U.S. stocks in freefall

[VictoriaF]

Free fall can also be upward.

Free fall is any motion of a body where gravity is the only force acting upon it, at least initially. These conditions produce an inertial trajectory so long as gravity remains the only force. Since this definition does not specify velocity, it also applies to objects initially moving upward.

Victoria

[Dieharder]

Since the late 1990's the S&P 500 has moved essentially sideways

Since Sept 30 1990 to Sept 21 2011 close, an investment in Vanguard S&P 500 Index returned approx. 8.7% per annum.

Since Sept 30 1995 to Sept 21 2011 close, an investment in Vanguard S&P 500 Index returned approx. 6.3% per annum.

Worst case for S&P 500 is since the peak of Tech bubble in 1999.

Since Sept 30 1999 to Sept 21 2011 close, an investment in Vanguard S&P 500 Index returned approx. 1.0% per annum.

During the worst period for S&P 500 Index, an investment in Vanguard Total Bond Index returned approx. 6.1% per annum.

A 50/50 mix of VFINX / VBMFX returned appox. 3.9% per annum during one of the worst periods in the history of U.S stock markets.

[natureexplorer]

Since Sept 30 1999 to Sept 21 2011 close, an investment in Vanguard S&P 500 Index returned approx. 1.0% per annum.

Nominally and before taxes.

[jeffyscott]

Since the late 1990's the S&P 500 has moved essentially sideways, but there's been a lot of volatility.

Over the last 14 years US stocks (VTSMX) would have underperformed cash (using short term treasury to represent cash):

http://quote.morningstar.com/fund/chart ... %2C0%22%7D

I'd guess that stocks probably barely kept up with inflation...let me check...to match inflation $10,000 in 1997 would need to be $14,115 today http://data.bls.gov/cgi-bin/cpicalc.pl? ... year2=2011
VTSMX would be $16,363, so that's 14 years with cumulative real return of about 16%, that's a bit over 1% real per year.

[Lbill]

Since Sept 30 1999 to Sept 21 2011 close, an investment in Vanguard S&P 500 Index returned approx. 1.0% per annum.

While T-Bills returned 2.8% per year. A funny thing happened on the way to the equity risk premium....

[plnelson]

Since Sept 30 1999 to Sept 21 2011 close, an investment in Vanguard S&P 500 Index returned approx. 1.0% per annum.

Which shows that a pure buy-and-hold strategy would have failed miserably. But a stock/bond mix with regular rebalancing would have - and for many of us, has - done much better.

Anyway, this thread is about stocks being in "freefall", whatever that means. I contend that this is not true - they are just being volatile, as they have been for some time, and this is a good thing, not a bad thing.

[Lbill]

plnelson wrote:

I think all this volatility is great - I have a conventional stock-and-bond-and-rebalance portfolio and I have a trading portfolio. My stock-and-bond-and-rebalance portfolio has ploddingly gained over the years through many rebalances despite the sideways S&P. And the trading portfolio has done fantastically well. If the markets had been placid over the last 12 years, but with the same closing prices today, neither portfolio would have done as well as they have. Volatility is a gift to us all.

Often such claims are made, but without any supporting data. As it turns out, there was practically no difference in total return between an annually rebalanced and non-rebalanced portfolio of 50% stocks + 50% bonds over the 2000-2010 period. The former returned approx 3.8% nominal annual, while the latter returned 3.6%. You would have ended up with $250 more on a $10K starting investment. Meanwhile, the volatility was actually lower with the unrebalanced portfolio (7.4% vs 9.8% annualized SD). So, I guess volatility is actually the gift that stopped giving....

[rcshouldis]

For those who think that the stock market is a good way to save for retirement :

Think again

[Dieharder]

Since Sept 30 1999 to Sept 21 2011 close, an investment in Vanguard S&P 500 Index returned approx. 1.0% per annum.

While T-Bills returned 2.8% per year. A funny thing happened on the way to the equity risk premium....

If you landed here from moon in 1999 and put down all your money on S&P 500 Index and did not add / take a dime to it, yeah, then that's what you got.

I am pretty sure this is how most people invest their money.

[plnelson]

As it turns out, there was practically no difference in total return between an annually rebalanced and non-rebalanced portfolio of 50% stocks + 50% bonds over the 2000-2010 period. The former returned approx 3.8% nominal annual, while the latter returned 3.6%. You would have ended up with $250 more on a $10K starting investment. Meanwhile, the volatility was actually lower with the unrebalanced portfolio (7.4% vs 9.8% annualized SD). So, I guess volatility is actually the gift that stopped giving....

