Chris Ciovacco

Multiple asset class via etfs, proprietary market model, rules based system, long, special situation short
Chris Ciovacco
Multiple asset class via ETFs, proprietary market model, rules based system, Long, special situation short
Contributor since: 2006
Company: Ciovacco Capital Management
RJL1955 - you are a class act and I am sure you have helped many people over the years.... appreciate all your insightful input (experience counts in the markets). I, too, wish you nothing but success - CC
BTW - the charts shown above actually favor the bulls:
http://bit.ly/1GkQ7Sr
Dollar-Cost Averaging is relevant, but it does not impact the percent loss in a bear market in any way. Click on link to view image and see better visual:
http://bit.ly/1e9sTFM
Investors pumped $180 Billion into stock mutual funds in 2007. No one every invests near a market peak.... right? Source: Morningstar
No One Invests Near A Market Peak? In 1999 investors sent $37 billion to Janus Funds alone (1 fund company). The market peaked 3 MO later
Follow-up in same order:
1. What investors should do and what they really do are two different things. Not every investor hires an adviser. As we know, the stats tell us the vast majority of Americans are behind in terms of saving for retirement. Many DIYers that are behind see "best way for long-term growth" and they try to catch up. It is not unusual for a DIY 50 year old (who may live to 90) to be heavily in stocks (right, wrong, or indifferent). I am talking about a DIY investor (not a client of a money management firm). The post is meant to show DIY investors the downside risk.
2. Thank you.
3. A 60%/40% stock/bond mix lost 32.44%. The stock side lost 59% between October 9, 2007 and March 9, 2009. AGG (diversified mix of bonds bonds) closed on October 9, 2007 at $77.24 (adjusted close) and was worth $82.95 (adjusted close) on March 9, 2009, which means bonds gained roughly 7.39% while the "best" growth allocation lost 59%. A 32.44% loss on $2M is a loss of $648,800.
4. The article says several times that buy-and-hold and re-balance works. The concern is during the loss of 32.44% many DIY investors will sell out and never receive the full cycle benefits of re-balancing. As stated in the article "Buy-and-hold works, but only if you hold during the good and bad times." This article is not an attack on buy-and-hold.... the concern is DIY implementation over full cycle.
5. Agree 100% inflation is not a concern now, but history shows inflation rates can accelerate quickly. Inflation may become a problem anytime in the next 36 months. The future is very uncertain especially after years of ZIRP and a ton of money in the system.
6. "any good professional would advise their clients of this" . Many people on SA are DIYers. They are not professionals. They do not have an adviser. Interest rates are near all time lows. The probability of bonds following the same return path they followed over the last 33 years during the next 33 years is low. Rising rates impact all bonds and all dividend paying instruments. Rates will eventually move higher... only a question of when, not if. We will not stay in a low inflation state with low rates for ever.
7. The point of the article is simple. If a bear market starts tomorrow....are you ready? The losses in a bear market have nothing to do with how you accumulated capital or invested in the past. The topic of the article is downside risk in a bear market, not how capital can be accumulated or invested. The questions are posed to DIYers, not seasoned pros.
In terms of "article would have been much better if you discussed the many additional points that I (and others) brought up", the article was not intended to cover every aspect of investing. The point of the article was defined clearly as follows:
"Our purpose here is not to question the long-term performance of the allocation above, but rather to demonstrate the difficulty of staying invested during good times and bad times, a requirement to successfully capture the benefits of any buy-and-hold portfolio. "
Then again later in the article:
"We want to emphasize we are not questioning what history says about the returns related to buy-and-hold and re-balance. Our concern is one of implementation. How many people that were sold on the benefits of the "best way to invest for long-term growth" portfolio over the past few years were also told the allocation lost almost 60% in the last bear market? If you do not understand how ugly it can get, then the odds of holding through a full market cycle are lower. If you do not hold through the good and bad times, buy-and-hold will not work as advertised."
Many DIY investors are sold on the benefits of diversification (and not told about what a bear market may look like). When their stock portfolio drops 59% percent, they think "this is not working" and they sell out and lock in big losses and never get to the benefits of re-balancing in 2009-2014. The same can be said for a 60% stock 40% bond portfolio that loses 32.44%. DIYers may never make it to March 10, 2009 because they were never educated on what a bear might look like.
This article is not talking about how an experienced and knowledgeable professional would (a) handle a bear market, or (b) build an allocation. If you have a good adviser, you have a big advantage in terms of experience and knowledge. What about the hard-working people who are trying to do this on their own? Who is going to tell them about what risk looks like? I am a professional... this analysis is helpful to me in terms of understanding risk.... if it is helpful to me, I would think it could help some DIYs who are trying to get to retirement and make ends meet in retirement. It is always prudent to ask "how bad can it get based on history?", which is exactly what the article does.
