What good is the stock market?

[oldcrowcall]

1. If it goes up big one day it goes down big the next day.
2. It keeps me awake at night.
3. I'm told I need it as a hedge against inflation but if there is a whiff of inflation it goes down.
4. Sometimes when it goes down they say it is high oil prices. today the said it went down because oil dropped significantly.
5. When it goes up for several days and I crow to my wife - she says- wait till next week - she is usually right.
Firecalc says I don't need much if any in equities for a 100% (I'm ER but now 66).
I'm 60% equities. So- what is the best answer, only look once a year or get out?

 

[Cut-Throat]

Well, if FireCalc says you don't need equities for a 100% SWR, and the market drives you nuts, I'd get out if I were you.

For folks that need inflation protection for 40 years or so, they should never judge the market on daily, weekly, or even a yearly basis. Think in terms of 20-30 years. There has been periods in the stock market history, where the market did not do much for 15 years or so.

 

[laurence]

Weeeeellll, we could go into historical returns, long term trends, diversification theory etc., but if you don't need it, and it bothers you, don't do it! I would reduce your holdings if you are 66. Maybe go down to 40%, shift your equities to more conservative stuff like utilities and dividend paying stocks, and build a short term CD ladder with that 20% of your portfolio you just freed up until the whole inflation/economy thing becomes a little clearer (nearly flat yeild curve, very little incentive to lock up your money long term). You in TIPS with any of your money?

Caveat: I'm just a punk 31 year old in accumulation phase.

EDIT: Ah CT says it better than I could, and faster too!

 

[retire@40]

It keeps me awake at night. ...So- what is the best answer, only look once a year or get out?

If it keeps you awake at night, you should get out.

I'm heavily into equities, but the fluctuations don't bother me (much).  Of course, a one day 33% or more sustained drop would concern me, but my feeling is the US is not at the end of it's empire, so in the long run I will be fine.  If that ever happened, I may even consider it a buying opportunity.

For example, yesterday the market brought my portfolio up $5,600, yet I didn't feel like I hit the lottery.  Today, my portfolio dropped $6,700, yet I had a great appetite at dinnertime and feel no angst.  Even my wife has a "whatever" attitude when I tell her how much we are up or down at the end of the day.  Some days I don't even look.

 

[wabmester]

The traditional advice is to reduce your equity exposure as you get older. The only reason for this is to reduce volatilty so you don't clutch your chest on a bad day.

I'm still young, and there are a few reasons that I don't have a high equity exposure:

1) I don't need that much growth.

2) I don't like volatility.

3) I believe that stocks will grow as the economy grows, which has typically been about 2-3% real growth. I can get 2% real growth in risk-free bonds.

Historically, the market has grown faster than the economy, but that's because we've had considerable P/E growth (or, conversely, risk premium compression). I think that P/E growth is unlikely to continue, so if I can get the same long-term market returns with less volatility, I'll take it.

 

[oldcrowcall]

Laurence, about 6% of my stash is in TIPS. They haven't done much in the last few years. I find that being in the distribution phase promotes a whole new mentality as regards to market volitility.  Without the steady earned income I am willing to give up the "rush" of of the upward swings on the market.

 

[wabmester]

about 6% of my stash is in TIPS. They haven't done much in the last few years.

Over the last 5 years, TIPS have averaged about 9-10%. Over the same period, the S&P 500 has averaged a little less than zero. Who knows what returns will be going forward. The only guarantee is that stocks will be more volatile than TIPS.

 

[Mr._johngalt]

Over the last 5 years, TIPS have averaged about 9-10%.   Over the same period, the S&P 500 has averaged a little less than zero.    Who knows what returns will be going forward.     The only guarantee is that stocks will be more volatile than TIPS.   

Whoa! I have not really studied TIPS even though many people are
pushing them. 9-10%? This is over the whole 5 years , right?
You're not saying 9-10% per annum??

JG

 

[wabmester]

Whoa!  I have not really studied TIPS even though many people are
pushing them.  9-10%? This is over the whole 5 years , right?
You're not saying 9-10% per annum??

It was around 9-10%/year, but about 1/2 of that was due to appreciation as real yields dropped. Going forward, I would only expect CPI+2% or so (which this year will mean about 7%).

 

[Jarhead*]

1. If it goes up big one day it goes down big the next day.
2. It keeps me awake at night.
3. I'm told I need it as a hedge against inflation but if there is a whiff of inflation it goes down.
4. Sometimes when it goes down they say it is high oil prices. today the said it went down because oil dropped significantly.
5. When it goes up for several days and I crow to my wife - she says- wait till next week - she is usually right.
Firecalc says I don't need much if any in equities for a 100% (I'm ER but now 66).
I'm 60% equities. So- what is the best answer, only look once a year or get out?

