Buying low or sign of things to come?

[Sisyphus]

Share your thoughts!

 

[grumpy]

None of the poll choices appeal to me. If you have a diversified portfolio and you intend to maintain a significant allocation to equities, then short term fluctuations are of no consequence.

Grumpy

 

[razztazz]

Just like everybody else, I'm no authority on this, ad the next time can be different but.... herky-jerky, up/down, can't guess what it's gonna do from one day to the next, good news/bad news makes no difference-type of volitility is usually associated with an impending major flouncing. 10%-20% 30%.....?

Might not be another 3 years heading down. Might just be what some toss off cavalierly as "a correction, ho hum" but you can't tell till after the fact. High volitility usually doesn't mean nothing.

 

[sgeeeee]

None of the poll choices appeal to me.  If you have a diversified portfolio and you intend to maintain a significant allocation to equities, then short term fluctuations are of no consequence.

  Grumpy

I agree with Grumpy. There were no reasonable poll choices for a hardcore asset allocator.

 

[canent]

I voted c)

Its nothing to concern a diversified portfolio, unless that person has some cash that they mught like to use to pick up a few bargains, or use to rebalance their holdings.

 

[boont]

I sold out of the market in January of 2000. The market is still not at the price at which I sold. That means, that for almost seven years, it hasn't gained. It has fallen and come back up significantly, but it hasn't regained its highs.

A couple of years ago I think it was, Buffett said he saw no prospects in the equities markets. I continue to agree.

If you have been placing money in the market over these last seven years you have made some profits on those investments but not on your equity as of 2000.

In my opinion that equity should have been re-allocated. This is the fatal flaw in "buy and hold."

boont

 

[canent]

If you have been placing money in the market over these last seven years you have made some profits on those investments but not on your equity as of 2000.

In my opinion that equity should have been re-allocated. This is the fatal flaw in "buy and hold."

But does this assume that the equities were purchased in 2000? If someone had bought the same equities long before then they would still have made money.

 

[haha]

But does this assume that the equities were purchased in 2000? If someone had bought the same equities long before then they would still have made money.

Of course, depending on when you bought them and how much you paid. But isn't that somewhat beside the point? The point is that several large indexes topped out in the year 2000, and this is 2006 and they aren't back to their tops yet.

So if you retired or close to retiring, you do not want this to happen to you.   Many believe that diversification is protection against this sort of thing. It was last time; but last time was very peculiar in that while the techs, NAZ and the very large blue chips were quite high, many smaller company stocks, oils, reits, etc, were very low. "Emerging Markets" were in fact emerging from the huge meltdown of 1998. Korea Fund, KF, was selling below 6. I remember because I bought some. Even my Korean friends thought I was nuts.

Not true today. Therefore the diversification theme may or may not work this time around- if indeed this is the beginning of another drop. Of course a large position in near cash and short duration fixed is protection, in that whatever % losses equities might experience, they will be lessened by having less at stake. (1/2$x loss is quite a bit better than $x loss!)

It is a lot easier to say what might not work than what will work, so I will just say where I have put my few paltry chips. I have already sold stocks and taken a lot of CG’s this year, and taken some money out of puts by rolling down to lower strikes. I expect further falls in the averages, and possibly just about everything else. At best, I hope to stay even with it by my little strategies, but I imagine I will see portfolio losses into late fall. But at that time I should have a large amount of cash to redeploy.

If this is all wet, I give back some of my gains already realized in put operations, and pay some CG tax that I could have put off. I do not think that there is a very large chance that I will miss hefty equity gains- I don’t think they are in the cards from these levels. So to me anyway, the R/R seems to favor caution.

Ha

 

[Alex]

None of the poll choices appeal to me. If you have a diversified portfolio and you intend to maintain a significant allocation to equities, then short term fluctuations are of no consequence.

Grumpy

I wholeheartedly agree.

 

[Scrooge]

The point is that several large indexes topped out in the year 2000, and this is 2006 and they aren't back to their tops yet.

Oh, come on, folks! It's been only 6 years! Here is one example. Dow Jones:

1965 - tops 900

1982 - under 900, as low as 769 in August

Now, that was painful! 

