2008 Net Worth Change and Years to Recoup Loss

[Spanky]

Nw -16.45%

 

[dmpi]

Net worth down 31%. I'm where I was in 2004.

 

[Grep]

In a way, I miss the good old days when my net worth rose solely based on my savings. There was such a feeling of control and self-determination associated with that.

Once upon a time, inflation didn't seem to matter, because I could easily out-earn and out-save it. Once upon a time, savings in the bank felt as good as gold (in the proverbial sense), and I didn't feel hostage to the vagaries of the marketplace.

No longer. Today, my income from labor is bound and chained, and savings from labor's income alone will no longer keep my accumulated savings topped off relative to inflation, never mind on the advance.

Today, my savings breathes in and out with a lusty life of its own. That's because I've felt forced into the mosh-pit, aka the stocks and bonds markets, in order to have some hope of keeping up with inflation. At least, that was a concern a year ago, and presumably it will be again sometime soon.

These days, I might make or lose more in a day than I can save from my labor in a week or a month or maybe even a year. Indeed, during 2008 I have lost more than I earned from all sources for several prior years.

However dismaying this is, it's also a source of some hope, for income from labor is something I'd prefer to graduate from.

May 2009 be a healthy and more profitable one for us all.

 

[tightasadrum]

Last time I looked, (I tend not to obsess over the numbers), I was down about 25% in net worth. This is based on significant retirement fund losses plus some estimated reduction in investment real estate value. Commodities have taken a heavy toll. I'm sure the amount I could sell investment property for has gone down even though the county has not reduced the tax appraised value at all. Even so, I have figured about 15% down from equity I had in 2007. It should prove to be an interesting year in 2009 from a tax value standpoint. So far I'm still 100% leased up. New leases sign up in Feb/March. We'll see how that goes this year.

But down only 25% overall? I'll take it, and hope for improvement in 2009.

 

[Meadbh]

Today, my savings breathes in and out with a lusty life of its own. That's because I've felt forced into the mosh-pit, aka the stocks and bonds markets, in order to have some hope of keeping up with inflation.

Great metaphor!

May 2009 be a healthy and more profitable one for us all.

Amen!

 

[Alan]

From one day to the next, these days, I make or lose more in a day than I can save from my labor in a week or a month or maybe even a year. Indeed, during 2008 I have lost more than I earned from all sources for several prior years.

However dismaying this is, it's also a source of some hope, for income from labor is something I'd prefer to graduate from.

May 2009 be a healthy and more profitable one for us all.

Well said Grep. Last year I lost more than DW and I earned - gross - in the previous year. On the first trading day of 2009 I gained more than I earn in a month. Not thought about it that way before. Interesting perspective - and disturbing.

Health, Wealth and Happiness to all in 2009.

 

[FUEGO]

Yep - we lost about a year and a half's worth of salary during 2008 in our investments. But I'm sure that can happen more and more as the NW increases.

 

[waltwill8]

Down about 11% from 1/1/08 (-14% from the peak in 9/08). About 20% of that was income taxes from withdrawing IRA money to help one of the kids to start a business. Yes, he's paying me back with interest. (Have to pay tax on that, too! ) I was lucky, and got out fairly early, when the market started going sour. Slowly getting back in, and just pulled ahead on Fri.

 

[NW-Bound]

Let's look on the bright side. If the S&P 500 price is distributed approximately log-normally, as most academics believe, the probability of a 50% increase is the same as that of a 33% decline.

Well, for its entire history the market has risen out of slumps before, so each 33% decline had to be followed by a 50% increase. The problem is that the time to decline is much shorter than the time to increase.

"Capital is like rabbits; it flees at the first sign of danger." -- Anon.

Which to me also means a market timer must be quick to sell, but can afford to be slow to buy.

Or is it different this time? Death of equities? Or 10 years to get that 50%?

Well said Grep. Last year I lost more than DW and I earned - gross - in the previous year. On the first trading day of 2009 I gained more than I earn in a month. Not thought about it that way before. Interesting perspective - and disturbing.

