How do you tolerate the Peaks and Vallies? I'm having a hard time!

[thefed]

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

 

[Texas Proud]

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=^DJI&t=my

 

[poyet]

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 )

 

[cute fuzzy bunny]

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.

 

[Cool Dood]

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..........

 

[cute fuzzy bunny]

I guess in a couple of areas I'm a little picky about wording. You dont experience a loss unless you sell, and I just hear a few too many very conservative or doom and gloomers saying "But what if the market turns down and I lose money!?!". You didnt lose money. An asset you're still holding has temporarily been reduced in value, and unless you sell it at that juncture, you havent "lost your shirt".

From the definition of the word...
To place (something) where one cannot find it again
To Fail to keep or to maintain; cease to have

But if you want to look at it in the worst possible light, g'head. Why not try to claim the 'loss' on your taxes

 

[Cool Dood]

Ah, I guess different things annoy us

For me, the main reason I ever cared about the distinction was doom 'n' gloomers who look at a paper gain and say, "but it's not worth anything until I sell -- I could still lose it all any time." Well, yes, but you could lose all your money at a time if you'd cashed out and were holding it in $100 bills, too; or, more likely, you could gradually lose it all over time through inflation. As it now stands, you have something that's worth as much as the paper says it is, and is pretty much as liquid as the currency you're measuring it in. And unless it's the year 2000, you're more likely to keep making money than to lose it all at once.

As for your definitions... if the price has gone down, you have ceased to have the difference in value; it no longer exists. And that you can't claim it on your taxes is only because of the mechanics of how taxes are collected, not because you still have that value in some way or another; it's gone.

Anyway, we both hate the right people, so why argue?

 

[haha]

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?

Depends on the dividend yield. In the case of Japan, very small contribution form dividends during these years.

Ha

 

[cute fuzzy bunny]

Ah, I guess different things annoy us

I'm really not annoyed, i'm just offering the half of the glass thats full rather than the half thats empty.

Anyway, we both hate the right people, so why argue?

I know you're kidding, but I dont really hate anyone. Well...maybe a couple of people. Not that I'd ever let it show...

Ha...your post went away while I was trying to quote it...not only do I not see any reason to show internally consistent reasoning, I dont see what stock market movement has to do with locking in a cd rate for 5-7 years when there is no sign that interest rates wont continue north for a little bit longer...

 

[poyet]

Cute 'n' Fuzzy Bunny, it's not a matter of doom and gloom. I've got a lot of money invested in the market and reasonable confidence and optimism about what I do, so I'm not a "doomer 'n' gloomer". Nevertheless, assets must be marked to market with some frequency to know what they're worth. Holding shares you can purchase everyday for less (than you've paid) does not make them more valuable than they are quoted for. Everybody must acknowledge that on his/her road to financial realism.

Back to the original post, I would recommend to mark to market (MM) trading accounts daily, investment accounts weekly, and total net worth quaterly.

As an indication, on a well diversified investment portfolio of funds with international exposure, I experienced this (quiet) year a weekly standard deviation (computed over a sliding year) of 6,22% of the NAV which gives 3k per 100k of market exposure, biggest pick to through (P2T) was just 3,91% between 30/09/2005 and 28/10/2006, total yearly return 17,7%.

Trading accounts have a much greater volatility and much larger P2T but with better returns... at the expense of greater risks !

 

[cute fuzzy bunny]

Poyet, I completely agree. I think its appropriate at this time to pause and read my sig. I have never, ever, ever, ever, ever made any connotations about ignoring day to day valuations.

I am objecting to the use of the word "lost" as in "I am expecting the stock market to dive, and that will cause me to lose all my money".

Unless you were planning on selling that day, you will not 'lose' anything. Just as you have not "found" money when your portfolio goes up.

I am also not trying to be Mr. Language Person here. We have an awful lot of inexperienced investors reading these threads, and when they hear they might "LOSE" money, its frightening to them. Its bizarre to see someone say "I'm afraid i'm going to lose money in the stock market so I moved everything to cash". What is really going on is they are afraid of volatility and want to move to an involatile asset class, which then loses value to inflation. The facts are, anything that gains money entails risk and volatility risk is one of those. However volatility risk IS NOT risk of loss.

 

[Spanky]

I concur that it's not a lost until it is sold, by definition, despite the drop in value.

 

[free4now]

Maybe it comes down to whether your psyche considers losses additive.

