Investors Losing Sleep Over Market Risk

“It doesn't sound like you are diversified enough. I'd model a 50-60% market drop, which is not crazy by historical standards. If that happens, you are margin called and go to $0. I have a SBLOC from JP Morgan, and I've kept my leverage to 20% and hold short-term treasuries as well incase I need to deleverage. [re: Liquidity Access Line with Morgan Stanley]”

“I mean that it takes that cash off the table. the alternative would be putting it mostly into a GIA which would be subject to capital gains taxes on growth, which you may still get higher net returns but not as high as if it was in a tax advantaged account. [re: What do to with an inheritance?]”

“Because it’s historically well below standard market returns. So every dollar you spend paying it off could have been a dollar invested in the market and you would be losing the delta between market returns and interest rate. [re: What do to with an inheritance?]”

“If you're planning on retiring so soon you should really be shifting everything into bonds, shouldn't you? But if you aren't because you want to continue to ride the stock pump then alls I can say is "play stupid games, win stupid prizes". [re: Company is all-in on LLMs, and now I finally see where the worry is coming from]”

“yes i was planning to have 2 or 3 years of withdrawals in a money market to use in the case of crash so i wouldnt be selling low. [re: Is there a way to backtest only withdrawing cash during crash?]”

“I think I understand what you're saying. But rate of return does matter. You can always buy a bond and have daily liquidity and no transaction costs. You have to be able to beat that. [re: Good old days 20-25% down cash flow positive]”

“the biggest shift for me was treating the daily drawdown like a hard business expense cap, not a target to recover before close. if i'm down early, size gets smaller or i stop. trying to "make it back" turns one red day into a failed eval fast. do you set a daily loss limit below the firm's limit, or use the full amount? submitted by /u/Acesleychan [link] [comments]”

“I’m thinking of starting to slowly move to higher allocation of cash / money market Given inflation, rates and how heavily weighted to AI the markets are, it just seems irresponsible to be heavily indexed to VT, VOO Doing it in my taxable accounts will trigger cap gains, which I don’t want to do at this time especially given tax bracket, so thinking of just doing it in my retirement accounts With interest rates going up, doesn’t make sense to buy bond funds given their values will decline though”

“I think you could see margin call earlier in a big crash as brokerages will tighten their requirements. Without box spread: down a lot, economy possibly in shambles (or could be temporary correction). With box spread: margin call and possibly lose everything. Margin is margin. Don’t pretend it’s not risky.”

“I mean, if the stock market stagnates for 25 years or something (I'm saying 0 nominal returns) then people withdrawing 4% are gonna have to change their plan assuming they're actually doing the early part of retire early. This is true in the extreme, but it is fair to call out that you can make a very reasonable plan where this risk isn't too big of a problem.”

“but all of those seem like tail risks that either means I'm screwed either way Are you? Most of us aren't screwed if growth slows or if interest rates spike.”

“Thanks for sharing. Bit older than you but frighteningly similar story. My advice for op would be that 3M today in the US for the next 60+ years might be a bit tight. Essentially a perpetual withdrawal ~3% including health/tax. Could work if that's liquid and residence is paid off but it's essentially a median 2 person household lifestyle without working, depending on the COL. Depends on lifestyle goals.”

“I dont understand. Why do you need this? Sounds like youre just losing money. If you are over 100 million plus then I guess you can do things like treasuries etc, but otherwise theres a concept called opportunity cost.”

“We don’t look at it that way at all. History teaches that the best returns over time come from the broader market, like an S&P 500 index fund, but you can’t predict the volatility of the market. Therefore, you maximize your returns by holding enough in safe investments (Like Treasuries) to cover your expenses for 3-5 years, since there have been very few bear markets that have lasted longer than three years, and almost none lasted longer than 5. So if you keep everything else in the market,”

“The premise of the question betrays a lack of understanding about sequence of returns risk and the purpose of holding lower risk assets. If SHTF, conservative holdings like bonds and treasuries are the first thing I sell to live on for a couple years, and on a decent enough pull back, I use the rest to buy more risk assets at a discount. That’s what I did in 2008 and 2020.”

“I’m reading a lot of back and forth regarding the damage that recently higher rates could create. I think it doesn’t matter. Reason being, investors are already beginning to shift money from overpriced stock choices, over to bonds showing 5% or greater, risk-free, return. Wealth continues to build, albeit at a slightly lower amount, but steady and predictable. For those wishing to take on actual debt, rates make that much more difficult. That’s a given. That piece of the economy must slow from i”

He's got $10 million in cash.

