Help me to love stocks!

[renferme]

I getting more and more like my Dad every day, disliking the stock market.
I know all the "why I should be in the stock market" reasons, but since 2000, a person would be better off in CDs and slept much better too.
If I get 5% from a CD and withdraw 3 to 4 % each year, I'm actually building my portfolio, right ? How do I get confidence that I should be more equity invested than I am right now (25%) ? Even reading Bernstein's book made me more pessimistic, when he said that the future expected Market Return = the annual div. rate of the market + the annual percentage increase in dividends. Or...
market return = 1 + 5 = 6 %,,,,that's not good. The historical market return was or is about 9 %, but that's when the market was paying 4% dividend rate.
Help!

 

[azanon]

I know all the "why I should be in the stock market" reasons, but since 2000, a person would be better off in CDs and slept much better too.

That's not really true anymore, but would depend on what market cap/sector you're looking at. There are certainly some groupings of stocks from 2000 though now, that actually would show a gain better than a CD. For example, i bet small cap value US would probably shows a better return than cd's over that period.

If I get 5% from a CD and withdraw 3 to 4 % each year, I'm actually building my portfolio, right ?

No, because inflation will be at least an additional 2%, and probably more like 3% or more.

How do I get confidence that I should be more equity invested than I am right now (25%) ? Even reading Bernstein's book made me more pessimistic, when he said that the future expected Market Return = the annual div. rate of the market + the annual percentage increase in dividends. Or...
market return = 1 + 5 = 6 %,,,,that's not good. The historical market return was or is about 9 %, but that's when the market was paying 4% dividend rate.

There have been and always will be doomsday stories about the market. But the bulk of the investment advisors as well as hindsight data will show that a solid portfolio will have a healthy weighting in stocks. As for how much, I like the quick and dirty 100- your age if you consider yourself a conservative investor. But I think the retirement point should definitely include a reanalysis of weightings if you think you couldnt get your job back.

 

[LOL!]

..., but since 2000, a person would be better off in CDs and slept much better too.

You must live in a different world than me.  Let's take the small cap value index ETF ticker symbol IWN.  If you bought in 2000 you would have gained over 100% to today.

It is true that if you bought the S&P 500 index, you would be under water.

Moral of story: Invest like the books tell you to invest.

 

[renferme]

OK, yes, if you would have invested in certain stocks or indexes, you could be above water since 2000. But how would you know where to be invested ?
Don't want to put all your eggs in small cap stocks, do you? I believe that the total market is down since 2000; if not down, then not up by much.
If you were a diversified equity investor, with 100% in equities, wouldn't you be down since year 2000 ?

And do you believe Bernstein, that future market returns will average about 6% ?
That historical 9% market returns are a thing of the past ?
And don't you believe that getting 6% from the market is too much risk when you can safely get 5% from CDs ?

 

[LOL!]

1. The books say diversify among asset classes, not try to pick the best asset class for the day.
2. We are still working, so we keep adding to investments just like we did in 2000.
3. An investment 6 years ago in VTSMX would be down about 1% today.
4. But if you had been adding over those years, you would be lovin' it.
5. The books do not recommend 100% equities.
6. I don't know what the future will bring and neither does Bernstein.

 

[Nords]

OK, yes, if you would have invested in certain stocks or indexes, you could be above water since 2000.    But how would you know where to be invested ?

We didn't. We put our money with value managers and with value funds. We actually had put some of our money in small-cap growth until we read about its miserable record in Bernstein's Four Pillars. (One small-cap growth ETF, IJT, has since doubled, but its long-term returns are expected to lag small-cap value-- and they have.)

Don't want to put all your eggs in small cap stocks, do you? I believe that the total market is down since 2000; if not down, then not up by much.

You're absolutely right, the S&P500 (which has absorbed about 70% of the TSM) has absolutely sucked over the last six years.