Despite having nearly 50% in MM+Ibond, I got 1.9% return on the first trading day, or nearly half of an annual SWR . Such volatility! But I am staying in the kitchen, determined to become a cook, if not a chef. I am at least a dishwasher now.

 

[clifp]

Asset down 28% but income up.

I generally enjoy the end of the year financial calculations and this year was no exception.

The bad news was my liquid assets were down -28%, not surprisingly since last Jan I deliberately shifted from a 70/30 AA to 80/20 AA by selling my TIPs bonds, taking out a Home Equity loan, and then buying those high yielding financial stocks. When I am wrong, I am really wrong.

The good news is the I am no longer a member of the I lost a million dollars in the stock market club, thanks to the recent rally . I've never been so happy to be kicked out of a club before.

The better news is my expected income rose next year by 6%. Now a part of this resulted from taking on more risk (e.g. moving 100K from Vanguard GNMA to Vanguard High Yield) but a fair amount was that getting much higher dividends this year was quite easy. Despite much lower money market rates, and a number of dividend cuts my actual income (dividends and interest) only dropped by a few thousand. Surprisingly twice as many companies raise dividends as cut this year. (Of course never having seen a a single dividend cut in my life it was quite a rude awakening to get hit with 6 this year).

I discovered one of the big benefits of dividend income, is that because dividends are much less volatile than prices the year was easier to ride out pyschological. Much like Uncle Micks Norweigan widow, I found myself waiting by the mailbox awaiting the dividend check. In my case I updated my income spreadsheet every couple of month and was encouraged to see my annual income flucuated only a few thousand between updates.

So despite actual loses of 70K and paper loses 10x that amount, I am not really worried about how many years before I recover. I expect many companies that have historically raised dividends to suspend increasing, a few bonds to default, and perhaps a couple of more dividends to be cut. But by a large my income will be about the same as last year and with inflation low not a big reasons to be concerned. On the other hand I really wish I had established a small CD ladder to help get me through years like 2008...

 

[haha]

On the other hand I really wish I had established a small CD ladder to help get me through years like 2008...

Does this mean that you were forced to sell stocks to meet expenses?

ha

 

[clifp]

Does this mean that you were forced to sell stocks to meet expenses?

ha

No expenses is what dividends and interest are for.
I was forced to sell stocks to buy other stocks which I thought were even bigger bargains, only to discover if I waited a bit longer they would have been even cheaper .

I think you and I discussed this earlier my 100K in a money market quickly got turned in to "wow GE... is under $20 let me buy some". If on the other hand if I had 100K in 4 year CD ladder. I wouldn't have cashed out the CD early to buy stocks. In Oct I would have slept better knowing that if the market really really tanked, I still had 25K+ in cash coming in for the next 4 years, plus income from Govt bonds I would ok.

IIRC we both resolved to do this when the market recovered. Remind me when I forget LOL

 

[haha]

If on the other hand if I had 100K in 4 year CD ladder. I wouldn't have cashed out the CD early to buy stocks. In Oct I would have slept better knowing that if the market really really tanked, I still had 25K+ in cash coming in for the next 4 years, plus income from Govt bonds I would ok.

IIRC we both resolved to do this when the market recovered. Remind me when I forget LOL

OK, I must have already forgotten this exchange. The exact same thing happened to me. This would be kind of building in some stickiness, so that when it really hits the fan we will still have some dry powder. I would be cursing my idiocy to have CDs when there were so many bargains around.

This was a weird event, IMO. Unlike 2000, fall of 2007 was not grossly overvalued in most sectors. I still expect O&G to enjoy the mother of all booms.


Ha

 

[FIRE'd@51]

Well, for its entire history the market has risen out of slumps before, so each 33% decline had to be followed by a 50% increase. The problem is that the time to decline is much shorter than the time to increase.

I guess I wasn't clear. The probabilities are theoretically the same per unit time, so the probability of an up 50% year is the same as that of a down 33% year.

 

[clifp]

OK, I must have already forgotten this exchange. The exact same thing happened to me. This would be kind of building in some stickiness, so that when it really hits the fan we will still have some dry powder. I would be cursing my idiocy to have CDs when there were so many bargains around.

