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THOSE WHO REGULARLY read posts on Bogleheads.org—and I’m guessing a good chunk of HumbleDollar readers do—know that the Bogleheads’ philosophy is to:
The Bogleheads forum is built around the investment philosophy of the late John Bogle, Vanguard Group’s founder who launched the first index mutual fund in 1976. The strategy is simple and brilliant, and has been shown to outperform almost all active fund managers over the past several decades.
All that said, I’m going to admit that I haven’t stayed true to the Bogleheads approach for the past few years. When interest rates began to rise in early 2022, I started paring back my stock and bond investments.
Once Treasury bills and certificates of deposit began approaching, and sometimes exceeding, a 5% yield, I put almost all our portfolio into money market funds and, as of this writing, almost all that money remains there. My thinking is that getting that kind of yield essentially risk-free is good enough.
What’s more, and probably most important, my wife and I are almost 68 years old, fairly early in our retirement, and I don’t want our portfolio to take a double-digit hit in the event of a severe market correction. A Boglehead would call this sequence-of-return risk.
The simple fact is, I feel that stocks, particularly in the U.S., are overvalued, and I’m happy to wait for what I believe is an inevitable major market correction. Whether that happens in six months or six years, I plan to stay mostly in cash until then. I don’t feel the current risk is worth the reward.
Of course, this goes completely against Bogleheads thinking, and I won’t be surprised if I’m proven wrong and miss out on more market gains. Still, I believe that keeping large sums in stock markets that set all-time highs virtually every day, even as interest rates can provide a strong, risk-free return, isn’t a good idea.
It’s obvious that I’m violating point No. 1 above. I am indeed timing the market. But I do feel that the Achilles’ heel of the Bogleheads philosophy is the belief that stocks always come back in a reasonable period of time after a correction.
Recent U.S. market history supports this belief. Markets needed only two years to recover from the 1987 Black Monday crash, six years to recover from the dot-com bubble and five years to recover from the 2008 financial crisis. In fact, the recovery from the COVID-19 crash took a mere six months.
All that said, am I willing to base our financial future on statistics from the past? Nope.
Elsewhere in the world, it has been known to take a while—a long while—for markets to recover. It took Japan’s Nikkei index an astounding 34 years to surpass its 1989 record high, a feat achieved earlier this year. If that arc were to occur now with U.S. stocks, the recovery wouldn’t be complete until I turn age 102. At that point, the wait would be over—and, almost certainly, so would I.
Tony Wilson spent most of his career working as a journalist and then newsroom technology trainer at news organizations in Kentucky, Kansas City, New York City, London and Geneva. He finished his career as the translations planner at printer manufacturer Lexmark. Tony’s previous articles were Fearing Nothing and Happy to Follow.
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A quote for you from Dale Carnegie, “A man convinced against his will is of the same option still.”
As a Boglehead, I certainly identify with your article’s premise. And like you, I made the decision to diversify my portfolio, by taking a significant sum “out of the market.”
In June 2023 I purchased 4 Fixed Indexed Annuities, with Income Riders. One I was from my wife’s Roth Account and the other three from my Roth Account.
Your “investments” are earning an interest rate. My annuities are not benefitting directly from interest earnings, rather, they are growing by a guaranteed fixed rate of 8.25%, in the Income Account of each annuity. In other words, for each year I delay taking income, my income account balance, from where future guaranteed income stream will originate, the income account to grow by 8.25%.
And like your strategy, many will argue that you are timing the market, or missing out on the market’s recovery, or you locked in your losses, etc., etc. The truth is you made decision to accept a reasonable rate for your investments and remove them from the risk of being in the market. Key words here..YOU and YOUR.
I think am 5 years older than you presently, as I am 73, and like you, I do not choose to take the chance that the next down turn will have a 2022 6 month quick recovery vs, the 5 year recovery of 2008. I simply choose not to participate, with those funds “moved off the table,” and invested in guaranteed income streams.
Now, I still have a considerable balance in the Market, and those funds are fully invested in equities…Vanguard’s VTI and VXUS. They represent my equities and my annuities represent my fixed income portion of my portfolio. I simply substituted one form of fixed income, Annuities, for the traditional form, Bonds.
Add to that my 67 months of cash, and that is my answer to all the various financial risks of retirement.