OldCrow:  I may (or may not), be in a similar situation than you.  I am a few years older than you and retired 19 years ago.
My wife was a homemaker all our married lives, and obviously has no pension.  I also left with no pension. (Point being, Soc. Sec. and our investments are going to have to carry us.)

You mention that the stock market was keeping you awake at night, and that you got 100% survival without the investing in the stock market.  (Whether that's literally true, well I'll leave that to you).

I came to somewhat the same realization about a year ago, and although I didn't jettison all my stocks, I cut back a whole bunch.

While age was certainly a factor, it is also my belief that both stocks and bonds have had such a tremendous run-up since the early 80's, that we are going to be taking a breather for a while.

In any case, what I decided to do is to cover the next 15 years or so with non-equities and allow the stocks (30%) to do what they will during that period of time.(Volitility is not your friend when you are withdrawing).

If you have enough to cover the way you spend your time, and life, and can do so without the ups and downs of the stock market at this stage, why bother?

Regarding inflation, I would feel much more comfortable in staying short, (especially if we get into a stag-flation invironment).  

Stocks and bonds during the 66 to 82 period didn't protect us much did they?

Anyway, good luck and congratulations on being able to bid a fond farewell to Wall Street if you choose to.

Regards, Jarhead

 

[Mr._johngalt]

It was around 9-10%/year, but about 1/2 of that was due to appreciation as real yields dropped.    Going forward, I would only expect CPI+2% or so (which this year will mean about 7%).

Still not bad. I am taking a lot more risk for my 7%+

JG

 

[Mr._johngalt]

If you have enough to cover the way you spend your time, and life, and can do so without the ups and downs of the stock market at this stage, why bother?

Why indeed?

JG

 

[Eagle43]

I think the adage about 100 minus your age holds true. So you should be about 34% in equities. I'm 62, and have a little less than 40% in equities, thanks to cash and a small IRA my broker handles. I'm happy with that and will stay there until 70, when 30% equities will be sufficient. This allows me to sleep at night. Also, since I have pensions, some wise people say I should be 100% in equities, but no way, not me. Sleeping is good!

 

[Jarhead*]

I think the adage about 100 minus your age holds true.  So you should be about 34% in equities.  I'm 62, and have a little less than 40% in equities, thanks to cash and a small IRA my broker handles.  I'm happy with that and will stay there until 70, when 30% equities will be sufficient.  This allows me to sleep at n Also, since I have pensions, some wise people say I should be 100% in equities, but no way, not me. Sleeping is good! 

Eagle43: You big chicken! You could afford to leverage your home equity into the market.

Bet the White Sox, though, if you want to make some easy money

 

[Michael]

I'm told I need it as a hedge against inflation but if there is a whiff of inflation it goes down.

The studies they point to tend to only compare bonds and equities. The studies have figured out that bonds are vulnerable to inflation long term. So many people have consequently fled bonds into equities that the dividend yield on the S&P has fallen to under 2%, with unknown implications for the future inflation protection of the S&P.

 

[ShokWaveRider]

Sorry, but I am quite opinionated on this one. Assuming one has enough of a stash, I believe that once "FIRED", capital preservation is king. A big enough stash (Not huge now, a modest stash) and regular fixed income can weather most storms. Now when I was working, that was not the case, I invested in a WIDE range of diversed investments, some won, a lot lost. I will safely say my FIRE strategy had not a lot to do with investing wisely. Personally I am better at saving, and maintaining my capital than I am at making money on the stock market. I have proved it many times, and I got the hint. I can teach anyone how to save regularly, and be disciplined about doing so, but still afford the good things in life. If anone has ever been to my web site, they know I am a sports car buff. But leave the stock market gains to Buffet and such like. OK. I will never be a gazillionnaire, the positive side of that is I will never die in fast yellow car on the freeway either (Joke, cannot afford to buy one!, not true actually, can afford to but am happy with that thought and a more modest car, as opposed to actually buying one, after all I have had them all now).

Back on point. I pulled out of the stock market just 2 months before the last 2001 stock dive. At the time I had a financial planner, and he advised STRONGLY against it, I of course ignored his sage advice. After the fact he conceeded that if I had "bottled" my strategy, and sold it at the time, it would have been big. Why did I get out. Some luck, a lot of luck actually, but I was so unhappy with the market swings at the time, I thought about it every night. After I pulled out, I slept like a baby. (One of the points mentioned here I believe) I have been in various fixed income investments ever since and sleep just fine.

