U.S. stocks in freefall

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mbk734
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Re: U.S. stocks in freefall

Post by mbk734 » Thu Sep 24, 2015 9:38 am

If you're young, you shouldn't care about the market short term. You should be dumping all you can into equities every month and reinvesting the dividends. Once you're closer to retirement, then you can worry about the market falling and your asset allocation. 2008 at age 20 and age 60 are very different beasts.
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Re: U.S. stocks in freefall

Post by hnzw rui » Thu Sep 24, 2015 10:22 am

mbk734 wrote:If you're young, you shouldn't care about the market short term. You should be dumping all you can into equities every month and reinvesting the dividends. Once you're closer to retirement, then you can worry about the market falling and your asset allocation. 2008 at age 20 and age 60 are very different beasts.

Yup. For someone who's just in their 20s, the half-off sale on stocks is awesome. Alas, at that time, I was still finding what my risk tolerance was along with getting a 10% paycheck cut so I totally missed the run-up in 2009 and 2010. :?

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Re: U.S. stocks in freefall

Post by Leeraar » Thu Sep 24, 2015 10:49 am

nisiprius wrote:Yes, and during the decade of 2000-2009 most of the outperformance of international stocks was due to the weakening of the U. S. dollar, although it was pretty hard to find international stock advocates willing to admit that. And the ones who were willing to admit that were rolling on the floor laughing at the very idea that the dollar could ever possibly strengthen.

I don't have long term currency data, but my recollection is that about 1975 a British Pound was worth nearly three US Dollars. The South African Rand used to be worth $1.45, now it is worth 7 cents.

L.
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Re: U.S. stocks in freefall

Post by flyingaway » Thu Sep 24, 2015 10:56 am

I just used my dry powder yesterday.

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Re: U.S. stocks in freefall

Post by HomerJ » Thu Sep 24, 2015 11:07 am

Browser wrote:an asset (U.S. stocks) that have barely managed to produce a cumulative return equal to that of 5-year treasuries over the last 16 years, with a couple of heart-stopping drawdowns along the way. And only managed that due to the last 6+ years of ZIRP that have driven valuations to record highs, where we now sit. :(



Actually, the fact that the return from stocks is equal to 5-year treasuries over the past 16 years makes me think that maybe it's possible that stocks AREN'T way over-valued.

Of course, if you do a chart from the past 20 years, or the past 10 years, stocks look a lot better...

So, as we all know, picking your beginning point and end-point, one can prove anything. Which discounts all our little charts.

Personally, I think we all should be forced to use 30-year charts for everything... :)
Last edited by HomerJ on Thu Sep 24, 2015 12:04 pm, edited 1 time in total.

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Re: U.S. stocks in freefall

Post by Browser » Thu Sep 24, 2015 11:22 am

HomerJ wrote:
Browser wrote:an asset (U.S. stocks) that have barely managed to produce a cumulative return equal to that of 5-year treasuries over the last 16 years, with a couple of heart-stopping drawdowns along the way. And only managed that due to the last 6+ years of ZIRP that have driven valuations to record highs, where we now sit. :(



Actually, the fact that the return from stocks is equal to 5-year treasuries over the past 16 years makes me think that maybe it's possible that stocks AREN'T way over-valued.

Of course, if you do a chart from the past 20 years, or the past 10 years, stocks look a lot better...

So, as we all know, picking your beginning point and end-point, one can prove anything. Which discounts all our little charts.

True enough. But this is relevant for folks who have actually been invested in stocks for the last 16 years and waiting for Godot. Even though Godot showed up over the last few years, all it has actually amounted to is a break-even with safe intermediate treasuries so far since 2000. All the risk of stocks with the return of bonds. They are never the sure thing that folks seem to think they are, even over long periods of time.
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Re: U.S. stocks in freefall

Post by sawhorse » Thu Sep 24, 2015 11:40 am

yukon50 wrote:International stocks...where money goes to die... :annoyed

I see a good cartoon or wall hanging in this.

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Re: U.S. stocks in freefall

Post by zotty » Thu Sep 24, 2015 11:55 am

nisiprius wrote:I don't think you understand the role of currencies in foreign stock returns.


i understand now. a long long time ago you mentioned that vanguard total international is a "risk 5" whereas domestics are a "risk 4". it was a puzzle then, but It's utterly clear now why this is so. the exchange rate significantly magnifies returns (one way and the other).

I'm 50/50 and i'm not changing now. I still see good value creation as we drift down. but... this has certainly been a learning experience. Yes, i am told that currency contributions are zero sum. maybe. yes, there is zigging and zagging, but the past is not the future and currency rates might NOT be zero-sum over my time horizon. hence, risk 5.

