Author Topic: Doubting the stock market  (Read 24293 times)

tooqk4u22

  • Handlebar Stache
  • *****
  • Posts: 2196
Re: Doubting the stock market
« Reply #50 on: January 30, 2014, 03:15:06 PM »
The regular old P/E is also high by pre-1990 historical standards.  It's only when you include the insane valuations of the 1990's and early 2000,s that today's regular P/E looks sane.

The current PE is about 19 and the current CAPE is about 25.

Avg. of last 100 years is 16 and 16.5.

Avg of last 50 years is 18.7 and 17.1.

Avg of last 50 years excluding highest and lowest 10% is 19.8 and 19.

For me the last 100 years is not relevent as the financial world (access, leverage, etc) has changed so dramatically - you could argue this about 50 as well but that is enough to have an adequate sample.  Point is current PEs are not that out of whack when compared on a 50 basis but the CAPE is out of whack. 


tooqk4u22

  • Handlebar Stache
  • *****
  • Posts: 2196
Re: Doubting the stock market
« Reply #51 on: January 30, 2014, 03:22:22 PM »
What are you talking about?  Do you know what the phrase worst case scenario means?  Do you know what SWR means?


I think a good analysis would be to look at the scenarios/data sets for those years (the 5% of the time that they failed) and compare those points in time with today and see if there are any consistencies - maybe somebody has done this already. If there similarities across the failure scenarios and with today then that would be a big red flag - but if there none or vary few then it boils down to being highly and random and not having the ability to time/control/affect the outcome.

It might also better to run this data for the near failure periods (10%?) as the trinity study is for a 30 year retirement, not 40, 50, or 60 so those near failure periods may in fact be failure periods 5 years later.


« Last Edit: January 30, 2014, 03:24:21 PM by tooqk4u22 »

tooqk4u22

  • Handlebar Stache
  • *****
  • Posts: 2196
Re: Doubting the stock market
« Reply #52 on: January 30, 2014, 03:38:36 PM »
Now, to cut to the conclusion, under current CAPE ~22 and bond yield of 2.0%, at an 80% equity allocation, a 4% SWR has a 55% probability of success, which is much lower than the original 95% the Trinity Study predicted.  Even more informative is Table 3 (copied): to get to an 80% success rate over a longer, 40 year retirement period SWR is predicted to be 2.1% (yikes!)

All I'm highlighting is, even Pfau is concerned that maybe the 4% rule is being misused in light of new research.

Escape - Good posts, I like the details and numbers.  To me this is an approriate way to discuss the validiity of the SWR and leans to my prior post of evaluating the times that it failed. One thing though is now bond rates are in the high 2% (10year US treasury) also longer bond or corporates with higher rates would presumably change the outcomes.

Maybe this this should be new thread topic - instead of a lot of it feelings (I feel that it works or won't blah blah blah) or blind love of the rule (countless studies and people have accepted and therefore I will to blah blah blah) lets dig deeper into substantiating it. 

Although I admit that it may need to be done by someone who has the time.

sheepstache

  • Handlebar Stache
  • *****
  • Posts: 2424
Re: Doubting the stock market
« Reply #53 on: January 30, 2014, 04:09:29 PM »
What are you talking about?  Do you know what the phrase worst case scenario means?  Do you know what SWR means?


I think a good analysis would be to look at the scenarios/data sets for those years (the 5% of the time that they failed) and compare those points in time with today and see if there are any consistencies - maybe somebody has done this already. If there similarities across the failure scenarios and with today then that would be a big red flag - but if there none or vary few then it boils down to being highly and random and not having the ability to time/control/affect the outcome.

It might also better to run this data for the near failure periods (10%?) as the trinity study is for a 30 year retirement, not 40, 50, or 60 so those near failure periods may in fact be failure periods 5 years later.

I think--not to go further in a philosophical discussion because I take your point in your next post--that the likelihood of such conditions persisting is also taken into account.  The study is saying "The principle failed in n number of years."  And you're saying "The principle fails under conditions x."  But essentially the study is saying, "Conditions x occur in n number of years." 

