Author Topic: 5 year bull market....are we due a cras...I mean correction?  (Read 17358 times)

Ferrisbueller

  • 5 O'Clock Shadow
  • *
  • Posts: 75
5 year bull market....are we due a cras...I mean correction?
« on: March 04, 2015, 04:01:30 PM »
5 years of bull markets across most of the worlds major indices.

While calling/timing the market is a mugs game I'm beginning to think of taking some of the risk off the table and switching some (40%-50%) of my portfolio to cash i.e timing the market !

Does anyone think there is a correction due?

Anyone derisking?

MikeBear

  • Bristles
  • ***
  • Posts: 390
  • Age: 60
  • Location: Michigan
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #1 on: March 04, 2015, 04:12:09 PM »
How would you "de-risk"? Put it in bank accounts, at .2% interest?

That's far more risky than leaving it in. Let 'er ride. The stock market ultimately always goes UP. If that ever changes, we are ALL equally screwed, so why let it worry you?


Ferrisbueller

  • 5 O'Clock Shadow
  • *
  • Posts: 75
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #2 on: March 04, 2015, 04:19:41 PM »
Park in cash
Market drops X%
Buy back in

MikeBear

  • Bristles
  • ***
  • Posts: 390
  • Age: 60
  • Location: Michigan
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #3 on: March 04, 2015, 04:27:56 PM »
Park in cash
Market drops X%
Buy back in

Ok, when would you propose to "buy back in"? What if after you "buy back in", it crashes further and you lose all that money?

Market timing is a BAD choice to base your investments on.

Put your money in when the markets down, put your money in when the markets high. It still ultimately goes UP eventually. All you should be concerned with is fee cost, and a keeping money in a long period of time in the market.

sol

  • Walrus Stache
  • *******
  • Posts: 8492
  • Age: 42
  • Location: Pacific Northwest
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #4 on: March 04, 2015, 04:32:26 PM »
That's a great plan.  How do plan to decide WHEN to park in cash, and what's your X percentage?

What do you do if it never drops that far?  How do you account for the lost value of depreciating cash holdings?

First, answer those questions for yourself.  Then back test your strategy against market history.  Then convince yourself that the market future is somehow related to market history. 

Then convince yourself that the thousands of PhD mathematicians working on wall street haven't already done this analysis in a more sophisticated way than you have.

If you really think you know something that the market doesn't, by all means post up your trades and then report back on how much you made. Don't forget your transaction costs.

Ferrisbueller

  • 5 O'Clock Shadow
  • *
  • Posts: 75
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #5 on: March 04, 2015, 04:52:31 PM »
That's a great plan.  How do plan to decide WHEN to park in cash, and what's your X percentage? Am considering shifting  40% to cash straight away, watching for next 6 months, if market drops 5% or more over any 1 week period will drip some cash back in - rinse and repeat.

What do you do if it never drops that far?  How do you account for the lost value of depreciating cash holdings? Good questions, I would hold out as above for 6 month sense check - then reinvest 20% and after another 3 months remaining 20% after id finished my humble pie.


First, answer those questions for yourself.  Then back test your strategy against market history.  Then convince yourself that the market future is somehow related to market history.  OK, hindsight ain't worth shit though. Market future is of course related to market history....companies and their results don't just "appear", govts dabbled and will continue to dabble with macro economics - calculating the degree of relativity between past and future is the hard part.

Then convince yourself that the thousands of PhD mathematicians working on wall street haven't already done this analysis in a more sophisticated way than you have. ....eh hello are you for real...when genius failed, financial crisis, active management not working, investment banks FAILING nassim taleb, Harvard endowment fund with Nobel laureates losing billions etc etc etc

If you really think you know something that the market doesn't, by all means post up your trades and then report back on how much you made. Don't forget your transaction costs. Will do !!!

kib

  • Stubble
  • **
  • Posts: 197
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #6 on: March 04, 2015, 05:00:39 PM »
Just a warning, I finally got money out of real estate and shoveled huge handfuls of it into the market, so it will 'correct' by 25-30% now and take 3-10 years to get back where it was, just like last time.  Sorry. 

I also washed my car, so you can thank me for the deluge of miserable sleet tomorrow.
« Last Edit: March 04, 2015, 05:02:45 PM by frufrau »

Psychstache

  • Pencil Stache
  • ****
  • Posts: 839
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #7 on: March 04, 2015, 05:02:26 PM »

While calling/timing the market is a mugs game I'm beginning to think of taking some of the risk off the table and switching some (40%-50%) of my portfolio to cash i.e. Timing the market

Why does this seem to be the MMM version of "I'm not racist/sexist, but (super racist/sexist statement)".

This topic gas come up it seems about once a week for at least the last 2 years. The consensus answer has been and continues to be no, just stay invested and keep investing.

sol

  • Walrus Stache
  • *******
  • Posts: 8492
  • Age: 42
  • Location: Pacific Northwest
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #8 on: March 04, 2015, 05:06:58 PM »
Just so we're all clear, the hypothesis you're putting forward is that the market is so unpredictable that even the world's smartest people can't predict it, and therefore you can predict it?

« Last Edit: March 04, 2015, 06:34:27 PM by sol »

Spork

  • Walrus Stache
  • *******
  • Posts: 5753
    • Spork In The Eye
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #9 on: March 04, 2015, 05:09:57 PM »
I don't know where you are in your retirement planning...  If you are FIRE and not earning money... maybe, MAYBE it makes sense to some degree.  But by "some degree" I DO NOT mean 40-50%.   I mean: You are going to have to pull some money out for daily living.  Maybe pull out 6 months expenses instead of 1 or ... whatever.

