"Stay the course"? Bah humbug!
curiousg...@hotmail.com
decline starting on 9/3/1929.
The fact that DJIA enjoyed expansive growth during the period
afterwards -- e.g. 136% for the 12 months ending 7/19/1933 -- seems
irrelevant to someone who was holding securities on 9/3/1929 and might
have been advised then to "stay the course".
The DJIA did not return to its peak level (381) until 11/23/1954. 25
years!! And that's just to get back to breaking even!!
Arguably, the DJIA is a poor index. I wish I had that kind of data
for the S&P 500 (and its equivalent(?) predecessor) or similar index.
But I don't.
That decline was motivated by broad economic problems. We are facing
broad economic problems now, with rising unemployment and federal bail-
outs for this and that major industry. And it's not even clear that
the bail-outs will work.
Arguably, pundits believe we are not headed for a 1930s-type
depression. Then again, the same pundits did not believe 11 months
ago that we were headed into the deep and long recession. I think
most pundits now agree we are.
With 20-20 hindsight, the time to have exited the market was at the
beginning of the year, when pundits were starting to talk it up about
risk in the lending market. More power to those who claim to have had
that foresight. Frankly, I dismiss most pundits as just windbags.
(But like the people who make outrageous predictions every Jan 1, if
they make enough predictions, they have to be right at least once due
to random chance.)
Anyway, I'm not interested in hearing "I told you so" hindsight. My
question is: what is a reasonable thing to do now?
I doubt that "stay the course" is right, at least not if "the course"
is 50-to-60% securities and 10% in cash equivalents.
But it's really not clear to me what __is__ a reasonable course,
especially since my liquid assets (mostly IRAs) have already lost
20-30% in the value.
Personal data: I'm only about 60, but I'm retired and relying on my
investments (including savings) for income. I have 3 years of cash
equivalents.
I probably should hire a financial planner. But it's hard
(impossible?) to separate the good from the bad, and frankly, I will
not have the time until after the end of the year. As important as it
is long-term, there are actually some more important short-term things
that require my full attention (sigh). I was content to "weather the
storm" while the market was moving sideways, despite the volatility.
But with increasingly bad economic news, I have the feel we are on the
precipice of the "bottom falling out".
HW "Skip" Weldon
wrote:
> I was content to "weather the
>storm" while the market was moving sideways, despite the volatility.
>But with increasingly bad economic news, I have the feel we are on the
>precipice of the "bottom falling out".
Gee - where have I heard that. <grin>
Seriously, the above is typical of a bear market. Also typical of a
bear market is that they end, and they do so when the vast majority of
investors feel it will last forever and America as we know it will
never be the same again.
Before anyone asks, nobody knows when this will reach a crescendo. My
guess - and I am a lousy guesser - is somewhere slightly between Dow
6500-7000 and SP500 600-700. Anybody else want to guess for fun?
-HW "Skip" Weldon
Columbia, SC
Douglas Johnson
>On Fri, 21 Nov 2008 04:18:52 -0600, curiousg...@hotmail.com
>wrote:
>
>> I was content to "weather the
>>storm" while the market was moving sideways, despite the volatility.
>>But with increasingly bad economic news, I have the feel we are on the
>>precipice of the "bottom falling out".
>
>Gee - where have I heard that. <grin>
The human mind has a real talent for believing the current trend is going to
last forever. It is one of the things that makes investment decision making so
difficult. It also seems that about the time things turn around, we get a post
here about disaster in the offing. We had a post suggesting $2.00 euros just
before the recent dollar rally and a 15% inflation post just before the biggest
CPI drop ever.
>Seriously, the above is typical of a bear market. Also typical of a
>bear market is that they end, and they do so when the vast majority of
>investors feel it will last forever and America as we know it will
>never be the same again.
At this point, we are in the second worst bear market since 1929. It is
incredibly difficult to watch your net worth decline with every market drop. So
stop watching. I'm currently shredding my brokers' statements without opening
them. Selling now is the absolute worst thing to do. There is far more upside
than downside.
>Before anyone asks, nobody knows when this will reach a crescendo. My
>guess - and I am a lousy guesser - is somewhere slightly between Dow
>6500-7000 and SP500 600-700. Anybody else want to guess for fun?
I think we are at or near the bottom. We have a lot more bad news ahead. GM is
going to go Chapter 11, earnings are going to continue to decline, unemployment
is going to continue to increase, GDP is going to continue to contract, at least
for a couple more quarters.
But the market has most of that priced in. It also tends to look 6 months
ahead. The current increase in volatility is another sign of an approaching
bottom. But I've been wrong before and will be wrong again.
-- Doug
Don
> It took 3 years (7/19/1932) for the DJIA to bottom-out after the steep
> decline starting on 9/3/1929.