Jamesqf

  • Magnum Stache
  • ******
  • Posts: 4047
Re: Doubting the stock market
« Reply #54 on: January 30, 2014, 08:47:54 PM »
I think some people are still a bit stuck on retirement being focused entirely on productivity dropping to 0.

Well, yes, people are stuck on that definition of reirement, because that's the definition of retirement.  The other is a career change.

InmanRoshi

  • 5 O'Clock Shadow
  • *
  • Posts: 2
Re: Doubting the stock market
« Reply #55 on: January 30, 2014, 10:03:08 PM »
I think it's a bit of a fool's errand to think of new ways that "This time, it's different".    Not that it isn't different, but in that it's always different.   At any moment in time, there are/were/will be  unique global factors pushing and pulling on the market.   I don't necessarily know that past market eras were inherently more advantageous to invest in equities than they will be in future markets.    One could make a case that the market is currently overly-inflated thanks to QE, and one could also make the case that in previous decades the world economy was previously overly-deflated from the fact that huge swaths of the world's populace  were living in the economic stone ages.        There wasn't anything inherently wonderful about the overall world economy during the Cold War era when billions upon billions of people, just in China and India alone,  were living under communism or in rudimentary economies and contributing very little to wealth creation or consumer spending.   The current economies of India and China alone are still just a fraction of what they'll be by 2050.   That's a lot of potential Coca Cola drinkers that weren't there in past decades. 

The only thing I do know is that if you want to publish a book and get on TV making financial predictions, the  worst thing to do is claim that the market is going to follow the modest gains of historical averages.   Thus, I try to not listen to people on TV or selling books.   Every year Jim Rogers goes on Fox Business or CNBC  and predicts that the entire US/Fed house of cards is going to collapse, and to pull all of your capital out of stocks.   Law of averages says he's going to be right one year and the market is going to take a beating, and everyone is going to have him on TV every five minutes to discuss how he's a financial Nostradamus.  But if you would have listened to him last year, you would have missed out on a year where the S&P 500   returned ~30%.
« Last Edit: January 31, 2014, 07:37:24 AM by InmanRoshi »

AtlStash

  • 5 O'Clock Shadow
  • *
  • Posts: 25
Re: Doubting the stock market
« Reply #56 on: February 01, 2014, 01:24:37 PM »
There are no sure things in life. Anyone that sets withdrawal at 4% and never looks back is asking for trouble. This is especially true if you spend all of your 4%. Spending 100% of your 4% is just as irresponsible as spending 100% of your current salary.

Left

  • Handlebar Stache
  • *****
  • Posts: 1159
Re: Doubting the stock market
« Reply #57 on: February 01, 2014, 03:25:13 PM »
hm about the 4% rule... not that I have a problem with it, but from the papers I've been reading on it lately, the 4% rule is applied to 50/50 stock/bond mix... how does it hold up to an 80/20 ratio or anything other than 50/50? I haven't found any studies on this but I don't really know what to search for except safe withdrawal rate and 4%

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: Doubting the stock market
« Reply #58 on: February 01, 2014, 06:12:47 PM »
hm about the 4% rule... not that I have a problem with it, but from the papers I've been reading on it lately, the 4% rule is applied to 50/50 stock/bond mix... how does it hold up to an 80/20 ratio or anything other than 50/50? I haven't found any studies on this but I don't really know what to search for except safe withdrawal rate and 4%

Here's a link to the updated Trinity Study.  It's where the 4% "rule" originally came from.

http://www.fpanet.org/journal/CurrentIssue/TableofContents/PortfolioSuccessRates/

EscapeVelocity2020

  • Handlebar Stache
  • *****
  • Posts: 2338
  • Age: 45
  • Location: Houston
    • EscapeVelocity2020
Re: Doubting the stock market
« Reply #59 on: February 01, 2014, 06:15:47 PM »
I think some people are still a bit stuck on retirement being focused entirely on productivity dropping to 0.