“I see. Just a fun story for you. One of my retiree buddies I like to hike with owned several properties leased out to Starbucks. You really can't get more blue chip than that. When Covid19 hit, Starbucks withheld rent and attempted to renegotiate the leases, claiming "oh, well, the real estate isn't worth what it was prior to Covid." My point is that credit quality is not the sole factor to consider when it comes to collecting rents. Fortunately the properties leased to Starbuc”

“To answer your questions directly: Yes, the concentration risk would more than bother me. No way I’d pump 70% of my liquid assets into any single asset class other than diversified public equities, much less the equivalent of buying a single equity. At your age and NW, your goal should be to diversify, simplify, and protect what you’ve built. Yes, I would pay the taxes as a small cost of doing business and getting out of an industry that is inconsistent with retired lifestyle. You’re 62, and bei”

“Got it, yeah I thought i was missing something, thanks. Why do you use this over a low rate margin loan? You can get it around 4% and seems like less risk and cost?”

“Similar to a margin loan, you borrow against your portfolio essentially at the risk free rate using an options strategy. You can use short term borrowing to control how much you realize in capital gains.”

“I deduct a tax liability from my gross holdings and use the after-tax figure in my projections. This is for back-of-the-napkin calculations and excel forecasts etc.”

“the box spread loans are a slick move for smoothing out the cap gains hits, most people just eat the tax bill and move on with 9M in taxable you've got plenty of runway to engineer that low effective rate, especially if you're keeping the income-producing stuff tucked away in the pre-tax accounts like you said curious what rate you're getting on the box spreads these days, last time i looked the implied rates were still pretty decent compared to margin”

“Also, it is important to look what a lost decade might look like? If you are no longer putting more in and only withdrawing, what does a GFC look like for your retirement? Personally, I keep a responsible asset allocation for my age and that includes bonds. I will be putting in for another 10-15 years, so I have some runway, but definitely starting to look at bubbles bursting and whatnot. We have a lot of older people who are 100% equities in ETFs that are touted as diversified, but are mostly A”

Consider CLOs such as FCLO, JAAA, etc.

Your percentages don’t add up

“I’ll add to this a bit, just some food for thought - The $2800 is estimated and at the end of the day they run those estimates off the same market conditions that govern the rest of the economy. In other words, if the market is stagnant and doesn’t grow, you’re unlikely to get your estimated $2800. So when running the numbers don’t treat the $2800 number as guaranteed. In light of this, barring massive collapse of the pension, most pensions are generally regarded as very safe. They are plenty of”

“Retiring this year - hadn’t planned for it but wifey and I just decided to get away from the corporate world. We have made enough money so that was never a problem. We are 49 and 100% invested in equities (with 1-2 years of living expenses in short-term T-bills). Anyhoo, now that we will be retired, the conventional investing wisdom is to move to bonds (maybe 20-40%). But I’m reading everywhere that this is the worst time to buy bonds or bond funds. I understand the impact of rising interest rat”

“$10mm in liquid investable assets- sorry not net worth. so with 10mm liquid most peoples net worth will be multiples above that.”

“When you learn to read you'll find out that I still averaged 30% annualized returns even during both 2020 and 2022 bear markets. In fact, I made the most lifechanging money of my life during 2020 and 2022. I hope the market crashes and we go through another bear market that would actually be the best case scenario for the way I invest.”

“Yes, I agree with that. But generally private businesses that sell for <5x EBITDA are very risky investments relative to the S&P500, which is a diversified fund of high-quality businesses. And they are a lot of work.”

“I know that this was due to a very peculiar economic environment in the 60s-80s, but the point stands that one can lose buying power for extended periods holding intermediate-long term bonds. Equities outpaced inflation over this same period. What’s the real value in holding bonds long term? submitted by /u/Proof_Kangaroo_2813 [link] [comments]”

“That is a very fair point. But I believe this is where the "sequence of returns" risk comes in to play. Nobody can predict the future. While I do believe the markets will return an average of at least 7% over the following 20+ years, that doesn't mean the first 10 years will see 7% each year. If day 1 of this scenario happened to be in 1998, the next 11 years might not looks so bright for investments. Maybe what I'm missing is assessing based on "risk adjusted returns&quot”

“The public equities (e.g., the S&P) has cash flow just like private assets. And its valuation can fluctuate, just like private assets. It’s just marked to market constantly so you know the valuation is changing, but it’s not actually more volatile than something like a private business as an example. The current P/E ratio is ~25 on the SP500 which means that the earnings yield (or cap rate) is roughly 4%. Obviously only some of that gets distributed via dividends, some sits on balance sheet,”

“Doesn’t avoid the tax event however better to take the hit now than in 10 years from now. Did the same. If BTC turns out the way many hope tfsa is a great way to get the gains out tax free or at least tax deferred.”

“You have a large bitcoin investment without a maxed out tfsa? Use your tfsa but you will owe tax on proceeds from the bitcoin.”

