Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Are we through the looking glass?
Old 03-20-2009, 03:40 PM   #1
Thinks s/he gets paid by the post
 
Join Date: Aug 2004
Location: Houston
Posts: 1,435
Are we through the looking glass?

Imagine yourself 5 or 10 years ago. If someone had told you then that their investment in a plain-jane money market account would outperform your portfolio of any reasonable combination of equities (small cap, large, value, growth, international, REITs, etc.), would you have believed them? I would have estimated the odds of that to be <1% and told them to take off their tinfoil hat.

Yet we find ourselves in that situation today. Not to mention some other extraordinary events:
  • Mortgage contracts are being unilaterally written down by judges.
  • Bonuses are being retroactively confiscated by the government with no due process.
  • The Fed's balance sheet will soon exceed $300,000,000,000.00.
  • Effective nationalization of large companies in critical industries (banks, automakers)
All the rules seem to be changing daily. No matter how safe I try to make my investments today, it seems I am placing a bet on how things will turn out. Even things like Treasuries, cash, or TIPS could be terrible investments over the next 10 years, depending on which scenario comes to pass. So I can't opt out. But my ability to predict the next 10 years isn't any better than it was 10 years ago. So how am I supposed to make prudent decisions for my future welfare?

Maybe I'm being too post-modern about all this, but "before" when you invested, you could identify the biggest risks (the "known unknowns") and either accept them, or pick a different investment. Now, it seems that the biggest risks you face are impossible to classify or quantify (the "unknown unknowns").
__________________

__________________
soupcxan is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 03-20-2009, 04:35 PM   #2
Recycles dryer sheets
 
Join Date: Sep 2006
Posts: 312
Depending on your circumstances, it may be time to take the "unsafe" bets.

Remember, the one statement in life that is always true is "this too shall pass."
__________________

__________________
Grep is offline   Reply With Quote
Old 03-20-2009, 04:37 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,380
Quote:
Originally Posted by soupcxan View Post
All the rules seem to be changing daily. No matter how safe I try to make my investments today, it seems I am placing a bet on how things will turn out. Even things like Treasuries, cash, or TIPS could be terrible investments over the next 10 years, depending on which scenario comes to pass. So I can't opt out. But my ability to predict the next 10 years isn't any better than it was 10 years ago. So how am I supposed to make prudent decisions for my future welfare?
Very well put. One can't really. We just do our best. IMO one of the best is a well diversified portfolio strongly tilted toward quality, high ROA companies with growing dividend streams.

Not perfect, there are many possible criticisms, but not bad either. Best would be to be a politician and divert some of these masive flows into your own coffers.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is online now   Reply With Quote
Old 03-20-2009, 04:38 PM   #4
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
I'm mostly betting on reversion to the mean... but I am hedging my bets somewhat. This is no garden-variety economic slowdown, and while I'm not in "doom and gloom" mode expecting all out financial apocalypse, I am hedging about 20% of my portfolio with stuff that could hold value should the economy go deeper into the toilet and the dollar becomes toast.

But for the most part, I'm still dancing with the one that brought me here. Though my equity exposure is more tilted toward more stable, higher-dividend blue chips.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 03-20-2009, 05:00 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Dawg52's Avatar
 
Join Date: Feb 2005
Location: Central MS/Orange Beach, AL
Posts: 7,432
Quote:
Originally Posted by Grep View Post
Depending on your circumstances, it may be time to take the "unsafe" bets.
Yup, "bets" pretty much sums up the stock market. Legalized gambling.
__________________
Retired 3/31/2007@52
Full time wuss.......
Dawg52 is offline   Reply With Quote
Old 03-20-2009, 05:13 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Nov 2007
Posts: 7,526
I view equity investing as if I am buying a lottery ticket with an expected payout greater than 1. You never know what you will get, but if you hold on to it for a couple decades, you think there is a good shot of hitting the jackpot. Higher return and high standard deviation.

