Investing for pessimists

Coffee
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I have to admit, I’m somewhat wary of the stock market, esp. the lofty valuations on US tech.

Is anyone feeling cautious too? I’m 70/30 stocks/‘bonds’, but even the bonds are not wholly bonds, but a mix of T-bills, cash and gold.

Given that the US is unlikely to stop spending furiously any time soon and Fed may still cut - the risk of inflation/weakening dollar/financial repression is quite strong. Which is one reason I moved part of the ‘bond’ holding into gold. I’m hoping that SNB cuts strongly to give an opportunity to bring back some $ into CHF.

I feel my stock allocation is still too high and would like to bring it down to 60/40 or even 50/50. Or alternatively bring a larger portion of the stocks into more defensive stocks. But what would those be?

  • Tobacco?
  • Utilities?

I hold a large portion of the 30 in T-bills, but if rates go down again, the interest earned would fall and FX losses would go on top. I guess you could play buying long duration e.g. TLT and going for the capital gains, but not sure I want to play those games and anyway would not want to hold TLT long term.

Ideas?

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What’s your time horizon? Do you look to FIREing? No solid ideas, just ride it out unfortunately.

I’m 100% stocks in both my liquid investments and illiquid 2nd pillar and 3A as I have a horizon of 12-15 years’ accumulation to go. Sequence of returns risk worries me a ton more than US tech, recession, the USD etc.

If I had 2 years to go I expect I’d be much more income-focused, likely still 100% in stocks, but dividend stocks. CHDVD has done the same as VWRL while providing 2x the income and in CHF.

Cash I see as a buffer to be left alone unless really needed, bonds/bills/notes…I don’t want to think in other currencies and Swiss bonds look like they return less than a standard savings account (which is so odd considering it’s a loan…). Gold I haven’t thought about much, I don’t like it to be honest, feels like a hedge and not an investment.

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Looking to RE in 3 years.

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Hmmm, I get you. So basically it’s sequence of returns risk keeping you up then? IF I was in your shows and IF I had a good enough pot to reliably generate enough income to maintain my desired standard of living I’d do what I said above, switch to dividend stocks like CHDVD (5 stocks make 70% of the ETF…) and then add some more by trying to learn to do what @Your_Full_Name’s doing.

Caveat, I’d look to break even before doing any of that…big caveat…

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Aren’t recession etc. all different risks which can lead to SoRR?

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You’re right, I meant more broadly vs what can bother someone right now (e.g., US tech was a problem in 1999 and may turn out to be one these days, whereas 2008 was banking and housing and credit - I mean the reasons for a downturn will vary while the concept remains the same).

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I am looking at a similar timeframe for FI. As @Mirager suggested, I too focus on income generating assets (because I neither believe the bond market will outperform equities in a potential upcoming recession with further interest rate decreases nor do I want to switch out of equities with generally higher return expectations).

Two years ago I begun shifting new ETF investments from 100% VWRL (All World) to 50% each into VWRL & VHYL (All World High Dividend, don’t like the heavily concentrated CHDVD), last year it was 100% VHYL and this year I even began switching existing investments. This should allow me to achieve FI with dividend returns only.

Of course, this only works if you target and achieve a high enough net worth, as only by being FI through income from assets you can (nearly) eliminate the sequence of return risk (SRR). SRR itself is indeed a simple combination of all the bad things that can happen.

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I don’t really know a lot about the withdrawal phase because I have not done much research on that topic. But I do remember reading a study that globally diversified stocks portfolio have a higher success versus Stocks /bonds in terms of „ruin“ probability. Which basically means what’s the chance of running out of money. This depends a lot on withdrawal rate expectations though. So whatever you decide as an asset allocation as you are nearing the RE phase, it’s up to you.

However I would like to make two comments

  • as far as I have seen, all Swiss wealth managed portfolios always hedge their currency risk for bond investments. They use international bonds mainly for credit risk and diversification but not really to get currency exposure. I think you should focus on Swiss bonds or Global hedged ETFs. T-bills and US bonds are exposed to currency fluctuations and can cause a headache if US debt crisis goes out of control.
  • Regarding „safe“ stocks, unless you are very good in picking stocks based on valuations and balance sheets, maybe you can get some guidance from long term assumptions from Vanguard, Blackrock etc and till your portfolio with respect to regional split.

I wouldn’t assume that dividend ETFs are safer than regular ones. Using dividend ETFs is more a decision about how you want to split your returns (income vs capital gains) but it doesn’t automatically make them safer or better

You didn’t say this, but maybe you are hinting towards it. I wouldn’t assume that low PE ratio makes anything any more safe. Volkswagen PE Ratio is low. But is it safe? Who knows. Maybe it is.

P.S -: I also have concerns over high asset prices across the board -: US Equities, Indian equities, Swiss real estate are the top ones. For time being my controllable portfolio is about 60% equity (excluding 2nd pillar) but this is not because I changed anything, it’s because I never got to that point yet being a newbie in investment world.

