Difficult Times

[Coffee]

I think Reub hit the nail on the head: Budd needs to focus more on his variable portfolio.

[sophie]

An observation that the PP was down while the S&P500 was up brought out my true emotions about GLD and TLT.

Let's admit it:  the days when the PP is down while there are big headlines about the stock market ascending to new highs can be really discouraging, even while you tell yourself that there's no way you'd be 100% stocks so the market gains aren't in any way a realistic metric.  My solution is to check in the next day.  Invariably, the market corrects down, and bonds and gold go up - but surprisingly enough, there are no headlines.  There's usually a net gain in the PP.

Meanwhile, you can consider such times to be great buying opportunities for bonds and gold!

[notsheigetz]

Meanwhile, you can consider such times to be great buying opportunities for bonds and gold!

As I am approaching the PP nirvana of rarely checking my portfolio terms like "great buying opportunity" strike a disharmonious note within. How does one possibly know whether or not one is confronted with a "great buying opportunity"?

Having said that I did buy mostly gold last week as I was doing my semi-annual investing of new money.

[sophie]

Meanwhile, you can consider such times to be great buying opportunities for bonds and gold!

As I am approaching the PP nirvana of rarely checking my portfolio terms like "great buying opportunity" strike a disharmonious note within. How does one possibly know whether or not one is confronted with a "great buying opportunity"?

Having said that I did buy mostly gold last week as I was doing my semi-annual investing of new money.

OK true, that's not exactly the thought of a PP Zen master.  That would be MT.  It's just something you can consider if you happen to be checking and get discouraged by a big uptick in the stock market.

I also managed to contradict myself with that statement....it amounts to putting new contributions into lagging assets, which is a perfectly good method but gives you slightly lower yields than buying all assets equally.

[AdamA]

Days like today and yesterday prove how challenging it will become for many to invest in the PP during a bull market run in equities. The PP outperforms when equities plunge, but under-performs when equities rise (generally speaking). If you are not a contrarian, then the cognitive dissonance of holding such a portfolio in times of prosperity is overwhelming. In other words, it's tough on the mind when the S&P achieves a 5-year high and your portfolio is down for the day.

Here's a mental exercise:

Pretend that you owned a stock portfolio and that over the course of the next few months there is a huge rally, and the value of your portfolio doubles. 

What would you do?

If you sold your stocks and the rally continued how would you feel?

If you kept your stocks and the market crashed, how would you feel?

[Pointedstick]

Here's a mental exercise:

Pretend that you owned a stock portfolio and that over the course of the next few months there is a huge rally, and the value of your portfolio doubles. 

What would you do?

If you sold your stocks and the rally continued how would you feel?

If you kept your stocks and the market crashed, how would you feel?

This is a great exercise.

I was in just that situation last year when I sold a bunch of AAPL in my VP that then continued to rise. I felt okay about it because I'd still made out big on what I sold. But I held onto the rest too for too long and now it's gone down a ton, and I feel pretty bad about that. The pain of seeing my net worth fall has been much worse than the pain of imagining my net worth rising a little bit farther if I'd sold at the peak.

[buddtholomew]

Days like today and yesterday prove how challenging it will become for many to invest in the PP during a bull market run in equities. The PP outperforms when equities plunge, but under-performs when equities rise (generally speaking). If you are not a contrarian, then the cognitive dissonance of holding such a portfolio in times of prosperity is overwhelming. In other words, it's tough on the mind when the S&P achieves a 5-year high and your portfolio is down for the day.

Here's a mental exercise:

Pretend that you owned a stock portfolio and that over the course of the next few months there is a huge rally, and the value of your portfolio doubles. 

What would you do?

If you sold your stocks and the rally continued how would you feel?

If you kept your stocks and the market crashed, how would you feel?

Fine and terrible

[MachineGhost]

If you sold your stocks and the rally continued how would you feel?

+1x.

If you kept your stocks and the market crashed, how would you feel?

