This article is composed by Bogleheads® forum member digarei
Recency bias
Our penchant for greed, even if unconscious, can impact our thinking during periods of low volatility in the markets. The frenetic reporting of last week has dissipated as quickly as new stories have emerged to replace it. We can be lulled into believing that nothing very bad will happen because it hasn’t lately (recency bias). That our investment approach is working and our nerves are as steel since we sailed through that awful 10% crash of—hmmm, was it just last week or was it the week before? Anyway, the correction was small potatoes to investors who’ve increased their stock allocations and see gains nearly every month.
For others, fear rules. The correction proves what they knew all along: the market is overvalued. It’s a dangerous world! Stay in cash.
The objective of this month’s meeting was in part to “afflict the comfortable and comfort the afflicted”. Yet there are best practices that can guide our decisions today and make investing a whole lot more enjoyable during both good times and bad. We tried to convey many of them in the presentation.
Our meeting
TWENTY (20) persons congregated in an upstairs room at our usual meeting location in mid-town Sacramento on Saturday, February 2018 to hear a presentation entitled, The Somnambulance of a Rising Tide Market (see below).
Members responded to this question during introductions: “What actions have you taken (if any) in reaction to the recent market turmoil?” The answers varied but the majority seemed to have had their attention piqued for several days but made no significant changes to their portfolios.
Following introductions, a two-minute YouTube video was played, which evoked much laughter.1
Background – Rising Tide Market
US stocks have done well in recent years, positively affecting other asset classes (international equities, domestic bonds). This has been caused in part by significant inflows from US stocks. Analysts often refer to rapid dips in the market as ‘profit taking’ but reasons can also include trading derivatives, redirection of dividends and portfolio rebalancing. 2
The bull market has endured for nine years. Sooner or later, we’ll experience a market decline when the wonderful gains accreted in our portfolios over this time will be in some jeopardy. Some investors stake out a buy and hold position through difficult times. However, a recovery from a serious down market can take years.
One could attempt to time the market—to get out of stocks before the crash. Or resort to holding an all-bonds and cash portfolio. In the past, other investors were determined to take advantage of dramatically lower prices during a bear market by overbalancing into stocks, thereby changing their risk profile, and subsequently selling as the market went up. And, of course, people have chosen to sell at the bottom of the market or on the way down to salvage what is left.
Good decisions under duress require a prepared mind and a plan.
Presentation – The Somnambulance of a Rising Tide Market
Brett Murray
Somnambulance: Harry, 2014
Somnambulance is sleepwalking, an activity usually undertaken without a conscious awareness of one’s surroundings. The purpose of the talk was to create an awareness of other investors’ mistakes when they have confronted a bear market, to outline the difference in opinion among Bogleheads when determining best practices, and present a few effective countermeasures to employ before a market correction or crash. 3
A number of good questions were posed during the ‘Investor Q & A’ segment and most were answered forthrightly by those in attendance. They included:
- Where to retire?
- Best approach to consolidating investment accounts—which ones should I keep?
- Is this a good time to buy a house in Sacramento?
- Should a down payment for a house be kept in a savings account that pays 1.5% interest?
- Vanguard recommends clients hold 30% of their fixed income in international bonds. Too much?
- What are the best funds to invest in? 4
After our meeting
The meeting was adjourned at 12:32 PM. Several of us met afterward at the Station16 Restaurant & Bar in Sacramento for lunch and conversation.
Station16 Restaurant & Bar
Notes
1 YouTube Video (satire)
“Learn How Rich You Could Have Been With Hindsight Financial – CONAN on TBS”
2 See this article by Trevor Hunnicut, Reuters, January 4, 2018 from Reuters for a deeper understanding of the rising tide market:Rising tide in U.S. markets helps bonds, global stocks.
“Non-domestic equity fund inflows of $171.4 billion and Treasury fund inflows of
$34 billion for the year are the largest on records dating to 1992. Emerging market
inflows were the biggest since 2010.”
3 Presentation: “The Somnambulance of a Rising Tide Market”, SABH_Sleepy_Master.pdf 8 MB [38 slides].
Content Copyright © Greg Dietrich 2018. Except sourced excerpts and quotes, whose copyrights are of their respective authors and publications.
4 We will discuss fund selection criteria, as well as other topics next month, March 2018. “Which mutual fund is right for you?
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