This was a weird event, IMO. Unlike 2000, fall of 2007 was not grossly overvalued in most sectors. I still expect O&G to enjoy the mother of all booms.


Ha

Here is the exchange

Originally Posted by clifp
I am with Ha Ha, absent a COLA pensioned I am not a a fan of auto pilot retirement plans.

I think just as no battle plan survives contact with the enemy no withdrawal plan survives its first bear market.

One of the things I've learned the hard way, is that it is too easy for me use my money market "living expenses" to buy stocks in bear market. I've said for years that I am going set up a CD ladder but never really got around to it. I set one up for my mom that is working out ok.

Interest and dividends are nice, but I think I'd feel much better if I really had 3 years living expenses in cash.
Cliff, this is my problem too. I think the next time we have some decent prices I will sell off at least $100,000 and keep my greedy hands off it.

ha

I guess the memory is slipping FYI, The Dow was at 8400 when we posted this.

In all seriousness when the Dow gets 12,000 and/or long CD rates exceed 5%, send me a PM telling me to take 100K out of the market it and put it in CDs. Frankly, other than the 6% PenFed CD a year or so ago, I always think I can do better in stocks or even bonds... I am likely to pay attention to a wise, serious investor with similar investing strategies and risk tolerance, where as I'd dismiss this advice from many other sources. I'll be happy to do the same for you at what ever criteria you think is appropriate as well as in any other investor who's testosterone rises during a bull market...

Interesting your comment about O&G. While I've owned pipelines and such for several years. I've never been to interested in pure Oil or even oil companies. I made my first oil related transaction last writing a put on USO. I don't believe $40 Oil is likely to last long.

 

[NW-Bound]

I guess I wasn't clear. The probabilities are theoretically the same per unit time, so the probability of an up 50% year is the same as that of a down 33% year.

Wow, didn't know that! I like it.

BUY, BUY, BUY.

 

[FIRE'd@51]

Wow, didn't know that! I like it.

BUY, BUY, BUY.

Well, I only said the probabilities were equal, not high.

 

[NW-Bound]

Continuing on our jesting...

Fact: S&P500 closed at 1554 on 10/11/07, and at 932 on 1/2/09. It has lost 40% in roughly 1 year. In order to get back to the old high, it needs a gain of 67%.

Talking about probabilities, the question one asks is: "what is the conditional probability that the S&P will gain 67% in X number of years, given that it has lost 40% the preceding year". X here is the time to recoup the loss.

That conditional probability is a lot higher than if one asks: "what is the probability that the S&P will gain 67% in X number of years?".

Another way of saying it is that the stock market is not a coin toss, or a dice throw, where each outcome is independent of the last. The stock market has memory, else we would not talk of "reversion to the mean", or the business cycle.

But, past historical data is simply not sufficiently long for a statistical meaningful answer. And then, I do not know how one can have faith that this is a stochastic stationary process, something that exists only in textbooks. The stock market is an outcome of human endeavors, not a random number generator.

Seriously, I believe successful traders intuitively know the above. It is not a true random walk like Malkiel said. It is a random process all right, but with the output determined from many inputs, some of which can be observed, such as "stimulus packages", the speed of the printing press at the Federal Reserve, etc...

Let's hope for the best. I will continue to buy in the coming months, with concentration in sectors TBD.

 

[FIRE'd@51]

Another way of saying it is that the stock market is not a coin toss, or a dice throw, where each outcome is independent of the last. The stock market has memory, else we would not talk of "reversion to the mean", or the business cycle.

I don't think this is necessarily true. Over the past 80-some years, the S&P 500 has returned, on average, about 10% per year. So we could have a random distribution with a mean of 10% and a standard deviation of 20% (roughly the historical average), out of which we are drawing future returns. In this context, "reversion to the mean" would simply mean that the expected average future return would revert to the 10% distribution mean, yet still be independent of past returns.

 

[youbet]

Or, just as likely if future returns are independent of past returns, there will be no tendency to revert to a past mean but rather things will "be what they will be" with zero regard to descriptive statistics of the past.

