Stocks and "the market"

[dennis thompson]

Why do people keep predicting what " the market" will do for the next year. I would bet that none of these market predictions for 2019 was for a 30% gain , yet this week Barrons has their annual roundtable in which market experts make their predictions for 2020, why?
The only good answer to the question : what do you think the market will do this year?, was a response by Michael Price, a billionaire investor, " I have no idea what the market will do, all I do is try to pick good stocks" Brilliant!

[roger wiegand]

People who make those predictions make lots of money from them, even more when they convince people to churn their portfolios based on their predictions. There's a lot of money to be made by making these predictions, about 90% of the "financial advisor" business is based on convincing investors that you have knowledge that no one else does or that you are smarter than the other guys.

The more interesting question is why, in the face of compelling data to the contrary, do people seek out, believe, and pay for such predictions? The number of actively managed mutual funds that consistently outperform their relevant market index is approximately zero, yet such funds dominate the market. (Yes everyone has their anecdote about how some fund tripled in one year when the market went bad, and all of those people seem to assume that they will pick that fund this time rather than the other 10,000 that will tank along with the market.

I think it comes down to most people being much more interested in and compelled by a good story than by data. Seems to be how humans are wired.

[Dave Anderson NH]

Roger, you are truly cynical. Unfortunately you are also correct.

[Stan Calow]

Just like astrology, the desire to believe outweighs the evidence.

[Mike Henderson]

People who make those predictions make lots of money from them, even more when they convince people to churn their portfolios based on their predictions. There's a lot of money to be made by making these predictions, about 90% of the "financial advisor" business is based on convincing investors that you have knowledge that no one else does or that you are smarter than the other guys.

The more interesting question is why, in the face of compelling data to the contrary, do people seek out, believe, and pay for such predictions? The number of actively managed mutual funds that consistently outperform their relevant market index is approximately zero, yet such funds dominate the market. (Yes everyone has their anecdote about how some fund tripled in one year when the market went bad, and all of those people seem to assume that they will pick that fund this time rather than the other 10,000 that will tank along with the market.

I think it comes down to most people being much more interested in and compelled by a good story than by data. Seems to be how humans are wired.

It's the same thing with gamblers. They also only talk about when they won and never seem to remember their losses. But it's impossible to beat the odds - if you play against the house you're going to lose long term.

Poker seems to be the exception because it's a game of skill and not just odds (until you run into a better player). But craps, roulette, blackjack, etc. are long term losers.

Mike

[Bruce Wrenn]

All these gains are "paper gains," unless you sell at the high point. They can evaporate in less than minute, kinda like frost when the sun comes up.

[Jerome Stanek]

If the stock goes up and people start to sell it will go down so you have to be one of the first to sell.

[Ron Citerone]

I think predictions are used for stock pickers to get their names out there. Jack Bogle is one of my few hero's!!

[Jerome Stanek]

I always wondered why these so called experts are not billionaires and not having to charge for their advice

[Mike Henderson]

I always wondered why these so called experts are not billionaires and not having to charge for their advice

Yeah, that's a good question: "If you're so smart, why ain't you rich?"

Mike

[Jim Koepke]

I always wondered why these so called experts are not billionaires and not having to charge for their advice


Yeah, that's a good question: "If you're so smart, why ain't you rich?"

Mike

Some of the best experts did become billionaires or at least very wealthy. Most of them had the same prediction on the market, "it will fluctuate." This is often credited to J.P. Morgan > https://quoteinvestigator.com/2013/09/28/market-fluctuate/

It seems a lot of financial thinkers saw this as obvious. Like surfing, it is how you ride the waves.

J.P. Morgan made a lot of money during the civil war by selling the Army defective rifles > https://www.history.co.uk/biographies/j-p-morgan


Morgan escapes military service during the Civil War by paying $300 to a substitute to fight for him. During the war he buys five thousand rifles at $3.50 each and sells them on at $22 apiece. The rifles are defective and some shoot off the thumbs of the soldiers firing them. Later, a congressional committee notes this but a federal judge upholds the deal and Morgan is exonerated.

One test when looking for brokers or advisers for financial purposes is not to look at their home or car, look at the homes and cars of their clients.

jtk

[Dominik Dudkiewicz]

It's just funny that the performance of stocks is now more important to those in power than the performance of the actual underlying economy. The stock market now drives economic policy rather than reacting to it. Somethings gotta give.

[Myk Rian]

Those predictions are the reason I have stayed out of the market.
2008 didn't affect us much, except for selling a house on Black lake. Had to cut the price 100k.

But, I do think another down turn is coming by mid '21. Just my prediction which probably isn't worth crap.

[Ron Citerone]

It's just funny that the performance of stocks is now more important to those in power than the performance of the actual underlying economy. The stock market now drives economic policy rather than reacting to it. Somethings gotta give.

The stock market is one thing that many people relate to because they have stocks in their 401k’s. IMO it is not a great overall indicator because it is driven by emotion in the short term. In the long term it is pretty rational I suppose. A friend who spent his life managing money says most people by and sell at the wrong time driven by greed and fear.

[jeff norris 2011]

It's the same thing with gamblers. They also only talk about when they won and never seem to remember their losses. But it's impossible to beat the odds - if you play against the house you're going to lose long term.

Poker seems to be the exception because it's a game of skill and not just odds (until you run into a better player). But craps, roulette, blackjack, etc. are long term losers.

Mike

Of course the 'markets' are the exact opposite as the math says on average you will make money ion the long term. The longer you stay the more likely you are to make money.

The question is if you could have made more money elsewhere.

[Mike Henderson]

Of course the 'markets' are the exact opposite as the math says on average you will make money ion the long term. The longer you stay the more likely you are to make money.

The question is if you could have made more money elsewhere.

Yeah, there have been a lot of studies that have shown that unless you have inside information, the best you can do long term is the average of the performance of the market. Of course, some private funds do get inside information. The fund managers cultivate people at various companies they're invested in and get advanced warning of changes in the fortunes of those companies.

Most of those private funds have very large initial investment requirements so it's another example of how the rich do better than the rest of us.

Mike

[Bill Dufour]

Several major brokers now charge no broker fees. I recently bought and sold over $10,000 in stocks for a total cost under 30 cents. What kills most investors is the brokerage fees and the management fees.
My market index fund charges about 0.01% annual fee. If a actively traded fund made 2% more (possible but unlikely) and charged 2.1% management fee I would be doing better. Compound fees every year add up to tens of thousands of dollars in a lifetime.
Bill D.

[Jerome Stanek]

I have had the same stock for 30 years and it has grown 30 times since I got it. plus I get over $3000 dividend check 4 times a year.

[jeff norris 2011]

Yeah, there have been a lot of studies that have shown that unless you have inside information, the best you can do long term is the average of the performance of the market. Of course, some private funds do get inside information. The fund managers cultivate people at various companies they're invested in and get advanced warning of changes in the fortunes of those companies.

Most of those private funds have very large initial investment requirements so it's another example of how the rich do better than the rest of us.

Mike

not denying that, but the average of the market is around 10% (over ten years or longer). the average black jack payout is -5% over the long term.

but yes the average guy is never going to do as well as folks with knowledge and leverage.

[Jim Koepke]

Warren Buffet is possibly the most successful investor in today's market.

His first rule of investing is to only buy stocks of companies in which he understands the business.

Too many investors want to 'make a killing' in the market. Others are afraid to sell a good thing too soon. Of the holding on too long, think of companies like Iomega, Osborne or Enron.

Jerome has a very good path on his stock, one that pays a decent dividend and just hang on. First make sure it is a company that is paying dividends from profits on its business and not through borrowed money.

If a stock is only being held for appreciation, then one does have to sell it when it appreciates. One famous investor whose name escapes me at the moment was asked about selling a stock that went up in value after he sold. His reply was that he is never upset about taking a profit.

jtk

[Edwin Santos]

If the stock goes up and people start to sell it will go down so you have to be one of the first to sell.

Or you just hold it and unless there is something fatally wrong with the company, it will go up again because all stocks cycle, again unless something is fatally wrong. Better yet, you could add to your position by buying more when it is going down, a technique called dollar cost averaging. This is partially what Warren Buffett is talking about when he says to be greedy when others are fearful and fearful when others are greedy. BTW, dollar cost averaging can work the other way too. If you are holding a stock for the long term, and let's say it doubles in value after several years. If you sold half your position, yes you would have to pay your capital gains tax on it, but your basis in the remaining stock you hold is zero, in other words you own it for free.


