I question whether if market crashes by e.g. 30% (and my portfolio of 100% stocks/etf as well) I would feel much better than with a 20% drop (because of 30% bonds etc).
That’s what keeps me at 100%, given a long horizon and no specific need to have X amount of money on day Y.
But without leverage. I don’t like the thought/minuscle possibility of ‘losing all’.
I think the decision to be 100% in equities (or not) should really be driven by the objective of investments and the goals
I think over the last couple of decades the goal of investments has moved from “return maximisation & risk management” to “return maximisation” for lot of retail investors
On other other hand if you look at strategic asset allocations for most wealth management firms, it’s not more than 50-70% equities in most cases.
For me personally, I also think 100% equity allocation somehow ignores the concept of asset class diversification by simply using the highest risk asset class
I think it‘s the upswing and the awesome feeling having your bonds to rebalance into cheap stocks, that makes the difference.
Also drawdown length is reduced by literal years, with even a modest allocation. Will definitely help stay the course.
The absolute drop is not too crazy different.
80/20, almost same return, but drawdown length significantly reduced:
Should we invest in USD bonds, or rather only in CHF bonds?
It was just to illustrate a point and VBMFX is the longest running total bond fund I know of.
We should definitely not invest in USD bonds unhedged.
what you mean by be ready for a crash?
Serious Question: What is wrong with gold? Did it turn into a BTC / YoLo stock like Speculation? Or is there something fundamentally wrong and we don‘t experience speculation but profound investing and shifting assets into Gold?
I consider 3 factors, there can be more:
1) Be financially safe
Have safety nets outside of stocks. Diversification of income, strong network, versatile skillset, low expenses and/or ability to reduce them in time of need, emergency fund, … all count.
2) Be psychologically ready
Know it can happen, practice equanimity: enjoy the gains but don’t let that drive your strategy, life or expectations. Accept the losses as a fact of investing that is necessary to also get the gains.
Study past crises and temper your expectations from them (time to hit the bottom, deepness of the drawdown, time for recovery, outside situations (job market, fear that banks might go belly up, armed conflicts/sentiment of the end of the world happening, energy crisis, etc.)).
Healthy habits, interests other than finance that will have your mind elsewhere than focused on the daily losses, good and reliable friends, physical activity, meditation, … all can help.
3) Have an allocation/strategy you can live with and theory-test it to harsher market conditions.
For my own personal assessments, I like to use 60% drawdown, 1-2 years to reach bottom and 2-3 years for recovery, while keeping in mind that 80% drawdowns would be exceptional but are still possible, though that’s what works for me, with a tendency to want to visualize more catastrophic scenarios and apply a positive view on them - another approach might suit other people better.
That allocation can be 100% stocks, it can be levered, in which case, one has to ask oneself what they will do if the drawdown is steeper than expected and try to assess what psychological and financial effects it would have on them.
It can contain bonds, gold, derivatives and other assets. It can include a set of rules. Having an individual strategy that others don’t apply shouldn’t frighten us but it should be designed for us, to allow for us to achieve our objectives and stand firm when the market conditions are less than optimal, including when it lasts for a significant amount of time.
I think it’s really a personal thing. Some people wouldn’t feel affected by a 30% drop at all, others would enjoy the dampening and having an asset that behaves better and the simple act of rebalancing can give a sense of agency at a time when we could otherwise feel helpless, as Tony1337 points out. I would personally want to steel myself against bigger drops than 30%.
Some people can fare well with a 100% stocks allocation, some people can live well with leverage and have the means to handle it even when their assets loose value. That’s not everybody. If someone thinks they can handle 100% stocks after having thoroughly assessed the situation, it’s great and all the more power to them but I would not just assume that 100% stocks will fare well enough for me if I haven’t given some serious thoughts pondering it as well as the alternatives.
I think it’s a combination of a couple of things. Ease and speed of investing, information glut (both good and bad), the recent bull market having created many geniuses, or people unaware of their real risk tolerance (how to be aware if it’s never been tested?).
It’s all too possible that the stuff we know over here and elsewhere was borderline unknown to most in the investing business. Not talking about Bogle, Buffett, Lynch etc but about the ground “soldiers”, basically salesmen, have no clue of investing theory (or, even worse, have a clue and still shill terrible investments).
Re the bolded part, one needs to have wealth in order to manage it, many of us here are in the process of making wealth 
I don’t think that’s necessarily the case, it doesn’t have to ignore it, it’s mostly not knowing ones real limits.
I’ll again draw from my own experience as it’s the only one I know intimately. Initially I was measured, kept a comfortable 20k CHF in cash at all times, maxed the 3A and invested a little here and there until from from about March 2023 I got confident and started throwing everything and the kitchen sink in the market…until June this year. Something told me I was stretched too thin and too much on the edge of being in trouble (and, more importantly, putting my family in trouble) if anything happened. I mean I was running with 1 month expenses in reserve! Sure, yeah RAV would kick in after ~3 months if I got fired, our expenses would be reduced to Mustachian levels, my notice period would give me a couple of months’ salary too and I’d eat our dog for meat, but all this started weighing on me too much for comfort. Hence I got jittery and decided to build the cash reserves up to a comfortable 4 months first no matter what’s happening in the market, then think about ex-US investments (specifically CH), then whatever’s left over for the 3A.