We DO want to put a substantial allocation of our eggs in small caps for the small-cap premium. Don't know how long it'll last, but all our large-caps are value or big dividend payers. And then there's the international allocation, let alone REITs & commodities.

If you were a diversified equity investor, with 100% in equities, wouldn't you be down since year 2000 ?

Nah, on another post I mentioned that our retirement portfolio has hit an all-time high, and it's up nearly 80% from the lowest point (right after 9/11). That's after taxes and despite much more in withdrawals than in contributions. In other words we don't appear to be spending it fast enough, despite retiring in mid-2002.

And do you believe Bernstein, that future market returns will average about 6% ?
That historical 9% market returns are a thing of the past ?

I believe that the overall big picture could well be 6% as described by the Gordon Equation. But that also has a number of assumptions which could be flawed. I think that returns will be 3-4% over inflation for the next 10-20 years, and so I really really hope that overall returns stay below 9%!

Bernstein doesn't give as good a perspective as "Triumph of the Optimists". I don't remember for sure, but I think Bernstein also doesn't do as good a job with international stocks. I think at least half the juice in the last few years of international returns is coming from a declining dollar.

And don't you believe that getting 6% from the market is too much risk when you can safely get 5% from CDs ?

The problem with a 5% CD is that you've had to be right for more than just a year. Last year those returns were coming from 4-5 year CDs and we may have ended up long & wrong with ours. Even 2-3 years may be too much forecasting.

If you're really in this for the long-term, wouldn't you rather compound a 6% annual stock return for two decades instead of a 5% CD return?

My parents-in-law are doing 100% fixed-income investing with Treasuries & CDs. They're finding out that their real concern is inflation. They're in their 70s, we're in our 40s. We can see where fixed-income investing would put us.

I can't remember if I read it in Four Pillars or elsewhere, but didn't a philanthropist require that his trust fund stay in 100% govt bonds, and didn't it spend itself after only 70-80 years?

 

[cute fuzzy bunny]

I guess its appropriate to bring up that old saw about investing in the rear view mirror.

Since the s&p500 has sucked for 5-6 years, isnt it about time for that to stop?

The way I look at it, cash/moneymarket/cd investments are fine for the emergency stash, but they can barely keep pace with inflation...if that. Maybe stocks wont have the returns they had in the late 90's...probably...maybe I wont get 10-12-15% out of them either.

But I'd rather go down with a shot at winning than punt on first down so nothing bad happens, and hope my defense wins the game. I swear thats the last time I'll use that analogy.

 

[bearkeley]

Cute and Fuzzy I find you posts very frustrating. Mostly because I can't enlarge the photos.

 

[Cool Dood]

Am I the only one who intuitively figures that stocks are not just climbing at x% of themselves per year, but that the x itself will continue to grow over the long term?

(With ups and downs, of course, just as equity growth has ups and downs.)

I'm not offering a detailed argument with charts and figures to back it up, and therefore I'm not in any way basing my retirement on the assumption, but it does seem intuitively obvious...............

 

[cute fuzzy bunny]

Cute and Fuzzy I find you posts very frustrating. Mostly because I can't enlarge the photos.

Just search for "Vida Guerra".

Cool dood...you've got it right. I'm actually pleased to see that a lot of people appear to have given up on stocks after a long flattish period for some indexes. Capitulation is the first step towards the next bull.

 

[renferme]

Since the s&p500 has sucked for 5-6 years, isnt it about time for that to stop?

No, it's not about time to stop...will only stop when the markets average dividend rate goes up... remember what Bernstein's says about expections of future market returns? See my earlier post.
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Remember guys, I am retired and can't put too much into stocks. Going by the
100-age "theory", I should be 40% into stocks, but no, I'm too conservative and can only imagine doing what I'm doing right now --> putting 25 to 29 % in stocks and withdrawing about 3 to 3.5% yearly.
My annual withdrawal will go down more, when I hit the big 62 and begin soc. security.
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Nords,
I have about 12% of total portfolio into REIT stocks right now. My other stocks are dividend payers like GE and MO, for example.
You can be more daring than me, because you're young.