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Re: U.S. stocks in freefall

Post by cfs » Thu Sep 24, 2015 11:59 am

Where?

Flyingaway said "I just used my dry powder yesterday."

Where?

In stocks, bonds, or all of the above?
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Re: U.S. stocks in freefall

Post by HomerJ » Thu Sep 24, 2015 12:13 pm

Browser wrote:
HomerJ wrote:So, as we all know, picking your beginning point and end-point, one can prove anything. Which discounts all our little charts.

True enough. But this is relevant for folks who have actually been invested in stocks for the last 16 years and waiting for Godot. Even though Godot showed up over the last few years, all it has actually amounted to is a break-even with safe intermediate treasuries so far since 2000. All the risk of stocks with the return of bonds. They are never the sure thing that folks seem to think they are, even over long periods of time.


Again though, you are cherry-picking your beginning and end-points..

I can easily show that stocks have beaten bonds over the past 20 years or the past 10 years, or especially, over the past 6 years.

So I can easily "prove" that stocks are a sure thing over the short-term and the long-term, if I wanted to. Just like you can "prove" that stocks are not a sure thing over a 16-year (and exactly a 16-year) period.

Personally, I think we should all be forced to use 30-year periods when making statements like "stocks are not a sure thing over the long-term".

Because otherwise we can prove whatever we want.

Anyway, stocks basically went nowhere for 16 years before... The DOW was at 1000 in 1966, and still at 1000 in 1982... This isn't something new...

And there were people exactly like you in 1982 stating "See! This proves that stocks are not always a good investment over the long-term! Look how poorly they've done for 16 years!"

In this 16-year case (2000-2016), stocks have not done that terrible, but bonds have done very well with the falling interest rates. However, it is very unlikely that interest rates will fall as much for the next 16 years... So trying to make a decision today based on the past 16 years may not be prudent.

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Re: U.S. stocks in freefall

Post by Leeraar » Thu Sep 24, 2015 12:48 pm

HomerJ wrote:Anyway, stocks basically went nowhere for 16 years before... The DOW was at 1000 in 1966, and still at 1000 in 1982... This isn't something new...

I think y'all are arguing about the wrong thing. I did quite well over the last sixteen years (and before) by executing a Boglehead type of strategy: Save over 20% of your income, stick to your AA, and rebalance when things get out of whack. (I look at potential rebalancing about twice a year.)

In my opinion, the Dow is not a measure of anything, especially with dividends not reinvested.

L.
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Re: U.S. stocks in freefall

Post by Bustoff » Thu Sep 24, 2015 1:10 pm

Browser wrote:We need to take back our ownership role by selling down to the "I Don't Give a Damn" point of indifference.

+1 ... Precisely.
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Re: U.S. stocks in freefall

Post by Browser » Thu Sep 24, 2015 2:29 pm

Not trying to prove stocks are or are not a sure thing in any given period. Just pointing out that for us who lived through the most recent 16 years and counting, they have been a disappointment relative to safer returns from treasury bonds. And, at current valuations, I would not be surprised if the equity risk premium will be AWOL for a few more years as well. :(
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Re: U.S. stocks in freefall

Post by backpacker » Thu Sep 24, 2015 2:57 pm

Browser wrote:
HomerJ wrote:
Browser wrote:an asset (U.S. stocks) that have barely managed to produce a cumulative return equal to that of 5-year treasuries over the last 16 years, with a couple of heart-stopping drawdowns along the way. And only managed that due to the last 6+ years of ZIRP that have driven valuations to record highs, where we now sit. :(



Actually, the fact that the return from stocks is equal to 5-year treasuries over the past 16 years makes me think that maybe it's possible that stocks AREN'T way over-valued.

Of course, if you do a chart from the past 20 years, or the past 10 years, stocks look a lot better...

So, as we all know, picking your beginning point and end-point, one can prove anything. Which discounts all our little charts.

True enough. But this is relevant for folks who have actually been invested in stocks for the last 16 years and waiting for Godot. Even though Godot showed up over the last few years, all it has actually amounted to is a break-even with safe intermediate treasuries so far since 2000. All the risk of stocks with the return of bonds. They are never the sure thing that folks seem to think they are, even over long periods of time.


Even so, an investor with a 40/60 portfolio starting in 2000 would have had higher returns and lower risk than someone with a 0/100 portfolio. It's a mistake to consider risk only in isolation.

