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The intelligent response is to then buy during buy season. No need to hedge something that is not seen as a problem.

Hboy54
That doesn't work if someone does not have enough cash to buy in the 'buy' season...and in particular, those in withdrawal mode without the 'cash dam'. Or one has to sell something out of another segment of their asset allocation to get the cash.

To respond to HP, I didn't 'freak out' in 2008/2009 due to a strong and well funded asset base to backstop relative 'tranquility'. Can't say I was a happy camper but like LTR, I was investing and tax loss selling during that period. I just happened to have a pretty good cash allocation at the time.

My 'black swan' hedging strategy is somewhat like LTR's strategy. I hold enough cash and cash equivalents that together with my small DB pension and dividend income, it will see me through a number of years of financial crisis. True, some dividends will get cut but I've taken a pretty significant discount to current investment income streams as part of my consideration.

Added: And I can cut back annual spending significantly if some really bad stuff happens.
 

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+1 ltr. Ditto here and for the same reasons you and OMO state.

j4b, just read a FP article today on 5 market doomsayers. Nassim Taleb was mentioned as per below:


Nassim Taleb

Taleb is best known for his 2007 book, The Black Swan: The Impact of the Highly Improbable, in which he warned about the inability to predict unusual events that have severe consequences. Certainly, he seems grounded, in that he says “you can’t predict what will happen” and we would agree to this completely as to the stock market, at least. His aim is to primarily sell books, but he has had some correct calls in the past. He did say that Donald Trump as president was no worry for investors, for example. Last August, however, he said that “a market crash was on the horizon,” quoting low interest rates and the fact that “you can’t cure debt with debt.”

n:
In the meantime,

http://www.marketwatch.com/story/september-saw-this-rare-and-bullish-trifecta-2017-09-29

Dow theory suggests clear sailing for a year or two.
 

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In the meantime,

http://www.marketwatch.com/story/september-saw-this-rare-and-bullish-trifecta-2017-09-29

Dow theory suggests clear sailing for a year or two.
Not so fast in 1929 the market topped out without a Dow theory non confirmation. (if memory correct I think it was the only time in history of the averages)

When using Dow theory based on the founding fathers of Dow theory there was no such thing as a Dow Theory sell signal regardless of what is written in the link (very few use the theory correctly)

The secondary cycle goes below their previous secondary lows would be a major warning that both averages were in gear to the down side. When the low of the current primary cycle is made it will set the bar for the next primary cycle. The secondary cycle is the 22 week cycle which can contract & expand.

All the declines going into 4 year cycle lows since inception of the averages both the Industrial & Transports had closing lows below their previous secoundary cycle lows. The 4 year cycle can expand & contract.

To see a chart of all the 4 yr cycle highs & lows since inception of the Dow go to cyclesman.net & somewhere they are posted for free.
 

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Discussion Starter #24
Thanks for all the responses. Nice ideas being raised here. I'm also in the camp that thinks that boring old asset allocation can solve this, since it provides the cash (or fixed income) cushion you can use to buy a very weak market.
 

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Not so fast in 1929 the market topped out without a Dow theory non confirmation. (if memory correct I think it was the only time in history of the averages)

When using Dow theory based on the founding fathers of Dow theory there was no such thing as a Dow Theory sell signal regardless of what is written in the link (very few use the theory correctly)

The secondary cycle goes below their previous secondary lows would be a major warning that both averages were in gear to the down side. When the low of the current primary cycle is made it will set the bar for the next primary cycle. The secondary cycle is the 22 week cycle which can contract & expand.

All the declines going into 4 year cycle lows since inception of the averages both the Industrial & Transports had closing lows below their previous secoundary cycle lows. The 4 year cycle can expand & contract.

To see a chart of all the 4 yr cycle highs & lows since inception of the Dow go to cyclesman.net & somewhere they are posted for free.
OK thanks. I didn't mean to say that the Dow theory was infallible, I was trying to balance out the negative in the Nat Post article cited in the thread. I'm not really getting the point of the doom and gloom crowd these days. to me things look fairly upbeat primarily because inflation is so tame.
 

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Discussion Starter #26 (Edited)
Are any of you shifting towards more conservative asset allocations with all the political talk of trade wars?

I'm still equal weights stocks/bonds/gold/cash -- but my cash cushion is included in that (not counted separately as people usually do).

I've chosen a conservative allocation because I may stop working in 2019 and I really don't want to lose any of my capital. This comes at the cost of performance: my allocation has returned 4.2% annually since I started using it, and I'm comfortable with this tradeoff -- more stability, less return.
 

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Are any of you shifting towards more conservative asset allocations with all the political talk of trade wars?
As I have posted in other threads I am examining my options & intend to move 10% of my portfolio into a Bond holding. I still have not pulled the trigger as I am still researching and examining the options....

HUT - might have been an interesting option but it no longer exists.

Your video (page 1) that demonstrates the 'tail insurance' or fancy 'magical matter' that redefines traditional portfolio balances is fascinating. It makes me wonder, if this really works why aren't more institutions doing it ? Horizons tried it (?) and discontinued the product ..... I'm interested in why. Maybe just bad market timing on its introduction ?