Well, yes, people are stuck on that definition of reirement, because that's the definition of retirement.  The other is a career change.
Thanks James.  I fully intend to retire early without depending on an income-producing hobby or part-time job, otherwise I would be considering it as a career change.  If I wanted a career change, I could have done that years ago when I was semi-FI.  My main plan is to pursue volunteering and charity work, domestic, and international travel, exercise and read, and possibly pursue courses in Economics.  I do not plan on buying RE or keeping up a regular job, I would prefer to work just as long as it takes to hit whatever magical number my lifespan requires to provide an inflation adjusted 40,000 a year lifestyle.  I could just as easily work 5-10 more years and save up a second million (assuming the markets cooperate over that time).  I'm going to be disappointed if I retire, hit a bear market 5 years in, not have an appreciable income from bonds, and end up living off of 20,000 a year for 5 years waiting for my portfolio to recover.  I'll also be disappointed if I'm 70 years old, have millions of extra dollars that I'll never spend, and have essentially 'wasted' that 5-10 extra years working.  As they say, no-one is on their deathbed bragging they had worked a few more years than they needed to.
I am at a point where I have all of the pieces in place to make a decision, and suddenly realize how difficult it is.  I'm blogging about it as I work through if I am retiring too early, but also justifying to myself that early retirement can be  an optimal and efficient decision (because of RMD's, taxes, ACA, etc. which become inefficient if you didn't need a huge portfolio to meet your spending). 
When people say, meh, this 4% rule is as good as it gets and I'll just go back to work if the market tanks, I wonder what those people would do if they met their net worth goals and were deciding today if they should retire early.  I'm guessing they just plan to worry about this later.  Will we all have 'one more year syndrome'?  With all of the research I'm doing, early retirement is a growing but still fairly new trend.  It turns out that most people still have retirement happen to them, there's a clear moment (death in the family, health issue, IPO windfall, etc.).  Most people don't have a good job and are waltzing along, but decide they have 'enough' and make the decision themself to retire...  I do think that professionals in the generations ahead will have more and more opportunities to pursue early retirement if they choose, and that this 4% rule will be very important to understand.  For now, I think we're in a bridge period where 30 and 40 year old early retirees have just about a workable 4% SWR, but do a career change downshift (to landlord, blogging, etc.).  That's cool too, but it isn't my plan. 
« Last Edit: February 01, 2014, 06:20:32 PM by EscapeVelocity2020 »

bk1

  • 5 O'Clock Shadow
  • *
  • Posts: 13
Re: Doubting the stock market
« Reply #60 on: February 01, 2014, 07:16:17 PM »
I have my doubts about the stock market. It seems like a rigged game sometimes. However, if the game is rigged sometimes the only thing you can do is play along. That is my strategy for this year anyway. Less in cash, more in stock market investment.

I had been thinking I would try to accumulate cash then look at real estate investing like rental properties etc. I just don't know how to get started in that area. That seems more real to me that stock market investing.

When you really look at the stock market, it seems like it's Las Vegas. You can bet for/against but it's the house that comes out ahead.

dadof4

  • Stubble
  • **
  • Posts: 179
  • Age: 44
  • Location: Portland, OR
Re: Doubting the stock market
« Reply #61 on: February 03, 2014, 11:14:09 AM »
When you really look at the stock market, it seems like it's Las Vegas. You can bet for/against but it's the house that comes out ahead.
The question then becomes, when investing are YOU the house, or the patsy?

Historically speaking, on average you will come out ahead in the stock market - which is exactly how the house makes money in Vegas.

req897

  • 5 O'Clock Shadow
  • *
  • Posts: 11
Re: Doubting the stock market
« Reply #62 on: February 03, 2014, 11:30:56 AM »
I struggle with this as well. I know historically what the stock market has done. However, never before have we been running this kind of debt totals as a country with no end in sight. Also, the fed buying up all this debt just doesn't seem right as they pretty much create the funds to buy the debt from nothing.