>
> The fact that DJIA enjoyed expansive growth during the period
> afterwards -- e.g. 136% for the 12 months ending 7/19/1933 -- seems
> irrelevant to someone who was holding securities on 9/3/1929 and might
> have been advised then to "stay the course".
lt is interesting that, a year ago, almost everyone in this newsgroup
would have recommended "staying the course" in spite of the inevitable
bumps and blips in the market, because of the historical long-term
performance of stocks. Now we are beginning to see more and more
frequent questioning of that advice, even among experts and
professionals.
There is a wide gap between sage financial advice and actual practice
on the part of small investors. The plain fact is that it is extremely
difficult to "stay the course," even by people who appreciate and
understand the reasons behind the advice. People stay the course in
good times and veer off course in bad times.
I wonder what the advocates of "dollar cost averaging" are recommending
nowadays. If someone decided to put $200 into the market every month,
year after year through thick and thin, should that plan be continued
without flinching right now? If it ever was a good idea, I wonder how
many investors, large and small, are actually following it at present.
curiousg...@hotmail.com
Oh come on, Skip. You know this is not your mother's "typical bear
market". And to trivialize my observations in that way is just plain
wrong, if not naive.
Hint: I referred to the severe economic down-turn, not merely a loss
of market value. I believe that changes the game. Your comments are
like comparing Katrina to a rain shower.
> Also typical of a bear market is that they end
Yup. And in general, trying to time the market highs and lows is
risky and wrong-minded. Are there any other platitudes that we can
regurgitate?
The point is: when facing a small brown bear, "stand tall and stand
your ground" might be reasonable advice. But when facing a Kodiak
bear, you stand a better chance of survival by doing something else.
My question is: what else?
> Before anyone asks, nobody knows when this will reach a crescendo.
> [....]
> Anybody else want to guess for fun?
Gee, whadaya do when the moderator completely derails a thread?
Can we now return to __my__ question, which was: having demonstrated
that "stay the course" can be risky in "XXX bear" markets -- at least
one time taking 3 years to bottom out (and losing nearly 90% in value)
and taking 25 years just to break even, which is the limit, if not
beyond, the horizon of most investors and certainly any post-
retirement investor, "what is a reasonable thing to do now?".
For example, if you believe the market is going to continue to go down
or move sideways with high volatility, why not put "all" of your money
in cash? Earning even 0.2% is better then -x%.
Yes, the market will rise again. And yes, market timing is risky; we
probably will miss the low. But it should be clear now that will not
happen overnight. There will be lots of (volatile) sideways movement
first -- plenty of time to mull things over and get back into the
market.
I am not advocating that; the point is: I don't know what to do. But
in light of Skip's trite comments, I want to demonstrate the kind of
thoughtful contribution that someone could make to this thread.
honda....@gmail.com
> The point is: when facing a small brown bear, "stand tall and
stand
> your ground" might be reasonable advice. But when facing a Kodiak
> bear, you stand a better chance of survival by doing something else.
> My question is: what else?
What you want to do is to recognize that this is not a Kodiak bear,
and that the aforementioned "platitudes" are in fact wisdom.
This is a bad moment for those who buy stocks the same way gamblers
lay chips on the table in Las Vegas, practicing numerology, so-called
momentum (with no basis at all for further momentum) and so on. Of
course you are panicking, just like a gambler losing would panic. But
for those who buy stocks understanding they are buying ownership of a
company, and for those who know something about these companies, this
market dive is a part of economic cycles.
Stay the course. Remain diversified. Re-invest dividends. Live within
your means. Note that you can take a road trip for about half of what
it cost a few months ago. Go fishing. Don't read no stinkin' brokers'
statements. Re-read Douglas Johnson's very good post in this thread.
Elizabeth Richardson
<curiousg...@hotmail.com> wrote in message
news:60e17e8b-ab9e-4bb3...@w1g2000prk.googlegroups.com...
>
> Personal data: I'm only about 60, but I'm retired and relying on my
> investments (including savings) for income. I have 3 years of cash
> equivalents.
>
Same here. I'm staying the course because I believe it's the right thing to
do.
Elizabeth Richardson
kastnna
> The human mind has a real talent for believing the current trend is going to
> last forever. It is one of the things that makes investment decision making so
> difficult. It also seems that about the time things turn around, we get a post
> here about disaster in the offing. We had a post suggesting $2.00 euros just
> before the recent dollar rally and a 15% inflation post just before the biggest
> CPI drop ever.
You're right about that. The phenomenon is called the recency effect.
I invite anyone not familiar with it to google.
Douglas Johnson
>On Fri, 21 Nov 2008 04:18:52 -0600, curiousg...@hotmail.com
>wrote:
>
>> I was content to "weather the
>>storm" while the market was moving sideways, despite the volatility.
>>But with increasingly bad economic news, I have the feel we are on the
>>precipice of the "bottom falling out".