But if you are in a stash building mode, a correction might just be your friend.  Leave it there... but be more aggressive in your buying when you see the market falling.

Yes, this is still market timing.  Yes, it's probably just as dumb.  I'm just saying if you do it, go small.


nanu

  • Bristles
  • ***
  • Posts: 345
  • Age: 31
  • Location: Cambridge, MA
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #10 on: March 04, 2015, 05:13:31 PM »
Personally, I hope we're due for a correction in a few months.
I'll be starting my first job then and will just shovel any excess funds into the market, hopefully at their lowest point (but who knows?)
The market will go back up after some time, boosting my stash along with it

WildJager

  • Bristles
  • ***
  • Posts: 439
  • Age: 33
    • Can't complain.
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #11 on: March 04, 2015, 05:28:40 PM »
At the start of 2014, the financial media recognized that we were at a 5 year bull.  On average, there is a 10% correction every 5 years.  That is on average... which means absolutely nothing.  Those who listened to the talking heads who advocated reallocating their money in cash, wait for the dip, then reinvest missed out of the about 11% gains of the S&P 500 over the course of 2014. 

So, for fear of a 10% correction, they lost out on substantial gains.  Read "A Random Walk Down Wallstreet", then I hope you'll be convinced that market timing is a losing game.  You'll also learn that over the course of the last century, all the substantial market gains occurred during 5 individual trading days.  You read that right, 5 days made the positive market averages.  Those who were sitting in cash "waiting for the right time to invest" missed out on the great opportunity.

Will there be a correction in the future?  Sure, the market always goes up and down over time.  But those dips are simply a buying opportunity if you happen to have cash.  If not, wait it out, and the market will eventually recover.

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6742
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #12 on: March 04, 2015, 05:34:08 PM »

Does anyone think there is a correction due?


I bought $10K of equities yesterday. I'll buy more next month.

I have no idea what's going to happen.

By waiting you could miss 15% of growth and feed your money back in right before a 30% correction.

It really is pointless to time the markets. We can truck on for another year + before a correction. Can you really watch today's returns rolling by while you miss them in the hopes there will be a correction between now and the time you lose confidence and dump your money back into much more expensive equities?

-- Vik

Indexer

  • Handlebar Stache
  • *****
  • Posts: 1396
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #13 on: March 04, 2015, 05:52:33 PM »
Then convince yourself that the thousands of PhD mathematicians working on wall street haven't already done this analysis in a more sophisticated way than you have. ....eh hello are you for real...when genius failed, financial crisis, active management not working, investment banks FAILING nassim taleb, Harvard endowment fund with Nobel laureates losing billions etc etc etc

Right.. the experts are all wrong so that is evidence you are right?  The experts have a hard time predicting the markets because it is by its very nature unpredictable.  All the experts are also competing against other experts. 

Your entire rationalization that there could be a crash is that there hasn't been a crash in 5 years.  Don't you think you should have a stronger argument for moving 40% of your portfolio?  Imagine you had a financial planner and he told you to dump your existing plan and shift 40% to cash because the market has been up for 5 years in a row.  Would you take him seriously?

Quote
OK, hindsight ain't worth shit though. Market future is of course related to market history....companies and their results don't just "appear", govts dabbled and will continue to dabble with macro economics - calculating the degree of relativity between past and future is the hard part.

Is the market future related to market history?  Have you ever read, "past performance is not an indicator of future success?"  If it was as easy as calculating the degree of relativity between the past and future it would be done.  Wall Street calculates everything.  If there is a relationship between two numbers that can be measured, they measured it.  There are a few numbers that have relationships to long term returns, but even those numbers are useless for trying to make predictions in a time frame less than 10 years.  You are trying to make 6 month predictions.....

bigchrisb

  • Handlebar Stache
  • *****
  • Posts: 1158
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #14 on: March 04, 2015, 05:58:05 PM »
I'm guilty of partial market timing.  I don't sell stocks when valuations seem high, and I don't mess with my dividend reinvestment (all divs reinvested, either automatically or manually).  I do use some leverage (margin) in my stock portfolio however.  When I feel values are on the high side, as I feel they are at the moment, I tend to de-leverage the margin debt with my new savings. When there seems to be panic, I try to buy more on margin.

I guess what I'm trying to say is that I have trouble telling when stocks are expensive, however have a reasonable time telling when they are cheap, and I'm OK with plowing more money in when things seem to be a bargain. I'm not clever enough to identify when to sell them to overcome the friction of brokerage and capital gains taxes.

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1211
  • Age: 39
  • Location: Texas
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #15 on: March 04, 2015, 06:44:34 PM »
Look into ideas from Meb Faber and Gary Antonnacci for a start. There's dumb market timing and then there's intelligent market timing.

sol

  • Walrus Stache
  • *******
  • Posts: 8492
  • Age: 42
  • Location: Pacific Northwest
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #16 on: March 04, 2015, 06:53:34 PM »
Look into ideas from Meb Faber and Gary Antonnacci for a start. There's dumb market timing and then there's intelligent market timing.

I really like Meb Faber's work.  It feels like it SHOULD work, and I hear the siren song loud and clear:  "use data to increase returns!"

Unfortunately, reality has not been kind to his good ideas.  He may yet be proved right in the long run, but over the past few years his good ideas have turned out to be really bad ideas.

rpr

  • Guest
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #17 on: March 04, 2015, 07:05:04 PM »
For your reading pleasure. From:  skyrefuge. Thank you so much for this cautionary tale of smedlydb and his crystal balls. :)

http://forum.mrmoneymustache.com/investor-alley/crystal-balls/msg570684/#msg570684

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1211
  • Age: 39
  • Location: Texas
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #18 on: March 04, 2015, 07:19:52 PM »

Look into ideas from Meb Faber and Gary Antonnacci for a start. There's dumb market timing and then there's intelligent market timing.