Agree - the 10 investments gives a "false sense of being diversified", something that was exposed when the allocation dropped 59% in the financial crisis.  Valid points - have a great day! CC
On being 100% invested at retirement, even if an investor had 40% of their assets in bonds in 2008, 60% of their assets would have dropped between 50% and 60% in the last bear market. On a $2,000,000 portfolio, 60% in stocks = $1,200,000... a 59% loss on 1.2M is a loss of $708,000. Most retirees would prefer not to lose $700K in their golden years. The post says "look at your allocation to stocks"; the lessons apply to any portfolio that has exposure to stocks.
See clip for where the 60% loss comes from: http://bit.ly/1IHoTJe
On "bonds are one obvious alternative"...
What happens if I have a fixed allocation to bonds and interest rates flip from a 33 year downtrend to a 33 year uptrend. See this clip - rates will impact the returns on many "pie chart" allocations:

http://bit.ly/1e5gzq3

What happens if rising inflation and rising rates are what kick off the next bear market? Stocks and bonds could both get killed similar to simultaneous drops in 1994 when rates spiked - see charts in post:

http://bit.ly/1e5gy5x
RedRocket:
Our approach can allocate to gold if the hard data says it is a good place to be. Therefore, I agree it is an option to consider. We do not own gold now.
As the article notes: "Our job as investors is to find a 'that makes sense to me' approach, allowing us to stick with it over a full market cycle." You should look for something that makes sense to you.
The "useful advice" from the article: water testing your portfolio makes sense now while the sun is shining. If you do not like what you see in the water test, the next step is look for a better way or better allocation.
The articles below cover some ideas on other ways to possibly approach investing:
Tired Of Missing Rallies? 4 Ways To Improve Your Game
http://bit.ly/1FMBzIG
With Fed Stepping Back, Your Portfolio Needs You To Step Up And Lead
http://bit.ly/1e6yD38
Weekend Reading - Links To Numerous "Other Methods" Articles:
http://bit.ly/1e6yH2C
Weekly videos also cover numerous topics about risk management and asset select:
http://bit.ly/1cQ3Q9w
Appreciate the kind words.... agree there are many was to invest and many variations of buy-and-hold.
The article speaks to pie chart allocations that are meant to be held and re-balanced from time-to-time, which is a very common practice on Wall Street; it is also basically what "intelligent advisors" do - ask some questions - build a pie chart based on history - re-balance from time-to-time. Re-balancing, as you know, it not a pure form of risk management, but many believe re-balancing means "the robot will reduce risk when it makes sense", which is not the case with most robot advisors.
Appreciate the input - have a great day - CC
Appreciate the kind words and agree the comments are value-add. Have a great day - CC
Agree - the chart in the post shows high correlation in good times.... chart in clip shows high correlation in bad times:
http://bit.ly/1FLBTY8
The correlation issue has been impacted by low rates and central bank policy, which means it is still an issue of note.
Have a great day - CC
Thanks Jon - agree some excellent input from all.
I have been working on Wall Street for 20 years.... so I agree with your comments - they are all very valid points. Let me play devil's advocate - my tone is friendly.
1. We did not pick the allocation. We read an article on a major and respected website that said the mix "was the best way to invest for long-term growth based on the best research and over 45 years of experience while doing so with enormous diversification".
2. Watch the video:
http://bit.ly/1e5gy5r
3. A 59% loss is a 59% loss. There is no way to rationalize it away.
4. Watch this clip http://bit.ly/1IHoTJe and see the day-by-day loss in the bear market.... re-balancing on 12/31/2007 and 12/31/2008 would have made almost no difference in the returns. How do we know that.... we know the loss in each position... they all got hammered.... just as they all got hammered in this example that was also criticized when written in DEC 2006:
http://bit.ly/1Gzq8K3
5. What happens if I have a fixed allocation to bonds and interest rates flip from a 33 year downtrend to a 33 year uptrend. See this clip - rates will impact the returns on many "pie chart" allocations:
http://bit.ly/1e5gzq3
6. What happens if rising inflation and rising rates are what kick off the next bear market? Stocks and bonds could both get killed similar to simultaneous drops in 1994 when rates spiked - see charts in post:
http://bit.ly/1e5gy5x
7. Dollar cost averaging (accumulating) does not help a retiree who is no longer buying with new money. Even if they had 40% of their assets in bonds in 2008, 60% of their assets would have dropped between 50% and 60% in the last bear market. On a $2,000,000 portfolio, 60% in stocks = $1,200,000... a 59% loss on 1.2M is a loss of $708,000. Most retirees would prefer not to lose $700K in their golden years.
Again.... your comments are value-add and I respect them... just throwing out some other view points. I also respect that the markets are difficult.... nothing is easy in this business.
Appreciate your input - have a great day - CC
The comments from everyone have been excellent and value-add. Investing, retirement, and the markets are complex topics. The good news is the debate and comments help spur some risk management "what if" self-talk for investors. It never hurts to review your risk exposure.... you might say "I am fine" and sleep better at night. As AuCoaster points out, it is important to have a game plan for both scenarios covered here:
http://seekingalpha.co...
This article is not about how money was invested in the past. It is about making sure your are ready for the NEXT bear market. When the next bear starts, the % loss will not be impacted by our cost basis or by how many years it took us to feather money in the market. The same was true when the bear started in 2000 and 2007. The market does not care about any of that. 