>
>Gee - where have I heard that. <grin>
The human mind has a real talent for believing the current trend is going to
last forever. It is one of the things that makes investment decision making so
difficult. It also seems that about the time things turn around, we get a post
here about disaster in the offing. We had a post suggesting $2.00 euros just
before the recent dollar rally and a 15% inflation post just before the biggest
CPI drop ever.
>Seriously, the above is typical of a bear market. Also typical of a
>bear market is that they end, and they do so when the vast majority of
>investors feel it will last forever and America as we know it will
>never be the same again.
At this point, we are in the second worst bear market since 1929. It is
incredibly difficult to watch your net worth decline with every market drop. So
stop watching. I'm currently shredding my brokers' statements without opening
them. Selling now is the absolute worst thing to do. There is far more upside
than downside.
>Before anyone asks, nobody knows when this will reach a crescendo. My
>guess - and I am a lousy guesser - is somewhere slightly between Dow
>6500-7000 and SP500 600-700. Anybody else want to guess for fun?
I think we are at or near the bottom. We have a lot more bad news ahead. GM is
catalpa
"Don" <dwz...@telus.net> wrote in message
news:2008112109082250073-dwzimm@telusnet...
These are the times that advocates of "dollar cost averaging" hope and pray
for. Buying in bull markets makes you little money. The real investing money
is made by buying throughout bear markets, not by selling at lows.
Any long term investor that continued to invest during the bear markets of
1973 to 1975 and 1980 to 1982 is way ahead of the game even with the S&P 500
at 800.
The main problem is actually having the money to continue to invest during a
severe bear market.
Tad Borek
> It took 3 years (7/19/1932) for the DJIA to bottom-out after the steep
> decline starting on 9/3/1929.
>
> for the S&P 500 (and its equivalent(?) predecessor) or similar index.
> But I don't.
S&P's total return data for the S&P 500:
1927 +37.5%
1928 +43.6%
1929 -8.4%
1930 -24.9%
1931 -43.3%
1932 -8.2%
1933 +54.0%
1934 -1.4%
1935 +47.7%
1936 +33.9%
1937 -35.0%
1938 +31.1%
It's interesting that as of this morning the S&P 500 has lost ~52% since
its peak close in October 2007, not factoring in dividends. Compounding
the figures above, the cumulative loss from 1929-32 was ~64%, including
dividends.
Meaning the stock market decline of the past year, half of which
happened in just the past 2 weeks, is comparable to the cumulative
losses during the worst stock-market period of the Great Depression - a
period that spanned four years.
Another interesting data point: the dividend yield on the entire US
stock market is north of 4% at the moment, subject of course to changes
in dividend payout (up & down). The 30-year Treasury bond yield is about
3.7%.
-Tad
kastnna
> The point is: when facing a small brown bear, "stand tall and stand
> your ground" might be reasonable advice. But when facing a Kodiak
> bear, you stand a better chance of survival by doing something else.
> My question is: what else?
You take for granted that we know what type of bear it is. The posters
you seem at odds with (myself included) haven't yet decided it's a
Kodiak. Maybe it is, but maybe it's not.
> Can we now return to __my__ question, which was: having demonstrated
> that "stay the course" can be risky in "XXX bear" markets -- at least
> one time taking 3 years to bottom out (and losing nearly 90% in value)
> and taking 25 years just to break even, which is the limit, if not
> beyond, the horizon of most investors and certainly any post-
> retirement investor, "what is a reasonable thing to do now?".
Again, you want advice based on assumptions that many of us do not
support. You're also cherry-picking your bear markets. I acknowledge
that there are not many data samples, but you are focusing on the
statistical outlier of the bunch.
> Yes, the market will rise again. And yes, market timing is risky; we
> probably will miss the low. But it should be clear now that will not
> happen overnight. There will be lots of (volatile) sideways movement
> first -- plenty of time to mull things over and get back into the
> market.
I don't think it's "clear". That statement is also historically
inaccurate. During bear markets the indices typically move within a
limited range while they "bottom-out" (with much volatility) and then
rapidly dart-off in a positive direction.
The problem with "plenty of time to mull things over and get back into
the market" is that it is largely dependent on your emotional analysis
of our economy. A quick look at the Investor Confidence Index suggests
that by the time the average joe is bullish on the market, it's way
too late. FWIW, investors confidence peaked in August 2007. A simple
yahoo chart should show you how misplaced that confidence was.
Everyone always thinks it will be easy to indentify when the rebound
starts. Everybody is almost always wrong. Skip made light of your
comments because we've heard them all before, every other time, by
every other investor. We just don't think this time is any different.
You, apparently, do. To each his own.
> I am not advocating that; the point is: I don't know what to do. But
> in light of Skip's trite comments, I want to demonstrate the kind of
> thoughtful contribution that someone could make to this thread.