I really like Meb Faber's work.  It feels like it SHOULD work, and I hear the siren song loud and clear:  "use data to increase returns!"

Unfortunately, reality has not been kind to his good ideas.  He may yet be proved right in the long run, but over the past few years his good ideas have turned out to be really bad ideas.

A market timing strategy is never going to beat a market in a strong, sustained bull market. The best strategy during a bull market is buy and hold. Where market timing shows it's worth is during a bear market.

That being said, judging any strategy based on a few years of data is incomplete. It really needs to be judged over a full market cycle.

Taran Wanderer

  • Pencil Stache
  • ****
  • Posts: 556
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #19 on: March 04, 2015, 07:31:12 PM »
I've always subscribed to the buy and hold approach, and it has served me very well in recovering from the 2000 and 2008 corrections. But I have a question - how is portfolio rebalancing different from market timing?  I mean, basically you're just moving money out of the winners and into the losers in a growing market, or out of the smaller losers and into the bigger losers in a falling market. Does regular reallocation actually improve portfolio performance? 

sol

  • Walrus Stache
  • *******
  • Posts: 8492
  • Age: 42
  • Location: Pacific Northwest
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #20 on: March 04, 2015, 07:36:03 PM »
Does regular reallocation actually improve portfolio performance?

Oh god yes.  It guarantees that you're selling high and buying low. 

This is sort of central to the investment philosophy espoused here, and at a bogleheads, and by Modern Portfolio Theory, and really by anyone who isn't trying to make money by convincing you to make bad decisions. 

nanu

  • Bristles
  • ***
  • Posts: 345
  • Age: 31
  • Location: Cambridge, MA
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #21 on: March 04, 2015, 07:43:14 PM »
For your reading pleasure. From:  skyrefuge. Thank you so much for this cautionary tale of smedlydb and his crystal balls. :)

http://forum.mrmoneymustache.com/investor-alley/crystal-balls/msg570684/#msg570684
I haven't seen this before. Thank you, it was wonderful to read

skyrefuge

  • Handlebar Stache
  • *****
  • Posts: 1007
  • Location: Suburban Chicago, IL
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #22 on: March 04, 2015, 07:44:53 PM »
Does regular reallocation actually improve portfolio performance?

Oh god yes.  It guarantees that you're selling high and buying low.

No, rebalancing only improves returns if all of your asset classes have the same expected returns. In the standard case (rebalancing between stocks and bonds, which have differing expected returns), rebalancing actually hurts your (raw) portfolio return (because in most cases you'll be shifting from higher-returning assets to lower-returning ones). But by controlling risk (which is the real goal of rebalancing), it is likely to increase your actual portfolio return by preventing you from making dumb emotional decisions.

And so that explains why rebalancing is not market-timing. Its goal is to reduce risk, not increase return, and unlike market-timing, requires no opinion to be formed on whether an asset class is "high" or "low".

WildJager

  • Bristles
  • ***
  • Posts: 439
  • Age: 33
    • Can't complain.
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #23 on: March 04, 2015, 08:56:58 PM »
Reducing risk via re-balancing is a form of market timing.  I would be cautious to advertising that it is not.  This will in fact smooth the ups and downs of the market, surely, but at the cost of potentially higher overall gains.  If you own a house, do you track its net worth between when you buy it and when you sell it?  Some do, and adjust their equity proportionally.  Most don't, and that's the smart move in my opinion.  Therefore, the ebb and flow is irrelevant.  Only the final gain matters.

Reference "The Intelligent Investor" by Benjamin Graham. 

nanu

  • Bristles
  • ***
  • Posts: 345
  • Age: 31
  • Location: Cambridge, MA
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #24 on: March 04, 2015, 09:03:36 PM »
^^^
I'm not sure about not tracking home equity, since you could theoretically sell it (and then rent or buy something else).
After all, you probably track your investments every so often (yearly, or more often than that) but you don't sell them, so why not your house?

The value of investments can fluctuate just as much as the home value can change... why track one and not the other?
They are both "stuff" you own that you can convert to cash when you want (though one is less liquid, but can still convert to cash with a bit of time)

Static Void

  • Stubble
  • **
  • Posts: 103
  • Age: 56
  • Location: Silicon Valley Beach
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #25 on: March 04, 2015, 09:18:27 PM »
I am so ashamed of some idle cash I've been hanging on to, in some weird limbo of "ooooh, i feel like the market is so high." Like for the last 4 years. Yeah. That. Moved 20k to each of vtsax and vtsiax today. Will repeat next week and yes I'm dollar cost averaging to soothe some jitters. And yes, there will be bumps! Onward (and hopefully generally upward).

TreeTired

  • Bristles
  • ***
  • Posts: 449
  • Age: 135
  • Location: North Carolina
  • I think we can make it
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #26 on: March 04, 2015, 09:23:27 PM »
i have raised my cash balances a bit lately,  but I am 61 and at this point I feel that for me personally the risk of a very large market decline is greater than getting stuck with a low return on cash.   But cash is still only 8%.  I might take it up to 20%.  I was buying stocks primarily for yield a few years ago. Didn't do a whole lot of research,  just divided the annual dividend by the price.  Some of those stocks that I bought because the yield was >4% are now yielding <3%  and it's not as if they are great growth stories.   A little too much reaching for yield for me.  I bought INTC for yield at 4%+.   Now it yields 2.8%. 