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Last edited by backpacker on Fri Sep 25, 2015 6:12 am, edited 1 time in total.

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Re: U.S. stocks in freefall

Post by SimpleGift » Thu Sep 24, 2015 3:36 pm

Browser wrote:And, at current valuations, I would not be surprised if the equity risk premium will be AWOL for a few more years as well.

One can't look at current equity valuations in a vacuum, and then just assume they are overvalued.

Given today's very low levels of inflation and interest rates, current P/E ratios are very much in line with their long-term historical averages. See this recent thread: Inflation and Price/Earnings Ratios, 1880-2015.
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Re: U.S. stocks in freefall

Post by nisiprius » Thu Sep 24, 2015 4:07 pm

Leeraar wrote:
HomerJ wrote:Anyway, stocks basically went nowhere for 16 years before... The DOW was at 1000 in 1966, and still at 1000 in 1982... This isn't something new...

I think y'all are arguing about the wrong thing. I did quite well over the last sixteen years (and before) by executing a Boglehead type of strategy: Save over 20% of your income, stick to your AA, and rebalance when things get out of whack. (I look at potential rebalancing about twice a year.)

In my opinion, the Dow is not a measure of anything, especially with dividends not reinvested.

L.
No, but HomerJ's statement that "stocks basically went nowhere for 16 years before" is correct anyway.

With dividends reinvested but corrected for inflation, the S&P 500 basically went nowhere from 1966 through 1982 inclusive. A tiny loss, actually. And a big loss after taxes, of course, because taxes are assessed on the nominal gain and there was a big nominal gain even though there was no real gain.

http://www.moneychimp.com/features/market_cagr.htm

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Re: U.S. stocks in freefall

Post by sawhorse » Thu Sep 24, 2015 6:06 pm

HomerJ wrote:Personally, I think we should all be forced to use 30-year periods when making statements like "stocks are not a sure thing over the long-term".

Why 30 years? I can see arguments for several choices of time intervals, some shorter than 30 years, some longer than 30 years.

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Re: U.S. stocks in freefall

Post by Leeraar » Thu Sep 24, 2015 9:18 pm

nisiprius wrote:
Leeraar wrote:
HomerJ wrote:Anyway, stocks basically went nowhere for 16 years before... The DOW was at 1000 in 1966, and still at 1000 in 1982... This isn't something new...

I think y'all are arguing about the wrong thing. I did quite well over the last sixteen years (and before) by executing a Boglehead type of strategy: Save over 20% of your income, stick to your AA, and rebalance when things get out of whack. (I look at potential rebalancing about twice a year.)

In my opinion, the Dow is not a measure of anything, especially with dividends not reinvested.

L.
No, but HomerJ's statement that "stocks basically went nowhere for 16 years before" is correct anyway.

nisiprius,

Yes, but sequence of returns works both ways. I saved and saved, and then came post-2009.

I did, in fact, not do too badly 2001-2008 either.

L.
Last edited by Leeraar on Thu Sep 24, 2015 9:20 pm, edited 1 time in total.
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Re: U.S. stocks in freefall

Post by Uncle Pennybags » Thu Sep 24, 2015 9:19 pm

yukon50 wrote:International stocks...where money goes to die... :annoyed
It not funny anymore. Not only is foreign stock my biggest loser it is the only one with a comma. I stopped adding to foreign, I'm dropping from 20% to 10% of stock holdings. It should be there in a fortnight. :(

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Re: U.S. stocks in freefall

Post by yukon50 » Thu Sep 24, 2015 10:45 pm

Browser wrote:Just pointing out that for us who lived through the most recent 16 years and counting, they have been a disappointment relative to safer returns from treasury bonds. :(


Yup! Lots of us never experienced the pre-2000 strong returns. Just lackluster stock returns and never-ending 0% interest rates. :? :?

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Re: U.S. stocks in freefall

Post by zaboomafoozarg » Thu Sep 24, 2015 10:59 pm

yukon50 wrote:Yup! Lots of us never experienced the pre-2000 strong returns. Just lackluster stock returns and never-ending 0% interest rates. :? :?


It's probably the deleveraging in action. We may have another 20 or 30 years of it. Or more.

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Re: U.S. stocks in freefall

Post by HomerJ » Fri Sep 25, 2015 12:01 am

Leeraar wrote:Yes, but sequence of returns works both ways. I saved and saved, and then came post-2009.


Oh, I agree... Very few of us invested all our money in 2000, and have not invested since then... All of us who invested every month from 2000-2015 have done pretty well.

Another reason why looking at cherry-picked time periods simplistically is not very useful.

