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Old 11-07-2008, 05:26 PM   #21
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Thanks, Fired@51. So as Ha mentioned in the first post, over a ten year period (and however long the market will take to recoup), the fixed income provided stability of principle and even went up 50%, correct? So, let's say stocks go up 32%, as is typical in the first year after a bear market. But that 32% isn't just 18% lower than the 50% (which would work out to about 70% with five more years, for a total 15 year period)? If the market drops further, then that 32% doesn't begin to recoup everything.

I'm confusing myself!
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Old 11-07-2008, 05:28 PM   #22
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Thanks, Ha. I understand better (if only you had posted this back in 2007---think how much money you could have saved me from losing, if it had convinced me to bale out!!!!).
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Old 11-07-2008, 11:38 PM   #23
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Hussman's intent was to demonstrate that returns over a complete cycle are contingent on entry valuations. Ha
Yes!

Additionally, I would like to offer some observations as follows.

1) What I see from the graph is that a person who bought and held the S&P index for 10 years ended up at the same point as if she held Treasuries through the same period. And the latter would not be so emotionally draining.

2) An accumulator who has been DCA'ing during this cycle into S&P 500 would end up losing money, compared to one who has been accumulating treasuries. I don't know how one would fare if he also accumulated into bonds during the same time.

3) One who auspiciously picked a sector that performed better than S&P 500, AND also was able to fight greed so as to get out at the top of the cycle would do very well. In the bull cycle topping out in 2000, it was the tech sector. In the more recent cycle, it was the energy and the material sectors. What is the next hot sector? I don't think any can tell, as we might not have stopped digging yet. Of course this is tough, as Malkiel and Bogle have told us that no one could do this consistently.

4) However, we could also see that if one practiced "balancing" religiously, one could beat treasuries by selling when stocks became highly valued at the top of the economic cycles. It is not possible to time the top and bottom perfectly, but it should be possible to obtain an advantage of a few percent over treasuries. If we remembered that things tend to revert to the mean and if we take the mean as treasuries, then we would sell when equities have substantially outperformed treasuries. Sadly, we tended to think that good times roll on forever, hence might not rebalance to cash in 2007. Could we have sold some stocks in 2007, not knowing about the impending credit crunch, and just from looking at this graph?

5) Looking at the graph, I can see that if the economic cycle repeats itself - at least in the near future - then this present time appears to be the period of undervaluation of equities. It would mean that this is a good entry point for stock buyers. Of course, if you are a "gloom and doomer", then this graph does not mean anything to you about the predictability of the future.

It seems Ha believes in the recurrence of the cycle, hence he recently went to the 100% equity position. The recent financial fiasco, and to some people the election outcome, might have caused some to think that an upswing is unlikely, at least in the foreseeable future. As I am prudently optimistic, I do not think the situation is hopeless, but do not want to place all my bets yet.

Hence I am slowly getting back into the market from a position of 70% cash. Very slowly.

By the way, I am not fond of either presidential candidate, so the election outcome did not concern me much. The fact that both legislative and executive branches get controlled by one party bothers me more. Still, that does not cause me to abandon hope. Not yet anyway. And then, there are always foreign markets to consider.
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Old 11-08-2008, 10:14 AM   #24
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Thanks, Ha. I understand better (if only you had posted this back in 2007---think how much money you could have saved me from losing, if it had convinced me to bale out!!!!).
This is more of a "how it turned out" graph, than something to help us plan strategy. In ealy summer of 2007, it might have looked like stocks were the obvious answer.

In any case, I sold some but not by any means all in 2007 and early 2008, but reinvested too early when I thought that bargains were to be had.

Perhaps they were, but the bargains are better now! (Or not, depending on how things work out. )

One thing certain, the only way to absolutely cut down on your loss potential in a big downdraft is to have a good sized short to intermediate term, high quality, fixed allocation.

