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53 Comments

  1. I say congrats on continuing your positive net worth. I would also say that you are a bit cautious, but to each his own. Have you thought about doing a 60/40 split instead of 40/60? Good luck and great blog.

    • Mr. Groovy

      Thanks, Jason. Mrs. G has ice in her veins when it comes to investing. She would be perfectly happy with a 70/30 split. I’m the wimp in the household. I do want to get to a 60/40 split eventually. I’m just waiting for the next 2008. Thanks for stopping by, my friend.

  2. I know the CAPE ratio is really high. You have 29 in your article and that is extremely high. But I think that that will drop as soon as we get 10 years past the 2009 crash. The earnings from 2008/9 are still in the calculation of this ratio. They were ridiculously low and are skewing the ratio.

    That being said, I think you’re smart to be cautious. I also believe the market is high. This recovery has lasted something like 95 months. The business cycle is bound to turn sometime, right? Is brick-and-mortar retail going to spark it…maybe car loan defaults? Who knows. Smart to be cautious.

    • Mr. Groovy

      Thank you, Matt. You definitely put my lizard brain at ease. My vote is that retail is going to spark the correction. But then, again, maybe it will be the subprime car loans, or the gargantuan student loan debt, or the public pension crisis that is rolling through one municipality and state after another, or the….now I’m getting nervous again. Thanks for stopping by, Matt. Reality isn’t always music to the ears. So I’ll just take your advice and be CAUTIOUS. Cheers.

  3. Ref the Schiller model. In studying it I’d like to point out what I think is a flaw. The model uses a historical context of average market PEs and by that standard today’s market appears to be high and even over-valued. The one absolutely CRITICAL thing that Schiller’s model ignores is prevailing interest rates. Historically speaking, if the risk-free rate is ~5% and the market PE is say 25 (implying a risky rate of 4%) then yes – we’re at great risk in the stock market. But that’s not the case today. Our risk free rate for government 10 yr bonds is about 2.5% not 5%… that changes EVERYTHING. Suddenly, a PE of 25 (and a 4% earnings yield) appears a lot more rational juxtaposed to a 2.5% risk-free rate. There’s good reason why Buffett said that he wouldn’t touch Long-term bonds with a ten foot pole. Why? Their “earnings yield” implies a PE of 40 for the 10 year bond and PE of 33 for the 30 year. Bonds also don’t grow their earnings like stocks do. No wonder why Buffett just said this weekend that IF rates stay at these very low rates for an extended period of time (as Ben Bernanke just said would likely be the case) then stocks at today’s price are a very good value. Therefore, I would not be expecting some calamitous fall due to over-valuation anytime soon. Yes, we have some increased risk just due to the world we live in and it’s tougher to invest with certainty today…. but our underlying reality has also changed. If rates were to rise? Then those 30 yr bonds will have hell to pay. You get a 2% dividend yield in the S&P500 with a coupon that grows…. Buffett just recommended stocks for that reason.

    • Mr. Groovy

      Thank you GO4IT. Excellent analysis. Once you take account of super low interest rates, stock prices don’t look so lofty. And the way it looks now, interest rates won’t return to normal levels anytime soon. Quick aside. When I got my first mortgage back in 1998, my interest rate was 7.75 percent, and that was considered a great rate. So thanks to you and the other commenters here, I’m a little less nervous. I’ll just stick with my 40/60 allocation and rebalance when necessary. Thanks again GO4IT. I really appreciate what you brought to our conversation. Cheers.

  4. This post reminds me I need to check the market a lot less often. I think part of it is that it’s easy to check on my laptop while I’m at work. But I’m invested for the long-term so it shouldn’t matter! Ah!

    I like that you pointed out the Shiller PE Ratio. I don’t think many people think about the macro-economic factors that will impact their investments, and clearly you have. I think the relatively large amount of consumer and government debt that we have in the US exacerbates the issue.

    • Mr. Groovy

      “I think the relatively large amount of consumer and government debt that we have in the US exacerbates the issue.”

      This is what scares me. I don’t see a huge tech bubble or huge real estate bubble. But how much more debt can we take on? Our national debt is closing in on $20 trillion. Student loan debt is over a trillion. What happens when the music stops, when no one is willing to lend us more money? I got to assume the fallout will hit the stock market. Meh.

      Thanks for stopping by, DC. I really appreciate your thoughts. The next five or ten years should be very interesting.

  5. I’ve been waiting for the big correction for several years and have slowly allocated more towards cash and bonds, especially after the election.

    I’m in love with muni bonds. Hope rates go back up a little so I can lock in!

