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A very thoughtful questioning of the buy and hold strategy to investing in equities..
Old 06-18-2010, 10:42 PM   #1
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A very thoughtful questioning of the buy and hold strategy to investing in equities..

Excuse if already posted...

Doomed to Repeat?
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Old 06-18-2010, 11:45 PM   #2
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The article uses a hypothetical 40 year old Japanese person who bought the Japanese market in 1980 once and did nothing else. Such a person simply does not exist, so the article is total BS.

In this respect, this article is kind of like all those "Lost Decade" in the US articles (2000-2009). Nobody in the US bought 100% equities once in March 2000 and simple held to 2009. Nobody.

Buy-and-hold means buy equities (US & foreign) and bonds, rebalance, & tax-loss harvest, while sticking to your planned asset allocation.
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Old 06-19-2010, 12:21 AM   #3
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The article uses a hypothetical 40 year old Japanese person who bought the Japanese market in 1980 once and did nothing else. Such a person simply does not exist, so the article is total BS.

In this respect, this article is kind of like all those "Lost Decade" in the US articles (2000-2009). Nobody in the US bought 100% equities once in March 2000 and simple held to 2009. Nobody.

Buy-and-hold means buy equities (US & foreign) and bonds, rebalance, & tax-loss harvest, while sticking to your planned asset allocation.
No where does the author address asset allocations, your main argument for claiming “BS”.

His focus is purely on the Japanese equity market and "buy and hold" and the lessons that can be drawn from that experience. Moreover, all the rebalancing in the world within an equity portfolio would not have saved an investor in Japanese equities in the last 20 years. The only thing that would have was buying on each successive low and selling at each successive bear market rally top.

As to the hypothetical investor who cares. The real point is that anyone purchasing and holding equities at any point between 1989 and approximately 2004 has lost money.

Finally, he questions whether the US equity markets could follow the Japanese experience given our similar problems of a collapsing housing market, cheap credit and mountains of bad debt. A valid question worthy of serious consideration.
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Old 06-19-2010, 12:29 AM   #4
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I agree with him that one should not hold a 100% equity portfolio. Instead, one should have stocks and bonds, tax-loss harvest losers and rebalance between stocks and bonds as warranted. But isn't that what everybody recommends including the proponents of buy-and-hold?
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Old 06-19-2010, 02:04 AM   #5
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The stock market can stay irrational longer than you can stay solvent is one of my favorite investment sayings and clearly the Japanese market has been pretty irrational for the last 25 years judging by the crazy swings. Still I am very suspicious of people who cherry pick data and then make some pretty fundamental errors.

Given that Japanese are famous for being great savers why start investing in stocks at 40? . Lets say the guy started saving at 20 like most Japanese and invests in the market and is now 60. Similar to many like many board members. Maybe because the author is an investment adviser who wants to offer his services and how to time the market?

See back in Jan 1970 the Nikki was at 2100 and change. 40 years latter it is at 10,000 or almost 5x higher. Now almost 5x return over 40 years isn't great just 4% a year.

My second criticism is the author conveniently forgets dividends. Historically dividends represent almost 40% of the total stock market returns in the US market. One of the tricks annuity salesman and financial advisers to ignore dividends when making comparison. Now I have no idea if there was a Nikki index fund back in 1970 although I'd bet there was one in 1990. A far far fairer comparison is to use total returns as measured by a fund or 3rd party than simply looking at the index.

Now dividends have decreased in recent decades. And the dividend yield for the Nikki index I believe is typically below the US. Still it appears to be in the 1-2% so suddenly the buy and hold investor is looking at total return in the 5.5%. Now this isn't a great return but it doesn't totally suck.

By way of comparison the Dow was 800 back in Jan 1979 the 20 year old US buy and hold investor would have since a 12x gain over 40 years and 6.5% price return and dividend yield of about 3%, for a total return over 9%, not half bad even after this last decade.


Finally it is worth noting that why the returns over the last 20 years in the Japanese market have been truly awful, the alternate investments for Japaneses have also being horrible. Japanese real estate is still below the peak levels, and interest rates on CDs, government or corporate bonds have been near 0% for most of the last 20 years.
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Old 06-19-2010, 07:16 AM   #6
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cherry-picking slices of market history that support passive investing are the only ways Wall Street can justify exposing investors’ assets to a passive philosophy.
So starting an equity return analysis from a bubble peak isn't cherry-picking data? And we're to assume from this comment that "Wall-Street" somehow prefers the low-commission, low fee, passive investing style - that they'd cherry pick data to support a product that earns them less money? Ok.

