That’s really interesting, thank you. It sounds like you made some great choices, strategically. We think carefully about our money now so I imagine that’s not going to change in the future. When I think about how clueless I was about money in my twenties, I cringe. A lot of missed opportunities there. But, well, I learned by failing. The real breakthrough for me was You Need a Budget, which made everything so much easier to keep track of. This would have been what, 15 years ago? Before everything required a subscription and you just bought software. I still use it every day.
Then once I mastered that, it was like, okay, we have money now. What do we do with it?
That’s the ideal person to be using a Roth. First a disciplined person like that? Likely going to make a higher income later. But even if not those funds will appreciate mightily and even if they pull out enough that it would otherwise be at 24% marginal rate it is zero more to them.
It’s making my head swim when I can easily find just as many reputable and knowledgeable sources that state with confidence that either AI is absolutely a bubble ready to pop, as those that assert it’s as sound as houses and we should pile in now.
My ‘play money’ (i.e. active investment outside managed retirement funds) is only about 5% of my total investments but I’m still loathe to jump on the AI bandwagon with it. I guess I’m in the ‘probably a bubble’ camp.
I’ll offer another way to look at the AI bubble, or bubbles in general.
Free markets must have bubbles. You don’t need to know more than that to make money in the stock market.
AI is not going to fail. It’s going to succeed. Same with the dot com bubble. Internet was not going to fail, it was going to succeed.
However, not all the companies involved were going to succeed. Most were going to fail. But which ones? That’s the bubble. Then it pops, as it should, and the strongest companies come out the other side. Almost every single dot com company failed. Amazon succeeded. It’s all worth it as an investor just for Amazon.
Since you can’t know which company will succeed, just invest in broad funds/etf’s. Know they are inflated at the moment and it must pop. However, your broad stocks will capture the few companies that succeed which will outweigh all the thousands that fail. On average, your stocks will go up over the years/decades. It’s not more complicated than that unless you want it to be.
The problem with bubbles has more to do with psychology. It’s the thinking/expecting/hoping that your stock value is cash all the time. It’s not. I trick myself into that all the time. I tell myself that’s not real. That’s not cash even though it really looks exactly the same as if I were looking at my savings account balance. If I want stock value to be cash, then I need to sell it now. If that’s not enough to retire on, then it’s not enough to retire on, and I’m gambling/fingers crossed what I know must happen might not happen right now.
And even Amazon went down - by a lot - when the bubble popped. Remember it wasn’t making any money back then. Sure the market will recover eventually, and those who hold on will be fine, but those who need to sell - perhaps because they are retiring - might not be in such good shape.
Also, the popping of the bubble spreads to industries outside the sector with the bubble. In 2001 the general economy was good. Today it looks like AI is propping up a weak economy. But who knows when it will pop. In 2008, even though it was obvious to some that the mortgage market was a disaster waiting to happen, it took longer than expected. The investors highlighted in “The Big Short” almost went bust because it took so long for their bets to pay off.
As a novice investor, the reasons don’t matter at all. The only thing I need to know is that the market will, it must, crash every 7 years or so. That’s just a part of it how it properly works. Why it happens in each instance is fun to talk about and discuss, but it will never change the fact that it is going to happen.
This is exactly right. The market must do that. With this information, it should be treated only as a long-term investment. Anything short-term is a bit of a gamble.
The only thing that matters is whether it’s true or not true. A free market necessitates ups and downs.
The market drops a fairly big amount (crash, bear market, bubble, etc - I’m not being technical) all the time. It’s going to happen. Whatever the particular mechanism or reason for that particular crash can’t be predicted. After that happens, the market goes back up again. Every time. On average, you make money if you stay invested and don’t touch it for a long time.
I don’t think there is any disagreement here, but I can certainly cite sources.
What causes the ups and downs is certainly debatable. It’s probably not knowable even with hindsight. Not really. I think there is a general mechanism (a free market), but it really does not matter because it’s not predictive other than the basic premise.
It would be easier if we knew when the ups and downs would occur, or if we could prevent the downs. We can’t know or do that, nor is that possible in a free market. It will go up, it will go down, and we must rely on averages of the long-term (20+ years) of those ups and downs. It’s like the climate, it will, on average get hotter over the next 20 years. There will be hot years and very cold ones, but on average, it will slowly get hotter. Just because I get caught “selling” in a cold year, doesn’t mean that is not true.
