Planning for the worst

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crane89
Posts: 10
Joined: Fri Mar 15, 2013 9:35 pm

Planning for the worst

Post by crane89 »

So I've been following a daily seasonal strategy since about mid August with excellent results so far. Currently in #16517. My question pertains to what happens if/when there is a significant market correction. I understand that its a strategy and the idea is to follow it exactly but what happens if the correction happens and I am all in an equity fund, am I supposed to make my next IFT as scheduled and lock in those losses permanently? My gut feeling would be to stay in the equity fund so as not to lock those losses in? I guess it's subjective as to whats considered a significant market correction but what do you all think would be the appropriate course of action for a strategy follower should a significant correction occur?

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Sad Al
Posts: 107
Joined: Tue Jun 08, 2010 11:50 am

Re: Planning for the worst

Post by Sad Al »

I, too, am following 16517, and that is a question I asked myself. For reassurance, I checked the performance of 2007 and 2008. I noted that there were several months of negative returns, but check what happened the month that followed. Nearly every time the next month made up the difference and often with additional gains. In each of those years the strategy still yielded greater than 30%. So if you stopped following the prescribed moves, your performance certainly would change, but it might not be for the better, if you fail to move back into the favored stock fund at the right time. Personally, I'm not too good at predicting the next move in the market. Cheers!

Qball
Posts: 11
Joined: Tue Apr 04, 2017 11:00 pm

Re: Planning for the worst

Post by Qball »

Sad Al wrote:Personally, I'm not too good at predicting the next move in the market.
Neither or most of us. And that's why I think it's best to follow a plan regardless of what the market does.

crane89
Posts: 10
Joined: Fri Mar 15, 2013 9:35 pm

Re: Planning for the worst

Post by crane89 »

Thanks for the replies. I would like to think I will stick with the strategy. Its just tough to overcome the fear of selling while prices are down.

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TSPsmart
Posts: 212
Joined: Fri Nov 14, 2014 12:24 pm

Re: Planning for the worst

Post by TSPsmart »

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Crane89,
I love your comment. Your thoughts are shared by so many investors. It explains a lot about the market psychology that help create market tops.
Its just tough to overcome the fear of selling while prices are down.

So what are you going to do in a Bear market? Are you going to freeze and hold equities and ride it down?

We've had two bear markets since 2000 that lost over 50%. How are you going to tell the difference between a bear and a dip?

Are you now conditioned to "buy the dip" because the market always bounces back during bull markets? The strongest rallies in the market occur during bear markets! They suck a lot of buy-the-dippers back in to the market prior to the markets rolling over into deeper losses.

Many people ride the bear market down, become scared as they see their balances lose 50% or more (80% in tech stock indexes when the tech bubble burst) and then panic sell.

I don't believe in Buy & Hope. A 50% loss requires a 100% gain to breakeven. A 80% loss requires a 400% gain to breakeven.

The last bear market gave back over 100% of the preceding bull market gains - think about it. Have a real strategy that takes Bear markets into account. It's only a strategy if you follow it. So make sure you have a good strategy and stick to it.

Do you know what is driving this bull market? It isn't corporate earnings - they are sitting at 2012 levels. It isn't the economy. You need to understand this to know when the tide has turned.

My thoughts on your dilemma: It would be better to exit the market on your signals with some losses and be scared to re-enter and lose some gains, than to ride a bear market down. Think of selling as locking in gains, not losses. Or protecting your capital from further losses.

Seasonal investing is great for bull markets, but you need to have bear market signals too.

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rcozby
Posts: 341
Joined: Mon Aug 11, 2014 12:14 pm

Re: Planning for the worst

Post by rcozby »

TSPsmart wrote:.
Seasonal investing is great for bull markets, but you need to have bear market signals too.
Along those lines, I wonder, with the entrance of a new Fed chair and the clear unwinding of the Fed's massive treasury holdings, if we're seeing the end of a season that began in 1982. Most seasonal strategies aren't back-tested that far back, and they'd need to go back to, what? 1937? in order to capture a track record that covers periods where the Fed experiences a macro change of mind of the kind we may be seeing.

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Aitrus
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Posts: 2391
Joined: Mon Aug 06, 2012 5:03 pm

Re: Planning for the worst

Post by Aitrus »

rcozby wrote:
TSPsmart wrote:.
Seasonal investing is great for bull markets, but you need to have bear market signals too.
Along those lines, I wonder, with the entrance of a new Fed chair and the clear unwinding of the Fed's massive treasury holdings, if we're seeing the end of a season that began in 1982. Most seasonal strategies aren't back-tested that far back, and they'd need to go back to, what? 1937? in order to capture a track record that covers periods where the Fed experiences a macro change of mind of the kind we may be seeing.
The Monthly seasonal goes back to 1988, which I think is about right.

It was in the late '80s and early '90s that the American business model really started moving away from pensions and more into retirement accounts. Also, that was when the economy started gaining steam in the technology / information age / service sectors of the market. The modern market has changed significantly since the 70's and early 80's.

Going back to 1937 wouldn't be a good basis for modern market strategies. Back then our economy was mostly agrarian, and agrarian-based economies are historically strongest in the summer and fall as projected yields from crops and summer mining operations become more solidified. Winter was the weakest because the economy slows to a crawl due to lack of reliable long range transportation to take good from producers to marketplaces.

Going back to the 50s or 70s wouldn't work either, because the US was a manufacturing-based economy. We still manufacture a lot, but not in the same ways or the same overheads, and we now import a lot of the raw materials used in the products. In addition, other sectors of the economy now take up an equally large, or even larger share, of the market. Non-manufacturing tech businesses (Amazon, for example), healthcare and energy are all big drivers. These sectors each have their own seasonal highs and lows, and where there are confluences in these highs and lows is where you find collective strength or weakness in the overall market.

All this is to say that today's modern market is not like it was way back when. The strong seasons now were the weak seasons of the past. That's why we don't use a static model for investing, we continually analyze it as new data comes in to see if trends develop that justify changing our strategy. It will change gradually as the economy stretches into new areas or behaves in new ways.
Seasonal Musings 2022: viewtopic.php?f=14&t=19005
Recommended Reading: http://tspcenter.com/forums/viewtopic.php?f=14&t=13474
"It's not what happens to you, but how you react to it that matters" Epictetus

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