This recession this time just seems to astonish everybody including the experts. If you own stocks, the body blows you have to take in a week like this are just devastating. Some pundits are even questioning whether "buy and hold" is dead.
I've come across an interactive chart that's proving interesting. By using the scroll bar that comes on a computer mouse and positioning it in the white space above the blue line you can get the chart to show various historic ranges of the DOW. When you quit scrolling and just move the mouse to where the left side expanded to, it gives you an historic figure for that index. [BTW I just realized when writing a post today, you have to try not to use a sentence that uses the plural of 'mouse' or you run into the quandary of "is it 'mice' or 'mouses' when it comes to computers?]
Although I was a stock purchaser as far back as 1976 or so when I got stocks through a company purchase plan [buying their stocks], I don't really consider myself to have been a stock market investor until around 1992. I continued to dilly dally with stocks before then, but I knew very little about how to go about it; I was really just a gambler in stocks, and a piker at that. And doing it in the perfect manner to assure that overall I would fail to see a profit: buying when I had money and selling when things were tight. That is a prescription for 'buying high and selling low' I came to realize, as of course I tended to have money when the economy was good and needed it back when the economy was bad.
Anyway, in the age of IRA's and when I seemed to have enough put away in bank savings to be able to invest in a recommended "buy and hold" manner, I also came across a very interesting claim. This claim probably derived from something factual but gets repeated here and there in a manner without citing sources, so there are different versions, but basically it goes like this:
*stocks lose value very frequently in 5 year time periods.
*10 yr time periods are less risky but sometimes stocks do lose money in such periods.
*there is no 15 yr time period in which stocks lost money.
*there is no 20 yr time period in which stocks didn't outperform any and all other investments, including any period around the Great Depression.
Now I have come to realize that these claims do make some assumptions:
*this assumes you bought stocks in a recommended manner such as systematic purchasing [that creates the benefit of cost averaging].
*to test this there is an assumption you aren't trying to pick out a single stock purchased on, say, the day before the stock market crashed in '29, but a diversified range bought over time.
*the rule assumes we aren't looking at absolute buy and hold, but managed investments. In other words, if you own a mutual fund share, or just look at the historic DOW, these are things that have been managed. The dogs got ditched, and newer more profitable companies are now in the mix.
So, I started to wonder if the above tool [see link] isn't a way to kind of check this out? This week is a good time to try, the market took a dive and if anything it seems to me this is a harsh measure as it mimics buying stocks on just one day and taking a specially selected snapshot to make the comparison look bad. Or perhaps someone can tell me why this doesn't work as a way to test the rule.
In any case, I proceed with the scrolling and find that the comparison with a year or two ago shows horrible losses in the 40% range. If I go back 5 years I still get a horrid 30% or so bombshell. Going back 12 years to March 19th 1997 I get a $7200 DOW figure, about where it is now. The 15 year-ago period, which was pretty stable for weeks, is at around 3800 for the DOW. It certainly does seem unlikely we could drop to that.
Twenty years? Dow was at about 2000 points. Could you make a case that this roughly 400% increase over our current horrid snapshot is better return than any and all other investments for that period? Real estate, which I dislike investing in except for my own home, perhaps did better, but it is a complicated calculation what with all the expenses involved with owning property. You get the snapshot phenomenon with Real Estate, too.
I'd say it's pretty remarkable how the rule has held up even with the current snapshot. Certainly the 15 yr rule has held up and looks safe, something I have counted on very heavily [and 15 years ago is about the time I really started investing in stocks too]. The 20 year rule can make a case although I am less sure about that. I'll bet it is better than if you had invested in gold, though.
Well, am I all wet?
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7 comments:
I suppose fundamentally, it is still sound. I'm at least hoping that the money that continues to pour into my 401K will help dollar cost average out the free fall. I'm taking the ignorance is bliss approach at this point. I don't look at the statements anymore.
One thing, and I have nothing to back this up, except that I think I heard it on NPR. I heard that investing in fine art has always outperformed the market. Not sure if true.
>money that continues to pour into my 401K
Glad to hear you are doing it. I'd say if you can be sure you don't have to touch it for 15 yrs, and with reasonable risk 10 yrs, you can't go wrong. FDIC insured money sitting in the bank is in far worse danger from inflation [something we are probably going to get in spades soon enough] Also, somebody once pointed out that if you believe our system will *never* recover, the only investments that make sense are survival gear and gold coins.
>investing in fine art
I think you need to be able to buy the indisputably valuable items that Sotheby's instantly agrees to auction off. Like stocks, typically property you don't pay taxes on till you sell it. Valuable to other people who need to do the same tax shelter thing, you know. The rich know what they are doing.
Cute charting program. I have to admit that stocks are a mystery to me. I can never figure out whether I am making money or not. I always seems to me that I am losing my shirt and I usually am. I must be stupid.
I joined the government 401K (TSP) in the middle 80s. I don't think I have much more in it than what I have put in. It lost 40% in the last quarter alone.
But everybody else says its wonderful! I guess that I am just unlucky. I know my investment in TSP has not kept up with the rate of inflation, much less the Dow Jones. I think a good investment goal is to match the DJ. Few funds or people do, in my observation.
On the other hand my wife, Linda, has had better luck. It seems to me she buys stock in solid companys and then just sticks with them as they slowly grow and then she sells when she is sure she has made money.
