Is it Possible for the Stock Market Trend to Change

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Jezbro
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Is it Possible for the Stock Market Trend to Change

Post by Jezbro » Sat Jan 02, 2016 3:56 am

Hi guys, sorry if this is a bit more of a more amateur question than what you may be used to.

I'm new to the world of investing and after reading a bunch of websites/books I have a question with regards to the stock market as a whole. Being 21 years old, I'm looking at investing in ETFs for the long run (40+ years) and enjoying the rewards as John Bogle frequently recommends. My concern is however, everyone says that the stock market will always increase. Sure in the intermediary it will go up and down but over long periods it increases. Is it possible for this to not be true? Can the market perhaps stagnate over time and maybe even decline on the large scale? Would investing in ETFs result in a poor performance in the long term that it would become unfavourable? How can we be sure that it will always go up?

IPer
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Re: Is it Possible for the Stock Market Trend to Change

Post by IPer » Sat Jan 02, 2016 4:03 am

Jezbro wrote:Hi guys, sorry if this is a bit more of a more amateur question than what you may be used to.

I'm new to the world of investing and after reading a bunch of websites/books I have a question with regards to the stock market as a whole. Being 21 years old, I'm looking at investing in ETFs for the long run (40+ years) and enjoying the rewards as John Bogle frequently recommends. My concern is however, everyone says that the stock market will always increase. Sure in the intermediary it will go up and down but over long periods it increases. Is it possible for this to not be true? Can the market perhaps stagnate over time and maybe even decline on the large scale? Would investing in ETFs result in a poor performance in the long term that it would become unfavourable? How can we be sure that it will always go up?
The market has stagnated from time to time, this is true. What you think you heard and now believe might be far from the truth!
Here is what is going to happen: The market is going to fluctuate daily.
Read the Wiki Wiki !

IPer
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Re: Is it Possible for the Stock Market Trend to Change

Post by IPer » Sat Jan 02, 2016 4:07 am

The other part that you might not have heard is that as a younger person (21) you should anticipate
times when the market is down and you are in your accumulation stage and putting money in steadily.

(you won't know this until you look back and see that that was a a lower market you had invested in)

Why? Because this constitutes your time of buying low, generally. We don't actually have enough market
history to say or conjecture that a 40 year down period cannot occur, it could, it may, I don't think it will,
but it certainly could, as well as a lot of others things that could make life as we know it very rough. There
is no real reason to live your life in that state of fear though. Live long and prosper!
Last edited by IPer on Sat Jan 02, 2016 4:25 am, edited 1 time in total.
Read the Wiki Wiki !

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cfs
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Re: Is it Possible for the Stock Market Trend to Change

Post by cfs » Sat Jan 02, 2016 4:22 am

Good questions.

And the answer is "we don't know what Miss Market is going to do next." Invest slowly and for the long run. However, periods of long declines can happen here in the US and any other country, for example check this chart on the Japanese stock market going from about 40k in December 1989 to about 19k in December 2015. Again, invest slowly and for the long run.

Good luck in your investing career.
~ Member of the Active Retired Force, portfolio withdrawal and spending rate 1.7% ~

retiredjg
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Re: Is it Possible for the Stock Market Trend to Change

Post by retiredjg » Sat Jan 02, 2016 5:52 am

Jezbro wrote:Is it possible for this to not be true? Can the market perhaps stagnate over time and maybe even decline on the large scale?
Yes. It could happen. In fact, that is what has happened in Japan - a very steep drop which has never recovered.
Would investing in ETFs result in a poor performance in the long term that it would become unfavourable?
Yes, but what other choice do you have? If you don't invest, you are betting that the market will not increase. That does not seem like a good bet to me.
How can we be sure that it will always go up?
You can't. But it seems to be more likely than not.

jimkinny
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Re: Is it Possible for the Stock Market Trend to Change

Post by jimkinny » Sat Jan 02, 2016 6:04 am

Jezbro: the stock markets can go down and stay down for very long periods of time, 5-20 years. It is possible that, starting today, equity investors will lose money for the next ten years.

It is much less risky to make and save more than counting on the stock markets.

the lowest risk investments you can make are I Bonds and TIPS. After that, it is just piling on risk.

Judge the amount of risk you take by your need, ability and willingness to take that risk.

Clive
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Re: Is it Possible for the Stock Market Trend to Change

Post by Clive » Sat Jan 02, 2016 6:24 am

Jezbro wrote:My concern is however, everyone says that the stock market will always increase.
Because 'everyone' measures incorrectly! Gross nominal. Measure more correctly - net real - after costs, taxes and inflation, and stock's aren't a one way street.

One of the Bogle concepts is to keep costs low, and inflation, taxation as well as fund fees and trading costs (spreads etc) are all part of 'costs'.