I enjoyed your article, as it gave me the opportunity to rethink and reaffirm my strategy. Thanks!
Tony,
Like it has been stated, one of the Boglehead tenets is setting an asset allocation that allows one to sleep at night…and of course, an investor is allowed to change their allocation if they feel compelled.
Corrections (~10%), bear markets (~20%), crashes (yikes)… We don’t like any of those :(, but they are the price of doing business.
I’m curious what magnitude of correction you are looking for to “get back into the market.” Recent down draft examples – S&P 500 down ~25% (~3600 from 4800), NASDAQ down~37% (10K from 16k). Obviously, those occurred while you were going to cash, but now what? Just curious if you have determined what magnitude of pullback and what index (or indices) will give you “the sign.” Thanks.
I also have to disagree with the traditional advice of don’t time the market. That philosophy goes against common sense of buying stuff when it’s on sale or avoiding it when the prices are high.
I know no one can predict when the exact top or bottom is reached but I do know when the market is in a significantly higher or lower state than normal. I don’t sell when the market is significantly up unless I need some cash or think it may be a good tax move. I would also put off any non recurring investing during peaks. When we have corrections I’ve always invested as much extra as I can over a period of time.In 2008 I was getting in as much OT as I could to buy more stocks. While retired in the 2022 downturn I did some significant purchasing.Both of these moves paid off handsomely.
I think that with discretion and common sense you should always consider the current market ‘time’ when buying or selling when ever possible. Being semi retired now for a couple of years I’m rethinking this strategy a bit as I have no income and have tax consequences to deal with and plan for.
I think we’re on the same page on this one. To me, it’s not market timing, but over-rebalancing during market declines. Here’s a piece I wrote about the topic back at year-end 2023:
https://humbledollar.com/2023/12/lean-against-the-wind/
I appreciate your post. The responses show how passionate people are about their investment philosophies. I feel the same way you do. Once the fed raised rates, I started moving most of our IRA money into 5 and 10 year treasuries and TIPS. I have also been buying the maximum amount of I-Bonds for both my wife and I for the last few years and will continue to do so. Our taxable account money is in money market accounts and short term treasuries that automatically reinvest at maturity (every two months). I keep 15% of my IRA money in index funds just to have some exposure to stocks.
Yes, we are very conservative but we are very happy with that mix of investments. That’s really the most important thing.
We are also very fortunate that we both have state pensions (no COLA), I have a military pension and my wife is drawing SS both of which have COLAs. I will be drawing SS in three years when I turn 70.
Again, thank you for the post that represents the readers with low risk tolerance.
I survived the numerous crashes since ’87. After each I invested more in CD’s than the market.
My parents were depression era , so I think it came easy for me to be more conservative, as my father never held stock, but did invest in So. Ca property which funded his retirement. I followed his advise and bought a So. Ca home near the coast in 1970 with my GI Ioan, that seemed so very costly “at the time”. Forty years later it was the golden parachute that landed my wife and I in Hawaii, where
to this day I’m maintaining 75% of holdings in CD’s, a paid for piece of property that’s conservatively growing at 15% annually.
But the best part is, “the same ‘ol”. At 79 years old, I sleep very well, thank you.
Aloha and good nite.
Bob Smith
.
Tony, I salute your bravery for posting this article to a tough audience. I share many of your sentiments for similar reasons and am currently overweight cash and short-term bonds but still hold a healthy slug of equities and will add during the next inevitable stock market swoon.
So after the 2008 crash I went insane and went to cash, (then double insanity and went into REITs). For seven years I watched the market recover and go up and up all the while stuck in REITS, lost a lot in principle and opportunity loss. I’m 64 and have about 60% in stocks, the rest in bonds and cash. I will NEVER get out of the market again. But hike your own hike and be happy. thanks
Following the dot-com crash, the years 2000-2009 were labelled the “lost decade” by the Wall Street Journal. The reason? The total return of the S&P 500 was -9.1%.
But during that same span of time, emerging markets returned 162%, small-cap value returned 158% and REITS returned 169% (data from A Wealth of Common Sense by Ben Carlson).
