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Old 10-14-2008, 07:30 PM   #61
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I'd like to be optimistic, but in surfing, I found this (a blog by someone who is admittedly quite a bear):

Fred's Intelligent Bear Site - Inflation Adjusted DJIA

...

They say "the market always goes up in the long term," but at an average return of 1.9% per year, it can take many years to recover from a large decline. The peak in 1929 was not ultimately exceeded until 1992. When the market touched the bottom of the channel in 1982, its value was about equal to the value at the beginning of the chart in 1910.

...

Can anyone comment on this? The guy is making sense to me, even though he is quite the bearish contrarian. But it goes against everyone I've read and against most of what people on here think....

Many years ago, I was perplexed by the apparent contradiction between the assertion that historical stock return being 9-10% annual and some stock charts showing the DOW being flat for decades. Somebody is obviously lying, or very mistaken.

I was relieved to find the answer in a book, entitled "How to buy stocks" by Louis Engel and Brendan Boyd. It described an effort by the Center of Research in Security Prices at the Graduate School of Business of the University of Chicago. This endeavor was to compile stock prices and dividend payout of ALL stocks that have been listed since 1926, prior to the Great Crash. Note my capitalization of ALL stocks. They tracked down all stocks that were ever listed, including ones that had been merged or delisted or gone bankrupt.

This effort started in 1958, took 5 years, and cost $250K back then. Remember that then, historical records were not available on computer for easy retrieval and dissemination as we take for granted now. This work was continued at least until 1980, the most recent date quoted in this book (edition 1983).

The following quote from page 257 of this book will answer TM's question.

"Probably the most significant figure in the table is that 9.9% at the bottom of the first column. That figure means that an investment of an equal amount of money in each of all the Big Board stocks on December 31, 1925 would by December 31, 1980, with the reinvestment of dividends, have yielded a return equal to 9.9% interest per annum compounded annually".

Now, I looked at the chart at the Web link provided by TM. Right in the center of the chart is the caveat "Excluding Dividends". Right there is the cause of the disconnect between charts like this, and the results from the University of Chicago study. People may not appreciate the fact that until recent times, stocks paid lots of dividends, sometimes as high as 10% annual, with an average of around 6% until 1950. Exclude them, and you can spin another story out of the same data. See attached links that illustrate the dividend yield.

Political Calculations: The History of S&P 500 Dividends in Pictures

Bespoke Investment Group: Historical Dividend Yield of the S&P 500: 1925-Present

I think one of the causes of the modern-day low dividend yield was the tax policy that favored capital gains over dividend, up until recently. Companies and its shareholders prefer retention of the earnings to grow the business instead of paying out. The dark side of that is of course flim-flam book-keeping practices, and the squandering of earnings on dubious "investments" such as dot-coms and take-overs.

Before I close, I must include another sentence from the above book that relates to the OP question, "length of time to recover lost money".

"The longest span of years showing losses is the 14-year period from 1928 to 1942." p.257.

And here is a lucrative (and elusive) goal for market timers who want to get in at the bottom:

"If you had bought in 1932, there was never a year in which you would not have realized a profit of at least 10% - usually much more - until 1974".

By the way, I believe all these numbers were before inflation. If I find out differently, I will post a follow-up.

The problem with relying on historical data is that there is no guarantee that history will repeat exactly the same way. I have just finished reading "Fooled by Randomness" and "The Black Swan" by Nassim Taleb, which are long overdue on my reading list. The gist is (my words) "No one knows, and those who claim to know either knowingly lie or are full of it". His books make you think!

PS. Taleb said the current liquidity crisis is a white swan, meaning its occurence is doomed to occur by the action of the culprit bankers and those in the know. I did not find out what his thinking is about the "outcome", meaning the effect on the economy and the stock recovery. I think he would shrug and said "I dunno".
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Old 10-14-2008, 07:51 PM   #62
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Originally Posted by NW-Bound View Post
People may not appreciate the fact that until recent times, stocks paid lots of dividends, sometimes as high as 10% annual, with an average of around 6% until 1950. Exclude them, and you can spin another story out of the same data. See attached links that illustrate the dividend yield.

Political Calculations: The History of S&P 500 Dividends in Pictures

Bespoke Investment Group: Historical Dividend Yield of the S&P 500: 1925-Present
Both were good reads, thank you for sharing.