Consider the inflation rate for example - a indication of the change in purchase power of money. If inflation runs at 9%, your investment gains 9%, but you pay 33% of nominal gains in tax, then you're left with 6% and your total investment has lost some of its purchase power. To compensate your investment ideally would have grown by 12% just to maintain purchase power. By the measure that 'everyone' uses that has the illusion that stocks 'always increase'.

Another factor is survivorship. Historic performance figures quoted are often based on survivorship. "Since 1928.." or whatever "..the Dow has gained x%.." for instance. Dow and Jones however devised three indexes, Industrial, Transport and Utility averages. Over time the preference has been to focus on and transform the best of the three as being the indicator of historic 'averages'. At the offset you'd have been less likely to 'overweight' that best case and more likely to have either selected a 'below average' case or diversified across all three and lagged the 'average' in practice.

Yet another factor is the inflation rate figure. CPI as in consumer prices have relatively declined as robots have replaced factories full of manual workers. Lower 'production' costs, lower retail prices. Compare stock inflation with house price inflation and the two more closely aligned, a couple of percent above CPI inflation. Add on the imputed rent benefit of owning a home rather tha renting and owning a home was as, if not more productive than stocks.

Keep back some reserves to deploy when stock purchase power declines (share prices drop a lot), replenish reserves when stocks are overheating, and the ancient Talmudic advice (some business (stocks), some land (home), some reserves) still holds as good today as it did millenia ago. You don't have to be good at timing, just periodically rebalance whenever sizeable deviations away from target weightings have become apparent.

My advice to a younger accumulation individual would be to go for owning a home first, then look to build a stock portfolio later and finally build up reserves after that.

magneto
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Re: Is it Possible for the Stock Market Trend to Change

Post by magneto » Sat Jan 02, 2016 6:52 am

When investing 'The Market' is not some strange abstract concept.
The market is ownership of a collection of underlying functioning businesses, with hopefully growing profits and earnings per share.
Generally the market can be expected to reflect the performance of the underlying growing businesses.

But markets do fluctuate around their long term rational medians, sometimes wildy so. :shock:
Years of outperformance and underperformance in the stock indices can then result.
Some note of market valuations can inform the investor (if not to a change in trend, but rather to long term expected returns).
Think US 1999, 2009, : Japan 1980 to date : UK 1999, 2009 and to date.

What can throw the markets more seriously adrift is a general failure of the economy with resultant falling companies' earnings.
Benjamin Roth's 'The Great Depression, A Diary', should be on every investor's must read list (esp the 100% stock clique). :!:
'There is a tide in the affairs of men ...', Brutus (Market Timer)

warner25
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Re: Is it Possible for the Stock Market Trend to Change

Post by warner25 » Sat Jan 02, 2016 7:33 am

Yes, the value of the aggregate, publicly-traded, global stock market could stagnate or diminish over very long periods of time (i.e. longer than our lifetimes). However, the underlying causes of such an event would mean that we have bigger things to worry about than our shrinking savings. The primary concerns would be staying employed, accessing essential goods and services, and surviving the likely wars and revolutions. Alternative investments wouldn't perform much better; "safer" options would cease being safe during a true global economic collapse, so it's kind of a Pascal's Wager for investing in my mind. The best we can do is diversify as much as possible, and keep our skills sharp.

joebh
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Re: Is it Possible for the Stock Market Trend to Change

Post by joebh » Sat Jan 02, 2016 7:50 am

Jezbro wrote:Sure in the intermediary it will go up and down but over long periods it increases. Is it possible for this to not be true?
Yes, anything is possible.
Can the market perhaps stagnate over time and maybe even decline on the large scale?
Yes, it could.
Would investing in ETFs result in a poor performance in the long term that it would become unfavourable?
It could. And if you are invested and the market declines on a large scale, then that could be unfavorable.
How can we be sure that it will always go up?
You cannot.

That said, look what has happened in the past and compare it to your other investment possibilities.

joebh
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Re: Is it Possible for the Stock Market Trend to Change

Post by joebh » Sat Jan 02, 2016 7:52 am

retiredjg wrote:
Jezbro wrote:Is it possible for this to not be true? Can the market perhaps stagnate over time and maybe even decline on the large scale?
Yes. It could happen. In fact, that is what has happened in Japan - a very steep drop which has never recovered.
Correction - "Has not recovered yet."

Never is a long time.

Twins Fan
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Re: Is it Possible for the Stock Market Trend to Change

Post by Twins Fan » Sat Jan 02, 2016 8:06 am

Jezbro wrote:How can we be sure that it will always go up?
We can't. Good luck to us all. :happy

We don't know that it will always go up, but we go off of probabilities and likely to do so.

