Buying and/or Holding Stocks In 2008

[moda0306]

Regardless of whether you rebalanced into stocks during 2008 within your PP (if you were even lucky enough to have a PP in 2008), for those of you who had other significant holdings in 2008, were you tempted or did you purchase stocks or stay in stocks within your holdings (depending on what you were invested in)?

I didn't have the liberty of having much wealth invested to test myself, but I think it'd be good to hear how hard living through that time may have been, for me and many of the younger folks here.  Maybe those of you with heavy cash holdings were constantly see opportunities appear, while those of you with stock-heavy allocations were maybe quite nervous and wanted to pull out.

I viewed 2008 with a kind of childish awe... it's amazing to watch the dow go down 700 pts in a day and not be invested (I was trying to shove whatever I could out of my paycheck into the market, but it still didn't affect me much).  If we ever have that type of event again, or significant declines of a less hasty nature, it would be valueable to have heard from some of you and had time to roll it around in our heads.

[Lone Wolf]

I didn't yet have a PP in '08.  I was stocks \ cash (CD ladder and savings accounts).  I was good about saving money but didn't really think about investing with any depth.  If my portfolio was a VCR, the numbers on its digital clock display would have always been flashing "12:00".

After the market took a dive, I was left with greatly devalued stock holdings but a reasonable pile of cash.  I decided to double down and bought at the end of November 2008 and again in February 2009 (March would have been better!)  I was sure that things would turn around so I felt that the risk was worth it to "get my money back".  (This was back when I, like Miss Cleo, could predict the future.  I'm no longer smart \ talented enough to do this.)

I found the whole process stressful.  I was reading a lot of history at the time and the more I studied, the more sure I was that the the future was extremely hard to predict, that hard assets somehow should be a part of any portfolio, and that I wasn't interested in getting on any more of history's roller coaster rides without a safety harness.  Getting to the PP was pretty natural after that.  Once I'd made back all the money that I'd originally lost (thanks to the doubling down in late 2008 and early 2009), I called it "even" and moved into a PP.

How was it?  Kinda scary.  When you're married and the one in charge of handling finances, it's your job to keep the ship off the reefs.  The "near miss" of 2008 was transformative for me (and I'm sure many, many others.)

[MediumTex]

As 2008 began to unfold, I felt more and more unesy about what was happening.  I thought that the whole inflation narrative was somehow fundamantally misguided because I knew that the energy price increases we were seeing had always triggered recessions when they had occurred in the past.

As I tried to comprehend what was happening with the financial institutions I was reminded of the Enron fiasco again and again and I began to suspect that we might be seeing basically an Enron x 100 scenario all over again.

All of my Mother's assets were under management with a typical suspenders-wearing market dope.  In August of 2008 I explained my concerns to her and in the first week of September she liquidated all of her assets managed by the market dope and went to cash and moved the cash into a new account for me to manage.  This was just a lucky call on my part, though I'm glad that I made it.  We all get lucky from time to time, I suppose.

I kept this cash until March of 2009 and deployed a PP for her between March and August of 2009.

Although I had started my PP with a small portion of my assets in the middle of 2008, I didn't take the advice I offered my Mother and saw some large losses in 2008 in the other part of my portfolio, before moving all of my assets into the PP over the same timeframe above.

2008 was a scary experience and one that I will not forget.  I think we are very unlikely to see such an event again in our lifetimes.  I think it's the nature of such events that even if the exact same set of external conditions occurred again, it wouldn't have the same effect on all of us simply because the same scary stimulus is almost never as scary the second time around, and thus tends to unfold in a different manner.

[AdamA]

Good question.

I was a subscriber to a couple of The Motley Fool's newsletters.  I can't remember exactly, but I think I owned Netflix, Pfizer, Adobe, Apple, Chicago Bridge and Iron, and maybe one more ADR.

I was a believer in the Buy and Hold dogma that is big over The Motley Fool, so I didn't think twice, I viewed it as a speed bump and figured I would just hold.  

A lot of my friends knew I was invested and would ask me for advice, and what I came to realize was that I was basically just blindly picking stocks from a couple of newsletters and holding them b/c someone was telling me it was bad to sell them.  

