[tyleo]

It’s an interesting thought. The growth is so extreme that if the S&P 500 fell 50% today it would reach levels last seen in 2022. Given that the timespan is so short, I’m honestly not sure it would be as bad for 401ks as people expect unless all of your investment was concentrated in the last 4 years.

I suppose it’s worse if your calculation is, “I’ll retire when my 401k hits $X absolute value,” but I think most people just retire at a certain age instead with risk spread across decades.

[Imustaskforhelp]

During the dot-com crisis. Nasdaq fell around 78% from its peak and S&P by around 49% so it isn't unprecedented (ironically has both aspects of being both tech and are within the same time-era)

It created an actual recession albeit thankfully short one for the case of dotcom (sadly not for 2007) and a really recessionary environment which causes unemployment and just straight up fear and panic.

I do understand what you are talking about and overall in long term, perhaps things flatten out but atleast speaking financially so, its better to be on a smooth sailing road rather than insane ups and downs with retirement money if preferable.

> I think most people just retire at a certain age instead with risk spread across decades.

The issue in my opinion is with people near that certain age you mention and who retire in the time during boom just before bust. They would then get the 50% hit on their savings instantly with an recession/inflation/unemployment environment which in my opinion might be genuinely devastating.

(supposing that they had their investments in stocks, I wouldn't consider that any retiree would have all their money in stocks but there have been some other comments which show a sizable amount, @kipchak's comment shows 50% stock for retirement. so a 50% shock on top of that could lead to a wipe out of 25% of your retirement fund which is honestly still pretty crazy.)

[Karrot_Kream]

This kind of metric is always used to shock and awe in pop media when talking about the GFC, but it's not how actual investment works. In practice most investments are DCAed.

No person puts all of their retirement savings into QQQ or SPY at the peak and sell it off at the trough. Instead folks drip their savings into their weighted portfolio and withdraw money from their weighted portfolio as expenses accrue. Now obviously the GFC was a huge deal, but this sort of facile understanding of stock markets always leads to big misunderstandings. There's a reason Monte Carlo analyses of these events are used to model these scenarios.

(Though I imagine there were many people who tried to re-balance their portfolio into a less equity-heavy model abruptly during the GFC and based on equities performance at the time, it was probably the right move as long as taxes were taken into account.)

[toomuchtodo]

> (supposing that they had their investments in stocks, I wouldn't consider that any retiree would have all their money in stocks but there have been some other comments which show a sizable amount, @kipchak's comment shows 50% stock for retirement. so a 50% shock on top of that could lead to a wipe out of 25% of your retirement fund which is honestly still pretty crazy.)

What do you think the cost would be for protective puts per $1M of equity exposure of a portfolio on a monthly basis? "Bubble Insurance" if you will. Going 100% bonds is simply intolerable for the time window for most retirees, but an equity wipeout of this magnitude is equally intolerable.

[otherjason]

They are probably not going to be implemented using long put positions, but a product with a similar return profile to what you're looking for is a buffered ETF. Basically, over a defined period, you agree to a maximum possible downside in exchange for a capped upside. They are available in ETF form from a number of providers.

For example, you could have an S&P 500 fund that, over the next year, will have a maximum of 0% capital losses (it can't go down), you will only get the first, say, 5% of gains that the equity index makes. So if stocks go up 20% the next year, your return is capped at 5%, but if they crash 50%, you don't absorb any capital losses. In practice, the return cap is going to be just a bit above the corresponding Treasury bill for the same duration.

These can be constructed in various different ways and institutionally I'm sure there are more bespoke ways that are more efficient from a fees/returns and tax perspective, but one way to do this on your own without going the ETF route is:

- Pick an amount you'd like to invest. - Buy a Treasury bill for some duration. Treasury bills are discounted at the time of purchase and return the target amount when the bill matures. For instance, if you buy a $100k 1-year Treasury bill, it might cost $96.5k today. - Now you have $3.5k in your pocket and a guarantee that you'll get $100k in a year when the bill matures. Use that $3.5k now to purchase call options or vertical spreads on the S&P 500 index to capture the upside that you can. Your return is limited by the structure of that options trade and what its maximum payoff is.

