How confident are you in the markets?

[GTM]

I think many of the calculators such as FIREcal are good tools but with all of the uncertainties in todays world...
terrorism, corporate scandals, national debt, high medical costs, war etc etc.

Can we really depend on the past as a good indicator of the future?
(The Red Sox down 3-0 are on their way to winning the ALCS)

Are many happy with there stock market returns over the last four years? Not to mention the low interst rates received on fixed income products.
I know we must think long term but how long.

Just looking for opinions

 

[sgeeeee]

Remember that FIRECALC does not find the average SWR that would have worked over the past. It finds the worst case SWR for any retiree since 1872.

The next 10 years could produce results that are well below the historical average, but that does not mean that they will be worse than the Great Depression . . . or worse than the times faced by the mid-60's retiree.

 

[Cut-Throat]

I agree with SG here. FIRECalc is a worst case tool since 1872.  

If the U.S. has worse stock market returns than the Depression and the 1930's, my guess is that you'll have bigger worries than your SWR.

Are many happy with there (sic) stock market returns over the last four years? Not to mention the low interst rates received on fixed income products.
I know we must think long term but how long.

Well, mine are positive - Not impressive at all - But not Negative. If you look at stock market history there are many periods that are negative.

And returns were far too high in the late 1990's, so this is to be expected.

You ask How Long? - For Investors in the Stock market 30 years is a good period to look at - 4 years is too short.

 

[retire@40]

There have always been reasons for people not to invest in the stock market.

In 1991 people were afraid of investing because we were about to enter into a war with Iraq.

In 1989 people were afraid to invest because of the fear that the government had to bail out the S&Ls.

In 1988 people were afraid after Black Monday.

In 1987 people thought they missed the boat when the Dow hit 2000.

In 1983 people were afraid because unemployment was at 10% and banks were failing.

In 1981 people were skeptical of the future of US businesses when Chrysler needed a $400 million loan to stay in business.

In 1980 people were afraid of a war when Iran was holding US hostages.

In 1977 people were afraid of inflation killing the economy when coffee was at $5 a pound.

In 1976 people were afraid of the stock market when New York City almost went bankrupt.

In 1963 the Dow dropped 4% the day Kennedy was assassinated but recovered all losses on the very next business day.

In 1941 the market dropped 1.72% the first week following Pearl Harbor but recovered in just 5 months.

In every one of those years or any year in between, if you had invested in the stock market, you would be worth a considerable amount more today.  Invest for the long-term in the stock market and you will be rewarded.

 

[John Galt]

Hello retire@40............Good stuff but you left out a word.
You should insert "probably" in front of "will be rewarded". I repeat, anything which might have happened in a particular
way as far back as you can measure certainly does not mean it will continue in the future.

John Galt

 

[retire@40]

John Galt,

One of my favorite lines in the Godfather were the very first two lines of the movie:

"I believe in America. America has made my fortune."

I am cautious about how I invest, but I am optimistic that I WILL be rewarded in the long-term.

 

[unclemick]

De Gaul, Ben Graham and Bogle. Bogle's still around.

 

[Michael]

Can we really depend on the past as a good indicator of the future?

No, but there is no way for mere mortals such as ourselves to predict the future. All we can do is look at what worked in the past, and perhaps add a fudge factor to account for surprises.

 

[cute fuzzy bunny]

I guess it depends on which past you're looking at, intelligently asking whether those time periods bear relation to todays situations, and looking at similarities in what happened when historic situations were similar to todays.

I've sometimes taken our usual stock market data to task because it generally starts immediately following the civil war when it was at an incredible low. This has the effect of ignoring the poor market conditions during the decade or two prior to the starting year, and starts the trends at an artificially low number. Now...does financial data from the mid 1800's really have any bearing on us today? Probably not, but neither does data from the 1920's or maybe even the 1960's.

But its kinda irrational to say that period stock market returns are xx% for the full term of the data when the start period was awfully depressed.

Whats impressive is that followers of the historic data theory that the future will be no worse than the past ignore macroscopic changes in our culture, and its also a function of many people of this mindset to ignore repetitive previous situations. For example, we've experienced several instances of strong run-ups in the stock market. Those periods were followed either by crashes or very long sideways periods. We just had a very strong run up in the stock market. By historic standards, we should see a crash or a long sideways period. But not a lot of people will consider that. The 2000-2001 period doesnt even count...we barely took the edge off the runup and 2002-2004 just put it right back on.

The historic data shows growth in our markets as our country grew, built, and evolved. These time periods can almost be correlated to emerging markets and developing markets. It wasnt really until after WWII that we could be considered a 'mature market'.