The key word, above, is "annually" rebalanced. Many (most?) of us don't rebalance annually, we rebalance when our allocations fall outside our target percentages. I've done 2 rebalances in the last 12 months - the first one, about 8 months ago shifted some money from stocks to st bonds, the second one, about a month ago went in the other direction.

[deerhunter]

I had enough of the stock market in 1999. I sold down to 10 percent and haven't looked back. My Gnma's and bonds have done well, not as much as I hoped but enough to give me a decent retirement.

[plnelson]

For those who think that the stock market is a good way to save for retirement :

Think again

I'm 58 and I'm happy with it. The key is diversification across many dimensions. Not just different asset classes and levels of risk, but also across strategies. I have portfolios that follow Bogleheadish rules, ones with bond-ladders, ones with long-term value investing, and a trading portfolio.

[xerty24]

Since Sept 30 1999 to Sept 21 2011 close, an investment in Vanguard S&P 500 Index returned approx. 1.0% per annum.

While T-Bills returned 2.8% per year. A funny thing happened on the way to the equity risk premium....

And CPI inflation averaged 2.8% so if you weren't in gold (or something that went up a reasonable amount), you're not gaining ground on that retirement. Oh, and you did pay taxes on those T-Bills too...

[Lbill]

The key word, above, is "annually" rebalanced. Many (most?) of us don't rebalance annually, we rebalance when our allocations fall outside our target percentages. I've done 2 rebalances in the last 12 months - the first one, about 8 months ago shifted some money from stocks to st bonds, the second one, about a month ago went in the other direction.

Yes, some people use "bands" to rebalance. Do you have any data that shows whether this worked any better than annually rebalancing? I'm skeptical that any method of rebalancing actually improves risk-adjusted returns on a predictable basis. This agrees with the view of Larry Swedroe. The reason that rebalancing hasn't worked very well over the last 10-12 year period is that bonds have outperformed stocks and rebalancers just kept on selling those good old bonds to buy stocks to get whacked again and again. Ask a Japanese investor how that rebalancing back into stocks has been working for him the last 20 years or so.

[Johm221122]

For those who think that the stock market is a good way to save for retirement :

Think again

Stop drinking cool aid

[Noobvestor]

Since Sept 30 1999 to Sept 21 2011 close, an investment in Vanguard S&P 500 Index returned approx. 1.0% per annum.

Which shows that a pure buy-and-hold strategy would have failed miserably. But a stock/bond mix with regular rebalancing would have - and for many of us, has - done much better.

Anyway, this thread is about stocks being in "freefall", whatever that means. I contend that this is not true - they are just being volatile, as they have been for some time, and this is a good thing, not a bad thing.

I'm not sure why holding the S&P 500 is being called a 'pure' strategy - it is a concentrated bet on 500 US companies, not a global equity portfolio (let alone a global investment portfolio)

[allsop]

The key word, above, is "annually" rebalanced. Many (most?) of us don't rebalance annually, we rebalance when our allocations fall outside our target percentages. I've done 2 rebalances in the last 12 months - the first one, about 8 months ago shifted some money from stocks to st bonds, the second one, about a month ago went in the other direction.

Yes, some people use "bands" to rebalance. Do you have any data that shows whether this worked any better than annually rebalancing? I'm skeptical that any method of rebalancing actually improves risk-adjusted returns on a predictable basis. This agrees with the view of Larry Swedroe. The reason that rebalancing hasn't worked very well over the last 10-12 year period is that bonds have outperformed stocks and rebalancers just kept on selling those good old bonds to buy stocks to get whacked again and again. Ask a Japanese investor how that rebalancing back into stocks has been working for him the last 20 years or so.

Perhaps he rebalanced as part of risk management and not to have better returns, as you seem to assume.
You assume that he rebalanced to

[Lbill]

DOW flirting with a 400-point haircut just now (noon EDT).

[jeffyscott]

Regarding rebalancing...

Growth of $10,000 over the last 14 years, per M*:

Vanguard Balanced Index Inv:19,788.04
Vanguard Short-Term Treasury Inv:18,835.03

[plnelson]

Yes, some people use "bands" to rebalance. Do you have any data that shows whether this worked any better than annually rebalancing? I'm skeptical that any method of rebalancing actually improves risk-adjusted returns on a predictable basis. This agrees with the view of Larry Swedroe. The reason that rebalancing hasn't worked very well over the last 10-12 year period is that bonds have outperformed stocks and rebalancers just kept on selling those good old bonds to buy stocks to get whacked again and again. Ask a Japanese investor how that rebalancing back into stocks has been working for him the last 20 years or so.

The bond portion of the my stock-bond-rebalance portfolio is mostly a short term bond fund. They make smaller price moves than LT bonds so rebalancing out of stocks when they're high has less of an effect of moving into another "high" asset class; it's more like moving between cash and stocks. But lately I've been mixing an intermediate bond fun in, so this may change my results.

