What Can We Learn From This Bear Market?

[steadyeddy]

Attached is a chart I generated using M* (Growth w Div option). That option I believe shows total return for each of those investments assuming a fixed one time investment on the start date and no sells/buys.

I used 11/1/2021 as the starting date since the stock market peaked around that date. Today 6/14/2023 as the ending date.

All the usual disclaimers apply to this thread discussion such as "past performance does not guarantee...," "don't look through the rearview mirror...," etc etc

But just engage me for a bit. We all know what kind of rollercoaster market we had against the backdrop of brutal inflation and interest rate hikes.

If you notice, best performing and least volatile is PIMIX; somewhat volatile but respectable TR is HYG; boglehead choice for bonds BND is the worst performer; total world stock VT was most volatile and lost more than PIMIX & HYG but less than BND.

So what broad observations can we draw from this chart? And is this info useful in portfolio construction for retirees?

Thanks,

[roi2020]

"So what broad observations can we draw from this chart? And is this info useful in portfolio construction for retirees?"

This was a very short time period and it was a rare instance when both stocks and high-quality bonds experienced large losses.
I would not make any broad observations nor would I modify my portfolio based on this single chart.

[Norbert]

I think it would be more informative to look at a longer time period, not just the "Bear Market" phase.  This chart version starts right before the Covid crash.

(click to enlarge)

Now we see that, despite a sharp 2022 correction, equities have held on to much of their gains; while bonds of all types offered near-zero total returns.

However, it's been a bizarre period.  During Covid we saw massive monetary stimulus and historically low interest rates that generated a huge rally in risky assets.  Am not sure how useful this period will be as a guide to future returns of various asset classes.

[bigseal]

Just like politicians, bear markets come and go.  One should never overreact to it by changing your allocation.  Holding a portfolio of stocks in high quality businesses will always do well over reasonable periods of time.  We’ve always been 90%+ stocks sand will never change.  All bear markets end.  Unfortunately most people don’t have the courage to stick with it and harm their financial future by trying to market time.

[steelpony10]

steadyeddy ,

        I learned this from the retirees that went through Stagflation. You need continuous cash flow through all markets. Many had pensions, utility stocks and high confidence semi growth stocks (read Aristocrats). Coupled with SS those 4 income sources always gave something. Their safe money was placed in CD’s. Disregarding inflation they combined cutting back on the wants at times instead which were few. This worked for 35 years for my parents. It’s an easy problem to solve. Sacrifice and save and you should get more later on, Depression era mentality.

         This is unlike our generation of possible two income families. Sacrifice was completely foreign to most probably. The present generation seems to live day to day with their parents (us) picking up some of the tab along the way. In my opinion fortunately I was raised to be self reliant like all the other animals, lol.*

          * I don’t have any links or charts. You can project the future based on the past but no one can predict the future. Years of quarterly and monthly cash flow and compounding combined with a variety of real market stress tests is all I need. 

[uncleharley]

By studying those charts we can see where the bottom was and project the direction we are currently in.

[steadyeddy]

Jun 15, 2023 5:13:53 GMT Norbert said:

I think it would be more informative to look at a longer time period, not just the "Bear Market" phase.  This chart version starts right before the Covid crash.

(click to enlarge)

View Attachment

Now we see that, despite a sharp 2022 correction, equities have held on to much of their gains; while bonds of all types offered near-zero total returns.

However, it's been a bizarre period.  During Covid we saw massive monetary stimulus and historically low interest rates that generated a huge rally in risky assets.  Am not sure how useful this period will be as a guide to future returns of various asset classes.

Norbert, agree completely with you that the time period chosen in a chart shows different things.

Yep bizarre periods, and they seem to happen often enough. 1987, 2000, 2008,2020 - and prior to 1987 I was not investing. 

I only had insignificant amount in the market in 1987 so didn't bat an eye. In 2000 and 2008 a bit more was at stake but I didn't lose sleep (I was 100% equities). In 2020, I worried a lot as I was/am just a few years from retirement. So adjusted my AA. Now, I am totally dialed-in on capital preservation with some growth as I am at the verge of entering retirement.

Right, wrong or indifferent I am focusing more on volatility of various investments and how they sit in my portfolio to generate the necessary cashflow and reasonable opportunity to combat (not necessarily beat) inflation.

[steadyeddy]

Jun 15, 2023 10:51:19 GMT steelpony10 said:

steadyeddy ,

        I learned this from the retirees that went through Stagflation. You need continuous cash flow through all markets. Many had pensions, utility stocks and high confidence semi growth stocks (read Aristocrats). Coupled with SS those 4 income sources always gave something. Their safe money was placed in CD’s. Disregarding inflation they combined cutting back on the wants at times instead which were few. This worked for 35 years for my parents. It’s an easy problem to solve. Sacrifice and save and you should get more later on, Depression era mentality.

         This is unlike our generation of possible two income families. Sacrifice was completely foreign to most probably. The present generation seems to live day to day with their parents (us) picking up some of the tab along the way. In my opinion fortunately I was raised to be self reliant like all the other animals, lol.*

          * I don’t have any links or charts. You can project the future based on the past but no one can predict the future. Years of quarterly and monthly cash flow and compounding combined with a variety of real market stress tests is all I need. 

steelpony10, I always enjoy the lessons you learned through the "school of hard knocks," and in many ways resonate with them because of my upbringing and how money was not plentiful. I subscribe to "penny saved is a penny earned" mindset. 

Thanks for continuing to share.

[steadyeddy]

Jun 15, 2023 11:12:22 GMT uncleharley said:

By studying those charts we can see where the bottom was and project the direction we are currently in.

uncleharley, I know you study trends to make investment decisions. So this view is completely in line with that approach.

Thanks for sharing.

[steadyeddy]

Jun 15, 2023 8:29:00 GMT bigseal said:

Just like politicians, bear markets come and go.  One should never overreact to it by changing your allocation.  Holding a portfolio of stocks in high quality businesses will always do well over reasonable periods of time.  We’ve always been 90%+ stocks sand will never change.  All bear markets end.  Unfortunately most people don’t have the courage to stick with it and harm their financial future by trying to market time.

bigseal , I do not have what it takes to be 90%+ in equities. True bear markets end, but they shouldn't end when the need for the money appears. That is the trick.

Thanks for sharing.

[win1177]

Jun 15, 2023 8:29:00 GMT bigseal said:

Just like politicians, bear markets come and go.  One should never overreact to it by changing your allocation.  Holding a portfolio of stocks in high quality businesses will always do well over reasonable periods of time.  We’ve always been 90%+ stocks sand will never change.  All bear markets end.  Unfortunately most people don’t have the courage to stick with it and harm their financial future by trying to market time.

Same here! We’ve always been 90%+ in equities, and it has paid off with a very nice sized portfolio. Now that I’m retired, we’re dialing it back ”a little”, to about 85-90% equity, but still pretty “aggressive” for most people. We also have emphasized strong “wide moat” companies with durable competitive advantages, especially companies that pay rising dividends. It takes a commitment to holding through the “tough times” to stick with these positions, but it tends to pay off in the long run. Sometimes we have had to endure periods where our portfolio has dropped for extended periods of time, but we alway keep a “slice” of the portfolio in cash (money markets) and higher quality fixed income, that is enough to cover us for five years or more. This in addition to about 3 months in ready cash in a money market that is our “emergency fund”.

Now that rates have come up somewhat, I’m moving a bit more into bonds, as I don’t think we’ll see short term Money Market rats stay this high for very long. Might as well capture the yields a little longer. Also, we kind of have “won the game”, so playing a little more defense now that I’m retired. 

Win