Here is a question- the article posts a yield for S&P 500. I know that yield will be payout/value, what is the way to measure payout of the index? Justing adding up the payout of the 500 stocks? Then just adding up the price? I know it's not that simple... but please explain.

I generally invest most of my large cap positions in dividend paying mutual funds. What I have seen is the good ones (Windsor II and T Rowe Equity Income PRFDX are the two I look at the most, I own PRFDX) yield around 2.5%. VFINX usually has a yield posted of 2.2%, yet the article is suggesting that 1.1-1.9% is the yield of the index.

I realize the yield of the index will change based on market performance...

My issues as I learn more are that I want a way to measure payout and verify it is consistent year over year. My preferred withdraw strategy is to be 80-20 stocks bonds, with 75% of the stock position in dividend paying mutual funds which have a consistent and slowly rising payout per share.

This way the 80% equity position still grows and the increasing payout is my inflation hedge.

I want to measure my yield relative to S&P 500 (because many equity income funds have a stated goal of yielding more than the S&P 500). I have looked at other index funds which yield higher, but there does not seem to be enough data to know how the indexes are contructed or how consistent the payout of those funds are.
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Old 10-14-2008, 08:07 PM   #63
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Both were good reads, thank you for sharing.

Here is a question- the article posts a yield for S&P 500. I know that yield will be payout/value, what is the way to measure payout of the index? Justing adding up the payout of the 500 stocks? Then just adding up the price? I know it's not that simple... but please explain.
The total payout would depend on the weighting of the stocks in the index, which I've got to admit I do not know (or ever care enough to find out). However, I believe the dividend payout of SPY or a low-expense index fund like Vanguard would come close to the theoretical yield shown in the charts.

By the way, the Chicago study assumed equal money invested in all listed stocks, big or small. That would weight small stocks WAY more than the S&P500. I have not seen a mutual fund allocation that way. Has anyone?
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Old 10-14-2008, 08:22 PM   #64
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The total payout would depend on the weighting of the stocks in the index, which I've got to admit I do not know (or ever care enough to find out). However, I believe the dividend payout of SPY or a low-expense index fund like Vanguard would come close to the theoretical yield shown in the charts.

By the way, the Chicago study assumed equal money invested in all listed stocks, big or small. That would weight small stocks WAY more than the S&P500. I have not seen a mutual fund allocation that way. Has anyone?
My issue is that if I want dividends (and lots of them) I have not found
a) a yield high enough to be a reasonable withdraw rate (2.2% on S&P 500 does not cut it)
b) a managed fund with a payout of more than 3% (many investors here get 3%+ when investing in individual stocks, MF are not getting that... why? PRFDX- T Rowe Equity Income and Windsor II are the two I look at most.
c) an index fund which I understand (I know Vanguard has index funds with 3% yields, but I have not heard of the indexes or seen long enough history to know payouts will be consistent
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Old 10-14-2008, 09:24 PM   #65
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My issue is that if I want dividends (and lots of them) I have not found
a) a yield high enough to be a reasonable withdraw rate (2.2% on S&P 500 does not cut it)
b) a managed fund with a payout of more than 3% (many investors here get 3%+ when investing in individual stocks, MF are not getting that... why? PRFDX- T Rowe Equity Income and Windsor II are the two I look at most.
c) an index fund which I understand (I know Vanguard has index funds with 3% yields, but I have not heard of the indexes or seen long enough history to know payouts will be consistent
Gee, you really want a lot! Just kidding, because who wouldn't want some.

a) As the charts of historical yield show, it is not common for companies to pay out big dividends like they did in the 30-60s.

b, c) The stocks paying higher than average dividends tend to be boring consumer staples and utility stocks, and gasp, financial stocks, until recently that is. I heard of but do not own the two MFs you mentioned. I cannot speak for the MF managers, but suspect they do not want to put too much into the above mentioned sectors. I own a couple of conservative, long-tenured MFs that crashed harder than the SP500 because they mistakenly loaded up on financial stocks. Sigh....

If you want to buy individual dividend-paying stocks (I always have 1/2 of my equity investment in MFs, 1/2 in individual stocks), with the recent rout, there are now plenty of utility and consumer staples stocks (good for defensive stance in the next few years) that pay good dividends.