Correct me if I'm wrong but isn't that 'magical matter' put into most hedge funds ? Isn't that an integral part of a hedge fund ?

I am evaluating a more defensive portfolio, I think that year by year I will look at becoming just a bit more defensive 2018/2019/2020 - as I think that the market is currently on the high side.

In contrast, from '08 until recently more money was injected into the global economy to make it go than has ever happened before. This had desired immediate effects but also will have longer side effects that concern me. The volume of money that was injected was absolutely amazing too. I cant hesitate to think that this injection created an economic super cycle that we are in the early stages of. We have had a 9+ yr Bull run. Is it over or tapering? or are there just a lot of factors that are dampening the cycle ? None of us are familiar with such a large event & there are many things happening that are hard to interpret given the strange conditions that have created this.

Items to consider :
-Inflation vs interest rates - the effects of lots of money eventually surface
-The bond sell off by the Fed that is flattening/inverting the curve, is it just the feds sell off and not really a market indicator
-Bubbles
-Trade war that will also effect markets and inflation
-There are many other factors that are making things today very unique from a financial standpoint.

We are in interesting times.

I have believed that a super cycle was under way for a few years now and invested accordingly & I am starting to look at my options given what I have written above.
 

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A Super Cycle! That is the first bicycle I owned. I bought it in town at Canadian Tire purchased with my potato picking money. A 1 speed of course. I rode it up and down dusty country roads for many years as a youngster till I moved on to motorcycles at age 12. It was definately a worthwhile purchase.

Think though, if I had bought some CTC shares back then and had the good sense to hold them through thick and thin. I'd be much wealthier today.

My point is, over the long term succesful companies create value, grow, and profit. That is the reason to hold equities. What if they had failed? That is the reason to diversify. You could play it safe and own only their bonds instead. But they are never going to pay you as much as they believe they can earn reinvesting that money into their business. As a shareholder you benefit from that success.

If your holding period is truly long term, the crashes of the past soon look like mere blips in the rear view mirror.

If I have any regret as an investor, it might be that I was fairly conservative in my early years (only GIC's initially). Granted, investing in equities then was more difficult and expensive than it is now. And choices for diversification were limited or expensive as well.

Today, if I was starting an RRSP (or TSFA) that I wasn't touching for over 40 years as in my case, I would put it into diverse equities (e.g. an etf) and leave it there.

Super Cycle or not.
 

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Discussion Starter #31 (Edited)
If your holding period is truly long term, the crashes of the past soon look like mere blips in the rear view mirror.
Most of us don't have the 50 or 100 year time horizons for this to really work.

The question becomes, how comfortable are you seeing significant declines like 40% to 70% drops in your portfolio? And how comfortable are you with low stocks returns over say 10 or 20 years? Both the TSX and S&P 500 had zero return for the first 12 years of this century, with lots of scary drops along the way.

Of course that got balanced out with higher returns later, but those 12 years were a big deal to a lot of people. What if the big drops happened just before someone retired? What if someone lost their job and needed the money during the down periods? And there have been even longer stretches historically, like 15 or 20 years.

How many of us have the ability to suffer through 10 to 20 years of zero stock returns (plus sharp drops)? I don't. When I was running my business, I watched my employment income crash at the same time the stock market crashed.
 

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Most of us don't have the 50 or 100 year time horizons for this to really work.
I agree, 42 years from age 30 to age 72 (RRIF time) might be the most you should count on. Not that all your equitities would disappear at age 72 though. You might have another 15 years? on top of that.

Both the TSX and S&P 500 had zero return for the first 12 years of this century, with lots of scary drops along the way. Of course that got balanced out with higher returns later, but those 12 years were a big deal to a lot of people.
Not sure where you get your numbers James? I see a total return of about 93.5% (7.8% annualized) for XIU for the 12 years from Jan.3.00 to Jan.2.12.

What if the big drops happened just before someone retired? What if someone lost their job and needed the money during the down periods? And there have been even longer stretches historically, like 15 or 20 years.
I think as long as you didn't sell it all at once in a panic, the amount you need to withdraw through the down years is not likely to impoverish you? Particularly if you are up by 93.5% overall and particularly if you are using a variable percentage withdrawl method. The RRIF withdrawl table is very close in values to the VPW table (or visa versa actually). I do also think carrying a 'cash' (FI) cushion is a good idea.
 

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Discussion Starter #33 (Edited)
Not sure where you get your numbers James? I see a total return of about 93.5% (7.8% annualized) for XIU for the 12 years from Jan.3.00 to Jan.2.12.
Depends on the start date. Starting at the peak, 2000-09-01, the iShares XIU performance tool shows that at 2012-09-10 you'd be up +29.1% total cumulative return. That works out 2.2% annualized over 12 years or about zero real return. The S&P 500 is an even lower return starting from its peak.

Not a horrifying return, but still awfully weak considering that many people seem to expect stocks to provide 6% to 10% annual returns.