I have had the same stock for 30 years and it has grown 30 times since I got it. plus I get over $3000 dividend check 4 times a year.

Great story, and perhaps the best part is your stock investment has been growing on a compounded basis and you haven't had to pay any taxes. Compounded growth in a tax deferred environment is to your money what a turbocharger is to a car.

For anyone who has stayed out of the stock market, unless you have found some other alternative investment, I feel for you. This is because you have excluded yourself from a 9 year run of asset appreciation that does not happen very often in a lifetime.
IMO one of the biggest reasons for the wealth gap in the US is not wage disparity. It is because some people are participating in asset appreciation and some people are not. The people who are participating are seeing their wealth increase materially and the people who are not, are being left behind, tracking inflation at best, in other words stagnating, which is unfortunate.

Somewhere in this thread Jack Bogle, the founder of Vanguard was mentioned. His advice was very sound, which is to buy low cost index funds so rather than individual stocks you are buying the market, or a subset category of the market. Either way your risk is spread and over time you will get market returns at the lowest possible cost.

[Kev Williams]

3 times in my life I bought into mutual funds for our retirement, spanning over 20 years. All of them had stellar 20 year performance records. After 20-ish years of paying in monthly, I finally gave up and cashed out the $4200 net gain before the '08 crash took the rest of it.

On our last trip to Vegas many years ago, I succeeded in winning zero out of 27 hands at blackjack, in about 4 different casinos. After losing the first 8 or 9 I kept track ;) - Had a few pushes, but not a single winner.
as a reference- if you bet $5 and let it ride for 27 winning hands, the result is $335,544,320...

I'm cursed at any form of gambling, so I don't do it any more. You guys and gals have fun with it :)

[Malcolm McLeod]

My first rule: No investment is made based on advice from the internet.

[Malcolm McLeod]

I have had the same stock for 30 years and it has grown 30 times since I got it. plus I get over $3000 dividend check 4 times a year.

Admirable persistence. Slightly better than historical market return (quick look at the guzinta machine says you got 11.4%). The dividend can be deceptive - not so good if you have to invest $12,000,000.00 to get a $3000.0 quarterly dividend..?

My advice: beware of a lack of diversification. ...Enron urged all their folks to ONLY invest in Enron. (So much for my advice; please see my first rule above!:cool:)

[Jerome Stanek]

My first investment was a stock option or a cash settlement of $8000

[Edwin Santos]

Admirable persistence. Slightly better than historical market return (quick look at the guzinta machine says you got 11.4%). The dividend can be deceptive - not so good if you have to invest $12,000,000.00 to get a $3000.0 quarterly dividend..?



Malcolm, I agree with the overall return based on a 30x multiple over the 30 year time period, however the dividend ought to be part of the calculation so the total IRR (or yield) of his investment should be higher, possibly much higher than 11.4%. The exact calculation would depend on what he paid for the stock initially.

[Edwin Santos]

3 times in my life I bought into mutual funds for our retirement, spanning over 20 years. All of them had stellar 20 year performance records. After 20-ish years of paying in monthly, I finally gave up and cashed out the $4200 net gain before the '08 crash took the rest of it.



Have you looked up what it would be worth today if you had not cashed out? Might be an interesting comparison for you.
Disclaimer: I admit to being a numbers geek.

[Roger Feeley]

Mike there is a fascinating story about a bunch of MIT types who developed a system for beating blackjack. Using a very early wearable computer and buttons in their shoes, they could predict the octant where the ball would fall and get them all before the ball fell. They did this by activating one button every time a point on the wheel passed a certain spot. They activated another button every time the ball passed a certain spot. The computer digested all this and used vibration to tell them where to get.

check out https://en.wikipedia.org/wiki/Eudaemons

[Bill Dufour]

Dividends are only needed in retirement. The problem with dividends is income tax.
Bill D

[Jim Koepke]

Mike there is a fascinating story about a bunch of MIT types who developed a system for beating blackjack.

The Eudaemons were doing this at the roulette table.

jtk

[Doug Dawson]

Yeah, there have been a lot of studies that have shown that unless you have inside information, the best you can do long term is the average of the performance of the market.

Hence the wisdom of investing in index funds, with a low-cost provider like Vanguard etc. Unfortunately, when investing for retirement, this is the only game in town. Put in your money and forget about it.

[Jim Becker]

For the majority of the time I was contributing to my employer's 401K over 21 years prior to my retirement, the money went into a "target year" fund where the mixture changed over time from aggressive to less aggressive. No muss, no fuss, and that decision paid off very nicely as I was able to retire comfortably at age 60. I'm using similar funds for my IRAs that the 401K was rolled over into upon retirement, albeit more conservative than prior to retirement for most of the money. I like to keep things simple. :)

[Doug Dawson]

For the majority of the time I was contributing to my employer's 401K over 21 years prior to my retirement, the money went into a "target year" fund where the mixture changed over time from aggressive to less aggressive. No muss, no fuss, and that decision paid off very nicely as I was able to retire comfortably at age 60. I'm using similar funds for my IRAs that the 401K was rolled over into upon retirement, albeit more conservative than prior to retirement for most of the money. I like to keep things simple. :)

That's the ticket alright.

[Ken Fitzgerald]

The comments here got me so concerned, I sold some of my stocks in my 401K today. Well, actually, I just made a partial withdrawal to cover some redecorating expense we are incurring right now.

I have a 60/40 ratio in stocks and bonds. I am in for the long haul.

[Doug Dawson]

The comments here got me so concerned, I sold some of my stocks in my 401K today. Well, actually, I just made a partial withdrawal to cover some redecorating expense we are incurring right now.

IMO, I have a 60/40 ration in stocks and bonds. I am in for the long haul.

The trick to succeeding in the stock market is to completely ignore it once you're in. The people who withdrew investments during the 2007-9 downturn were the people who really got hurt. The rest of us did just fine. FUD is your enemy. Ignore the talking heads, wherever they may appear (the media, paid advisers, etc.)

And no, this is not "just my opinion". Assuming index funds, not "fashion candy".

[Bruce Wrenn]

Great story, and perhaps the best part is your stock investment has been growing on a compounded basis and you haven't had to pay any taxes. Compounded growth in a tax deferred environment is to your money what a turbocharger is to a car.

IMO one of the biggest reasons for the wealth gap in the US is not wage disparity. It is because some people are participating in asset appreciation and some people are not. The people who are participating are seeing their wealth increase materially and the people who are not, are being left behind, tracking inflation at best, in other words stagnating, which is unfortunate.

For many it is a choice of eating, paying rent, paying for health care, or investing in the stock market. For lower earners, there hasn't been this wonderful rise in wealth. They are working two or three jobs just to survive. In 1979 -1980, I bought some land and built two houses. Only ever had a mortgage on one. Paid it off 5 years early (ten years instead of fifteen.) Paid $54K for both pieces of land, and first house. Today they are worth on close of a million. Land that in 1979 was selling for $2000 and acre, now goes for over $110K an acre. Put some money in a mutual fund, and after ten years (before 2008) had only lost $54. Wish I had bought more land, instead of mutual fund.

[Mike Henderson]

For many it is a choice of eating, paying rent, paying for health care, or investing in the stock market. For lower earners, there hasn't been this wonderful rise in wealth. They are working two or three jobs just to survive. In 1979 -1980, I bought some land and built two houses. Only ever had a mortgage on one. Paid it off 5 years early (ten years instead of fifteen.) Paid $54K for both pieces of land, and first house. Today they are worth on close of a million. Land that in 1979 was selling for $2000 and acre, now goes for over $110K an acre. Put some money in a mutual fund, and after ten years (before 2008) had only lost $54. Wish I had bought more land, instead of mutual fund.

To my mind, the situation is even worse for those just getting by. Even if they manage to put some money into an IRA or a 401K, often some life event comes along and they make a reasonable choice to take the tax penalty and use the money for that event - they just don't have any other assets to fall back on. So they wind up too old to work (or to get hired) and the only thing they have to fall back on is Social Security.

With Social Security or a company provided pension, they can't get access to the money. That's bad for the life event but the people have some retirement assets.

Mike

[By life event I mean something like medical expenses for a sick child or paying for life while the breadwinner recovers from an accident. There are many reasons.]

[Ken Fitzgerald]

The trick to succeeding in the stock market is to completely ignore it once you're in. The people who withdrew investments during the 2007-9 downturn were the people who really got hurt. The rest of us did just fine. FUD is your enemy. Ignore the talking heads, wherever they may appear (the media, paid advisers, etc.)