I don't have any data about whether "band" rebalancing works better but to me it intuitively seems like it should which is why I do it. I'd like to see some data on this, though.

[NERD777]

For those who think that the stock market is a good way to save for retirement :

Think again

Stop drinking cool aid

Thinking that equities have no place in a long term investment strategy is as silly as thinking bonds have no place in a long term investment strategy. If the ebbs and flows of the market drastically change your long term strategy you probably shouldn't have discretion over your investments.

[plnelson]

DOW flirting with a 400-point haircut just now (noon EDT).

Oh, that Dow is such a shameless flirt! It's down 428 as of right now. And that's what I call a "come hither look" for investors who are looking for bargains.

[jeffyscott]

I'm not sure why holding the S&P 500 is being called a 'pure' strategy - it is a concentrated bet on 500 US companies, not a global equity portfolio (let alone a global investment portfolio)

Growth of $10,000, over the past 14 years:

Vanguard Total Intl Stock Index Inv:16,396.44
MSCI EAFE NR USD:15,565.38
Vanguard Total Stock Mkt Idx Inv:16,363.41
Vanguard Short-Term Treasury Inv:18,835.03

Bonds did not help much (see VBINX returns above)

What would have helped was paying even the tiniest bit of attention to valuations:
14 year growth of $10K in Vanguard Wellington Inv: 23,524.62

[plnelson]

Regarding rebalancing...

Growth of $10,000 over the last 14 years, per M*:

Vanguard Balanced Index Inv:19,788.04

Do they rebalance to maintain their 60:40 target? If so does anyone know how they do it (frequency, percent, etc?)

[Johm221122]

For those who think that the stock market is a good way to save for retirement :

Think again

Stop drinking cool aid

Thinking that equities have no place in a long term investment strategy is as silly as thinking bonds have no place in a long term investment strategy. If the ebbs and flows of the market drastically change your long term strategy you probably shouldn't have discretion over your investments.

I think a balanced portfolio is the right answer,what do you think???rcshouldis says stocks are not a good way to save for retirement I think there the corner stone,but not whole house

[HomerJ]

A 50/50 mix of VFINX / VBMFX returned appox. 3.9% per annum during one of the worst periods in the history of U.S stock markets.

And that's with no rebalancing, and no new contributions during downturns.

[rcshouldis]

For those who think that the stock market is a good way to save for retirement :

Think again

Stop drinking cool aid

Thinking that equities have no place in a long term investment strategy is as silly as thinking bonds have no place in a long term investment strategy. If the ebbs and flows of the market drastically change your long term strategy you probably shouldn't have discretion over your investments.

I think a balanced portfolio is the right answer,what do you think???rcshouldis says stocks are not a good way to save for retirement I think there the corner stone,but not whole house

When you're all selling pencils on the street corner very shortly, don't say you weren't warned.

[allsop]

For those who think that the stock market is a good way to save for retirement :

Think again

Stop drinking cool aid

Thinking that equities have no place in a long term investment strategy is as silly as thinking bonds have no place in a long term investment strategy. If the ebbs and flows of the market drastically change your long term strategy you probably shouldn't have discretion over your investments.

I think a balanced portfolio is the right answer,what do you think???rcshouldis says stocks are not a good way to save for retirement I think there the corner stone,but not whole house

When you're all selling pencils on the street corner very shortly, don't say you weren't warned.

Is this a sign that equity capitulation is near?

[Sidney]

For those who think that the stock market is a good way to save for retirement :

Think again

Stop drinking cool aid

Thinking that equities have no place in a long term investment strategy is as silly as thinking bonds have no place in a long term investment strategy. If the ebbs and flows of the market drastically change your long term strategy you probably shouldn't have discretion over your investments.

I think a balanced portfolio is the right answer,what do you think???rcshouldis says stocks are not a good way to save for retirement I think there the corner stone,but not whole house

When you're all selling pencils on the street corner very shortly, don't say you weren't warned.

In April, you were 50/50. What changed your mind?

viewtopic.php?p=1022659#1022659

[Lbill]

My belief in the Tooth Fairy is stronger than my belief in the so-called Equity Risk Premium (actually I believe the ERP is negative). I'm putting my IRA under my pillow and hoping that I'll find a quarter there when I wake up tomorrow.

[xerty24]

In April, you were 50/50. What changed your mind?

viewtopic.php?p=1022659#1022659

If he didn't rebalance, he's down to 45/55 as well as -5% on his portfolio. AA will be closer and overall loss larger if he did rebalance on the way down.