It is well-known that large-cap tech stocks are the main driver of rising market indices. But other sectors of the market may not be overvalued. Some exposure to smaller companies and international stocks might be warranted (say, 20-30% of your portfolio) even if the U.S. market, as a whole, looks expensive.
How confident are you that MMF rates will beat inflation? What does history say about that? Are you looking at TIPS to mitigate the risk that they won’t stay ahead?
I too am approaching a point where I don’t have years-and-years to wait for a potential Bear to return to his den. Thankfully, with a 50/50 stocks/bonds allocation, I have “enough” to comfortably live on TIPS returns plus Social Security.
Specifically, by summer’s end my fixed-income holdings will be two-thirds TIPS and one-third MMF. Then I just have to remember that while my survivors may care what stocks do/did, I don’t have to care. <grin>
“It took Japan’s Nikkei index an astounding 34 years to surpass its 1989 record high, a feat achieved earlier this year.”
I think that the headline misses a lot about the “why” it took so long, and one major reason is that the people actually weren’t consuming much, and were actually doing mostly what you are trying to do, which is to not own stocks and only having essentially savings accounts. Given the US culture of consumerism, it’s unlikely that the US would ever get into that state; this is the primary reason the US seems to be able to recover from crashes and recessions relatively quickly, compared to Japan.
That is the ostensibly the primary reason that the Fed has been trying to keep inflation at 2%, since that encourages people to maintain a certain amount of consumption, which is a big driver of the GDP and financial well-being of the US stock market.
To some degree, going all in with money market/cash is not only trying to time the markets, there’s a rather large longevity risk, i.e., outliving your money, which is another thing that Bogleheads do, or should, worry about as well. Note that all these economic trends are not independent, i.e., the interest rates are high because the Fed cranked up interest rates to fight inflation, and people are still essentially on a buying frenzy. If inflation eventually gets into the 2% Fed target, interest rates will be dropping, and we’d likely be back in the negligible returns for savings and money market accounts that we’ve been experiencing since the Fed targeted a 2% inflation rate. While the core and headline inflation numbers might get down there, there are other costs that rise faster than that, namely medical and long-term care; if they do, then longevity risk vis-a-vis those costs are a real and present danger.
Not an approach I would use but I hope it works for you and I understand your reasoning. Per another recent HD article – https://humbledollar.com/2024/05/wheres-the-value-2/?utm_source_platform=mailpoet – I’m a collector of quotes. Your article brought several investment quotes to mind including:
Peter Lynch: “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”
Benjamin Graham: “The investor’s chief problem — even his worst enemy — is likely to be himself.”
John Maynard Keynes: “The market can stay irrational longer than you can stay solvent.”
The Keynes quote is great — but he almost certainly didn’t say it:
https://quoteinvestigator.com/2011/08/09/remain-solvent/
Jonathan, thank you for that. I will update my list and attribute the quote to Mr. Shilling. Also a good site for me for future reference.
I’m in London UK and just came across your great article by accident. I’ve done exactly the same but at 58, made redundant, career over as too old – a lot of ageism out there nowadays. My view is about a 60% chance of something serious impacting the markets. I feel really bad for Gen Z and Milenials, (my kids) here house prices haven’t been this far out from salaries since 1880. It very much feels like the 70’s to me, and the AI bubble reminds me of the past ‘corrections’ which seems like a diplomatic way of saying big selloffs by the casino house, and the house always wins, apart from those able to stay in a long long time. A bird in the hand is my motto for now, though barbell strategies look interesting. I’ve cut spending massively to counter inflation.
The Magnificent 7 stocks are driving a lot of the run-up in US stock valuations, accounting for something like 30% of the S&P 500’s returns. Instead of sitting on the sidelines awaiting a correction, have you considered value stocks instead? True, they haven’t returned much of anything for quite a long time, but perhaps that’s a decent reason to consider them. The P/E for Vanguard’s US Growth Index Fund is 35.1. Their Value Index Fund P/E is 18.6. Also worth considering is a Total International Stock Fund. This is kind of a value fund as well given the low P/E of 1.4 in Vanguard’s offering. A single country can tank for a long time as you point out, but diversifying across lots of countries with still a good amount of domestic stocks split between value and some growth is worth a look. Lastly, in order to reap the reward of market timing, you have be right twice: once when you pull out of the market and again when you buy back in. You should have well-defined criteria for when to buy back in. This is no easy task. I didn’t develop good re-buy guidelines when I pulled out of stocks in 1997 anticipating a major drop. Right first + wrong second = still wrong overall. Lesson learned.
