Invite your colleagues and friends interested in investing to enter the gates of Shrewd'm, for they will thank you (and their larger pockets!) later.
- Manlobbi
Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A) ❤
No. of Recommendations: 6
That’s why I invest more in the broad market whenever there’s a steep drop. No, I don’t try to figure out whether stocks are objectively cheap, because I’ve learned market yardsticks can’t tell us where the market is headed next.
Instead, I simply take my cues from the magnitude of the market’s decline, and the bigger it is, the more enthusiastic I am about buying. That might sound naïve. But after decades of investing, buying aggressively during a bear market—coupled with leaning heavily toward stocks and favoring index funds—are the only ways I know to get an edge.
https://humbledollar.com/2024/12/sharing-lessons/Interesting piece by Jonathan Clements
No. of Recommendations: 7
I invest more in the broad market whenever there’s a steep drop.
...
I simply take my cues from the magnitude of the market’s decline, and the bigger it is, the more enthusiastic I am about buying.
All well and good, but where does the money for that big buying come from?
Presumably you've got a pot of money that is not invested in stocks but is sitting in savings accounts or bonds.
Which means that it is missing out on the stock gains while the market is going up.
That is going to severely hurt your overall portfolio.
Then there is the question of when to sell stocks and rebuild your cash for the next downturn.
No. of Recommendations: 3
All well and good, but where does the money for that big buying come from?
From changing the asset allocation, reduce bonds & cash and increase equity.
No. of Recommendations: 8
All well and good, but where does the money for that big buying come from?
Indeed, Clements does not answer this. He first writes that he doesn't lighten up on stocks:
Indeed, As I’ve argued before, I’m not inclined to lighten up on stocks when the market appears overheated, because there’s no limit to how high share prices might climb.
And then he goes straight on to say when he buys:
That’s why I invest more in the broad market whenever there’s a steep drop. No, I don’t try to figure out whether stocks are objectively cheap, because I’ve learned market yardsticks can’t tell us where the market is headed next. Instead, I simply take my cues from the magnitude of the market’s decline, and the bigger it is, the more enthusiastic I am about buying. That might sound naïve. But after decades of investing, buying aggressively during a bear market—coupled with leaning heavily toward stocks and favoring index funds—are the only ways I know to get an edge.
Interesting 'edge' given that it is logically impossible to implement. He mentions bonds at 40% in the comments, but holding bonds at that rate exceedingly unperformed a 100% stock allocation. Changing the allocation to more stocks after steep declines would outperform the 40% fixed bond strategy (but not outperform a 100% stock strategy except he also wrote he doesn't lighten up when he thinks the market is overvalued.
Regarding the overall sentiment, though - buying index funds after steep market declines - you might consider taking the opposite trade. After steep market declines (say over 40%) in the S&P500, the businesses considered viewed as junk can decline far more than the S&P500.
If you want an edge over the S&P500 whilst largely invested in the S&P500, and you don't like to pick individual stocks, and you want to remain fully invested - then here's one solution: Whilst remaining fully invested, you could hold an index fund for the majority of the time, but then move all of your equity into a bucket of at least 20 low quality firms that no-one wants during market declines. You are taking the opposite trade of people searching for quality whilst experiencing fear, which puts a premium on large cap stocks and those with the strongest economic moats.
When the S&P500 recovers, the 'junk' stocks also recover, but from far deeper lows, so you can experience enormous gains. When the market recovers, switch back to the index fund.
This can be backtested if we define a "steep market decline" (when moving into junk) as a decline of 50%, and "recovered market" (moving back to the index) as the S&P500 reaching its former high. The junk could be defined stocks that have fallen at least 75% from their former high, and from that group taking the top 20 as ranked by the highest 5-year past return.
I wouldn't have the nerve to follow such a strategy, I have to admit, but if you were a pure numbers person I believe it would have outperformed a fixed 100% S&P500 strategy over the last 30 years by quite a margin.
- Manlobbi
No. of Recommendations: 5
Argh! Yahoo has gone downhill again. Now the charts are garbage.
</rant>
This can be backtested if we define a "steep market decline" (when moving into junk) as a decline of 50%, and "recovered market" (moving back to the index) as the S&P500 reaching its former high. The junk could be defined stocks that have fallen at least 75% from their former high...
Anyway....
SPY (S&P500) has only had one decline of 50% since inception of 1993. That was the 2008 bear market.
Only 2 declines more than 40%, that was the 2002-2003 market.
Two more at 25%, 2011 and 2020.
There are not enough "big" falls to test this theory with.
I suspect that there wouldn't be a good way to reliably pick the junk stocks that will rebound greater than the market. There's just too many junk stocks, and most of them are just that -- JUNK.
One potential candidate might be the opposite of the large S&P500 stocks but not quite junk, like the S&P 600 small cap ETF. But when I plotted SPY & IJR on testfol.io, they fall & rise in unison. But the embarrassing thing is, since inception (May 2000), IJR beats SPY handily. More volatile, though.
One thing that I have reluctantly become convinced of is that for a long-term investor, trying to do timing is futile and counterproductive. Well-defined timing rule-based strategies of course, not handwaving ad-hoc untestable strategies.
All that timing does (a well-defined good strategy, that is) is to reduce the volatility and avoid the large drawdowns. But they also miss out on some of the subsequent gains. Long-term, the return is slightly reduced over buy-and-hold.
The biggest advantage of timing is when the portfolio is short term, like for a 75+ year old retiree. Instances where the bounce after the crash may not come before the end.
No. of Recommendations: 2
One thing that I have reluctantly become convinced of is that for a long-term investor, trying to do timing is futile and counterproductive. Well-defined timing rule-based strategies of course, not handwaving ad-hoc untestable strategies.
All that timing does (a well-defined good strategy, that is) is to reduce the volatility and avoid the large drawdowns. But they also miss out on some of the subsequent gains. Long-term, the return is slightly reduced over buy-and-hold.
That could be important for someone living close to the edge, say pulling 4 or 5% annually. Improving the sequence of returns could be more beneficial than outright long-term performance.
Then there's the sleep-at-night factor.
Timing isn't for me but I do see the utility for some.