[xerty24]

Is this a sign that equity capitulation is near?

Maybe, maybe not, but the headlines are similar:

Global Meltdown: Investors Are Dumping Nearly Everything (CNBC)

The only green on my screen is treasuries, and even moreso, munis.

[Taylor Larimore]

Bogleheads:

The Newsweek cover: "Death of Equities" is dated August 13, 1979 when the S&P 500 Index closed at 107.

Today the S&P is about 1,100 (dividends not included).

Bogleheads ignore media "noise" and stay-the-course.

Edit in red

[gkaplan]

Yawn.

[jeffyscott]

Today the S&P is about 1,100 (dividends not included).

It was also 1100 in 1998, 2001, 2003, 2004, 2008, 2009, and 2010

[Mel Lindauer]

Bogleheads:

The Newsweek cover: "Death of Equities" is dated August 13, 1995 when the S&P 500 Index was about 550.

Today the S&P is about 1,100 (dividends not included).

Bogleheads ignore media "noise" and stay-the-course.

Actually, my friend, that was August 13, 1979. (Gotta clean those glasses once in a while!)

[Taylor Larimore]

Hi Mel:

Thank you for the correction. I edited my post.

[plnelson]

Is this a sign that equity capitulation is near?

Maybe, maybe not, but the headlines are similar:

Global Meltdown: Investors Are Dumping Nearly Everything (CNBC)

The only green on my screen is treasuries, and even moreso, munis.

Is that on cost basis or just today's changes? I don't have any stocks that went below their cost basis today - that screen is all green. If I just look at today's results it's all red, but that's what one would expect on a day when the Dow drops 482 points. Meanwhile I just bought GE and CVX - good long term growth prospects, and great dividends which will make it more tolerable to wait for the recovery, which could be awhile.

[Sidney]

Is this a sign that equity capitulation is near?

Maybe, maybe not, but the headlines are similar:

Global Meltdown: Investors Are Dumping Nearly Everything (CNBC)

The only green on my screen is treasuries, and even moreso, munis.

Is that on cost basis or just today's changes? I don't have any stocks that went below their cost basis today - that screen is all green. If I just look at today's results it's all red, but that's what one would expect on a day when the Dow drops 482 points. Meanwhile I just bought GE and CVX - good long term growth prospects, and great dividends which will make it more tolerable to wait for the recovery, which could be awhile.

didn't GE cut their dividend last time we had a recession?

[xerty24]

Is that on cost basis or just today's changes? I don't have any stocks that went below their cost basis today - that screen is all green.

Today's change for a bunch of market indexes and ETFs. I don't hold most of this stuff except for a few munis right now anyway. I don't think too much about cost basis, except for tax decisions, since it leads to sunk cost irrationality if you're not careful.

[plnelson]

didn't GE cut their dividend last time we had a recession?

Actually I expect them to cut it back slightly. 3.7% is kind of outrageously high for a company like that - I'd rather it be under 3% and the money used for R&D or expansion. I think they are widely expected to do this so it may already be priced-in.

But their big problem in 2008 was due to GE Capital's excesses which nearly torpedoed the company. Since then they have scaled back GE Capital and limited it to financial operations more in tune with helping GE's businesses. (e.g., if some hospital wants to buy some expensive GE MRI unit GE Capital can make the financing easier.)

[Lbill]

Jeffy wrote:

It [the S&P 500] was also 1100 in 1998, 2001, 2003, 2004, 2008, 2009, and 2010

Sometimes the required time period for buy-and-hold to work as advertised begins to suggest that the market can stay down longer than one can stay alive.

[gkaplan]

Yawn

[kerplunk]

I'm annoyed at this economy.

[Lbill]

DOW finished down 391. We'll see tomorrow if players want to hold stocks into the weekend with Europe ready to tank - I'm guessing No.

[plnelson]

DOW finished down 391. We'll see tomorrow if players want to hold stocks into the weekend with Europe ready to tank - I'm guessing No.

I believe in "buy on bad news, sell on good." You seem to be advocating "sell on bad news". When do you suggest investors should buy?

[Manbaerpig]

a quarter or so before the turnaround

good luck identifying this

[LazyNihilist]

Are the markets afraid about 'Faster than light' traveling neutrinos?

[stratton]

Panic!

Paul

[woof755]

It's not fair to make fun of the media, specifically its constant need to explain why the markets are down...even on days that the Dow actually reverses and ends higher.

But we make fun of them anyways, and Ezra Klein from WaPo adds his take:

http://www.washingtonpost.com/blogs/ezra-klein/post/why-are-the-markets-down-today-no-reason/2011/08/25/gIQAVDvPoK_blog.html?wprss=ezra-klein