    Sam

    • Mr. Groovy

      Haha! Same here, Sam. I’ve been waiting for the mother of all corrections for several years now and the stock market keeps going up. I don’t want to see a repeat of 2008-2009, of course, but I’m ready. I have plenty of gun powder itching to do battle. Have to plead ignorance when it comes to muni bonds, though. My cousin who is a big-time estate planner for Merril Lynch is also a big proponent of munis. Perhaps it’s time I heeded you and him and started doing some research. Thanks for stopping by, my friend. Always a pleasure hearing from you.

  6. Kurt

    Enjoy reading your blog and I can relate to this post because I have lots of similar thoughts. It looks like you have a solid, conservative asset allocation with the added bonus of simplicity making it easy to monitor.

    It seems that underlying some of the comments are judgments about stocks being high while interest rates are low. In general I agree but if we take the next logical step then we end up with some version of market timing. And from what I read and my own humble experience, timing the market works really well – in hindsight. The problem comes when we try to do it in the future. My crystal ball is a little cloudy and on top of that predicting financial markets with my own money on the line is emotionally draining. So I guess my philosophy is to diversify with a few index funds and rebalance as needed. Hopefully a simple objective plan keeps my emotions in check so I don’t end up selling low and buying high ☺

    • Mr. Groovy

      Agreed. The last thing I want to do is try my hand at marketing timing. I have no doubt that I would fare poorly if I went that route. After hearing from the community, and your wise counsel, I’m going to stick with our 40/60 and rebalance when necessary. Thanks for stopping by, Kurt. I really appreciate your thoughts.

  7. This is a lot to think about. Since you’re at 40/60 currently, were you initially going to follow the rising equity glidepath to 60/40, or stay there?
    Mrs. Grumby and I have been having a similar conversation about the potential for an upcoming crash, but our roles are reversed: she is a bit more cautious like you and I am more prone to let things ride for now. We’re at about 65/30 with some cash and other stuff, but our plan was to move to 40/60 when we retire in 11 months.
    I’m gonna feel like a Big Dummy if the big one happens and I didn’t move. On the other hand, I might feel like a Meathead if I move and miss some sweet market appreciation. Sheesh, decisions!
    (Yes, I mixed my Norman Lear metaphors there….)

    • Mr. Groovy

      Hey, Mr. Grumby. Our plan is to go with the rising equity glide path of 1 to 2 percent per year until the big one. Once the big one comes (i.e., a 30 to 40 percent decline in the market), we’ll jump to a 60/40 allocation and rebalance every year after accordingly. That’s the game plan, anyway. Our goal is to be very greedy when others are very fearful. Do we have the stones to pull it off? Only time will tell. Thanks for stopping by, my friend. It’s always great hearing from people who mix their Norman Lear metaphors.

      P.S. Working “Big Dummy” and “Meathead” into one paragraph was a stroke of genius. LOL. Well played, sir. Well played.

  8. I’m turning 31 this summer so thankfully I can weather the next correction. I oversold in ’09 so I’m going to do do better at holding this time.

    I know my grandparents got burnt by the Great Recession because they were mostly stocks & had to work a few extra years to rebuild their portfolio.

    My large concern is the amount of Quantitative Easing that so many nations have done & rock-bottom interest rates. I don’t know what the damage will be & how to best hedge from it. I’m primarily in total stock market index funds right now.

    • Mr. Groovy

      “My large concern is the amount of Quantitative Easing that so many nations have done & rock-bottom interest rates.”

      Great observation, Josh. To say we’re in uncharted territory is a supreme understatement. A lot of easy money has been thrown into the world economy. I don’t see how that ends well. I think the best hedge against that is to be young. A 30-something has a lot better shot at recovering from a financial armageddon than a 50- or 60-something. Thanks for stopping by, my friend. It’s always great to hear your take on things.

  9. I am with Erik. I believe there will be a fall, so a bit of cash set aside will enable you to take advantage of the drop, when it does come.
    The cash also ensures you can sit it out, and don’t have to touch your capital if the fall extends longer than anticipated.

    • Mr. Groovy

      Excellent points, Erith. Erik makes a lot of sense. Yes, cash on the sidelines will lose value to inflation. But when the big one or not-so big one comes, cash will come in very handy. Thanks for stopping by.

  10. I learned after the last crash to close my eyes and sit tight until the birds start chirping. Back in 2008ish my then husband decided we should move everything into cash….literally. The 401k stayed where it was but moved to a stable fund and everything in our bank accounts came out in cash. We were hoarding. Now, this type of anxiety came from him being a war refugee and seeing his whole country and economy collapse. When he saw what was happening in our markets he believed war would soon break out and at the very least we would lose all our money. Thankfully neither happened but changing funds set me back big time. 😩

    Anywho, now knowing what I know I am happy to just sit tight and ride the wave. Your situation is far different by mine (FI already!!) so I’m interested to see how it goes. Keep us posted!! Oh, and you always have a home in Chicago should the shit hit the fan. 😁

    • Mr. Groovy

      Miss M to the rescue! I love it. If I can eat at Lou Malnati’s once a week, I’m in. In all seriousness, though, I really appreciate your sound advice. “Cash is important but don’t go overboard. Sit tight and ride the wave.” Love the way your mind works, Miss M.