We do know that the ups and down are going to happen in the market. If money is needed in the short-term, it’s always a risk a person will get caught in a down-term. The only way to prevent the risk is to not be invested in stocks.
Late: 7 years is an average. I just mean you should expect it to happen multiple times over your life.
That is a very US-centric statement and not at all true for other parts of the world. Which strongly suggests that this statement will not remain true forever in the USA.
Yes and no. It’s averages. You will get outliers; good and bad.
If we’re talking averages, with a free market reinvesting dividends, I’d say it’s true anywhere. Over enough time (I’m using 20 years). That’s just how free markets work. Up n down, trend up over time. Rules and regulations and all the rest we can debate if they help blunt the ups and downs and by how much, or do they hurt and by how much.
It might be human lifespan centric. Like, the major counter-example I can think of is Japan. If a free market Japan takes 30 years to recover, what do the 20 year averages really mean or how is that helpful to plan for my retirement. I’d agree with that. But that doesn’t mean the Nikkei doesn’t, on average, produce good returns over the long-term. Maybe Japan is the outlier and not the US. “Average” does have a specific meaning that is not always helpful (e.g., 1 excellent year, many bad years would be an unhelpful/misleading use of an average).
With all that said, I think it’s true but this is about the extent of my knowledge. The take away for me is to remind myself that stock value does not equal cash even though my statement has a number that looks and feels a lot like cash - down to the penny. You can’t have the certainty and not the risk. In a free market, there must be down years that must happen. Tread carefully if I need cash in the short-term. But no need to panic if you don’t need money in the short-term.
I’m kind of basing my life around it being true, so let me know =)
I believe the central issue that @Pardel-Lux meant was that markets go up long term … in stable countries that have a continuous government, no hyperinflation, are not invaded, do not suffer revolutions, etc.
At least one of those calamities has happened to almost every country in Europe at least once in the last 150 years. And did a total wipeout and reset of their stock market when it occurred.
The USA is a total outlier in not having any of that happen to them. Yet.
I was not ony talking about Japan’s 30 year bear market, but also about Moscow’s stock exchange 1917, Eastern Europe’s in general after WWII, Argentina (no date necessary), Tehran 1978/79, Cuba 1960, and several others if you look for them, I am sure. The term that seems to be eluding you is survivorship bias, and there is a nice wikiarticle about the subject that even includes a reference to the Straight Dope on the question of cats falling out of windows and surviving.
You are betting on American exceptionalism, and I wish you luck with that.
ETA: Or what LSLGuy said. Good to know I am not so cryptic to read as I sometimes fear.
In 2008 I just laughed off the crash and kept buying, and it worked out very well. That wasn’t due to me being smart, it was due to me doing it wrong in 2001 and getting burned.
The people who suffer are those who lose their jobs and not have the reserves to ride it out.
Ok, I get it now. I am assuming there is a free market. Obviously, average returns breaks down when there is nothing being traded / no free market anymore. That would be an apocalyptic event.
This conversation could now go a lot of ways. I don’t think any of it changes my thoughts, though. Japan is probably still relevant example since it stayed a free market. The other examples didn’t have Apple. I think we’ve already had this conversation a few months ago. You’re suggesting scenarios where there is cataclysmic breakdown of the American free market. I’m betting on these American companies surviving because they are needed/used worldwide. I suppose there is an American bias in that, but they are the biggest and best companies in the world, they just happen to be American. Anything that affects all of those giant “American” companies, will almost certainly be affecting the rest of the world just as much.
Like what set of scenarios would ever make someone not want to own Apple/other good American companies? Even if zombies came only to America, Apple still feels like a good bet. Right? I realize as I’m typing this that I’m exhibiting survivorship biased behaviors, but what is the alternative? A worldwide ETF? I have those and you’ll get similar average returns, little less, but have the exact same “ups/down but trend up” over time premise.
Yes, that is the reason I wished you luck. I am an egoist too.
Imagine someone in power decided that foreigners were stealing from America by buying their shares, just like they are stealing from Americans by buying their debts. And like the hypocritical Mar a Lago accord hinted at converting US bonds to bonds with a fixed low interest and a maturity in 100 years, this populist could suggest that foreigners should be punitivey taxed, or their assets frozen. I would like to exit before that, and never come back, would you not, if you were not US-american? Inconceivable, you say?