And no, this is not "just my opinion". Assuming index funds, not "fashion candy".

Doug,

I have been in a 401K since 1978. My wife is great about living within a budget. So, after getting out of the Navy after 8 years, when my first employer offered 401K with matching funds, I managed to convince my wife that we needed to invest to get the matching funds. She didn't find it difficult as I was making over 3 times as much as I did as an E-6 over 8 for pay purposes in the Navy. 10 years later they sold us to another corporation. That corporation had a similar program. I always referred to that 401K as our retirement "play" money. The amount we invested wasn't much but over 32 years, even small amounts add up. After both of us working and retiring, we'd live on our small pensions and use that money to play, do things we couldn't afford to do while we were busy working and raising our 3 kids. I woke up deaf in July 2010. My employer had short term disability insurance on me that covered my salary for 6 months. Luckily, I had been paying a paltry amount for long term disability insurance. Most people who buy that don't (luckily) have an opportunity to collect on it. We retired in February 2011. We have traveled and enjoyed ourselves on my "play" money.

I agree with your advice. Don't listen to the talking heads, don't get nervous and research the companies in whom you invest.

[Jim Koepke]

My surprise about contributing to a 457K (public employee version of a 401K) is that it really didn't lower my take home pay by very much.

So far it has only had to be touched for a new roof a few years back.

Is one required to start taking money out at some time?

jtk

[jeff norris 2011]

My first rule: No investment is made based on advice from the internet.

So I should I take your advice and by doing so pay attention to the internet???

Joking aside, the internet is a great source fo research if you know how to use it.

[Mike Henderson]

My surprise about contributing to a 457K (public employee version of a 401K) is that it really didn't lower my take home pay by very much.

So far it has only had to be touched for a new roof a few years back.

Is one required to start taking money out at some time?

jtk

I'm not familiar with a 457K but for an IRA or a 401K, yes, you have to start taking withdrawals at age 70.5. There's an equation that tells you how much you have to take each year, but your financial company handing your account will give you the data at the start of the year.

It will take you to a very long life, over 100 before you take all your money out.

If you die and there's still money in the account, your heirs have 10 years to take it all out.

Mike

[Jerome Stanek]

Remember that as of the !st of this new year the Mandatory withdrawal will be 72 years old not 70.5

[roger wiegand]

A fun, if old, read on investing is Bernard Malkiel's book "A Random Walk Down Wall Street". There are those who dispute his theory (including Buffett), but his conclusion (basically, invest in a balanced portfolio of low cost mutual funds on a regular basis over time, no matter what the market is doing) works awfully well for most people as a strategy.

https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street

[Joe Mioux]

do the exact opposite of any recommendation made by Paul Krugman. ;)

Kind of hard to predict prices, but you can kind of predict dividends...

[michael dilday]

I gave up on trying and caring. Wells Fargo Advisors worries about my investments now. I spend my time in the shop and traveling.

[Mike Henderson]

Remember that as of the !st of this new year the Mandatory withdrawal will be 72 years old not 70.5

I didn't know that. Thanks for posting.

Mike

[Jim Koepke]

do the exact opposite of any recommendation made by Paul Krugman. ;)

Kind of hard to predict prices, but you can kind of predict dividends...

Joe, when was the last time Paul Krugman gave an investment recommendation?

Mostly he writes about the economics of political agendas.

Besides, would you rather listen to someone who has received a Nobel Prize in Economics or the guy sitting at the end of the bar?

jtk

[roger wiegand]

do the exact opposite of any recommendation made by Paul Krugman. ;)

Kind of hard to predict prices, but you can kind of predict dividends...

Krugman would tell you to invest in low cost stock and bond index funds over the long term, a pretty proven strategy. The opposite would be to buy penny stocks or stocks touted by guys on TV for the latest, greatest, hottest returns 10 times the market (yeah, you bet). Why would I do that?

[Nicholas Lawrence]

A fun, if old, read on investing is Bernard Malkiel's book "A Random Walk Down Wall Street". There are those who dispute his theory (including Buffett), but his conclusion (basically, invest in a balanced portfolio of low cost mutual funds on a regular basis over time, no matter what the market is doing) works awfully well for most people as a strategy.

https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street

Not sure what you are referring to exactly, but Buffett is the guy who bet $1 million he could beat any hedge funds returns (net of fees) with a basket of index funds over ten years. He has said many times that for a normal investor, index funds are the best option.

[roger wiegand]

Not sure what you are referring to exactly, but Buffett is the guy who bet $1 million he could beat any hedge funds returns (net of fees) with a basket of index funds over ten years. He has said many times that for a normal investor, index funds are the best option.

Buffet has defended his "value investing" approach, see https://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-Doddsville. I don't think that's inconsistent with the bet he offered.

[Jim Koepke]

I'm not familiar with a 457K but for an IRA or a 401K, yes, you have to start taking withdrawals at age 70.5.

The way it was explained to me, 401K plans do not have a provision for government or public agency employees. The 457K plan is an equivalent of the 401K for them. The 457K may only cover state, county or city agency employees. There may be a similar plan for federal employees.

Other than having worked for a public transit agency, which had a 457K investment plan available, my knowledge on this is limited.

One method many of my coworkers employed was to make their contributions high enough so they would max out in October or November. Then the last paychecks of the year would be a few hundred dollars higher. This helps if you have a lot of Christmas shopping to do.

jtk

[Jim Becker]

403-B plans for non-profits are also similar to 401K. I had one for an old employer and Professor Dr. SWMBO's plan is a 403-B.

[dennis thompson]

When I started this thread I did not, in any way, mean to discourage people from investing in the stock market. I only meant that listening to prognosticators predict what "the market" would do, in the short term, was not a good way to invest. In fact, if you look at the S&P 500, over the last 35 years, it has returned about 11.3% (assuming reinvesting dividends) in the Vanguard 500 fund. I believe that if you are looking to provide for your retirement ( or any long term need, such as college for your new born child) that investing conservatively in the stock market is a good (but not the only) alternative.
Note that when I say conservatively I mean investing in a diversified mutual fund (such as the Vanguard 500 fund mentioned above) or ETF, not in Uber or Beyond Meat or the latest marijuana stock:)

[roger wiegand]

Note that the Vanguard 500 is not a diversified fund, it is a large cap, US only, stock fund (mirroring the S&P 500 index). It's a good one, and I own it, but diversification should cover large, medium and small cap markets, US and international, as well as long and short term bonds, real estate, and, if you can find the right vehicle, commodities. It takes a blend of ~6-8 different index finds covering those different sectors to give you a well-diversified portfolio. Companies like Vanguard do also put together low cost target funds that do that for you, altering the blend based on when you plan to retire.

[Doug Dawson]

Note that the Vanguard 500 is not a diversified fund, it is a large cap, US only, stock fund (mirroring the S&P 500 index). It's a good one, and I own it, but diversification should cover large, medium and small cap markets, US and international, as well as long and short term bonds, real estate, and, if you can find the right vehicle, commodities. It takes a blend of ~6-8 different index finds covering those different sectors to give you a well-diversified portfolio. Companies like Vanguard do also put together low cost target funds that do that for you, altering the blend based on when you plan to retire.

To paraphrase Buffett (Warren not Jimmy) the S&P is dominated by multinationals sufficiently large and diversified that they are _collectively_ almost immune to "local variations in performance" that you would observe in sector investing, hence his claim that that's all you really needed. With sector investing, you tend to fall prey to the issue of "skating where the puck was, not where it will be." Plus it invites paying attention to your portfolio, which nobody is any good at. ;^)

For absolute diversification, Vanguard also offers Total-US and Total-World, for the obsessed. :^)

[Pat Barry]

For those not investing in tje stock market, either through individual stocks or mutual funds, whete exactly are you investing? Curious about other options.

[Doug Dawson]

For those not investing in tje stock market, either through individual stocks or mutual funds, whete exactly are you investing? Curious about other options.

Methinks there aren't really any other options that wouldn't prove themselves to be an illusion in the long term. For example, it's been said about commodities, that there are two kinds of people who invest in them: those that have lost money, and those that will. Ask Louis Rukeyser, who lost so much money in them that he had to go work for PBS and come up with "Wall Street Week". I invite disagreement, of course.

Then again, there's always the option of never retiring. Many people choose this.

[Gary Ragatz]

For those not investing in tje stock market, either through individual stocks or mutual funds, whete exactly are you investing? Curious about other options.

