Lessons From The Recession (AARP)

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
umfundi
Posts: 3361
Joined: Tue Jun 07, 2011 5:26 pm

Lessons From The Recession (AARP)

Post by umfundi » Sat Sep 07, 2013 10:24 pm

I liked this article by Lynn Brenner. A good perspective.

http://www.aarp.org/money/investing/inf ... ssion.html

Keith
Déjà Vu is not a prediction

User avatar
steve roy
Posts: 1511
Joined: Thu May 13, 2010 5:16 pm

Re: Lessons From The Recession (AARP)

Post by steve roy » Sat Sep 07, 2013 10:35 pm

I liked it too. It's not as if we're out of the effects of the Great Recession even yet, with the job gains still anmic and the economy limping along. I would say that 2007-2009 was a Big Event in most investors' lives. Maybe not equal to 1929-1941, but epic just the same.

YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: Lessons From The Recession (AARP)

Post by YDNAL » Sun Sep 08, 2013 7:32 am

umfundi wrote:I liked this article by Lynn Brenner. A good perspective.

http://www.aarp.org/money/investing/inf ... ssion.html

Keith
A good synopsis of all things hammered to death at Bogleland. :)

But, not without (I guess unavoidable) the typical over-simplification.
Don't retire until you're confident you could pay your essential expenses for at least two years without having to tap your stock investments, says Steve Vernon, research scholar at the Stanford Center on Longevity. The surest way to achieve that goal is to boost your Social Security benefit by delaying your application.
Two years ? The surest way ?

Ask Bill Bernstein, and he would say "don't retire" unless you save sufficiently to have 20 years in cash (or short- intermediate-term high quality bonds) for residual "basic" living expenses.
http://www.bogleheads.org/forum/viewtop ... &p=1761508
wbern » Sun Jul 28, 2013 3:02 pm wrote:
Blue » Sun Jul 28, 2013 2:56 pm wrote:
wbern wrote:since any sane investor sits on a large hoard of cash anyway, and cash (or, if you like, even short-intermediate high-quality bonds)
Could you expound on this? What constitutes "large hoard"?
"Large hoard" =

1) Pre-retirement: The smaller of a) 25% of your portfolio (short bonds count) or b) 5 years living expenses
2) Retirement: Residual *basic* living expenses (after SS + pensions) for 20 years.

Bill
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

umfundi
Posts: 3361
Joined: Tue Jun 07, 2011 5:26 pm

Re: Lessons From The Recession (AARP)

Post by umfundi » Sun Sep 08, 2013 7:40 am

I like this:
"Your house is a place to live and a lifestyle choice. It's not an investment asset."
Keith
Déjà Vu is not a prediction

User avatar
DaleMaley
Posts: 1577
Joined: Thu Mar 01, 2007 8:04 pm
Location: Fairbury, Illinois
Contact:

Re: Lessons From The Recession (AARP)

Post by DaleMaley » Sun Sep 08, 2013 7:52 am

I recently finished reading The Great Depression: A Diary by James Ledbetter. From my book review on Amazon.........
My father was born in 1932. The only thing my father said about the Great Depression was about being hungry all the time when he was a boy. He and his brother were once so hungry they ate dried powder Jell-O. My dad turned out to be a hoarder of scrap wood, nuts, and bolts on his farm.

My father-in-law was born in 1920. He turned out to have a life long hatred of the stock market and refused to ever invest in stocks.

After reading this book, I better appreciate how the Depression experience changed their lives forever.

During the Roaring Twenties, the Dow Jones average grew at a compounded growth rate of 16% a year. It increased from about 100 in 1920 to 381 in 1929. This boom period is similar to the decades of the 1980s and 1990s. In each of these decades, the stock market appreciated at a compounded annual growth rate of about 18%.

It is hard for me to comprehend the stock market shrinking in value by 90%. I first started investing in stock mutual funds in 1980. I lived through the 1-day decline of 22% in 1987, and the roughly 50% declines in both the Tech Wreck of 2000 and the Sub-Prime Crash of 2008. I stayed the course and stayed fully invested through these declines. I am not sure I could stay the course through a 90% decline like in the Depression.

