Why I am reducing mkt exposure+have been since 2015.

[steveo]

So is Mr. Pro beating the market then? or have margins shrunk to 0?

I think most don't beat the market over time. I just quickly googled this article so don't take it as gospel but the facts are the most fund managers don't beat the market over a shorter time period. I think over a longer time period it would be even rarer.

http://ritholtz.com/2013/01/mutual-fund-managers-who-beat-the-market/

Margins haven't shrunk to 0 for these guys. They keep making money because people are either uneducated, irrational or think they will be one of the ones who beat the market.

if some people bought high, some people bought low. Market profiteers and losers. Plenty of people bought that summer when it was $60.

Yes some people probably made a successful trade. Can they consistently beat the market though ? The data says that they don't and these aren't dumb people. Have you read the story of Long Term Capital Management. These guys were nobel prize winners. They were smart dudes. They went bust because they couldn't beat the market consistently. At one point they beat the market.

https://en.wikipedia.org/wiki/Long-Term_Capital_Management

Compare that to simply investing in the index.

Everyone has to make the call about what they want to do but I'm not as smart as the guys in LTCM so I'll put my money in non-leveraged index funds.

[protostache]

So is Mr. Pro beating the market then? or have margins shrunk to 0?

I think most don't beat the market over time. I just quickly googled this article so don't take it as gospel but the facts are the most fund managers don't beat the market over a shorter time period. I think over a longer time period it would be even rarer.

http://ritholtz.com/2013/01/mutual-fund-managers-who-beat-the-market/

Margins haven't shrunk to 0 for these guys. They keep making money because people are either uneducated, irrational or think they will be one of the ones who beat the market.

if some people bought high, some people bought low. Market profiteers and losers. Plenty of people bought that summer when it was $60.

Yes some people probably made a successful trade. Can they consistently beat the market though ? The data says that they don't and these aren't dumb people. Have you read the story of Long Term Capital Management. These guys were nobel prize winners. They were smart dudes. They went bust because they couldn't beat the market consistently. At one point they beat the market.

https://en.wikipedia.org/wiki/Long-Term_Capital_Management

Compare that to simply investing in the index.

Everyone has to make the call about what they want to do but I'm not as smart as the guys in LTCM so I'll put my money in non-leveraged index funds.

LTCM went bust because their greedy arbitrage strategies stopped working or went the wrong way all at the same time. LTCM did not play in a buy and hold, long term value world, despite the name, so it's not really fair to compare value investors to them.

I don't think anyone in here is talking about those types of strategies. In fact the people you're arguing against explicitly say they don't sell, except to satisfy their personal cash flow needs.

[steveo]

LTCM went bust because their greedy arbitrage strategies stopped working or went the wrong way all at the same time. LTCM did not play in a buy and hold, long term value world, despite the name, so it's not really fair to compare value investors to them.

I don't think anyone in here is talking about those types of strategies. In fact the people you're arguing against explicitly say they don't sell, except to satisfy their personal cash flow needs.

If you think that it's fine but I disagree with what you are stating. The point is that beating the market is hard. If you don't want to use LTCM as an example of the professionals not beating the market then use the average fund manager. The point is that beating the index isn't so simple and typically it leads to not beating the index but being below the index. If you add to that fees or your time the question becomes is it really worth it.

That is a call that everyone has to make.

[protostache]

LTCM went bust because their greedy arbitrage strategies stopped working or went the wrong way all at the same time. LTCM did not play in a buy and hold, long term value world, despite the name, so it's not really fair to compare value investors to them.

I don't think anyone in here is talking about those types of strategies. In fact the people you're arguing against explicitly say they don't sell, except to satisfy their personal cash flow needs.

If you think that it's fine but I disagree with what you are stating. The point is that beating the market is hard. If you don't want to use LTCM as an example of the professionals not beating the market then use the average fund manager. The point is that beating the index isn't so simple and typically it leads to not beating the index but being below the index. If you add to that fees or your time the question becomes is it really worth it.