If I bought the money market lottery ticket, I know I am getting a return equal to inflation, plus maybe a percent.

Ex post, clearly the money market lottery ticket was a better bet. Ex ante, circa 1999, could you have said that a 100% allocation to money markets was the best bet?

I would suggest that a properly diversified portfolio invested in low cost, low turnover mutual funds that provide broad exposure to asset classes with low correlation is the best investment strategy going forward. Of course, temper your equity portion with bonds to match your risk tolerance and bake for 10 years. Serve when steaming hot in the middle.

I just took a quick peak at the 10 year returns on a number of funds offered by vanguard. The best performing money market fund was actually 33rd or so on that list. Outperforming it were a few funds that frequently are mentioned here, to wit, Wellington, Wellesley, a number of bond funds, Emerging Markets, Precious Metals and Mining, and Energy.

And many of the preferred slice n dicer asset classes do not lag far behind the money market returns: Small Cap value, REIT, international value, small cap.

So, yes, the equity lottery ticket was a loser vs. the money market lottery ticket, but not by a long shot. And I'm starting the measuring period in 1999, a period filled with manic positive outlooks on the economy riding the longest wave of economic expansion we have seen in modern history. And I'm ending this period today, in the middle of the worst market correction since the great depression. And yet the equities lottery ticket still did okay versus the money market.

I'm playing this game again.
__________________
FUEGO is offline   Reply With Quote
Old 03-20-2009, 07:11 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
freebird5825's Avatar
 
Join Date: Feb 2008
Location: East Nowhere, 43N Latitude, NY
Posts: 9,017
Past performance is no indicator of future returns.
Not FDIC insured.

I think I remembered those correctly. There it is in black and white.
No guarantees folks.
Put your money up and spin the wheel.
Only bring what you are willing to lose.
The good news is...yes...this too shall pass.
__________________
"All our dreams can come true, if we have the courage to pursue them." - Walt Disney
freebird5825 is offline   Reply With Quote
Old 03-20-2009, 07:16 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Dec 2007
Posts: 4,764
Quote:
Originally Posted by freebird5825 View Post
Past performance is no indicator of future returns.
Not FDIC insured.

I think I remembered those correctly. There it is in black and white.
No guarantees folks.
Put your money up and spin the wheel.
Only bring what you are willing to lose.
The good news is...yes...this too shall pass.
Round en round it goes where it stops noooobody knowsss
__________________
Notmuchlonger is offline   Reply With Quote
Old 03-20-2009, 07:20 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,615
The fact that you started this thread suggests that you are alive and well even after one of the worst 10 years in the market. What that suggests to me is that we could have another worst 10 years and we would all be alive and well even then.

So I'm not gonna worry about it because worry didn't help the last 10 years and won't help the next 10 years.

And you can tell your kids what it was like to live through the Great Recession. I doubt though that you will be like my mother-in-law who would eat out of our garbage can whenever she came to visit. It was a habit she picked up in the Depression.
__________________
LOL! is offline   Reply With Quote
Old 03-20-2009, 08:12 PM   #10
Recycles dryer sheets
 
Join Date: Jan 2007
Posts: 398
Quote:
Originally Posted by FUEGO View Post
I view equity investing as if I am buying a lottery ticket with an expected payout greater than 1. You never know what you will get, but if you hold on to it for a couple decades, you think there is a good shot of hitting the jackpot. Higher return and high standard deviation.
I look at it in a similar way and I'm not a betting man.

It's essentially a coin-flip (50-50 chance) on whether my equity portfolio will rise or fall on a given day. And it usually moves by non-trivial amounts (> $1000). In effect, each day I bet $1000 (or more) that fate will be on my side. About half the time I win. About half the time I lose.

Likewise, a red (or black) bet at the roulette wheel in Las Vegas also has odds of about 50%. I could bet $1000 each day on a single roll of the wheel. About half the time I win. About half the time I lose.