The whole stock market seems kind of like a big casino sometimes. You can bet this will go up, or bet that will go down. It seems like a game that we are almost forced to play.

At this point, I'm playing the game because although the game seems rigged, it's the only game in town.

You're pretty much correct. The stock market is a giant gamble that goes through boom and bust cycles along with our economy. We're in a boom right now, and we're nearing the peak. The Fed has already started reducing Quantitative Easing and our markets have did not do as well in January as a result. This of course makes sense. QE is the main reason, along with 0% interest rates, our boom appeared after the '08 crash. By continuously injecting more money into the economy, money becomes available for more loans and more financial trades. With less money, we can't have as many loans or trade as much in the markets, which directly reflects the stock market not doing as well last month.

When you see the fed begin to raise interest rates, get ready for our next recession. My prediction is '16 if we're lucky, '15 if we're not, right in time for Obama to be leaving office and the next president to be able to campaign on promising change. We have had 25 recessions according to wiki since '29, and in each case you will see the fed manipulating interest rates within the year prior to the market going down. This happens without fail.

These boom and bust cycles have one primary lasting affect, making the middle/lower class poorer while making the rich richer. After each recession after all is the best time to invest, prices are at a low point, but only the rich have enough money to invest much. The rich are also more aware of when the bust is about to happen and tend to withdraw their money from the market before the bust, shielding themselves from the losses that the majority endure.

Oh but this is just one part of it. The stock market is vastly manipulated by the major banks and prominent financial advisers. Advisers for example can greatly affect the stock market by their spreading of fear/hope, i.e. their influence on the public's speculation. You are playing their game, you are just an ant compared to the tank they use to steer the market how they want, when they want.

This is why I like the forex market much more. Banks and advisers cannot manipulate the market nearly as easily as it is a global market and trades several times the amount of volume than our rather small stock market. Forex is decentralized and while it is of course still speculative, no group of financial institutions can make huge changes in the market the way they can in the stock market.

Jamesqf

  • Magnum Stache
  • ******
  • Posts: 4047
Re: Doubting the stock market
« Reply #63 on: February 03, 2014, 11:53:07 AM »
As they say, no-one is on their deathbed bragging they had worked a few more years than they needed to.

I don't know about that.  I think that if you bothered to look, you'd find lots of people who work more years than they need to, simply because they enjoy their work and/or like to be productive.  Indeed, I'm arguably one of them.  Thing is, instead of having to work the daily 8-5 (or sometimes 8-midnight if you're in software) grind doing boring stuff, we use our increasing FI to do stuff we like, on our own schedule.

AccidentalMiser

  • Pencil Stache
  • ****
  • Posts: 659
  • Age: 51
  • Location: SE Tenn
Re: Doubting the stock market
« Reply #64 on: February 03, 2014, 12:25:03 PM »
Dear jaivee,

please find enclosed your 'enter' key. We apologies that it did not arrive with your new computer. Don't be afraid to put it to good use; we have factory tested it up to one hundred thousand key presses!

Sincerely,

PC Manufacturing Co Ltd

That's some funny shit, man!  I about fell out of my chair! 

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28013
  • Age: -999
  • Location: Seattle, WA
Re: Doubting the stock market
« Reply #65 on: February 03, 2014, 01:11:39 PM »
When you really look at the stock market, it seems like it's Las Vegas. You can bet for/against but it's the house that comes out ahead.
The question then becomes, when investing are YOU the house, or the patsy?

Historically speaking, on average you will come out ahead in the stock market - which is exactly how the house makes money in Vegas.

This.  You become the house when you buy and hold.

I struggle with this as well. I know historically what the stock market has done. However, never before have we been running this kind of debt totals as a country with no end in sight. Also, the fed buying up all this debt just doesn't seem right as they pretty much create the funds to buy the debt from nothing.