Just checked -   I was overweighted in INTC so sold a little back in May.... at 27.25 !   So how did that work out?
« Last Edit: March 04, 2015, 09:26:33 PM by TreeTired »

phillyvalue

  • 5 O'Clock Shadow
  • *
  • Posts: 88
  • Age: 28
  • Location: New York, NY
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #27 on: March 04, 2015, 09:28:05 PM »
I think it's perfectly valid to be less aggressive in buying stocks today than a few years ago. A few years ago, the rational (albeit difficult) choice for someone with a long-term time horizon was to pile everything they had into equities. If you had a mortgage, pay the minimums and invest anything else. Forgo any excess consumption so you have more to invest. If you had a paid off house, refinance at low rates and invest it.

Nobody knows where the market will go in a month or a year, but it is clear that the expected return on buying stocks today is far lower than it was 5-6 years ago, even if you have a long-term time horizon. That doesn't mean that the market will crash; stock returns can be low without a crash ever happening, or at most a minor correction happening versus a crash like 2008-2009. I think people of our generation are biased into thinking significant market crashes are common events, because we grew up with the 2000-2002 crash and the 2008-2009 crash, where equities fell 50% in each case. But throughout history, crashes of that magnitude are relatively rare. My point being, while expected returns are clearly lower today than a few years ago, reducing the attractiveness of buying today, that does not mean that you can wait around expecting a crash. There may be a correction or crash or there may not be, and nobody knows.

So my advice is to be less aggressive, but not try to time the market. There's a fine line between those. What I mean is, don't use leverage to invest in today's market, take advantages of situations that offer an assured return over investing in stocks (i.e., pay off a 4% loan instead of investing in stocks, if you have any debt), and only invest money in stocks that you will not need for a long period of time.   

WildJager

  • Bristles
  • ***
  • Posts: 439
  • Age: 33
    • Can't complain.
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #28 on: March 04, 2015, 09:53:35 PM »
I think it's perfectly valid to be less aggressive in buying stocks today than a few years ago. A few years ago, the rational (albeit difficult) choice for someone with a long-term time horizon was to pile everything they had into equities. If you had a mortgage, pay the minimums and invest anything else. Forgo any excess consumption so you have more to invest. If you had a paid off house, refinance at low rates and invest it.

Nobody knows where the market will go in a month or a year, but it is clear that the expected return on buying stocks today is far lower than it was 5-6 years ago, even if you have a long-term time horizon. That doesn't mean that the market will crash; stock returns can be low without a crash ever happening, or at most a minor correction happening versus a crash like 2008-2009. I think people of our generation are biased into thinking significant market crashes are common events, because we grew up with the 2000-2002 crash and the 2008-2009 crash, where equities fell 50% in each case. But throughout history, crashes of that magnitude are relatively rare. My point being, while expected returns are clearly lower today than a few years ago, reducing the attractiveness of buying today, that does not mean that you can wait around expecting a crash. There may be a correction or crash or there may not be, and nobody knows.

So my advice is to be less aggressive, but not try to time the market. There's a fine line between those. What I mean is, don't use leverage to invest in today's market, take advantages of situations that offer an assured return over investing in stocks (i.e., pay off a 4% loan instead of investing in stocks, if you have any debt), and only invest money in stocks that you will not need for a long period of time.

Is it clear though?  Really?

Common knowledge around here reflects that past performance is not indicative of future results.  We often say that as an excuse to expect a retard in potential results.  Are we so sure the future does not hold something new and explosive we never could have considered?

Apple changed the world with smart phones.  Their timing was synonymous with the sub-prime lending bubble.  We all know how that turned out.  Call me a glass half full guy... call me what you want.  But I'm not willing to gimp myself over some unspoken fear that we've reached the pinnacle of ingenuity in the world market.  Frankly, we are on the cusp of integrating emerging markets as a world system.  That alone flaunts potential.

Now, ask me whether this productivity is a good thing in terms of valuing our world resources and the inevitable destruction of our planet, and I'll have a whole new song and dance.  :)  But I'll never leave the creative power of greed off the table when it comes to investments and future potential for people to be prosperous. 

phillyvalue

  • 5 O'Clock Shadow
  • *
  • Posts: 88
  • Age: 28
  • Location: New York, NY
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #29 on: March 04, 2015, 10:11:55 PM »
I think it's perfectly valid to be less aggressive in buying stocks today than a few years ago. A few years ago, the rational (albeit difficult) choice for someone with a long-term time horizon was to pile everything they had into equities. If you had a mortgage, pay the minimums and invest anything else. Forgo any excess consumption so you have more to invest. If you had a paid off house, refinance at low rates and invest it.

Nobody knows where the market will go in a month or a year, but it is clear that the expected return on buying stocks today is far lower than it was 5-6 years ago, even if you have a long-term time horizon. That doesn't mean that the market will crash; stock returns can be low without a crash ever happening, or at most a minor correction happening versus a crash like 2008-2009. I think people of our generation are biased into thinking significant market crashes are common events, because we grew up with the 2000-2002 crash and the 2008-2009 crash, where equities fell 50% in each case. But throughout history, crashes of that magnitude are relatively rare. My point being, while expected returns are clearly lower today than a few years ago, reducing the attractiveness of buying today, that does not mean that you can wait around expecting a crash. There may be a correction or crash or there may not be, and nobody knows.

So my advice is to be less aggressive, but not try to time the market. There's a fine line between those. What I mean is, don't use leverage to invest in today's market, take advantages of situations that offer an assured return over investing in stocks (i.e., pay off a 4% loan instead of investing in stocks, if you have any debt), and only invest money in stocks that you will not need for a long period of time.

Is it clear though?  Really?

Common knowledge around here reflects that past performance is not indicative of future results.  We often say that as an excuse to expect a retard in potential results.  Are we so sure the future does not hold something new and explosive we never could have considered?