Examples include KFT (4.1%), UL(5.6%), SO(4.7%), PNW(6.7%). If their price goes up, and their yield drops, would you be complaining? Capital gain or dividend, they are both convertible to FERN (Federal Reserve Notes :-)

Will their dividend hold through the tough period ahead? Who would know? I just held my nose and bought some. Do your own homework, please.
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Old 10-15-2008, 06:43 AM   #66
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Thanks, NW! I understand the issues much better now, although the influence of dividends (and the probable lack thereof) is discouraging.....
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Old 10-15-2008, 08:50 AM   #67
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The OP asked how long it would take to recoup the losses. Not only are dividends excluded as has been pointed out, but are we considering "recoup the losses" to mean return to the market peak? Very few people bought all of their holdings at the peak... I personally see losses as a negative from where I bought, not a negative from the peak value of my account. I think most of us agree that the market was overpriced at its peak (looking back ), so why would we use that as the point of reference as opposed to how long it would take the market to return to its historical average or something similar?
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Old 10-15-2008, 09:12 AM   #68
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Just playing around with these charts...

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Old 10-15-2008, 09:12 AM   #69
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Old 10-15-2008, 09:13 AM   #70
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The OP asked how long it would take to recoup the losses. Not only are dividends excluded as has been pointed out, but are we considering "recoup the losses" to mean return to the market peak? Very few people bought all of their holdings at the peak... I personally see losses as a negative from where I bought, not a negative from the peak value of my account. I think most of us agree that the market was overpriced at its peak (looking back ), so why would we use that as the point of reference as opposed to how long it would take the market to return to its historical average or something similar?
Agreed,

Waiting for the market to return to former highs means you are counting on market forces to do all the heavy lifting. If we are in a Japanese style recession it could be a long wait for positive returns.

Positive returns will come quicker if an investor lowers the cost base on the portfolio by averaging down. This way a portfolio's return will become subjective to the aggressiveness of purchases at the lowest average cost. An investor who is unwilling to invest on lows becomes a captive of market events.
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Old 10-15-2008, 09:21 AM   #71
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Positive returns will come quicker if an investor lowers the cost base on the portfolio by averaging down. This way a portfolio's return will become subjective to the aggressiveness of purchases at the lowest average cost. An investor who is unwilling to invest on lows becomes a captive of market events.
Very good points.

I'm looking at a strategy of putting more money in Vanguard's High yield bond fund and then using the dividends to purchase stock funds.
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Old 10-15-2008, 12:55 PM   #72
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Trombone Al,

Thank you. I had the same issue with the original plot. It appeared to be an almost arbitrary selection of bands to make the specious (?) point that bear markets can last a very long time. That, of course, can be true, but probably not to the degree of that made in the original chart.

On another point: personally, I don't wish to count dividends towards a "recovery" since there's an opportunity cost to being in the market as opposed to a CD ladder, etc. A case could easily be made that dividends are lower than that opportunity cost.
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Old 10-15-2008, 12:58 PM   #73
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One last point: One can continue to buy on down days (as today is shaping up to be). That may or may not prove be a bargain. But eventually one runs out of cash or one is taking on more risk than preferred. A part of me would prefer to give up those potential gains just to be even around now.
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Old 10-15-2008, 01:14 PM   #74
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But eventually one runs out of cash or one is taking on more risk than preferred...
Agreed. There is a difference between buying low and throwing good money after bad! One has to face the internal struggle between greed and fear.

About the market action today, a pundit said that institutional investors are still deleveraging. That was the reason many good and "innocent" stocks got slammed hard today. Come to think of it, if an individual is broke or short of cash, does he pawn his garage knick-knack, which no one wants, or his wife's jewelry, which is the most valuable thing he got left?

I bought some, just to see they drop. I am holding back, and step to the sideline for now.

PS. About dividend payout, one should include it as part of the return. Dividends were a lot higher after the Depression, and have been admittedly quite meager recently compared to the other opportunity cost. Will that change? Of course no one knows. Hence we have to be diversified.
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Old 10-15-2008, 01:42 PM   #75
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Agreed. There is a difference between buying low and throwing good money after bad! One has to face the internal struggle between greed and fear.