Being new to investing, it sounds like a good time to look into risk tolerance. How much of your money are you willing to risk in the stock market? The market could/should go up, it could go sideways for a long time, it could go down/way down, or it could even go away. If people stopped investing in stocks and the market went away, either something way better came along or we have bigger things to worry about at that point though.

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Maynard F. Speer
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Re: Is it Possible for the Stock Market Trend to Change

Post by Maynard F. Speer » Sat Jan 02, 2016 8:08 am

Rob Arnott wrote on this:

The Biggest Urban Legend in Finance

Emboldened by the 1980s and 1990s (when stocks compounded at 17.6% and 18.2% per annum, respectively), “Stocks for the Long Run” became the mantra for long-term investing, as well as a best-selling book. This view is now embedded into the psyche of an entire generation of professional and casual investors who ignore the fact that much of those outsized returns were a consequence of soaring valuation multiples and tumbling yields. In this issue we examine historical U.S. equity performance from a larger perspective and find that today’s overwhelming equity bias is built on a shaky foundation, reliant on a short and unrepresentative time period.

https://www.researchaffiliates.com/Our% ... egend.aspx

In fact, many European markets - in perfectly functional economies - have experienced >60 years of negative real growth in their stock markets .. Many of my favourite markets to invest in - such as the FTSE AIM - don't rise over time (or at least haven't) ... There's a fairly delicate balance you need to strike, where the few successes outweigh the bulk of failures

But this is why I think you need to diversify ... If you'd been invested in Japan in 1990, your investments would've done horribly ... But if you'd been in Japanese value stocks, you'd barely have noticed the broad markets in perpetual free-fall at all

In the UK, our major stock index has done pretty abysmally since 2000 - you could have done better in cash .. However mid-caps have done extremely well, private equity has returned around 300-400%, and many active managers (the majority) have managed to keep you in the right parts of the market

The idea that holding the Total Stock Market gives you all the diversification you need - every sector, factor, size, etc - could be a mistake .. Just as stock markets won't always rise, it's every bit as much about what you aren't holding (or tilted to) as what you are .. I know this goes against Bogle philosophy, and against Warren Buffett (at certain points - although he's held both positions), but their perspectives may be emboldened by eras in which they've been investing
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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jwillis77373
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Re: Is it Possible for the Stock Market Trend to Change

Post by jwillis77373 » Sat Jan 02, 2016 8:29 am

You can look at it optimistically. You can look at is pessimistically.

However inflation will devalue cash over time. The alternatives are stocks, bonds (a type of short-term stock), and commodities (a type of passive stock). But its actually even more complicated than that, stocks can fail, emotions can drive the market, demographics of the population, wars, political intrigue. So absolutely the trend of the market can change... in the short-term.

But most would agree unless you need the cash in the short-term, its your worst option to hold, followed by switching it from investment to investment creating transactions fees (erasing your cash value even faster).. and then there is inflation erosion and tax to be paid on any gains.

So your stuck. With all these depressing options to choose from.. but you have one silver lining.. civilization.. your country, your planet has in general moved forward and generate greater and greater value and wealth. That's a long term trend.. and it runs in cycles usually less than a generation or about 30 years. Even the worst of recessions in the last three generations has not lasted more than a decade or so.. and as long as you have your basic needs met, investing in the total market would have netted great gains. The earlier the better. Its no guarantee.. but its the best anyone has come up with so far.
Last edited by jwillis77373 on Sat Jan 02, 2016 8:44 am, edited 2 times in total.

carolinaman
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Re: Is it Possible for the Stock Market Trend to Change

Post by carolinaman » Sat Jan 02, 2016 8:34 am

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carolinaman
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Re: Is it Possible for the Stock Market Trend to Change

Post by carolinaman » Sat Jan 02, 2016 8:35 am

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carolinaman
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Re: Is it Possible for the Stock Market Trend to Change

Post by carolinaman » Sat Jan 02, 2016 8:37 am

Maynard F. Speer wrote:Rob Arnott wrote on this:

The Biggest Urban Legend in Finance

Emboldened by the 1980s and 1990s (when stocks compounded at 17.6% and 18.2% per annum, respectively), “Stocks for the Long Run” became the mantra for long-term investing, as well as a best-selling book. This view is now embedded into the psyche of an entire generation of professional and casual investors who ignore the fact that much of those outsized returns were a consequence of soaring valuation multiples and tumbling yields. In this issue we examine historical U.S. equity performance from a larger perspective and find that today’s overwhelming equity bias is built on a shaky foundation, reliant on a short and unrepresentative time period.

https://www.researchaffiliates.com/Our% ... egend.aspx

In fact, many European markets - in perfectly functional economies - have experienced >60 years of negative real growth in their stock markets .. Many of my favourite markets to invest in - such as the FTSE AIM - don't rise over time (or at least haven't) ... There's a fairly delicate balance you need to strike, where the few successes outweigh the bulk of failures

