Yesterday I came across three different articles that I thought all tied to a similar theme about whether we should or should not rely on the idea of stock prices going up over the very long term. There were also comments on the blog this weekend along the same lines.
Regardless of what the futures holds, asking these types of questions has become much more popular because the S&P 500 is 18% lower than where it was exactly ten years ago and the world is in the middle of a financial crisis that has yet to be sorted out.
The first article was by Felix Salmon that makes a case for reorienting expectations toward dividends rather than capital gains.
The second article is from David Leonhardt about why prosperity is not an unalienable right.
The last one was an interview, of sorts, with Jack Bogle advocating stocks as an asset class are attractively priced now that they are down a lot, maintaining a diversified portfolio and that the world is not ending. You may not know this but Bogle has a pretty good track record for recognizing cheap markets and expensive ones. He says now it is cheap (this is obviously a long term opinion not short term).
This evokes two reactions in me. First is more of a practical idea which is easier said than done, but save more money. We have all read statistics about the savings rate possibly being zero or negative (the tracking of this tends to be flawed and while I'm not sure what is accurate it is obviously very low). There is tremendous psychological value in having savings and being a few months ahead in your checkbook. It provides a greater margin for error and a sense of accomplishment having set something meaningful aside.
The other initial reaction is a reminder that how we define retirement will have to change if it has not done so already. More people will have to figure out how to derive income for longer. That could mean working longer in your career, transitioning to some sort of secondary career, monetizing a hobby or something else.
I've written a few times about my neighbor with the backhoe, another neighbor who plows roads and driveways here in the winter and a hiking friend who has all the work she wants as a dog sitter. Some who is 50 and has had a hobby of some sort for a while will know whether it is possible (realistically speaking) to monetize it or not. At the same time someone who is 50 has enough years to figure something out if they don't want to work at some store or the like.
Candidly I am far less worried about the long term fate of the stock market versus the fate of social security and medicare. I have been writing for ages about the possibility of lower than normal returns in the US (hence the need for more foreign IMO) but believe the US financial system and stock market will resume functioning. While I am no expert on social security and medicare the numbers there make no sense to me. The worker/recipient ratio is out of whack and it stands to get worse.
As mentioned above the S&P 500 is down 18% from ten years ago (SPX closed at 1072.32 on October 26, 1998). Ten year periods like this are not unprecedented but are rare. Some element of looking forward and imperfect discounting still exists in how the market functions. The stock market warned of future trouble in q4 2007 when it started to roll over. The crash now being worked through is imperfectly discounting a worsening of GDP growth and higher unemployment.
The US has encountered serious financial problems before and recovered successfully on some sort of timetable and I believe it will do so again even if things look different on the other side. Success must include responsibility for your own actions like saving more, figuring a way to generate income for longer and my favorite; living below your means. This approach can help mitigate continued bear market equity results and an altered entitlement program.
28 comments:
Yesterday's thread ought to continue with a reading of today's weekly commentary from Hussman. As usual, it's a well-reasoned look at where we are, where we could be going, and what to do about it. I haven't read the Bogle article, but I suspect it's along the same lines.
Candidly I am far less worried about the long term fate of the stock market versus the fate of social security and medicare.
I share this view. My long term planning doesn't include social security or any government help because I fear it will not be there. If it is in some capacity, I will consider this as the means for a small life style improvement during retirement.
Is this unusual?
Being 75 my worries are for my kids long term, but now, my worries for me are the stock markets. We have passed the point of "normalcy" bear market and after down 40%+ the thoughts become one of how much further and the losses I am suffering. If and when we get to down 50, 60, 65% or more, is it too late to save my retirement? Horrible thoughts I know but many of us in retirement are facing this. Those older than me have never had this and with a global economy it will have new outcome that is unknown to anyone.
Amen, anon 5:55.
Roger,
FYI- Grantham published part 2 of his Q3 summary and has chaned his tune slightly by revisising the downside risk to the SP500 to the 575 level... It is well worth the read.
So move to bonds for income and loss? Talk to me about bonds. How bad is the market? I havn't found comparisons on the web. When I see 4.5% muni yields listed as attractive I find it laughable.As compared to what: Feds? What state is next after Al to declare bankruptsy? Whole countrys are going belly up! The courts decided the value of GO bonds: firemen get paid before bondholders. When will Munis break or have they already? How good are corporate ratings. S&P are in overtime downgrading AA's. Most of the stuff is near junk ready for the dumpster.
anon,
If I may pry, what percentage of your nest egg is in the stock market at 75?