I could be misreading, but your posts sound (to me) like your looking
to the group for justification to time the market. We can call it
something different, or make excuses as to why it would be okay just
this once, or play symantics with the vocabulary, yada yada, but at
the end of the day, it's still market timing. Nothing is going to
change the fact that any buy and sell strategy depends on knowing when
to get in and out. That's a feat most of us don't not claim to be able
to accomplish. Heck, even if you're right and this time IS different,
all that means is that we can't rely on history for advice. It still
doesn't in any way imply that the assumptions you're making will be
the correct ones.
If I am misreading your intentions/posts, I apologize.
curiousg...@hotmail.com
> SP500 600-700
That's a 7-20% decrease; pretty significant in my book.
If you believe that might be the case, why not cash in now, hold for
at least 31 days (to avoid wash rules), then jump back in?
Arguably, you are risking being wrong and missing a (sustained) market
rebound.
But realistically, understanding the factors that are driving the
market down (or wildly sideways) now and perhaps recognizing the fact
that those factors will not change for the better at least until after
Jan 20 (and probably much longer), just how much of a (sustained)
market rebound do you really believe is possible in the next 31 days?
On the flipside, if you cash in now and manage (by dumb luck) to hit
the market low (more likely soon thereafter), your "bullish" gains
will start from the current market value instead of an even deeper
hole of 7-20%. Remember: to recover from a 7-20% loss, you need a
gain of 7.5-25% just to break even.
The cost of such a strategy depends on whether it occurs in a taxable
or tax-deferred account. "No cost" in a tax-deferred account (other
than trading costs). "Negative cost" in a taxable account, probably
for several tax seasons, due to the large cap loss that will offset
future gains.
With 20-20 hindsight, is there really anyone who doesn't wish he
applied that strategy at the beginning of the year? ;-)
I think it would be untruthful to say "no". So the only reason not
apply that strategy now would be a conviction that the market has
indeed bottomed out, or nearly so. Personally, I think the economic
factors that has been driving the market decline, most notably the
sell-off in the last few days, will continue for a long time.
My point is: I think the reasonableness or not of the outlined
strategy turns not on platitudes, but on one's feeling about the
market and the economy. I feel it has a lot of downside potential.
"Reasonable people can disagree". But my opinion is no less valid
than yours.
So I return to my original question: for those who believe, as I do,
that the market has "a lot" more to fall, what strategies are
reasonable to preserve the value of your liquid assets and avoid
taking potentially many years to recover?
Lucky
"Douglas Johnson" <po...@classtech.com> wrote in message
news:40tdi4ps7jmniid6r...@4ax.com...
> At this point, we are in the second worst bear market since 1929. It is
> incredibly difficult to watch your net worth decline with every market
> drop. So
> stop watching. I'm currently shredding my brokers' statements without
> opening
> them. Selling now is the absolute worst thing to do. There is far more
> upside
> than downside.
Good luck with that, Doug.
http://news.morningstar.com/etf/Lists/ETFReturns.html
Housing will see further decline, lending is still hard to find. This
Christmas shopping season is slated to be the worst in 30 years.
Unemployment is on the rise, no one is buying automobiles and the big three
have an excellent change of going into chapter 11. I think 2009 won't see a
lot of progress in the averages.
Lucky
"kastnna" <kas...@auburnalum.org> wrote
> You take for granted that we know what type of bear it is. The posters
> you seem at odds with (myself included) haven't yet decided it's a
> Kodiak. Maybe it is, but maybe it's not.
Vanguard 500 is down 47% year to date. That's 'Kodiak' enough for me.
QQQQ, the Nasdaq100, is down 50% year to date.
IWM, Russell 2000, is down 49%.
" the typical Bear shows a 30 per cent loss. "
http://www.galwayindependent.com/business/business/money-matters-%11-is-this-your-average-bear?/
Douglas Johnson
>Good luck with that, Doug.
>http://news.morningstar.com/etf/Lists/ETFReturns.html
I'm sorry. I'm not sure what you are saying. That the shorts have been having
a party they'll remember for the rest of their lives? No doubt.
My comment that this is the absolutely wrong time to sell is addressed to folks
that are normally long and still are.
-- Doug
Elizabeth Richardson
"Lucky" <not...@shabby.net> wrote in message
news:duGVk.111$QX3...@nwrddc02.gnilink.net...
>
>
> Housing will see further decline, lending is still hard to find. This
> Christmas shopping season is slated to be the worst in 30 years.
> Unemployment is on the rise, no one is buying automobiles and the big
> three have an excellent change of going into chapter 11. I think 2009
> won't see a lot of progress in the averages.
It's hard to see that it is as deep as the liberal media would like you to
believe. Today there were long lines like in the 1930s bread lines. Except
today the lines were for buying $200 Blackberrys. People still have money
and are still willing to spend it.
Elizabeth Richardson
Marco Polo
>From a DCA perspective, this is exactly the time when your investment will
pay off the most.
Assuming the market recovers some day. The $200 you put in this month will
make you a lot more money then the $200 you happily put in last year to buy
the same shares at a lot higher prices.