The way I think about this is: this means if we drop 33% over the next 6 months then whatever I put in the market before 30th Oct 2023 will still be at zero, and not minus. That’s my comfort blanket
Ok, these are hardcore numbers, man! It’s good to be prepared though. I am personally less scared of a COVID-type drop and more of a long, grinding, soul-destroying, despair-inducing lost decade. Of course dirty dividends will help
I don’t normally invest in gold but I did starting this year. I actually wanted to buy earlier, but price was always a bit too high. This shifted to me buying gold even if I thought the price was too high.
Then in September after Fed decision in September I bought up gold to my new target allocation.
I think there are several reasons for the rise in gold:
I think there could be a WSB type FOMO reaction as gold rises.
I agree
Knowing one’s limit is key specially for the ones who have not experienced long drawdowns. Everything is great until bad things happen
Japan crash
Dot com crash
Great financial crash
Swiss real estate crash 1990s
All these happened after I was born. I just wasn’t investing so I didn’t feel any of this myself.
But somehow I keep hearing everything is a blip in big scheme of things. Well it’s not because if someone is caught in the drawdown, for them theory is less interesting and reality is very disheartening.
Similar here except 5 years to reach bottom and another 5-10 to recover.
I wonder how the Japan bubble and crash fits
Here’s the table with the Japan Bubble row added to the existing data:
| Equity Drawdown Event | Begin | End | Maximum Drawdown | Months to Drawdown | Months to Recovery |
|---|---|---|---|---|---|
| Post-COVID Inflation | Jan-22 | Current | -23.0% | 6 | N/A |
| COVID-19 | Feb-20 | Aug-20 | -33.8% | 1 | 6 |
| Global Financial Crisis | Oct-07 | Mar-13 | -56.8% | 17 | 49 |
| Tech Bubble | Mar-00 | May-07 | -49.2% | 30 | 56 |
| ’87 Crash | Sep-87 | May-89 | -29.5% | 3 | 18 |
| 70s Bear Market | Jan-73 | Jun-76 | -42.6% | 21 | 21 |
| Great Depression | Sep-29 | Jan-45 | -83.4% | 34 | 151 |
| Japan Bubble | Dec-89 | Oct-98 | -63.5% | 104 | 408+ |
I asked ChatGPT to add Japan bubble to this. I hope figures are right!
Data is very noisy but current CAPE ratios might suggest risk of low 10 year performance:
This is an interesting regression looking at multiple countries:
Note the relatively weaker correlation for US and CA.
Fixed it:
I like to use 60% drawdown, 2-3 years to reach bottom and post this another 6-8 years for recovery,
Why the drawdown size is important? I thought it’s important the time to recovery, which in your case is max 11 years.
How does it change your plan? Do you have cash to pay for expenses for 11 years or you have that in bonds (or bonds interests?)
It’s psychological. You had 1M and now you have 600k and it’s starting to go back up but it has already done that once. Is that the start of the end or the prelude for another leg down? And now you only have 500k left, will it go even further down?
It’s not the same story than “I had 1M 6 years ago and I have had 800k 3 years ago and now I have 900k and it’s slowly grinding up but I don’t know when I’ll break even”. Which is also very stressful.
The lesser drawdown scenario is easier to compensate with new inputs by accumulators, it might be easier on their mind to see that in terms of value of the portfolio, they’re up, because their new inputs are in and could even be positive, indicating they’re getting better off day by day.
Incidentally, larger drawdowns is when real money is made. Accumulators who have a long enough investing horizon and can steel themselves and keep throwing money in even when it seems the market is thoroughly doomed get to really profit from the recovery.
For retired people, it’s even worse: do I still have enough to fund what I want to do in my retirement? Case in point, the “plan B” thread in Bogleheads, where even otherwise level headed prominent Bogleheads decided they needed to get out of the stock market, that came out in December 2008: "Maximum Tolerable Loss" -- Not just a fear factor - Bogleheads.org
Because drawdown size would also impact the time of recovery.
Smaller draw downs typically don’t break the confidence of investors. But a large drawdown will break the confidence of many.
Not necessarily, covid was brutal but it was literally a blip, of course those in it didn’t know it was going to be a blip. I wasn’t there in terms of investing but have read of people bailing and locking in losses by not going back in until it was already broken even, and also people who threw the kitchen sink, and were laughing 2 months later.
Personally a grinding lost decade is what I’m afraid of.
Personally, I would have loved a grinding lost decade for the past 10 years. I would have bought a lot more for my money!