That is a call that everyone has to make.

It's really not, though. The "average fund manager" and "average investor" are worthless to compare against because, on average, they have huge turnover-induced drags. Buy and hold forever is a strategy that, over time will beat an index, simply by virtue of having less turnover. The Voya Corporate Leaders Trust handily proves the point. They bought the DJIA in 1935 and never changed, except for mergers and spinoffs. Look at the chart on that page and tell me buy and hold can't beat the S&P 500. Sometimes it moves opposite the index, of course, and you can see that on this Google chart which unfortunately only goes back to 2000.

My point is that indexing is a valid strategy if you want to match the performance of a benchmark index without a lot of thought. Absolutely that's fine, and my wife employs it her accounts and I have a good chunk of my retirement money in VTSAX. That said, buying and holding good companies with a good margin of safety for a long time with zero turnover is also a perfectly valid strategy which will lead to different, sometimes better results than indexing.

[Rubic]

On average, that assumption is correct -- most investors fail to beat the index. Moreover, you only find out whether you're skilled or not in hindsight (even if you think you're skilled, it could be the Dunning-Kruger effect instead). Therefore, for any random person asking "how do I invest" on this forum, index investing is the safest answer.

This is probably the best single comment on this thread.

By definition, very few investors can consistently beat the market by any significant amount for any significant period of time.  I used to subscribe to the (now defunct, alas) Outstanding Investor Digest and I was always impressed with the amount of hard work it required to discover a suitable investment gem in the piles of publicly traded companies.

Nobody here is likely to think they can beat a grandmaster level chess player, but for some reason we (mea culpa) think we can beat the guy on the other side of the trade.  And even the people have the smarts and who are willing to do the hard work, many lack the temperament to sit on a large percentage of cash and wait for an overwhelming opportunity.
 

[Aphalite]

The point *ISN'T* to consistently beat your bench mark EVERY year. The point is to beat the bench mark over the sum total of a *NUMBER* of years. Incidentally, this is why Bogle decries mutual funds, as the best returns (as advertised) have already passed investors by when most of the investors flock into them.

As far as individual stock selection versus buying an index fund, I don't care if I miss the ride up if the ride up consists of securities like Amazon, Facebook, or Netflix, I'm perfectly happy with my "inferior" returns since on a risk adjusted basis (which is NOT the same thing as volatility), I come out ahead. There's this misconception that value investors are beholden to the same timeline as fund managers, and really, I don't care about my quarterly performance, as long as long term, I'm coming out ahead, building up a deferred tax advantage, and don't have to worry about what Mr. Market is thinking. I also don't care about a "smooth" ride up, the end goal is the end goal, why does it matter if I get there by getting 30% one year and -15% the next or if I get there by getting a smooth 8% a year? Additionally, if you're focused ONLY on quantitative measures when value investing, you're doing it wrong.

The mass equation on this forum of value investing = market timing = fund managing=anyone that doesn't index just doesn't understand statistics is bewildering

[mrpercentage]

The point *ISN'T* to consistently beat your bench mark EVERY year.

The mass equation on this forum of value investing = market timing = fund managing=anyone that doesn't index just doesn't understand

I like you. What do you do?

[FINate]

The mass equation on this forum of value investing = market timing = fund managing=anyone that doesn't index just doesn't understand statistics is bewildering

The thread is long with many a winding turn... Started with a proposal by OP to essentially time the market.

I think value investing got pulled in as a proposed hybrid value-investing-market-timing approach:

Why not combine a few of the lessons from the greatest investors into one awesome strategy?  Bogle taught indexing, Buffett taught buy and hold value investing, Benjamin Graham taught margin of safety (25%).  Why can't these co-exist?  Why can't you buy and hold (Buffett) an indexed market fund, or sector ETF (Bogle) when there is a margin of safety from it's fair value (Benjamin Graham).  When you can't do that with the overall market, sit on the bench or look for the same opportunities in individual sector ETF's of the market.  If you still can't find anything, wait it out.  There will be a "fat pitch" eventually. 