Lucky
Sorry, I didn't catch that qualifier. You also said that much of what's
happening is already "priced in". Many experts disagree, they readily admit
that there are many unknowns remainging in this credit crisis. The lenders
still aren't lending, they are using the bailout money to buy other banks.
As Elizabeth mentioned, there were long lines to buy the new Blackberry.
That line was shorter than the number of insurance companies and other
institutions that want to buy a bank or reorganize into a bank holding
company so they too can get a piece of the taxpayer giveaway. There is
nothing wrong with staying on plan but there are ways to ease the pain.
Lucky
"Elizabeth Richardson" <eric...@worldnet.att.net> wrote in message
news:nUJVk.147485$Mh5.1...@bgtnsc04-news.ops.worldnet.att.net...
I saw that in the news. That said, buying a $200 phone is not the same as
getting a loan for a home or automobile. The fastest growing part of the
economy isn't GDP, it's unemployment. Since our consumers are 70% or so of
our economy and they are rapidly shrinking in numbers it wouldn't hurt to
balance of a portfolio with a short position. Better to go sideway than to
fall off a cliff. Many people are down 50% or so, that requires a 100% gain
to break even. I'm not happy about being down 4% this year but the "bah
humbug!" factor isn't as severe for me that it is for a lot of people.
Don
> "These are the times that advocates of "dollar cost averaging" hope and pray
> for. Buying in bull markets makes you little money. The real investing money
> is made by buying throughout bear markets, not by selling at lows.
True, but I do not hear too many people advocating that course of
action nowadays. People talk a lot about the advantages of dollar cost
averaging when the market is high. It is easy to sit back and think
about the increase in the value of stocks over a 50 year period when
the market is heading up. But when the market is low, people tend to
put rational thinking and their long-term plans aside, and the next 6
months ahead seems like 50 years.
Marco Polo
<curiousg...@hotmail.com> wrote in message
news:04933eba-78e0-404a...@z6g2000pre.googlegroups.com...
> >
> So I return to my original question: for those who believe, as I do,
> that the market has "a lot" more to fall, what strategies are
> reasonable to preserve the value of your liquid assets and avoid
> taking potentially many years to recover?
>
Maybe I don't understand your question, but if you are so sure the market is
going to fall a lot, then why not just short the indexes, there are plenty
of Ultra short funds where you can get 2x or more upside for every tick down
in the market. That would be acting on the courage of your convictions.
The replies you are getting from a lot of other posters are admitting to
less certainty and hubris regarding their knowledge about where the market
is going next. I also admit I have no idea where it is going in the short
term. I am staying invested because I am not smart enough top "know" where
the market is going, and at this time suspect that over a moderately long
term, there is much more upside potential then downside risk.
It seems to me many people who now "know" the market is going to keep going
down are many of the same people that "knew" the market was going to keep
going up a year ago...
Will Trice
> Anybody else want to guess for fun?
Sure! I like this game. I'll be the optimist and say that we just
entered a bull market on Friday. I hope my prediction lasts longer than
Monday's close...
-Will
william dot trice at ngc dot com
BreadW...@fractious.net
> "kastnna" <kas...@auburnalum.org> wrote
>
> > You take for granted that we know what type of bear it is. The posters
> > you seem at odds with (myself included) haven't yet decided it's a
> > Kodiak. Maybe it is, but maybe it's not.
>
> Vanguard 500 is down 47% year to date. That's 'Kodiak' enough for me.
> QQQQ, the Nasdaq100, is down 50% year to date.
> IWM, Russell 2000, is down 49%.
That being the case, the time to get out was before those
losses. And the time to get back in will be before the
markets start to climb again.
If one wasn't able to predict the former (ie. one was
unable to get out before the fall), what makes anyone
believe he'll be able to predict the latter any better?
As I've said before, the truth uncovered here is not
that the markets can be volatile, nor that it's hard
to "stay the course" sometimes. It's that many of us
did not correctly assess our actual risk tolerance.
So it's not time to time the market or make these
predictions about the future, but it is time to really
think about risk tolerance and perhaps to rebalance
our portfolios to reflect it better.
If one isn't prepared to lose 50%, one isn't prepared
to be 100% in stocks. Lots of folks have been saying
exactly that all along. Lots of them. Mostly the same
ones who continue to say to stay the course. The thing
is that the course they've been encouraging folks stay
may not be the course some are claiming.
A 60% stock, 40% bond portfolio over the last 12 months
(as built from a pair of ETFs) is down about 25%. Over
very long periods of time, that portfolio has had something
on the order of 80% of the annual return of a 100% stock
portfolio, but with only around 60% of the annual volatility -
exactly as what we've just seen.
There are probably a lot more folks out there who should
be 60/40 rather than 100% stocks. And once they've figured
that part out, staying the course should be a lot easier.
