Overconfidence In Market?

[pb4uski]

Good point... as I recall the 1929 meltdown was fueled by a big run up prior to that based on a lot of margin borrowing and reforms were put in place to mitigate speculation with borrowed money.... meaning that the 1929 meltdown may no longer be as valid of a datapoint.

 

[copyright1997reloaded]

I'm in the camp that once the game has been played, stop playing. I do own some stocks, mostly dividend producers, in a Roth IRA, but overall its a small percentage of my portfolio.
I'm mostly invested in bonds.

I could be earning more, enjoying the return the market has produced, but again, if being conservative gives me sufficient income, why take the risk?

My purpose with the thread was merely to get folks opinions on if the forum is too optimistic about the market, and if we have been conditioned by this latest bull.

If, as I believe, we are in for very dark times ahead, when the Central Banks are unable to continue to levitate the economy and the markets, a lot of folks over invested will be severely hurt very late in life.
.

I will repeat my first comment. If (as you say) we are in for very dark times ahead, then what makes you think conservative investments (e.g. bonds, fixed income) will do well?

I would maintain the ability to "print money" is the only real lever that central banks have if those dark times arrive. Thus, those who have retained wealth through instruments of trust (fiat currency) would be the ones most hurt. Those who controlled items that can't just be deemed into existence will be in (relatively) better shape.

 

[Cut-Throat]

I will repeat my first comment. If (as you say) we are in for very dark times ahead, then what makes you think conservative investments (e.g. bonds, fixed income) will do well?

It's not that fixed income and bonds will "do well" ..... It's that they won't crash.... It's all about risk.

 

[JimBob]

Sorry, posted a reply but somehow got lost. Getting used to the interface.

Dark times. Yes, I believe we are headed for very dark times. We are living in an unprecedented period where the world's debt is simply out of control. Its naive to think this will have no effect on our lives, and our investing environment.

Look at the following chart of the Federal Funds rate since 1980:

https://www.macrotrends.net/2015/fed-funds-rate-historical-chart

With each successive economic downturn the Fed has lowered rates, and then when the economy recovered, the Fed could not return rates to their pre-crisis level. At the beginning of the Great Financial Crisis, Fed Funds were at 5 percent. Now, with full employment and low inflation, the economy and the market are so fragile that the Fed has only been able to return rates to 250 basis points.

In the next recession, and it is inevitable, the Fed will immediately cut to zero. Out of rate bullets, the Fed will then introduce some new form of stimulus, quantitative easing, helicopter money, negative rates, name your poison.

When in the history of this country has our economy and the market been completely dependent on the largesse of the Federal Reserve?

And the European Central Bank, the Bank of Japan, and the Bank of China are even worse.

Some, based on recent experience, believe that Fed stimulus will send the market off to the races again. But the studies show that each successive QE, had less and less effect. So its doubtful anything the Fed does will save the day. Being in the market at such a time will be catastrophic.

The Central Banks are out of ammunition and losing control.

I don't know when it will happen, but it will happen, and we will be looking back fondly at the Great Financial Crisis.

Noone will be immune, even those in fixed income. But at that moment the question will not be accumation of capital, it will be preservation of capital.

For most on this site, we are too old to recover from what I'm describing.

 

[24601NoMore]

Factual or not, (I would like to know, though) I think the demographic profile of investors from 1929 to 1954 is entirely different than it is now. Back then there weren't 401ks, MFs, instant information and so on. A lot more average people participating in the market now than then. It changes how the market behaves to a certain extent and there are better safeguards in place.

Excellent point, and I agree - but we now (unlike 1929-1954) have to deal with a much faster pace of market movement where a single tweet can wipe a trillion off global markets, and people can buy and sell in nanoseconds via a simple keystroke or click of the mouse.

My big fear (which I don't think is unfounded) is that once the herd starts to stampede (which it will someday "soon", IMHO, if recent reaction to relatively minor events and unfounded volatility have been any indication), that the ability of people to sell by literally clicking a button is going to create a downdraft and "stampede" effect like none of us and none that went before us have ever seen. Then, the 24x7 talking heads (which we also didn't have in 1929-1954) will pour gasoline on the fire..which will lead to more selling and more talking head coverage of the doom and gloom. It may not end well when it starts.