These are similar scenarios with very similar odds. Yet one is an investment and the other is gambling. It all depends on which side of 50% the odds fall. In the short-term, I can't tell the difference. In the long-term, I can.

No. Investments aren't like gambling with well computed odds. There are reasons investments tend to increase (e.g., long-term economic growth). Still, I've always been fascinated with the investment-gambling analogy. Despite their very similar odds, one is prudent and the other is fiscally irresponsible.
__________________
Shawn is offline   Reply With Quote
Old 03-20-2009, 08:32 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Dawg52's Avatar
 
Join Date: Feb 2005
Location: Central MS/Orange Beach, AL
Posts: 7,432
Quote:
Originally Posted by Shawn View Post
.

No. Investments aren't like gambling with well computed odds. There are reasons investments tend to increase (e.g., long-term economic growth). Still, I've always been fascinated with the investment-gambling analogy. Despite their very similar odds, one is prudent and the other is fiscally irresponsible.
I agree. The last 10 years have been fiscally irresponsible. And I didn't go to any casinos.
__________________
Retired 3/31/2007@52
Full time wuss.......
Dawg52 is offline   Reply With Quote
Old 03-20-2009, 08:54 PM   #12
Thinks s/he gets paid by the post
DblDoc's Avatar
 
Join Date: Aug 2007
Posts: 1,224
Quote:
Now, it seems that the biggest risks you face are impossible to classify or quantify (the "unknown unknowns").
Those were always there whether you were aware of them or not. They were there 10 years ago and are there today. A well diversified portfolio still remains the most likely to succeed.

DD
__________________
DblDoc is offline   Reply With Quote
Old 03-20-2009, 09:40 PM   #13
Thinks s/he gets paid by the post
Bikerdude's Avatar
 
Join Date: Jul 2006
Posts: 1,901
Quote:
Originally Posted by LOL! View Post
And you can tell your kids what it was like to live through the Great Recession. I doubt though that you will be like my mother-in-law who would eat out of our garbage can whenever she came to visit. It was a habit she picked up in the Depression.
Maybe she didn't like what you were having for dinner.
__________________
“I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said” Alan Greenspan
Bikerdude is offline   Reply With Quote
Old 03-20-2009, 10:40 PM   #14
Recycles dryer sheets
 
Join Date: Sep 2006
Posts: 312
All this talk about the stock market being mere "gambling" is ridiculous. Yes, there is risk, and that risk can feel like a gamble. But stock ownership is the ownership of companies that have real value and produce real products (except A.I.G., of course). Invest in a Total Stock market fund, and you own a slice of the productivity of the United States (or the world). That may sputter at times, but it is a far cry from plunking money down at a roulette wheel.
__________________
Grep is offline   Reply With Quote
Old 03-21-2009, 08:10 AM   #15
Recycles dryer sheets
 
Join Date: Dec 2006
Location: Florida
Posts: 249
Grep, in addition to being a Unix utility program makes a good point, which I shall amplify: You can invest the money in good faith, but the company may do all kinds of untoward things; steal it, pay executives outrageous salaries, make dumb strategic decisions, or just be the victim of a bad economy. Add government meddling and who knows....? It is a crap shoot seems so sometimes ...
__________________
I've got nothing against an honest day's work, provided that someone else does it.
pedorrero is offline   Reply With Quote
Old 03-21-2009, 09:01 AM   #16
Recycles dryer sheets
 
Join Date: Sep 2006
Posts: 312
If you own the entire country or the entire world, e.g. via broad-based mutual funds, then you will be on the winning (or losing) end of population growth and increased productivity and consumption, etc. The game may feel rigged at times like these, but in the long term, "gambling" on the survival, energy, labor, innovation and ultimately the success of the one world we have is the only game in town.

