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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!
Old 03-09-2006, 12:01 PM   #61
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!

thefed, I wouldn't let the fact that you're a youngster who's averse to volatility get you down. I'm 24 and I hate volatility too. So my porfolio is mostly fixed income. Lower risk, lower expected return - but I'm willing to accept that because my personality just doesn't tolerate big fluctuations in my account balances from month to month. Mainly I am just a risk-averse kind of guy, and I would be fooling myself to pretend otherwise. Also, I find that I am worried by downside risk much more than I am encouraged by updside gains. Of course, this risk is also tempered by the risk that inflation will erode my purchasing power over time, unless I can earn an after-tax return that outpaces it. So I have to strike a balance.

There are many folks on the board who will say that you would be crazy to allocate anything less than 100% equities at your age. Personally, I think there is enough empirical evidence to suggest that 80/20 stocks/bonds gives you virtually the same amount of return for less risk than 100/0, but even so my allocation is nowhere near 80/20. I think you should also consider that many of the board's members have lived through a 25-year period of some of the greatest stock market returns the world has ever seen, so there may be some recency bias at work. The performance of most other countries' markets has not been nearly so great. I am not predicting that the recent US equities' performance is a one-time event (nor do I think that I can time the market on the micro or macro time scale), but I recognize the risk that the market's returns over the next 20 years may not look like the last 20 years. Since I'm unwilling to bear that risk, I limit my exposure to the market to a moderate amount, one that I am comfortable with.

Additionally, I do not like investments where I buy a sheet of paper with the hope that someone will want to buy that piece of paper from me for more money at a later date, based soley on his own expectations about what another person will pay him for it later on. Obviously, I am vastly oversimplifying things, but that is how I think most of the market operates. I prefer investments that generate cash and put it in my pocket. That covers bonds, dividend paying stocks, and REITs. You could also include MLPs and preferred stock CEFs, but I don't want the hassle. Maybe even individual real estate rental/investment properties once prices return to more reasonable valuations. Among those groups, I try to find assets whose returns are not highly correlated with each other. *Yes, you can make the argument that corporate dividends are double-taxed, or that the firm could grow faster if it reinvested in itself rather than paying shareholders, or that I will miss out on small-cap stocks that can't pay a dividend, etc. etc etc. But it doesn't matter to me. I want to buy tangible cash flow. So that's what I do - I buy them with the expectation that I will never need to sell them, and they will continue to generate cash for me long into the future.

I also don't agree with folks who say "the best thing that could happen is the market tanks tomorrow, and you buy more shares for less money." I agree that over the last few decades in the US, this would have been a great approach. But hindsight is 20/20. Would that approach have worked in Japan in 1990? There were pleny of "buying opportunities" but I don't think you would've been very happy with what you bought at a discount. Again, I'm not predicting that the US will suffer a similar fate, but I don't think most people acknowledge that long periods of dismal returns are possible. Of course, I also think that anyone who tells you that the average amateur investor can accurately time the market is full of crap.

The bottom line is: I wouldn't let anyone encourage you to take more risk than you are comfortable with. Risk and volatility are very real, and some peoples' personalities tolerate them better than others. Based on your own risk profile, you need to find the right balance between stocks/bonds/cash, and it will probably not happen overnight. Once you actually experience some losses and gains, you will be in a better position to say "that wasn't so bad" or "that was awful" and you can adjust your portfolio accordingly.
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!
Old 03-09-2006, 12:26 PM   #62
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!

Thanks again for all the input.

I think most of you are right in that I often OVER-analyze, and thus, create a quandry for myself.

I won't be touching this money for at least 20 yrs, and am confident tha tI will have earned money by then. However, it's in my nature to want to hedge the losses, especially in the beginning.

Soupxcan: It looks liek we're about in the sma eboat. I share some of the same ideas you do....you just put it into writing better!
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!
Old 03-09-2006, 12:38 PM   #63
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!

Quote:
Originally Posted by Cute n' Fuzzy Bunny
You'll learn.

If that were true, there'd be a lot of actively managed funds beating the indexes. At least the actively managed funds with well educated guessers.

Monkeys throwing doodie at a dart board would have had better results based on the numbers.

But maybe it'll be different now.

What indicators are you looking at? Looked at P/E, morningstar fair value and whatnot, I'm seeing something between neutral/fair price and maybe a 5-10% overvaluation of the broad market indexes. The nasdaq is pretty peaky, but the s&p and dow arent really. On the average right about where we've been for the last 3 years. It'd make sense to me that theres going to be a breakout to the upside or downside eventually. I just cant for the life of me tell which way.
It's just an overall feeling I'm getting. Yes, we are right about where we have been for a bit, but I feel the turn, when it happens, will be downward. Not so much as a direct result of P/E or overvaluation...but other things.