Apple changed the world with smart phones.  Their timing was synonymous with the sub-prime lending bubble.  We all know how that turned out.  Call me a glass half full guy... call me what you want.  But I'm not willing to gimp myself over some unspoken fear that we've reached the pinnacle of ingenuity in the world market.  Frankly, we are on the cusp of integrating emerging markets as a world system.  That alone flaunts potential.

Now, ask me whether this productivity is a good thing in terms of valuing our world resources and the inevitable destruction of our planet, and I'll have a whole new song and dance.  :)  But I'll never leave the creative power of greed off the table when it comes to investments and future potential for people to be prosperous.

Well yes, it's absolutely clear in the sense that, since the beginning of 09 (and stocks still fell much more between beginning of 2009 and the March 2009 low), the S&P has delivered an annualized total return of 17% per year. Given that 17% is far above what stocks have done historically or will do in the future, the expected return today is definitely lower than it was in 2009.

There is a legitimate question as to how stock returns going forward will compare to average stock returns over a long stretch of history. Returns from a broad base of stocks basically depend mostly on a few factors: (a) Growth in the overall economy, so GDP growth, (b) Changes in how the economic pie is split up (perhaps wages go up, reducing returns to capital; perhaps taxes go up, meaning the government takes a bigger piece of the pie), (c) Changes in valuation (how much are you willing to pay for $1 of earnings? So what is the market P/E ratio / other valuation ratios?), and (d) dividends and other forms of returning capital to investors.

In the period since the 80s in particular, the first three forces have worked in tandem to produce an incredible bull market, an ~11-12% annualized return from the early 80s to the present, despite some big bumps in the road over the latter 15 years of that period. However, standing here today, I think (b) and (c) are very unlikely to contribute to future stock returns. Valuations are very high today because of low interest rates; rates can't go much lower. Corporations are taking a huge piece of the productive output of the country in the form of profits, leaving very little for the working class; further increases in corporate profits relative to GDP are likely to cause social unrest, and moreover taxes are likely to increase. You discuss only (a), growth in GDP; without a doubt, we will produce more over time, and GDP will go up. But I would not expect more of a return from stocks than GDP Growth + Dividends/Repurchases. So if the market pays a 2% dividend and nominal GDP growth is 4% per year, then maybe you get a return on stocks of a bit over 6% per year. Given interest rates today of 2%, that's still attractive.

rocketpj

  • Pencil Stache
  • ****
  • Posts: 720
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #30 on: March 04, 2015, 10:44:33 PM »
I'm not super interested in timing the market just because I would find it too stressful.

That said, if we ever find ourselves in some kind of blatantly obvious bubble (like if the Dow were to double inside a year or two) I will be much more interested in evaluating my options and probably taking some money out before the bubble bursts.  But only in that unlikely scenario - and if that were to happen I would feel pretty silly for having pulled out before the bubble began to inflate.

To be honest I am much more concerned about the bond market than equities.  Typically investors see bonds as 'safe' money, despite clear evidence to the contrary(see: Europe).  There has been a ~35 year bull market in bonds, and all markets turn eventually.  But the bond market is enormous compared to equities, and a lot of pensions, retirement accounts and otherwise are heavily bought into bonds.  If that crashes things will get ugly (the last time it happened for serious was in the late 20s).

WildJager

  • Bristles
  • ***
  • Posts: 439
  • Age: 33
    • Can't complain.
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #31 on: March 05, 2015, 06:44:06 AM »
I think it's perfectly valid to be less aggressive in buying stocks today than a few years ago. A few years ago, the rational (albeit difficult) choice for someone with a long-term time horizon was to pile everything they had into equities. If you had a mortgage, pay the minimums and invest anything else. Forgo any excess consumption so you have more to invest. If you had a paid off house, refinance at low rates and invest it.

Nobody knows where the market will go in a month or a year, but it is clear that the expected return on buying stocks today is far lower than it was 5-6 years ago, even if you have a long-term time horizon. That doesn't mean that the market will crash; stock returns can be low without a crash ever happening, or at most a minor correction happening versus a crash like 2008-2009. I think people of our generation are biased into thinking significant market crashes are common events, because we grew up with the 2000-2002 crash and the 2008-2009 crash, where equities fell 50% in each case. But throughout history, crashes of that magnitude are relatively rare. My point being, while expected returns are clearly lower today than a few years ago, reducing the attractiveness of buying today, that does not mean that you can wait around expecting a crash. There may be a correction or crash or there may not be, and nobody knows.

So my advice is to be less aggressive, but not try to time the market. There's a fine line between those. What I mean is, don't use leverage to invest in today's market, take advantages of situations that offer an assured return over investing in stocks (i.e., pay off a 4% loan instead of investing in stocks, if you have any debt), and only invest money in stocks that you will not need for a long period of time.

Is it clear though?  Really?

Common knowledge around here reflects that past performance is not indicative of future results.  We often say that as an excuse to expect a retard in potential results.  Are we so sure the future does not hold something new and explosive we never could have considered?

Apple changed the world with smart phones.  Their timing was synonymous with the sub-prime lending bubble.  We all know how that turned out.  Call me a glass half full guy... call me what you want.  But I'm not willing to gimp myself over some unspoken fear that we've reached the pinnacle of ingenuity in the world market.  Frankly, we are on the cusp of integrating emerging markets as a world system.  That alone flaunts potential.

Now, ask me whether this productivity is a good thing in terms of valuing our world resources and the inevitable destruction of our planet, and I'll have a whole new song and dance.  :)  But I'll never leave the creative power of greed off the table when it comes to investments and future potential for people to be prosperous.