The whole stock market seems kind of like a big casino sometimes. You can bet this will go up, or bet that will go down. It seems like a game that we are almost forced to play.

At this point, I'm playing the game because although the game seems rigged, it's the only game in town.

You're pretty much correct. The stock market is a giant gamble that goes through boom and bust cycles along with our economy. We're in a boom right now, and we're nearing the peak.

In the short term, the stock market is like gambling.  The house (market) or the player (you) can win.  Or lose.  It's pretty random and it's gambling.

In the long run, in gambling, the house wins, as they have a mathematical edge and it eventually plays out.  If you're the casino, you may lose in the short run.  But wait.  You'll win in the end.

In the stock market, when you buy stocks, you may lose in the short run.  But wait.  You'll win in the end (because those stocks will go up, as they're based on ownership of the companies).

Be the house by buying and holding and letting your long term mathematical edge win.  Don't try to gamble and win in the short run.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

EscapeVelocity2020

  • Handlebar Stache
  • *****
  • Posts: 2338
  • Age: 45
  • Location: Houston
    • EscapeVelocity2020
Re: Doubting the stock market
« Reply #66 on: February 04, 2014, 07:26:55 AM »
As they say, no-one is on their deathbed bragging they had worked a few more years than they needed to.

I don't know about that.  I think that if you bothered to look, you'd find lots of people who work more years than they need to, simply because they enjoy their work and/or like to be productive.  Indeed, I'm arguably one of them.  Thing is, instead of having to work the daily 8-5 (or sometimes 8-midnight if you're in software) grind doing boring stuff, we use our increasing FI to do stuff we like, on our own schedule.

Right again.  I did a horrible job of paraphrasing the top 5 regrets that a palliative care nurse (Bonnie Ware) said people expressed on their deathbed.  So yes, there are plenty of people that don't regret working more or harder than they felt they needed to, it's just one of the common regrets people had expressed, along with: not living a life true to oneself, not having the courage to express one's feelings, losing touch with friends, and not allowing oneself to be happier.   
http://www.care2.com/greenliving/top-5-regrets-people-have-on-their-deathbed.html


bk1

  • 5 O'Clock Shadow
  • *
  • Posts: 13
Re: Doubting the stock market
« Reply #67 on: February 07, 2014, 09:19:08 PM »
I agree with what you guys are saying with if you look at history, you may lose in the short term in the stock market but long term gains are certain.

I just don't know any more given the way things like the federal reserve printing money to buy up US debt etc is going on. There just isn't a historical comparison for that. At least not one that looks good. It just seems so arbitrary when there is a hint of the fed reducing their buying of debt then stocks go down. How does that make a company suddenly worth less?

soccerluvof4

  • Walrus Stache
  • *******
  • Posts: 5335
  • Location: Artic Midwest
  • Retired at 50
    • My Journal
Re: Doubting the stock market
« Reply #68 on: February 08, 2014, 05:54:17 AM »
As they say, no-one is on their deathbed bragging they had worked a few more years than they needed to.

I don't know about that.  I think that if you bothered to look, you'd find lots of people who work more years than they need to, simply because they enjoy their work and/or like to be productive.  Indeed, I'm arguably one of them.  Thing is, instead of having to work the daily 8-5 (or sometimes 8-midnight if you're in software) grind doing boring stuff, we use our increasing FI to do stuff we like, on our own schedule.


Very good read! and I read some of your blog and find I share alot of the same insights.

Right again.  I did a horrible job of paraphrasing the top 5 regrets that a palliative care nurse (Bonnie Ware) said people expressed on their deathbed.  So yes, there are plenty of people that don't regret working more or harder than they felt they needed to, it's just one of the common regrets people had expressed, along with: not living a life true to oneself, not having the courage to express one's feelings, losing touch with friends, and not allowing oneself to be happier.   
http://www.care2.com/greenliving/top-5-regrets-people-have-on-their-deathbed.html