Well, there is the bond market. Not nearly as sexy as the stock market, but also (generally) less volatile. A lot depends on your stage in life and your stomach for ups-and-downs in the market. For a young person who doesn't expect to need to draw money from his/her investments in the near term, it's hard to beat the stock market. For an older person, in or near retirement, smaller but more stable returns in the bond market may be attractive. As an example, Dodge & Cox Income Fund (I mention this one because I have some money in it) has a 10-year annualized return of 4.38% and a 15-year annualized return of 4.79%. Not that impressive relative to stocks, but with inflation running at 1-2%, still a positive annual return. And, as we went into the Great Recession in 2008-2009, the fund lost less than 10% of its value, recovering that in less than a year.

[Doug Dawson]

Well, there is the bond market. Not nearly as sexy as the stock market, but also (generally) less volatile. A lot depends on your stage in life and your stomach for ups-and-downs in the market. For a young person who doesn't expect to need to draw money from his/her investments in the near term, it's hard to beat the stock market. For an older person, in or near retirement, smaller but more stable returns in the bond market may be attractive. As an example, Dodge & Cox Income Fund (I mention this one because I have some money in it) has a 10-year annualized return of 4.38% and a 15-year annualized return of 4.79%. Not that impressive relative to stocks, but with inflation running at 1-2%, still a positive annual return. And, as we went into the Great Recession in 2008-2009, the fund lost less than 10% of its value, recovering that in less than a year.

Bonds as a long-term investment have a relatively poor payout, especially now. You'd have to invest 2 or 3 times as much to get a comparable retirement return to what stocks have historically given. However, they are a good stabilizer.

I'd feel very sorry for anyone who converted to all-bonds back in 2008. ;^/

[Nicholas Lawrence]

Well, there is the bond market. Not nearly as sexy as the stock market, but also (generally) less volatile.

With all investments it is a good idea to read the prospectus carefully. An investor might be tempted to think that with bonds their only risk is if the borrower defaults.

However, with a bond fund (as opposed to an individual bond), you also have to take into account the fact that the market value of the bonds drops as interest rates rise. If the fund is not in a position to hold the bonds to maturity, they can lose significant value quickly as they have to sell bonds at reduced prices in order to pay people who want to withdraw their money from the fund.

A fund I was looking at over the holidays stated in their prospectus that the shares could lose 30% of their value if interest rates went up by 1%.

[Gary Ragatz]

Bonds as a long-term investment have a relatively poor payout, especially now. You'd have to invest 2 or 3 times as much to get a comparable retirement return to what stocks have historically given. However, they are a good stabilizer.

I'd feel very sorry for anyone who converted to all-bonds back in 2008. ;^/

Doug,


I wouldn't feel particularly sorry for someone very near retirement, or in retirement and needing to live off of their investments, who made that conversion in 2008. Or even for a younger person who was about to start drawing on their investments to pay for their kids' college. If they were all-in with stocks at that time, they would have lost around 50% of the value of their investments. It took the stock market about four years to recover its lost value, but if you were withdrawing money during that time for college or living expenses, you didn't benefit fully from that recovery. On the other hand, the bond market saw a much smaller decline in value, which recovered much more quickly. As I suggested before, it's a function of where you're at in life and your tolerance for ups and downs in the value of your investments.


"Bonds as a long-term investment have a relatively poor payout, especially now."

That "especially now" qualifier bothers me, because I think it means you're focusing on results over the past 9 or 10 years, when stock returns have far outpaced those of bonds. The big challenge in investing is that it deals with the (unknown) future as opposed to the (known) past. Yes, in retrospect, everyone wishes he/she had been fully invested in stocks over the past 10 years - but that doesn't mean that's where you want to have your money going forward - especially if you expect to draw money out of those investments in the next few years.

[Roger Feeley]

I always wondered why these so called experts are not billionaires and not having to charge for their advice

Jerome, You hit the nail on the head.

Imagine that you have a trading system that works. You can magically pick stocks that will go up, buy those stocks, then predict when to sell. The absolute last thing you should do is market your system. You should keep it a secret and use it to become wealthy. If you sell it, everyone will use it and then their transactions will eventually nullify the system.

In the real world, I knew of a guy who had a system that worked. He had, I believe, advanced degrees in Computer Science and Mathematics. His system involved high speed trading to exploit momentary price differences between exchanges. He grew into a very small company in Kansas City and hired a few top programmers away from us. They reported back that it was a bit like crewing a pirate ship. At the end of each day, the company would cash out it's portfolio. If there was a profit, it would be split among the owner and employees. If there was a loss, the owner ate it. They never knew from day to day what their pay would be. Additionally, they were essentially evaluated on a daily basis. At the end of the day, the owner could tell anyone not to come in anymore.

In order to make their system worked, they needed extremely high speed ticker information from the various stock exchanges. Nanoseconds mattered. They built that system and then the tail began to wag the dog. They never revealed or marketed the original trading system. But they did offer up the high speed quotes to others in the high speed trading industry. Then they started making markets which is allowing their users to trade with each other. That gave birth to the "Better Alternative Trading System" or BATS for short. BATS eventually because the 4th largest stock exchange in the world.

Two of the best programmers I ever worked with helped build BATS. Joe Ratterman and his brother Phil are both amazing talents and really great guys. I think Joe has sort of stepped back from day to day operations and does something with Angel Flights. Phil is an avid rock climber and has opened up a rock climbing gym in the KC area someplace.

[Roger Feeley]

I was taught that there are two kinds of traders:

-- Technical traders don't care what the company does. They just look at numbers.
-- Fundamental traders look closely at the company, evaluate the quality of management, evaluate the quality and marketability of the product and so on.

I fall mostly into that second camp and tend to go with mutual funds that are fundamental. I also like buy and hold vs the quick buck. I do ok.

[Doug Dawson]

Doug,


I wouldn't feel particularly sorry for someone very near retirement, or in retirement and needing to live off of their investments, who made that conversion in 2008. Or even for a younger person who was about to start drawing on their investments to pay for their kids' college. If they were all-in with stocks at that time, they would have lost around 50% of the value of their investments. It took the stock market about four years to recover its lost value, but if you were withdrawing money during that time for college or living expenses, you didn't benefit fully from that recovery. On the other hand, the bond market saw a much smaller decline in value, which recovered much more quickly. As I suggested before, it's a function of where you're at in life and your tolerance for ups and downs in the value of your investments.


"Bonds as a long-term investment have a relatively poor payout, especially now."

That "especially now" qualifier bothers me, because I think it means you're focusing on results over the past 9 or 10 years, when stock returns have far outpaced those of bonds. The big challenge in investing is that it deals with the (unknown) future as opposed to the (known) past. Yes, in retrospect, everyone wishes he/she had been fully invested in stocks over the past 10 years - but that doesn't mean that's where you want to have your money going forward - especially if you expect to draw money out of those investments in the next few years.

Especially now, but I'm not talking about the last ten years or so. The dramatic supremacy of stocks goes back a very long ways, over a century or so that I can recall (no I'm not _that_ old...) I.e. in the long term, which is what matters for retirement decisions. It's time-tested over a human's working lifespan.

Yes it's riskier to be "all in" (which I'm not.) You have to be able to pull it off, which works best when you never have to think about it (index funds.) Even with 2008, the worst financial period since the Great Depression, it all came back (the S&P) by 2011.

There's always real estate, but IME that's the opposite of a set-and-forget investment, and it's not like that land or building is going to be there forever, like the way we used to think.

[Doug Dawson]

However, with a bond fund (as opposed to an individual bond), you also have to take into account the fact that the market value of the bonds drops as interest rates rise. If the fund is not in a position to hold the bonds to maturity, they can lose significant value quickly as they have to sell bonds at reduced prices in order to pay people who want to withdraw their money from the fund.

A fund I was looking at over the holidays stated in their prospectus that the shares could lose 30% of their value if interest rates went up by 1%.

That raises a very important point. One of the reasons why bond funds did so well during the 2008+ "Great Recession" is that the interest rate dropped to near zero (part of the recovery effort.) Now that interest rates are _already_ near that, there is not so much recoverability. So, some things do change. Let us pray for divine intervention next time, so that we may not all be killed. :^)

[Gary Ragatz]

Doug,

I don't mean to be contentious, but if you're not talking about recent history, then why "especially now?" I'm in my 60's, I've been investing since the early 1970's, and have seen a lot of ups and downs in the stock market. No disagreement about your statement that stocks outperform in the very long term, but the point I was trying to make in my post is that different people have different investment planning horizons, and long-term average performance may not be the most relevant consideration. While the stock market's long term performance is great, I've also lived through periods where the 10-year annualized return for the S&P was negative (early 70's and early 2000's).