And, when the downdraft continues, the near instant ability to trade (unlike 1929-1954), the instant reaction to news, the computerized trading - is going to hammer the market like nothing ever before. Whether the buyers step in among the carnage is something we'll have to see - but I do think we are living in a MUCH different time than we were in 1929 - 1954, where you had to trade physical pieces of paper via a broker - and that process took TIME. Now? We can watch a trillion in global market values vaporized in a day or two.

So, agree - MUCH different..and not necessarily in a good way for those of us looking to protect our portfolios from being decimated.

Best of luck to all..but back to OP's point - I do think there is a tendency to not account for the risk that we all really do face in high equity positions, OR the time (often decades, not "2-3 years") that is needed to recover back to "even"..

 

[dtbach]

I guess the "Great Recession" wasn't "dark" enough for some folks here.

 

[W2R]

My purpose with the thread was merely to get folks opinions on if the forum is too optimistic about the market, and if we have been conditioned by this latest bull.

I don't think we are too optimistic at all. I do think that some here lean towards riskier investments than I would feel comfortable with, probably because they are younger and more risk tolerant than I am at this stage in my life, but then that's a different matter. I am perfectly comfortable with investing in broad index mutual funds, using a 42:58 AA.

Between my father, my brothers, and me, my family has been heavily invested in the stock market for at least 80 years, with quite satisfactory results and no regrets from anyone. We carry low risk, diversified investments with a long time frame in mind. I have absolutely no intention of pulling out my money from the NYSE and putting it into beanie babies, start-ups, or whatever other possibilities come to mind.

OK, I have been engaged in a peculiar train of thought about this so bear with me. I'll number the steps:

1) I was curious about how much the stock market dropped in 1929, so I googled it; this link is the first article that came up and says that the Dow dropped 25% in the crash of 1929. Surely it was more than that?

The stock market crash of 1929 was a four-day collapse of stock prices that began on October 24, 1929. It was the worst decline in U.S. history. The Dow Jones Industrial Average dropped 25 percent.

But 25% is what it says so I guess I'll use that as at least a rough guess. If someone less lazy than me finds a more reliable percentage we can go with that, but for now that is what I have.

2) Only 42% of my portfolio is invested in equities anyway, so if we lost 25% of equities tomorrow and bonds/cash remained the same, then that would be a loss of only 10.5% of my portfolio.

3) Right now, I have been retired and spending money from my conservatively invested portfolio for 10 years. I have 137% of what I started out with in 2009.

4) Now this seems weird, but IF all of the above is correct (granted, a big "IF" since I haven't verified that 25% number), then I am thinking that even if we had a crash of the severity seen in 1929 then the very next day I would still have more in my portfolio than I did when I first retired.

5) SS and pension have kicked in by now, and cover almost all or all of my expenses (at last!) so I have made it past the bend in the curve.... all of this is so much less crucial than it was at the beginning of ER.

 

[joeea]

I've been struck since I started reading the forum at how many here seem to have exorbitant faith in the market, and allocate accordingly.

After the longest bull market in history, historical gains, and a world economy and market almost completely dependent on Central Bank largesse, I'm wondering if there is not too much optimism on the forum?

This is an early retirement forum. It's not a surprise to me that many here are very optimistic about the market.

Only time will tell if they are too optimistic or not.

 

[joeea]

And why do wives who when you are working complain your never home, suddenly decide after retirement you are home way too much.

IMHO, those are the kinds of wives who should be out working.

I'm in the camp that once the game has been played, stop playing.

I could be earning more, enjoying the return the market has produced, but again, if being conservative gives me sufficient income, why take the risk?

If you are meeting your personal goals without taking risks, then there is absolutely no need to increase your risk.

My purpose with the thread was merely to get folks opinions on if the forum is too optimistic about the market, and if we have been conditioned by this latest bull.