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Re: U.S. stocks in freefall

Post by ofcmetz » Fri Sep 25, 2015 2:41 am

Lbill stopped posting in 2012. Browser started posting in 2012. Interesting.

Glad someone stepped up to fight against the holding of equities. If not this site wouldn't be as balanced as it is.
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Re: U.S. stocks in freefall

Post by ofcmetz » Fri Sep 25, 2015 2:48 am

Uncle Pennybags wrote:
yukon50 wrote:International stocks...where money goes to die... :annoyed
It not funny anymore. Not only is foreign stock my biggest loser it is the only one with a comma. I stopped adding to foreign, I'm dropping from 20% to 10% of stock holdings. It should be there in a fortnight. :(



I on the other hand have been putting most of my new money into the Total International Index. It's the asset that keeps getting below my desired allocation and my plan says that's where money goes. International has a better P/E and dividend as well. It has higher future expected returns to boot. We shouldn't be concerned with short term performance when it comes to holding equities. Do your research and come up with a well thought out plan. Then stick to it regardless of day to day and month to month movements.
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Re: U.S. stocks in freefall

Post by closetoreality » Fri Sep 25, 2015 6:48 am

Am I out of line to say those who are freaking out in this thread have over committed to the market?

Are we not suppose to look at it, smile, and buy even more when the market is in a dip?

Confused. Am I doing it wrong?

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Re: U.S. stocks in freefall

Post by cfs » Fri Sep 25, 2015 8:38 am

Just keeping the conversation going.

Actually, closetoreality, a good number of members are just keeping the conversation going. I don't see it as hitting the panic button or reaching the capitulation point. Some of our members are doing tax loss harvesting, portfolio rebalancing, removing actively managed skunks from their portfolio portfolio cleanup, buying new shares of equities or bonds, or just doing nothing at all because inactivity could be a good thing. On my side of the house I do what I need to do to keep the equity side of my SWAN (sleep well at night) portfolio below the 50% mark (and lately Miss Market is helping me with this one, so, no action needed on my part). All individual investors are responsible for taking care of their own portfolio.

Now closing, time to take care of my LUng distance workout before things get out of control with the heat out there.
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Re: U.S. stocks in freefall

Post by Uncle Pennybags » Fri Sep 25, 2015 11:23 pm

ofcmetz wrote: Then stick to it regardless of day to day and month to month movements.
I'm sticking at 10% foreign instead of 20%; I'm not selling I'm just not buying for awhile. You people talked me into 20%, I should have listens to Mr. Bogle.

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Re: U.S. stocks in freefall

Post by Call_Me_Op » Sat Sep 26, 2015 6:48 am

Uncle Pennybags wrote:
ofcmetz wrote: Then stick to it regardless of day to day and month to month movements.
I'm sticking at 10% foreign instead of 20%; I'm not selling I'm just not buying for awhile. You people talked me into 20%, I should have listens to Mr. Bogle.


Classic recency bias.
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Re: U.S. stocks in freefall

Post by Jags4186 » Sat Sep 26, 2015 9:04 am

Call_Me_Op wrote:
Uncle Pennybags wrote:
ofcmetz wrote: Then stick to it regardless of day to day and month to month movements.
I'm sticking at 10% foreign instead of 20%; I'm not selling I'm just not buying for awhile. You people talked me into 20%, I should have listens to Mr. Bogle.


Classic recency bias.


Classic Tammy

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Re: U.S. stocks in freefall

Post by theunknowntech » Sat Sep 26, 2015 11:30 am

Did something happen?

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Re: U.S. stocks in freefall

Post by Uncle Pennybags » Sat Sep 26, 2015 5:34 pm

theunknowntech wrote:Did something happen?

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Re: U.S. stocks in freefall

Post by Olysouthpaw24 » Sun Sep 27, 2015 11:26 am

nisiprius wrote:
Leeraar wrote:
HomerJ wrote:Anyway, stocks basically went nowhere for 16 years before... The DOW was at 1000 in 1966, and still at 1000 in 1982... This isn't something new...

I think y'all are arguing about the wrong thing. I did quite well over the last sixteen years (and before) by executing a Boglehead type of strategy: Save over 20% of your income, stick to your AA, and rebalance when things get out of whack. (I look at potential rebalancing about twice a year.)

In my opinion, the Dow is not a measure of anything, especially with dividends not reinvested.