"If you're really in this for the long-term, wouldn't you rather compound a 6% annual stock return for two decades instead of a 5% CD return? "
answer: NO, because the 6% is not guaranteed, dispite what anyone says.
And, at my age, I probably will be withdrawing, not compounding !

CD rates are going up, so my initial 5% statement is really conservative.
Right now my average CD (I have 5) is about 5% and that's for the past 5 years.
That will go up, as they begin to mature.

Actually I'm building my CDs up right now, until I turn 62; at that time I want them all to mature, and will pay off the house. Paying off the house, I know, is another topic, much discussed on this forum !
.

 

[Nords]

Actually I'm building my CDs up right now, until I turn 62;  at that time I want them all to mature, and will pay off the house.

Well, if you're going to need the money in a couple years then a CD is the only way to go.

When people talk about retirement portfolios my brain defaults to a survival rate of three to six decades.

Personally we're willing to raise the burn rate on our retirement portfolio (if necessary) in anticipation of spouse's 2021 Navy Reserve pension. I don't know if SS is only two years or 10 years away for you-- is your Social Security going to be enough later to raise your withdrawal rate now?

When they moved to Hawaii, my parents-in-law sold their East-coast home and banked the profits in a 7% CD. Life was good, but shortly afterward the Fed started frantically dropping interest rates in fear of deflation. When the CD matured a few years later, his "only" choice was a long-term 3% CD. My FIL said the credit union invited him to the party where they were going to redeem his 7% CD but that he declined because he was afraid he'd burst into tears. I don't know how big an effect that CD rate change had on their cash flow, but the penny-pinching money squabbles have continued for months. It's at the point where I'm being asked to fix an aluminum gutter with duct tape & silicon caulk instead of doing the right thing...

 

[cute fuzzy bunny]

No, it's not about time to stop...will only stop when the markets average dividend rate goes up... remember what Bernstein's says about expections of future market returns? See my earlier post.

Average dividend rates in the late 90's weren't much different from what they are today. Market went up. *shrug*

Point is, we dont know. I know that cash investments will barely make headway over inflation, if that. Goodies like the Gordon Equation tell me that if I stay in the market long enough, I will get a better return. One that actually keeps me afloat and in position to win.

But maybe it works out that stocks go nowhere for the next 20 years and the cash holders will turn out to be right.

We'll find out right about 2026...

 

[just_hatched]

I know all the "why I should be in the stock market" reasons, but since 2000, a person would be better off in CDs and slept much better too.

Why pick 2000 as the starting point? Since the market was at its high in 2000, then of course the returns seem "bad" since then.
It's probably better if you start at some other year.

 

[cute fuzzy bunny]

Indeed...choosing 3/3/96 and $10,000 in the S&P 500 as a starting point, you'd have $20,000 today after 10 years. 3/3/86 as a starting point, you'd have $57,600 after 20 years. 3/3/76 and you'd have $124, 614 after 30 years. Even going back to 3/3/66 and getting a good chunk of that late 60's/early 70's crappy sideways period, you'd still have $143,523.

That long term buy and hold thing appears to really work!

But yeah, you pick your start time at the precipice of the longest and steepest bear market in 50 years, its going to look ugly. Especially when you leave out the greatest bull market in US history that immediately preceded it...

 

[renferme]

Nords,
2 years 8 months till Soc. Security kicks in , so yes I could raise my SWR if needed.
.
Cute and Fuzzy and Just Hatched,
I really should pick 2004 as the starting point because that's when I retired,
but, I like to reference 2000, because that's when the market went BUST !
.
As we all know, what the market does immediately after retiring, has a big effect on whether your money lasts the rest of your lifetime. I've been very cautious these 2 years and my total portfolio has gone up slightly. I know someone that retired in 1993, age 65, and did not use his 401k until 70.5. Don't know for sure, but I'd guess he did really well for the first 7 years of his retirement.
Anyone know anyone that retired in year 2000 and how they are doing now ? ?