If I were talking to a young investor today, I'd tell him/her to invest in stocks, not "especially now," but "even now" - even though we're ten years into a bull market, even though the market indices are at all-time highs, even though stock valuations are historically high. I'd make that suggestion because I understand, like you do, that over the 35 years-or-so that kid has left before retirement, it will likely work to his/her advantage.

[Doug Dawson]

I don't mean to be contentious, but if you're not talking about recent history, then why "especially now?" I'm in my 60's, I've been investing since the early 1970's, and have seen a lot of ups and downs in the stock market. No disagreement about your statement that stocks outperform in the very long term, but the point I was trying to make in my post is that different people have different investment planning horizons, and long-term average performance may not be the most relevant consideration. While the stock market's long term performance is great, I've also lived through periods where the 10-year annualized return for the S&P was negative (early 70's and early 2000's).

If I were talking to a young investor today, I'd tell him/her to invest in stocks, not "especially now," but "even now" - even though we're ten years into a bull market, even though the market indices are at all-time highs, even though stock valuations are historically high. I'd make that suggestion because I understand, like you do, that over the 35 years-or-so that kid has left before retirement, it will likely work to his/her advantage.

It kind of gets my goat that people talk about 2008-2011 being part of the current "bull market", when in fact that period was just the (world) economy trying to pick up the pieces. If you look at 1929+, it took 20+ years to recover, but we _know_alot_more_ now about how economies function. If people are around who better understand how economics works. Ben Bernanke (et al) was one of those people. (FWIW the EEC took longer to get its footings, for reasons involving politics that I can't get into here.)

Re 10-year annualized returns, anyone can prove anything by picking the dates right.

IMO, the principal uncertainties now are whether society is still prepared to learn from the past, via institutional memory, and the extent to which the overwhelming consensus that the climate is changing is to be accepted and taken into account. That's not politics, it's basic science. The fate of the insurance industry (which could potentially collapse) hangs in the balance, like a Sword Of Damocles hanging over the heads of those people who were counting on it to remain solvent. That's the real Black Swan. Mark my words here.

[Edwin Santos]

It kind of gets my goat that people talk about 2008-2011 being part of the current "bull market", when in fact that period was just the (world) economy trying to pick up the pieces.

Looking at the S&P 500, the bottom was March 9, 2009. From that point forward we have been in a bull market in the US based on moving averages and the mathematical definition of a bull market. For the rest of the world, I would agree that the recovery took longer.

Where you and I surely agree, is that there ought to be a statue of Ben Bernanke erected because the sweeping actions he and his team took were heroic and fended off what most economists accept would have been an outright depression. I call it heroic because he stared down a lot of contrarian voices that argued for letting the banks fail, a politically appealing position. But he knew if we sent the banks down the tubes, they would take all of us with them. The steps that man took were truly into uncharted macroeconomic territory.

I wish I knew what the long term consequences will be of (1) zero and negative interest rate policy and (2) quantitative easing (as is still be actively practiced in several world economies, thankfully not the US at present). Surely even governments must have a limit to how high the debt to GDP ratio can go before stress cracks will appear.

I'm less concerned about the insurance industry. Climate change and related loss is happening before our eyes year over year and as policies roll over, I believe the insurance industry must be pricing in the increasing losses but I don't know for sure.

Some people think there is an impending implosion of student loan debt that could adversely affect the economy.
Who knows?

Further to the OP's point in starting the thread, none of us knows the economic future, and we've also proven our ability to predict presidential elections is not very good either (ha!)

[Edwin Santos]

......, but diversification should cover large, medium and small cap markets, US and international, as well as long and short term bonds, real estate, and, if you can find the right vehicle, commodities. It takes a blend of ~6-8 different index finds covering those different sectors to give you a well-diversified portfolio.

You probably know this, but what you have described is a strategy that helped make Ray Dalio of Bridgewater Associates one of the wealthiest people in the world. His proprietary name for it is the All Weather Portfolio and in theory it provides the investor a hedge to mitigate loss and participate in gain in every economic condition. The challenge for the investor is to sit tight despite all temptation to tinker or abandon the strategy, and the second important challenge is to re-balance back to the original allocation percentages. This is hard to do because it means taking away from the winners and adding to the loser positions, a very difficult thing for most people to do.

But nowadays the price of entry into Bridgewater is $7.5B in investable assets, so we're talking about institutions. However the All Weather strategy is available to any investor through the correct combination of ETFs like you've mentioned. I think it's a very sound strategy for the long term and for those with investing discipline.

[Gary Ragatz]

It kind of gets my goat that people talk about 2008-2011 being part of the current "bull market", when in fact that period was just the (world) economy trying to pick up the pieces. If you look at 1929+, it took 20+ years to recover, but we _know_alot_more_ now about how economies function. If people are around who better understand how economics works. Ben Bernanke (et al) was one of those people. (FWIW the EEC took longer to get its footings, for reasons involving politics that I can't get into here.)

Re 10-year annualized returns, anyone can prove anything by picking the dates right.

IMO, the principal uncertainties now are whether society is still prepared to learn from the past, via institutional memory, and the extent to which the overwhelming consensus that the climate is changing is to be accepted and taken into account. That's not politics, it's basic science. The fate of the insurance industry (which could potentially collapse) hangs in the balance, like a Sword Of Damocles hanging over the heads of those people who were counting on it to remain solvent. That's the real Black Swan. Mark my words here.

Doug,

Probably time for me to say I'll agree to disagree.

Best wishes,
Gary

[Jim Koepke]

Further to the OP's point in starting the thread, none of us knows the economic future, and we've also proven our ability to predict presidential elections is not very good either (ha!)

The old wisdom was:

"Buy when there is blood in the streets." (when everyone else is jumping out windows because the market is dropping.)

Sell when everyone is predicting there is no end in site for the rising market.

IMO, it is nice to have some commodities, like gold, silver or platinum. Not contracts, but actual physical metal you can keep in a safe. Now they are a bit high priced. Compared to when some of mine was purchased for less than $10 an ounce.

BTW, an ounce of gold or silver weighs more than an ounce of sugar. A pound of sugar weighs more than a pound of gold or silver. Sounds weird but it is true.

jtk

[Mel Fulks]

BTW, an ounce of gold or silver weighs more than an ounce of sugar. A pound of sugar weighs more than a pound of gold or silver. Sounds weird but it is true.

Wait, weight , dont tell me the Troy story !

[Edwin Santos]

The old wisdom was:



IMO, it is nice to have some commodities, like gold, silver or platinum. Not contracts, but actual physical metal you can keep in a safe. Now they are a bit high priced. Compared to when some of mine was purchased for less than $10 an ounce.


jtk

Jim,
Good job if you bought gold at $10/ounce and have held it. Even if it were 30 years ago, at today's spot rate, your return has been over 18% annually compounded. Not too many people could beat that.

Just as a comparison, the average home in the US has appreciated at about a rate of 1% per year over the long term. Most people don't realize how poor an investment a personal home is. Shelter yes, an investment, not so much.

Edwin

[Gary Ragatz]

Jim,
Good job if you bought gold at $10/ounce and have held it. Even if it were 30 years ago, at today's spot rate, your return has been over 18% annually compounded. Not too many people could beat that.

Just as a comparison, the average home in the US has appreciated at about a rate of 1% per year over the long term. Most people don't realize how poor an investment a personal home is. Shelter yes, an investment, not so much.

Edwin

I'm pretty sure Jim's not old enough to have bought gold at $10/ounce. I'm thinking it's the silver he got at $10.

[Edwin Santos]

I'm pretty sure Jim's not old enough to have bought gold at $10/ounce. I'm thinking it's the silver he got at $10.

Well as has been pointed out from time to time, we do have some old dawgs around here, but I think you're right on this one.

Edwin

[Jim Koepke]

Jim,
Good job if you bought gold at $10/ounce and have held it. Even if it were 30 years ago, at today's spot rate, your return has been over 18% annually compounded. Not too many people could beat that.

Just as a comparison, the average home in the US has appreciated at about a rate of 1% per year over the long term. Most people don't realize how poor an investment a personal home is. Shelter yes, an investment, not so much.

Edwin

On housing, it is all about location, location, location. In some areas a person would have a difficult time giving away property. In other places one might get tired of 'investors' knocking on their door every day wanting to buy their home.