Well yes, it's absolutely clear in the sense that, since the beginning of 09 (and stocks still fell much more between beginning of 2009 and the March 2009 low), the S&P has delivered an annualized total return of 17% per year. Given that 17% is far above what stocks have done historically or will do in the future, the expected return today is definitely lower than it was in 2009.

There is a legitimate question as to how stock returns going forward will compare to average stock returns over a long stretch of history. Returns from a broad base of stocks basically depend mostly on a few factors: (a) Growth in the overall economy, so GDP growth, (b) Changes in how the economic pie is split up (perhaps wages go up, reducing returns to capital; perhaps taxes go up, meaning the government takes a bigger piece of the pie), (c) Changes in valuation (how much are you willing to pay for $1 of earnings? So what is the market P/E ratio / other valuation ratios?), and (d) dividends and other forms of returning capital to investors.

In the period since the 80s in particular, the first three forces have worked in tandem to produce an incredible bull market, an ~11-12% annualized return from the early 80s to the present, despite some big bumps in the road over the latter 15 years of that period. However, standing here today, I think (b) and (c) are very unlikely to contribute to future stock returns. Valuations are very high today because of low interest rates; rates can't go much lower. Corporations are taking a huge piece of the productive output of the country in the form of profits, leaving very little for the working class; further increases in corporate profits relative to GDP are likely to cause social unrest, and moreover taxes are likely to increase. You discuss only (a), growth in GDP; without a doubt, we will produce more over time, and GDP will go up. But I would not expect more of a return from stocks than GDP Growth + Dividends/Repurchases. So if the market pays a 2% dividend and nominal GDP growth is 4% per year, then maybe you get a return on stocks of a bit over 6% per year. Given interest rates today of 2%, that's still attractive.

Agreed on all counts.  I too recognize the market value is relatively high, especially when you looks at the valuations you mentioned.  The rub comes when you try to predict exactly when the inevitable market correction will come.  As far as I'm aware (again I'll reference "A Random Walk Down Wallstreet") no systematic approach as been able to accurately predict this timing.  As a result, over time, those who ride the bumps out instead of trying to time the market dips have realized larger gains (as I mentioned before, over the last century, 5 single trading days of rebound growth following dips caused the trailing average growth that substantiate what we view as the average S&P 500 return.  Those who mis-timed the rebalancing of their portfolio missed out, and therefore had a lower average return than the market provided). 

cjottawa

  • Stubble
  • **
  • Posts: 152
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #32 on: March 05, 2015, 07:35:48 AM »
I've read a number of articles on this topic.

An idea that stood out was "missing the worst/best days in the market."

This says it better than I can: https://www.ifa.com/12steps/step4/missing_the_best_and_worst_days/

TL;DR: staying out of the market may mean avoiding "worst days" but it also means avoiding best days. You are better off staying invested. Even a down market generates dividends. Most people will fail to avoid the worst days but will succeed in avoiding some of the best.

Mitigate risk and reduce volatility by diversifying across asset classes (equity and fixed income indices) and within asset classes (domestic and international equity), not market timing.
« Last Edit: March 05, 2015, 07:49:40 AM by cjottawa »

jba302

  • Pencil Stache
  • ****
  • Posts: 623
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #33 on: March 05, 2015, 08:50:35 AM »
Something I learned recently, which combines with something Sol said on another thread. If I feel like I have a fair grip on a topic, and something is stated/written that confuses me, I read it or repeat it out loud a few times to make sure I understand what is actually being said. Sometimes I'll try to modify that statement into a very forgiving position just to be sure. If I'm still confused, the information is either above my head or the information is nonsense.

So far I've never seen a market timing strategy that made sense. Now, I'm not that smart, but all the buy and hold strategies for index funds make sense on long enough time periods and have some pretty straight forward math and such to explain what's going on. On the other side, every market timing / I've hacked the market reads like a schizophrenic that forgot their dose. I feel like there's a correlation there.

Numbers Man

  • Guest
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #34 on: March 05, 2015, 10:08:53 AM »
You need to execute not one, but two perfect trades to time the market. The first trade is to get out in time before the market goes south and the second part of the trade is to be fully invested at the point that the market is going up. Unfortunately, the emotions of greed and fear take over. In addition, you need to tune out the conflicting noise from all the talking heads on CNBC.

I heard a lot of chatter about how 2014 would be a lost year since 2013 was so robust. If you decided to pull out of the market back then would would have missed the 2014 gains. I heard the same shit in January of this year. Guess what, you would have missed the February run of 7%. So when do you bail? After a couple of 500 down days on the dow? When the dow is down 10%? When do you know when to get back in?

Good luck successfully timing the market.

nanu

  • Bristles
  • ***
  • Posts: 345
  • Age: 31
  • Location: Cambridge, MA
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #35 on: March 05, 2015, 11:38:41 AM »
You need to execute not one, but two perfect trades to time the market. The first trade is to get out in time before the market goes south and the second part of the trade is to be fully invested at the point that the market is going up.
Technically they don't need to be "perfect", they just need to be better than staying in the market throughout.
For example, getting out before the highest peak, or slightly after the highest peak (but before massive drops),
and then getting back in at a low point, even if not the very lowest point, is still better than just staying in.

That being said, I still doubt anyone can reliably perform those two good trades without a functioning crystal ball...
Personally my money is in the market, and is going to stay there

Cookie78

  • Handlebar Stache
  • *****
  • Posts: 1893
  • Location: Canada
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #36 on: March 05, 2015, 11:50:05 AM »
That being said, I still doubt anyone can reliably perform those two good trades without a functioning crystal ball...
Personally my money is in the market, and is going to stay there

As an added bonus, there would be a lot less effort, time, and stress involved with the buy and hold method too.

sol

  • Walrus Stache
  • *******
  • Posts: 8492
  • Age: 42
  • Location: Pacific Northwest
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #37 on: March 05, 2015, 11:51:12 AM »
One of these days the doomsayers are going to be right, and we're all going to lament staying in the market through the peak and subsequent drop.

