Larry Swedroe: Historical Data Can Comfort

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Random Walker
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Larry Swedroe: Historical Data Can Comfort

Post by Random Walker » Fri Jan 11, 2019 8:38 am

https://www.etf.com/sections/index-inve ... nopaging=1

Some historical data may help prevent us from catastrophising. Two of the many statistics from the article: on average the market has a 10% drop once every three years and a 20% drop once every six years. After the optimistic start though, Larry reminds us that markets can do poorly for long periods (Japan is always on my mind) and that global diversification is most prudent. In fact, international valuations currently more favorable than US.

Dave

Amadis_of_Gaul
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Re: Larry Swedroe: Historical Data Can Comfort

Post by Amadis_of_Gaul » Fri Jan 11, 2019 2:27 pm

As always, I appreciate you posting these!

From what I know of history, if truly catastrophic losses (worse than the Great Depression) are about to occur, the cause will be obvious. The US will be about to lose a world war (like Germany or Japan in World War II). The Federal Reserve will be in the middle of fueling a grotesque asset bubble with loose monetary policy (like the Japanese central bank in the late 1980's).

Yes, it's usually impossible to time the market, but sometimes the handwriting is on the wall. If you're a German in December 1941, and you see Germany declare war on the United States, you convert your life savings to gold and bury it someplace on the family farm. Catastrophic losses come from people making catastrophically bad decisions. If you don't see somebody doing that, you probably don't have to worry about catastrophe.

To say things another way, I don't think the preliminaries to a garden-variety recession look like The Big One. Getting the two confused won't do your heart any good.

marcopolo
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Re: Larry Swedroe: Historical Data Can Comfort

Post by marcopolo » Fri Jan 11, 2019 2:41 pm

Amadis_of_Gaul wrote:
Fri Jan 11, 2019 2:27 pm
As always, I appreciate you posting these!

From what I know of history, if truly catastrophic losses (worse than the Great Depression) are about to occur, the cause will be obvious. The US will be about to lose a world war (like Germany or Japan in World War II). The Federal Reserve will be in the middle of fueling a grotesque asset bubble with loose monetary policy (like the Japanese central bank in the late 1980's).

Yes, it's usually impossible to time the market, but sometimes the handwriting is on the wall. If you're a German in December 1941, and you see Germany declare war on the United States, you convert your life savings to gold and bury it someplace on the family farm. Catastrophic losses come from people making catastrophically bad decisions. If you don't see somebody doing that, you probably don't have to worry about catastrophe.

To say things another way, I don't think the preliminaries to a garden-variety recession look like The Big One. Getting the two confused won't do your heart any good.
I think the cause is only obvious in hind sight. There were a lot of very smart people on wall street that never saw the great depression coming. Did you see the great recession coming? In 1941 Germany. i suspect many people figure they would win the war. If the catastrophes were so easy to see ahead of time, they would not be catastrophes.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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hdas
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Re: Larry Swedroe: Historical Data Can Comfort

Post by hdas » Fri Jan 11, 2019 2:45 pm

Strangely, I find myself in complete agreement with Mr. Swedroe. People should just look and see what the prospective returns are given the current conditions at any time. My only qualifier is that you don't need anybody to do this for you. Just beat the lethargy download the data and count. Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

UKFred
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Re: Larry Swedroe: Historical Data Can Comfort

Post by UKFred » Fri Jan 11, 2019 2:54 pm

Amadis_of_Gaul wrote:
Fri Jan 11, 2019 2:27 pm
If you're a German in December 1941, and you see Germany declare war on the United States, you convert your life savings to gold and bury it someplace on the family farm.
But then you would have the bogleheads telling you to stay the course and your decision to bury gold will be wrong for the next year or two as war-related expenditure by the government causes the stock market to go higher and higher... it takes more guts than most people have to do this and this decision would actually be wrong more often than it is correct because not every bad decision ends in a catastrophe.

garlandwhizzer
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Re: Larry Swedroe: Historical Data Can Comfort

Post by garlandwhizzer » Fri Jan 11, 2019 5:01 pm

Agree with Larry that no matter what your investing approach is, over the decades the market will frustrate you and test your nerve to stay with your chosen plan in adversity. The market has never been a smooth ride over any significant time span and it never will be IMO. In essence the market pays you over a long time frame to tolerate its periodic down-cycles. You have to understand that up front and be ready for the inevitable gut checks. Pick a risk/reward portfolio that you can stick with through thick or thin and be sure you hold quality assets in both fixed income and equity rather than the latest get rich quick fad like Bitcoin was until it became over the last year get poor quick. I consider cap weighted indexes and well designed broadly diversified factor indexes quality assets worthy of holding on to during equity storms. I also agree with Larry about wide significant international exposure. There are plenty of very smart and very successful investors who stick with a US dominated portfolio (Bogle and Buffett among them) but I'm on the other side of that issue. Reasonable minds can from time to time differ on such points. There are very few investing rules that are written in stone. The increased diversification derived from international exposure has underperformed for a long time, but I believe that this long spell of failure sets the stage for success starting at some point in the near future. Many have deserted these underperforming assets and hence improved their valuations. Time will tell.

