Comment Thread

There was an odd comment thread on on yesterday’s rather innocuous post about another blogger’s theories about portfolio construction. Seemingly out of nowhere came some anti-financial market, anti-advisor and anti-blogger sentiment.

Some of the comments;

  • It seems all you “advisors” have this basic assumption that a “financial portfolio” is needed?

  • The “stock market” is a fools game created to steal your money.

  • Top down may have worked this time, but has it always?

  • Most of these blogs remind me of a daily racing form you get at the horse track… It is gambling!

Wow that is some dourness and I probably resemble some of those remarks (blogger and advisor). First off, after months and months of stock market declines it makes sense to expect that many people will be emotionally weary. Comments like the ones above belie that weariness. The folks leaving those comments might be inclined to tell me to hit the bricks but but for anyone not inclined to compare stock market content to a racing form they might benefit from recognizing the emotion exhibited by other people which in turn might prevent them from letting their own emotions get the best of them.

I was having a conversation with someone on Wednesday and I said the biggest threats to a successful financial plan are poor decisions and poor performance (it only takes one of those to derail a financial plan). People have more control over their decisions than their portfolio results. One source of poor decisions is letting emotion dictate portfolio action as opposed to logic. This is not to say that by remaining logical you will get every decision correct but your chances for success are better if you remain cool, calm and collected.

I’ve talked about the way I deal with market declines and emotion before but it could be useful now and has helped me along the way. I try to make this as simple as I can. The stock market goes up most of the time but occasionally it goes down and a little less frequently it goes down a lot. These are immutable laws of stock markets. There is no changing this. It will be the case for as long as you invest.

Knowing this ahead of time should make the task of enduring easier. If you look back at blog posts from a couple of years ago, even earlier, I talked about the next bear market and the one after that in very routine fashion as a way of trying to express how matter of fact they are. The current one will end then there will be a bull market again followed by another bear.

To the comment pasted above about top down, the market has tended to warn when the bear phase is starting in fairly consistent ways. Part of that has been that relatively close to peak the market crosses below its 200 DMA. If the goal is to miss a lot of most of the pain of a typical bear market as opposed to trying to get out at the top then a top down exit strategy can be very effective.

15 Comments

  1. What’s frustrating, at least to me, is that other people’s emotions affect the performance of my investments. I’m a left-brained investor who gravitates to charts, data, and logic to guide my decisions. I try to keep a pretty tight grip on my own emotions, but when hedgies, mutual fund managers, and cocktail party investors dump stocks en masse, I’ve got little choice but to react. While that’s the beauty of the 200 dma, it’s also a source of continual agitation for me.

    Reply
  2. Regarding top down. Let us assume the 200 DMA is a reliable indicator of whether to unload or load up. I agree that in a world with no taxes and no trading costs it may make some sense. Mind you, not all in or all out, just increasing or decreasing the weightings in the portfolio.

    This bear market has been so extreme that unquestionably it was the correct decision to make. Even after paying taxes on short term gains at the highest combined federal and state tax rates, an investor would probably still be ahead. However, for a person in a high tax bracket faced with a not so extreme bear market (and who really knows in advance) a case can be made for following the 200 DMA as a strict rule is more detrimental than just sticking with a conventional balanced portfolio that directs earning to the underweighted asset class.

    So the correct strategy “depends.” The warning of recency from yesterday is sensible, because history shows that not all bear markets are alike nor this extreme.

    Not trying to bash or be hyper-critical, I just think that a one size fits all approach can be dangerous.

    Over and out.

    Reply
  3. taxes are never my first priority, for some people tax are the first priority.

    the commission is $10 a trade. if you have an account of a certain size then even ten trades to get defensive is nothing, cost-wise.

    Reply
  4. thanks for the clarification on taxes Roger. I appreciate the honesty. I presume you would agree with the statement “it’s what you keep that counts.” For many, taxes are indeed a secondary consideration if even a factor at all.

    Perhaps, I don’t belong posting on this blog since my perspective is almost always affected by the tax consequences and thus my preference for little to no trading.

    Reply
  5. don’t belong is probably extreme but taxes a little further down the priority list is where i am coming from.

    my experience is that taxes are often viewed as a nuisance as a opposed to genuine anguish or even despair caused by a portfolio cutting in half

    Reply
  6. I have a problem with the idea of “high” tax brackets in the modern world.

    If you’re married and filing jointly and making $200k, you are taxed at 28% (I’m not gonna bring in mortgage deductions, etc.). From there, taxes top out at 35%. IMO, that’s nothing.

    I’m seriously not trying to start some kind of tax debate. I try to avoid taxes and I constantly look for ways to do it – but I’ll also admit that the vast majority of my savings are in tax advantaged accounts.

