So I guess we’ll need to wait until you retire before we know how well your simple strategy works.
Future retirees buying stocks in January 1929 didn’t end up too happy. And the S&P 500 P/E was then 17.8 compared with today’s 25.6. Ignoring recessionary periods, the only precedent for P/E this high was the 1999-2000 bubble.
Don’t get me wrong: I’m not playing Chicken Little and have much of my own meager savings in stocks (though, smartly or stupidly, I’ve been inching away from N.Y. markets toward Asia’s). Your simple strategy will probably work out fine for you; it just seems like your incurious confidence is a little too brazen.
Well, yes. But in all seriousness the US stock market has outpaced US inflation in practically every 15 year or longer interval. Now why is that? Because we keep building stuff and we aren’t printing that much more money relative to stuff being built.
And it’s not that I’m incurious. I just don’t think Donald Trump is chaotic enough to counteract the long term growth. Even if we get in a war or two. The one thing that does concern me and I mentioned earlier in this thread is the rise of AI and robotics. We need to start seriously rethinking how currency is distributed as labor becomes decoupled from productivity.
1/25.6 is almost 4%. Now look at returns for your fixed income investments. 4% looks pretty damn good.
And remember, P/E doesn’t compare apples with apples. You’re combining a trailing indicator (earnings) with a future indicator (price). The fixation people have with this ratio is unhealthy.
Yes. As I pointed out, P/E’s are often quite high during recessionary periods. But note that trailing profits right now are quadruple what they were in 1998 during the Great Clinton Boom. Can you be sure they will be even higher next year?
I do agree that stocks are likely still a good investment, given the peculiarly low interest rate environment. I merely thought it pertinent to call attention to another Doper’s incurious optimism.
When I was in my 20s, I could put my paycheck in the bank and get 4.5% off a passbook savings account. So, for the risk of investing in stock, 4% only looks damn good because that is the revised normal.
That’s true. 4% only looks good by comparison. But that’s why I think we’re no where near a significant downturn.
Look at it this way. If you’re a business looking to expand, how do you judge the feasibility of a new project? Your primary limiting factor is your cost of capital. With low interest rates as they are now, capital is virtually free - if you can convince someone to lend it to you.
So virtually any new endeavor with a positive rate of return after your capital costs is going to get the green light. That means more capital spending, more jobs, more money flowing through the economy. With more money, you have more lending and more expansion.
So my perspective on the current state of affairs is that we have a very long way to go before we enter a period of economic contraction.
Of course all of that could change depending on how the fed handles things. If we get a fed chair who is overly hawkish and decides to raise rates too much too quickly, that could put everything into a very different light.
Sure, but it’s still beneficial to facilitate trade and detrimental to hinder it. Right now, as far as Trump succeeding in doing anything, it’s largely been to protect big business interests with tax cuts and deregulation. Not great for american society and inequality but it’s not surprising that in the short term it’s boosted the economy.
Trade becoming more difficult or costly will have a hit on those at the top however so might start to flatten the curve.
Those predictions are not coupled. So the fact one may have been bad (and note that a prediction being *bad *is not the fact it was incorrect (as we cannot know the future), it’s if it was based on shaky logic) doesn’t mean that the other is/was.
Not quite. The U.S. Prime Bank Loan Rate (“the interest rate that commercial banks charge their most credit-worthy customers”) is currently 4.25%. This is higher than it was during the 1950’s or during much of the early 2000’s. Note that private individuals can invest in this sort of paper through their bank.
Just for fun, I downloaded four September interest-rate series from the Federal Reserve Bank of St. Louis. (If the chart is illegible, you have probably erroneously selected the “Sultan: Please break CODE tag” option at the bottom of this page.)
It sounds like you’ve forgotten about the explosion of the credit bubble 10 years ago, or you had no consequential stake at that time. Let’s look where you’d be in a Dow index fund. On October 12, 2007 it was at a record high of 14,093. Just 17 months later it was more than cut in half, at 6,626.
I know I’ll regret not getting your definition of “tremendously low” or “societal collapse” up front. But with your buy and hold strategy, if were 50 years old at that point, you would have seen your retirement savings take a severe kick in the balls with a 50% cut. There’s a good chance you’d have lost your job and would have to start tapping your funds at a dirt cheap sale price to stay afloat. You would have been watching in agony as it took 2, 3, 5, as long as 6 years for the market to return to normal.
Society didn’t collapse for everyone… just for buy-and-hold investors like you, who were getting close to retirement and getting stuck holding the back. It also was damn painful for everybody else as well, for young wage-workers who saw their capital vanish and were essentially starting over. The tragic thing was that the credit bubble wasn’t a secret. You can probably pick up 40 weekly issues of The Economist and other financial papers warning in great detail how this was unsustainable. The bullish response was simply that credit derivatives had changed the fundamentals, so valuations were no longer as obvious as it used to be. It’s different this time.
The last time I heard that line and ignored it, I got scalped in the dot-com bubble of 2000. I was young, I had little at stake, but it still hurt. I learned to bail out of bubbles when people say this time is going to be different, because it never is. It sounds like your investing horizon is 30+. If so, bully for you. Sounds like you’re a long way from retirement and likely have lots of career options ahead of you. But you should know that as you age, your perspective changes due to inevitable life experience and narrowing of prospects.