--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting
Ernie Klein
"Lucky" <not...@shabby.net> wrote:
> Unemployment is on the rise, no one is buying automobiles and the big three
> have an excellent change of going into chapter 11. I think 2009 won't see a
> lot of progress in the averages.
I keep hearing talk about the auto industry and chapter 11 but I just
don't see why _anybody_ would purchase a car from a company in chapter
11 that might not be around to service it or do warrantee work. They
would have to offer it at a great discount price to reel me in and deep
discounts won't make them the money they need. I think chapter 11 would
just make the current situation worse.
--
-Ernie-
Don
> Assuming the market recovers some day. The $200 you put in this month will
> make you a lot more money then the $200 you happily put in last year to buy
> the same shares at a lot higher prices.
A trouble with dollar cost averaging is that people's ability to invest
usually does not stay constant over a long period of time. In their
early working years, small investors can put away, perhaps, $100 a
month or so. But as income and wealth accumulates in later years, they
can afford to invest a lot more, sometimes in lump sums all at one
time. So chance plays a big role in what is happening during a
particular time period.
Some people, including stock brokers who receive commissions,
securities analysts, etc, are prone to recommend that NOW is always the
best time to invest, regardless of what is going on in the economy, the
more money the better. Of course, somewhat different reasons are given,
depending on whether the market is high or low.
Augustine
>
> I think chapter 11 would
> just make the current situation worse.
Indeed, bankruptcy would be better, because then the productive
assets, including employees, would be grabbed by the likes of Toyota,
Honda, Nissan, VW, etc. Just like GM and Ford grew by buying failed
manufacturers (recently Daweoo and Jaguar), other companies would grow
by buying what's left of GM and Ford.
After all, it's not like 1/2 of the car-buying public would not buy
cars anymore because GM and Ford are no more. Other manufacturers
would be glad to fill the space opened.
Back to the topic...
Augustine
>
> That being the case, the time to get out was before those
> losses. And the time to get back in will be before the
> markets start to climb again.
This would only be true if bottom had been reached, which neither you
nor I know. If bottom hasn't been reached yet, now's a good time.
Given that it's a bet, hedging might offset the losses... and the
gains, depending on where the market goes.
Will Trice
> Yup. And in general, trying to time the market highs and lows is
> risky and wrong-minded. Are there any other platitudes that we can
> regurgitate?
Huh, I thought Skip actually gave you a great reply (and if you've spent
any time on this newsgroup, you know that I hate to compliment Skip).
> The point is: when facing a small brown bear, "stand tall and stand
> your ground" might be reasonable advice. But when facing a Kodiak
> bear, you stand a better chance of survival by doing something else.
> My question is: what else?
Fall down and play dead. (Seriously!)
> For example, if you believe the market is going to continue to go down
> or move sideways with high volatility, why not put "all" of your money
> in cash? Earning even 0.2% is better then -x%.
Yes, why not?
> Yes, the market will rise again. And yes, market timing is risky; we
> probably will miss the low. But it should be clear now that will not
> happen overnight. There will be lots of (volatile) sideways movement
> first -- plenty of time to mull things over and get back into the
> market.
Ah, that's the part that's not clear to the rest of us. Since you're
going to be a buzzkill and insist on serious discussion (just kidding,
this is a serious topic), I'll pitch in my $0.02 (though it is actually
worth less I imagine). I am not particularly near retirement, so I'm
staying the course. The way I look at it, I cannot attain my retirement
goals with savings running at 0.2% interest, at least not without
seriously compromising my current lifestyle. I'm young and probably
better able to enjoy money now than I will be able to in retirement (or
I could croak tomorrow), so it does not make sense to me to endure a
monastic lifestyle now in order to live fat in retirement. The ideal
case would be to live fat now and live fat in retirement. In reality I
must also temper the possibility of eating cat food in retirement. So
balance is needed.
To throw around a few rules of thumb - it is often mentioned here that a
person needs to save 25x income to retire. Let's call that retiring
fat. If this person works and saves for 45 years, and has a constant
salary, s/he must save 53% of pre-tax income if savings are only earning
0.2%. That might be somewhat difficult and not much fun.
Of course, salary is typically not constant, so that drives up the
savings rate even more. The only way to drive the savings rate back
down is to take risk. The probable worst-case scenario between now and
my retirement is that the market moves sideways, or it moves up at less
than the historical rate thus not getting back to where it was a year
ago. Maybe this is equal to putting my money in an asset that performs
at 0.2%. But if the market does better than the worst case from here
forward? I'm golden.
Of course, advice here is very different for those that are saving and
those that are in or close to retirement. That's not me, so I'll leave
that to others.
Will Trice
> On the flipside, if you cash in now and manage (by dumb luck) to hit
> the market low (more likely soon thereafter), your "bullish" gains
> will start from the current market value instead of an even deeper
> hole of 7-20%. Remember: to recover from a 7-20% loss, you need a
> gain of 7.5-25% just to break even.