There is absolutely no doubt that the long bull run has caused some folks to forget that the market can come down, and that others never knew to begin with.

If, as I believe, we are in for very dark times ahead, when the Central Banks are unable to continue to levitate the economy and the markets, a lot of folks over invested will be severely hurt very late in life.

I suppose it depends on what "over invested" means.

And while I don't agree that "the Central Banks are levitating the economy and the markets", I do believe that a few big mistakes by the Central Banks and/or the Executive Branch could certainly cause the market to tumble for a while.

 

[haha]

My purpose with the thread was merely to get folks opinions on if the forum is too optimistic about the market, and if we have been conditioned by this latest bull.

People, Including us, will always be influenced strongly by the dramatic and the recent. It is quite hard to avoid either one of these pulls.

Ha

 

[RenoJay]

After the longest bull market in history, historical gains, and a world economy and market almost completely dependent on Central Bank largesse, I'm wondering if there is not too much optimism on the forum?

Yup.

 

[kjpliny]

I don't think we are too optimistic at all. I do think that some here lean towards riskier investments than I would feel comfortable with, probably because they are younger and more risk tolerant than I am at this stage in my life, but then that's a different matter. I am perfectly comfortable with investing in broad index mutual funds, using a 42:58 AA.

Between my father, my brothers, and me, my family has been heavily invested in the stock market for at least 80 years, with quite satisfactory results and no regrets from anyone. We carry low risk, diversified investments with a long time frame in mind. I have absolutely no intention of pulling out my money from the NYSE and putting it into beanie babies, start-ups, or whatever other possibilities come to mind.

OK, I have been engaged in a peculiar train of thought about this so bear with me. I'll number the steps:

1) I was curious about how much the stock market dropped in 1929, so I googled it; this link is the first article that came up and says that the Dow dropped 25% in the crash of 1929. Surely it was more than that? But 25% is what it says so I guess I'll use that as at least a rough guess. If someone less lazy than me finds a more reliable percentage we can go with that, but for now that is what I have.

2) Only 42% of my portfolio is invested in equities anyway, so if we lost 25% of equities tomorrow and bonds/cash remained the same, then that would be a loss of only 10.5% of my portfolio.

3) Right now, I have been retired and spending money from my conservatively invested portfolio for 10 years. I have 137% of what I started out with in 2009.

4) Now this seems weird, but IF all of the above is correct (granted, a big "IF" since I haven't verified that 25% number), then I am thinking that even if we had a crash of the severity seen in 1929 then the very next day I would still have more in my portfolio than I did when I first retired.

5) SS and pension have kicked in by now, and cover almost all or all of my expenses (at last!) so I have made it past the bend in the curve.... all of this is so much less crucial than it was at the beginning of ER.

The great depression started in 1929 but continued for years, with stocks falling nearly 90% through 1932 before things began to stabilize.

 

[COcheesehead]

The great depression started in 1929 but continued for years, with stocks falling nearly 90% through 1932 before things began to stabilize.

Yup.

 

[Oz investor]

having plan A ( if the markets hold up ) and a plan B ( if the markets fall heavily ) seems wise

the markets WILL crash one day ( i thought in mid-2013 ) , i decided to hang on tightly and take sensible profits , so far so good but the current plan hasn't been stress-tested , yet

when will the crash happen and how long will the downturn last
sorry i don't have the answers for that ( only for what i will do if the market keeps climbing , or falls steeply )

 

[street]

There really is only a few options and no one knows when the crash will happen. You get out or just have the best plan that you can or stay in and weather the storm. I choose to play with more of a risk and I have no idea if that is good or bad.

 

[RobbieB]

I don't have an over confidence in equities, I have an under confidence in bonds.

 

[GR111]

It all works out. Markets go up, markets go down, generations come, generations go. There is nothing new under the sun. Keep a high quality, diversified portfolio, sensible allocation, and spend more time with those you love. Life is so short. Best of luck.

 

[W2R]

The great depression started in 1929 but continued for years, with stocks falling nearly 90% through 1932 before things began to stabilize.

Yup.

Could either of you link to a source like I did? Thanks!! Much appreciated.