    Reply
  7. Roger: I’ve also noted the intensity of the negative comments on the blog lately. It seems that this classical Bear is achieving its ultimate purpose, which is to gradually strangle all positive feelings toward the market and stocks out of the investing public. As in the 1930’s, we’ll be left with a generation or two of people who shake their heads sadly when asked about the “stock market,” and then tell horror stories about dear old Uncle Fred, who lost everything back in the “Big One.” It is tough to be objective in watching the train crash when one is a passenger on the train!

    Reply
  8. uncle Fred, the big one. nice. maybe i’ll do this week’s video in a Walter Huston voice (is that the gold dancing guy?)

    Reply
  9. Pretty negative comments.

    Hmmm! Are we finally beginning to hear capitulation?

    Cynthia

    Reply
  10. when they’re yell’n, sell, when they’re cry’n, buy.

    Reply
  11. Anyone who was not aware of the sub-prime crisis and the effect it would have on the stock market, doesn’t belong in equities.

    I’m not a smart investor, I’m a dumb one, but I was out before the 500 crossed the 200dma.

    Down a little = OK

    Down a lot = really stupid

    I have enough capital gains to bail out Citibank.

    OG

    Reply
  12. Roger: Are you going to share with your readers if/when you take action based on future protectionist concerns? I think this is a potentially hugely important issue (as u do since you posted it yesterday) and am just wondering………….

    Thanks for one of the most thought provoking blogs on the web!

    Reply
  13. OT: Roger, thanks for the greenfaucet referral to the Quinn post re: comparative debt/GDP, US & Japan & implications. Cogent & sourced.

    Anna in NC

    Reply
  14. “If you’re married and filing jointly and making $200k, you are taxed at 28% (I’m not gonna bring in mortgage deductions, etc.). From there, taxes top out at 35%. IMO, that’s nothing.”

    Huh?

    Guess guys like Bernstein and Bogle have it all wrong.

    Reply
  15. “If you’re married and filing jointly and making $200k, you are taxed at 28% (I’m not gonna bring in mortgage deductions, etc.). From there, taxes top out at 35%. IMO, that’s nothing.”

    That may be nothing to you, but it has real world implications that I think amount to at least “something.” If one assumes we work 260 days a year(52 weeks times 5 work days), then 28% means one works almost 73 of those days just to pay federal taxes. If your rate is 35%, you are working 91 days out of 260 to pay “the man.” 91 days. Where I come from, that’s more than 18 work weeks, or 4.5 months. That may be “nothing” to you, but it sure sounds like “something” to me.

    Reply

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Comment Thread

There was an odd comment thread on on yesterday’s rather innocuous post about another blogger’s theories about portfolio construction. Seemingly out of nowhere came some anti-financial market, anti-advisor and anti-blogger sentiment.

Some of the comments;

  • It seems all you “advisors” have this basic assumption that a “financial portfolio” is needed?

  • The “stock market” is a fools game created to steal your money.

  • Top down may have worked this time, but has it always?

  • Most of these blogs remind me of a daily racing form you get at the horse track… It is gambling!

Wow that is some dourness and I probably resemble some of those remarks (blogger and advisor). First off, after months and months of stock market declines it makes sense to expect that many people will be emotionally weary. Comments like the ones above belie that weariness. The folks leaving those comments might be inclined to tell me to hit the bricks but but for anyone not inclined to compare stock market content to a racing form they might benefit from recognizing the emotion exhibited by other people which in turn might prevent them from letting their own emotions get the best of them.

I was having a conversation with someone on Wednesday and I said the biggest threats to a successful financial plan are poor decisions and poor performance (it only takes one of those to derail a financial plan). People have more control over their decisions than their portfolio results. One source of poor decisions is letting emotion dictate portfolio action as opposed to logic. This is not to say that by remaining logical you will get every decision correct but your chances for success are better if you remain cool, calm and collected.

I’ve talked about the way I deal with market declines and emotion before but it could be useful now and has helped me along the way. I try to make this as simple as I can. The stock market goes up most of the time but occasionally it goes down and a little less frequently it goes down a lot. These are immutable laws of stock markets. There is no changing this. It will be the case for as long as you invest.

Knowing this ahead of time should make the task of enduring easier. If you look back at blog posts from a couple of years ago, even earlier, I talked about the next bear market and the one after that in very routine fashion as a way of trying to express how matter of fact they are. The current one will end then there will be a bull market again followed by another bear.

To the comment pasted above about top down, the market has tended to warn when the bear phase is starting in fairly consistent ways. Part of that has been that relatively close to peak the market crosses below its 200 DMA. If the goal is to miss a lot of most of the pain of a typical bear market as opposed to trying to get out at the top then a top down exit strategy can be very effective.

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