Overconfidence In Market?

[RenoJay]

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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]

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Originally Posted by W2R 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]

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Originally Posted by kjpliny 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]

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

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Originally Posted by COcheesehead 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]

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Originally Posted by kjpliny 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]

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Originally Posted by NW-Bound 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]

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Originally Posted by dtbach 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]

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Originally Posted by 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.

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]

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Originally Posted by Cut-Throat 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.

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Originally Posted by 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...storical-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?

[marko]

What a glum thread!

But lets also remember that during the Great Depression there were people (my grandfather among them) who made a fortune. Not everyone was destitute. IIRC unemployment was 25% meaning 75% still had jobs.

I'm not saying it wasn't horrific but there were opportunities out there. Please! I'm not trying to be provocative or minimize people's pain at the time...let's not go down that path!!

Again, I suspect that were it not for the modern controls in place, 2008 could've been worse than 1929 but for a number of reasons it was kept in check. While we must learn from it, I just don't see us able to compare today's modern markets with 1929.

How many of us here on this forum took advantage of stock or real estate opportunities during the '08-'09 ("end of the world as we know it") period? I sure did.

As an aside, my great-grandmother dropped dead on October 29, 1929 when her husband came home and told her the banks were closed. Right there in the hallway...so it wasn't all sunshine for her son, my grandfather.

[COcheesehead]

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Originally Posted by W2R Could either of you link to a source like I did? Thanks!! Much appreciated.

https://www.investopedia.com/feature...s/crashes5.asp

From the link...
A string of terrible days led to a more than 40% drop in the market from the beginning of September 1929 to the end of October 1929. In fact, the market continued to decline until July 1932 when it bottomed out, down nearly 90% from its 1929 highs.

[RunningBum]

I like the balance brought by a doom and gloomer like the OP. I don't think things will get that bad, but it does remind me that my plan should handle really bad cases. Just because we don't want to hear it doesn't mean it can't happen.

[24601NoMore]

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

Here's a good post on BH from a 95-year old member with more data on year by year returns in the 1929-1932 meltdown (89%) as well as the 46% drop between 1973 and 1976. He also shares some good experience on what living through a "real" bear market is like..I especially thought this part was relevant..

Figures cannot convey the horrifying and debilitating effects of a bear market. You watch in agony as month after month your life savings evaporate before your eyes. Gloom and doom talk is everywhere. Nearly everyone else is selling. You have no idea when, or if, your portfolio will stop losing money.

Your friends and relatives urge you to sell. Nearly all financial experts recommend "sell". You are ridiculed for trying to hold on. You begin to have self-doubt. Despair sets in. Buying stocks is unthinkable. Suicides increase. That's a REAL bear market.

This is why many people in retirement have 40-70% in bonds.

I'm slightly south of 30% in equities (need to update the spreadsheet to see exact % and have not gotten to it recently), and even THAT is making me apprehensive for reasons mentioned previously. To each their own, but seeing as many posts as I have where such relatively high equity allocations are being mentioned for people in or near ER is alarming..

[pb4uski]

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Originally Posted by W2R Could either of you link to a source like I did? Thanks!! Much appreciated.

I found this..... looks like a 90% drop to me.... from a little short of 6,000 to below 1,000. That said, my understanding is that much of the drop and economic carnage it caused was due to irrational exuberance and borrowing money on margin to invest in the market... when the market went down 25% the margin calls started and people were wiped out and having to pay their margin loans resulted in other economic pressures. Margin lending reforms in the aftermath will prevent that sort of depression in the future (not that investors can't borrow money with other collateral for investment).