It eventually became important for me to actually understand my investments and my investing strategy, which started a lengthy period of reading and experimentation that eventually got me to the PP.  (The things I did en route are restrospectively hilarious...I was, at one point, attempting to get "credentialed" in Eliot Wave Theory!!!).  

In short, it wasn't really fear that converted me, it was more a desire to understand what the heck I was doing.

[MediumTex]

The things I did en route are restrospectively hilarious...I was, at one point, attempting to get "credentialed" in Eliot Wave Theory!!!  

As silly as some of these things seem in retrospect, I think we come to see them as necessary steps in arriving at where we are today.

The hope that one has is that he won't look back on what he is doing today and see it as similarly silly in the future.

I once heard that good investing is the process of minimizing future regret.  That always stuck with me.

Any time I look at pictures of myself when I was a teenager, I marvel at having subsequently covered so much ground in a few short decades.

It amazes me when someone really young is able to create something that holds up well over time, especially works of art and literature.  When I listen to Harry Browne's audio program, part of what impresses me so deeply is that he was only 32 or so at the time.  Having that depth of insight at that age is very rare.

[moda0306]

I considered peer-to-peer lending, Adam.

Don't think you're alone.

[AdamA]

As silly as some of these things seem in retrospect, I think we come to see them as necessary steps in arriving at where we are today.

When I think back on the handfull of activities that I have achieved any degree of proficiency with, most of them involve application of a few simple principles.  After learning how to do something seemingly complicated, I often look back and wonder why it took me such a long time.

Then...I try to teach someone else, and I realize that there is perhaps more to these simple principles, and that they have really only become simple to me b/c I have internalized them.

Definitely applies with the PP.  You have to have fretted over inflation/deflation/corporate banruptcy, etc before you can really understand and appreciate the PP.

I'm reminded of this any time I try to explain my investment strategy to anyone.

[moda0306]

Trying to explain the PP to my dad was very difficult.

You tell somebody 30-year bond at 4.5% they invision collecting 4.5% interest for 30 years.

You tell somebody gold, and they invision keeping a yellow metal in a safe, waiting patiently for zombie invasion or currency collapse.

Then you tell them cash and they get really bored, especially at .1%.

You've lost them by the time you get to stocks, and they're probably not that interested in them anyway after 2008.

Everyone, I think, tries to fit things into their preconceived notions of how things work, whether they realize it or not.

[MediumTex]

When I think back on the handfull of activities that I have achieved any degree of proficiency with, most of them involve application of a few simple principles.  After learning how to do something seemingly complicated, I often look back and wonder why it took me such a long time.

Then...I try to teach someone else, and I realize that there is perhaps more to these simple principles, and that they have really only become simple to me b/c I have internalized them.

Definitely applies with the PP.  You have to have fretted over inflation/deflation/corporate banruptcy, etc before you can really understand and appreciate the PP.

I'm reminded of this any time I try to explain my investment strategy to anyone.

It's ironic how something as strong and conservative as the PP would be so difficult to explain to an otherwise intelligent and well-informed person.  I've tried so many times and failed that I basically just do it for sport now.

The conversation goes something like this:

MT: "You buy four assets correlated to underlying economic conditions, knowing that one or more of them will almost always be doing well, which over time buoys the whole portfolio."

Listener: "That's interesting.  If I ever did anything like that, I would probably lighten up on the treasuries since interest rates are about to start rising, and I would probably also go a little lighter on the gold since it is basically in a bubble right now.  As for the cash, I don't know what the point of that is with interest rates at zero."

MT: "Well, it's counterintuitive, but I always like to start with the question 'how well does it actually work in practice?' and go from there.  In practice, it's worked very well for several decades now."

Listener: "Yeah, well that's how it is with most strategies--if you mine the data you can make almost anything look good."

MT: "Yes, but the strategy isn't the result of data mining.  The data just confirms that the underlying theory is sound."

Listener: [shaking head] "It just seems like the gains in one asset would be canceled out by losses in the other assets."

MT: "I know it seems that way, but that's not what actually happens."