It was interesting to read about Roth's struggles to understand all the economic factors changing around him. It seems that 70 years later in 2008, nobody really understands economics yet. When the first rumbling of troubles in the real estate market surfaced in 2006, I remember an "expert" talking head on TV commenting on the situation. His prediction was that since real estate and construction were less than 10% of the annual GDP, even if we lost the whole sector it would not have much impact on the economy. He did not realize that like the Great Depression, highly leveraged investments implode when the market prices goes down.

I liked Roth's internal struggles to develop an investment strategy that would survive the inevitable boom and bust cycles. He trends towards buying investments at the bottom and selling at the top. He then realizes it is almost impossible to make 2 decisions at exactly the right times (the buy and sell decisions).

The Great Depression prompted other to try to develop a better investment strategy. Benjamin Graham settled in on a portfolio with both stocks and bonds. He suggested the stock portion range from 25% to 75%, with the balance in bonds. He suggested buying stocks when they were selling for less than 50% on the dollar, and selling when they reached 100% of their intrinsic value.

Roth observed that investors with a diversified portfolio did ok. This included blue chip stocks, government bonds, and real estate. None of these should be purchased using borrowed money.

It is too bad the authors did not add a graph of the Dow Jones from 1920 until 1940. This graphic would help readers to understand with an image how high the market went, and how dramatically it declined.

If you are going to attempt to grow your wealth over time, I highly recommend you read this book.
After reading the Diary book, I read some of the same books that the author of the diary was reading, when he was trying to figure out the causes of the Great Depression. One of those books was Our Mysterious Panics, 1830-1930, by Charles Albert Collman. From my book review on Amazon:
I heard about this book from reading Benjamin Roth's book, The Great Depression: A Diary. Roth said he read this book to try to better understand what happened during the Great Depression.

This book covers 100 years of financial panics and was first written in 1931. It covers the panics of 1837, 1857, 1873, 1884, 1893, 1901, 1907, and 1929.

Having 8 panics in 92 years means we experienced a panic about every 11.5 or 12 years.

Since WWII, we have averaged a Bear stock market about every 8 years, so not very far from the 12 years noted in this book.

The author noted that the "Dismal Sciences" (economics), had failed to predict the Panic of 1929. The same thing happened 79 years later when economists failed to predict the almost collapse of the financial system from the 2008 Sub-Prime Crash.

I found it interesting that in the old panics, men sometimes killed themselves, died broke, or went to prison. In the latest Sub-Prime Crash of 2008, the government (Federal Reserve), decided not to prosecute any of the heads of the major banks because it might cause the whole system to fail. None of the execs involved with creating the 2008 Crash have gone to jail.......and most had golden parachutes which assured they kept their personal wealth after the crash.

Near the end of this book, the author concludes the common factor of all 8 crashes he studied was that individual men created all the financial panics.

In 1889, Clement Jugler said, "The regular development of the riches of nations does not take place without suffering or without resistance". In other words, there is no way of avoiding panics in a capitalist society.

Several of the panics studied were the result of men trying to create monopolies so they could raise prices and profits.

The author also concluded, "The explanation of panics must show some factor that is common to them all, and in those which we have contemplated in Wall Street's history, they have uniformly revealed themselves as the results of human schemes and human undertakings." He also comments that men do not make panics deliberately, they are their unconscious agents.

Myself and others have made the observation that to achieve average stock market returns of 10% annually, we must have Bear stock markets about every 8 years. If there were no Bear markets, then there would be no risk, and therefore no return of 10%. Without a 10% average return from stocks, there is no way for the common man to save and build any wealth over time.
The author noted the Federal Reserve indirectly aids stock market speculation. After the Tech Wreck of 2000, the Fed kept interest rates low for many years, which fueled the speculation in real estate.

The author seems to recommend more regulation of Wall Street. He recommends more transparency so investors can figure out if owners are cooking the books. He also suggests more limits on margin trading.