Here's the problem. Let's say Skip is right and the market moves down.
Then you get a quick rally. Let's say like the one that just occurred
from the 10/27 close to the 11/4 close, market up 18%. Almost a bull
market. Do you buy? The market will have recovered most or all of
Skip's decline. If you wait, you may be buying back in higher that you
got out (if it's not already too late). So using your strategy, you
buy. Maybe just to see the market tank again, losing money. But if the
market continues up from the rally, then you're no better off than if
you had held, in fact you lose the dividends and create trading costs.
So what's the point?
> With 20-20 hindsight, is there really anyone who doesn't wish he
> applied that strategy at the beginning of the year? ;-)
>
> I think it would be untruthful to say "no". So the only reason not
> apply that strategy now would be a conviction that the market has
> indeed bottomed out, or nearly so.
Or the realization that you have no idea which way the market will go in
the short term.
Will Trice
> I wonder what the advocates of "dollar cost averaging" are recommending
> nowadays. If someone decided to put $200 into the market every month,
> year after year through thick and thin, should that plan be continued
> without flinching right now? If it ever was a good idea, I wonder how
> many investors, large and small, are actually following it at present.
Count me as someone who continues to invest in the market, and I intend
to dramatically increase my savings rate shortly (though this would have
happened regardless of market conditions...).
Douglas Johnson
>That being the case, the time to get out was before those
>losses. And the time to get back in will be before the
>markets start to climb again.
One point is that when markets come off a bottom, they go up like a rocket. The
average gain in the year after the last 10 bears has been 44%. Now, someone
will point out that does not restore what the bear ate. That's true. But
forgoing those gains by being out of the market is even worse.
>As I've said before, the truth uncovered here is not
>that the markets can be volatile, nor that it's hard
>to "stay the course" sometimes. It's that many of us
>did not correctly assess our actual risk tolerance.
When markets are stable and rising for a long time, people start to think that
is normal. People are willing to assume more risk and get paid less for it. In
many ways that was what caused the current troubles. "Housing always goes up,
so we are not taking a risk with this subprime loan."
While I think we are near the bottom, one big risk out there is the auto
companies going Chapter 7. If even one ceases operations, that will be a whole
new ball game.
-- Doug
Douglas Johnson
>I keep hearing talk about the auto industry and chapter 11 but I just
>don't see why _anybody_ would purchase a car from a company in chapter
>11 that might not be around to service it or do warrantee work.
I suspect the auto companies will have to offer some kind of warranty insurance.
Some trusted third party will guarantee the warranty. As for service, lots of
people can fix cars and there are lots of third party parts suppliers.
It's my opinion that Chapter 11 is the *only* way out for the auto companies.
They have tied themselves into wages and benefits that are unsustainable. Their
dealer networks are too large. They have too many plants and it is too
expensive to close them under current contracts. Chapter 11 allows them to fix
all that. Everyone involved will be very unhappy. But not as unhappy as they
would be under Chapter 7.
We'll see if the CEO's come back with a plan that makes sense. But my guess is
that government loans will just delay the inevitable. Oh. When they go to
Washington to present the plan, they damn well better fly coach.
-- Doug
Rich Carreiro
> A 60% stock, 40% bond portfolio over the last 12 months
> (as built from a pair of ETFs) is down about 25%. Over
What duration for the bond part? From what I've read,
one would want to use short-term bonds (duration of 2-5 years)
for bond portion because generally the yield curve isn't steep
enough for the extra yield to compensate for the extra annual
volatility of longer duration bonds.
And which bond ETF(s), and why ETF(s) over bond funds from a
Vanguard or Fidelity? (who are both good and pretty cheap on
bond funds).
--
Rich Carreiro rlc-...@rlcarr.com
dapperdobbs
market.
IMO (which some do actually agree with) the immense financial
"superstructure" got itself into trouble thanks to many more than
usual jerks who leveraged beyond reason, justifying it with
probability distributions (aka "risk management" - what a joke, huh?).
The margin requirements for individuals were 10% in the 1920's, and
financial reporting was sketchy at best (sometimes only sales figures
were grudgingly disclosed. Huge banks in the 2000's used only 3.3%
margin, and these jerks had very little understanding of what they
were pouring YOUR money into. And they tried to keep it all a big
secret, as in: "So that nobody will know." There's just no excuse.
I find it appalling that almost the minute banking regulations were
"eased", we got another financial crash. However, there are major
economic and social differences today. The individual investor and
mutual fund buyer is not leveraged (for the most part). We also have
FDIC, and, like it or not, the "safety nets" that were put in place. I
find it notable that no one seems to mention the droughts of the
1930's that wreaked absolute havoc in the Mid-West. Didn't "The Grapes
of Wrath" make a big enough impression to remember?