But this is why I think you need to diversify ... If you'd been invested in Japan in 1990, your investments would've done horribly ... But if you'd been in Japanese value stocks, you'd barely have noticed the broad markets in perpetual free-fall at all

In the UK, our major stock index has done pretty abysmally since 2000 - you could have done better in cash .. However mid-caps have done extremely well, private equity has returned around 300-400%, and many active managers (the majority) have managed to keep you in the right parts of the market

The idea that holding the Total Stock Market gives you all the diversification you need - every sector, factor, size, etc - could be a mistake .. Just as stock markets won't always rise, it's every bit as much about what you aren't holding (or tilted to) as what you are .. I know this goes against Bogle philosophy, and against Warren Buffett (at certain points - although he's held both positions), but their perspectives may be emboldened by eras in which they've been investing
+1. Good article Maynard.

A key point is the increased valuation multiples during the past 30 years. Dumb question: What caused the rise in valuation multiples? And why would the valuations not revert to the historic mean?

"Conclusion:
We aren’t saying that we should expect bonds to beat stocks over the next 10 or 20 years. Rather, this brief history lesson illuminates that the much-vaunted 4–5% risk premium for stocks is unreliable and a dangerous assumption on which to make our future plans. In our view, a more reasonable analysis would suggest 2–3%, which is the historic risk premium absent the rise in valuation multiples in the past 30 years. Today’s low starting yields, combined with the prospective challenges from our addiction to debt-financed consumption and aging population, would put us closer to 1%."

longinvest
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Re: Is it Possible for the Stock Market Trend to Change

Post by longinvest » Sat Jan 02, 2016 9:38 am

jwillis77373 wrote:[...] The alternatives are stocks, bonds (a type of short-term stock), and commodities (a type of passive stock). [...]
I completely disagree with these definitions.

A bond is a legal contract to receive specific coupon payments on specific dates and the capital back at a specific maturity date.

A stock is an ownership certificate that give its owner the right to receive his fair share of any future dividends and a voting right (giving him partial influence on the management of the corporation).

A commodity is something that is bought in the hope of being sold at a higher price later.

Of these three, only the bond is a written promise of growing the invested capital (when bought at par). Partial ownership of a productive company that either pays dividends or is growing holds a reasonable prospect of growing the invested capital, sometimes spectacularly, but there is a lot of risk, as the company could be mismanaged, or its market could dry up, leading it to failure and, possibly, bankruptcy. Also, a stock does not have a maturity date; it holds no explicit promise of paying back the invested capital. As for a commodity, it has no internal growth factor. For example, if you take a pile of gold, bury it for years, and dig it out years later, it won't have grown. Worse, in most cases, one has to pay for its storage. The only hope to make a profit off a commodity depends on selling it at a higher price than one paid for it (and its storage). There is very little difference between speculating on commodities and gambling.

The Bogleheads investment philosophy only recommends investing into stocks and bonds. Bonds do have risks (interest rate risk, credit risk for corporate bonds, inflation risk for nominal bonds, etc.) but it is easy to see that a short-term Treasury bond has much less risk than a stock, but also much less potential for high growth. That's why our philosophy recommends that we never bear too much or too little risk; in other words, that we invest into both bonds and stocks.

We simply don't know the future. The prudent thing to do is to diversify across assets with an internal growth source (coupons for bonds, asset growth and dividends for stocks).
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

Clive
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Re: Is it Possible for the Stock Market Trend to Change

Post by Clive » Sat Jan 02, 2016 3:59 pm

Maynard F. Speer wrote:...If you'd been invested in Japan in 1990, your investments would've done horribly ... But if you'd been in Japanese value stocks, you'd barely have noticed the broad markets in perpetual free-fall at all

In the UK, our major stock index has done pretty abysmally since 2000 - you could have done better in cash .. However mid-caps have done extremely well, private equity has returned around 300-400%...
A broader mix of Japanese stocks rather than the biggies that peaked at very high levels also faired much better. Ditto UK FT100 that overweighted dot coms pre dot com bubble bursting and financials pre 2008/9 financial crisis (and more recently is heavily weighted into oil/mining stocks - during a time when demand for commodities is relatively low (share prices flat/in-decline). Moral as I see it is not to overweight any one single stock/sector and instead to invest small amounts more widely - a.k.a S&P500/FT250 style.

The S&P intentionally diversifies across sectors. The UK midcap is somewhat similar (financials is relatively heavy by number, but around 30 to 40 of the stocks are investment trusts, which invest in a wide range of different things/countries).

Other indexes are much more concentrated/focussed, and as Japan and FT100 show that can have a negative effect.

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