I tend to agree with NW-Bound on this particular subject. Financial returns are not independent and random. But, sadly, I have absolutely no clue about the causes of tomorrow's numbers........

 

[tuixiu]

We're down about 17%.

Still working though and would have been much worse if not currently at peak contributions stage of life. Assuming sideways-ish market should recover in late 2009.

 

[FIRE'd@51]

Or, just as likely if future returns are independent of past returns, there will be no tendency to revert to a past mean but rather things will "be what they will be" with zero regard to descriptive statistics of the past.

I tend to agree with NW-Bound on this particular subject. Financial returns are not independent and random. But, sadly, I have absolutely no clue about the causes of tomorrow's numbers........

Maybe you are implicitly saying that future returns are independent of past returns, but come from a new normal distribution with a different mean and standard deviation. That seems to be consistent with the "after-the-fact" research of Malkiel, Cootner, and others, who found that the ex-post returns of the S&P 500 were approximately normally distributed.

In any case, I am comfortable making the bet that I'm drawing from a normal distribution with a 10% mean return and 20% standard deviation; and that over many years (e.g. drawings) I will realize close to that mean return. I'm certainly not going to bet against that, by trying to time the market.

 

[TromboneAl]

Or, just as likely if future returns are independent of past returns, there will be no tendency to revert to a past mean but rather things will "be what they will be" with zero regard to descriptive statistics of the past.

I tend to agree with NW-Bound on this particular subject. Financial returns are not independent and random. But, sadly, I have absolutely no clue about the causes of tomorrow's numbers........

My gut feeling about this is that the value of the market is a combination of the (unknowable) true value of the stocks and the speculative value of the stocks. The speculative component oscillates rapidly around the more stable true value.

If the recent downturn was caused by a change in mostly the speculative part (investor fear), then you'd expect it to be followed by a return towards the true value.

 

[Frugality_of_Apathy]

Maybe you are implicitly saying that future returns are independent of past returns, but come from a new normal distribution with a different mean and standard deviation. That seems to be consistent with the "after-the-fact" research of Malkiel, Cootner, and others, who found that the ex-post returns of the S&P 500 were approximately normally distributed.

In any case, I am comfortable making the bet that I'm drawing from a normal distribution with a 10% mean return and 20% standard deviation; and that over many years (e.g. drawings) I will realize close to that mean return. I'm certainly not going to bet against that, by trying to time the market.

Sociologists will be glad to hear they have now become a hard science.

The economy isn't a physical object dominated by chance like a coin toss or a roll of the dice. And it's not a complex machine designed for a purpose that any slight change or quantum uncertainty will cause failures. It's more akin to having a sack that has an infinite number of things but only one of each kind, then letting random 1000 blind men grab something out of the sack and setting them loose in the woods. You could do it a billion times and each time would be different.

If you took a model of the jobs people have had over the last 20,000 years within 3 standard deviations you would predict that almost the entire economy would be based on farming or hunter-gathering. Today those feilds are only 5% of the economy and is dropping.

 

[ziggy29]

My gut feeling about this is that the value of the market is a combination of the (unknowable) true value of the stocks and the speculative value of the stocks. The speculative component oscillates rapidly around the more stable true value.

If the recent downturn was caused by a change in mostly the speculative part (investor fear), then you'd expect it to be followed by a return towards the true value.

I suspect that the market does this on a regular basis: it both overshoots valuations in bull markets where "irrational exuberance" reigns, and undershoots in bear markets where there is panic in the streets.

In reality, if you view stocks from a Buffettesque "intrinsic value" concept, the value of a generally sound business wouldn't drop much more than 10-20% in a recession. The sum of all the cash flows from the businesses, discounted out to infinity (or even 20 years), is likely to not change by much more than 10%, 20% in a near worst-case (assuming sound businesses that are very likely to survive economic downturns).

A less precise way would look and see how the PE10 changes. One or two bad years isn't going to reduce the 10-year earnings yield by much more than 10-20%, either.

The "fear factor" is one of general risk-aversion when asset values are falling combined with the fear that maybe *this* is one of the stocks which won't survive or ever be the same.