I'm pretty sure Jim's not old enough to have bought gold at $10/ounce. I'm thinking it's the silver he got at $10.


Well as has been pointed out from time to time, we do have some old dawgs around here, but I think you're right on this one.

Edwin

Yes, my faux pas not stating it was silver. Even the founding fathers had gold pegged above $10 an ounce.

Some of my silver was pulled from circulation at face value. Shortly after the Hunt brothers tried to corner the silver market one could purchase common silver dollars from many coin dealers for less than $10. Some of the 'regular customers' would come in and purchase a few then make the rounds of some bars, slap one down on the counter and ask, "anyone here buy me a beer and give me $20 for this silver dollar?" Tough job, but someone's gonna do it.

jtk

[Nicholas Lawrence]

You have to have shelter. The only choice you get to make is how much, and whether you rent it (0% return on investment) or buy (some return on investment). All else being equal, something beats nothing every time.

[Jim Koepke]

You have to have shelter. The only choice you get to make is how much, and whether you rent it (0% return on investment) or buy (some return on investment). All else being equal, something beats nothing every time.

Besides, if one rents the owner can raise the rent, sell to someone who wants to move in or any other myriad of untoward actions.

Buying with a fixed mortgage at least lets you plan month to month expenses without a big surprise or having to move.

Our old home in California was purchased by my parents in ~1946. To the best of my knowledge it cost less than $9000. It was transferred to me in the late 1980s at $110,000. We sold it a few years ago for double that. If we had wanted to put in a bunch of work via long distance we could have likely tripled from the price at transfer. We were happy to be out of the long distance real estate business. It was a bit serendipitous that a broker called wanting to know about my M-I-L's house. She had died recently. He ended up conveying our old home instead. It was a very easy transaction with almost all of it taking place over the internet and telephone. No regrets.

jtk

[Tim Otto]

Market gains are still "paper gains" since they are denominated in USD, a fiat currency since 1971. Until the fiat is exchanged for something useful and real, like a new (old) planer, tools, firearms, etc., even gold and silver (as a store of value), you still have nothing but a string of 1's and 0's in cyberspace.

Buy low, sell high, collect early, pay late ... works every time.

[Thomas L Carpenter]

And then along came the dreaded RMDs. Everyone has to pay the piper (taxes) eventually. I've always kept my investments simple but after both of us having several different employers over the years we have investments at various locations and you REALLY have to pay attention to doing your RMDs correctly. DAMHIK.

[Ron Citerone]

And then along came the dreaded RMDs. Everyone has to pay the piper (taxes) eventually. I've always kept my investments simple but after both of us having several different employers over the years we have investments at various locations and you REALLY have to pay attention to doing your RMDs correctly. DAMHIK.

I thought once you retired you could roll them all into one IRA and simplify/consolidate the RMD stuff?

[Thomas L Carpenter]

I thought once you retired you could roll them all into one IRA and simplify/consolidate the RMD stuff?

You definitely can and one day I will. All my eggs in one basket comes to mind but I guess these days that a pretty old fashioned mind set.

[Jim Becker]

I thought once you retired you could roll them all into one IRA and simplify/consolidate the RMD stuff?

Yes, you can consolidate with no penalties and simplify things. That was only one reason I rolled over my 401K to IRAs. The second was that a portion of the 401K was eligible to be directly rolled into a Roth IRA (the portion that was post-tax deposits into the 401K because it was over the annual limit for pre-tax) which means that money and it's earnings will be able to be withdrawn federal income tax free after the 5 year waiting period. (Although I would withdraw that last because of the tax advantages including to my estate, as it were)

Required Minimum Withdrawals hit at age 70 for tax deferred accounts like 401K and tax-deferred IRAs, and if one doesn't "need" the money, those withdrawals can be re-deposited into a Roth, assuming one's income level permits depositing into a Roth.

[Gary Ragatz]

Required Minimum Withdrawals hit at age 70 for tax deferred accounts like 401K and tax-deferred IRAs, and if one doesn't "need" the money, those withdrawals can be re-deposited into a Roth, assuming one's income level permits depositing into a Roth.

If you aren't already required to take RMD's, the rules changed this year, pushing RMD's back to the year you turn 72.

[Jim Becker]

If you aren't already required to take RMD's, the rules changed this year, pushing RMD's back to the year you turn 72.

Thanks for that update. I'm only 63 next month so I'm not worrying about RMDs for awhile... :) ...and even what I take now is above what I believe would be the RMD, I suspect.

[Ronald Blue]

I'm not going to get into the stock market analysis. It's to much smoke and mirrors. For example, let's say you had a portfolio worth $100,000 and the market dives 25%. 75,000 now correct? So let's say this was in 2008. Just for discussion sake. They say they average 10% a year gain. However in 2007 you were worth 100,000 and now your worth $75,000. Their 10% claim is misleading because you will need about 4 years to get back to where you were. It really lowers the actual performance of your portfolio. "Figures don't lie but liars figure". Just food for thought.

There are better investments believe me. Look up life settlements. Also real estate investment companies. Private equity funds. There are some others but I won't put them out there here. Some of these require you to be accredited. So out of reach for some. They are around but you have to search for them and research them.

[Art Mann]

If you think real estate investments are less risky than stocks, you need to do a little more research yourself. The same is true of private investment funds.

[Jim Koepke]

One thing to consider in almost any investment is if there is no risk, there is likely not much of a reward or very little interest to be paid.

Nothing is a perfectly safe bet. Successful investors diversify. Said another way, do not put all of your eggs in one basket.

Realestate can cause the headaches of being a landlord and property maintenance on one side. Bare property can eat one up in taxes while waiting for it to appreciate.

Commodities fluctuate or contracts expire. Even if you bought silver in the 1960s look at what a dollar would buy then compared to now. A person couldn't actually buy large amounts of gold in the U.S. until the 1970s without buying coins for collecting at a premium. Gold and silver may be a good hedge against inflation.

Stocks and bonds have always fluctuated. At least with bonds there is the promise of the full value at maturity with interest payments along the way.

jtk

[Edwin Santos]

Gold and silver may be a good hedge against inflation.

jtk

Inflation? What's that?

Seriously though, inflation is a bit of a chameleon. On the one hand it has been a long long time since we've seen meaningful inflation as reported in the CPI figures. Like since the early 80s. On the other hand, we've seen so much asset price escalation for things like real property, higher ticket durable goods like vehicles. But for everyday items and disposable consumer goods, many things are not really any more expensive than they were decades ago. I think this is in large part due to the diffuse benefits of global trade and low cost manufacturing in places like China. And then tech items and electronics have actually deflated in price, significantly. To your point though, future purchasing power of your money is an important thing to be aware of.

Like I commented earlier, it is unfortunate that so many people who have not been in a position to invest or benefit from asset appreciation in some other way have been left behind due to their wealth either stagnating, or moving backwards in relative "real" terms.

Interestingly even though we haven't had a lot of "official" inflation, gold has been a very good speculative investment since 2000.
However timing is everything. If you bought gold in 1980, you would still be waiting to break even.
On the other hand, if you had invested $10,000 in Microsoft in 1989 and either forgot about it or had the discipline to not touch it, today you would have over $2.5M, a return of almost 25,000%. And the best part is after writing the initial check to buy it in 1989, you would never have to write another check again. A real estate investment will usually involve writing checks perpetually until the day you sell it, and even then the selling costs will usually be about 5-7% of the total sale price. The selling cost of the Microsoft stock would be about $10 in exchange costs at a no trade fee broker like Schwab.

[Ole Anderson]

Anybody here bold enough to get into the market as it bottomed out in 2008, not knowing if it was going to totally crash?

[Dave Mills]

Remember that as of the !st of this new year the Mandatory withdrawal will be 72 years old not 70.5

And depending on your income and tax situation, it may be better to start drawing out IRA money early in fixed annual amounts. Talk to your accountant about it if you haven't done the math. I've been drawing from my IRA since I was 55.

[Jim Koepke]

Inflation? What's that?

Seriously though, inflation is a bit of a chameleon. On the one hand it has been a long long time since we've seen meaningful inflation as reported in the CPI figures. Like since the early 80s. On the other hand, we've seen so much asset price escalation for things like real property, higher ticket durable goods like vehicles. But for everyday items and disposable consumer goods, many things are not really any more expensive than they were decades ago. I think this is in large part due to the diffuse benefits of global trade and low cost manufacturing in places like China. And then tech items and electronics have actually deflated in price, significantly. To your point though, future purchasing power of your money is an important thing to be aware of.