A lot is different now. Our population has exploded. Housing is expensive. Extreme debt is easy to get into. We've been attacked on our own soil for the first time in a very long time. The spectre of inflation. Unemployment and jobs being sent overseas.

Given the optimistic start of "the data", the maturity of our markets, and the many differences in world culture today, there is every bit of reason to expect that things may "be different" going forward. And for one to be wary of todays financial markets.

I guess the best example was one put forward in humor a while back, and I've used this before. A crack team of scientists studied George W. Bush on 355 different occasions over the past four years. In each instance of analysis, he was found to be both alive and president. It is reasonable to presume, based on that analysis, that George will both live forever, and always be president.

Ah...but some events do cause change...it just depends on how and when you measure it...

Its tempting to say you should put all or most of your money into US stocks, because according to the data, you'll win out. Except once upon a time, that wasnt true, and at some point, it wont be true again. There was a time when george wasnt alive or president, and there will be a time again when george isnt alive or president.

Just dont blindly put all your eggs in one basket and go fishing. I think buying only US stocks and bonds is akin to putting your eggs in one basket.

 

[Cut-Throat]

A lot is different now. Our population has exploded. Housing is expensive. Extreme debt is easy to get into. We've been attacked on our own soil for the first time in a very long time. The spectre of inflation. Unemployment and jobs being sent overseas.

Gosh TH - you make 1929 seem like Utopia!

Actually, I saw more bad things on the Horizon in 1981 than I do today. Yes we've got problems and investing in the Stock Market seems risky I agree. But where else are you going to put your money? - Under your mattress?

And your point on diversification is well taken. I think most of us here (except Wab) advocate spreading your money in U.S. Stocks and Bonds, In different asset classes and International Funds also.

 

[retire@40]

TH,

You are comparing apples to oranges when you use the President Bush metaphor. President Bush is a living creature that is predetermined to die, while the stock market is not alive and has no foreseable end. Presidents can only serve a predetermined 8 years in office, while the stock market can theoretically exist forever.

Also, another flaw in that analysis is that only a short amount of time was used. If 200 years were used, then perhaps the conclusion would have been that presidents (like stocks) come and go, but the presidency (like the stock market) will likely exist for many more decades or centuries.

 

[cute fuzzy bunny]

And your point on diversification is well taken. I think most of us here (except Wab) advocate spreading your money in U.S. Stocks and Bonds, In different asset classes and International Funds also.

Sure, we always have some different scary monsters around.

Back in '81 we had runaway inflation, high interest rates, a "reasonable" enemy with nuclear weapons, and various threats of war.

Today we have artificially lowered inflation reports, inflation rates you cant make any money on, unreasonable enemies that might have nuclear weapons, and various threats of war.

But in '81 we were not far removed from a long sideways period. Hence one could expect better times in the market. We were also only 30 years removed from the maturation of our market from developed to stable/mature.

But you did take away my fundamental message that allocating into one or two US based asset classes may not be a very good idea.

Oh yeah, the other thing about historical data stuff? Not only are many of the periods not particularly relevant to todays political, financial and cultural conditions...the ones that are relevant usually arent included as full term periods in our calculations. For example, if you do a 30 year run (typical), the series starting in 1974 arent complete and dont give a full test of safety.

If you only consider full series runs of 30 years, and only the most recent of those to maintain some coherency with modern times, then perhaps only the runs from 1950-1974 are really worthwhile in calculating.

If you run firecalc with the default settings, it gives you a 93.2% chance of success across all series. Looking just at the full runs from 1950 through 1974 shows 6 failed series out of 25...about a 75% chance of success.

If you decide that the 50's and even the early 60's are still too old to be fair comparisons, isolating the runs from 1965-1974 produce 6 failures out of 10...a 40% success rate.

You're now scowling at me and saying that one could data-mine to produce any results you want.

Just like starting with a data series post civil war and ending 30 years ago...

The other point is we have historically had several strong market periods. The ~20 year one ending in 1929 with a crash and a long downward trend. The ~20 year one from ~1945 that ended with a long sideways trend. And the ~20 year one from 1980-2000...

Anyone seeing a trend...?

My only question is "is it going to be a crash or a sideways period"...?

 

[cute fuzzy bunny]

TH,

You are comparing apples to oranges when you use the President Bush metaphor. President Bush is a living creature that is predetermined to die, while the stock market is not alive and has no foreseable end. Presidents can only serve a predetermined 8 years in office, while the stock market can theoretically exist forever.

Also, another flaw in that analysis is that only a short amount of time was used. If 200 years were used, then perhaps the conclusion would have been that presidents (like stocks) come and go, but the presidency (like the stock market) will likely exist for many more decades or centuries.

Thanks for proving my point. It certainly does have a lot to do with which time period you choose and why, doesnt it?