I have agreed that the long term seems to favor investing more internationally. But with that fact that foreign markets are getting crushed I am starting to re-think what allocations are appropriate. I know you have favored foreign, aren't you getting crushed more in your foreign holdings?
most retirees keep lots of money in stocks, I wouldn't be surprised if he had 75%.
Couple of notes....
1. Alabama didn't go bankrupt. An individual county within Alabama was considering bankrupty.
2. You'll probably never see the U.s. savings rate look good until you start counting 401ks.
The colosal leveraged house hold debt we have took decades to build. If we unwind it over night we will go straight into a depression.
I do not think the Fed wants that. So why we may see S&P 500 or 600 in a year or two we will not see it soon. They will pull out all the stops to make this an orderly deleveraging. In other words here comes lots of liquidity to boost stocks soon.
Of course enough liquidity could mean we never see lower lows, but I tend to think this will stretch out for some time to come. As for me I am looking forward to a nice rally.
Unless you are a very good active trader, what good will a nice bear rally do for long term investors. A correction to a 600 S&P will be devastating to most baby boomers.
BWJR
Everyone needs to listen to this:
http://www.youtube.com/watch?v=iivL4c_3pck
I keep reading about forced selling, deleveraging, and hedge fund liquidations. Sure sounds like the smart money hasn't heard that we're supposed to be stepping up to the plate now.
People talk abouthow "we need to be saving more" as if we collectively commited a cardinal sin.
Well, it should be remarked that those who are being hurt the most in this downturn are the SAVERS.
Those with no assets who over-leveraged with their mortgage only stand to lose a right they should have never been given, aka. to borrow other people's money. At worst, they sell these assets that were never theirs, and move on. At best, so many special breaks will be given to these people that over time they still end up with years of free rent.
Those who saved their income and invested for their future instead, which in most cases entails stock market invesments, have lost far, far more. Years of saving behavior have shown no rewards at all, quite the contrary; a large portion of the saved income is, for now, gone.
And yet we tell these people they will need to save even more?
Well, you can count me out. After saving 50% of my income for years and years only to see it all go down the drain on events outside my control, you can bet my wallet will be much more open to spending instead of saving from now on.
Saving, without its corollary, investing, is a negative-sum game. Delaying consumption in the future in a world of positive inflation is a loser's game. Sure, keeping a six month cushion, that's all good, that sure ain't no economy fixer.
The entire system is geared against savers. As a saver, you relinquish control over your time & money, in the vague hopes of a "freedom" that may never come, based on the vaguaries of crowd panic behavior.
Now with leveraged funds dumping their assets, clearly, even today, we can now see that in the end it's the ones in debt who hold the savers hostage and game the system.
anon @2:54
A very valid point. I am in the same boat as yours. I have been saving a ton to see the value of dollars declining and bank interest rates at record lows. At least the guys who spent their money have some fond memories :)
And now they can walk away free thanks to jingle mail and huge bailouts with slight damage to credit history. I did the prudent thing of not jumping in the real estate bandwagon and now i will be punished too because of these bailouts and long term increase in interest rates and falling dollar.
I guess i should have also been in the camp of "instant gratificatio"
\vent.
BWJR,
My point is do not sell any here in the panic wait for a rally at the very least
As far as your longer term 600 S&P concern, that is a very legitimate concern. You either have to sell a little (10 to 25%) when the S&P rallies to 1200 to 1250 OR tough it out and only live on dividends (no selling) until a few years after 600 on the S&P. I believe the markets are in for some bad days ahead, but I do not believe the USA is going to dry up and blow away. Equities will come back strong eventually.
My original point is do not sell during this panic selling period or next years panic selling period if it ever comes.
anon254 - I agree ! No need to look any farther than the fact that interest pays full marginal taxes, while real estate debt is deductible...
I think we should give the populace much more credit - people are rationale and their mass behavior is a clear indication that there is a systemic bias in favor of immediate spending and borrowing vs. saving.
The most worrying thing we may be facing are discussions to go even more in this direction - higher taxes on investment, dividends and even discussions to eliminate 401K tax deferral.
A few folks seem to think that the only real saving is gov. "saving" evidently.
EVERYONE NEEDS TO GO TO LINK BELOW AND LISTEN TO IT CLOSELY:
http://www.youtube.com/watch?v=iivL4c_3pck
bill b - I called for s&p 800 being a done deal a couple weeks ago and you thought the call was crazy. Still think so?
People need to remember that when feelings run high the border between belief and delusion can become so blurred it disappears entirely. They also need to remember that when belief is strong people will convince themselves that lies are truth as long as those lies confirm their beliefs.
This is true of investing and it is true in life. In the case of the markets, there is value in equities now as Hussman argues, but value can shrink when earnings fall so it's not a bad idea to wait for more earnings news before wading in further rather than convincing yourself or allowing others to convince you it is time to take the plunge.
