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Thread: Stocks and "the market"

  1. #61
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    Quote Originally Posted by Doug Dawson View Post
    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.

  2. #62
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    Quote Originally Posted by Jerome Stanek View Post
    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.

  3. #63
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    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.

  4. #64
    Quote Originally Posted by Gary Ragatz View Post
    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.

  5. #65
    Quote Originally Posted by Nicholas Lawrence View Post
    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. :^)

  6. #66
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    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.

  7. #67
    Quote Originally Posted by Gary Ragatz View Post
    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.

  8. #68
    Quote Originally Posted by Doug Dawson View Post
    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!)

  9. #69
    Quote Originally Posted by roger wiegand View Post
    ......, 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.

  10. #70
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    Quote Originally Posted by Doug Dawson View Post
    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

  11. #71
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    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
    "A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty."
    - Sir Winston Churchill (1874-1965)

  12. #72
    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 !

  13. #73
    Quote Originally Posted by Jim Koepke View Post
    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

  14. #74
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    Quote Originally Posted by Edwin Santos View Post
    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.

  15. #75
    Quote Originally Posted by Gary Ragatz View Post
    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

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