 

[haha]

None of the poll choices appeal to me.  If you have a diversified portfolio and you intend to maintain a significant allocation to equities, then short term fluctuations are of no consequence.

  Grumpy

What is the "short term"? We are now at 6 years and counting on the Dow and S&P, and as Scrooge pointed out, there was the little short term of 1966 to 1982. The market went nowhere, for 16 years? And as I remember there was some pretty powerful inflation over that span, so one didn’t just mark time for 16 years, his real loss was quite large.

I admit that I find the statement "...and you intend to maintain a significant allocation to equities..." more than a bit odd. What it is about equities that would make one make an a priori decision in all situations, to maintain a "significant allocation"?

Are equities a covert religion for those who are agnostic in more traditional spiritual matters?

Ha

 

[Ed_The_Gypsy]

Welllll...

I found this the other day:
http://bobsfiles.home.att.net/secular.html

"The Market" (PRICES!!) during this time did not go anywhere, but this did not reflect re-investing dividends. Divends reinvested, the value of the S&P 500 tripled in 17 years (~ 7%/yr, if I did my calcs right).

With dividends re-invested, small caps grew over 10 times in the same period (~ 14.8%/yr--same caveat).

Data from Ibbotson.

Lesson: diversify. Slice-and-dice anyone?

 

[razztazz]

Insert Quote
Welllll...

I found this the other day:
http://bobsfiles.home.att.net/secular.html

"The Market" (PRICES!!) during this time did not go anywhere, but this did not reflect re-investing dividends. Divends reinvested, the value of the S&P 500 tripled in 17 years (~ 7%/yr, if I did my calcs right).

With dividends re-invested, small caps grew over 10 times in the same period (~ 14.8%/yr--same caveat).

Data from Ibbotson.

Lesson: diversify. Slice-and-dice anyone?

If youre marching towards retirement , it might not matter but in retirement....?

In retirement you would never have been able to reinvest those dividends anyway. You'd have eaten those plus principle and even tho the market trippled during that span with reinvestment it still lost to inflation if I am not mistaken.

Diversify into small caps? Is there any reason to belive without any possiblity of being wrong tat the next time small caps will do the same? If enough people did that there wouldnt be enough small cap stocks around to sell anyway

To rely on histyorical diversity is like the people who say "Dont worry. The markey always goes up" It's a form of technical analysis without the analysis. Chart reading

 

[Scrooge]

I found this the other day:
http://bobsfiles.home.att.net/secular.html

"The Market" (PRICES!!) during this time did not go anywhere, but this did not reflect re-investing dividends.  Divends reinvested, the value of the S&P 500 tripled in 17 years (~ 7%/yr, if I did my calcs right).

Well, the 2000-2006 vs. 1965-1982 comparison above was for nominal index numbers. With divident reinvestment (and DJIA was paying dividents in 2000-2006 and 1965-1982 as well), it would be a somewhat different story.

As far as S&P500 goes, the author writes that it went from 53 in 1965 to 162 in 1982. But if you use Westegg's inflation calculator for the same period, you discover that $53 in 1965 was equivalent to $155.66 in 1982. So even with divident reinvestment, you barely stayed ahead of inflation if you were invested in S&P500.

The author does address the issue of inflation, but he believes that it was stock-bond-cash neutral during this period:

Unfortunately, inflation acts on bonds and cash as well as stocks. So yes, there were few places to hide with inflation so high during that period.

This assertion would imply that the real interest rate (i.e. the nominal interest rate minus the inflation rate) was negative or at least around 0%. This doesn't appear to be the case, however. See, for example, this graph -- http://www.thehindubusinessline.com/businessline/2001/07/21/stories/042120ma.htm -- which shows only one period ca. 1977 when the real interest rate was at or below 0%.

Disclaimer: I know next to nothing about economics, I just look this stuff up

 

[grumpy]

What is the "short term"? We are now at 6 years and counting on the Dow and S&P, and as Scrooge pointed out, there was the little short term of 1966 to 1982. The market went nowhere, for 16 years? And as I remember there was some pretty powerful inflation over that span, so one didn’t just mark time for 16 years, his real loss was quite large.