Garland Whizzer

Amadis_of_Gaul
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Re: Larry Swedroe: Historical Data Can Comfort

Post by Amadis_of_Gaul » Fri Jan 11, 2019 7:00 pm

marcopolo wrote:
Fri Jan 11, 2019 2:41 pm

I think the cause is only obvious in hind sight. There were a lot of very smart people on wall street that never saw the great depression coming. Did you see the great recession coming? In 1941 Germany. i suspect many people figure they would win the war. If the catastrophes were so easy to see ahead of time, they would not be catastrophes.
Actually, I pretty much did see the Great Recession coming. :) I posted the following on a social-media site on August 1, 2007:

"THE POINT (I'm putting this first because I don't think many of you will read the explanation):

"- DO NOT do a significant home-equity loan or cash-out refinance now, or probably for the next five years. It will bite you.

"- DO NOT buy residential real estate for investment purposes. Probably, if you can avoid it, don't even buy a house to live in.

"- Expect a rough financial road for the next several years. Times are likely not going to be good.

"I don't normally post on economics and finance, but the times these days are getting interesting indeed. For the past five years or so, your average American has been laboring under the illusion that buying a house is a good investment, and, as evidence, has pointed to the fact that for the past decade, housing prices have been going steadily upward, sometimes more than the stock market.

"Historically speaking, however, housing prices have only gone up at the rate of inflation, or maybe a percentage point or two above. The reason for the recent housing boom has been that folks in the mortgage industry have gotten greedy and relaxed lending policies and standards. That led to more money in the mortgage market, which created artificial price increases.

"The problem is that these impressive price increases are a house of cards. Just because the mortgage people assume that some dude with no job can make payments on a $600K mortgage doesn't mean that he actually CAN. As a result, foreclosures are spiking, and because of the characteristics of many of these exotic mortgages, the rate of foreclosure is going to get worse.

"This, in turn, affects the hedge funds, etc., who hold the right to collect from the homeowners with flaky mortgages. As those homeowners start going under, the funds' income stream starts drying up. Investor perception becomes that those funds are worthless, so they become worthless. I think the current count is that about 15 hedge funds have gone under as of now, but the process is snowballing as lack of investor confidence cripples the entire industry.

"In addition, the folks who originated all of these toxic waste loans in the first place (subprime, but even alt-A now) are realizing that, yeah, we shouldn't have gotten greedy and relaxed lending standards. A lot of them have already gone bankrupt, but the big ones who are still alive (Wells Fargo, etc.) are dramatically tightening their lending standards. As a result, people are no longer able to get the same kinds of loans (5% down payment, etc.) that fueled the housing boom.

"This combination of factors (more houses on the market due to foreclosure + credit crunch) means that housing prices are going to drop significantly. The decline will be gradual (nobody's going to want to sell for less than they paid), but it will be enough to put millions of Americans underwater on their mortgages. Probably, this decline will continue until the value of housing is below what the rate of inflation says it should be, and then the market will correct upward. As a consequence of this, people will no longer be able to live above their means via equity withdrawals from their houses, which will hurt retailers across the board.

"This will also have a massively negative effect on new-home builders, who will find themselves competing with cut-priced existing homes for fewer buyer dollars. Many builder employees will find themselves out of work, and companies that support the construction trade (Home Depot, etc.) will also hurt in a big way.

"It will be interesting to see if the larger economy can stand up to this combination of factors. If not, we're looking at the first ever real estate-led recession. Assuming it happens, people will probably look back and say yesterday was the day the music stopped."

I think the big problem with market timing is not what but when. Even if you know right when to get out, how do you know when to get back in? However, if you anticipate the economic demise of your country, "back in" is not really a relevant concept. There were certainly people in late 1941 who predicted that Germany's defeat was inevitable once Hitler declared war on the US. Churchill was one of them, and I think anybody who bothered to compare relative populations, GDP's, etc., would have agreed.

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