Some closing words by the author included the observation that panics are not caused by crop failures or business failures. He said that false optimisms are more pernicious than lack of faith...and he recommends action be taken when we start to see speculative bubbles forming.

My observation from this book is that these panics were caused by very, very greedy men trying to get very, very rich. They were not caused by reasonable business leaders trying to earn a decent return to their shareholders by satisfying their customer's needs.
Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. – Warren Buffett

User avatar
nedsaid
Posts: 9400
Joined: Fri Nov 23, 2012 12:33 pm

Re: Lessons From The Recession (AARP)

Post by nedsaid » Sun Sep 08, 2013 12:09 pm

I very much enjoyed the article.

A couple of the posts on this thread reminded me of the stories that my grandmother and my father told me about the Great Depression.

It pays in your personal finances to err on the side of conservatism. People get into trouble because they want to push the envelope on everything. Create a cushion or a margin of error in your personal finances. Having a margin of error works great when driving a car, it also works great in personal finances.
A fool and his money are good for business.

Professor Emeritus
Posts: 2628
Joined: Mon Aug 13, 2012 6:43 am

Re: Lessons From The Recession (AARP)

Post by Professor Emeritus » Sun Sep 08, 2013 6:49 pm

umfundi wrote:I like this:
"Your house is a place to live and a lifestyle choice. It's not an investment asset."
Keith
It's a little more complicated than that
Houses represent both investment and consumption.
What you need to make is a conscious "investment" decision about what you want your house to be.
E.g. A house you own is a hedge against inflation in housing costs.
A house is a relatively illiquid long term "investment"
The older you get the more you need a plan for your house.

As one example our house is part of our asset base for "self insurance" for long term care. If we both need LTC we sell the house.

Fallible
Posts: 6306
Joined: Fri Nov 27, 2009 4:44 pm
Contact:

Re: Lessons From The Recession (AARP)

Post by Fallible » Sun Sep 08, 2013 7:38 pm

Very good article, just tells it like it was. I like that it starts with the still staggering statistics we need to remember: the lost jobs and household wealth in particular. Even the recession dates are important to repeat and borrowing money surely is No. 1 among the lessons - for Wall Street and Main Street, partners in greed.

Thanks for the link.
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

jlawrence01
Posts: 1317
Joined: Mon Feb 25, 2013 1:34 am
Location: Southern AZ

Re: Lessons From The Recession (AARP)

Post by jlawrence01 » Sun Sep 08, 2013 7:43 pm

I thought that the article was very well thought out.

However, I have to say that the I learned a number of lessons from the "great recession."

1) Some of the "old truths" are myths. The one that comes to mind immediately is "home prices ALWAYS go up." I heard that from hundreds of commentators and friends. I did not believe that myth but it was used by many to justify poor decisions.

2) When everyone starts talking about investments or real estate, you are probably reaching the top of the market. I remember sitting in a cab ib Cleveland in 1999 being lectured on the stock market by a cabbie.

3) When you start seeing blogs criticizing an industry written by industry insiders, take that as warning. There were any number of blogs in 2004-06 stating that many real estate loans were ill advised. My only regret is that I did not sell my home in 2005, near the top of the market, as my wife and I discussed.

4) A lot of the lessons that my grandparents and parents taught us were true - avoid debt like the plague, stay the course, be diversified, and never take a mortgage more than 2x your income ...

Fallible
Posts: 6306
Joined: Fri Nov 27, 2009 4:44 pm
Contact:

Re: Lessons From The Recession (AARP)

Post by Fallible » Sun Sep 08, 2013 7:56 pm

jlawrence01 wrote:I thought that the article was very well thought out.

However, I have to say that the I learned a number of lessons from the "great recession."