If you're willing to accept more than 0% downside, then you can achieve a higher potential upside cap as well.

[toomuchtodo]

This is exactly what I was looking for, thank you for taking the time to reply!

[Imustaskforhelp]

> What do you think the cost would be for protective puts per $1M of equity exposure of a portfolio on a monthly basis? "Bubble Insurance" if you will. Going 100% bonds is simply intolerable for the time window for most retirees, but an equity wipeout of this magnitude is equally intolerable.

Investment companies have to remain profitable or at-worst neutral as such they would generally charge a decent bit of money for this type of setup. (If they end up having too big of losses then perhaps it could be similar to the the 2007 Banking/Investment companies crisis.)

Generally speaking I am not a financial advisor but you can take a look at international index funds/ETF's in general which have less exposure to AI in general.

and you can follow the age rule created by Mr Bogle where you have (age)% in bonds and (100-age)% in stocks, so at 70 you have 70% bonds, 30% stocks.

So again taking the example of dot com bubble, International Index funds fell from my understanding 30-40% and suppose that you had 30% stocks and 70% bonds.

So that would only have a 30% times 30 % which is 9% which perhaps might be more managable as compared to the previous 25%. There might be some other strategies as well which can help in diversification

Hope this helps!

[mhh__]

The cost of insurance is carry e.g. when you buy an option you are paying for the convexity with time decay. It is quite expensive.

It is worth saying however that part of tail hedging is that the payoff is worth a lot more when everything else has tanked, so e.g. even if you (say) get 10% on your puts when the wider portfolio is still down 40% (made up numbers), you can deploy that capital at probably quite a high expected return.

[matwood]

Even someone close to retirement doesn't need to go 100% bonds. It's not like someone needs all their retirement money on day 1. The part that remains in equities will continue generating dividends that will get reinvested, and recover over time.

[ligne]

100% of anything is a bad idea if you're going to have to draw on them any time soon. Bonds are less volatile than equity, but they're still subject to drops in value.

[matwood]

Sure, but a mistake I often see is people thinking that people's entire retirement savings is needed on the first day of retirement. People can and should still be invested in equities even in retirement, it's just the percentage is less depending on age and burn rate.

[mhh__]

Indeed, we have just been through arguably the largest (nominal) drawdown in the history of fixed income.

[barchar]

It would cost an extreme amount. The only reason to do something like that would be to defer capital gains into retirement while protecting your position.

You can use a collar for this at somewhat reasonable cost. Not sure how rolling that would compare to just using it to defer until you can cheaply sell and buy some fixed income ladder. Probably badly.

Also, there’s no capital gains to defer if you use a retirement account, which will be a better place for fixed income anyway.

[Marsymars]

> What do you think the cost would be for protective puts per $1M of equity exposure of a portfolio on a monthly basis? "Bubble Insurance" if you will.

I expect that would not be a cost-effective way of attaining the risk profile you'd be looking for.

I expect there won't be a more cost-effective way of managing your portfolio risk than by simply adjusting your split of broadly-diversified equities vs bonds.

[intrasight]

My homeowners insurance isn't "cost-effective" either but I still do it. I think the reason that investors don't is because they are greedy or irrational or both.

That was the message that I got from a financial podcast I listened to a couple weeks ago anyway.

[Marsymars]

I'd content that homeowners' insurance is quite cost-effective, because there isn't a cheaper alternative to hedge your risk.

I'm saying that for the cost of buying puts to hedge against equity downside in a retirement portfolio, for any given level of risk, you'd probably be better off just selling some of the equities and buying bonds instead.

e.g. try and find any equity-focused ETF with downside protection that generally outperforms a bog-standard stock/bond split total-market ETF for whatever measure of volatility/downside protection that you want.

