It's pretty freaky watching your stocks go up & down all day

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
john94549
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Re: It's pretty freaky watching your stocks go up & down all

Post by john94549 »

Look at the bright side. If you were a tad over-weight in equities last week, you aren't now.
EvelynTroy
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Re: It's pretty freaky watching your stocks go up & down all

Post by EvelynTroy »

Perhaps some guidance and wisdom by nisiprius - I always thought this post should have been a "sticky" for easy reference. I saved and reread every now and then. IMHO required reading for all investors.

A Time To Evaluate Your Jitters

http://www.bogleheads.org/forum/viewtop ... =1&t=79939

Evelyn
gd
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Location: MA, USA

Re: It's pretty freaky watching your stocks go up & down all

Post by gd »

My financial peace of mind increased quite a bit when I let my Quicken automatic updates expire after 3 years. Instead of updating it several times a day, now at the end of each month I spend 1/2 hour updating everything by hand, glance at any trends, look at my net worth for amusement, and that's it. Sometimes you need to engage in some psychological engineering and arrange your affairs to circumvent your bad habits and counterproductive tendencies.

Extra bonus, I don't have to buy and figure out a new Quicken version every year that does the same thing as the old one except differently. Quicken 2004 works quite nicely.
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William4u
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Re: It's pretty freaky watching your stocks go up & down all

Post by William4u »

The Average Investor over the last 30 years averaged a 1.9% annual return due to not staying the course. 1.9%! I think a 70/30 stock bond mix in Vanguard index funds got around 8% annually.

Basically, the "average investor" buys high and sells low. People panic sell when stocks are low, and pile back in when stocks are high.

So if one just buys and holds the market by owning a Vanguard Total Index Fund and a Bond Fund, one is doing much, much better than the average investor. Ignore the ups and downs. Stay the course with a 70/30 or 60/40 or 50/50 Total Stock/Total Bond mix. Most people, however, do not...

Why The Average Investor's Investment Return Is So Low (Forbes)
According to the latest 2014 release of Dalbar’s Quantitative Analysis of Investor Behavior (QAIB), the average investor in a blend of equities and fixed-income mutual funds has garnered only a 2.6% net annualized rate of return for the 10-year time period ending Dec. 31, 2013.

The same average investor hasn’t fared any better over longer time frames. The 20-year annualized return comes in at 2.5%, while the 30-year annualized rate is just 1.9%. Wow! ...

Why does the average investor underperform?

Investors may only have themselves to blame. According to Dalbar’s QAIB, investors make poor investment choices that hurt their investment returns. These decisions, including when to buy and sell, are often driven by emotion...

Fast forward to 2008, just before the “Great Recession” market downturn, and stock prices were falling, but investors refused to sell at a loss. As the market continued to fall, investors held off until they simply couldn’t take it any longer. Many sold their stock near the bottom and missed the following upswing that began March 2009...

Investing your own money is a very difficult thing to do. To properly invest, you need to emotionally detach yourself from your money. This is more than many investors are capable of doing.
http://www.forbes.com/sites/advisor/201 ... is-so-low/

The key is to get a good Vanguard-based IPS and stick to it. I think you could use a good IPS (Investment Policy Statement)...
http://www.bogleheads.org/wiki/Investme ... _statement
http://www.bogleheads.org/forum/viewtopic.php?t=61915

My IPS says that I own %Bonds = Age-10, and I rebalance my stock/bond allocation every 6 months. So my bond allocation goes up 1% a year. A 40 year old would have 30% bonds on my IPS.

I never cash out, I only rebalance. So if stocks are up, I will add to my bonds to keep my allocation the same.
If stocks are down, I will add to my stocks to keep my allocation the same.

So rebalance, rebalance, rebalance. That is what keeps your investment risk and volatility in check, while keeping expected returns up as well.
Caduceus
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Re: It's pretty freaky watching your stocks go up & down all

Post by Caduceus »

Unless you're intending to sell, you should hope for the markets to go down, not up. Sure, if you truly believe in the semi-strong/strong version of the efficient markets hypothesis, as Bogleheads are wont to embrace, then you should say that the stock price is a fair valuation of the index/company anyway at any given time. But if even a group as distinguished as the Noble Prize committee can give their award to theorists who believed in diametrically opposed things in the same year, you could be forgiven for being something less than a pure agnostic.

So, another way of thinking about it is that you're trying to increase your stakes in various indexes/companies, and at some points the quoted price is high, and at others the price is low. Which should you hope for?

If you are a buyer (well, a non-agnostic semi-Boglehead sort-of buyer), it is far more rational to be excited when prices go down and disappointed when they go up, the same way you'd rather pay $5 for a burger rather than $10.

