Liquidity = when you look at your brokerage statement and wet your pants!
I think that visceral reaction can be a valuable tool for fine tuning
asset allocation, once you separate out one painful issue. One must
abandon the "anchoring" tendancy, to wistfully cling to the way things
were. Don't be like the house seller who even in better times sticks
with an overvalued price out of sentiment and slowly bleeds for a year
of lost opportunity.
Accept that a financial battle was lost, and today is the start of the
next battle which you can expect to win (at least relative to your
current realistic position). Tune your financial allocation so that
the swings of fear and greed are about balanced as the rallies and
dips proceed. Even the unfair dips, like my tiny allocation into
equities recently were mauled by the political scares put into
preferred and health stocks (I failed to learn from a similar Clinton
experience).
Anyway I don't see why I've been criticized on this forum during early
parts of this crash for advocating incremental sell downs. Shame on me
for spending multiple (single digit) brokerage fees in the sell down
and the future ramp up, some said. And would I please take this
discussion of gingerly dipping into bonds off the forum, SHE said. Now
I have preserved more liquid asset firepower, and do think and feel
myself in a comfortable asset allocation.
Similarly in the early 2000's crash (under a different username) I was
castigated on this forum for switching to fringe asset classes that
were actually working, like certain long-short funds or certain
financial sectors. And pre-internet, folks thought me nuts for
immediately pouring money into stocks in the crash of 87.
I may be an idiot in 97% of aspects of financial planning (and truely
appreciate the generous advice and brainstorming provided here), but I
can't accept the party line on asset allocation and have thrived by
defying it. The Vanguard/Bogle platitudes on slow and steady course
with a backing of umpteen statistics seemed so plausible, but then
seemed obviously in denial of the emotional rollercoaster of reality.
It was clear to me that if you felt the energy of volatility, you
could harness it rather than just withstand it. No, this is not
stepping into any frantic trading mode but simply reacting to the
tides of history with strategic shifts. It does help to watch how
various sectors of assets are doing and why at least weekly ("The
Economist" magazine has been my bible on macro-currents of finance and
world events for decades).
And charting trends are very valuable - I think the last 25 years are
quite instructive, as in a slightly cartoonish version:
http://finance.yahoo.com/q/bc?t=my&s=^IXIC&l=off&z=l&q=l&c=^n225,^mid&c=^DJI
Unfortunately it doesn't reflect dividends, but suggests about the
only sector you might have wished to buy and hold were midcaps. My
formative stage was in the mid 80's where I held the Nikkei225 during
that fabulous upslope. Note 1987 crash which was proportionately far
less in Japan, so I judged it not the end of the world but a big
buying opportunity which was quite right.
And mainly by luck I bailed out of Japan before the mother of all
horrifying and everlasting crashes happened. This prepared me for
handling the tech and later financial crashes. The tech crash was not
that scary because there damage wasn't so total... there were seeds of
survival in corners of the equity market. The financial crash seems
more scary with respect to stockHOLDers because the destruction is so
widespread.
So I say listen and respond to what your emotions tell you, as long as
they are informed and not just knee jerk. Something seems missing from
the financial planning cold logic that I have been exposed to; I don't
think conservative holdings with overanalyzed p/e ratios are the
answer. In my personal experience I managed my retirement account in a
more traditional conservative way and it fell behind. Also I was
appointed trustee of some relatives estates, and also saw how backward
looking conservatism had driven hard won assets into decline. "Watch/
think AND feel/react" is my investing motto.