[kipchak]

I think the risk for increasing your bond exposure as compensation would be if instead of a low growth/low inflation scenario (Bonds do well) there's a low growth+high inflation scenario (1940s, 1970s, 2022) and the negative correlation between stocks and bonds doesn't hold.

[duzer65657]

investors are irrational but actually tend to go the other way - too risk adverse. I'm not sure what a "greedy" investor is, TBH.

[intrasight]

Yeah "greedy" is not really the right word. What I meant was not properly managing.

[TacticalCoder]

Take SPY at a strike of $738, per lot of 100 that's $73 800. Take 14 lots, give or take, to make a cool million.

SPY260821P00738000 (OCC symbol: PUT on SPY expiring the 21th of August 2026 at a strike of $738) is $12.20 as I type this, so $1220 per lot. So $16 800 to protect for a month. So $200 K per year.

A solid 20% yearly, unless my math is way off.

Now of course you can buy, instead of a PUT, a PUT debit spread, or you can buy further from the strike, or you can finance or partially finance your PUT or PUT debit spread with a CALL you'd sell (turning it into a covered strangle) etc. That's not the point of this exercise though. And anyway I doubt many retirees have the know-how to do that.

In any case it's well known that the costs to hedge are extremely high.

In 1929 those who had 10% gold for example "only" lost 25% overall: gold has value since thousands of years. My dumb thinking is that if gold has value since thousands of years, there's an extremely high probability that it'll keep value for the few decades I've got left at most.

[FabHK]

A more sensible strategy is probably to protect only against large down moves, so get OTM puts, and then longer maturities (like 1/2 year or so), then rotate them every quarter.

ATM options cost approximately 0.4 S sigma T^0.5 (do a Taylor expansion of the "N"s in the Black Scholes formula), so indeed, for current index vols of about 16% we are talking 0.4 * 16% * (1/12)^0.5 = 1.85% for a 1 month option, and 12 of them indeed cost 22% of your portfolio. Not a good idea.

However, if you hold the options only half the way to expiry, you lose only 1/4 of the time value. And if you buy OTM, you have convexity coming your way on the way down.

Lastly, index vols were very low (until yesterday, ha), as so many firms entered the dispersion trade: they wanted to go long dispersion (some firms do well with AI, some lose out), so short correlation, therefore long single stock vol and short index vol. Which means you could buy index vol (ie protection) quite cheap.

[MattGrommes]

One of the big issues with this is sequence of returns risk. If you retire and rely on your portfolio but the market dives for a year or two right after you leave the workforce, your total portfolio value is screwed because you were selling at a low point.

[Terr_]

Tangentially: I think a lot of people forget/underestimate the degree to which the industries behind their job are ones that they need to diversify away-from.

In other words, a programmer should invest a bit more away from software than average, a realtor should invest a bit more away from properties than average, a coal-miner should invest a bit more away from energy and mining, etc.

If you have your job, you can weather a stock-downturn, and if investments are solid, you can weather a period of unemployment by liquidating some, but if both hit trouble simultaneously then that's much much worse.

[mancerayder]

That makes sense, and it probably should be said more. It's probably just because we invest in what we know. If you're a real estate broker, you have an interest in properties, you think about it all the time, so you'll buy your own properties, or invest perhaps in builder stocks. If you're in tech, well, I don't need to say it because that's most of us. If you work in the energy sector, I imagine you know a thing or two about transport and esoterica of speculative miners or drillers, etc.

[Terr_]

> It's probably just because we invest in what we know.

I'm mostly thinking of folks that will passively invest in a big broad index fund, and then assume they've reached the end in terms of balancing industry/sector risk.

[parpfish]

it's also why you shouldn't hold equity in your own company any longer than necessary (e.g., an apple employee shouldn't tie up the majority of their networth in apple stock).

[Terr_]

My go-to example is always Enron, and the impact on employees whose retirement funds were in their own too-awesome-to-fail employer.

Oh, sure, it's way worse because of the fraud-angle, but even if it had just been a more honest kind of mania, the arrangement was reckless and bad.