-2.5x.

[AdamA]

Fine and terrible

In the first case (where you sold and the rally continued), what would you do with your money when you sold?

[buddtholomew]

Fine and terrible

In the first case (where you sold and the rally continued), what would you do with your money when you sold?

I would have rebalanced into bonds or other lagging assets to restore the AA.

[AdamA]

Fine and terrible

In the first case (where you sold and the rally continued), what would you do with your money when you sold?

I would have rebalanced into bonds or other lagging assets to restore the AA.

Even if that other asset had been tanking in response to the stock rally?

[buddtholomew]

In the first case (where you sold and the rally continued), what would you do with your money when you sold?

I would have rebalanced into bonds or other lagging assets to restore the AA.

Even if that other asset had been tanking in response to the stock rally?

Yes, as long as its not long-term bonds or gold.

[AgAuMoney]

A long term investor who had been in 100% U.S. stocks for the last 13 years would have had a very rough ride for a 0% return.

Actually that is only true for a very limited set of stock investments.  Specifically, indexing.  And indexing sucks.

Since 2002 I don't index as a general rule.  From 2000 thru 2009 I did have a portion of my stock investments in an index in a 401(k).  That money is now my PP account and is not indexed.

After having done some rough figures last night, the stock portion of my portfolio averaged roughly 8% annually since 2002 and just over 6% annually since my peak in 2000.  That is a simple average that accounts for contributions and includes almost -50% in 2000-2002 and a -25% in 2008.  The "roughly" is because I don't typically break out and track stock vs. non-stock returns and the complexities of exactly when I was trading the 401(k) into and out of money market and bond funds make exact numbers pretty much impossible.

My biggest percentage losses in 2000-02 were my IRA accounts.

My biggest percentage losses in 2007-09 were in my 401(k) (about 35% in the 401(k) vs 30% overall).

Most of my gain came from continuing contributions (buying more shares at lower prices) and overall losing significantly less than the index in 2007-9.  The indexed 401(k) was not so lucky...  In 2000-2002 my balance was small enough my contributions could keep it level most months.  Not in 2007.  It really hurts to be putting a significant portion of your paycheck every month into an account and watching the balance go down by more than you put in. 

My averaged gains also include some stinkers including one spectacular loss, "losing" one year's salary in HPQ.  Twice.  Since that particular holding is in the DJIA and S&P500 it wasn't unique to me.  (And I actually made enough that I am whole, but I still have a basis in the shares I hold.  The loss on that basis I would report to the IRS should I sell today is about $7,000.  The bigger number is unrealized peak to current value had I managed to sell at either peak.)

The real wake up call for me that sent me looking for a solution was the lifetime return in that 401(k) account.  Since fall 1991 until rollover into an IRA in early 2011 the lifetime return was only 80.7% or an internal rate of return of 7.2% annually.  In 2002 the account had been open 10 years and my return was barely positive at the end of the year.  Most of that 80% gain was games I played since 2002 and especially since 2008.  Part of the problem was the limited funds for the first 10 years of the account which were the 1990's bull market.  Part of the problem was chasing "growth" funds.  The biggest part of the problem was indexing when everything dropped 2000-2002.

The biggest win was taking out a $50,000 loan in Aug 2008 when the account had dropped only 10%.  Even with most of the account in money market and bond funds it dropped a total of 26.5% in 2008 and another 9.9% before march 2009.  The $50k loan I basically doubled in 18 months so I paid off the loan balance Jan 6, 2010 to improve my cashflow.

On the other hand, a whole-life life insurance policy I started June 1994 has increased 48.8% for a CAGR of over 3.8%.  And that rate of growth is increasing (since it was very negative the first several years).  A comparable June 1996 policy is up 35.7% for a CAGR of 3.3%.  But before making the 2012 payment the CAGR was under 3% on the 1996.  Last year I made more than 5% on my payments to those policies.  Not bad for cash.  The policies could be self-funding now, but where else can I get 5% on cash?  (And the death benefit has also increased.  Important since my youngest just turned 3 last fall and expenses to raise a child are significantly higher than in 1994.)