That should say 14.9 for the P/E, not 1.4.
I have biased toward cash in my portfolio as rates have risen; however, every month I force myself to DCA into equities to maintain my overall asset allocation.
I too feel that equities are overpriced, but I remind myself they can go higher still, and routinely have done in the past when they were considered overvalued.
So I hold my nose and click the “buy” button, assuming that in the long run the curve is up and to the right. But no, there are no guarantees.
I think it’s prudent to invest sums over time and not try to time the market.
I share your concerns about the stock market valuation level, but what to do about it? I am retired, with a 30 year horizon for planning purposes and a 3% burn rate. I like Jonathan’s approach of holding sufficient liquid assets to provide my desired annual income stream in the event stocks fall significantly. He suggests 5 years worth of withdrawals. I know less about this topic than him, but like you, I am concerned about an overpriced market. My compromise is to hold 10 years worth of liquid assets, which may be overkill but I feel safer. If I went completely to cash, I’d worry I would not get back into the market at the right time. Good luck!
I am also a recovering journalist and I agree with you. We are retired, age 72, and so far are not withdrawing any retirement funds. We continue to invest automatically with Vanguard each month, but I am also playing the CD game with the banks for now. While our index funds are flying high for now, I can’t help but wonder how the party is going to end.
This is why I enjoy Humble Dollar, I totally agree with half of your article and I totally disagree with with half of your article 🙂
With secure pensions and S.S. we chose to be 100% in the market (VTI) in our retirement accounts. But I occasionally also try to time the markets and those are the only regrets I’ve ever had. I locked in what I thought was a good CD rate. I’m the time it has taken me to get 5.5% interest the market has gone up 19%. CD’s and MM are only for parking cash but I view them as a “wash” since after taxes and inflation I feel they are lucky to break even.
I believe the markets have proven to bounce back relatively quick. It’s according to how much patience I have. Again, pensions and SS allow us to feel this way
At 68, protecting your healthiest retirement years from a significant hit to your portfolio if the conservative approach works for you makes a lot of sense to me. We could easily experience a Japan like situation and then what? I’m guessing at 102 you won’t enjoy your money as much as you can now. I don’t understand this mantra that one must be in equities to keep up with inflation as that assumes we won’t experience a prolonged downturn. How one experiences and deals with higher prices is also very unique to each of us; the headline number is not my basket of goods.
Actually, rather than look at the s&p500 top in 2008, if you look at the top in early 2000, the s&p500 total return (including dividends) through early 2013 (from January 2000) was 1.6% annual return. A buy and hold investor was pretty flat for 13 years (although it cycled up and down during the period, but not reaching new highs). A similar thing occurred from late 1968 to late 1982. These aren’t really problems for younger investors who continue to invest every month, but they can be devastating for someone who’s trying to live off a fixed amount invested in the s&p500. And they’re not exactly rare events, considering it’s happened twice in the last 56 years, each lasting about 13 years.
IMO, you are making a mistake.
Cash investments are a perfectly fine vehicle for your immediate or short-term spending needs. If you are looking to protect your medium-term retirement spending needs from the volatility associated with stock investments, you might consider a TIPS ladder. However, using cash investments for longer-term assets invites real reinvestment risk, where your investments will not even keep up with inflation. If you cannot stomach the volatility of riskier investments, a liability-matching portfolio or an annuity might be a better choice.
There have been a number of articles here about the emotional side of investing. It is my belief, that in dealing with investments, there are two and only two basic emotions: fear and greed.
Since these emotions are perhaps universal, the issue for investors is how to deal with them. What combination of asset classes in what %s allows you to deal with the fear of a big loss via a downturn in the market, or missing out on a big upturn.
There isn’t any single correct answer except for the one that lets you feel comfortable with the risks as you see and understand them for your own situation.
What we all need to do is to work hard to really understand all of the risks we face, and not to ignore some while acting to avoid others.
I agree with your two basic emotions, but I believe you need to add one additional element. I call it Stupidity and I referred to it as the “Triumvirate of Ignorance” when I was still a teaching academic.
