I’ve been in a 100% cash position with my retirement portfolio for a while now and I’ve been asked a “couple” of times (I don’t get a lot of readership), how will I know when it’s time to “get back in”?
Of course, I don’t have the precise answer people are looking for, or even seem to expect. It’s market-timing plain and simple and I’m just using my own intuitive judgment based on what I see, hear and read concerning the economy. I haven’t found a good reason to change my mind. To me, as a whole, everything seems to point to a weakening economy, not one on the rebound.
But, one gauge that I use to evaluate whether the stock market is “really” reversing it’s trend is the junk bond market, specifically, the Vanguard Group’s High-Yield Corporate Fund, Investor Shares (VWEHX) because it contains “higher-grade” junk.
My reasoning is that junk bonds prices are directly correlated with stock market prices. If both stock and junk bond market prices continue to rise, then it could be indicative of a turn-around. If stock market prices leap, but VWEHX falls or remains the same, I view it as short-term speculative movement, not a reversal of course.
For example, the stock market really bounced back at the beginning of the week, and like most investors betting on a bear market, it caused me a little concern. But, my anxieties were allayed once I saw that VWEHX didn’t move at all. As a matter of fact, VWEHX is at historic lows, and the outlook for junk looks pretty grim. According to a Bloomberg.com article today:
Aug. 7 (Bloomberg) — The global default rate for speculative-grade company bonds may rise to as much as 10 percent over the next year as the economy slows, according to Moody’s Investors Service.
Defaults may reach 6.3 percent in 12 months, the highest in more than five years, and could be higher should the housing slump lead to a “protracted U.S. recession,” the New York- based rating company said in a report today. The failure rate increased to 2.5 percent in July from 1.5 percent a year ago.
That speaks more to me than any short-term stock market gains.
Comments 5
G the C,
Absolutely nothin’ wrong with cash. As my grandpa used to tell me, “no one likes 3% till they lose 30%”.
continued success to you.
Posted 12 Aug 2008 at 5:41 pm ¶HD
I know you are in all cash currently, but being the Bogle guy that you are, why aren’t you buying up total market etf’s and other low expense indexes.
Posted 12 Aug 2008 at 7:50 pm ¶Thanks Harleydog.. your grandfather’s a smart man.
Hi MJ.. glad to see you back from vacation. Hope you didn’t pick up any wacky diseases over there.
I can’t believe it’s been this long, but I’ve been 100% cash for two years now.
Your right, if I’m a boglehead, what the hell am I doing trying to time the market?
Well, I probably shouldn’t have, but I just believed that we were due for a correction, and when the yield curve inverted, I was convinced. Of course, in hindsight, I got out a little too early.
I’m still holding out because I believe the markets have further to fall. But, there’s a lot of fight left in them bulls and they’re not going down easy. I’ve continued to DCA all this time, but it’s all been into my money market funds (VMMXX).
Before moving to cash, I had 100% of my retirement savings in VTTVX, Vanguard’s Target Retirement 2025 Fund. This fund gives me the exact diversity that I’m looking for and does all the re-balancing for me. Of course, there’s always those who believe I could tweak it better, but I don’t see the need to be so precise. VTTVX, is all index, low-cost, and works just fine for me.
When (not if) the price drops below $12.00 per share, I’m going to move back into it 100% again. After that, I don’t plan on speculating with my retirement portfolio again. So far, it’s working out for me, but I really don’t like taking the additional risk.
Posted 12 Aug 2008 at 9:40 pm ¶Target Funds are good. I like being in cash, although I am not too much, but I really think that this is a good time to start buying up some of these other total market funds. I need to review my ideas more, I like your basis for pulling out with the yeild curve. However, I like the indexing though because well I suck at dropping out on stocks, and these you typically hold and hold and hold.
Posted 14 Aug 2008 at 12:56 am ¶Everything you just said sounds like great advice MJ. But, I’m a walking contradiction, an atypical investor, a contrarian.
All my instincts and logic was telling me that the economy was headed for a fall. But on the other hand, I index because I believe very few people can consistently time the markets.
Although I’ve never tried it before with my retirement portfolio, I just decided that it had to be done. So far I haven’t yet reached my goal, so who’s to say that my market timing adventure was right or not?
My fingers are still crossed.
Posted 14 Aug 2008 at 6:12 am ¶Post a Comment