  11. There’s going to be a 15-20% correction coming soon – there always is at least once a year. If I was you, I’d stay 40-60 and then build cash to be able to take advtange of the correction – essentially a bloated emergency fund.

    You don’t want to be caught with your pants down and not have cash… but you also don’t want to lose out on a gains. 40/60 gives a good mix of that.

    One last thing, your bonds will most likely go up in value because in a recession, there is a flight to quality -> interest rates go down -> price goes up.

    • Mr. Groovy

      Thanks, Erik. The discussion we’re having is very helpful. I think I may be over thinking our defenses. We do have a bloated emergency fund and our 40/60 portfolio is a reasonable way to capture market gains and withstand market corrections. Sometimes the best course of action is to take a deep breathe and do nothing. Love this community. First-rate minds offering first-rate advice.

  12. I’m not convinced the big one is coming. I think that came in 2007-2009. I think we might have a recession with a 20-25% but nothing like we saw last time when the housing bubble crashed. But that’s just my two cents. Although I am a little worried when someone that didn’t know anything about investments told me now was the perfect time to buy stocks. I thought, top of the market must be here 🙂

    • Mr. Groovy

      What’s the saying, if you start getting stock tips from your cabbie or barber it’s time to get out of the market? I hope you’re right, my friend. It would be great if we don’t see another big one for a decade or so.

  13. I’ve thought we were due for a crash for a bit, but then I also thought we’d be back to normal interest rates by now. I don’t think I’ll be opening any 1-800-PSYCHIC side hustles anytime soon, but we are sitting on more cash than normal, and I’m glad we have the real estate rentals so not completely dependent on the stock market.

    It’s a good time to hedge bets, whether that’s by accelerating debt pay off, holding on to extra cash, or finding alternative investments for your portfolio.

    • “I’ve thought we were due for a crash for a bit, but then I also thought we’d be back to normal interest rates by now.”

      Same. I have basically given up trying to adjust in preparation for things I am terrible at predicting. That said, my family still has two incomes coming in, so the stakes are lower for me. I really don’t know what I would be doing if I were relying on the income. I think I would be keeping a year or two of expenses in cash, a year or so in treasury bills and then going more aggressive in something like 80/20 stocks/bonds.

      • Mr. Groovy

        You’re a wise man, Matt. Thanks to you and GO4IT, Mrs. Groovy and I are going to take a serious look into treasury bills. Interest rates are surely going up, and short term treasuries are better suited for that.

    • Mr. Groovy

      I was right about the housing bust. I just didn’t see how Long Island housing prices could go up 15-20% every year for eternity, especially when incomes were basically stagnant. Now, I just don’t see how an economy based on a federal funds rate of 1 percent can long avoid a stock market crash. But like you, Emily, my psychic abilities are very fickle. So we’ll probably stick with our current defense. No debt, four to five years of living expenses in cash, and a 40/60 portfolio allocation. If that Maginot Line can’t withstand the next economic assault, we’re all in serious trouble. Thanks for stopping by, Emily. It’s always great hearing from a struggling psychic.

  14. GO4ITUSA

    Don’t forget to add being a tour guide to the list! That’s what I’ve been doing and I absolutely LOVE IT!

  15. I tend to point out that while the P/E in the dot com boom was 44 at crash, it was still significantly higher then today long before the crash (we’re talking 3-5 years). Had you bought at this point in that runnup you would remained in the money through the crash. Something to think about.

    • Mr. Groovy

      Definitely. To be prepared for a crash, you may miss out on a number of years of double-digit returns. Meh. Damn, this investing business is hard.

  16. The cool thing is that the world is full of options and you aren’t chained to any of them! Maybe you spend a year in Mexico? Or “working” at a state park campground in Montana! Maybe you take up cat sitting. =) Being retired creates 1000 options and 1 might just end up being even better than the original plan! And if you don’t like it, you can just change gears again.

    • Mr. Groovy

      Love the way your mind works, Ms. M. There are no shortage of ways to protect your portfolio if you engage your brain. Three years in Mexico or Thailand would put a lot less pressure on one’s portfolio. Like you said, “being retired creates 1000 options.” And now I have Mrs. G dreaming of Montana again. Make that 1001 options.