Listener: "Hmm, I will definitely talk to my financial advisor about it and see what he thinks.  He's a pretty sharp guy.  He's got me in a couple of closed end split infinitive funds right now.  Pretty advanced stuff."

[moda0306]

Great mock-dialogue, MT.

Not to mention, as soon as you mention gold or LTT's to somebody with a political axe to grind (or most people with no political axe to grind, but with a few preconceived notions), you've probably offended his intelligence in some way.

My gold-bug friend wouldn't even hear it when I mentioned the PP... he had so little confidence in the dollar that he wouldn't hear that bonds were worth holding.

I knew a financial advisor who's strategy was picking for his clients high-quality, high-dividend paying stocks say that he didn't believe in modern portfolio theory... but then went on to say how tough 2008 was for him with even high-quality stocks getting hammered.  I was too nervous of getting in an awkward back-and-forth with him to say anything.  For what it's worth, he thinks stocks are significantly undervalued and really hates bonds right now.

...for what it's worth.

[Jan Van]

During the weeks that AIG went belly up I was consulting somewhere, and we were in a conference room for a few weeks with a bunch of middle aged people like myself. Obviously we were talking about everything going on, and thinking back on it some people had that "deer in the headlights" kind of look. Some really had a sense of desperation, seeing their investments melt away day after day. Made me feel bad for them...
The morning that I was listening to PBS and they were pretty much saying that AIG was busted I was kind of flabbergasted. Really a WTF moment. Never saw that one coming. AIG??? That's a freakin' insurance company, how the f$@# can they be involved in this mess??? Well, they were.
Luckily I was still relatively young enough and ignorant where I saw it as a good buying opportunity. Still took me quite a while to get back to even. Now being a bit older and wiser I know I don't want to go through a 30~40% dip again if I can help it. So it did make me a more conservative investor. Which is why part of my money is in the PP. I do like to play around a bit though, so the VP idea appeals to me :-)

[MediumTex]

As soon as you mention gold or LTT's to somebody with a political axe to grind (or most people with no political axe to grind, but with a few preconceived notions), you've probably offended his intelligence in some way.

When I get to the long term treasuries part, people frequently change their expression from one of curiosity to one of pity, and for the rest of the discussion they look at me like it's sad that this apparently intelligent person they are talking to is actually retarded.

The look of concern I get is sometimes so pronounced that I get the impression that the person I am talking to wants to help me escape whatever delusion is making me want to do such crazy things with my money.

Like I said, these days I mostly talk about the PP in the real world for sport.  If I had to make my living selling the PP, I would probably do what Cuggino does and just act like it's a lot more complicated than it actually is and talk about it in very vague terms.

[moda0306]

Amidst a discussion of investments while playing poker, I told a group of buzzed-up financially savvy (just savvy enough to think I'm an idiot) buddies that I liked long-term treasuries and thought rates woud drop like they did in Japan.  I didn't say "bet the farm," but I made my predictions clear.

Needless to say, I was "the dip$hit" of the poker table... maybe that subconsciously helped me take all their money from them?

It's official... new poker strategy... Get talking investments with your buddies and then predict for long-term rates to drop below 3%.  They'll peg you as the sucker and play accordingly.

But seriously, MT, I know how you feel.  I literally almost felt the pity bleeding off of these guys.

[MediumTex]

Amidst a discussion of investments while playing poker, I told a group of buzzed-up financially savvy (just savvy enough to think I'm an idiot) buddies that I liked long-term treasuries and thought rates woud drop like they did in Japan.  I didn't say "bet the farm," but I made my predictions clear.

When was that?

What has happened to rates since that discussion?

It's weird, but people seem not to notice when rates are falling, only when they are rising.

I should probably stop there and note that I'm not sure how many people actually understand how the bond market works.  I think a common perception is that a 30 year bond paying 4% is crazy because it will only pay a 4% coupon, as opposed to understanding the capital gains that could result if interest rates fell.

[moda0306]

MT,

With my dad, I had to show different periods, on excel, of how when rates rose gold more than made up for it, and how when rates fell it was during a time of prosperity, so LT bonds and stocks completely blew up golds losses... it was nice to be able to show him 2008, where LT treasuries floated the portfolio, and how horribly every other bond-class did (Craig's bond graph is worth 1,000 words).