 

[cute fuzzy bunny]

Yeah...me.

Doing great, thanks!

 

[Nords]

As we all know, what the market does immediately after retiring, has a big effect on whether your money lasts the rest of your lifetime.    I've been very cautious these 2 years and my total portfolio has gone up slightly.

Anyone know anyone that retired in year 2000 and how they are doing now ? ?

If your portfolio's made it this far, it begins to look like you'll go the distance, even without the Social Security assist!

We retired in early 2002. We were vacationing with family in Maui during the July '02 market ugliness, we were vacationing in Waikiki during the Oct '02 capitulation, and we were cruising back from Fanning Island as the market bottomed again in anticipation of the March '03 Iraq invasion.

Our retirement portfolio hit another all-time high yesterday (Friday).

Our next vacation will probably be this June or July...

 

[HFWR]

Lost maybe half in 2000-2001... (50% loss)

Currently about back where I started... (100% gain)

 

[Gone4Good]

but since 2000, a person would be better off in CDs and slept much better too.

We invest almost entirely in index funds with a 60-70% stock allocation.  Equities are split between S&P 500, Mid-Cap Index, Small Cap Index, International Index fund, International Small cap fund, and a small dollop of REITS . . . were up about 9% from 2000 to today.  No fancy stock picking here.  Just broad diversification.

If I get 5% from a CD . . .

How confident are you that short-term rates will stay at current levels? 

Long-bond rates are at or below those of short-term rates, which means that bond investors think rates are heading lower in the near-term.  If you're pulling 3-4% out of your portfolio and short rates drop back to ~3%, what do you do then?  How do you deal with inflation?

Even reading Bernstein's book made me more pessimistic, when he said that the future expected Market Return = the annual div. rate of the market + the annual percentage increase in dividends.    Or...market return = 1 + 5 = 6 %,,,,that's not good.    The historical market return was or is about 9 %, but that's when the market was paying 4% dividend rate.
Help!

A few things to consider here.  Over long-periods earnings growth tends to track GDP growth.  Long-run REAL GDP growth is around 3%.  With inflation averaging around 3%, you can expect NOMINAL earnings growth in the 6% area, plus your S&P 500 dividend yield of about 1.5-1.75% . . . for a total expected equity return of 7.5%-8%.

Historical returns where higher than that but not 13% (as your 9% +4% dividend yield suggest).  Equity returns were 10%-11%, or about 2-3% higher than what we might be looking forward to today.  However, volatility has declined a ton in the real economy (expansions are longer, recessions more shallow, and inflation is more stable) which makes equities less risky then they once were.  We (as individual investors) have significantly more ability to diversify then ever before, which makes equity investing significantly less risky then it once was.  And, if lower dividend payouts mean companies are reinvesting more, that might not be such a bad thing for long-run total returns either.

 

[ebisky]

Invest wisely. Even investing in an index fund/mutual fund requires a sense of what's going on in the market.

Invest in industries. Find out what industries are doing well and invest in an index fund corresponding to it. Once that industry is not gaining as much, invest in another. For example, oil and gas has been a very good industry for the past few years. You could invest the majority of your money in oil and gas and diversify the rest. This requires little management, but will yield a substantial gain over investing in an overall index and letting the money go through ups and downs.

Check out the 1 year return on ETF's that track energy: http://finance.yahoo.com/etf/browser/mkt?f=0&c=etf_sn&cs=1&ce=10

Here is real-estate, which was also a huge sector:
http://finance.yahoo.com/etf/browser/mkt?c=etf_sr&f=0

*note that YTD = year to date..which would be Jan 1 of 2006.