I admit that I find the statement "...and you intend to maintain a significant allocation to equities..." more than a bit odd. What it is about equities that would make one make an a priori decision in all situations, to maintain a "significant allocation"?

Are equities a covert religion for those who are agnostic in more traditional spiritual matters?

Ha

HaHa,

I freely admit that I am not smart enough to successfully time the market. It was not wisdom but good luck that I was fully invested during the roaring 90's and avoided the worst of the dot.com carnage. Similarly, I am not smart enough to know when a down market will begin to recover and to get back in. I gratefully accepted the large gains then, and I will stoically accept small gains or losses going forward. I have five years worth of living expenses in cash. I trust that with a well diversified portfolio (large cap value, small cap, mid cap, foreign, etc. etc.) some sector will be doing well if and when I need to liquidate to replenish cash. If that "faith" is a "covert religion" then I'm guilty as charged. I have been FIRE'd for two years. My net worth today is greater than it was the day I retired. I'll ignore the current market fluctuations 'cause I'm not smart enough to know what else to do. You follow your "covert religion" and I'll follow mine. Check with me in 20 years and we'll see how we are each doing.

Grumpy

 

[Ed_The_Gypsy]

If youre marching towards retirement , it might not matter but in retirement....?

Good point, razz. Seventeen years is a long time. Could be scary if all one had was the S&P.

However, FIREcalc scenarios have taken that period into account, and include both receiving dividends and selling equities. And there are other asset classes, too.

Of course, one could always go back to w*rk.

 

[samclem]

In retirement you would never have been able to reinvest those dividends anyway. You'd have eaten those plus principle and even tho the market trippled during that span with reinvestment it still lost to inflation if I am not mistaken.

If you were in retirement, yes, you'd have to spend the dividends. Just like you'd have to spend the interest from bonds/CDs, etc. Looking at inflation vs real bond rates (looks like approx 2% average over the period, with a short period of negative real return), you would have had the same issue--spending your principal, which is also being eroded by inflation. Bad. At least with equity there's considerable upside potential when the pain stops.

Diversify into small caps? Is there any reason to belive without any possiblity of being wrong tat the next time small caps will do the same? If enough people did that there wouldnt be enough small cap stocks around to sell anyway

To rely on histyorical diversity is like the people who say "Dont worry. The markey always goes up" It's a form of technical analysis without the analysis. Chart reading

Well, reading the charts DOES tell me that the market goes up over time. It doesn't do it smoothly, but it does it.

And, there's never been a case when there weren't enough stocks of a particular type available for sale. When the price rises, there are always going to be sellers. If you own small caps beforehand (or foreign stocks, large caps, etc) then you can be a seller at the new, higher price. That's why diversification is good.

There's an interesting table on pg 10 of the pdf file at this link (warning--long download)
http://www.vanguard.com.au/library/pdf/RL_Preserve_Port_Val_04_2005.pdf
In a nutshell:
If we look at the individual decades from 1930 - 2000, the real return (price plus dividends adjusted for inflation) on stocks has been negative in only one case-the 1970's (average real return per year: -0.32%). Long term treasuries have had 4 negative decades (biggest losses in the 1950s, real losses of - 2.25% per year over that timeframe). Intermediate treasuries have had 3 negative decades (max losses were in the 1940s, with annual real losses of -3.35% per year over that decade). 30 day T-bills have had 3 negative decades (biggest losses in the 1940s: - 4.64% per year over the decade).


So, stocks have had fewer "negative decades" than any of these asset classes, and that negative decade for stocks was milder than the worst decades experienced by the others. Stocks had an annualized real total return from 1926-2004 of 7.19%. LT treasuries= 2.36%. IT treasuries=2.19%. T-Bills= 0.79%

If you can survive the dry spells, stocks have definitely been the place to be.

Of course, this is all just historical chart reading . . . part of the catechism of the equity covert religion

 

[TromboneAl]

I'm not sure that "steadily declining" and "super volatile" can be used to describe the same thing, but I know what you mean.