 

[OldShooter]

One of the flaws in Modern Portfolio Theory is that risk and volatility are conflated. Yes, volatility is risky in a SOR problem but for those in the accumulation phase and for those with AAs that permit them to ride out volatility it is not serious risk. IOW volatility is not risk in all circumstances.


Individual stocks are often risky; Think Enron, Sears, GE. But individual issue risk can easily be diversified away -- so no risk is necessary there either.


Approaching 72YO we are 75% equities and do not consider that to be particularly risky.

 

[NW-Bound]

The great depression started in 1929 but continued for years, with stocks falling nearly 90% through 1932 before things began to stabilize.

During that time, there was deflation and by just holding cash one could get a return of 32% in 3 years.

However, the above was the result of tightening money supply, which central banks around the world have vowed to never repeat. Witness Bernanke's comment about dropping money from helicopters if necessary.

Hence, inflation will be a much higher risk if things go bad now.

 

[joeea]

However, the above was the result of tightening money supply, which central banks around the world have vowed to never repeat.

"Never" is a long time.

If I recall correctly, central banks are run by people - people who are appointed by leaders with different agendas. Some of those leaders don't always know what they are doing and don't care about anything but short term gain.

 

[NW-Bound]

The tendency for governments is usually to spend too much money rather than too little, thus increasing the money supply rather than tightening it.

I was saying that if and when future problems develop they are not likely to be the same as that of the Great Depression, when serious deflation took place.

I did not say that there would never be problems. It's just that one should not expect an exact repeat of the Great Depression, where cash did great compared to stocks.

 

[Andre1969]

I guess the "Great Recession" wasn't "dark" enough for some folks here.

I think anyone's individual memory of the Great Recession is going to be based on how it affected them, personally. And, there really wasn't any one great consensus there...it affected everybody differently.

In my case, it was definitely a wakeup call. I lost half of everything in just three short months...September/October/November. But, I was never in any danger of losing my job, and hadn't bought a house at the peak of the market, so I didn't have to worry about dipping into retirement to try and stay afloat, losing the house, stuff like that.

One thing that inadvertently worked in my favor, was that a lot of banks were starting to freeze HELOCs, so that you couldn't draw any more out, even if you were nowhere near your limit. I called mine, to see if they were going to do that as well. They said no, but I didn't fully trust them, so I maxed out my HELOC, just in case. Rates had dropped so low, it didn't cost much to do that. And then, once things seemed like they were going to stabilize, instead of paying the HELOC back down, I invested the money. Not at the bottom of the market, but, while it was still low, at least.

Once we got past March 2009 though, it seemed like the market was going nowhere but up. By November of 2009, my investments were at a new high, although that was partly because of additional investments. I figure I was "made whole" again (gained back all of my losses) sometime in early 2010. In retrospect, it seemed like it went by in a flash, and we recovered a bit too quickly. But, I do remember going through it seemed like hell, and I was constantly worried about when the market would go south again.

For instance, in November of '09, even though my net worth was at new peaks, my car got totaled. Even though I could easily afford just about any new car I'd reasonably want, I was leery about spending any serious money. I didn't like spending the ~$7800 I did end up blowing, on a used Buick.

In February 2010, the market tanked a bit. It ended up being the first down month I had since March of 2009, and I started to worry. But, looking at it now, it only knocked me down about 5.5%. But, I was still thinking, oh crap, here we go again. March/April were good months, but then May/June/July were three month where it went progressively lower, ultimately dropping me about 14.5%. And, the whole time I was thinking we're gonna crash again.

In 2011, I lost about 14% from July to August, and my first thought was oh crap, looks like the party is over. But, then it didn't go any lower, and I was recovered by February of 2012.

I think the Great Recession did scar me a bit, in some ways. But, it also taught me that in the end, the market always comes back. And, often, quicker than we might think. Heck, even during the Great Depression, I believe there was a pretty big rebound in 1933, before it tanked again in 1934.