And the one thing I with I could tell my past self would be… when the macro signals are getting dangerously high, then it’s time to risk leaving a little money on the table. Because “this time” is never different.
Yeah, people in their 50’s have a different time horizon and perhaps shouldn’t be 100% in stocks. Since I’m not in my 50s, a crash is a buying opportunity. And if you didn’t sellduring the dip you didn’t lose anything. If you had x shares before the dip you had x shares during and after. That’s the whole point of buying and holding or a strategy like dollar cost averaging.
Yep. Zero interest rate policy coupled with unprecedented expansion of central bank balance sheets over the past decade is a good enough explanation for me as to why asset prices just keep going up. The huge amount of liquidity injected into the system has to go somewhere. I don’t foresee anything changing until this chart starts to turn around.
IDK about China and Japan, but for the US, the trillions in liquidity created by the fed is locked in bank reserves. IOW, the only use that money can be put to is to meet reserve requirements for new loans.
So far, that hasn’t been an issue banks have taken a very long time to return to normal lending practices. But that could become a problem if we return to the easy credit policies of a decade ago.
That’s why the fed has indicated that they will start to normalize their balance sheet. As they sell assets, that will reduce the money supply and drive up interest rates. But that only happens if lending doesn’t continue to increase since with every dollar loaned the money multiplier creates new money.
So it has to be a finely choreographed dance such that the sale of assets doesn’t get too far ahead of money creation via lending.
The Greenspan/Bernanke/Yellen Put is still in effect. There will be no choreographed dance, there will be a front porch shuffle with the Fed as Steve Martin and the markets as the Johnsons.
I know it seems like it should have been some kind of disaster, but for me, in my late fifties in 2008, it really was lost in the noise. Sure, my 401k dropped by 32% between 1/1/2008 and 1/1/2009, and that was with me buying stocks as hard as I could. The actual market losses were closer to the 50% that you stated.
Then the very next year between 1/1/2009 and 1/1/2010 my 401k increased by 50%. A lot of that gain was from stocks I bought during 2008 when everything was on sale. As long as you can keep purchasing down markets really are sources of opportunity.
Someone once said being happy about the stock market going up is like being happy about gasoline prices going up just because you’ve got some in your tank.
So at the time of the downturn, you either had a lot of liquidity in your 401k, meaning you sold out or accumulated cash in the boom times (following my advice! Great job!) Or you added a lot of cash to your 401k (seems dubious, with the $15K annual limit or whatever it was in 2007)
Then you “bought stocks as hard as you could” in the downturn. So you took all this liquidity and spent it on these excellent stocks… which also is interesting, since most 401k don’t allow investing in individual stocks. You must mean you were buying mutual funds, which of course can include stocks, but you’re not exactly the one picking the deals here, are you?
Even if we ignore the holes in your story, it validates what I’m saying. You want to buy in the bust period. You can only do that if you have some liquidity to play with. That means you protect your assets in the boom period, which is what I’m advising.
I really don’t understand all these people saying that obviously you need to buy low and sell high, and then insist that they aren’t selling around the peak. That means either you think you have a superhuman ability to know exactly when to get out, or that you’re just gambling and hoping for the best, or that you’re really not doing anything you say you’re doing.
No holes there. If your allocation is say 80/20 stocks/bonds and the stocks drop 50%, then you switch bonds funds you already hold for stock funds and put new contributions solely into stocks. No need for “a lot of liquidity”. No need for individual stocks.
Trade deals with the U.S.A. have been occuring since 1789, and Canada has been solely responsible for it’s trade deals since 1931. Or is it 1982? Some trade deals are better than others, and they can all be renegotiated.
The modification, or ending, of NAFTA isn’t going to end trade between Canada and the U.S… Nations want to make money, companies want to make money, investors want to make money, employees want to make money, and most voters want to earn money. Trade between Canada and the U.S. will continue, in spite of any internal politics.
As far as those “predictions” being coupled, one was a statement (Some people have been predicting a slump in the economy), and the other was a point in time (ever since …).
Semantics. If you can convert to cash in a day or so, that’s liquidity. Or sufficient liquidity to demonstrate my point, which is, if you consider market crashes as a buying opportunity, then you must consider market booms as a selling opportunity. Otherwise you’ve got nothing to buy with.
And the larger point I’m addressing is the incoherence of some of the conversational points I’m hearing. i.e. people saying they’ll stay fully in stocks while the market is high, and then pick up all the bargains when the market crashes. No. That’s not how that works, not unless you have a crystal ball to call the crash right before it happens. Either that, or you weren’t completely honest about being 100% exposed to stocks.
Nobody ever said the end of NAFTA would be the end of trade. It would be a huge change to how everybody trades. Change creates uncertainty, uncertainty destabilizes markets. Trade will continue in the aggregate, but some companies and sectors will go bankrupt because they can’t adjust fast enough or because it changes their business models.
I am all for creative destruction and market darwinism. But I want companies to bankrupt because they’re poorly managed, not because it’s too hard to keep up with Trump turning the trade world upside down every month or so. Everyone benefits from political stability.