Which conflated value investing with the idea that one could time the market by using value investing strategies. I agree, they are separate things.

Long term buy and hold value investing is a sound approach, assuming one is willing to invest the time and energy necessary and has the intestinal fortitude to stick with it and ignore market momentum.

Passive index investing is also a sound strategy, though probably more appropriate for the majority of investors because it is so simple. Like value investing, one needs to avoid trying to time the market.

[steveo]

Buy and hold forever is a strategy that, over time will beat an index, simply by virtue of having less turnover.

It isn't this simple. Companies go bust.

That said, buying and holding good companies with a good margin of safety for a long time with zero turnover is also a perfectly valid strategy which will lead to different, sometimes better results than indexing.

I basically agree if:-

1. You pick them right. I assume some sort of value investing approach.
2. You accept that you may be less diversified than having an index fund.
3. You are prepared to spend extra time doing the research. This takes away time from doing something else.

I have a chunk of money in one company simply from working at that company and being given shares. The company has gone great and the returns have been fantastic. Personally though I don't like it because I'm not diversified at all. I also think that I (and everyone else) are better off focussing on an asset allocation that works for me (or you) rather than bothering picking any individual stocks. I don't think the additional return (if it occurs) is worth the effort.

[steveo]

Long term buy and hold value investing is a sound approach, assuming one is willing to invest the time and energy necessary and has the intestinal fortitude to stick with it and ignore market momentum.

Passive index investing is also a sound strategy, though probably more appropriate for the majority of investors because it is so simple. Like value investing, one needs to avoid trying to time the market.

Some good points here. I also think value investing can work if you are prepared to be less diversified within your equity (in this case) portfolio. I just think it's not the real big issue. I think it comes down to in degree of importance:-

1. Saving money.
2. Choosing some asset allocation that works for you.
3. Being as diversified as possible within each asset class that you have.
4. Maybe having some special investments ala value investing.

[faramund]

I basically agree if:-

1. You pick them right. I assume some sort of value investing approach.

Although, even if you pick say 6 stocks, and 3 are good, 2 are ho-hum and 1 is bad. Over time, the good stocks will grow to dominate your portfolio, and so their growth rates will tend to be your average growth rate (as long as you don't rebalance). This is why I say if you are diverse with non-bubble stocks, you'll probably be ok.

2. You accept that you may be less diversified than having an index fund.

Because index stocks are often dominated by large stocks, that's not necessarily true. I have around 50 stocks, none of these is more than 10% of my portfolio, and I don't have more than 20% in any sector/sub-sector. I'd say I have more diversity than most index funds - particularly where I am in Australia, where the index funds are dominated by mining and finance and about 6-10 large companies.

3. You are prepared to spend extra time doing the research. This takes away time from doing something else.

In my case, this is certainly true - although, if you buy a dividend biased index fund, or some other cheap value-based fund its not too much work. I know I spend a lot of time on this, but I enjoy doing it.

I have a chunk of money in one company simply from working at that company and being given shares. The company has gone great and the returns have been fantastic. Personally though I don't like it because I'm not diversified at all. I also think that I (and everyone else) are better off focussing on an asset allocation that works for me (or you) rather than bothering picking any individual stocks. I don't think the additional return (if it occurs) is worth the effort.

[steveo]

You make a good point with index investing having its downside in relation to large stocks possibly dominating an index.. One of the indexes that I will invest in has 50% of the index comprised of the top 10 stocks.

[Cougar]

The thread is long with many a winding turn... Started with a proposal by OP to essentially time the market.

Um, no, I offered no such advice; my advice was to preserve capital. reducing allocations during declines is how you do that. I offered no specifics of buying and selling at a moving average, a certain percent down or a point range on an exchange. I would say its working well as evidenced below.

