Sequence of returns risk and the 4% rule

[ChapInTokyo]

Well, I'm definitely living in my sequence of returns risk phase now. 8 million yen down and counting... not from the peak, but from the total amount I invested.

What with being hit by a 300,000 yen repair bill on the car (unbudgeted for!), and the world's economy heading for negative growth due to the American tariffs, The idea we had of a Christmas holiday in Kyoto is definitely off the menu for the forseeable future.

So people, sequence of returns risk is real! Who knows when the market will recover from this covid level spanner in the works?

How do you budget out your emergency funds?

Do you have a separate house repair/car repair fund , separate from living expenses?

Maybe more of a cash buffer?

To be honest, I simply have an allocation to bank accounts, separately from my investment portfolios. Since I'm still at the start of my retirement, I still have a good amount in the banks so I decided to bite the bullet and have the car repair done. As for house repair, I have so far remained shy of buying real estate, since prices are very high in Tokyo, and I don't want to buy an older property which may fall on top of me when the big earthquake hits. I do worry about when to buy and where though, as I guess that renting will become more difficult as I age.

[ChapInTokyo]

Rather than "I lost this much," or "I'm down this much", another way to look at it is when was your portfolio last at the present level? Was it six, nine, 12 months ago, or what?

For me, that was may 7-8 last year (the august dip is now a little above where I am now).

So another way to see it is that the market has been flat (or choppy, or moving sideways) for 11 months. Like, so what.

*

And IMO, what has just happened has nothing to do with sequence of returns. Yet. This downturn is only a couple months old--far from being even a year old, let alone a sequence of years.

Sequence of returns, everything I've read on it, is framed in years, not any two month period.

To be honest, last year when the markets dipped due to the inflation and interest rate expectations, I was not overly worried even though my portfolio lost over 100,000 usd at one point. This time it's different since the American tariffs are not a short term event like inflation and interest rate expectations. I for one am looking to gradually shift more of my assets to fixed income funds, since it looks like the world is likely to head to a recessionary phase of the business cycle. Of course, you will probably have a different take on it and that's all part of the fun...

[ChapInTokyo]

I think it depends on whether you're in your accumulation phase, or in your draw down phase. For me, I can do without the volatility, since I need to buy a flat or a house at some point before they start refusing to rent to me because of age.

Does that mean you are overexposed to equities? Ideally you would have a mix of assets so that a year or two (or five!) of volatility wouldn't negatively impact your retirement plans.

I'm moving to a retirement portfolio allocation so I'm currently 40% equities and 60% fixed income and REITS. What I meant to say is that if you're still accumulating, a bit of volatility can buy you more stocks at a good price. However when you're retired, and still have some big outlays such as a house purchase ahead of you, you can do without a madman in the White House throwing the economic system into disarray.

I believe that a market collapse has sometimes taken up to 10 years to regain its former level and I do not want to be spending down from distressed stocks, hence my reference to the sequence of returns risk...

[ChapInTokyo]

Another thing to do is just look at the bottom of your portfolio (at least on SBI) where it tells you the total by which you are up and see just how much you are still up overall. I'm technically down about 13 million from where I was at the turn of the year but I'm still considerably up on what my invested money would have been if it was just sitting in a bank.

Good point. My holdings in Japan are still less than a year old, so I'm sevel millions of yen down from what I invested here, but if I include my US broker account in the picture, with all dividends reinvested, I've done quite well.

If I'm worried about anything, it's that the 'economic nuclear winter' triggered by these tariffs could weigh down the world economy for a long time, something like the post-bubble 'lost decade' in Japan.

[captainspoke]

...This time it's different since the American tariffs are not a short term event like inflation and interest rate expectations. ...

So you're really sure of that?

I'm not.

Nobody expected the covid market downturn to be as short as it was. Nobody expected the 'crash of '87 to be as short as it was. Noboy expected the 2000-2002 downturn to last as long as it did. Or the 2009-2011 period.

Yes, some are longer, but some are shorter. (And 5+ years ago nobody expected the yen to be where it is now...)

I doubt you have a crystal ball accurately telling you that "This time it's different..."

[ChapInTokyo]

...This time it's different since the American tariffs are not a short term event like inflation and interest rate expectations. ...

So you're really sure of that?

I'm not.

Nobody expected the covid market downturn to be as short as it was. Nobody expected the 'crash of '87 to be as short as it was. Noboy expected the 2000-2002 downturn to last as long as it did. Or the 2009-2011 period.

Yes, some are longer, but some are shorter. (And 5+ years ago nobody expected the yen to be where it is now...)

I doubt you have a crystal ball accurately telling you that "This time it's different..."

As I said, you will probably have a different take on it and that's all part of the fun.

Don’t know about you but I like to place my own bets according to my view of how events affect the business cycle. As the saying goes, you pays your money and you takes your choice.

[Deep Blue]

7

I doubt you have a crystal ball accurately telling you that "This time it's different..."

I think we can say “this time could be different”.

Nobody here knows how serious Trump is. There are good arguments on both sides so we will just have to wait and see which is correct.

[captainspoke]

7

I doubt you have a crystal ball accurately telling you that "This time it's different..."

I think we can say “this time could be different”.

Nobody here knows how serious Trump is. There are good arguments on both sides so we will just have to wait and see which is correct.

Which is what I said?

[ToushiTime]

Rather than "I lost this much," or "I'm down this much", another way to look at it is when was your portfolio last at the present level? Was it six, nine, 12 months ago, or what?

For me, that was may 7-8 last year (the august dip is now a little above where I am now).

So another way to see it is that the market has been flat (or choppy, or moving sideways) for 11 months. Like, so what.

*

And IMO, what has just happened has nothing to do with sequence of returns. Yet. This downturn is only a couple months old--far from being even a year old, let alone a sequence of years.

Sequence of returns, everything I've read on it, is framed in years, not any two month period.

To be honest, last year when the markets dipped due to the inflation and interest rate expectations, I was not overly worried even though my portfolio lost over 100,000 usd at one point. This time it's different since the American tariffs are not a short term event like inflation and interest rate expectations. I for one am looking to gradually shift more of my assets to fixed income funds, since it looks like the world is likely to head to a recessionary phase of the business cycle. Of course, you will probably have a different take on it and that's all part of the fun...

What duration are you thinking of for your fixed income?

I am kinda nervous about holding too much of intermediate and longer term bonds.
Leaving aside the Cederburg paper, I would be worried about duration and inflation risk, given that we might be heading for stagflation rather than a deflationary recession. Either could happen as it is so hard to predict anything right now.
Longer term bonds can have quite long drawdowns. The WGBI ex-Japan (6-7 year duration) bond fund still hasn't recovered when excluding support from the fall in the yen. Look at the hedged and unhedged versions here https://www.google.com/finance/quote/25 ... TYO%3A2511

[sutebayashi]

Just could do without the richest nation in the world tearing down the world economic order and taking us closer to recession.

If it weren't that concern it'd be the Deepseek shock or whatever, no? The market was due for a correction.

The tariff negotiations have commenced; it's looking good to me. Will probably look back fondly on this time, when all is said and done.