Empirical evidence has proven, time and again, that the average investor benefits more from investments in low cost, passively managed, Indexed investments, then they do from actively managed investments, yet millions of Americans continue to pay advisors to underperform the market and at a minimum, pay them 1% or more, annually, for the privilege of losing money.
But in the end, you are correct in that there is no single correct answer, except for the one that allows you to sleep at night. Unfortunately, because the average investor has little financial literacy, the answer often selected is based on the aforementioned “Triumvirate of Ignorance.”
HD readers are unlikely to be in that group however, but we all know people who are.
Considering 2-3% inflation, your after tax return may be negative. Is that what you are seeking?
I would also look at how investing fads impact valuations and trading. If large numbers of people believe index investing will always work, what will that do to prices?
Let’s go back in time and look at the Nifty Fifty. That was another set it and forget it theory – if you buy the Nifty Fifty, no matter what the price, you can’t lose. Well, it turned out you could.
Now let’s look at the S&P today. About 30% of the index is 10 tech stocks. Are they correctly priced? Every month, millions of 401K accounts buy the S&P 500, and 30% of that new money goes into these 10 stocks. So they have an incredible tailwind from the true believers in index theory. Some of them are buying back stock, too, so every month there are fewer shares available to trade.
Will this continue? It will continue as long as nothing changes. But things do change, and eventually reality takes over.
I know it is sacrilege to mention it here, but broad market indexing is by definition “Buy high, sell low”. If you look at it as buying part of a BUSINESS, not just a stock and plan to hold long term, indexing is not the optimal approach.
Wow! A Boglehead confession! I see how your strategy lets you sleep at night. I too have felt the call of the 5+% money market fund. My solution was to rebalance, a percent or two overweighted, from equities into the MMF. But not sure I would be comfortable to completly change my overall strategy. Simply lock in some profits from currently winning the game.
Investing is never easy and trying to make it easy usually leads to inferior returns. If you have enough to live on 2% interest then your plan is sound. If not, you are going to lose to inflation by going to all cash. Your article may help others make the same decision to their possible detriment.
Many Bogleheads get a little too ridged in their thinking. Bogle developed a winning strategy for sure. But anytime investors proclaim there is one and only one way to invest, it is an oversimplification.
I think of myself as 70% Bogle compatible. I’ve reaped outsized reward when I’ve strayed into individual stocks. Apple and Microsoft at the top of the list.
Those who have incurred outsized losses when they have stayed to individual stocks rarely admit to having done so.
Parkslope, I promise no outsized losses to admit to. My worst individual stock was Verizon. The share price has declined. The dividends bring the total return to ALMOST break even. But the opportunity cost is there too. To make this an even more blurry answer, I have been investing the VZ dividends into other funds. I can’t begin to calculate everything. Safe to say it hasn’t been a winner.
I wasn’t referring to you personally, but to the universe of investors. Random chance dictates that some individual investors will come out way ahead while others will fare very poorly. Not surprisingly, we are much more likely to hear from the winners.
Re: gambling too. I used to work with one!
Well, the most you can lose is 100%. You can make much more than that.
I will freely admit having lost a lot of money on some stocks. But if you own 50 stocks, you have to look at the overall performance of your portfolio. For that matter, if you own the S&P 500, you own quite a few real losers – AT&T, Bristol Myers, GE, IBM, Viatris, etc.
The first two sentences of your comment hold for all forms of gambling.
In the case of the stock market, if you short the wrong stock, your losses are unlimited.
I can understand your strategy and your concerns, nothing better than a steady income stream, but what happens when interest rates fall or just match inflation?
To build the steadiness in income did you consider a fixed immediate annuity?
His approach should result in after tax earnings slightly below inflation regardless of where inflation is at.
according to the Morningstar article https://www.morningstar.com/columns/rekenthaler-report/cash-an-inflation-hedge-revisited (which actually suggests cash is a decent hedge against inflation compared to alternatives) from May 2021 to June 2022 cash lost about 8% of its value.
Returns on money market funds lag inflation and cumulatively fall short, otherwise there would be no use for TIPS nor any purchasers of TIPS. Note TIPS bond funds are not the same as purchasing TIPS and holding to maturity.