Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Support MFO
Donate through PayPal
A 'big fall' in markets is coming as traders put record cash to work
Thanks DavidV. Despite a hyped-up overly sensational title, this actually makes for pretty good reading. Couple of excerpts:
"... active equity funds just absorbed their biggest inflows in 2 1/2 years, according to BAML. This is a sign of confidence not just for the market, but for fund managers that make their living picking stocks. It's a rare bright spot for active management, which has struggled alongside the rise of the red-hot ETF industry."
"... Institutional investors are also holding the lowest levels of cash since the start of the eight-year bull market, survey data compiled by Citigroup show. The measure now sits at less than one-third of a multi-year high reached in 2016."
The first quote seems to explain (at least partially) the fact that S&P ETFs are seeing steady outflows (see other thread). Looks like maybe some of that is going into actively managed funds.
I'm a bit perplexed re the second quote. Are MFs counted as institutional investors? In that case, there would seem to be a contradiction, as just about every actively managed fund I own has been raising cash over the past 3-6 months. (Of course, T. Rowe could be the exception.)
Good article. Just touched on a couple things that stood out to me.
My take is that the market is currently highly levered up. With this, when big money starts to cash out ... watch out! So, I am keeping my cash allocation at about 20% as it will act as a dampner in a falling stock market plus it will also provide me with some buying power to play the rebound.
I figure every day has a 50/50 chance of going up, or going down. Historically there have been a lot more up days than down. We are wired to remember the down days and "forget" the good days. So the moral (IMHO) is to create an allocation that allows you to sleep at night, knowing there will be some down days and some just plain awful days, in addition to the great days. Timing these things is impossible. Be sure you have any cash needs for 3-5 years from the portfolio held in cash or short-term bonds. Yes, it may be "fun" to look at the accounts every day, but it really doesn't matter. Make changes along the way when really needed, and try to keep expenses as low as is practical. Don't think you will find a magic bullet, and don't spend too much time trying to find the perfect manager. Don't be afraid to index, especially in domestic stocks. Get a life if you don't have one. These are probably over-simplified, but they have worked for me...when I adhere to them.
>> I figure every day has a 50/50 chance of going up, or going down.
? And then you go on to say that actually this is not how you 'figure'. I mean, none of us does.
Disregarding the subjective stuff ("sleep at night", selective memory, etc.) that people act upon, it's the objective statement that's suspect: "Historically there have been a lot more up days than down."
Up days do dominate, but not by all that much, typically 55% give or take. Or just one extra up day per month of 20 trading days (11 up days, where 10 would be 50/50). https://www.crestmontresearch.com/docs/Stock-Yo-Yo.pdf
I completely concur with keeping 3-5 years in cash/short term bonds, assuming one can afford the hit in a low interest rate environment. It is one of the safer, more "sleep at night" approaches.
5y of cashflow in cash would mean a lot of people would never be equity-invested at all, in anything. Has anyone ever advised 'don't invest in the equity markets except with more than 5y of your living expenses'? Maybe they have and I have missed it.
5y of cashflow in cash would mean a lot of people would never be equity-invested at all, in anything. Has anyone ever advised 'don't invest in the equity markets except with more than 5y of your living expenses'? Maybe they have and I have missed it.
"I’ve told the trustee to put 90% of it in an S&P 500 index fund and 10% in short-term governments. And the reason for the 10% in short-term governments is that if there’s a terrible period in the market and she’s withdrawing 3% or 4% a year you take it out of that instead of selling stocks at the wrong time. She’ll do fine with that. And anybody will do fine with that. "
Need? I didn't infer that from the 90/10 rule. Just that 10% in cash/short term bonds is sufficient (according to Buffett) to protect against sequence risk.
That leaves you free to invest the rest however you see fit subject to the constraint that it will outlast you. If you've got a 30 year horizon, and 27x annual cash flow to invest (after the first three years of cash), all you need do is match inflation (after taxes) to meet that objective.
Equities should do better than that, but TIPS in a Roth would also suffice, as would a 50/50 mix (a la Bengen).
If you've got less to invest, you can't take such a cavalier attitude toward allocation, but the 10% in cash/short term bonds still serves its role. I've been meaning to post a link to a sequence risk article - I'll start a separate thread for that.
No one mentioned 90/10 till you did, right? I was just riffing off the needing-3y-cash thing. Where 10% cash would cover 3y. While you waited sleeplessly for your 90% to at least recover.
Comments
"... active equity funds just absorbed their biggest inflows in 2 1/2 years, according to BAML. This is a sign of confidence not just for the market, but for fund managers that make their living picking stocks. It's a rare bright spot for active management, which has struggled alongside the rise of the red-hot ETF industry."
"... Institutional investors are also holding the lowest levels of cash since the start of the eight-year bull market, survey data compiled by Citigroup show. The measure now sits at less than one-third of a multi-year high reached in 2016."
The first quote seems to explain (at least partially) the fact that S&P ETFs are seeing steady outflows (see other thread). Looks like maybe some of that is going into actively managed funds.
I'm a bit perplexed re the second quote. Are MFs counted as institutional investors? In that case, there would seem to be a contradiction, as just about every actively managed fund I own has been raising cash over the past 3-6 months. (Of course, T. Rowe could be the exception.)
Good article. Just touched on a couple things that stood out to me.
My take is that the market is currently highly levered up. With this, when big money starts to cash out ... watch out! So, I am keeping my cash allocation at about 20% as it will act as a dampner in a falling stock market plus it will also provide me with some buying power to play the rebound.
Skeet
?
And then you go on to say that actually this is not how you 'figure'. I mean, none of us does.
Up days do dominate, but not by all that much, typically 55% give or take. Or just one extra up day per month of 20 trading days (11 up days, where 10 would be 50/50).
https://www.crestmontresearch.com/docs/Stock-Yo-Yo.pdf
I completely concur with keeping 3-5 years in cash/short term bonds, assuming one can afford the hit in a low interest rate environment. It is one of the safer, more "sleep at night" approaches.
Even 3y would be problematic for many.
"I’ve told the trustee to put 90% of it in an S&P 500 index fund and 10% in short-term governments. And the reason for the 10% in short-term governments is that if there’s a terrible period in the market and she’s withdrawing 3% or 4% a year you take it out of that instead of selling stocks at the wrong time. She’ll do fine with that. And anybody will do fine with that. "
https://blogs.cfainstitute.org/investor/2014/03/04/warren-buffetts-90-10-rule-of-thumb-for-retirement-investing/
That leaves you free to invest the rest however you see fit subject to the constraint that it will outlast you. If you've got a 30 year horizon, and 27x annual cash flow to invest (after the first three years of cash), all you need do is match inflation (after taxes) to meet that objective.
Equities should do better than that, but TIPS in a Roth would also suffice, as would a 50/50 mix (a la Bengen).
If you've got less to invest, you can't take such a cavalier attitude toward allocation, but the 10% in cash/short term bonds still serves its role. I've been meaning to post a link to a sequence risk article - I'll start a separate thread for that.