Whether the "mark-to-market" accounting rules pushed this Humpty-
Dumpty off the wall is still being debated, but the huge efforts of
the Federal Reserve, and the midnight sweat of the unhappy mid-
managements who got stuck with sorting this mess out may have brought
the pieces back together again. This is principally, remember, a
financial crisis.
Mr. Market is having a bad hair day. (I'm safe in saying that because
if it is in fact the End of the World, my optimism will at least bring
some small cheer over the freezing waters of the deceptively placid
Atlantic Ocean.)
Personally, I'm upset with myself because I didn't see this market
fall-apart coming, but I value my portfolio based on my estimation of
what it is really worth in terms of products, services, people, and
earnings. My valuation is higher than Mr. Market's (no offense to the
wonderful fellow).
Lucky
"Rich Carreiro" <rlc-...@rlcarr.com> wrote
I'm using PRTIX. Average duration is about 5.5 years. It's up about 9% year
to date.
For ETF's I would have chosen IEI or ITE. IEI is doing the best.
BreadW...@fractious.net
> BreadW...@fractious.net writes:
>
> > A 60% stock, 40% bond portfolio over the last 12 months
> > (as built from a pair of ETFs) is down about 25%. Over
>
> What duration for the bond part? From what I've read,
> one would want to use short-term bonds (duration of 2-5 years)
For this example, for simplicity, I chose Vanguard Total
Bond and Total Stock ETFs, which track, respectively,
the Lehman Agg and the MSCI US Broad Indices.
> for bond portion because generally the yield curve isn't steep
> enough for the extra yield to compensate for the extra annual
> volatility of longer duration bonds.
The Agg has a duration now of about 4.5yrs which is roughly
a third fixed-rate conforming MBS securities, roughly a
third in Treasuries and other Gov't related debt and about
20% corporates, the rest made of other mortgage backed stuff.
> And which bond ETF(s), and why ETF(s) over bond funds from a
> Vanguard or Fidelity? (who are both good and pretty cheap on
> bond funds).
No particular reason other than convenience to look up at
the moment. Any low-cost well run index funds off of
similar indices should behave almost identically. The
point here was not specific funds but rather about asset
allocation.
Some folks recommend short and intermed-term treasury-only
funds rather than the Agg due to somewhat different
correlations. When the universe goes to crap, folks
buy up treasuries and often do so in flight away from
both mortgages and corporates. When folks are under-
pricing risk, they often do so in both corporate bonds
as well as the stock market. I don't have current numbers
handy though, comparing longer term behaviour of a
60/40 with the Agg vs an all Treasury fund of similar
duration. However, in the last year, this exact difference
of behavior is well demonstrated. Replace that 40% of
Lehman Agg with 40% in either of the iShares Lehman
3-7 or 7-10yr treasury ETFs, both of which have returned
more than 10% over the last year, and the 60/40 portfolio
would have gone down about 21% instead of the 25% I
noted above. And, in fact, when the stock portion of
that portfolio starts to do well again, I would expect
the bond portion - in all treasuries - to underperform
the broader bond market and somewhat offset the stocks -
ie. they'd do exactly what they are supposed to do -
temper the volatility.
(the durations of those two all-treasury funds are
about 4 yrs and about 6.5yr respectively, btw - I'd be
inclined towards that 3-7 yr fund for this exercise)
Douglas Johnson
>Yes, the market will rise again. And yes, market timing is risky; we
>probably will miss the low. But it should be clear now that will not
>happen overnight. There will be lots of (volatile) sideways movement
>first -- plenty of time to mull things over and get back into the
>market.
It would be a good approach if you can tell when it happens. But I can't. For
example, is the current big rally the start of the recovery or just more
volatility?
-- Doug
Tad Borek
> It took 3 years (7/19/1932) for the DJIA to bottom-out after the steep
> decline starting on 9/3/1929.
>
> Arguably, the DJIA is a poor index. I wish I had that kind of data
> for the S&P 500 (and its equivalent(?) predecessor) or similar index.
> But I don't.
(repost from 11/21, last didn't make it but I had a typo anyway!)
S&P's total return data for the S&P 500:
1927 +37.5%
1928 +43.6%
1929 -8.4%
1930 -24.9%
1931 -43.3%
1932 -8.2%
1933 +54.0%
1934 -1.4%
1935 +47.7%
1936 +33.9%
1937 -35.0%
1938 +31.1%
It's interesting that as of this morning the S&P 500 has lost ~52% since
its peak close in October 2007, not factoring in dividends. Compounding
the figures above, the cumulative loss from 1929-32 was ~64%, including
dividends.
Meaning the stock market decline of the past year, half of which
happened in just the past 2 weeks, is comparable to the cumulative
losses during the worst stock-market period of the Great Depression - a
period that spanned four years.
Another interesting data point: the dividend yield on the entire US
stock market is a bit south of 4% at the moment, subject of course to
changes in dividend payout (up & down). The 30-year Treasury bond yield
is about 3.7%.
-Tad