1) Some of the "old truths" are myths. The one that comes to mind immediately is "home prices ALWAYS go up." I heard that from hundreds of commentators and friends. I did not believe that myth but it was used by many to justify poor decisions....
When I read books on the '08 crisis, one thing kept coming out loud and clear: just about everything financial in those days was based on the belief that housing would go up. Talk about a house of cards...
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

Professor Emeritus
Posts: 2628
Joined: Mon Aug 13, 2012 6:43 am

Re: Lessons From The Recession (AARP)

Post by Professor Emeritus » Sun Sep 08, 2013 8:11 pm

jlawrence01 wrote:I

1) Some of the "old truths" are myths. The one that comes to mind immediately is "home prices ALWAYS go up." I heard that from hundreds of commentators and friends. I did not believe that myth but it was used by many to justify poor decisions.
..
Anyone who lived through the S&L debacle knew any such clam was simply false.

Fallible
Posts: 6306
Joined: Fri Nov 27, 2009 4:44 pm
Contact:

Re: Lessons From The Recession (AARP)

Post by Fallible » Sun Sep 08, 2013 8:59 pm

Professor Emeritus wrote:
jlawrence01 wrote:I

1) Some of the "old truths" are myths. The one that comes to mind immediately is "home prices ALWAYS go up." I heard that from hundreds of commentators and friends. I did not believe that myth but it was used by many to justify poor decisions.
..
Anyone who lived through the S&L debacle knew any such clam was simply false.
Not only that, but as the '08 crisis neared, many on Wall Street and Main Street also knew it probably wasn't true even as they kept loaning and borrowing and slicing and dicing and investing and rating it all AAA. Just too much money still to be made.
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

umfundi
Posts: 3361
Joined: Tue Jun 07, 2011 5:26 pm

Re: Lessons From The Recession (AARP)

Post by umfundi » Sun Sep 08, 2013 9:03 pm

Fallible, Professor:

Much of the reason I like the article is that it puts housing in perspective.

in early 1993 we bought a nice house in a beautiful location on an inland lake in SE Michigan. On a peninsula, you can see water from every window in the house. Cost: $225k.

Here we are, 20 years later, in the same house, retired and having brought up our two kids here. Current value? $225k. In real terms we have "lost" nearly 50%. In reality, I could not be happier with our choice.

Keith
Déjà Vu is not a prediction

User avatar
Kalo
Posts: 477
Joined: Sat May 25, 2013 1:01 pm

Re: Lessons From The Recession (AARP)

Post by Kalo » Sun Sep 08, 2013 9:06 pm

umfundi wrote:I like this:
"Your house is a place to live and a lifestyle choice. It's not an investment asset."
Keith
I don't disagree with this, but, it's not the same statement as "renting is better than buying."

Kalo
"When people say they have a high risk tolerance, what they really mean is that they are willing to make a lot of money." -- Ben Stein/Phil DeMuth - The Little Book of Bullet Proof Investing.

umfundi
Posts: 3361
Joined: Tue Jun 07, 2011 5:26 pm

Re: Lessons From The Recession (AARP)

Post by umfundi » Sun Sep 08, 2013 9:11 pm

Kalo wrote:
umfundi wrote:I like this:
"Your house is a place to live and a lifestyle choice. It's not an investment asset."
Keith
I don't disagree with this, but, it's not the same statement as "renting is better than buying."

Kalo
I could rephrase that: The place you choose to live is a lifestyle decision. You should not view it as an investment.

Keith
Déjà Vu is not a prediction

Fallible
Posts: 6306
Joined: Fri Nov 27, 2009 4:44 pm
Contact:

Re: Lessons From The Recession (AARP)

Post by Fallible » Sun Sep 08, 2013 9:33 pm

umfundi wrote:Fallible, Professor:

Much of the reason I like the article is that it puts housing in perspective.

in early 1993 we bought a nice house in a beautiful location on an inland lake in SE Michigan. On a peninsula, you can see water from every window in the house. Cost: $225k.

Here we are, 20 years later, in the same house, retired and having brought up our two kids here. Current value? $225k. In real terms we have "lost" nearly 50%. In reality, I could not be happier with our choice.

Keith
Keith,

Right on. As the article says: "A house is primarily a place to live." If you have bought wisely, as you obviously have, it is a also a happy place to live. No more should be expected of it.