When a bear market starts, the market has no idea how long your capital has been invested. The market treats all dollars in the same manner during a bear market; a dollar invested 20 years ago is treated the same as a dollar invested 20 days ago.....
See comment that starts with "It makes no difference if people invest their money incrementally over time." for more details.
It makes no difference if people invest their money incrementally over time.
When a bear market starts, the market has no idea how long your capital has been invested. The market treats all dollars in the same manner during a bear market; a dollar invested 20 years ago is treated the same as a dollar invested 20 days ago.
Assume I invest my capital in the allocation shown at the top of this post. And as you correctly point out, I invest over time between 2003 and 2007 (or if you prefer 1950 and 2007). After years of investing, my capital grows to $1,000,0000 on October 9, 2007.
As shown in the video (see clip http://bit.ly/1IHoTJe ) the allocation lost 59% in the bear market (2007-2009). Therefore, regardless of the start date or how I got the $1,000,000, the loss is 59% in the bear market.
It does not matter where the $1,000,000 comes from (years of investing, liquidating a CD, selling a business, or rolling over a 401K)...$1,000,000 in the allocation above dropped 59% between OCT 2007 and MAR 2009. A 59% loss is a 59% loss regardless of the start date (1950, 2003, or 2007). I doubt anyone wants to giveback 59% of their portfolio even if their portfolio has years of gains prior to the loss.
The same applies to 1929. If I invested for 10 years in the DOW starting in 1928 and my portfolio grew to $1,000,000 in 1929. If I stayed invested in the DOW, my portfolio would have gone basically nowhere for 20 something years. The returns between 1929 and 1955 are not impacted by the past or the source of capital in any way... the math is the math... the facts are the facts.. history is history. The Dow has no idea how long the money has been invested and it does not change the returns between 1929 and 1955.
It is very common for someone rollover $2,000,000 cash after retirement from a 401k to an IRA. Let's assume they invest 50% in bonds and 50% in the "best way to invest" allocation above. Regardless of where the cash came from the $1,000,000 in the stock allocation would have dropped 59% between OCT 2007 and MAR 2009. That is a fact and it has nothing to do with the source of the money. We know thousands of people retired in 2007...we also know thousands of them rolled over 401Ks and invested lump sums in 2007. We know thousands of them lost 50% or more in the portions of their allocations that were invested in stocks.
The point of the post is simple. How can an investor be expected to hold through the good and bad times, if they do not understand in advance how bad the bad times can get?
In most cases they are shown the average annual return and shown nothing about how the allocation performs in a bear market. If an investor is surprised by the losses in a bear market, the odds are good they will panic and sell out (often near a major bottom). You cannot receive the benefits of buy and hold unless you hold through good and bad times.
We heard similar "cherry picking" comments when we posted a similar analysis in DEC 2006. In 2008, we also received many "thank you" emails about the 2006 "be careful" post. This 2006 post (link below) ended up being very useful in terms of getting investors to think about downside risk - dated 2006 post:
False Diversification May Prove Costly In 2007:
http://bit.ly/1Gzq8K3
False diversification and pie charts ran into trouble less than a year after the 2006 post above. Investors cannot stick their head in the sand about historical facts and historical losses. If the post is not helpful to you, we respect that.
Said another way.... buy-and-hold is based on historical returns and history... therefore you cannot "delete" the bad periods in history and ignore them. It happened and it can happen again.
The article states why the periods shown were selected.... if you are told to buy and hold, it makes sense to understand "how bad can it get?". I have been working on Wall Street for 20 years+.... client assets are regularly invested 100% in a pie chart in a day - agree 100% with you that a lump sum not a good way to get started, but it is done all the time (a very common practice). The analysis is based on 100% facts. If you are implementing buy-and-hold, you are correct... all periods matter... good and bad.... the bad shown here are part of buy-and-hold and they are a part of history... you cannot just cherry pick the good periods either.
Thanks Mike - agree 100% on limiting draw downs.... this video ties that concept into mature bull markets and the miracle of compounding - you might enjoy it:
http://bit.ly/1cLO0MH
Appreciate your kind words - have a great day - CC
That is a logical and fair argument...with one exception, the present day chart has not turned bearish yet... it may, but we need to "see it" in our approach... flexibility remains key... have a good weekend - CC
As you know, the other amazing part is the fractal nature of the markets ( 1 min charts behave in same manner as 60-min, day, week, month).
Appreciate kind words - price/trends/charts/FIBS will guide us - have a great day - CC
Nature, including FIBS, is an amazing creature.
Agree we need to see how the next couple of weeks play out..as always, keeping an open mind. Have a great day - CC
We talk to investors every day - Questions about 1987 and the flash crash come up quite frequently.
Nate - well said - have a great day - CC
bbro - agree on "going against human nature" - thus, why systems and rules are helpful to offset some of our human tendencies. Enjoy your time off - CC
Strike - have a safe and relaxing holiday - appreciate your comments - CC
JD - have a good holiday - CC
Gum Buster - appreciate your kind words - have a relaxing holiday - CC