Instead of not watching the stocks, I'd actually re-condition my emotional responses based on this understanding the way livesoft described it.
ArthurO
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Re: It's pretty freaky watching your stocks go up & down all

Post by ArthurO »

Caduceus wrote:Unless you're intending to sell, you should hope for the markets to go down, not up. Sure, if you truly believe in the semi-strong/strong version of the efficient markets hypothesis, as Bogleheads are wont to embrace, then you should say that the stock price is a fair valuation of the index/company anyway at any given time. But if even a group as distinguished as the Noble Prize committee can give their award to theorists who believed in diametrically opposed things in the same year, you could be forgiven for being something less than a pure agnostic.

So, another way of thinking about it is that you're trying to increase your stakes in various indexes/companies, and at some points the quoted price is high, and at others the price is low. Which should you hope for?

If you are a buyer (well, a non-agnostic semi-Boglehead sort-of buyer), it is far more rational to be excited when prices go down and disappointed when they go up, the same way you'd rather pay $5 for a burger rather than $10.

Instead of not watching the stocks, I'd actually re-condition my emotional responses based on this understanding the way livesoft described it.
this is NOT CORRECT, even if you are a buyer, but your portfolio has a substantial value you don't want it to go down. Lets do a simple calculation. Lets assume your 401k portfolio has a value of 500K, lets assume you put in maximum per year which is 17.5K, now lets say the market drops by a small 10% correction, your value will go down to 450K and with new money will take you 3 years just to break even, assuming no growth in stocks, if we have prolonged bear market, you will struggle just to keep the value constant, never mind making any money. And if we have a real big drop of say 50% (2008 style) you will lose 250k and divided by 20K contributions for simplicity reasons, it will take you years just to recoup these losses and break even again, this is a power of compounding in the negative way. Mr. Market can be little generous but usually he comes back and bite you in a ruthless and unpredictable way.

I must admit I am quite annoyed by people who say, if you are making contribution you should be happy when market goes down, this is only true if you are at the beginning of your investing career and you haven't accumulated a lot of cash,

if you have a large base and and looking to grow your money, statement that market going down is good for you is quite ridiculous.
Sidney
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Re: It's pretty freaky watching your stocks go up & down all

Post by Sidney »

ArthurO wrote:
this is NOT CORRECT, even if you are a buyer, but your portfolio has a substantial value you don't want it to go down. Lets do a simple calculation. Lets assume your 401k portfolio has a value of 500K, lets assume you put in maximum per year which is 17.5K, now lets say the market drops by a small 10% correction, your value will go down to 450K and with new money will take you 3 years just to break even, assuming no growth in stocks, if we have prolonged bear market, you will struggle just to keep the value constant, never mind making any money. And if we have a real big drop of say 50% (2008 style) you will lose 250k and divided by 20K contributions for simplicity reasons, it will take you years just to recoup these losses and break even again, this is a power of compounding in the negative way. Mr. Market can be little generous but usually he comes back and bite you in a ruthless and unpredictable way.

I must admit I am quite annoyed by people who say, if you are making contribution you should be happy when market goes down, this is only true if you are at the beginning of your investing career and you haven't accumulated a lot of cash,

if you have a large base and and looking to grow your money, statement that market going down is good for you is quite ridiculous.
I would make the caveat that in either case (-10% or -50%), someone with a balanced or conservative portfolio would be re-balancing bonds to equity so that might (depending on the recovery) speed the catch-up time.
I always wanted to be a procrastinator.
ArthurO
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Re: It's pretty freaky watching your stocks go up & down all

Post by ArthurO »

Sidney wrote:
ArthurO wrote:
this is NOT CORRECT, even if you are a buyer, but your portfolio has a substantial value you don't want it to go down. Lets do a simple calculation. Lets assume your 401k portfolio has a value of 500K, lets assume you put in maximum per year which is 17.5K, now lets say the market drops by a small 10% correction, your value will go down to 450K and with new money will take you 3 years just to break even, assuming no growth in stocks, if we have prolonged bear market, you will struggle just to keep the value constant, never mind making any money. And if we have a real big drop of say 50% (2008 style) you will lose 250k and divided by 20K contributions for simplicity reasons, it will take you years just to recoup these losses and break even again, this is a power of compounding in the negative way. Mr. Market can be little generous but usually he comes back and bite you in a ruthless and unpredictable way.

I must admit I am quite annoyed by people who say, if you are making contribution you should be happy when market goes down, this is only true if you are at the beginning of your investing career and you haven't accumulated a lot of cash,

if you have a large base and and looking to grow your money, statement that market going down is good for you is quite ridiculous.
I would make the caveat that in either case (-10% or -50%), someone with a balanced or conservative portfolio would be re-balancing bonds to equity so that might (depending on the recovery) speed the catch-up time.
your point is valid and well taken, however I was making a simplified example for sake of argument. My main point still holds and that is, rebalancing into stocks as market tanks is tough and further more taking money out of bonds and sinking it into stocks as they just keep plummeting is very difficult, and even many bogleheads have no stomach for it, ESPECIALLY if they portfolio value is large, the losses are very significant, in absolute terms, and that is my major quibble about the fact that some people justify market downturns by buying low,

the idea is silly, in my circumstance at least it is like saying, I've bought 1000 t-shirts and $10 per t-shirt, and now the t shirts went on sale for 50% off so they are worth $5 each, but it's ok because I am buying 1 t shirt a month for 50% off, the idea is RIDICULOUS, the t-shirts I already own lost value and a lot of it, and it will take years before the total value will break back to even....