[Cougar]

Alright, I started this thread and in it I have been cast aside, been called out, been told I’m nothing but a trend follower, market timer and probably many other things; but I don’t care. I’m not trying to earn anyones business, praise or respect; besides I have made 8% this year shorting the market and I only know of myself and horseman capital that have done that, so blast away at me; I can handle the insults as I’m keeping that short open and am likely to make over 10% this year easily.

I’m a capital preservationist and I would think the MMM’ers would be the same. I have gotten some good information from the MMM site, so I am posting this and the original post in this thread to return the favor.

I am posting again now because our local financial guy has now advised to reduce equity exposure to his minimum level that he had in the worst of 2008, 15%; so this is essentially my final and will be last warning.

The average person lost 50% in 2008. If that happens again or you just lose 28%, the average decline in a bear market(which we are right on the edge of and would be in if the market didn’t rally on a record 12% increase in oil in one day), how long is it going to take you to earn it back ?

The market high was 2131, we are now about 14% lower; so for you to get back to even from here the market has to get to 2429 or for the dow it is now 15,973 had would have to get to 20,875 for you to be even. Where do you see that happening this year ? If you see it gaining that much after the decline it has had in 6 weeks, then go ahead; but that’s more optimistic than jp morgan and citigroup advisors.

My minimum advice would be to reduce exposure until we hit the average decline of 28% and then if you want to average it, at least you saved around 15% (although given the economic indicators and the fact that the market has a greater herd mentality than ever before which will give faster and greater losses than anyone predicts in a recession, I’d bet it declines more than 28%).

I’ll give that one resource I mentioned at my first post. He is now going to 15% equity exposure, his maximum reduction of equity exposure in the worst of 2008 and even considering shorting to reduce his equity exposure to zero and every rally this year that he has called has been weaker than he was expecting , so you can be pretty sure we are going much further down than just the 8% that we are down so far this year. If you’re better than a guy who manages over 100 million dollars go ahead and do your own thing. If not you might read his latest newsletter at: realinvestmentadvice.com.

Okay, that’s it. I’m out again. I will come back and eat the biggest crow if by some miracle the current world economic slowdown reverses itself and the market makes a new high this year. If not, I will not be back to give advise until a new recovery has started, which I’d bet my car, does not happen this year.

Best of luck to all of you.

[ender]

I am posting again now because our local financial guy has now advised to reduce equity exposure to his minimum level that he had in the worst of 2008, 15%; so this is essentially my final and will be last warning.

The average person lost 50% in 2008. If that happens again or you just lose 28%, the average decline in a bear market(which we are right on the edge of and would be in if the market didn’t rally on a record 12% increase in oil in one day), how long is it going to take you to earn it back ?

Using your example of 2008, it took the SP500 about 5 years to consistently stay above its Jan 1, 2008 price (not including dividend reinvestment, which would make that occur earlier).

[FINate]

The thread is long with many a winding turn... Started with a proposal by OP to essentially time the market.

Um, no, I offered no such advice; my advice was to preserve capital. reducing allocations during declines is how you do that. I offered no specifics of buying and selling at a moving average, a certain percent down or a point range on an exchange. I would say its working well as evidenced below.

Changing allocations in anticipation of declines (or future/ongoing declines) is market timing (http://www.investopedia.com/terms/m/markettiming.asp). Unless of course you mean reducing allocations after declines, but that would be silly and the worst possible thing to do.

You're free to give advice, and others are free to agree or disagree with you. We all get to make our own decisions on how we invest, so it's good to hear many sides of the argument. It has been an interesting thread. Best wishes!

[wienerdog]

besides I have made 8% this year shorting the market and I only know of myself and horseman capital that have done that, so blast away at me; I can handle the insults as I’m keeping that short open and am likely to make over 10% this year easily.

I moved to mostly bonds last summer also and have remained.

In the other thread you said you moved into mostly bonds this past summer.  How have you made 8% this year with mostly bonds?

[aperture]

The world is an amazing place.  Unless we blow it up or destroy it, I see no reason why it will not be more amazing in the future.