If you buy a security at 100 and it's value drops 10 points ten times while you hold it, then an unenlightened person might feel in their gut "I've lost ten times 10 which is everything I put into it... I am hosed! I should have gotten out a long time ago.".

But the more enlightened person might notice that everytime it dropped 10 points in value it soon rose 11 points, and the value is now 110. So this person doesn't perceive that any losses have occurred at all.

 

[tomz]

The facts are, anything that gains money entails risk and volatility risk is one of those. However volatility risk IS NOT risk of loss.

It is, however, a loss if you need to cash in an investment when it is down.  If you have created a portfolio that allows you to subsist and ignore volatilty and wait for the investment to go back up, then you can deal with the volatility.  However, if your buffer is not large enough, volatility can turn into a loss.  Trying to strike a balance between your buffer (which can handle losses) and the volatility is the rub.  If only we were omniscient. :

 

[cute fuzzy bunny]

Absolutely right Tomz.

If you dont have enough of a cash buffer, a heloc, some fixed income or other investments to sip from if the market takes a long deep downturn, then you've screwed up. Thats the education most people need to hear...good asset allocation where you have both conservative stuff and assets that actually will produce a long term positive gain.

But to be fair, the "sit in cash until the downturn" or "aiyee, the market is going to crash" folks will look pretty darn smart if it happens. Sometime during our lifetime there will likely be such an event. Although since i'm outpacing cash and fixed income holders by 4-6%+ a year, if it doesnt happen soon it really wont make a difference.

 

[Texas Proud]

I am objecting to the use of the word "lost" as in "I am expecting the stock market to dive, and that will cause me to lose all my money".

Unless you were planning on selling that day, you will not 'lose' anything.  Just as you have not "found" money when your portfolio goes up.

It is how one looks at the what people are saying.. when someone is using 'lost' they usually mean 'I lost value', not that I am missing my stock... and the opposite is not 'found', but gained. You either lose or gain value on a daily basis... and it is real. You do not have to sell to have a real loss. The defininition I use for this is below. Yes, your definition is for losing you keys or something else where you do not have physical possession of the article anymore.

The reason why I try to get some others to see this is that I have heard many people delude themselves into saying they have not 'lost' anything because the stock price is down because they have not sold... that if they hang onto it long enough it will come back to where they purchased and they can say "see, I did not lose anything"... they hang onto a bad investment trying to justify their purchase of it instead of recognizing the obvious and they saying where is the money best invested... it might be the stock they own right now, but it might be another stock. NOT recognizing that you have already LOST the value will keep some people from moving money into a better investment.




Main Entry: loss
Function: noun
1 : physical, emotional, or esp. economic harm or damage sustained: as a : decrease in value, capital, or amount —compare GAIN b : an amount by which the cost of something (as goods or services) exceeds the selling price —compare PROFIT c : something unintentionally destroyed or placed beyond recovery

 

[haha]

The reason why I try to get some others to see this is that I have heard many people delude themselves into saying they have not 'lost' anything because the stock price is down because they have not sold...  that if they hang onto it long enough it will come back to where they purchased and they can say "see, I did not lose anything"...  they hang onto a bad investment trying to justify their purchase of it instead of recognizing the obvious and they saying where is the money best invested... it might be the stock they own right now, but it might be another stock.  NOT recognizing that you have already LOST the value will keep some people from moving money into a better investment.

I believe that the bunny understands this. He is just having a provocative bad week.

Ha

 

[cute fuzzy bunny]

I absolutely understand the line of thinking. I just dont know why someone would subject themselves to it. I can choose to look positively at a situation or take the worst case and drive myself into the ground with it. Choosing the latter results in poor decisions, self destruction and depression. Choosing the former helps one maintain discipline. Neither alters the financial facts.

Even in the mitigating definition above, the words "economic harm" "damage sustained" "destroyed" and "placed beyond recovery" are well taken.

Should the stock market drop 99.99% today, I will have suffered no harm, no damage, nothing will have been destroyed and nothing will be beyond recovery. Unless I sell as an emotional reaction. Unless I thought I was an investing "genius" and held individual stocks in companies that defaulted. Unless I used poor asset allocation. Unless my planning lacked sensible safety nets and the ability to accommodate a portfolio value that is temporarily reduced.