I also showed him how LT bonds and gold, during significant (10% or more) calendar years of stock losses, tended to average excellent positive returns.

I also showed him a simple example of the PP being "greater than a sum of its parts" by showing how gold and stocks, when combined and rebalanced, actually returned significantly better than one or the other or the average of the two... this relationship was more significantly obvious than others, so I chose it... also, the standard line has bonds and stocks as the happy couple, with little/no room for gold.

He was probably, as my dad and a nice guy, humoring me at first... but he cought on when I showed him it from so many different angles he began to see that I wasn't full of it.

I'd imagine most people wouldn't have been nearly as patient with me, but I finally got through to him.

I tend to think showing the averag CAGR and either SD or max drawdown to somebody first would be the best approach, as the philosophy takes a little bit more time to absorb, and you may have needed to shock them into hearing you out.

[moda0306]

When was that?

What has happened to rates since that discussion?

It was close to April 15th and rates have dropped about 25 basis points since then.  I did make the point of pointing that out to one of my buddies recently.

I explained the price move, but that didn't phase them too much... I think they'd already made up their mind.

I think you're right though... I don't think most people understand how long-bonds work.  They just view it as some kind of fixed annuity that will/could get destroyed by inflation or rising rates.

[AdamA]

Listener: "Yeah, well that's how it is with most strategies--if you mine the data you can make almost anything look good."

MT: "Yes, but the strategy isn't the result of data mining.  The data just confirms that the underlying theory is sound."

That's interesting...

Most people don't even know what data mining is. 

What's funny is that the data used to sell them their mutual fund was much more likely to have been mined than any that is associated with the PP. 

[KevinW]

In 2008 I had substantially all of my invested assets in a standard Boglehead 70/30 style portfolio of domestic stock, foreign stock, REIT, and bond index funds.  At the worst point I was down something like 30-40% and sweating bullets.  I had read all the standard Boglehead books and knew intellectually that I needed to hold, and was doing so, but that was making me anxious on a daily basis.  I had been researching more conservative approaches, including the PP, prior to the crash, and I had a strong urge to switch to a more conservative allocation, which would have amounted to capitulation.  The bad news is that my pre-scheduled annual rebalancing appointment came up and I didn't have the nerve to sell bonds to buy stocks.  The good news is that I never succumbed to the pressure to sell stocks either.  A few months ago my wife and I were rearranging our finances, and my accounts had recovered to pre-crash values, and I took that as an opportunity to go all-in on the PP.  So I didn't lose money, but I did suffer some emotional damage.

Along the lines of what jmourik said, I learned that, while I'm capable of holding a volatile portfolio during a bad bear market, it's uncomfortable and not something I ever want to do again.

One bit of irony is that my peers with negative net worths had less anxiety in that time than I did.  So, people with no investments felt more financially secure than someone with investments.  That's backwards!  The whole point of investing is to feel more financially secure, especially during scary economic conditions.

Also, I can say objectively and with all humility that I am a very disciplined person and a highly informed investor.  And yet even I had immense difficulty sticking with a standard lazy index portfolio.  I now think that the standard three-fund, age-in-bonds, advice is unrealistic for the majority of people.  It looks good on paper when all you look at is contributions in, time invested, and expected-value portfolio size after decades.  However that kind of analysis ignores the psychological discomfort of holding a volatile portfolio that whole time, and the likelihood that an investor will capitulate due to human nature.  I agree with HB that the default starting point should be a conservative low-volatility portfolio, and that additional risk is an optional choice that individuals only enter into after due consideration.

[Pkg Man]

One bit of irony is that my peers with negative net worths had less anxiety in that time than I did.  So, people with no investments felt more financially secure than someone with investments.  That's backwards!  The whole point of investing is to feel more financially secure, especially during scary economic conditions.

I guess that's kind of like a power outage in Amish country...

[AgAuMoney]

Regardless of whether you rebalanced into stocks during 2008 within your PP (if you were even lucky enough to have a PP in 2008), for those of you who had other significant holdings in 2008, were you tempted or did you purchase stocks or stay in stocks within your holdings (depending on what you were invested in)?