Invest your money wisely. Invest in index funds, yet invest in industries. Knowing which industries are doing well is pretty easy and can yield you great returns.

For the people still worried about investing per industry, just know that the majority of your funds should be in a small cap index during a bull market and a large cap index during a bear market. At the very least, take this strategy.

-E

 

[ebisky]

Indeed...choosing 3/3/96 and $10,000 in the S&P 500 as a starting point, you'd have $20,000 today after 10 years. 3/3/86 as a starting point, you'd have $57,600 after 20 years. 3/3/76 and you'd have $124, 614 after 30 years. Even going back to 3/3/66 and getting a good chunk of that late 60's/early 70's crappy sideways period, you'd still have $143,523.

That long term buy and hold thing appears to really work!

But yeah, you pick your start time at the precipice of the longest and steepest bear market in 50 years, its going to look ugly. Especially when you leave out the greatest bull market in US history that immediately preceded it...

True, yet $10,00 in 1986 was about $7,000 compared to 1996. And in 1976, was worth only $3500.

Also, buy and hold isn't the best option. Maybe back in the day when commision rates were insane, but today selling and buying doesn't cost much and is easy to do. No sense in keeping your $$ in a stock/fund going down, you can always buy it back later if you like it THAT bad(yet make sure you know the signs first..don't blindly invest). You'll also be able to buy more shares due to having more $$ from the sell when it was going down.

 

[cute fuzzy bunny]

True, yet $10,00 in 1986 was about $7,000 compared to 1996. And in 1976, was worth only $3500.

Why you're absolutely correct. Now try the same trick with a bond fund and report back the period results. I can probably help you by letting on that the inflation adjusted returns for bonds arent as good as the inflation adjusted returns for stocks.

Also, buy and hold isn't the best option. Maybe back in the day when commision rates were insane, but today selling and buying doesn't cost much and is easy to do. No sense in keeping your $$ in a stock/fund going down, you can always buy it back later if you like it THAT bad(yet make sure you know the signs first..don't blindly invest). You'll also be able to buy more shares due to having more $$ from the sell when it was going down.

I've been waiting for you all of my life. What mechanism do you use to know when to sell when things are going down and to buy when things are going up? Ten thousand mutual fund managers and millions of indivual investors are waiting with bated breath to learn how to time the market effectively...

 

[Cool Dood]

I've been waiting for you all of my life. What mechanism do you use to know when to sell when things are going down and to buy when things are going up? Ten thousand mutual fund managers and millions of indivual investors are waiting with bated breath to learn how to time the market effectively...

It's easy... Just buy low, and sell high.......

 

[ebisky]

Why you're absolutely correct. Now try the same trick with a bond fund and report back the period results. I can probably help you by letting on that the inflation adjusted returns for bonds arent as good as the inflation adjusted returns for stocks.

I've been waiting for you all of my life. What mechanism do you use to know when to sell when things are going down and to buy when things are going up? Ten thousand mutual fund managers and millions of indivual investors are waiting with bated breath to learn how to time the market effectively...

Using technical analysis and understanding trends. Hopefully it was obvious to most that when the internet bubble burst, they should get out of tech stocks.

I actively manage my money, but the idea I'm presenting is to ride the stock up, through a the usual ups and downs, but if the stock is in a clear downtrend, to not hold onto it because it does not make any sense. I'm not saying to buy and sell every week. Buy when an industry is doing well and sell when it is not. This could be maybe one or two (or less) buy/sells a year. If money was invested in real-estate a few years ago, you could still be holding onto that. I'm not suggesting actively managing the money, just know what has momentum and what is slowing down or reversing.

Watch financial news or go to the library (maybe subscribe) to a financial magazine. That's about all the information you should need for minimal management. I think most people realize that natural resources + real estate have been the big movers over the last few years. It is almost common knowledge. There are reports, however, of the housing bubble about to burst, so if I was invested in real estate I'd be watching things more closely.