Whole life was a great decision for me.

The 401(k) if I could do it over I would put in only enough to get the match.  Instead, most years I put in 2x-3x the match and I wish I had put that money just about anywhere else.

[AgAuMoney]

Pretend that you owned a stock portfolio and that over the course of the next few months there is a huge rally, and the value of your portfolio doubles. 

If I noticed, and probably I would, I expect the various holdings would not have increased equally, at the very least cash would look light.  I'd sell SOME of the higher assets and buy additional of the lower.

I'm sure glad I went under weight on my TLT and EDV last fall...

[rocketdog]

I was in just that situation last year when I sold a bunch of AAPL in my VP that then continued to rise. I felt okay about it because I'd still made out big on what I sold. But I held onto the rest too for too long and now it's gone down a ton, and I feel pretty bad about that. The pain of seeing my net worth fall has been much worse than the pain of imagining my net worth rising a little bit farther if I'd sold at the peak.

Who was it that said, "Nobody ever went broke by taking a profit"? 

[rocketdog]

The pain of seeing my net worth fall has been much worse than the pain of imagining my net worth rising a little bit farther if I'd sold at the peak.

There have been psychology studies on precisely this phenomenon.  Namely, we feel the sting of a loss more than we feel the joy of a gain.  It's just one of our human frailties.  If you learn to overcome it, you will become the master of your personal financial world. 

[MediumTex]

The pain of seeing my net worth fall has been much worse than the pain of imagining my net worth rising a little bit farther if I'd sold at the peak.

There have been psychology studies on precisely this phenomenon.  Namely, we feel the sting of a loss more than we feel the joy of a gain.  It's just one of our human frailties.  If you learn to overcome it, you will become the master of your personal financial world.

For most people, I think that ignoring the markets is the easiest way to reach this point.

Who needs nerves of steel when you've got the option of being indifferent?

[Pointedstick]

One thing I've found slightly ironic is that those who are the most prepared to accept risk and volatility are often the ones who avoid it the most, while those who actively seek it out more often than not can't take the stress when the chips are down.

[dualstow]

I was in just that situation last year when I sold a bunch of AAPL in my VP that then continued to rise. I felt okay about it because I'd still made out big on what I sold. But I held onto the rest too for too long and now it's gone down a ton, and I feel pretty bad about that. The pain of seeing my net worth fall has been much worse than the pain of imagining my net worth rising a little bit farther if I'd sold at the peak.

A friend of mine has a ton of AAPL. He won't reveal exactly how much and I won't pry, but I know that is net worth is high and it's like 1/3 to 1/2 in AAPL. Every time I suggest maybe taking some shares off the table, he says that *all* his friends have been saying that for years but, to paraphrase, "I got here by NOT taking shares off the table." So his balls (or chutzpah, depending on how you want to interpret it) have earned him huge unrealized gains. Quadrupling at least.

When Apple started to nosedive after peaking in the 700s, I didn't have the heart to ask if he'd sold any. He must be hurting.
---
I've gone through both situations with a few individual stocks,  but I feel pretty good now that I have a 40% core invested in the pp.

[MediumTex]

I was in just that situation last year when I sold a bunch of AAPL in my VP that then continued to rise. I felt okay about it because I'd still made out big on what I sold. But I held onto the rest too for too long and now it's gone down a ton, and I feel pretty bad about that. The pain of seeing my net worth fall has been much worse than the pain of imagining my net worth rising a little bit farther if I'd sold at the peak.

A friend of mine has a ton of AAPL. He won't reveal exactly how much and I won't pry, but I know that is net worth is high and it's like 1/3 to 1/2 in AAPL. Every time I suggest maybe taking some shares off the table, he says that *all* his friends have been saying that for years but, to paraphrase, "I got here by NOT taking shares off the table." So his balls (or chutzpah, depending on how you want to interpret it) have earned him huge unrealized gains. Quadrupling at least.