[parpfish]

stock options/rsus are a great example of some sort of cognitive bias (maybe it's the endowment effect?).

give somebody $1000 worth of shares in their company, and a lot of folks will hang on to them. but if you gave them $1000 cash to invest, they almost certainly would not choose to dump all of that money into their own company.

[Terr_]

Tax-law also makes is sticky: StockX -> Money -> StockY means a portion of is lost as capital-gains tax on the money step. StockY might be better... but is it something that will perform better-enough to be worth the switching costs? (At this point logarithms and spreadsheets start getting involved.)

In contrast, starting with Money and then choosing between StockX or StockY is an easier choice.

[rwmj]

Which is why you keep 3-5 years of spending money in cash (or a bond ladder if you want to be fancy).

[duzer65657]

most don't even have 3-5 years "spending money" (whatever that is) in total savings; if you're keeping that in cash you're getting 2-3% annually while the market has doubled.

[LargeWu]

Last week I was at the bank in my hometown, a small rural community. The teller took a phone call, and I overheard her say "You have $1.53 in your checking account, and $150 in savings".

Presumably this is their total net worth. I think this is way more common than people on this type of forum realize. Most will work until they literally can't anymore, then scrape by on social security until they die. I think it's important to keep that perspective.

[HDBaseT]

It is either that, or they have tons of debt. (Sometimes both!)

The average person is struggling in modern America.

[alex43578]

Because the average person also makes a litany of poor financial decisions. $100K student loan balances for an state school arts degree, forgoing health insurance but expecting to receive $200K in care for free, or buying that $80K F150 on a 12.5% loan and rolling in negative equity.

The US is second in the world for median equivalised household disposable income, second only to Luxembourg and 10%+ above Norway. For daily median per person income after taxes and transfers, we're only behind Norway, Switzerland, Luxembourg, Qatar, and the UAE. Outside of petrostates, microstates, and Switzerland, no country has richer "average" people.

The US certainly doesn't have the safety net of some of these other states, but these aren't holes you're being thrown into by society: they're pits you've deliberately jumped into in 99% of cases.

[MattGrommes]

When you're headed into retirement, one possibility is to shift to saving more in cash-like options instead of a 401k (or whatever). It's should just be part of your retirement plan to account for possibilities like this.

[light_hue_1]

And lose the tax advantages? That's crazy

[Grombobulous]

The comment parent to you said it poorly. The 401k is the container, you don’t move stuff out of it you change the investments inside of it.

[smallmancontrov]

The tax advantages of being forced to pay ordinary income rates on your distributions as compared to long term capital gains (which are low, capped, can be exercised before a tax hike, and avoided entirely if you just need collateral)?

[kmbfjr]

Keep in mind post tax income sources are king when retiring before age 65 and looking for ACA subsidies.

[bell-cot]

Look back at the grandparent comment. If someone doesn't have 3-5 years in total savings, then they had better not try to retire.

[rwmj]

Sure, but we're not talking about people who have no savings. FIRE people have huge investment portfolios while being frugal with their spending, and understand the risk of keeping 5-10% of their total net worth in cash equivalents (not dissimilar to having insurance).

[hdgvhicv]

People return with less than 4 years expenses in retirement funds

Surely you need about 20 years?

[budman1]

Social Security, my friend. And there are still some pensions out there.

[staticman2]

3 to 5 years of cash or a bond ladder won't help in a 1970s stagflation scenario.

[inigyou]

At the extreme end of this, realise that absolutely nothing is safe.

[Panzer04]

3-5x is way too much if you're still working.

1x is plenty IMO.

[bandrami]

Which is why lifecycle funds move you into bonds gradually as you approach retirement age

[zer00eyz]

Inherited IRA's, if you aren't the spouse, have some pretty strict draw down rules.

As the boomers die off - if they have these accounts - their kids are quickly going to be forced to liquidate them over the course of 10 years. With some of them having to sell a chunk annually.