L.
No, but HomerJ's statement that "stocks basically went nowhere for 16 years before" is correct anyway.

With dividends reinvested but corrected for inflation, the S&P 500 basically went nowhere from 1966 through 1982 inclusive. A tiny loss, actually. And a big loss after taxes, of course, because taxes are assessed on the nominal gain and there was a big nominal gain even though there was no real gain.

http://www.moneychimp.com/features/market_cagr.htm

Image


In my opinion, this is dishonest and misleading. You cover a period of the worst inflation in modern history and purposefully end at the bottom of a market crash. The fact is that equities are the only vehicle that meaningfully outpace inflation over any intermediate or long term time period and using scare tactics on people only serves to pad the pockets of brokers and create panic selling when people should be buying. The bigger the market drop, the more I dump in to equities.

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Re: U.S. stocks in freefall

Post by Leeraar » Sun Sep 27, 2015 12:25 pm

Isn't nisiprius the biggest complainer about cherry-picking start and end dates?

L. :)
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Re: U.S. stocks in freefall

Post by nisiprius » Sun Sep 27, 2015 8:48 pm

Leeraar wrote:Isn't nisiprius the biggest complainer about cherry-picking start and end dates?

L. :)
On the one hand, that's a good point. By the way, does anyone have a good term for "the opposite of cherry-picking" (choose a period because it is particularly bad?)

Defensiveness follows.

It would be misleading if I said that was a typical period. I should have pointed out more clearly that it was a very unusual, extremely bad period. I didn't pick the endpoints, HomerJ did.

Extremes happen. 1929 happened. 1937 happened. The panic of 1907 happened. The stock market dropping 22% in one day in 1987 happened. Bonds beating stocks over a 30-year period happened. 2008-2009 happened. They are not typical. They are also not hit-by-a-meteorite rare. Not only do extremes happen, but one of the important lessons of financial history is that they happen more often than they "should," if we use statistical models that assume random samples from the normal distributions and the like.

1966-1982 is important to remember because it was an extremely bad period that sometimes escapes notice. It was a period of time during which investors were worn out, lost faith in stocks, the period BusinessWeek called "the death of equities." Brokerages suffered enormously, and problems with backoffice operations and rumored underworld involvement led to problems that in turn led to the creation of the SIPC to insure brokerage accounts against errors or fraud in keeping track of securities held in street name.

HomerJ said, accurately
HomerJ wrote:Anyway, stocks basically went nowhere for 16 years before...
He then justified this by saying "the DOW was at 1000 in 1966, and still at 1000 in 1982..." He was criticized for citing the Dow and not including reinvested dividends. I pointed out that if you use the S&P 500, include dividends, but also correct for inflation, the statement is still basically correct.
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Re: U.S. stocks in freefall

Post by dodecahedron » Sun Sep 27, 2015 9:37 pm

nisiprius wrote:
1966-1982 is important to remember because it was an extremely bad period that sometimes escapes notice. It was a period of time during which investors were worn out, lost faith in stocks, the period BusinessWeek called "the death of equities." Brokerages suffered enormously, and problems with backoffice operations and rumored underworld involvement led to problems that in turn led to the creation of the SIPC to insure brokerage accounts against errors or fraud in keeping track of securities held in street name.


I agree. Real people suffered a lot of financial stress during that period! My widowed mother-in-law was trying to raise two young children during that time, unable to work due to fragile health, and was trying to make the most of prudently investing what remained of a small life insurance policy after paying off the mortgage to supplement her modest Social Security survivor benefits (which was not even indexed for inflation until midway through that period.) I can't begin to imagine how difficult and stressful this period must have been, especially with minimum trading commissions as high as they were, banking regulations holding down interest rates on savings accounts to levels well below inflation, etc.

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Re: U.S. stocks in freefall

Post by Leeraar » Sun Sep 27, 2015 9:43 pm

Of course, I hope you all realize that I could not pass up a rare opportunity to cherry-pick on something nisiprius said!

L. :)
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Re: U.S. stocks in freefall

Post by Clearly_Irrational » Mon Sep 28, 2015 11:06 am

nisiprius wrote:Extremes happen. 1929 happened. 1937 happened. The panic of 1907 happened. The stock market dropping 22% in one day in 1987 happened. Bonds beating stocks over a 30-year period happened. 2008-2009 happened. They are not typical. They are also not hit-by-a-meteorite rare. Not only do extremes happen, but one of the important lessons of financial history is that they happen more often than they "should," if we use statistical models that assume random samples from the normal distributions and the like.


I consider this to be a very important point and I think it's one that often gets glossed over.