In the case of the audio/video regarding wealth distribution that our excitable (and rather repetitious) Anonymous wishes us to "listen to closely" it is frankly less distracting -- particularly given the big, bold yellow words in the audio/video that tell you what the 'correct' interpretation of the audio really is -- to just listen to the original (Real audio) tape at http://www.wbez.org/audio_library/ram/od/od-010118.ram
If interested further then read contrary opinion, particularly that of authorities in the field -- legal scholars in this case (see below) -- and then compare to the opinion of partisans.
For example, David Bernstein opines that, "[B]ased on this interview, it seems unlikely that Obama opposes constitutionalizing the redistributive agenda because he's an originalist, or otherwise endorses the Constitution as a "charter of negative liberties," though he explicitly recognizes that this is how the Constitution has been interpreted since the Founding. Rather, he seems to think that focusing on litigation distracts liberal activists from necessary political organizing, and that any radical victories they might manage to win from the courts would be unstable because those decisions wouldn't have public backing." (http://tinyurl.com/6fegh9)
Critical thinking is work and not for sissies.
And I am still waiting for that rally: May we all grow wiser and wealthier anon.
My goal is to run for congress, attend meetings for 5 years and then get a GUARENTEED pension for 150,00K per year regardless of what the markets do.
Sweet. Americans are idiots for letting their "elected" officials have gaurenteed retirements while forcing taxpayers into market driven 401Ks.
Any memebers of congress on this board, worried about thier guarenteed pensions?
Did not think so, out golfing.
Time to get out of the market and into treasuries. Long term it is finished because America is not the same as it used to be.
For the past 20 years we've been told that stocks are necessary for retirement investment to beat inflation.
We've been told buy and hold, timing adds no value, we need international diversification. We now see what happens when "everybody" believes in the same mantras. The markets are good at punishing those that follow the accepted view of the crowd, irregardless of how reasonable it may sound at the time.
I've posted an overview here of my personal scaling style (that I call Ladder) as it may prove to be of use for others.
Partitioning a top and bottom price range into proportional steps (in the example I've used a top of 1700 (twice the current 850 S&P level) and bottom of 425 (half the current 850 S&P level) with 7.2% step spacings (minimum trade amount of $5000)) we can spread our exposure in a scaled like manner.
Assuming we had $100,000 available for investment purposes then I might create a S&P specific Ladder of
S&P $ Cash Reserve
1707.2 100000
1592.5 95000
1485.5 90000
1385.7 85000
1292.7 80000
1205.8 75000
1124.9 70000
1049.3 65000
978.87 60000
913.12 55000
851.79 50000
794.58 45000
741.22 40000
691.43 35000
644.99 30000
601.67 25000
561.26 20000
523.56 15000
488.40 10000
455.6 5000
425 0
Having created the Ladder we simply maintain cash reserves in alignment with those indicated in the above table. For example at the current 850 S&P level we have $50,000 of indicated cash reserve (50%).
Maintain a 'cash' reserve figure and over time buy or sell stock to adjust that 'cash' reserve to the level indicated against a given S&P price level.
We could trade each at each and every step or combine larger moves into a single larger trade by trading perhaps once per quarter.
Following the Ladder will have you buying more as prices decline (buy-low) and reducing out of stocks as prices rise (sell-high) in a totally mechanical and emotionless manner.
Taking this one step further, as cash (generally) acts as a drag, I instead apply cash reserves to a bespoke Managed Futures style. The two 'stocks' and 'cash' parts ideally should be invested in holdings that exhibit equity like longer term returns, but have low or inverse correlations with each other.
My Managed Futures style is self managed (for me the likes of RYMFX are too heavy on expenses). So as an alternative I use a stop-loss based style that generally has low downside correlation to that of the market index, but has correlated returns on the up-side, and over the longer term comes quite close to tracking equity like total returns.
Removes the volatility emotions for me :)
Best. Clive.
bill b - I called for s&p 800 being a done deal a couple weeks ago and you thought the call was crazy. Still think so?
Never called you crazy, sir. I simply grow tired of baseless predictions. Only to have people come out of the woodwork when they're "right" and disappear from sight when they're wrong. I think it's pointless and quite frankly a waste of time. If you feel strongly about S&P 500, sell a bunch of futures and be done with it.
I care far more about strategy and handling what the market gives rather than your silly numbers.
bill B - I wouldn't call the 00/02 bear market bottom of roughly 800 on the S&P a "baseless prediction".
Maybe if you paid more attention to such silly technical levels you would have saved a little more of your hardearned 401k savings
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