+1.  I don't think it has been mentioned yet, so I will plug the book "A Random Walk Down Wall Street" by Burton Malkiel and the random walk hypothesis as one of the key underpinnings of market theory that guides most investors here.

I invest with every paycheck and do not pay much attention to the markets ups and downs.  An unfortunate corollary is that I speak up all the time - not paying much attention to whether my words are particularly artful, or painfully dull.  Best wishes to you all, Ap.

[bacchi]

I am posting again now because our local financial guy has now advised to reduce equity exposure to his minimum level that he had in the worst of 2008, 15%; so this is essentially my final and will be last warning.

But, but, some other prognosticators are saying that we have a bottom! Who do I believe? ???

[Eric]

The market high was 2131, we are now about 14% lower; so for you to get back to even from here the market has to get to 2429 or for the dow it is now 15,973 had would have to get to 20,875 for you to be even.

If the market high was 2131, to get to even it would have to get to 2131.  If it goes to 2132 or higher, then you're ahead.  Are you struggling with basic math again?

[wienerdog]

If the market high was 2131, to get to even it would have to get to 2131.  If it goes to 2132 or higher, then you're ahead.  Are you struggling with basic math again?

I think this might be the problem.

http://realinvestmentadvice.com/why-you-should-question-buy-and-hold-advice/

[steveo]

If the market high was 2131, to get to even it would have to get to 2131.  If it goes to 2132 or higher, then you're ahead.  Are you struggling with basic math again?

I think this might be the problem.

http://realinvestmentadvice.com/why-you-should-question-buy-and-hold-advice/

That is a good article.

I would state if you could reduce exposure prior to the market going down and then increase exposure prior to it going up and you didn't get smashed with tax issues then that would be the ideal approach.

I don't though believe that is possible so it comes back again to an appropriate asset allocation.

[Keith123]

If the market high was 2131, to get to even it would have to get to 2131.  If it goes to 2132 or higher, then you're ahead.  Are you struggling with basic math again?

I think this might be the problem.

http://realinvestmentadvice.com/why-you-should-question-buy-and-hold-advice/

That is one hell of an article.  I'm sure it will be dismissed by most on this forum unfortunately. 

[Telecaster]

That is a good article.

That article blows goats.

Basically all he said is that the market can go sideways for long periods of time.   Then he had lots of confusing charts that say the market can go sideways for long periods time.   Thanks, but we already all knew that, or at least we should know that by now.   

But he was also misleading.   At the beginning of the article, he's careful to point out the average returns of the S&P are about 10% with dividends included.   That's always something good to point out, because you can't look at just the price returns if you are trying to figure out the total, you must also include dividends.  But then he says don't count on 10% every year.  Fair enough, that what they tell you on the first day of Investing 101. 

Then later on he says that the market went sideways from 1963 to 1983 (presumably making investors sad).  Actually, this is his exact statement:

1) If you started investing in 1963, at the end of 1983 you had less money than you started with. (20 Years) 

Now, that actually was a really bad time for stocks.  However,  he's completely full of shit, because he's only look at price and not including dividends.  You know, the thing you are supposed to include.   If reinvested the dividends, you almost quintipled your money, and you realized a reasonable 8%-ish a year average annual gain.    Below average, but not horrific either. 

[bacchi]

Then later on he says that the market went sideways from 1963 to 1983 (presumably making investors sad).  Actually, this is his exact statement:

1) If you started investing in 1963, at the end of 1983 you had less money than you started with. (20 Years) 

Now, that actually was a really bad time for stocks.  However,  he's completely full of shit, because he's only look at price and not including dividends.  You know, the thing you are supposed to include.   If reinvested the dividends, you almost quintipled your money, and you realized a reasonable 8%-ish a year average annual gain.    Below average, but not horrific either.

And, more importantly for us, a portfolio with 100% stocks and a 4% inflation-adjusted withdrawal would've survived over a 30 year period from 1963-1993.