I'm just mentally preparing myself for the day when the "I told you so"s are coming from the other side.  Even a broken clock...

RapmasterD

  • Pencil Stache
  • ****
  • Posts: 589
  • Location: SF Peninsula
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #38 on: March 05, 2015, 01:47:43 PM »
<<Well yes, it's absolutely clear in the sense that, since the beginning of 09 (and stocks still fell much more between beginning of 2009 and the March 2009 low), the S&P has delivered an annualized total return of 17% per year. Given that 17% is far above what stocks have done historically or will do in the future, the expected return today is definitely lower than it was in 2009.>>

You didn't include 2000 - 2008 (annualized return of -3.68% during this time period with dividends reinvested), so it's not clear to me at all.

Now let's look at 2000-2014 (annualized return of 4.4% during this time period with dividends reinvested).

The future looks bright.
« Last Edit: March 05, 2015, 01:55:31 PM by RapmasterD »

frugledoc

  • Pencil Stache
  • ****
  • Posts: 690
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #39 on: March 05, 2015, 02:14:27 PM »
Market timing is very difficult for sure.

My largest stock holding is in a single share accounting for about 5% of my portfolio. 

It has pretty much doubled in value over the last few years and yesterday I was going to sell it and invest the money in an passive ETF.  I didn't have time yesterday and today it has jumped 7% in one day.  This is a UK blue chip company we are talking about not a penny share (Aviva).

Rather than sell your investments why not just keep new funds uninvested for the next 6 months and drip feed during any market dips.   If you don't get your dips and decide against the strategy then just lump it in.

phillyvalue

  • 5 O'Clock Shadow
  • *
  • Posts: 88
  • Age: 28
  • Location: New York, NY
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #40 on: March 05, 2015, 02:20:19 PM »
<<Well yes, it's absolutely clear in the sense that, since the beginning of 09 (and stocks still fell much more between beginning of 2009 and the March 2009 low), the S&P has delivered an annualized total return of 17% per year. Given that 17% is far above what stocks have done historically or will do in the future, the expected return today is definitely lower than it was in 2009.>>

You didn't include 2000 - 2008 (annualized return of -3.68% during this time period with dividends reinvested), so it's not clear to me at all.

Now let's look at 2000-2014 (annualized return of 4.4% during this time period with dividends reinvested).

The future looks bright.

My statement was, "The expected return on stocks today is lower than it was in 2009." That has nothing to do with returns in 2000-2008. What matters is whether or not the performance in the 2009-2014 period was higher or lower than performance we can expect going forward. The 17%/yr return achieved from 09-14 is beyond anyone's wildest dreams for expected returns going forward, and thus return expectations must be lower than they were in 2009. It's math, you cant argue with it.

WildJager

  • Bristles
  • ***
  • Posts: 439
  • Age: 33
    • Can't complain.
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #41 on: March 05, 2015, 02:33:34 PM »
<<Well yes, it's absolutely clear in the sense that, since the beginning of 09 (and stocks still fell much more between beginning of 2009 and the March 2009 low), the S&P has delivered an annualized total return of 17% per year. Given that 17% is far above what stocks have done historically or will do in the future, the expected return today is definitely lower than it was in 2009.>>

You didn't include 2000 - 2008 (annualized return of -3.68% during this time period with dividends reinvested), so it's not clear to me at all.

Now let's look at 2000-2014 (annualized return of 4.4% during this time period with dividends reinvested).

The future looks bright.

My statement was, "The expected return on stocks today is lower than it was in 2009." That has nothing to do with returns in 2000-2008. What matters is whether or not the performance in the 2009-2014 period was higher or lower than performance we can expect going forward. The 17%/yr return achieved from 09-14 is beyond anyone's wildest dreams for expected returns going forward, and thus return expectations must be lower than they were in 2009. It's math, you cant argue with it.

That checks, because those returns were the result of the market correcting in the positive direction from being undervalued after the recession.  Since we are now overvalued (compared to the raw assets of the companies) what we're seeing now is more enthusiasm than sound investing.

On a general note, somewhat responding to fugledoc, a funny phenomena among investors is the tendency to sell stocks that are doing well in order to trade them into more passive funds in order to lock in gains.  Autopilot and less stress for sure, but it in of itself is a form of market timing.  I think it was Benjamin Graham who said (I paraphrase), "Why would you sell your prized racing stallion that is consistently winning for a more mediocre horse for the off chance that it may one day become a champion?"  I don't have a good answer to this dilemma, and that frankly becomes a guy check each individual must weigh in on.  The advice I remember reading was to sell when there is evidence that the company may do poorly in the future (new weak management, bad press, no new product innovation, etc).  I lament that is a very intensive process to accomplish successfully.

brooklynguy

  • Handlebar Stache
  • *****
  • Posts: 2207
  • Age: 39
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #42 on: March 05, 2015, 02:41:24 PM »
It's math, you cant argue with it.

While I don't disagree that we should not expect 2009-2014 levels of returns going forward, it is not just "math," it is investor behavior, and investors can and do "argue with it" all the time.  If, five years from now, we find out that 2015-2020 do provide 17% annualized returns, you can argue until you're blue in the face why they should not have done so but it ain't gonna change the fact that they did.

phillyvalue

  • 5 O'Clock Shadow
  • *
  • Posts: 88
  • Age: 28
  • Location: New York, NY
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #43 on: March 05, 2015, 02:41:32 PM »
Deciding when to sell a good business is definitely tough. The price you pay and the quality of the business both always matter, but over a very long holding period, the quality of the business matters more than the price paid; in contrast, if you hold something for a short period of time, the valuation multiple you buy and sell at matter far more than the earnings growth of the business.