And heck, during this last downturn at the end of 2018, I got burned a bit because I tried to take advantage of it! I sold a few assets at a loss to write it off on my taxes, and figured I'd buy back at a low price after the wash sale period ran out. But, then, the market came back, seemingly quicker than it crashed.

But, in contrast, I remember we had some neighbors who bought their house for $375K in 2007, at the peak of the market. They ended up losing it, and the bank took it over. The next people to buy it, in early 2012, paid $152,000. Now, I don't think it was the Great Recession, itself, that made them lose the house, because they didn't lose it until around 2010 or 2011. I heard that part of their family was in trouble with the law over identity theft, credit card fraud, etc. But, when they did fall on hard times, in the wake of the Great Recession, the depressed home value certainly didn't help them. Anyway, I'm sure their views of that timeframe are vastly different from mine.

I know a few people too, younger than me, who can remember their parents losing their homes in that timeframe. So to them, it's going to be etched into their memories for life, most likely

 

[street]

The tendency for governments is usually to spend too much money rather than too little, thus increasing the money supply rather than tightening it.

I was saying that if and when future problems develop they are not likely to be the same as that of the Great Depression, when serious deflation took place.

I did not say that there would never be problems. It's just that one should not expect an exact repeat of the Great Depression, where cash did great compared to stocks.

I beleive ^ is very true. We have better tools and seem to have more control and to know and adjust to the problem faster, with better understanding, these days verses the 1920's depression.

 

[copyright1997reloaded]

It's not that fixed income and bonds will "do well" ..... It's that they won't crash.... It's all about risk.

My point is that if we have massive monetary expansion, e.g. dropping money from helicopters, that is an inflationary event, and bonds aren't gonna be where you want to be.

Sorry, posted a reply but somehow got lost. Getting used to the interface.

Dark times. Yes, I believe we are headed for very dark times. We are living in an unprecedented period where the world's debt is simply out of control. Its naive to think this will have no effect on our lives, and our investing environment.

Look at the following chart of the Federal Funds rate since 1980:

https://www.macrotrends.net/2015/fed-funds-rate-historical-chart

With each successive economic downturn the Fed has lowered rates, and then when the economy recovered, the Fed could not return rates to their pre-crisis level. At the beginning of the Great Financial Crisis, Fed Funds were at 5 percent. Now, with full employment and low inflation, the economy and the market are so fragile that the Fed has only been able to return rates to 250 basis points.

In the next recession, and it is inevitable, the Fed will immediately cut to zero. Out of rate bullets, the Fed will then introduce some new form of stimulus, quantitative easing, helicopter money, negative rates, name your poison.

When in the history of this country has our economy and the market been completely dependent on the largesse of the Federal Reserve?

And the European Central Bank, the Bank of Japan, and the Bank of China are even worse.

Some, based on recent experience, believe that Fed stimulus will send the market off to the races again. But the studies show that each successive QE, had less and less effect. So its doubtful anything the Fed does will save the day. Being in the market at such a time will be catastrophic.

The Central Banks are out of ammunition and losing control.

I don't know when it will happen, but it will happen, and we will be looking back fondly at the Great Financial Crisis.

Noone will be immune, even those in fixed income. But at that moment the question will not be accumation of capital, it will be preservation of capital.

For most on this site, we are too old to recover from what I'm describing.

I have on more than one occasion posted to this site: "In a credit crisis, investors go from worrying about return on capital to return OF capital."

My issue with what you've posted (so far) is one of clarity. That is, if this dark times ahead that you describe is one of out of control inflation, or one of a super credit crisis where debt isn't repaid which is deflationary.

In the great-depression government bonds were a good investment because of the deflationary environment. Bonds in companies that went out of business? NOT SO GOOD. My point also is that governments and central banks learned a lesson from the great depression (one that they have been trying to avoid repeating) and why they fight credit contraction through monetary and fiscal policy. To me, this means that they are more likely to achieve the opposite result, i.e. hyper-inflation, and that holding fixed rate debt in this scenario is a disaster.

So one more time. If times ahead are truly dark, WHERE CAN I PUT MY ACCUMULATED WEALTH? Tell me which asset class is the magic answer?