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Death of buy and Hold
Old 06-21-2010, 11:18 AM   #1
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Death of buy and Hold

I often read from the Early Retirement Extreme blog, but I found this article to be a little disheartening since I am an index fund investor.
http://earlyretirementextreme.com/th...-and-hold.html
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Old 06-21-2010, 11:23 AM   #2
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I think back to when Business Week lamented "The Death of Equities" around 1980 or so.

As it turned out, it was a rather good time to start buying stocks, as the secular bull market from 1982 to early 2000 was one of the most explosive ever.

No guarantees that the future will be like the past, but then as now, many "doom and gloom" data points and economic trends were used to declare stock investing dead. Who knows? The permabears and the "this time it's different" crowd isn't always wrong, and maybe they aren't here. But their long-term track record of being right (the 2008-09 meltdown notwithstanding) isn't very inspiring or compelling.
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Old 06-21-2010, 12:05 PM   #3
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In conclusion: DCA, buy and hold, and index investing are all good, but they are not a silver bullet. They are going to make you richer than your peers if you stick to them, but it is not due to their superior strategic virtues. Rather it is due to the discipline which you have and others do not.
So whats the problem?

FYI what he is describing is called periodic investing not DCA. PI is what you do with your monthly/bimonthly paycheck, DCA is what you do with a lump sum.

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Old 06-21-2010, 12:11 PM   #4
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Another version of "this time it's different." Every time there is a downturn "they" make a very convincing argument as to why it's "different this time," only to ultimately be proven wrong once again. Sort of like those who predict the end of the world, they've also been wrong at least 220 times so far...220 Dates for the End of the world!!! Date Setters!.

When/if they're ever right, there won't be any avoiding the consequences anyway...
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Old 06-21-2010, 12:38 PM   #5
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I was alarmed by the long periods of time that index buy and hold did not keep up with inflation in European countries and Japan.
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Old 06-21-2010, 12:49 PM   #6
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I often read from the Early Retirement Extreme blog, but I found this article to be a little disheartening since I am an index fund investor.
IIRC, Jacob buys equities when the dividend rate approaches 5% and sells when the rate approaches 3%. He's also traded options in the past (selling covered calls) although I don't know if he still does that. So the only challenge is finding equities yielding 5% that will someday appreciate to a yield of 3%. Yup, that's all.

Here's some cheery counterpoint to consider with the shorter-term thinking of that article:

The Buffett family is cheering because the price of equities hamburger has dropped, yet most burger-eaters have run away screaming to put their money in CDs, TIPS, and gold funds.

I agree that B&H looks pretty crappy when considered over a term of a decade. Yet the last 10 years have been in pretty short supply over the last 30 years, and most of today's active retail investors haven't known anything other than a bull market. The investor's psychological phenomena are "recency" and "anchoring", and they can be pretty discouraging when they're focused on Dow 14,000.

DCA's strongest advantage is that it imposes a savings discipline on the investor. It probably matters less what the investor chooses to invest in as long as they have a pile of shares when the market takes off. Kinda hard to play catch-up after the market has started rising.

Asset allocation can also be your friend by forcing you to put your money where the market's underperforming. Again you've accumulated a pile of cheap sh!t shares when the market takes off.

Another aspect of the two to consider is value averaging-- put the month's DCA dollars in whatever's doing worst. Take dividends in cash (instead of reinvested shares) and move them to lagging assets.

Another benefit to B&H is that it minimizes expenses by reducing trading costs (and bad spreads) as well as taxes.

It's probably unrealistic to expect that the majority of individual investors will ever learn how to pick market trends, let alone stocks. This is assuming that individuals even have the time to study the skill, let alone the capability to develop it. But we can all be expected to learn how to exert control over our savings rates, our sleep-at-night asset allocations, and our investment expenses.

So, yeah, B&H can be pretty discouraging at times, but it's better than the alternatives. "Disheartening" might be an indication that it's time to look at the ER portfolio's asset allocation or the ER budget/expenses or ESR.

If you want good news about B&H, it's that our ER portfolio is 50% higher over the "lost" decade. We haven't been adding to it during my ER, either-- just reinvesting most of the dividends. The part of my portfolio that I used to actively trade (using a number of widely-accepted strategies) hasn't done much better than money markets (but with sickeningly higher volatility). I was getting better, too, but I was also getting tired of having to put in all that work for "just" a few extra percentage points. Meanwhile the assets in our ER portfolio did better the longer I ignored them.
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Old 06-21-2010, 12:50 PM   #7
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You will like this note as well:
One Big Thing We Don’t Know About Stocks - Bucks Blog - NYTimes.com

Does the risk premium still exist? It certainly fluctuates. It's all about timing, but mostly when you were born.
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Old 06-21-2010, 04:10 PM   #8
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I think it is different this time. The boomers are retiring in droves, what that means for the stock market or vacation homes not sure. But suspect that the percent stock that people hold may be reduced. Just a guess.
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Old 06-21-2010, 04:58 PM   #9
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I think it is different this time. The boomers are retiring in droves...
Would these be the same Boomers who haven't saved any money for retirement and are upside-down in their mortgages?
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Old 06-21-2010, 05:20 PM   #10
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Nords: I guess that is my point, what ever the boomers do there are so many of us that, the effect on the economy/market could be major. For instance I retired in 08 just applied for SS last Sunday. My Acura TL lease is up and I am not buying the car out,or getting a new one for myself, but downsizing to our 05 Ford Escape. Would love to keep the TL best car I ever owned, but reducing monthly cash flow is more important.
As far as the boomers who did not save, if they have a pension and two SS incomes they should be fine. Of course when one dies then things may get dicy. I just got out in time before they froze the pensions.
In my case our medium size 140 year old private company was bought out by an investiment group, they offered any of us 60 or over a good package, this was August 08 before things hit the fan. I suspect many compaines are getting rid of their older people for one reaon or another, this will force many into retirement.
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Old 06-21-2010, 05:36 PM   #11
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Would these be the same Boomers who haven't saved any money for retirement and are upside-down in their mortgages?
According to the financial pundits: if the boomers retire in droves as they near retirement age, they will take the market, economy and government finances down with it as they reduce stock exposure and pay less in taxes while not working. Disaster.