But the bigger flaw in this report, and most of its kind, is that it omits any description of the alternative. So even if we agree that passive investing in equities is stupid, what do we do instead? Where is the data supporting the position that active equity investors in Japan have fared better than their buy-and-hold brethren?

Ironically, in absence of a reliable alternative to passive investing, the only sensible conclusion one could draw from this report is not one the author likely intended . . . "don't buy equities at all".
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Old 06-19-2010, 07:34 AM   #7
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... it is worth noting that why the returns over the last 20 years in the Japanese market have been truly awful, the alternate investments for Japaneses have also being horrible. Japanese real estate is still below the peak levels, and interest rates on CDs, government or corporate bonds have been near 0% for most of the last 20 years.
There appears to be no way a typical Japanese worker can achieve FIRE, as there are no asset classes that would give them any return at all. Do most of them just work until their old age, then rely on just private pension or government hand outs?

I remember there were some Japanese posters on this forum. Perhaps they or members like Rambler can entertain us on this topic.
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Old 06-19-2010, 07:41 AM   #8
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I have spoken to Japanese professors and engineers about retire plans. There is a system much like our social security which they pay into. But like Europeans, the government scheme pays more money out during retirement than the US system.

You can imagine that if social security was guaranteed to pay you 80% of the average of your last 3 years of income that you would probably not have to save any money for retirement. I'm not saying this is what happens in Japan and Europe, but just hinting at the possibility. Because of their governments benevolence, I think there are not as many investors in Japan and Europe as there are in the US.

Also check out the news about the French retirement system in the media recently.
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Old 06-19-2010, 07:44 AM   #9
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? Where is the data supporting the position that active equity investors in Japan have fared better than their buy-and-hold brethren?

Ironically, in absence of a reliable alternative to passive investing, the only sensible conclusion one could draw from this report is not one the author likely intended . . . "don't buy equities at all".
Actually given the equally bad alternative investments in bonds, or real estate.the most sensible conclusion is if you are Japanese is to move or at the very least invest outside of Japan.

Now it is possible that we also could be in for another decade of horrible equity returns. I personally think it is more possible now than I thought even during the crash, but I am not convinced that returns in the US will be particularly bad. My nominee for that dubious honor is the Eurozone.

In one respect the authors is absolutely right
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Risk management is not something you do for a while and then stop. I believe the evidence is clear that an active investment process is an absolute necessity to survive in today’s uncertain world
In world were equity returns maybe negative the only way an adviser can make a living is advocating active investing...
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Old 06-19-2010, 07:52 AM   #10
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Actually given the equally bad alternative investments in bonds, or real estate.the most sensible conclusion is if you are Japanese is to move or at the very least invest outside of Japan.
Maybe not. Pre-crisis interest rates were in the 5% area. 10-yr and 30yr bonds would have done nicely. Current 10-yr rates are 1.2%, but inflation has been non-existent in Japan, so that is pretty close to a real yield (right on top of our 1.19% 10-yr TIPS rate). Not great, but I suspect a retiree who had 100% laddered treasury portfolio wouldn't have been in too bad of shape.
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Old 06-19-2010, 10:34 AM   #11
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The chart in the linked article shows that the Nikkei is near its lowest point in the last 25 years. This means that an investor in the accumulation phase during that time has not made money, if she only buys and holds during that time. If she started out in her 20s in 1984, she is now in her late 40s, and has no returns to show for it.

Of course, if she has been trading rebalancing during that period, she may still come out ahead.

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Maybe not. Pre-crisis interest rates were in the 5% area. 10-yr and 30yr bonds would have done nicely. Current 10-yr rates are 1.2%, but inflation has been non-existent in Japan, so that is pretty close to a real yield (right on top of our 1.19% 10-yr TIPS rate). Not great, but I suspect a retiree who had 100% laddered treasury portfolio wouldn't have been in too bad of shape.
So, could that be the thinking of some US posters who hold no equities?