Ha
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Old 11-08-2008, 10:28 AM   #25
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Hmmm - I retired 1993 before your chart starts and my 60/40ish balanced index tripled and then some over the period - I don't think rebalancing is that good and I did take erratic amounts out after 2005.

Man - now you have me really scratching my head.?

heh heh heh -
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Old 11-08-2008, 11:12 AM   #26
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I retired 1993 before your chart starts and my 60/40ish balanced index tripled and then some over the period ...
The stock market performance was really good in the 90s. I was not in my prime earning years, and additionally was too busy with raising a family, and also being a geek, so did not fully "participate" in this rally. Still, I did not do too bad.

Looking back, I think it is accepted among economists that the above period performance was due to the "peace dividend" when the Soviet block collapsed, plus the rise of the technologies that improved producticity, e.g. factory robots, computerization, communications, etc...

In this forum, I have seen threads started by younger people who lamented that they missed out on the goin' buster decade of the 90s. Back then, you could hardly go wrong because nearly every stock went up. You either won big, or won small (like I did).

Things have been a bit tougher since 2000. What is the next thing that drives growth? Other than investments in alternative energy, and technologies to help conservation, can any of us suggest something else?

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Old 11-08-2008, 11:31 AM   #27
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Over at the VD forum, a poster had asked about if it would've been better to invest in stocks or bonds over her past saving timeframe, which was 1988-present. So I did up a little spreadsheet to see. Feel free to play around with it. In addition to the individual funds [VWESX, VUSTX, VBMFX, + VFINX] I wanted to see how a balanced portfolio of stocks and bonds did if one was contributing to the portfolio every year. I also calculated the ending value of a set amount contributed at the beginning of the time period with no contributions. I wanted to see if there was a difference in stocks or bonds beating the other whether you contributed only at the beginning or contributed every year.

Note: I choose those funds b/c they were in existence in 1988. I suppose I could've also chosen VFSTX or VFIIX, but I figured others could replace the existing returns with the returns for those funds at their leisure.

I also added 1997-present.

- Alec
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Old 11-08-2008, 05:02 PM   #28
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One thing certain, the only way to absolutely cut down on your loss potential in a big downdraft is to have a good sized short to intermediate term, high quality, fixed allocation.
The other take home message is to diversify beyond the S & P 500, both domestically and internationally

DD
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Old 11-08-2008, 05:45 PM   #29
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The other take home message is to diversify beyond the S & P 500, both domestically and internationally

DD
That is certainly conventional wisdom, but it wouldn't have helped much in this latest smash-up.

Ha
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Old 11-08-2008, 07:08 PM   #30
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That is certainly conventional wisdom, but it wouldn't have helped much in this latest smash-up.

Ha
Yep - Target 2015 is pretty much theory fresh outta the can but down 25% doesn't make me feel warm and comfy all over. I can play defense ala SEC yield til the cows come home - but I'd rather see the sun come out and the market rise - bargins or no bargins.

The $ dividends are holding up (except for some bank stocks) in my Norwegian widow stocks - but the P/E contraction is worse for me than the S&P.

So the defense is holding - but like many humans I'd rather toss a few touchdowns - speaking portfolio wise.

heh heh heh - Alabama won in OT - expected but I was rootin for the underdog.
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Old 11-09-2008, 12:46 AM   #31
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That is certainly conventional wisdom, but it wouldn't have helped much in this latest smash-up.

Ha
True. Hopefully it will help on the way out of this. This has been a good example of how asset correlation can change. Unfortunately a global black swan creates correlation coefficients of closer to 1 for everything...

DD
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Old 11-09-2008, 08:31 AM   #32
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True. Hopefully it will help on the way out of this. This has been a good example of how asset correlation can change. Unfortunately a global black swan creates correlation coefficients of closer to 1 for everything...

DD
When the problem is liquidity, which frequently is the case with abrupt market breaks, correlations of any risky assets almost always go toward 1.

Ha
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