Like I commented earlier, it is unfortunate that so many people who have not been in a position to invest or benefit from asset appreciation in some other way have been left behind due to their wealth either stagnating, or moving backwards in relative "real" terms.

Interestingly even though we haven't had a lot of "official" inflation, gold has been a very good speculative investment since 2000.
However timing is everything. If you bought gold in 1980, you would still be waiting to break even.
On the other hand, if you had invested $10,000 in Microsoft in 1989 and either forgot about it or had the discipline to not touch it, today you would have over $2.5M, a return of almost 25,000%. And the best part is after writing the initial check to buy it in 1989, you would never have to write another check again. A real estate investment will usually involve writing checks perpetually until the day you sell it, and even then the selling costs will usually be about 5-7% of the total sale price. The selling cost of the Microsoft stock would be about $10 in exchange costs at a no trade fee broker like Schwab.

Some of the price escalation you mention is a real driver of inflation.

A low inflation rate is kind of like the story of a frog in a pot on the stove. A little every year can occur without notice:

425902

This is from > https://inflationdata.com/Inflation/Inflation_Rate/HistoricalInflation.aspx

The rate is from the same month a year earlier.

Here it is calculated:

425903

This was from > https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=1%2C000.00&year1=201701&year2=202001

It looks like the money folks stashed in their mattresses lost a chunk of value.

Just like so many other things, if you decide to buy when the price is taking off like a rocket, you likely waited too long:

425904

In many markets, timing is everything.


Anybody here bold enough to get into the market as it bottomed out in 2008, not knowing if it was going to totally crash?

In early 2008 about a years salary worth of my retirement investment account was used to purchase 'time served' with the agency governing my retirement system. It increased my retirement payment by about 11%. So my defined retirement has paid this back since leaving service. My retirement was also in 2008. My investment account has been mostly untouched. We did make a withdrawal to fix a couple of roofs. It is better than double the size than it was in 2008 before withdrawing for the new roofs in 2016.

Having investments in diverse funds with professional management is somewhat safer for the average person than trying to pick your own investments unless you are an investment guru.

jtk

[Nicholas Lawrence]

Nope, bought a house during the 30% off sale that was running around then.

[Dominik Dudkiewicz]

Anybody here bold enough to get into the market as it bottomed out in 2008, not knowing if it was going to totally crash?

No, before my time (before I had anything to invest). But I'm sitting on the sidelines waiting for the next crash - which I feel should be soon. Although I don't doubt the money printing that's been going on over the past 20 years ,and escalating, may continue to push assets ever higher before that happens.

Cheers, Dom

[Ronald Blue]

If you think real estate investments are less risky than stocks, you need to do a little more research yourself. The same is true of private investment funds.
That's okay Art. I smile every month with the automatic deposits. Research your investments. Nothing but Life Settlements is risk free but wise investments in the right places pay well. 10-12% return. Nuff said.

[Art Mann]

I have been doing my research and investing in stocks for close to 40 years now. For every dollar I paid in social security, I invested about a dollar in the stock market. As a result, I was able to retire 11 years ago at age 54 and my investments pay several times what I get from social security. I paid in the maximum SS for many years. I don't know what the average yield has been over my lifetime but stock investments were better than I could get through any other investment vehicle. I have tried them all.

As far as I can tell, "Life Settlements" amounts to selling your life insurance policy, which is not the same thing as investing. I have a paid up life insurance policy too which pays me dividends yearly. It is in the 6-8% range. That is the only reason I keep it. Life insurance is risky too if you buy it from the wrong company. So are annuities. Nothing is certain in this world except that refraining from investing somewhere will guarantee that inflation will consume you purchasing power.

[Ronald Blue]

Sure it is. I'm on the buying side not the selling side. It is most definitely investing. Money from a group of investors is pooled and then policies purchased for much less than face value. This isn't buying someones 100,000 dollar policy. These are 1,000,000 and up policies. The yields are better than anything else you will find. Your happy with what works for you and I'm happy with what works for me.

[Greg Funk]

Nothing but Life Settlements is risk freeNot understanding the risks is not the same as 'risk free'.

[Doug Dawson]

That's okay Art. I smile every month with the automatic deposits. Research your investments. Nothing but Life Settlements is risk free but wise investments in the right places pay well. 10-12% return. Nuff said.

Bernie Madoff promised `12% returns risk-free. Now he's in the Big House. The viability/reliability of insurance companies for invested quantities past a certain point is questionable, long-term, even if you do completely understand the terms (which are designed to be inscrutable, and few do.) Nothing is guaranteed.

I would rather invest in things that I understand (to paraphrase Warren Buffet.) The S&P 500 and index funds thereon are well-understood (also to paraphrase Warren Buffet.)

[Ronald Blue]

Research it. Life insurance companies have to have 100% of their liabilities in reserve. See if you can find where a life insurance company couldn't pay there obligations. It's a strictly regulated industry. Much more so than banks. The hitch for most is the requirements of being accredited. That trips up most people.

[Art Mann]

Maybe I don't understand what you mean but that statement seems nonsensical. Suppose I buy a single premium whole life policy of $100,000 and pay $10,000 for it. That is a reasonable scenario. The insurance company incurs a $100,000 liability and only has $10,000 to cover it. Are you claiming that the insurance company has to come up with an additional $90,000 to cover the liability? How do they ever make any money?

[Nicholas Lawrence]

He is buying paid up policies from other people based on their life expectancy. Not buying policies on himself.

[Ronald Blue]

The owner of the policy is selling it not the insurance company. Only the owner of the policy can sell it not the underwriter. The premiums are taken over by the investment group. It has no impact on the insurance companies liability. If it was as you say a $100,000 policy then it is still a $100,000 policy.

[Ronald Blue]

He is buying paid up policies from other people based on their life expectancy. Not buying policies on himself.

Actually they aren't paid up but that is factored into the equation.

[Art Mann]

So then the insurance companies don't have to have 100% of their liabilities in reserve. I already knew that but was just wondering why you said something so irrational.

Insurance companies do the same thing with their assets that a mutual fund does with its assets. They invest them in stocks, bonds and a host of other investment vehicles. If you choose a good insurance company to deal with, then you are pretty safe. If you buy an insurance policy written on someone by an unsound insurance company then your investment is risky. There is no such thing as a risk free investment and the riskier it is, the more up side potential there is. The market is incredibly efficient.

[Ronald Blue]

So then the insurance companies don't have to have 100% of their liabilities in reserve. I already knew that but was just wondering why you said something so irrational.

Insurance companies do the same thing with their assets that a mutual fund does with its assets. They invest them in stocks, bonds and a host of other investment vehicles. If you choose a good insurance company to deal with, then you are pretty safe. If you buy an insurance policy written on someone by an unsound insurance company then your investment is risky. There is no such thing as a risk free investment and the riskier it is, the more up side potential there is. The market is incredibly efficient.

It has zero to do with the insurance company investing in anything. The insurance company isn't the seller. I really could care less how they invest their money. I suppose it's true there is no risk free investment but this is as close as you can get. 300 to 350 per cent yield in 5 - 7 years. This isn't available to everyone. As I said you have to be accredited. You can research that if your interested.

Just for discussion sake let's say you have 1 million dollar life insurance policy and for whatever reason you want or need money now. If you are over 65 then you are eligible to sell. You can put it out there for sale. You might receive none or several offers depending upon whether it looks to have a reasonable expectation of paying of in the near future. Determined by the actuarial tables. Suppose after all the pro's and con's are weighed you receive an offer of 300 hundred thousand for it. If you accept you will be paid that amount and ownership will be taken over by the investment group as well as premium payments. The face value of the policy will pay to the investment group and be divided accordingly. The only point that the insurance company becomes a player is when a claim for death benefits is filed. Until then it's business as usual for the insurance company.

[Bill Dufour]

Charles Schwab has recently eliminated their trading fees, others had to follow suit. This means buying and selling short terms does not eat up money in fees like it used to. I sold about 9,000$ of stock recently and the fee was 17 cents. Not sure what the fee was it was described as market fee or some such.
i am now a big fan of exchange traded funds. Low annual fees (0.03%) for mine and no fees in or out. A traditional managed account will not do much better and the fees will eat up any extra returns. If they charge 1.00% management fee they have to make 0.97% more then mine to break even.
Bill D

[Doug Dawson]

So then the insurance companies don't have to have 100% of their liabilities in reserve. I already knew that but was just wondering why you said something so irrational.