This is a good post on the subject of portfolio turnover: http://basehitinvesting.com/portfolio-turnover-a-vastly-misunderstood-concept/

That said, sometimes the market's love for a good business is so overdone that it's much better to exit. Coke in the late 90s was in that situation, where the valuation made no sense. If you held/bought KO at its peak in 1998, you are still flat or slightly down in terms of stock price, and your only return has been dividends.

phillyvalue

  • 5 O'Clock Shadow
  • *
  • Posts: 88
  • Age: 28
  • Location: New York, NY
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #44 on: March 05, 2015, 02:45:58 PM »
It's math, you cant argue with it.

While I don't disagree that we should not expect 2009-2014 levels of returns going forward, it is not just "math," it is investor behavior, and investors can and do "argue with it" all the time.  If, five years from now, we find out that 2015-2020 do provide 17% annualized returns, you can argue until you're blue in the face why they should not have done so but it ain't gonna change the fact that they did.

2015-2020 is nowhere near the sample size I'm talking about. I'm saying, from today going out 40 years, 50 years, 100 years, whatever is long-term to you, annualized returns will be lower in real terms than the returns we achieved in 2009-2014.

jmusic

  • Bristles
  • ***
  • Posts: 465
  • Location: Somewhere...
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #45 on: March 05, 2015, 03:30:10 PM »
One of these days the doomsayers are going to be right, and we're all going to lament staying in the market through the peak and subsequent drop.

I'm just mentally preparing myself for the day when the "I told you so"s are coming from the other side.  Even a broken clock...

What's funny (ok, no it's not!) is that the mutual fund industry does the same thing with their funds and managers. 

Two hypothetical funds are opened in 2013, investment choices are PURELY RANDOM, and relative to market index of your choice:
Fund A 2013 return:  -8%
Fund B 2013 return:  11%

Fund A manager is firedm fund is dissolved with zero fanfare.  Fund B manager gets heaped praise, huge bonus, advertising budget, etc.  Plebes invest truckloads of money.
Fund A 2014 return:  none, it's closed!
Fund B 2014 return:  -8%  (His random allocation will not outperform the index on balance)


I read about this concept in "Fooled by Randomness"
http://www.amazon.com/Fooled-Randomness-Hidden-Markets-Incerto/dp/0812975219

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1211
  • Age: 39
  • Location: Texas
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #46 on: March 05, 2015, 03:54:30 PM »
So far I've never seen a market timing strategy that made sense. Now, I'm not that smart, but all the buy and hold strategies for index funds make sense on long enough time periods and have some pretty straight forward math and such to explain what's going on. On the other side, every market timing / I've hacked the market reads like a schizophrenic that forgot their dose. I feel like there's a correlation there.

Does this make sense to you? http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461

RapmasterD

  • Pencil Stache
  • ****
  • Posts: 589
  • Location: SF Peninsula
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #47 on: March 05, 2015, 05:05:05 PM »
<<Well yes, it's absolutely clear in the sense that, since the beginning of 09 (and stocks still fell much more between beginning of 2009 and the March 2009 low), the S&P has delivered an annualized total return of 17% per year. Given that 17% is far above what stocks have done historically or will do in the future, the expected return today is definitely lower than it was in 2009.>>

You didn't include 2000 - 2008 (annualized return of -3.68% during this time period with dividends reinvested), so it's not clear to me at all.

Now let's look at 2000-2014 (annualized return of 4.4% during this time period with dividends reinvested).

The future looks bright.

My statement was, "The expected return on stocks today is lower than it was in 2009." That has nothing to do with returns in 2000-2008. What matters is whether or not the performance in the 2009-2014 period was higher or lower than performance we can expect going forward. The 17%/yr return achieved from 09-14 is beyond anyone's wildest dreams for expected returns going forward, and thus return expectations must be lower than they were in 2009. It's math, you cant argue with it.

You know what? You are ABSOLUTELY right! Have a great day and best of success to you!!

aschmidt2930

  • Bristles
  • ***
  • Posts: 273
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #48 on: March 05, 2015, 05:27:38 PM »
Or the simpler and more effective option, invest now, and if the market crashes, keep investing. 

WildJager

  • Bristles
  • ***
  • Posts: 439
  • Age: 33
    • Can't complain.
Re: 5 year bull market....are we due a cras...I mean correction?
« Reply #49 on: March 05, 2015, 06:50:21 PM »
So far I've never seen a market timing strategy that made sense. Now, I'm not that smart, but all the buy and hold strategies for index funds make sense on long enough time periods and have some pretty straight forward math and such to explain what's going on. On the other side, every market timing / I've hacked the market reads like a schizophrenic that forgot their dose. I feel like there's a correlation there.

Does this make sense to you? http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461

I skimmed it, which is all I can really offer for a 70 page document you didn't even summarize.  I'll say this... nothing new is really offered.  Any slight gains (and I say slight... they self admitted their strategy provided a lesser return than buy and hold, but came out ahead because of compound gains being inflated from less volatility... I can't speak on that because I've never considered that before) are eventually whittled away via tax loss and brokerage fees from constantly buying and selling.  That's something that paper doesn't touch upon, but others have studied extensively.

The question is not, "Is there a market timing strategy that can slightly beat buy and hold?"  The question is, "Is there a strategy that can do so and still come on top after short term capital gains and brokerage fees?"