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Re: U.S. stocks in freefall

Post by Leeraar » Mon Sep 28, 2015 11:17 am

Clearly_Irrational wrote:
nisiprius wrote:Extremes happen. 1929 happened. 1937 happened. The panic of 1907 happened. The stock market dropping 22% in one day in 1987 happened. Bonds beating stocks over a 30-year period happened. 2008-2009 happened. They are not typical. They are also not hit-by-a-meteorite rare. Not only do extremes happen, but one of the important lessons of financial history is that they happen more often than they "should," if we use statistical models that assume random samples from the normal distributions and the like.


I consider this to be a very important point and I think it's one that often gets glossed over.

Yes.

And, these "outlier" points (up and down) absolutely shape the market. The is an interesting TED video where Benoit Mandelbrot removes ten data points and the graph of market returns is markedly different.

L.
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Re: U.S. stocks in freefall

Post by cfs » Mon Sep 28, 2015 11:39 am

Amazing timing.

Another tuff day for the why bonds gang, another good day for the out of the market gang.

Some of our members manage to be in the market during good times and out of the market during tuff times.
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Re: U.S. stocks in freefall

Post by ofcmetz » Mon Sep 28, 2015 11:41 am

cfs wrote:Amazing timing.

Another tuff day for the why bonds gang, another good day for the out of the market gang.

Some of our members manage to be in the market during good times and out of the market during tuff times.


I assure you that I am in the market for the good and bad times. A constant asset allocation makes for some interesting rides.
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Re: U.S. stocks in freefall

Post by cfs » Mon Sep 28, 2015 11:44 am

ofcmetz wrote:
cfs wrote:Amazing timing.

Another tuff day for the why bonds gang, another good day for the out of the market gang.

Some of our members manage to be in the market during good times and out of the market during tuff times.


I assure you that I am in the market for the good and bad times. A constant asset allocation makes for some interesting rides.

Exactly, that's why I like my SWAN or sleep well at night portfolio, and I don't even need to re-balance (Miss Market takes care of the re-balancing act for me).
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Re: U.S. stocks in freefall

Post by Rx 4 investing » Mon Sep 28, 2015 11:56 am

If an investor started at the beginning of any of these cycles, their outcome was probably a lot different than they had planned...

--From 1906 to 1924 (18 years), stock returns were flat

--From 1929 to 1954 (25 years), stocks returns were flat

--From 1965 to 1982 (17 years), stock returns were flat

--From 2000 to 2010 (10 years), stock returns were flat

Luck plays a role-- it matters where we start. In a sense, the long-term is easy to predict. From Mr. Bogle's Twelve Pillars --I am referring to "regression to the mean."

I occasionally refer to Bob Ferrel's "10 rules for investing." There are a lot of similarities in his sage wisdom and Mr. Bogle's. There's that pesky "regression to the mean" theme again as Ferrel's #1 ...

1. Markets tend to return to the mean over time

2. Excesses in one direction will lead to an excess in the opposite direction

3. There are no new eras – excesses are never permanent

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways

5. The public buys the most at the top and the least at the bottom

6. Fear and greed are stronger than long-term resolve

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names

8. Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend

9. When all the experts and forecasts agree – something else is going to happen

10. Bull markets are more fun than bear markets

From over two hundred years of market history, there are logical reasons why the long-term P/E ttm of stocks is 15.6, and the Shiller P/E's long-term mean is 16.6. Right now, the Shiller P/E is at 24 and the P/E ttm of the S & P 500 is 19.

For those of us who are pre-retirees, or those already retired, with years of investing experience behind us, we know that both valuation measures are likely to return to their means sometime in the future. The question is "when? " Let's just hope for the sake of those who have just received their gold watch and enjoyed the past 6 year bull market, this isn't the start of one of the ugly stretches of "flat returns" that happen every so often.

Be safe out there, and good luck !
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Re: U.S. stocks in freefall

Post by HomerJ » Mon Sep 28, 2015 1:58 pm

Rx 4 investing wrote:If an investor started at the beginning of any of these cycles, their outcome was probably a lot different than they had planned...

--From 1906 to 1924 (18 years), stock returns were flat

--From 1929 to 1954 (25 years), stocks returns were flat

--From 1965 to 1982 (17 years), stock returns were flat

--From 2000 to 2010 (10 years), stock returns were flat



One, I don't think you included dividends and inflation/deflation in those periods... Returns weren't quite that bad (except 1966-1982).

Two, you said investors... the above is really only important for retirees... People who retired in 1906, or 1929 or 1965, etc, did indeed have difficult outcomes... Of course, retirees should have much less of their money in stocks, and bonds did okay during most of those periods (again 1966-1982 was the exceptionally bad period - where bonds did poorly as well)

4% withdrawal worked for all those periods (okay 3.8% for 1966-1982)...