If the boomers keep working, it's terrible because it means their 401Ks are 201Ks, they are upside down on their mortgages, they can't afford the health insurance in retirement and their pensions are being taken. Disaster.

If the economy is good enough to let boomers retire, it's bad. If the economy is too weak to allow them to retire, it's bad.

Got it.
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Old 06-21-2010, 06:22 PM   #12
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I find that I cannot make any sort of realistic assessment of what is likely to be in store.

I know one thing, this is not a low risk or "no brainer" time to be investing.

I am glad that I have a reasonable amount of money, my overhead is more or less under control, no one has a legal or moral lien on me, and I am content with my life as it is.

I am not as sanguine as some on the forum, but I think I probably have good shot at not falling off the mountain.

I do think that this is a poor time to rely on rules of thumb, or average experiences from the past. To me, the deflationary credit conditions and the inflationary government responses make a tough puzzle.

Ha
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Old 06-21-2010, 06:59 PM   #13
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I find that I cannot make any sort of realistic assessment of what is likely to be in store.

I know one thing, this is not a low risk or "no brainer" time to be investing.

I am glad that I have a reasonable amount of money, my overhead is more or less under control, no one has a legal or moral lien on me, and I am content with my life as it is.

I am not as sanguine as some on the forum, but I think I probably have good shot at not falling off the mountain.

I do think that this is a poor time to rely on rules of thumb, or average experiences from the past. To me, the deflationary credit conditions and the inflationary government responses make a tough puzzle.

Ha
I suspect that if anyone can make it through a rough patch its precisely the FI/ER/LBYM types that frequent this site. I firmly believe that the traits that got most of us to find this forum an interesting place to visit are precisely the traits that will work towards survival and eventual prosperity - way ahead of anybody else that hasn't won the lotto (maybe even them, I recall a thread on that subject that didn't go too well...)

Some will slice and dice the asset allocations differently but I think those are mere details - its the mind set that makes all the difference.
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Old 06-21-2010, 07:03 PM   #14
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Didn't we all just make it through a rough patch? A 10-year rough patch for some of us?
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Old 06-21-2010, 07:54 PM   #15
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Didn't we all just make it through a rough patch? A 10-year rough patch for some of us?
I would say that we experienced a 10 year rough patch. Whether we are through it or not is still to be decided.

Ha
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Old 06-21-2010, 07:56 PM   #16
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Didn't we all just make it through a rough patch? A 10-year rough patch for some of us?
Who's to say we're done? I haven't been on the "we're another Japan" bandwagon, but the longer this drags out the more it's starting to look like a possibility. I certainly hope March 2009 was *the* bottom, but I see rough sailing ahead for a while.
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Old 06-21-2010, 08:05 PM   #17
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I suspect that if anyone can make it through a rough patch its precisely the FI/ER/LBYM types that frequent this site. I firmly believe that the traits that got most of us to find this forum an interesting place to visit are precisely the traits that will work towards survival and eventual prosperity - way ahead of anybody else that hasn't won the lotto (maybe even them, I recall a thread on that subject that didn't go too well...)

Some will slice and dice the asset allocations differently but I think those are mere details - its the mind set that makes all the difference.
Yes!

Additionally, looking into the future and all the uncertainties that may be of concern, I personally think my health condition may be a larger deciding factor in my happiness level than the stock market or my portfolio size. If I cannot afford foreign travel in the future, if my lifestyle is reduced to "frugal bastardhood", it is still not a big deal if I would retain my health.

Same as many people here who are LBYM and know how to manage and conserve their wealth, no matter how they invest, I think the risk of me being homeless and hungry is slim. Our state of health is a much larger risk as we age, yet we cannot predict nor do much about it.
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Old 06-21-2010, 08:30 PM   #18
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I find that I cannot make any sort of realistic assessment of what is likely to be in store.

I know one thing, this is not a low risk or "no brainer" time to be investing.

I am glad that I have a reasonable amount of money, my overhead is more or less under control, no one has a legal or moral lien on me, and I am content with my life as it is.

I am not as sanguine as some on the forum, but I think I probably have good shot at not falling off the mountain.

I do think that this is a poor time to rely on rules of thumb, or average experiences from the past. To me, the deflationary credit conditions and the inflationary government responses make a tough puzzle.

Ha
My overhead is under control, no liens besides a mortgage, and I'm reasonably content, and might just make it to FIRE (or IRE, or maybe IR...) one of these days.

I panicked have strategically reallocated, based on my tea leaves ouija board magic 8-ball SWAG exhaustive research, which is worth the price I paid for it. But I use index ETFs almost exclusively, so no hot stock tips here.

Currently: Stocks 40%, Bonds 40%, REIT 5%, PCRIX 5%, Cash 10%

All perfectly correlated during the late '08 - early '09 time period...
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Old 06-21-2010, 08:42 PM   #19
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All perfectly correlated during the late '08 - early '09 time period...
If our main problem continues to be credit stress, all risk assets will tend to be correlated.

Get sme blazing inflation going and we will see dispersion among these, according to their resistance (or not) to inflation.

Ha
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Old 06-22-2010, 09:47 PM   #20
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To me, the deflationary credit conditions and the inflationary government responses make a tough puzzle.

Ha

+1 Nicely put Ha.
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