I myself am more optimistic about our economic future (yes, me who has admitted to being of a gloomy personal nature), and will not abandon my equities position in the foreseeable future. It's at 75% of portfolio now.

Of course I hedge by holding quite a bit of foreign stocks.
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Old 06-19-2010, 10:39 AM   #12
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Of course I hedge by holding quite a bit of foreign stocks.
And a St. Christopher medal, I hope?

Ha
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Old 06-19-2010, 10:50 AM   #13
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The chart in the linked article shows that the Nikkei is near its lowest point in the last 25 years. This means that an investor in the accumulation phase during that time has not made money, if she only buys and holds during that time. If she started out in her 20s in 1984, she is now in her late 40s, and has no returns to show for it.

Of course, if she has been trading rebalancing during that period, she may still come out ahead.



So, could that be the thinking of some US posters who hold no equities?
My own conclusion is that at least for the near term (next two years or so) the US equity markets will be one to trade, and not buy and hold. Volatility, as we have already experienced, will continue to be the norm.

Generally, the only exception that I see to the above statement are high yielding stocks (with cash flow to support dividends) that will provide some downside protection during downdraft periods.

I've come to this conclusion based upon my concerns that the US still faces a Japanese style outcome. Until I am convinced otherwise, I do not think significant exposure to equities on a buy and hold approach makes sense.

YMMV...
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Old 06-19-2010, 10:53 AM   #14
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The stock market can stay irrational longer than you can stay solvent is one of my favorite investment sayings...
Equally favorite of mine is that "trees can't grow to the moon"...
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Old 06-19-2010, 11:07 AM   #15
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As I recall, it is very hard for the average Japanese to own foreign stocks. I do not think Japanese stocks pay dividends, either.

When I was there, I felt bad for them. They are exploited terribly and they sit still for it.

Myself, I hold 50/50 US/foreign. And I want dividends.
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Old 06-19-2010, 11:10 AM   #16
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You can imagine that if social security was guaranteed to pay you 80% of the average of your last 3 years of income that you would probably not have to save any money for retirement. I'm not saying this is what happens in Japan and Europe, but just hinting at the possibility. Because of their governments benevolence, I think there are not as many investors in Japan and Europe as there are in the US.
Agreed . If I thought I already had a sufficient and guaranteed income stream in retirement, you can bet I wouldn't nearly be as aggressive in gambling investing directly in equities.
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Old 06-19-2010, 11:18 AM   #17
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The article uses a hypothetical 40 year old Japanese person who bought the Japanese market in 1980 once and did nothing else. Such a person simply does not exist, so the article is total BS.
Imagining the worst case scenario doesn't make the article BS. This person, real or imaginary had the worst timing, which is of utmost importance. We've been spoon fed to diversify, rebalance, and keep giving money to wall street. This strategy has been good and bad at times. Passive investing with "the market always comes back" attitude works only if the timing is right. Our recent American economic history might have given us all a sense of confidence and complacency when it comes to investing. It would be wise to temper that with a wider slice of history as the article suggests.
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Old 06-19-2010, 11:20 AM   #18
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And a St. Christopher medal, I hope?
Ha
I don't. But thinking about it, I can see if it doesn't help, it doesn't hurt either. Well, as long as I do not go sightseeing in Afghanistan wearing the medal, thinking it would make me safe.

Oh, but you meant my 75% equities is the same as playing tourist in Afghanistan.

Well, you know, life can be dull if one does not take a bit of calculated risk. That's why I am going by RV to Alaska rather than taking a cruise.

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Equally favorite of mine is that "trees can't grow to the moon"...
Oh, nobody disputes that!

But my trees are bearing fruit. And I think some are still only chest high.
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Old 06-19-2010, 11:21 AM   #19
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Agreed . If I thought I already had a sufficient and guaranteed income stream in retirement, you can bet I wouldn't nearly be as aggressive in gambling investing directly in equities.
And this is why "means-testing" SS is a terrible idea. Everyone will modify their savings habits to the detriment of the country.

[Note: I figure I can hijack the tread as I started it. And now back to our regular programming...]
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Old 06-19-2010, 11:58 AM   #20
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I hope the pessimism continues for years. The longer this goes on, the more shares I can accumulate of great multinational companies, at reasonable yields and with solid dividend growth histories. The great recession of 2008 just may assure that I can ESR a decade from now.
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