal is to not loose big or win big, but to hit base hits year after year without striking out.

      The problem with FIRE is if you’re going to RE you better hit a bunch of home runs both BEFORE and AFTER RE, otherwise you’re going to be beet pickin at 75. The more I study this the more it seems like 37 to me, so I made that bet. If it doesn’t pan out I’ll still have plenty of money. My losses will be a slightly reduced rate of return. If it does pan out I’ll be preserved and miss a big hit from the crash, BUT that other joker who’s retirement I was paying will need to find a different benefactor. The points therefore are do you believe the economy is basically stable and will never change in the next 20 years as far as upward trend or do you think things are a bit (or a lot) wobbly.

  5. Hey Gasem, thanks for the informative post. It got me thinking more and more about what can happen next. Being relatively young, I have never experienced any economic depression at all. I had no income or investments prior to 2009. And when I was finally able to moonlight as a senior resident in 2010, I started investing. Obviously my earning and investing trajectory went up as I become an attending and later a partner. I’ve been accustomed to this historic bull run. But I can see what you mean how it is starting to look like ’37 all over again. The debt burden, wobbly economy, geopolitical factors seem to point that way. Because I think my job is relatively stable and as a family we already live on quite a bit less than my income, I figured I can hold on, tough it out, and stomach any major loss on my equities. I for sure would not sell because with a stable income, I wouldn’t need the money. But to see that loss suffer for 10, maybe 15 or 20 years before breaking even again… that has me thinking. Perhaps it’s time to cool off dumping most of my excess money into equities. Maybe long term bonds, gold, and BTC is the way to go. And if we go socialist… I guess I better start packing and geoarbitrage to Thailand…

    1. Hey DrM

      You have the best risk “averter” abundant human capital. Your family is even more risk avert right now, 2 high incomes and only 1 kid. I don’t know what your AA mix is, but if it’s anything like the rest of the FIRE crowd it’s risky. Stock prices have risen but 19% of that rise is smoke and mirrors from companies buying back stock using cheap debt. The S&P closed today at 2847 that means 540 S&P points are squishy financial engineering. I read a recent paper (Aug 23) that said 113 of the S&P are issuing guidance, of the 113, 87 are issuing negative guidance and only 26 positive. I can give you 50 more statistics like that.

      Given your profession you will likely never suffer a job loss but you may suffer income loss. There is a huge push for “other providers” to enter out field, Dr’s of Nursing and such. I can easily see a Dr of CRNA coming to compete, a DR of CRNA who would be happy to make $200K on the hospital’s payroll complete with benefits and a 40 hour week and let the hospital bill and keep the extra 200K you make, for themselves. Nurses don’t sweat it, They just do policy, and go home when it’s 3:01, pay me my 200K please. Pain medicine used to be the purview of Anesthesia. Now every swinging dick with a MD is a “pain doctor”. It’s the reason an epidural only nets barely $30 after collection, practice overhead and malpractice maybe less depending on payer mix. Supply and demand.

      That said I would make hay while the sun shines. I would hedge some and guard against the financial engineering genie. The FED wants to get rid of money as “cash” so you can’t hide. Too much shadow economy, too much theft and graft so eventually we are going to see the governments version of BTC and that’s going to be the legal tender and that’s going to be 100% tracked by the block chain. The crypto will become cryptless to the government. Once the underground market is eliminated the FED will be free to financially engineer all they want but 9 out of 10 times the fed gets it wrong, so I have mixed feeling about BTC. I recently bought more BTC because it acts like GLD and gives some diversity to my alternatives but I’m not sure I’ll buy more.

      I read something else about passive index funds, touted as the end all in diversity. They called the index trade as equivalent to autonomous driving, algorithmicly brainless. What happens to risk when your cheap S&P 500 fund has 450 losing stocks and only 50 high flyers, high flying enough to beat the other 450 and raise the index eg THE FANGS. It means your risk is not apparent and 50 stocks is not diversified especially if 19% of the stock price is from stock buy back and floating debt.

      In addition I’m retired. I used to be productive, very productive. I never thought about retiring early and wasting my human capital. My productivity and investment in the society is what propelled the society. Now it’s someone else’s job to do that. Seems all the someone else’s also want to retire early and waste 20 years of productivity and human capital on non productive bull shit like blogging. That future RE society is going to take a productivity hit. You got 2 choices when that happens tighten the belt or deficit spend. Venezuela here we come. So I think it’s most prudent to not focus so much on return but on playing some defense. Return is important but with return comes excess risk. If productivity goes away return goes away and risk remains. The other thing is to not count your chickens before they hatch. FIRE and FI is notorious for this, yet their wealth creation is almost exclusively passive and entirely dependent on the economy. If the economy does poorly they gonna do poorly PERIOD. Nothing wrong with owning a dab of gold. Not a huge pile but a dab. China bought 80 tons of gold so far this year, mostly because they probably want to punish us in not purchasing treasuries but non the less it points out how non correlated diversity works. At the end of the day if the world crashes China owns 80 new tons of gold. It won’t save them but better than a sharp stick in the eye.

      My other advice is don’t quit your day jobs and don’t plan on quitting. You have no idea what the future holds, and blogoland is not reality by any stretch. In ’37 it took a freakin world war to reset the system. Now we are surrounded by nukes both tactical and strategic. We are in a societal turn after 37 came 45 and the peace time expansion of the world. So things recover but they recover through creative destruction. A job rides the crest of creative destruction and will re-inflate your life if it becomes deflated.

  6. Gassem, I agree with your comments here. You should turn your thoughts on macroeconomics and geopolitics into a full blog post. S&P volatility has been making me nervous, and I’m leaning towards agreement with your assessment on where demographics and monetary policy will lead us over the mid to long term.

    1. Equity prices used to be based on productivity. Now equity prices are based on debt because of buy backs. Corporations used to employ the middle class. Now corporations create middle classes in foreign countries while Americans don’t get raises. Government pensions NEED to make 7.15% on their investments, they haven’t done that in a while. The S&P500 since Aug 1999 (20 years) has an annualized inflation adjusted dividend reinvested return of 3.51%. So if a pension is in 100% S&P 500 (a pretty risky position) it’s meeting only half its needed return with a freakin 100% stock portfolio. As I stated stock prices are artificially inflated due to buybacks meaning buybacks have been funded by cheap debt, so much debt, the debt is now 25% BBB, one step above junk. If that debt service fails, corporations fail, and stock prices fail, and pension funds fail and a big wad of consumers counting on pension money won’t have the pension money promised. No money no spendy. No spendy = recession. So the whole thing is levered up beyond belief. It’s no wonder they want to take away everybody’s guns. Might not happen, but the yield curve has inverted several times now. Stocks are traded by robots, bonds are traded by people so the bond traders are telling us recession is coming, my guess sooner rather than later. Maybe a mild recession who knows, but it may be a hum dinger. The rest of the world is already in recession as far as I can see.

  7. Fascinating post, especially enjoying the comments. I envision you as the ghost of Xmas future when it comes to investing, so it’s incredibly helpful to forecast what considerations are at the forefront in retirement by seeing through your eyes.

    My current insurance plan is to invest in a long runway by making medicine a remunerative hobby I enjoy instead of a sentence I am dreading, so that I can sustain it as long as possible through upcoming mean reversion.

    1. Nothing diversifies like a good reliable well paying job. Then when you are old (like me) tap the nest egg till ya die!

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