I think as long as you didn't sell it all at once in a panic, the amount you need to withdraw through the down years is not likely to impoverish you? Particularly if you are up by 93.5% overall and particularly if you are using a variable percentage withdrawl method. The RRIF withdrawl table is very close in values to the VPW table (or visa versa actually). I do also think carrying a 'cash' (FI) cushion is a good idea.
I agree, variable withdrawals go a long way.
 

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james, with respect, you are a number mystic ... you aren’t alone, the search for the infallible investing theory marches on and powers a substantial portion of the internet devoted to investing

i suspect that in the case of the video presenter, and you, and most other people that the portfolio drag produced by the never ending search for the perfect hedge will cancel out its (the hedges) value over time ... we see it in the good and bad years that hedge fund managers deliver time after time

all of it involves predicting the future and nobody does that well

why not have a diversified portfolio, a good asset mix, a balance of growth and dividend stocks across most of the sectors, a healthy mix of bonds and most important of all ... enough cash to avoid a liquidity squeeze

your opportunity cost because of your cash and gold allocation to 50% of your portfolio is simply too high and i don’t have to look at any numbers to know that

for the average small investor, good diversification ... and liquidity ... are the much simpler keys to long term investing success
Do not want to be average investor
 

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My black swan & bear market protection strategy.
What I don't do is use bonds. I am 100% stocks. If this was 1982 and rates were 15%+ I'd think differently as bonds would offer great income, and capial gains. Currently I see bonds as dead money. Low rates, and after tax and inflation, a losing proposition.

I buy stocks with tons of assets and good balance sheets. Upon the inevitable black swan/bear market my plan is to do nothing until the value looks utterly compelling, and technical analysis aproximates a bottom. Then buy more quality stocks on margin - as muich as I can stand and wait for the market to recover. Then sell enough stock to get off margin. I should make a bundle. I actually don't fear a bear market, I look forward to it. I made a killing in from 2008 - 2010 using margin.
 

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Discussion Starter #36
2008-2009 was a very short bear market by historical standards and the recovery was blazingly fast. I wouldn't count on that always happening. In your strategy, you might want to prepare for scenarios such as a stock index that falls and then stays low for 10 or even 15 years. The last crash & recovery helped train people to expect fast recoveries and relatively painless bear markets. Some people even forgot how bad the 2000-2003 bear market was.

We've basically been in a perpetual bull market since 1982 or so, and I don't think anyone really remembers what a true bear market is like. We have a strong equity culture today because equities have been incredibly strong for 36 years. I don't always expect this to be true.

By the way, I would argue that right now -- with stocks at all time highs and gold/bonds relatively weak -- is precisely when it makes sense to add hedges and protections.
 

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i agree the 2008-2009 debacle was a short lived V trough that isn't all that representative of recessions in the last century. It would behoove those (me included) to look at other recessions to see how long it took to fully recover market highs. I certainly wouldn't, for a nanosecond, be buying what one might perceive to be market lows on margin. It could take a very long time to pay that margin loan off.
 

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My black swan & bear market protection strategy.
What I don't do is use bonds. I am 100% stocks. If this was 1982 and rates were 15%+ I'd think differently as bonds would offer great income, and capial gains. Currently I see bonds as dead money. Low rates, and after tax and inflation, a losing proposition.

I buy stocks with tons of assets and good balance sheets. Upon the inevitable black swan/bear market my plan is to do nothing until the value looks utterly compelling, and technical analysis aproximates a bottom. Then buy more quality stocks on margin - as muich as I can stand and wait for the market to recover. Then sell enough stock to get off margin. I should make a bundle. I actually don't fear a bear market, I look forward to it. I made a killing in from 2008 - 2010 using margin.
i was about to ask you how much you lose by maintaining a large cash allocation since you need to be ready to buy and then i read again and see you are borrowing to buy at what you ... guess ... are lows

100% equities and the use of margin is about at the extreme end of the spectrum of investing risk ... i like a little bond allocation with my morning cereal and at my age don't borrow anything from anyone ... but i am not you :)

we need to set up an investing cage ring match and have you in one corner and james in the other :)
 

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Discussion Starter #40 (Edited)
Regarding buying a crashing market on margin, have you taken into account that stock brokerages might curtail their lending during sharp downturns, tightening their margin lending?

This is one of the pitfalls of margin. It introduces parameters that are beyond your control. Now it's not just a matter of what YOU decide to do, but also what your broker decides to do -- and their problems are different than yours. Say the TSX crashes 30% and you start aggressively buying more. Then it crashes another 30% on top of that and you try to buy more on margin. Your broker might not play along. It wouldn't be surprising in such a scenario for them to tighten margin lending, actually forcing you into a margin call, and forcing you to liquidate when you really want to buy.

Changes to margin policies can also happen fast. How are you going to detect and respond to that? I like using margin for short term maneuvers but it's not a good idea for longer term positions. Unless you are going to be constantly on top of your brokerage for the next 20 years, and have enough cash on the sidelines to respond to margin policy changes, I seriously doubt this method will work.
 
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