[wienerdog]

Plus if you compound $100 at 10% for 5 years you end up with $161.05.

"Let’s assume an investor wants to compound their investments by 10% a year over a 5-year period."

With his example and the 10% loss it would have took 34.4% to get back to 10% compound over a 5-year period.  His math is as bad as the OP but I guess you could call it a rounding error.  The article has a good point if you are buying 1 time and holding forever but most of us are buying during the -10% loss also which he doesn't figure in.  It might apply to a lottery winner that buys in at one point but I think there is a much bigger picture.

[Keith123]

That is a good article.

That article blows goats.

Basically all he said is that the market can go sideways for long periods of time.   Then he had lots of confusing charts that say the market can go sideways for long periods time.   Thanks, but we already all knew that, or at least we should know that by now.   

But he was also misleading.   At the beginning of the article, he's careful to point out the average returns of the S&P are about 10% with dividends included.   That's always something good to point out, because you can't look at just the price returns if you are trying to figure out the total, you must also include dividends.  But then he says don't count on 10% every year.  Fair enough, that what they tell you on the first day of Investing 101. 

Then later on he says that the market went sideways from 1963 to 1983 (presumably making investors sad).  Actually, this is his exact statement:

1) If you started investing in 1963, at the end of 1983 you had less money than you started with. (20 Years) 

Now, that actually was a really bad time for stocks.  However,  he's completely full of shit, because he's only look at price and not including dividends.  You know, the thing you are supposed to include.   If reinvested the dividends, you almost quintipled your money, and you realized a reasonable 8%-ish a year average annual gain.    Below average, but not horrific either.

Quintipled your money?  Where are you coming up with this?

I got 2.04% annual return (adjusted for inflation and dividends reinvested) from January 1963 to January 1983 - http://dqydj.net/sp-500-return-calculator/. 

Even with another source, I'm only coming up with 2.86% (adjusted for inflation and dividends reinvested) - http://www.moneychimp.com/features/market_cagr.htm

[Heckler]

It's hilarious how many people think "the market" is made up of only  500 US companies.

My Market is made up of 952 Canadian Bonds 3 to 10 years duration, 231 Canadian companies, 3791 US companies, 1810 EAFE and 3106 Emerging markets.  Average that!

[Telecaster]

Quintipled your money?  Where are you coming up with this?

I got 2.04% annual return (adjusted for inflation and dividends reinvested) from January 1963 to January 1983 - http://dqydj.net/sp-500-return-calculator/. 

Even with another source, I'm only coming up with 2.86% (adjusted for inflation and dividends reinvested) - http://www.moneychimp.com/features/market_cagr.htm

I was just being consistent with the author.  He didn't include inflation in his first example that set up the premise of the article, so I didn't include inflation either.

However, fact is he claimed you would have lost money from 1963 to 1983.   However you slice it, inflation or no, we both agree that's a false statement.

Bottom line is he's either 1) very confused, 2) trying to mislead people, or 3) both. 

None of those conditions are very impressive to me.

[mrpercentage]

wow this is specific

[NorcalBlue]

But, but....what time after lunch will it bottom?  1:00?  2:30??  EST lunchtime or PCT lunchtime?  What time does this clown...errrr, I mean analyst eat his lunch??

Specific my ass!  I want the exact time dammit!

[PathtoFIRE]

That is one hell of an article.  I'm sure it will be dismissed by most on this forum unfortunately.

That picture at the top does not bode well...anyway, off to read the article.

[PathtoFIRE]

The market high was 2131, we are now about 14% lower; so for you to get back to even from here the market has to get to 2429 or for the dow it is now 15,973 had would have to get to 20,875 for you to be even.

If the market high was 2131, to get to even it would have to get to 2131.  If it goes to 2132 or higher, then you're ahead.  Are you struggling with basic math again?

And since these "market" numbers don't factor in dividends, it doesn't even need to get to 2131 to break even.