International Monetary policy (japan?). Some see this as a good thing, I for one, do not. Soaring energy prices. Increasing rates across the board (for many reasons). Bonds increasing. Housing bubble/thing we have going on right now. Once it pops or receeds, people will feel less wealthy and tighten the reigns across the board (30 yr mortgages hit 3 yr high today I think). Record high trade deficit. And most importantly, my GUT.
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!
Old 03-09-2006, 12:59 PM   #64
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!

Dude...your gut is down 1.39% as of this moment...

http://moneycentral.msn.com/detail/s...ote?Symbol=gut



By the way, it used to be 70,000 nukes pointed at our heads, and the red menace before that. This is nothing...
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!
Old 03-09-2006, 01:53 PM   #65
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!

Quote:
Originally Posted by Cute n' Fuzzy Bunny
Dude...your gut is down 1.39% as of this moment...

http://moneycentral.msn.com/detail/s...ote?Symbol=gut



By the way, it used to be 70,000 nukes pointed at our heads, and the red menace before that. This is nothing...
I love how those 70,000 nukes are still pointed at our heads and communists are still menacing us, and yet we just put it on the back burner because, uh, well, I guess the USSR doesn't exist any more......
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!
Old 03-10-2006, 12:14 AM   #66
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!

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Originally Posted by soupcxan

I also don't agree with folks who say "the best thing that could happen is the market tanks tomorrow, and you buy more shares for less money." I agree that over the last few decades in the US, this would have been a great approach. But hindsight is 20/20. Would that approach have worked in Japan in 1990?
It's 2006. So a 22-year-old, investing in Japan's market since 1990 would be 38 now and have had a miserable return. Pretty much like a 38 year old would have had in 1945 had he started investing in the Dow in 1929. But look where he would have been at age 50, in 1957. His return on his first $6500 would have been pathetic. But his overall return would have been quite respectable had he kept buying in. It seems unlikely that we are presently at 1929 valuations.

So it depends somewhat on your time frame. For a 22 year-old, in my opinion, it is too early to make the call on Japan of 1990.
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!
Old 03-10-2006, 06:56 AM   #67
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!

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Originally Posted by bosco
It's 2006.* So a 22-year-old, investing in Japan's market since 1990 would be 38 now and have had a miserable return.* Pretty much like a 38 year old would have had in 1945 had he started investing in the Dow in 1929.* But look where he would have been at age 50, in 1957.* His return on his first $6500 would have been pathetic.* But his overall return would have been quite respectable had he kept buying in.* It seems unlikely that we are presently at 1929 valuations.

So it depends somewhat on your time frame.* For a 22 year-old, in my opinion, it is too early to make the call on Japan of 1990.
All ofthis just illustrates why it is so important to have a portfolio that is diversified across many asset classes.
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!
Old 03-10-2006, 07:23 AM   #68
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!

Yep

8% return - pretty miserable by today's standards. Buried in Ben Graham's 4th ed of The Intelligent Investor is the example of dollar cost averaging - had you started at the peak in 1929 investing in the DOW.

Now what would have happened in Japan over a flat/down period?? - don't know.

heh heh heh heh - rather than trying to catch a falling knife - one places bets on the way down as to how fall it will fall.
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!
Old 03-10-2006, 11:29 AM   #69
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!

My guts are lousy predictors, so I'm just going to go with this. As soon as the fed stops raising rates, or at least gives a clear signal that they're done or almost done, we'll see a 5-6% rally spread over a couple of weeks, a little light selling as people take profits, and then a neat smooth upside to a total return of about 8% on the broader market indexes.
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!
Old 03-10-2006, 12:07 PM   #70
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!

I just ran some quick numbers - Investing $10,000 in the Nikkei index on the last business day of March from 1990 through 2005 would leave you with $165,000 today after investing a total of $160,000. Still slightly positive with a $5000 gain.

My calculations ignored any dividends paid during the 16 years. That would increase returns. I also ignored changes in yen-dollar exchange rates.

In reality, most of us are able to increase our investments each year as we earn more. If you had started in 1990 investing $10k/yr, then upped it by $1k each year ($11k in 1991, $12k in 1992, etc), you would have invested $280,000 and now have $311,000. A little more positive.

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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!
Old 03-10-2006, 12:25 PM   #71
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!

Stocks will go up and down based on greed and fear. This is normal. People get greedy, the stocks go up, people have fear they go down.

What you want to watch for is the trend. A stock in an uptrend (higher highs and higher lows) is a good thing, a stock in a downtrend (lower highs and lower lows) is a bad thing(obviously it isn't this easy, but it is a very basic principle).

Get some books on investing. Don't invest blindly. If you are not sure what you are investing in, get a professional to manage your money or put the majority of your money in the money market until you understand the market better. Don't let your emotions control your trading. Have a plan and stick to it. Uncontrollable emotions are the downfall of most individual investors. It's hard to get over.

If these swings are causing you to not be very productive during the day, you may want to consider some other investments. Your investments should not be greatly impacting how you feel each day dependent upon how they are doing.

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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!
Old 03-10-2006, 12:42 PM   #72
 
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!