I notice that she stays away from the high flyers and IT companies. She tends to go with "blue chip" types. She also takes advantage of reinvestment options to avoid fees. In some ways she is like Warren Buffet in that she stays away from things she doesn't understand (I couldn't convince her to buy stock in Cisco - she was right). I heard that Warren Buffet says that this is a good time to buy GE, for example.
I wish she had invested my 401K instead of those "hot dogs" at TSP. On the other hand, I am the last person to give advice on this issue and I have the losses to prove it.
FBW
>I joined the government 401K (TSP) in the middle 80s.
I can't imagine that your original money hasn't done well if they put you into diversified investing, altho at the moment anything since mid-90's has been slaughtered. The time frames really matter and from some simple computing I have done on my own it is clear that the real difference comes in with what you can do with 30 and 40 yr time frames. That presumably will be something that young people with IRAs and 401ks will get to experience. My 30 years ago stock purchases were done by an uninformed idiot [me] and I have nothing to show for that.
One thing for sure, nobody knows how the current fiasco will play out nor what kind of long-term affects it will have. Hopefully in the future I won't have a blog post about how for the first time stocks seem to have lost money for that 15 yr time period. Sometimes I wonder.
I have heard this but frankly, I don't think that it is a statistic worth betting on. The fact is that it requires timing and as you noted "on top of it" management. I am sure that there are lots of folks out there who have been in the market for 15 years and they are taking a beating right now. If they sold just before the crash, then they made it and the statistic bore it out. If not, do they have to wait another 15 years?
Here is one thing that I have learned in dealing with trust law, the most conservative investments are the safest and I don't know about you but I would rather not gamble with my money. In other words, if you were a trustee managing money for say, a 15 year old orphan, would you risk an inheritance on stocks? Or would you sock it away in T-bills and other interest bearing funds that bring in a solid return year after year. The legal standard would tell you that you have to go with the safe investment. Think of the coupon clipper heirs.
Inflation is not that great and it never has been. We have done studies of that in my line of work too. Generally, interest beats inflation unless there is something odd going on in the economy. Inflation usually hovers between 1 and 3%. Well, that is not hard to beat with interest.
Interest will not bring you 20% returns as we saw recently, but frankly, that was an anomaly. A normal stock return might be in the 8-9% range. With interest you are looking at an average of say 5%. So the difference between stocks and interest is about 3% historically. (I am basing this on data that we developed for some lawsuits int he past.) For my money, no pun intended, I'd rather go with a safe 5%.
The other problem I have with the stocks are better argument is that this is based on a history when not everyone was up to their eyeballs in the market and we were not in the area of 24 hour news cycles. Now the market is entirely irrational and it is based on rumor after rumor. I have a feeling that this argument is going to be called into question soon enough.
A little over two years ago, beginning in 2007, I started moving massive amounts of money into CDs and treasuries and corporate bonds. Well, guess who still has a viable retirement account that is beating the indices? But you see, that was all about timing. I had a sense and I acted. Many, many others, including apparently many banks and hedge funds, were not so intuitive and they convinced themselves that 20% returns would last forever.
As for fine art, that is also something we do. We have some of our retirement in art around our house. Not a Monet of course, but stuff we know will appreciate with time (and the death of an artist). Nothing like betting on the grim reaper.
Well, I can see you put a lot of thought into what to do with your assets, but know that I think about it, of course you have!
It is certainly true that it is an odd time to be defending the stock market! In fact I don't want to be misunderstood on this, I think those of us who put some trust into it have been handed our heads. The Rubins/Greenspans of the world were smart enough to know that the world of hedge funds was fundamentally flawed and IMO this world was being allowed to do things counter to what it was we were supposed to have learned from the Great Depression. And mollycoddled, too, those bastards running hedge funds didn't even have to pay the same income taxes the rest of us have to!
So I posted my little thing to mull about the irony that the claim about the historical stock market was holding up. I didn't talk too much about my concern that things could get so bad that we may soon be noting that this claim can no longer be made.
>I started moving massive amounts of money into CDs and treasuries and corporate bonds. Well, guess who still has a viable retirement account that is beating the indices?
Of course I am insanely jealous of anyone who was smart enough to do this. It galls me a bit to think I thought of doing some of that when the market was at 14,000 and got talked out of it by a friend.
>But you see, that was all about timing.
The problem is "they" tell you not to try to do market timing. I mean the newsletters you get from such as Vanguard and also the Ric Edelmans of the world.
>if you were a trustee managing money for say, a 15 year old orphan
In fact I still trust the fundamentals enough to say that no young person with substantial assets should not have a lot of money in stocks. At age 15, if you wanted to play it super-conservatively I'd say at least 40% in stocks [assumption: proper diversification]. Perhaps trustees can't make these sorts of decisions and not be liable to be sued, that would be something I know nothing about.
Clearly we won't agree on this.
>Inflation is not that great and it never has been. We have done studies of that in my line of work
I don't dare step on that, but it would take quite a bit to convince me that Certificates of Deposit and such are the way to go, let's just leave it at that.
>As for fine art, that is also something we do
It must be a lot more fun than other forms of investing!
Thanks for your input. In the current conditions, you have a lot backing you up.
Regarding the advice not to do "market timing" I've never fully bought the idea that it doesnt make sense to increase your *buying* when the market is down.
the next time the market is at an all-time peak, and yes we will see that again IMO, I am not going to let anyone talk me out of increasing my cash position. Of course I'll probably be old enough the desperately need to rebalance ala newsletter type advice anyway [g]
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