When Apple started to nosedive after peaking in the 700s, I didn't have the heart to ask if he'd sold any. He must be hurting.
---
I've gone through both situations with a few individual stocks,  but I feel pretty good now that I have a 40% core invested in the pp.

Apple investors who hung on through the 2008-2009 decline were richly rewarded.

I do, however, think that when you get to be the largest company in the world (or close) the factors needed for further price appreciation become more challenging. 

Ultimately, the only thing that makes a stock (or any asset) move up in price is a greater willingness of buyers to buy than of sellers to sell.  Once everyone owns something, it's hard to keep this balance tipped in favor of further upward price movements.

[KevinW]

My concern with Apple is that I can't see any avenues left for expansion. Yes they have dominant market shares in several markets, but there is strong and growing resistance to increasing that. In the past they have expanded with sudden invasions into new markets (iTunes, iPhone, iPad), but all of those invasions were brainchildren of Steve Jobs who of course is no longer with us.

From outward appearances they don't seem to be investing significantly in R&D or acquisitions, and their balance sheet shows a humongous cash reserve that is sitting idle. Apparently they don't know what to invest in either.

Someone at autoblog.com made an apt observation when Toyota started having unprecedented huge recalls in 2009: "It's hard being GM." Meaning, that once a company achieves a dominant position and becomes one of the largest corporations in the world, as GM did in the 1960s, and Toyota and Apple did in the 2000s, it becomes very difficult to hold it together. There are a lot of competing priorities and it's hard to maintain the corporate culture and public perception that made the company so successful in the first place. Apple's success was built on an image of being a premium, exclusive product for independent thinkers. How long can they keep that up when the reality is they have the largest market share and are under downward price pressure?

[MediumTex]

My concern with Apple is that I can't see any avenues left for expansion. Yes they have dominant market shares in several markets, but there is strong and growing resistance to increasing that. In the past they have expanded with sudden invasions into new markets (iTunes, iPhone, iPad), but all of those invasions were brainchildren of Steve Jobs who of course is no longer with us.

From outward appearances they don't seem to be investing significantly in R&D or acquisitions, and their balance sheet shows a humongous cash reserve that is sitting idle. Apparently they don't know what to invest in either.

Someone at autoblog.com made an apt observation when Toyota started having unprecedented huge recalls in 2009: "It's hard being GM." Meaning, that once a company achieves a dominant position and becomes one of the largest corporations in the world, as GM did in the 1960s, and Toyota and Apple did in the 2000s, it becomes very difficult to hold it together. There are a lot of competing priorities and it's hard to maintain the corporate culture and public perception that made the company so successful in the first place. Apple's success was built on an image of being a premium, exclusive product for independent thinkers. How long can they keep that up when the reality is they have the largest market share and are under downward price pressure?

I think that a fat dividend would help.

Give it a yield of about 6% at current prices and there is your price floor on the stock and it can move up from there if it wants to.

[rocketdog]

Here's something that makes me sick whenever I think about it.  Back in 2002 I was just starting grad school.  I was old enough to have fathered the students I was taking classes with.  Soon I started seeing more and more of the other students carrying these little white devices connected to earbuds.  I finally asked one of them what it was, and he explained it was called an iPod, and it was a music player from Apple. 

Now, if I had been smart about it, I would have thought to myself, "Hmm... these iPod devices seem to be catching on with this generation.  Maybe I should pick up some Apple stock. 

Here's the part where I get sick:  AAPL was trading for around $10 per share at that time. 

[Reub]

Budd, did you feel better today when stocks were way down and yet gold and bonds were up nicely?

[buddtholomew]

Budd, did you feel better today when stocks were way down and yet gold and bonds were up nicely?

Yes, very much so.