[Kaspian]

If the market high was 2131, to get to even it would have to get to 2131.  If it goes to 2132 or higher, then you're ahead.  Are you struggling with basic math again?

I think this might be the problem.

http://realinvestmentadvice.com/why-you-should-question-buy-and-hold-advice/

That is one hell of an article.  I'm sure it will be dismissed by most on this forum unfortunately. 

That picture at the top does not bode well...anyway, off to read the article.

Holy crap!  That guy looks exactly like Chet from "Weird Science"!  ...Just sayin'. 

[MrGreen]

The market high was 2131, we are now about 14% lower; so for you to get back to even from here the market has to get to 2429 or for the dow it is now 15,973 had would have to get to 20,875 for you to be even. Where do you see that happening this year ? If you see it gaining that much after the decline it has had in 6 weeks, then go ahead; but that’s more optimistic than jp morgan and citigroup advisors.

I do not understand this at all. If I had $10,000 invested in the S&P 500 @ 2131 and it dropped 14%, then returned to 2131, I would still have $10,000. What am I missing here?

[MrGreen]

I think this might be the problem.

http://realinvestmentadvice.com/why-you-should-question-buy-and-hold-advice/

After reading that article, it's obvious that guy was just throwing around a bunch of charts and numbers and words to try and scare people into thinking they need a financial advisor. He shows a chart where the market has gone through four bull markets and four bear markets and then says it's all about timing because the market only made you money in half of the last four major cycles. Uh.....duh? That's kinda how it works with cycles. He's stating the obvious but making it look ugly and scary. The example he gives about needing a 30% return to recover from a 10% loss only works for the specific example he gives, but he makes it sounds like it applies universally, no matter how long the time line or what your previous returns were and that is simply untrue. Again, with the sowing fear and doubt.

If I were judging from that one article alone, I'd say that guy is the very definition of a shyster.

[PathtoFIRE]

The market high was 2131, we are now about 14% lower; so for you to get back to even from here the market has to get to 2429 or for the dow it is now 15,973 had would have to get to 20,875 for you to be even. Where do you see that happening this year ? If you see it gaining that much after the decline it has had in 6 weeks, then go ahead; but that’s more optimistic than jp morgan and citigroup advisors.

I do not understand this at all. If I had $10,000 invested in the S&P 500 @ 2131 and it dropped 14%, then returned to 2131, I would still have $10,000. What am I missing here?

You are missing nothing, and plus you would have dividends paid out during that period on top of that!

I think some people mixing things up with regards to percentages lost/gained. If the market drops 14% from it's high (100 * 0.86 = 86), then it has to gain ~16.3% from that low (86 * 1.163 = 100.02) to get back to the previous high. But if you are just dealing in the actual numbers, like the SP500 or the price of VTSAX or whatever, then 100 points regained is equivalent to the 100 points you lost the day before.

[Tyler]

http://realinvestmentadvice.com/why-you-should-question-buy-and-hold-advice/

That article is excellent.  Thanks for sharing.

His main point is not that buy and hold is a bad idea, but that your expectations for receiving the average return in your own personal timeframe may be unrealistic depending on your portfolio. 

When investors lose money in the market it is possible to regain the lost principal given enough time, however, what can never be recovered is the lost “time” between today and retirement.  “Time” is extremely finite and the most precious commodity that investors have.

While I disagree with his implication at the bottom that moving in and out of asset classes is the solution (I believe smart buy-and-hold diversification up-front can work even better), I think his points about unrealistic investing expectations and the long periods of slow compound growth obscured by simple long-term averages are very poignant. 

FWIW, I wrote a post this morning that kinda touches on a similar theme.  TL;DR -- the problem many people have with investing too heavily in stocks is the natural disconnect between their understanding of the long-term average and how that translates into what the annual returns actually look like.  It's not simply a matter of emotion, but of rational cognitive dissonance caused by the difficulty in truly comprehending uncertainty.  Rather than trying to ignore the tradeoffs of volatility, understanding them up front can make you a better and happier  investor. 