As far as Georges presidential term and longevity, one rests on a law that could be changed, the other rests on medical care and advances...both malleable.

Does our stock market have no predetermination to end? Are you sure? I can run off a long, long list of powerful civilizations that probably thought so that arent here anymore.

It would certainly take a lot to take us out, but the precedent is there.

 

[retire@40]

Does our stock market have no predetermination to end? Are you sure?  I can run off a long, long list of powerful civilizations that probably thought so that arent here anymore.

It would certainly take a lot to take us out, but the precedent is there.

Well, I don't see an end to the US government any time soon, but even if the US manages to outperform the Roman Empire, I believe we still have at least 4 or 5 more centuries to go. That's enough time for me

 

[cute fuzzy bunny]

Boy, you guys just wont quit writing stuff that makes me wanna answer...I have chores to do!

Heres two examples...

#1...we leave our newly minted democratic iraq. Eight years later after civil war, its run by muslim fundamentalists. They join up with Iran and decide they've had enough of those american butt kissers in Saudi Arabia and those folks in Israel and invade. In response, we move our carrier groups into the area and they're smacked with tactical nukes. That pretty much ends our ability to slam dunk armed conflicts like we've been doing. Facing a million well armed muslim extremists that are looking forward to dying, we probably end up having to withdraw from the area with 1/2-2/3 of our oil supply cut off.

#2...we suffer WMD terrorist attacks here in the US. One major city, say New York, is nuked. LA and DC are hit with virulent biological attacks. Millions are killed. Martial law is declared to restore order.

In either case, we would be a shadow of our former selves and very vulnerable. Our economy and financial markets would be devastated.

Dont think these scenarios are feasible? They're two of the top ten situational scenarios that our military and political think-tanks play with on a regular basis, and those folks think that either is quite possible.

 

[Cut-Throat]

Dont think these scenarios are feasible? They're two of the top ten situational scenarios that our military and political think-tanks play with on a regular basis, and those folks think that either is quite possible.

Well, sure TH - I'm just not going to change my Investment Life Plan based on what might happen. Lighten up Dude. We'll all be dead in 50 years anyway!

 

[charlie]

Nothing is certain ....... except death and taxes.
However, I am pretty confident that a "sky is falling"
approach to life is not a winning strategy.l

We all have to place our bets as best we can and
play the game out. Stay the course and don't look
back. Wobbling back and forth in response to the
latest prognostication of eminent doom is a sure
recipe for failure.

If you need any more trite comments, I am full of them.

Cheers,

Charlie

 

[Jarhead*]

Well, sure TH - I'm just not going to change my Investment Life Plan based on what might happen. Lighten up Dude. We'll all be dead in 50 years anyway!

Exactly, Cuthoat.
One of the few problems with retiring is the time that you have available to conjur up all kinds of scenarios that will give you something to worry about.
When you're working, and up to your a-- with alligators, the only thing that concerns you is getting out of the swamp.
A little less time on CNN and more time on the golf course and trout streams is a pretty fair antidote

 

[ESRBob]

Exactly,
You can drive yourself crazy worrying about markets. One benefit of following the broad diversification approach is that it dampens volatility a lot and reduces the "episodes" of financial market obsession that all of us in ER know about. It would happen to me whenever the Portfolio was down 5-10% in a year, or even a few percent in a week. Much more likely in a less-diversified equity-laden portfolio.

What could happen? Who knows? Psychologically, I think we all need some sort of ace-in-the-hole plan B, even if only vaguely defined in our minds (move to Thailand or New Zealand, sell the house and go live in a cabin in the woods, join a monastery/ashram, whatever). ER lasts a really long time, and all kinds of things could happen.

For me, the "S" in my moniker, for semi-retirement, is another way to deal with the risk of a long ER that turns financially bad. It gives you options for making money at some future point in a way that is either efficient (you've kept your skills alive, so you're not doing the Wall-Mart Greeter gig) or inspiring (you've figured out how to make a bit of money doing something you really love, so you don't mind doing it a bit more assiduously).

ESRBob

 

[cute fuzzy bunny]

Apparently my message ran off again without being noticed.

All scenarios aside, the core message is, once again, dont put all your eggs in one basket. If you feel that the past US market performance is a solid indicator of the next 30-40 years, and that our good economy and good stock market performance is inviolable...well...good luck.

On the other hand, good asset allocation away from the 1-2 US 'buckets' could alleviate a lot of soreness a decade or two from now. I have less than 35% of my money invested in US stocks...

As far as our long term health...the roman empire is still our best analogy. It ended after the people became apathetic, the leadership weak and in turmoil, and overextension of the empire.

Gee, that doesnt sound familiar at all...