Quote:
My calculations ignored any dividends paid during the 16 years.
A lot of times analysts ignore dividends. Is it just because it would make things more complicated to calculate? The dividends would make a big difference, right?
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!
Old 03-10-2006, 12:51 PM   #73
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!

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Originally Posted by TromboneAl


A lot of times analysts ignore dividends.* Is it just because it would make things more complicated to calculate?* The dividends would make a big difference, right?
In Japan? I am pretty sure yields ar fairly low, given the tradition of disdain for minority shareholders in Japan. Probably would make a difference, but not huge.
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!
Old 03-10-2006, 01:59 PM   #74
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!

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A lot of times analysts ignore dividends. Is it just because it would make things more complicated to calculate? The dividends would make a big difference, right?
Not sure how complicated it is for a "real" analyst. I went to Yahoo! Finance and got historical closing prices for the Nikkei index. Yahoo doesn't have dividend data for the index itself, so I omitted them. Brewer is right though, the div yield is pretty small. I'm thinking around 1%-1.5% based on what I got from my Vanguard Pacific index which is ~75% japanese stock, and I received 1.something% in dividends.

But the dividends are significant. In the example I gave above, the rate of return would approximately increase by the dividend rate.

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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!
Old 03-14-2006, 03:10 PM   #75
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!

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I understand everyone's point that my 6500 bucks isn't much....but do realize that the first few years are THE years to get a good return
I do not agree. Would you rather get your big 25% return when your balance was $6500 or $1,000,000? Or another way to state it, would you rather have a return of $1650 or $250,000?

The most important thing about the first few years is that you actually started the investment process. This is often the hardest thing to do.
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!
Old 03-14-2006, 03:50 PM   #76
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!

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I do not agree. Would you rather get your big 25% return when your balance was $6500 or $1,000,000? Or another way to state it, would you rather have a return of $1650 or $250,000?

The most important thing about the first few years is that you actually started the investment process. This is often the hardest thing to do.
I disagree.

Of COURSE I'd want the 25% gain later in the game, but I do NOT want my first year, two, or three to be breaking even or negative. That would counterdict what you refer to as the most important thing....starting the investment process (early). Compunding interest is wonderful.



I think we're both right.

The more i calculate though, the more your theory makes sense. If I had 10 years of interest earning potential, adding funds the whole way, I would be much better off having a negative year in the beginning.

So, okay, maybe u are right
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!
Old 03-15-2006, 10:12 AM   #77
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!

Soup...

The last 25 years is not much different than the previous time periods... look at a graph of the Dow based on a percent increase and the line is 'straightish' except for the big crash.... now, the '66 to '83 time period does look kind of flat... it also looks flat the last 8 years or so... but, I do not think this is with reinvested dividends...


http://finance.yahoo.com/q/bc?s=%5EDJI&t=my
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!
Old 03-18-2006, 06:45 AM   #78
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!

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Originally Posted by Cute 'n Fuzzy Bunny
No, you havent. The liquid asset value of your shares is lower. You havent "lost" a thing. You still have every single share.

Your car just became worth ten bucks less while you read this!
I disagree. You must mark to market (frequency depends on various factors), but things are worth what they can be sold for. If you hold millions of worthless shares / options you still have zero even though you have every single one ! keep your enrons, worldcoms et busted dotcoms no one knows, they might recover :-(

My car cannot be 10 bucks less as being 16 years old its total value is 10 bucks :-))
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!
Old 03-18-2006, 10:56 AM   #79
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!

Nice timely response.

In that light, all investments should be avoided. Bonds can default. Banks can fail. The US government might fold up.

The point is, people consider a stock market downturn to be "lost" money. You own an asset and the assets prices are variable. With history as a guide, your shares will recover their value.

I guess if you focus on buying individual stocks, its possible for one of those to flame out and "lose" your money. Anyone thats not diversified well enough and has elected to take on that 'risk' can certainly be subject to a real loss. And deserves it.

f you want to focus on criminally run companies and irrational investments as the basis for evaluating stocks, I hope we're looking at fraudulent bond issuers and funny offshore banks that offer up CD's as the basis for those investments as well.
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!
Old 03-18-2006, 12:54 PM   #80
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Re: How do you tolerate the Peaks and Vallies? I'm having a hard time!

OK, I guess we're all a bit late to the party

CFB, I'm surprised to hear you say that. But I'm usually surprised to hear people disagree with me. If the "value" of your holding goes down, then you have that much less no matter whether you're holding stocks or currency or anything. If it's still in any way "worth" what you paid for it, then tell me how you'll get what it's worth? And if its worth is that you're holding it as a stock and it's sure to rebound and recover its value, well then you can buy the stock at the current price and it's just as sure to rebound, only you've paid its current cost rather than the higher initial cost. All in all you've lost the same amount of money.

I had something brilliant to add to that, but I got distracted for a while and when I came back I'd already forgotten what it was..........
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