Investors, on the other hand, did just fine through those periods (assuming they kept their jobs and could continue to invest. They continued to put money in each month at different price points, some much lower than others, so they made money even during those periods... And more importantly, every one of those periods was followed by a bull market where all the money saved and invested during those bad times, was multiplied 5 times, 7 times, 10 times.

Think about that... A guy who was 30 in 1966 and yet still diligently saved for 16 years, had a decent amount of money in 1982... and then the money was multiplied 10x (TEN times) in the next 18 years. That investor who started investing in 1966 (the worst time to retire) did very well.

From over two hundred years of market history, there are logical reasons why the long-term P/E ttm of stocks is 15.6, and the Shiller P/E's long-term mean is 16.6. Right now, the Shiller P/E is at 24 and the P/E ttm of the S & P 500 is 19.


Please read this.

https://philosophicaleconomics.wordpress.com/2013/12/13/shiller/

For most of history, the Shiller Cyclically-Adjusted Price-Earnings ratio (CAPE) oscillated in a pseudo sine wave around a long-term (130 year) average of 15.30. It spent 55% percent of the time above the average, and 45% of the time below–a reasonable result for a metric that allegedly mean reverts. Since 1990, however, the metric has only spent 2% of the time below its historical average–98% of the time above.

The metric’s failure to mean-revert over the last 23 years hasn’t been for a lack of reasons. The period covered three recessions, two stock market crashes, and one bonafide financial panic–the likes of which hadn’t been seen since the Great Depression. Even in the worst parts of the 2008-2009 crash–at levels that we now look back on with nostalgia as the “buying opportunity” of our generation–the metric failed to provide an accurate valuation signal. In an inexcusable blunder, it basically called the market “slightly below fair value”.

If we’re being honest, there are only two possibilities. Either the “normal” levels of the metric have shifted significantly upwards over the last few decades, or the metric is broken. There is no other way to coherently explain why the metric has consistently failed to migrate towards its long-term average, or spend any amount of time below it, as it should do every so often in bear markets.
Last edited by HomerJ on Mon Sep 28, 2015 3:29 pm, edited 2 times in total.

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Re: U.S. stocks in freefall

Post by zaboomafoozarg » Mon Sep 28, 2015 1:58 pm

Well on the plus side, emerging markets look like an even better buy today. :-)

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Re: U.S. stocks in freefall

Post by livesoft » Mon Sep 28, 2015 1:59 pm

Public Service Announcement: VXF was in RBD territory earlier today.
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Re: U.S. stocks in freefall

Post by VictoriaF » Mon Sep 28, 2015 2:03 pm

cfs wrote:Exactly, that's why I like my SWAN or sleep well at night portfolio, and I don't even need to re-balance (Miss Market takes care of the re-balancing act for me).


Yes, shipmate cfs, there is more to life than watching markets. Yesterday I spent hours laughing out loud in my Improv class; now I am back from the Pilates class and on my way for a daily walk; tomorrow I have Zumba. In the mean time, you are doing your LUng workouts, right?

Cheers,
Victoria
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Re: U.S. stocks in freefall

Post by poker27 » Mon Sep 28, 2015 2:38 pm

So assuming this loss stands, the S&P will be down about 9% for YTD, and around 5% for the past 12 months. The 5 year is still a +64% :)

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Re: U.S. stocks in freefall

Post by cfs » Mon Sep 28, 2015 2:58 pm

VictoriaF wrote:
cfs wrote:Exactly, that's why I like my SWAN or sleep well at night portfolio, and I don't even need to re-balance (Miss Market takes care of the re-balancing act for me).


Yes, shipmate cfs, there is more to life than watching markets. Yesterday I spent hours laughing out loud in my Improv class; now I am back from the Pilates class and on my way for a daily walk; tomorrow I have Zumba. In the mean time, you are doing your LUng workouts, right?

Cheers,
Victoria

Ahoy! Yes my shipmate Victoria, I took care of my LUng distance workout very early this morning (number one item on my to-do-list). God bless.
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Re: U.S. stocks in freefall

Post by Rx 4 investing » Mon Sep 28, 2015 3:47 pm

Homer J wrote: Please read this.
https://philosophicaleconomics.wordpres ... 3/shiller/
" For most of history, the Shiller Cyclically-Adjusted Price-Earnings ratio (CAPE) oscillated in a pseudo sine wave around a long-term (130 year) average of 15.30. It spent 55% percent of the time above the average, and 45% of the time below–a reasonable result for a metric that allegedly mean reverts. Since 1990, however, the metric has only spent 2% of the time below its historical average–98% of the time above.