“I'm setting out to answer the question in the title. The answer, after the analysis below, seems to be "close, but no". Below is the first version analysis that assumes flat growth rates in an index/bond portfolio. I'm working my way up to a simulator to model sequence of returns risk. Has anyone done anything similar? Am I over-thinking it? Goals Invest enough to have $4M in real terms in 30 years to that I can withdraw 4% and net a real 120k/year after taxes (conservative fla”

“You are the rare person in a position where a Delaware Statutory Trust may make sense. I would probably still recommend just selling outright, paying the taxes, and moving on to a public equities portfolio that will outperform over the long run. But if you just can’t stomach it (even though it’s the clear long term economic win), then a portfolio of DSTs will give you the ability to time the tax hits. DSTs are wealth preservation tools, not wealth accumulation tools. But they do give you some ab”

“Try to time the transaction for as early as possible next year. Jan 1 if you can. Then you have the entire tax year to try and reduce the gain. You could take a strong portion of the liquidity and deploy a long/short equity with higher leverage (150/50 or higher). This might chop away at some of the realized gain.”

“Welcome to the world of margin/leverage. Loans can be called for any reason whatsoever. Even the Feds (since the 1930s) can decide to do it to reduce the money supply though so far they have never chosen to do so.”

“Generally people have more than a single account to account for the $10M. And you would not utilize a long/short strategy across your entire networth.”

“Exactly. I'm always surprised about how people confidently express that a safe withdrawal rate supports expenses without considering taxes”

Yes. OP could have 7 years spending in cash and still be in 82% equities.

“Only 29 so currently have no bonds/cash but was thinking about this as I was going through some scenarios in a spreadsheet. Basic idea is that more returns require greater risk (stock vs bond allocation) and people that have contributed well over the years eventually hit a point where it becomes smart to trade some potential returns for mitigated risk. Basic investing 101 however your goal and what you have invested should dictate allocations rather than how close you are to retirement. For exam”

Thought about this but there’s going to be a crash.

“So FWIW I believe the guy who came up with the original 4.0% number said that 4.6% is okay? Also isn't the median case is that in fact you double your money at time of death? So you could just live off 4.5% and then switch to 4.0% (or lower) if something comes up? A top poster here is 4.5% SWR I was hoping he or she could chime in. submitted by /u/Affectionate-Reason2 [link] [comments]”

“I'm reaching the age/portfolio size where a fast 50% drawdown (say over 6 months) would be a headache, while a 3-5 year grind down wouldn't bother me nearly as much (due to other income, margin, etc.) I'm considering spending ~3%/year on staggered puts to protect my core buy-and-hold SPY and QQQ portfolio, and expect the long-run cost to be around 1.5%/year (including the gains due to crashes). The goal is partly to hedge but also to have lump sum cash to deploy after a crash. My mai”

“Buy a stock you think will go down. You can then sell at a loss to offset the gains. Of course you might get screwed if the stock goes up and you owe more tax.”

“but some positions I reinvested in have since declined and are currently at a loss I want to help reframe this in a way that can help you understand what you're actually doing. The quoted text above can be restated to: I took a loan from the IRS and gambled with it. I lost. If the word "gambled" doesn't sit well with you, feel free to sub it with something less forceful like "calculated risk". Ultimately you need to understand that this money was never yours.”

That will save the most taxes.

Long/short direct indexing.

“I don't want to eliminate growth, but I recognize that my current investment profile is high risk/high reward and suspect I should transition to a more balanced risk/growth strategy...”

“Walking away from 16% returns is the wrong way to think about this. If you’re 100% confident that will continue then obviously you wouldn’t rebalance. What you’re considering (correctly) is the risk associated with stocks. Everyone has different risk tolerances. Some of this also depends on what sources of income you’ll have too. If you spend 100k and expect a 80k pension then you can deal with the risk better.”

“Its called "Sequence of Returns" (SoR). Your Risk part of a portfolio is the SoR Risk (SoRR). Not knowing about SoRR in 2002, son's UGMA lost 70% of value and cost us together 10s thousands in interest payments. Again in 2008 lost 100s thousands and forced retirement while caring for 3 senior parents. I knew something was afoot but didn't know how to mitigate the Risk. Odd part is I have and older brother with PhD Economics with job at Big Bank. He was obviously scared but he d”

“Just a point of reference, the S&P had a negative total return for the decade from 2000 to 2010. It was brutal for recent retirees.”

“Or another 2008 gfc where it's down 50%. I'd be tempted to use cc ETFs to generate the income and plan to be able to live on half that income should another 2008 gfc occur. As an extreme example, 1 million in qqqi would generate around 140k\year. If another 2008 gfc occurs, that income would likely drop to 70k until recovery. (But I'm personally not a single fund investor. This is simply an example).”

“Thanks. This is helpful advice to hear even with 2020 hindsight. One caveat / nascent thought I’ve had was the idea that if we did, for some very lucky reason, hit something like $10m + paid off house, then I would maybe allow myself to accumulate a concentrated bet once I’ve already established a position of FatFire security.”

“This! Why sell these off when theyre the bulk contributors of most major index funds already. It's like selling off fresh bread and rebuying Subway bread. Why??? Diverting dividends to cash or something otherwise vanilla like people said is better.”

“2 years This time frame is defined as short. Market risk is inappropriate for short time frames.”