Die hard investors will disagree of course, and that is fine. But if I loose 25 - 30% of my nest egg, I would have to go back to work. That I do not like.

SWR

 

[Eagle43]

Eagle43:  You big chicken!  You could afford to leverage your home equity into the market.

Bet the White Sox, though, if you want to make some easy money

Cluck, cluck, cluck. Been laying rotten eggs all my life.

You could be right about the White Sox, but I'm rooting for the Astros. BTW: I talked to SIL in Houston yesterday. Apparently it's no socks weekend in Houston. Nobody wears socks, especially white ones.

 

[retire@40]

Assuming one has enough of a stash, I believe that once "FIRED", capital preservation is king. A big enough stash (Not huge now, a modest stash) and regular fixed income can weather most storms.

Nothing wrong with that plan, but assuming you have $1mil and need $40K a year, where could you invest today in a conservative investment to give you a 4% SWR to last you the next 40 years?

 

[ShokWaveRider]

Nothing wrong with that plan, but assuming you have $1mil and need $40K a year, where could you invest today in a conservative investment to give you a 4% SWR to last you the next 40 years?

Our average return on individual fixed income investments this year before taxes has been about 4.9% on a ~$1.85m 'ish Stash (give or take). Some making 5.15% others 5% others 4.7%, I even have a smalel one making 6.6% left over from the glory days, and so on. I consider $100k - $200k small, I like to put $300k - $500k in a single institution to gain leverage, they will often add some small incentive if you negociate, I get a 0.5% premium at one of my institutions. Now with a Credit Union, you can get NCUA insurance over $100k depending on your beneficiaries, we have $600k insurance per joint account. At one point I had some single investments making 8%, sadly now since expired. Now $300 - $500k of the stash will go into a home at some point, when I finally decide where to lay my hat, and home prices come down a bit. Currently we are renting, very comfortably and reasonably I might add.

@5% 1m will give you 50k before taxes and inflation. I believe one can control their own level of inflation somewhat after retirement, others disagree. Taxes are inevitable. An ideal fixed income return for what you are requesting I think would be 5.5% - 6.5% be patient, it is coming. When it does lock it in.

I invest mostly in Credit Unions, I watch Corus Bank Closely, but have yet to commit funds to them. This web site is a GEM for getting the latest fixed income updates. They get it here before BANKRATE.com and others do. We love to post our findings immediately we find them, that is great I hope it keeps up. I check this site every day, and that is a prime motivating factor for me to keep doing so. That and there are no annoying adds of course.

The lady accross our street calls herself a financial planner, and does not consult Bankrate.com at all, actually sh did not even know it exsited till I told her. Most finiancial planners (IMHO) are brainwashed into selling their employer's preferred investments, and are so sure they are the best. I am sure independents are more savvy, but there must be some bias some place based on their revenue stream. We are in America after all. Which is why I think financial planning is mostly a sales avenue for the employers.

If I was a so called financial planner, I may go to one of my clients daughter's graduations as a doctor, only after I had made a ton of money off her dad!

I am in the process of organizing my thoughts on a web site, but it will take a few months. It worked for us, it may work for others.

SWR

 

[brewer12345]

I am in the process of organizing my thoughts on a web site, but it will take a few months. It worked for us, it may work for others.

SWR

Uhoh. The web address wouldn't happen to be passionsaving would it? H****, is that you?

 

[wildcat]

Who the hell is this H**** character everyone keeps talking about?

 

[REWahoo]

Who the hell is this H**** character everyone keeps talking about?

You can find out more than you want to know about this subject here:

http://www.retireearlyhomepage.com/cgi-bin/yabb/YaBB.pl?board=HOCO

 

[TromboneAl]

If it keeps you awake at night, you should get out.

But if he gets out and there's a sustained rally, he won't sleep at night either.

 

[brewer12345]

I guess you might just as well ask what good are CDs? After all, interest rates available appear to be below inflation, you pay taxes on everthing you make, and there is no upside beyound the coupon.

If you can't stand the heat, get out of the kitchen. Personally, I think it would be foolhardy to not own any equity, but you are the captain of your own ship. Just be aware of the possible downsides of your choices.

 

[laurence]

Who the hell is this H**** character everyone keeps talking about?

NOOOOO! NEVER ASK! IT SPIES ON US, PRECIOUS! WE HATESES IT! GOLLUM! GOLLUM!