Theres a message here, and it isnt that I'm trying to be contentious. Its that we have a strong history of what does and what doesnt work when one is trying to make money in financial markets. What works is taking a broad position using good asset allocation, and barring truly exceptional events, to hold the course. Having a backup plan. Maintaining a safety net. And not losing your cool when bad things happen. Then there is little chance of "losing" anything.

The worst thing on earth you can do is add up all the fears and negatives and beat yourself into a losing strategy as a result.

But maybe it's all different now. Maybe a huge downturn IS right around the corner. Maybe the holders of primarily cash and fixed instruments will see what they've long expected and have their pickings of the market through a horrific 5 year bear market or a 10 year secular bear. Geez louise, if that was my idea of what to look forward to, I'd have to strap on some of my kids diapers cuz I'd be crapping my pants three times a day in fear.

Or maybe sentiment is good, valuations are decent, and a few trillion bucks worth of cash thats been "sitting on the sidelines" gets deployed and we see a nice smooth bull for 10.

In either situation, I have a plan that works. And I dont "LOSE" anything. And I know for a fact that nobody knows whats going to happen except for someone who was the lucky guesser of the day.

What I know for sure is that waiting is a fools game, and that the price of weasel cheese, the south american hogwart political position, the chinese incursion and the m5 to g5 pricing ratio are as good or better than any other predictor of whats going to happen.

Now put on your helmets, get in the game, and win one for the bunny, goddammit.

 

[justin]

Geez louise, if that was my idea of what to look forward to, I'd have to strap on some of my kids diapers cuz I'd be crapping my pants three times a day in fear.

Pardon me if I'm overstepping my bounds here. I'm no nurse, so you may want to check with your wife first, but I'd recommend "right-sizing" some adult diapers onto that a$$ of yours. Those little baby diapers just won't hold all the $hit you are capable of spewing forth.

(sorry for gross imagery )

 

[cute fuzzy bunny]

I thought there was a slim chance someone would "go there". Glad to see my concerns werent misplaced

However in response to your issue, I have duct tape.

 

[HFWR]

Duct tape will even fix a bear market...

 

[Maximillion]

Your Portfolio declines $20,000, that means, using 4% withdrawal you hypothetically have to cut back your spending $67 a month.

Next Year it could go up $20,000, you can now increase your spending by $67 a month.

Gains and Losses are spread over a lifetime, not at a particular moment.

FA's can never be right all the time, but people measure tham at that moment.

 

[sgeeeee]

Duct tape will even fix a bear market... 

Who makes duct tape? Maybe we should invest in them. . . . and whoever makes diapers.

 

[Texas Proud]

Hey Bunny,

Great post... and I actually do know where you are coming from and I am not at all directing this at you, because I think you 'get it'.. and let me also say that I am not one of those doom sayers either... I am 90% in stocks....

But, using your example... if the stock market when down 99.99% you say you did not lose anything.... UNTIL YOU SOLD.. but, under a good plan, you know you did because you would REBALANCE sometime as a good investor would... if you had not lost (or gained) you would not have to rebalance ever unless you sold because you have NO GAIN in any asset class and NO LOSS (or less gain) in the others...

Again, I am trying to get some of the people who do not understand to change thier thinking... as I have said, I have heard lots of people say the stock they own is worth 50% of what they paid for it, but they have not lost anything because they had not sold... to me they are deluding themselves into keeping a bad investment.. What I try to tell them is... today, what is the best investments for your dollars... if it is NOT the stock you own that you have a value loss, sell it and move to something else... it is this notion of 'not losing until you sell' that keeps people in bad investments because the do not want to admit a loss...

Now, I know that I will not change your thinking at all... it is like a friend of mine who believe that the gold system is the only way to go... I ask an economics professor how can I 'argue' debate with him to change his mind... he asked 'does he actually believe what he says', I said 'yes', he said 'drop it, you can not change his mind'.... so, I will take this sage advice and agree to disagree..

 

[cute fuzzy bunny]

I cant disagree with most of what you said, except for the rebalancing part. Come on, lets not get into weak semantics, but when rebalancing, i'm not buying lost assets with found money. I'm using appreciated assets to buy more depreciated assets.

I will fully agree that I dont think anybody every changed anyones set mind in person or via an internet chat board.

Its sad that people will spend their time so fearful of a loss that they'll fail to win as a result. Even sadder that when good buying opportunities come around, that people will chew themselves up over their "lost money".