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In case you ever get bored (for like two weeks straight): The safe withdrawal rate series by ERN goes into abundant detail on SRR too.

It was one of the sources which helped me to conclude that I will not shift towards a high share of bonds prior to RE. Rather the opposite, I need at least 80% equities to (hopefully) ensure I won’t run out of money in a five decades long retirement.

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Interesting chart on there:

image

You see the failures at the bottom left when CAPE yield is low. Today this is 2.8% far to the left so literally off the chart which points to higher risk of failure.

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The positive argument is that the current CAPE does include both the losses during the pandemic and the subsequent supply-chain-issue driven high inflation, and therefore underestimates the true run-rate of 10-year-average earnings.

The neutral argument is that the recent equity returns are largely driven by a few companies in one sector, and their AI returns simply haven’t materialized yet. It could be argued to be absolutely normal to see highly elevated CAPE ratios whilst the market is (still) being disrupted as the market is forward looking and the CAPE backward looking.

The negative argument is that multiple asset classes are indicating that we are in a big bubble, ripe for bursting (though that also has been true for quite a while).

Ultimately, I have no idea what’s true, but I’d prefer a big bursting bubble now while I am still accumulating rather than immediately after retiring (which brings us back to the SRR).

PS: Careful @PhilMongoose , I believe you are comparing CAPE yield, which should be around 2.8%, with excess CAPE yield (accounting for US treasury returns), even though that doesn’t change your point that we currently must expect a higher risk of failure.

PPS: CAPE calculation favors (i.e. is lower) value stocks who pay dividends, compared to growth stocks who reinvest their earnings and stocks who use share buybacks instead of dividends. So, even ceteris paribus, you would see quite higher CAPE levels today vs 30 years ago.

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You are right. I corrected the number.

Agree. It is fair to say that with the shift from, say, oil companies and the likes of AT&T to Google and Facebook, you’d expect a shift in CAPE, so you cannot simply look across time and expect to use CAPE as a consistent measure.

Ultimately, I have no idea what’s true, but I’d prefer a big bursting bubble now while I am still accumulating rather than immediately after retiring (which brings us back to the SRR).

Agree. I would like it to burst now while I’m still employed.

This is the issue. There are many warning indicators, but with fiscal spending/stimulus out of control (and no end in sight, even the Republican party seems firmly on the fiscal spending train), there’s a huge uncertainty when/if there will be a correction under such circumstances. I feel like we’re playing a game of pass the parcel where everybody is happily unwrapping the parcel and collecting $100 bills each round, but we suspect the middle of the parcel contains a bomb.

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Yes we do. We have got term elected politicians after all, and modern monetary theory suggests we can play this game far longer than anyone thought possible.

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I own my own home (with mortgage) and have some rental properties, which might help on smoothing income, but maybe adds lumpy maintenance. I think in retirement, I would probably only want 50%-60% stocks in the liquid portfolio from a peace of mind perspective.

I’m not sure how to construct the remaining 40%-50%. Maybe very stable dividend companies could fill part of it if I’m struggling to allocate. Maybe some in cash.

Maybe I need to go back to the drawing board and try to come up with a model portfolio that I can leave alone and is low enough volatility not to worry me.

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As most likely you would need yields, following could be options for the non-stocks portion

Bonds
CHCORP or equivalent CS fund could be a good alternate. The YTM is low but CHF is also very strong currency , so it’s tough to get high yields for bonds.

Direct real estate
In addition the DRPF type of funds also give decent yields and have tax advantages. But there the high asset value of RE means you really need to remain invested for long term and not count too much on inflation adjusted capital appreciation.

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I guess if low yield bonds are in the mix, then I might also think about paying off my mortgages.

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That’s true
Of course depends if mortgage interest is lower or higher than yields

But definitely something to check

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“Investing for pessimists” sounds like an oxymoron to me – I think as a long term investor you cannot be not optimistic – but the topic title surely makes for nice clickbait that I couldn’t resist clicking into. :wink:

Well …

“It’s a market of stocks, not a stock market.”
          — Chuck Carnevale aka Mr. Valuation

I don’t own any of the mag 7 (except probably via broad index funds in retirement accounts) but I believe there’s still many fairly or even undervalued companies out there.

I think it’s always best to be cautious, regardless of where “the market” is at. Well, maybe not always. Sometimes you need to be courageous instead of cautious, like in March 2020.
See also the seven virtues of great investors as described by Jason Zweig.

Well, I intend to stick to the plan* regardless whether we stay in the current bubble, roll into the next one or just pop the current bubble.

* Of course you need to have one first. My plan is: Extra cash goes into buying - ideally with a margin of safety - dividend paying and dividend growing companies that have a strong track record of paying and growing them.
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IMHO this. î

Find the plan that you can stick with, market up or down, with the plan’s performance lagging this index or beating that other index, but the plan that you’re convinced of and can stick with.

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Wanted to come back on that, why does it matter if you get dividends or if you withdraw from your assets? (as long as you keep your allocation in check it should be equivalent)

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