Five years from now, when we are probing new highs every other day (we can hope, anyway), few will be complaining in despair that the stock market is nothing more than gambling. The few that would dare say such words would probably be scolded and told (with studies at hand) that the stock market is "actually safer than treasuries in the long run due to enhanced portfolio longevity," etc.

By the way, I'm more of a contrarian than a cheer-leader.
__________________
Grep is offline   Reply With Quote
Old 03-21-2009, 09:09 AM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Dawg52's Avatar
 
Join Date: Feb 2005
Location: Central MS/Orange Beach, AL
Posts: 7,432
Quote:
Originally Posted by Grep View Post

Five years from now, when we are probing new highs every other day (we can hope, anyway), few will be complaining in despair that the stock market is nothing more than gambling. The few that would dare say such words would probably be scolded and told (with studies at hand) that the stock market is "actually safer than treasuries in the long run due to enhanced portfolio longevity," etc.
I hope you are right. Then I can unload my gambling investments.
__________________
Retired 3/31/2007@52
Full time wuss.......
Dawg52 is offline   Reply With Quote
Old 03-21-2009, 09:19 AM   #18
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by Grep View Post
Five years from now, when we are probing new highs every other day (we can hope, anyway), few will be complaining in despair that the stock market is nothing more than gambling. The few that would dare say such words would probably be scolded and told (with studies at hand) that the stock market is "actually safer than treasuries in the long run due to enhanced portfolio longevity," etc.
Like the "few" who were scolded 18 months ago? Not to mention some of us thinking the same things but not having the guts to get out?

Seriously, though, if the market is hitting new highs in five years -- goodbye 70/30, hello 50/50...
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 03-21-2009, 11:01 AM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Quote:
Originally Posted by soupcxan View Post
Maybe I'm being too post-modern about all this, but "before" when you invested, you could identify the biggest risks (the "known unknowns") and either accept them, or pick a different investment. Now, it seems that the biggest risks you face are impossible to classify or quantify (the "unknown unknowns").
Hmmmm, really?

So you mean investing in stocks was less risky before they declined 50%? Is that even possible?

The joke about investing (in all asset classes) is that the lowest future returns are garnered when investing during "safe" and "stable" times. Low risk premiums invariably lead to low returns. Now, however, risk premiums are high. That doesn't guarantee positive future returns, but it does increase the odds. Meanwhile, the risks haven't really changed . . . specific risks have just become more apparent. For example, it's hard to say that over-leveraged banks and consumers is a new risk. We're just getting paid a higher premium to accept that risk now.
__________________
Gone4Good is offline   Reply With Quote
Old 03-21-2009, 11:55 AM   #20
Recycles dryer sheets
gryffindor's Avatar
 
Join Date: Mar 2008
Posts: 51
I don't think you could have accurately identified all of the risks 15 years ago you just thought you could.

This crisis is a good reminder for all of us to really understand risk and where it lies. So the real question is where are all of the systematic risks and how do you protect yourself from them. New risks that I have been considering

Risk of human capital - ability to hold down good paying steady job (certainly high risk if you are in financial industry , lower if you are in health care)

Currency risk -- potential that dollar will dramatically lose value. Certainly when the Fed injects $ 1 trillion into the money supply in one day, the potential of this happening has gone up significantly.

Financial institution / liquidity risk -- now we all need to think about who is holding our assets and how quickly we could access them if needed.

I'm sure others can identify other new risks that they hadn't considered in the past.
__________________

__________________
Gryffindor
gryffindor is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Slow glass calmloki Other topics 2 03-07-2008 09:13 PM
Broken Glass in Dishwasher TromboneAl Other topics 17 06-13-2007 05:36 PM
Glass of Wine a Day Fights Dementia Eagle43 Health and Early Retirement 9 05-24-2007 02:50 PM
French Doors or Sliding Glass Door? wabmester Other topics 12 01-23-2004 06:28 AM

 

 
All times are GMT -6. The time now is 01:18 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.