The metric’s failure to mean-revert over the last 23 years hasn’t been for a lack of reasons. The period covered three recessions, two stock market crashes, and one bonafide financial panic–the likes of which hadn’t been seen since the Great Depression. Even in the worst parts of the 2008-2009 crash–at levels that we now look back on with nostalgia as the “buying opportunity” of our generation–the metric failed to provide an accurate valuation signal. In an inexcusable blunder, it basically called the market “slightly below fair value”.

If we’re being honest, there are only two possibilities. Either the “normal” levels of the metric have shifted significantly upwards over the last few decades, or the metric is broken. There is no other way to coherently explain why the metric has consistently failed to migrate towards its long-term average, or spend any amount of time below it, as it should do every so often in bear markets. "


I have read this several times, and I don't think your guru is looking at the Shiller P/E the right way. First, your friend seems to be suffering from a case of recency bias...

--On May 1, 2007 , the Shiller P/E was recorded at 27.55.

--On March 1, 2009, the Shiller P/E was recorded at 13.32 .

---The long term mean was around 16 at the time.

That action, falling from 27.55 to a landing around 13.32 , is "regression to the mean" (and then some.) Those dates fall within "the last 23 years" as noted by the blogger.

For your consideration...

Maybe folks think that the 16.6 tells them something more than it's really meant to? It may require a paradigm shift. From my simple mind, let me offer a mental picture-like analogy...

--The long-term should be thought of as a stake in the ground. That stake has a bunge cord attached to it.

--The farther the cord (the market) is stretched in either direction (high or low) , the cord will eventually recoil and return to the mean.

In other words, the "meaning" of the Shiller P/E reading--- at any point in time---is totally dependent on what the investor has decided is their "golden " allocation is when the reading is at the 16.6 mean (i.e. when the cord is not stretched; when the cord is in a basket, simply right on top of the stake in the ground) .

FWIW...The linear formula-based approach (see link below) I have adopted suggests 65% stocks /35 % bonds when the Shiller P/E is at the 16.6 mean, i.e. when the reading is exactly at the stake in the ground.

--The formula gradually lowers my stock allocation the higher the Shiller P/E reading climbs above 16.6. (And raises my allocation above 65% when it is below the long term mean). I don't like it when that cord comes back and whips me in the face !! The Shiller P/E reminds us--- based on how far we are from the mean---that EVENTUALLY, the cord (the market) will recoil back to the mean. How lucky do you feel when it gets really stretched?

The proposed 65/35 allocation at the mean (at the stake in the ground) is rationalized by the way the dispersions of returns have fallen out over the long measurement history of the Shiller P/E. The dispersion of outcomes fall roughly like this....

-- Higher 10 year returns, and higher average annual gains, when the market is at lower Shiller P/E levels. (relative to the mean)

-- Lower 10 year returns, and lower average annual gains when the market is at higher Shiller P/E values. (relative to the mean)

---Reversion or regression to the mean can happen from both low Shiller P/E levels vs. high Shiller P/E levels.

The Shiller P/E is nothing more than a systematic, non-emotional quant measure. A totally objective risk/reward metric if you will, telling the investor where the equity market is trading (how far the cord is stretched) vs. the long-term mean (the stake in the ground).

It is up to the investor to decide where the current Shiller reading fits with their own individual risk profile, and the potential dispersion of outcomes from the various levels.

Hope this helps with another way to think about it ? Good luck out there.

LINK to value-based asset allocation w/ bh7's back-testing: viewtopic.php?f=10&t=168852
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Re: U.S. stocks in freefall

Post by Browser » Mon Sep 28, 2015 4:00 pm

Rx 4 investing - The problem with your strategy is that CAPE bears a relationship to long term returns, on the order of 7-10 years or so. This means is that it might be the case that your returns a decade or so from now might be forecast to some extent by the current CAPE ratio, but not your returns for shorter time periods; and that assumes that you maintain your CAPE-based equity allocation over that time period. However, your strategy calls for continually adjusting your equity allocation based on CAPE, which entails short term market timing. CAPE does not have a meaningful relationship to returns for an allocation held for less than 7-10 years. So, you're just deluding yourself, IMO. The best you can ever do by using CAPE would be to adjust your allocation only every 7-10 years, based on the CAPE value. But that isn't what you're doing.
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