  17. Yea. It’s thickened indeed. I use VFISX for my T-Bills. The yield isn’t much but the risk to principle is so much smaller. It ain’t worth it to me to get 2.5 (10 yr bonds) rather than 1.25% on short term treasuries but take all the extra risk… I can buy the Vanguard high yield stock fund, get a 3% dividend, and pay about 22 times earnings…. an intermediate or long term bond fund has a lower dividend yield, no growth, and sells for a pe that’s nearly double. If we have say a liquidity crisis then bonds will drop just like stocks – really no safer. War? Bonds should hold up but what the hey…. stocks ain’t going out of business. The way I try to look at it is that I really don’t care what the price and value of the equity is… fluctuate all you want….. if that 3% dividend is stable that’s what matters.

    • Mr. Groovy

      Wow, GO4IT. I really appreciate the follow up. Great points and great suggestions. Mrs. Groovy and I will do some research on VFISX this week. Thank you, my friend.

  18. Hmmmmmmmmm….. Bonds are far more overvalued than stocks these days so I think most of your risk is in the bond fund. You’re paying the pe equivalent of 40 to own a 10 year bond with zero growth to compensate. I think it dangerous to assume that the bond fund would zig or hold steady while stocks zag. Warren Buffett acknowledges all of this and he’s put his bond money (which will be 10% of his widow’s inheritance portfolio) into short term treasuries which are far less exposed to things like rising rates.

    • Mr. Groovy

      Excellent point, GO4IT. Our total bond market fund is considered an intermediate range bond fund. Perhaps it’s time to park some of our portfolio into a short-term treasury bond fund. The plot thickens, my friend.

  19. I am 40 and my wife is 47. We have an asset allocation of 65/35. At retirement, we plan on an allocation of 50/50 in less than 12 years. She will also have a Pa teachers pension to cover most of our expenses. We are just a little more conservative than you.

    • Mr. Groovy

      Your wife’s pension is key. My pension covers roughly half of our living expenses. Couple that with a conservative portfolio allocation of 40/60 and two future Social Security checks, and I don’t see how we screw up this retirement thingy–even if we’re now on the doorstep of another crash. You’re in an even more enviable position than I. A pension that covers all of your living expenses is gold. Add a 50/50 portfolio allocation and Social Security to that revenue stream and I see nothing but a bright retirement for you and your wife. Bravo, my friend.

      • It makes me nervous when you say “I don’t see how we screw up…”. I’m spitting three times– toi, toi , toi, and throwing salt over my shoulder. There are many ways we can screw up. Or life may have something in store for us. I don’t want to take anything for granted.

  20. Great post. Thanks for your transparency. I do think another crash is coming within 3 years, and I’m sitting still because I believe the readjustment will be of benefit. I’m also playing for the long term so other people’s millage will vary.

    • Mr. Groovy

      Thank you, KP. I appreciate your input. Because Mrs. G is far more fearless than I am when it comes to investing, we’ll probably stick with our current 40/60 allocation. And that’s okay. As my very crude analysis shows, a 40/60 allocation gives us plenty of ammo to return fire after a market crash. The key is to just remain calm and rebalance. I like the way your mind works, KP. Thanks for stopping by.

    • Mr. Groovy

      Thanks, MMM. Always got a kick out of Sanford and Son. The verbal sparring between Fred and Aunt Esther was a riot.

  21. I can’t believe it’s May already. Mentally I’m still back in November. 😛

    I really do feel that another recession is coming soon. The market can only continue like this for so long before it crashes. I would prep by being more conservative with my allocations. We don’t know *when* a crash will happen, so it’s good to be prepared before it happens, in my opinion.

    • Mr. Groovy

      I hear ya, Mrs. PP. Mentally I’m still in November too. But the weather outside is gorgeous, so I guess it’s time to embrace the spring. The dog days of summer are just around the corner. The question is, however, are the dog days of the economy just around the corner? I think we’re good with our current allocation of 40/60. If Mrs. G is up for a 30/70 allocation, I’m game. But when it comes to investing, she has ice in her veins. She thinks we’re being too conservative as is. Thanks for stopping by, Mrs. PP. Always a pleasure hearing from you.

  22. I share your concern, Mr. G! One thing I’d question, tho, is your assumption that: “For our purposes here, I assume that the bonds/cash portion of the portfolio will retain its value during the crash.”

    If/when interest rates rise, we also have risk with our bond allocation. Scary times, and I’m not sure how best to handle it. I hate to go to cash, since we also have to keep up with inflation.

    Easy-Peasy? Not in my book. My knees, they are a knockin’!

    • Mr. Groovy

      Haha! So true. That assumption about the bonds/cash side of the portfolio retaining its value is pretty damn rosy. I’ll have to do some research on how much bonds typically lose during a rising interest rate environment. Meh.

        • Mr. Groovy

          Will do, my friend. Mrs. Groovy and I are kicking around the idea of adding a short-term treasury bond fund into our mix. That should mitigate some of the risk our portfolio has to rising interest rates. But then the complexity of our portfolio will jump 50%. We’ll have 3 funds rather than 2. Can we handle it? We’ll keep you posted, for sure.