About the market action today, a pundit said that institutional investors are still deleveraging. That was the reason many good and "innocent" stocks got slammed hard today. Come to think of it, if an individual is broke or short of cash, does he pawn his garage knickkack or his wife's jewelry, which is the most valuable thing he got left?

I bought some, just to see they drop. I am holding back, and step to the sideline for now.

PS. About dividend payout, one should include it as part of the return. Dividends were a lot higher after the Depression, and have been admittedly quite meager recently compared to the other opportunity cost. Will that change? Of course no one knows. Hence we have to be diversified.
I believe dollar cost averaging is the way to go until the market rises agian. Dollar cost averaging works best in a declining market, not so well at the top.


Regarding dividends, they allow the investor to purchase more stock at a lower price in a bear market...
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Old 10-15-2008, 02:06 PM   #76
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One last point: One can continue to buy on down days (as today is shaping up to be). That may or may not prove be a bargain. But eventually one runs out of cash or one is taking on more risk than preferred. A part of me would prefer to give up those potential gains just to be even around now.
The good news is that I get paid on the 15th and last days of each month, and on those paydays new 401K money is invested. So if the market has to have a crappy day, the 15th is as good a day as any for it...
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Old 10-15-2008, 02:10 PM   #77
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Regarding dividends, they allow the investor to purchase more stock at a lower price in a bear market...
And dividend reinvestment may never be more important than in a terrible bear market.

This is best seen by the "break-even" time of the Dow after the 1929 peak as I've repeatedly mentioned recently. The conventional wisdom says the break-even point was in 1954, just by looking at the actual reading of the Dow. But that ignores reinvested dividends. When the market was WAY down in the 1930s, dividend yields were often in the 8-10% range, and that was a hefty dividend yield which could by a large number of dirt-cheap shares if reinvested.

The net result is that someone who reinvested dividends at the most important time to do so -- with the highest dividend yields and the lowest stock prices -- came back to flatline in 1944, ten years sooner than someone who received and spent the cash dividends.
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Old 10-15-2008, 02:17 PM   #78
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I am not even thinking about dividends...

I was 50% in cash 2 months ago. It is 62% as I write this. Call me a dirty market timer, but I am licking my chop, waiting for institutional investors to finish folding.

Down $500K from Oct 2007. In percentage, still a lot less than Nords' 35% that he reported in another thread... Sorry Nords, I couldn't help it

PS. By the way, my cash portion is 36% higher than my total portfolio in the bottom of 2003. And I took time off then (actually when I withdrew myself from a venture business that was dying), and went see Nice and Venice during their Carnival. Me worry?

BTW, just had my colonoscopy last week. Clear bill of health. That's the most important thing in life.

PS. I am not market timing, only waiting for the right moment to "rebalance".
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Old 10-15-2008, 02:17 PM   #79
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And dividend reinvestment may never be more important than in a terrible bear market.

This is best seen by the "break-even" time of the Dow after the 1929 peak as I've repeatedly mentioned recently. The conventional wisdom says the break-even point was in 1954, just by looking at the actual reading of the Dow. But that ignores reinvested dividends. When the market was WAY down in the 1930s, dividend yields were often in the 8-10% range, and that was a hefty dividend yield which could by a large number of dirt-cheap shares if reinvested.

The net result is that someone who reinvested dividends at the most important time to do so -- with the highest dividend yields and the lowest stock prices -- came back to flatline in 1944, ten years sooner than someone who received and spent the cash dividends.


To add to your point, the investor who also invested on a monthly basis throughout would probably have broken even within 5 years. Dollar cost averaging on the bottom takes nerve, but the benefits will be compounded when the market recovers.

The key is not to bet on individual stocks but on the entire market. If the market goes to zero, you might as well spend your last few dollars on guns and ammo.
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Old 10-15-2008, 02:35 PM   #80
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One last point: One can continue to buy on down days (as today is shaping up to be). That may or may not prove be a bargain. But eventually one runs out of cash or one is taking on more risk than preferred. A part of me would prefer to give up those potential gains just to be even around now.

Your risk actually goes up with the price of the investment. A lower trend price does not increase your risk as long as you stay within your personal asset allocation. Risk will go down


What actually goes up is your perceived risk. Mathematically your risk goes down when averaging down as long as you don't pick individual stocks and bonds and remain within your targeted asset allocation.


This is easy to do with a broad sell off.
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