How Low Can It Go?

The stock market keeps dropping. The Dow closed under 13,000 yesterday. The recent decline tripped another wire for my rebalancing. This time it was for the small cap value asset class. I bought more iShares Russell 2000 Value Index Fund (IWN). This fund was down 8% since the beginning of this year. It was down 15% from its peak in early June.

I was early when I bought more REITs in July. The Vanguard REIT ETF (VNQ) was down another 7% from the price I paid 3 weeks ago. I’m probably early on small value as well. The “best” strategy for rebalancing is waiting until the bottom to buy and waiting until the top to sell. The problem is that nobody knows where is the bottom or the top. A run can quickly turn to the other direction or it can extend beyond anybody’s imagination. Here’s a rough recap of the greater-than-10% downturns in the last 20 years using S&P 500 data (not including dividends):

Date Change Duration Next Leg
7/07 – ??? -9% and counting 4 weeks and counting ???
11/02 – 3/03 -15% 3.5 months +94%
3/00 – 10/02 -48% 2.5 years +21%
7/99 – 10/99 -12% 3 months +22%
9/98 – 10/98 -10% 2 weeks +48%
7/98 – 8/98 -19% 6 weeks +11%
10/97 – 10/97 -10% 2 weeks +35%
2/97 – 4/97 -10% 7 weeks +33%
7/90 – 10/90 -20% 3 months +176%
1/90 – 1/90 -10% 4 weeks +14%
8/87 – 12/87 -34% 3.5 months +61%


At the end of the previous declines, nobody rang a bell and gave the all clear signal. All of a sudden for no apparent reason the market decided that it had enough and wanted to go up instead of down. This time it won’t be any different. The market will stop going down at some point. Exactly when is anybody’s guess. If you look at the extent and the duration of the previous declines, this one could be done by now or continue for a few more weeks, a few months, or years. 

So far it looks like a garden variety ~10% decline. Is it the bottom yet? Who knows? Can it get worse? Sure. I just hope we don’t get another big one like the one from 2000 to 2002 which took 2.5 years and went down 48% from the peak. But I am prepared. More rebalancing wires will be tripped along the way.

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  1. Ted says

    TFB – You can certainly decline, but I’d be interested to see your chosen asset allocation strategy and what your “trips” are.

    I’m not asking for dollars (unless you want to), but percentages.

    I think you’re 60% equity to 40% bonds, correct? Based on this post I’m guessing you’re leaning small and valuey.


  2. Brad says

    I’d love to see that too, Ted. I have fiddled with my allocation and have given a lot of thought to rebalancing thresholds, but have made no set decision. I’m always looking to see what others do.

  3. Anonymous says

    Could I ask you to also elaborate on your rebalancing strategy?

    Vanguard Diehards advocate rebalancing one’s portfolio annually (e.g. the first day of the new year, your birthday anniversary, etc.).

    Do you rebalance annually, after a market correction, etc.

    I am still planning to adjust things (only) in January.

    Maybe the Titanic is sinking and I’m too dense to get into a lifeboat now (instead of in Jan, 2008).

    I’d appreciate your perspective.

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