Insurance companies do the same thing with their assets that a mutual fund does with its assets. They invest them in stocks, bonds and a host of other investment vehicles. If you choose a good insurance company to deal with, then you are pretty safe. If you buy an insurance policy written on someone by an unsound insurance company then your investment is risky. There is no such thing as a risk free investment and the riskier it is, the more up side potential there is. The market is incredibly efficient.

Well, the market is not _perfectly_ efficient, but one thing that is guaranteed, is that some middleman is taking his cut in this case. Otherwise why would they bother. Follow the money.

[Art Mann]

That proposition does not address the risk issue. In order for an insurance company to pay out anything, it must remain solvent and make large sums of money. It is not a ponzi scheme. The way they do that is to invest in the stock and bond markets, among other things. If they invest poorly, the company fails and the policy becomes worthless. If you paid for that policy, then you lose. So, you are, in reality, investing in the stock market indirectly whether you know it or not. Furthermore, if you pay $300,000 for a million dollar policy and then wait 15 years for the guy to die, then you haven't done as well as I have historically speaking. The amount you pay for a policy benefit is related to how risky and potentially long term the policy and company is. The risk is just obscured -- not negated.


It has zero to do with the insurance company investing in anything. The insurance company isn't the seller. I really could care less how they invest their money. I suppose it's true there is no risk free investment but this is as close as you can get. 300 to 350 per cent yield in 5 - 7 years. This isn't available to everyone. As I said you have to be accredited. You can research that if your interested.

Just for discussion sake let's say you have 1 million dollar life insurance policy and for whatever reason you want or need money now. If you are over 65 then you are eligible to sell. You can put it out there for sale. You might receive none or several offers depending upon whether it looks to have a reasonable expectation of paying of in the near future. Determined by the actuarial tables. Suppose after all the pro's and con's are weighed you receive an offer of 300 hundred thousand for it. If you accept you will be paid that amount and ownership will be taken over by the investment group as well as premium payments. The face value of the policy will pay to the investment group and be divided accordingly. The only point that the insurance company becomes a player is when a claim for death benefits is filed. Until then it's business as usual for the insurance company.

[Bill Dufour]

I remember when the oldest women in the world was French. She lived to be 122 years old. She sold her house with a reverse mortgage when she was 60 something. She got paid every month until the day she died or had to move out. She had to move into an old folks home about 55 years latter so the payments stopped then.
Bill D

[Ronald Blue]

That proposition does not address the risk issue. In order for an insurance company to pay out anything, it must remain solvent and make large sums of money. It is not a ponzi scheme. The way they do that is to invest in the stock and bond markets, among other things. If they invest poorly, the company fails and the policy becomes worthless. If you paid for that policy, then you lose. So, you are, in reality, investing in the stock market indirectly whether you know it or not. Furthermore, if you pay $300,000 for a million dollar policy and then wait 15 years for the guy to die, then you haven't done as well as I have historically speaking. The amount you pay for a policy benefit is related to how risky and potentially long term the policy and company is. The risk is just obscured -- not negated.

You read the parts you choose to read and ignore what you choose to. NEVER is it 15 years. Or even 10. Like I have already said you are happy and I am happy. No more from me on this.

[Edwin Santos]

I'm not advocating for or against Life Settlements in any way, but from what I know the policies being purchased are generally from highly rated AM Best insurers. The likes of Prudential, Met Life, New York Life, Mass Mutual. The likelihood that one of these companies would default on a policy benefit payout is very very low. Please remember that an individual investor is generally not buying a single policy, what they are investing in is a pool of policies that have been aggregated by a third party Life Settlements company, often times a private equity company. This party is functioning as the intermediary between you as an investor, the original policy holder, and the life company. I would say the biggest risk in the investment would be the performance of this third party company. To a great degree you are relying upon their underwriting and management skills when they assemble and administer the pool. They are supposed to be considering many factors when they price what they will pay for a policy.

In the end what you are buying is the spread between the discounted net present value of the policy and the price that policy holder is agreeing to accept to assign his/her policy benefits to the pool. The Life Settlement company is taking a cut of the spread and probably an ongoing management fee for administering the pool. I would not be surprised if they also take an origination fee and probably also a few other creative types of fees.

Ironically, someone in this thread mentioned Warren Buffett and his mantra to only invest in what you understand. Well Buffett and Berkshire Hathaway are a big player in Life Settlements, to the tune of about $600MM per year through their subsidiary Berkshire Settlements. So apparently he understands it.

To really simplify this, think of a check cashing place. The original policy holder is like a check cashing customer insofar as what they are doing is cashing out their life policy prematurely at a discount due to some changed circumstance in their life. The Life Settlement business (check cashing place) is agreeing to cash out the policy a discount spread. The Life Settlement investor is investing in the check cashing place. The life insurance company is maker of the check who will honor it when it is eventually presented to them, when the original policy holder dies. IMO many in this thread are focusing on whether the life company might not honor the check, but I would say the bigger risk is that the check cashing place goes belly up (or front loads the fees and absconds). But if they are a legitimate investment company with a track record, hopefully this will not be the case.

The people who came up with this figured out that cash surrender values of most policies were so low that it would be possible to buy the policy from the insured at a more attractive price (to them) and still make a healthy return.

FYI, I am not an investor in Life Settlements, not am I recommending for or against them. I would consider them an alternative investment, and thus I would expect the returns to be higher but the investment to be less liquid than a conventional marketable investment. As with any alternative investment, you wouldn't want to go all in and put your entire portfolio into an investment class like this, but it is absolutely sound as a portion of your portfolio. I hope this is a helpful summary.

Edwin

P.S. One other thing - In the event the policy is from a lower rated insurer, maybe a sound insurance company but not in the league of the household names, then that policy purchase would be priced accordingly, i.e. a bigger discount.
Also, the overall pool may have been underwritten to provide for some % of default or loss for the sake of conservatism and to cover any unforeseen contingency losses. Again, this is not to say there would not be risks because after all, pools of mortgages were assembled in this same way before the 2007 financial crisis, however one difference here is that pools of life policies are not exposed to asset bubble risks, crashes or corrections in the mainstream markets.

Another factoid - You might be wondering why a policy holder would want to prematurely cash out their policy and take a haircut to do so in the first place. One of them is the trend in recent years of increasing estate tax exemption. A common use of life insurance is to fund estate taxes due upon the death of the policy holder when assets are distributed to next generation heirs. Now that the exemption is much higher than it was, there is a market of people who are basically over-insured. Another reason would be if you determine that your heirs really don't need the death benefit money. For example, Mark Zuckerberg's father might not need his life insurance any longer and might decide to assign it to a Life Settlement fund to cash out.

[Doug Dawson]

ronically, someone in this thread mentioned Warren Buffett and his mantra to only invest in what you understand. Well Buffett and Berkshire Hathaway are a big player in Life Settlements, to the tune of about $600MM per year through their subsidiary Berkshire Settlements. So apparently he understands it.

A major contributor to Buffett's cash flow is the insurance business, at which he is an expert (and of course he is a very shrewd businessman.) Would I want to be on the opposite end of a deal with Buffett in this area? No.

His recommendation to his family members, as to where to invest after he is gone, is on record as being S&P 500 index funds and things closely related to that.

[Edwin Santos]

A major contributor to Buffett's cash flow is the insurance business, at which he is an expert (and of course he is a very shrewd businessman.) Would I want to be on the opposite end of a deal with Buffett in this area? No.

His recommendation to his family members, as to where to invest after he is gone, is on record as being S&P 500 index funds and things closely related to that.

You couldn't be on the opposite end of a deal with Buffett in this area unless you were the insured person selling your policy to him. With regard to Life Settlements, he is the investor, marketing to policy holders to consider selling their policy to him. He is not soliciting investors for this specific line of business so if you wanted to participate (indirectly), your option would be to buy stock in Berkshire Hathaway in which case your money is right alongside Warren's.

[Doug Dawson]

You couldn't be on the opposite end of a deal with Buffett in this area unless you were the insured person selling your policy to him. With regard to Life Settlements, he is the investor, marketing to policy holders to consider selling their policy to him. He is not soliciting investors for this specific line of business so if you wanted to participate (indirectly), your option would be to buy stock in Berkshire Hathaway in which case your money is right alongside Warren's.

Yes. As part of a balanced well-diversified portfolio, BH is a non-tiny part of the S&P 500. Just so you don't have to think about where Life Settlements is heading w.r.t. it's current tax status, etc. Nobody likes surprises with this stuff.