I did some market timing and it turned out OK this time.

One of the big problems with going to cash is knowing when to get back in.  I went largely to cash and just started going back in immediately using a dollar cost averaging approach.

Timeline...

April 2006 started my PP spread over several accounts.

Mid-2008 I had about 15%-20% of my portfolio in the PP (not sure exactly as the gating factor for me was then and still is the amount of treasuries).  So lumping it all together I was about 25% cash and bonds (under 5% was treasuries), 10% gold and 65% stocks (25% individual and 40% index funds).

May 2008 things started to go/look squirrely.  Starting in mid-June and finishing before August I took out a max 401(k) loan and moved nearly all the remaining 401(k) money into cash.  I also adjusted so that 80% of the 401(k) incoming was going back into stocks.  Also put some tight stops under some of my more speculative stocks in other accounts.  The 401(k) payment was maybe $950 per month.  I was putting about the same amount into gold and silver every month (both amounts coming from the loan proceeds).

Sep 2008 I took 1/3 of my available HELOC and put it into cash.

End of Sep 2008 I was laid off (after almost 18 years).  (No my 401(k) loan was not due immediately.  I just gave them my payment info and kept on keeping on.)

6 April 2009 I started putting about $1000 per week back into dividend growth stocks.  (would have been better to dump in all at once, but who knew?  Psychologically I'd be required to do the same approach today.)

Early 2010 the surplus cash is all invested.

Now ...

There is no more 401(k) account.

My portfolio is worth considerably more than it was summer 2008.

About 35% of my portfolio is in my PP.

Dividend income still has a long way to go before I can live on it.

[pershing83]

<<2008 was a scary experience and one that I will not forget.  I think we are very unlikely to see such an event again in our lifetimes. >>


Heh, heh, how old are you? 75 or 80? Or, maybe better, 80-85!

[MediumTex]

<<2008 was a scary experience and one that I will not forget.  I think we are very unlikely to see such an event again in our lifetimes. >>


Heh, heh, how old are you? 75 or 80? Or, maybe better, 80-85!

If we consider the Fall of 2008 to be analogous to the Fall of 1929 (which I think it was in many ways) then it's probably fair to say that such an experience is unlikely to be seen more than once a generation.

Events like 2008 require a certain level of complacency that is unlikely to be present for a LONG time after such events occur (which is part of the reason that such events are so rare).

[pershing83]

Medium Tex predictions of the future:

<<I think we are very unlikely to see such an event again in our lifetime>>

2008? Nothing like it for another generation? Heh... the triumph of hope over reason.

When I came to this board I noted a certain naivete here and mentioned it. It seems to live on.  I hope the younger and/or less enlightened members will simply ignore predictions of smooth sailing, no black swans and all the rest.

[AdamA]

I hope the younger and/or less enlightened members will simply ignore predictions of smooth sailing, no black swans and all the rest.

I don't think that MT is predicting smooth sailing.  I think his point is that our issues may manifest in ways other than large, dramatic events.  A slow, steady deflation can be just as a damaging as a rapid crash...it's just less fun to discuss this possibility b/c it's not as exciting. 

[Roy]

Medium Tex predictions of the future:

<<I think we are very unlikely to see such an event again in our lifetime>>

2008? Nothing like it for another generation? Heh... the triumph of hope over reason.

When I came to this board I noted a certain naivete here and mentioned it. It seems to live on.  I hope the younger and/or less enlightened members will simply ignore predictions of smooth sailing, no black swans and all the rest.

There is a difference between making predictions, or guesses and acting upon them.  2008 may well occur again, and with some modified virulence that makes it different from the last 2008.  I'm not sure the PP will be worse than any other strategy in dealing with it, and has weathered a greater variety of climates better than most—including 2008.  

One must commit to something in which conviction can be placed (and that can be a number of strategies) or act on guesses and commit resources as those analyses dictate.  And there is very little evidence the latter approach has been consistently successful.  What's your reasoned plan for the next 2008, black swans, and all the rest?