Fallible
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

User avatar
Kalo
Posts: 477
Joined: Sat May 25, 2013 1:01 pm

Re: Lessons From The Recession (AARP)

Post by Kalo » Sun Sep 08, 2013 10:41 pm

umfundi wrote:
Kalo wrote:
umfundi wrote:I like this:
"Your house is a place to live and a lifestyle choice. It's not an investment asset."
Keith
I don't disagree with this, but, it's not the same statement as "renting is better than buying."

Kalo
I could rephrase that: The place you choose to live is a lifestyle decision. You should not view it as an investment.

Keith
I was being lazy with my post. What I meant was, I agree that a primary residence is not an investment. But purchasing a primary residence may or may not be a better financial decision than renting that same asset.

Kalo
"When people say they have a high risk tolerance, what they really mean is that they are willing to make a lot of money." -- Ben Stein/Phil DeMuth - The Little Book of Bullet Proof Investing.

Beagler
Posts: 3442
Joined: Sun Dec 21, 2008 7:39 pm

Re: Lessons From The Recession (AARP)

Post by Beagler » Mon Sep 09, 2013 8:18 am

When a reverse mortgage is being processed, isn't the house viewed as an asset from the viewpoint of the underwriter?
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.

User avatar
nisiprius
Advisory Board
Posts: 35473
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Lessons From The Recession (AARP)

Post by nisiprius » Mon Sep 09, 2013 8:26 am

Beagler wrote:When a reverse mortgage is being processed, isn't the house viewed as an asset from the viewpoint of the underwriter?
Things can serve different functions to different people, just as they can have different dollar values to different people (that being the basis of trade).

Just because a house is shelter for the owner does not make it shelter for the underwriter.

Just because it is an asset to the underwriter does not make it an asset to the owner.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Dulocracy
Posts: 2271
Joined: Wed Feb 27, 2013 1:03 pm
Location: Atlanta, GA

Re: Lessons From The Recession (AARP)

Post by Dulocracy » Mon Sep 09, 2013 9:19 am

I think it would be more appropriate to say that a house IS an asset, but it is NOT an investment.

As something that has value and can be sold, it is an asset that may increase or decrease in value.

It should not, however, be viewed as an investment for building wealth.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

Beagler
Posts: 3442
Joined: Sun Dec 21, 2008 7:39 pm

Re: Lessons From The Recession (AARP)

Post by Beagler » Mon Sep 09, 2013 9:35 am

nisiprius wrote:
Beagler wrote:When a reverse mortgage is being processed, isn't the house viewed as an asset from the viewpoint of the underwriter?
Things can serve different functions to different people, just as they can have different dollar values to different people (that being the basis of trade).

Just because a house is shelter for the owner does not make it shelter for the underwriter.

Just because it is an asset to the underwriter does not make it an asset to the owner.
Interesting perspective. I see it as an asset (anything owned that has exchange value), even though it's not what I consider an investment (something which I hope will increase in value).

"An asset is anything of value that can be converted into cash. Assets are owned by individuals, businesses and governments. Examples of assets include:

Cash and cash equivalents – certificates of deposit, checking and savings accounts, money market accounts, physical cash, Treasury bills;
Real property – land and any structure that is permanently attached to it;
Personal property – everything that you own that is not real property such as boats, collectibles, household furnishings, jewelry, vehicles;
Investments – annuities, bonds, cash value of life insurance policies, mutual funds, pensions, retirement plans (IRA, 401(k), 403(b), etc.,) stocks and other investments." http://tinyurl.com/c5457l5
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.

Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

Re: Lessons From The Recession (AARP)

Post by Rodc » Mon Sep 09, 2013 11:23 am

We seem to be getting off topic. Rather than provide my view of is a house an investment or not, I will save myself some typing and perhaps others by pointing out this topic is (1) off topic and (2) beaten to death in other threads dedicated to this topic.

Others might save some time by simply reading one of those threads.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

Post Reply