Again, simplified example to illustrate the point, math is little more complex with re balancing and fixed/equity allocation, I stand my my argument though.
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DonCamillo
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Re: It's pretty freaky watching your stocks go up & down all

Post by DonCamillo »

ArthurO wrote: this is NOT CORRECT, even if you are a buyer, but your portfolio has a substantial value you don't want it to go down. Lets do a simple calculation. Lets assume your 401k portfolio has a value of 500K, lets assume you put in maximum per year which is 17.5K, now lets say the market drops by a small 10% correction, your value will go down to 450K and with new money will take you 3 years just to break even, assuming no growth in stocks, if we have prolonged bear market, you will struggle just to keep the value constant, never mind making any money. And if we have a real big drop of say 50% (2008 style) you will lose 250k and divided by 20K contributions for simplicity reasons, it will take you years just to recoup these losses and break even again, this is a power of compounding in the negative way. Mr. Market can be little generous but usually he comes back and bite you in a ruthless and unpredictable way.
If you look at the percentage drops and the recovery times since the Second World War, you will see that stock prices tend to swing like a pendulum. Instead of a smooth progression to a new value, they overshoot and undershoot their "fair value" as indicated by the trend line. Therefore it is not irrational to rejoice when prices are below the long term trend line, especially as recovery from bargain prices usually occurs within a relatively short time.

My investments are overwhelmingly periodic, mostly retirement contributions from my paycheck, reinvested dividends and capital gains in my stock funds, and annual contributions to my Roth. But when pieces dip, I try to take advantage of them, including a massive investment of two tenths of one percent of my net worth :moneybag into an index fund this past Thursday to take advantage of the dip. That represents 20 cents for every $100 I have invested!
Les vieillards aiment à donner de bons préceptes, pour se consoler de n'être plus en état de donner de mauvais exemples. | (François, duc de La Rochefoucauld, maxim 93)
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Toons
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Re: It's pretty freaky watching your stocks go up & down all

Post by Toons »

Tex wrote:DCA and don't pay attention to financial porn. Also, limit looking at financial accounts.
+1 Excellent Ideas :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
ArthurO
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Re: It's pretty freaky watching your stocks go up & down all

Post by ArthurO »

DonCamillo wrote:
ArthurO wrote: this is NOT CORRECT, even if you are a buyer, but your portfolio has a substantial value you don't want it to go down. Lets do a simple calculation. Lets assume your 401k portfolio has a value of 500K, lets assume you put in maximum per year which is 17.5K, now lets say the market drops by a small 10% correction, your value will go down to 450K and with new money will take you 3 years just to break even, assuming no growth in stocks, if we have prolonged bear market, you will struggle just to keep the value constant, never mind making any money. And if we have a real big drop of say 50% (2008 style) you will lose 250k and divided by 20K contributions for simplicity reasons, it will take you years just to recoup these losses and break even again, this is a power of compounding in the negative way. Mr. Market can be little generous but usually he comes back and bite you in a ruthless and unpredictable way.
If you look at the percentage drops and the recovery times since the Second World War, you will see that stock prices tend to swing like a pendulum. Instead of a smooth progression to a new value, they overshoot and undershoot their "fair value" as indicated by the trend line. Therefore it is not irrational to rejoice when prices are below the long term trend line, especially as recovery from bargain prices usually occurs within a relatively short time.

My investments are overwhelmingly periodic, mostly retirement contributions from my paycheck, reinvested dividends and capital gains in my stock funds, and annual contributions to my Roth. But when pieces dip, I try to take advantage of them, including a massive investment of two tenths of one percent of my net worth :moneybag into an index fund this past Thursday to take advantage of the dip. That represents 20 cents for every $100 I have invested!
I don't know what is the point that you are making, yes % wise stock market swings back and forth, and on relative terms it always goes up on rolling returns, however in absolute terms success is not guaranteed, it depends at which point in the cycle you have a lot of money invested.

It is important to know that on relative terms investments mean diddly squat, ultimately it is the ABSOLUTE amount of money that is in the account that really matters. It is the size of the nest egg that matters not the % return. On average you may make 8% per year but if there was 50% drop after 20 years of accumulation you may be in bad shape on absolute terms.

If the downswing appears when you have very little, you will do OK, if the downswing appears when you've been accumulating for years of periodic contributions and have substantial amount you may be lucky just to break even, so in my view people who say to be happy when market drops because they can buy cheap, don't really know what they are talking about, as this statement is only true in a particular circumstance of investors who entered the market casino very recently.
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