[thd7t]

The market high was 2131, we are now about 14% lower; so for you to get back to even from here the market has to get to 2429 or for the dow it is now 15,973 had would have to get to 20,875 for you to be even. Where do you see that happening this year ? If you see it gaining that much after the decline it has had in 6 weeks, then go ahead; but that’s more optimistic than jp morgan and citigroup advisors.

I do not understand this at all. If I had $10,000 invested in the S&P 500 @ 2131 and it dropped 14%, then returned to 2131, I would still have $10,000. What am I missing here?

You are missing nothing, and plus you would have dividends paid out during that period on top of that!

I think some people mixing things up with regards to percentages lost/gained. If the market drops 14% from it's high (100 * 0.86 = 86), then it has to gain ~16.3% from that low (86 * 1.163 = 100.02) to get back to the previous high. But if you are just dealing in the actual numbers, like the SP500 or the price of VTSAX or whatever, then 100 points regained is equivalent to the 100 points you lost the day before.

The only other thing I can think of is inflation, but it still doesn't account for the difference described.

[Tyler]

Then later on he says that the market went sideways from 1963 to 1983 (presumably making investors sad).  Actually, this is his exact statement:

1) If you started investing in 1963, at the end of 1983 you had less money than you started with. (20 Years) 

Now, that actually was a really bad time for stocks.  However,  he's completely full of shit, because he's only look at price and not including dividends.  You know, the thing you are supposed to include.   If reinvested the dividends, you almost quintipled your money, and you realized a reasonable 8%-ish a year average annual gain.    Below average, but not horrific either.

The chart he is referencing in that quote is titled "Real S&P 500 index".  The word "real" means it is inflation adjusted. 



The fact that the stock market (including dividends) lost inflation-adjusted money for the 20 year period starting in 1963 is backed up by other sources.

http://www.crestmontresearch.com/docs/Stock-Matrix-Tax-Exempt-Real3-11x17.pdf

[thepokercab]

http://realinvestmentadvice.com/why-you-should-question-buy-and-hold-advice/

If I were judging from that one article alone, I'd say that guy is the very definition of a shyster.

That is a good article.

That article blows goats. 

Ladies and gents:  The Internet! 

[Telecaster]

The fact that the stock market (including dividends) lost inflation-adjusted money for the 20 year period starting in 1963 is backed up by other sources.

http://www.crestmontresearch.com/docs/Stock-Matrix-Tax-Exempt-Real3-11x17.pdf

Hey, two out of three ain't bad.  Just for the sake of argument, let's use your numbers and we'll agree you would have lost money in that time frame.  However, Lance is still being deceptive.    He's  clearly talking about the accumulation phase.  Right before he introduces those charts, he says:

This leaves most individuals with just 20 to 25 productive work years before retirement age to achieve investment goals.

Here is the problem. There are periods in history, where returns over a 20-year period have been close to zero or even negative.

He's saying the poor slob who don't start saving until only 20 years to retirement won't get much by being in the market by the time he retires.   We'll call the poor slob Frodo.    Frodo guy started buying stock in 1963.  Now it is 1983, he retires and because he's been making monthly contributions or whatever, he has a decent stash, but it is pretty much all principal.  He's got nothing in the way of stock returns.    Poor bastard. 

Lance uses this as a warning.  Don't be like Frodo.   And for a fee, he can save you from the problem (his word) of winding up like Frodo.   Whew!  Glad a smart young man like that can help us dodge that bullet!   Only the real problem is Lance is completely full of shit.   Frodo is a fucking genius. 

You see, Frodo was loading up on stocks at probably the best time in history to buy stocks.   And just as he retires, the market takes off like a rocket!   Frodo sees his portfolio explode with double digit returns year after year after year.   Frodo is now in physical danger---from falling off his wallet and breaking an arm.  And if he had bought a few bonds along the way, he would have made a bundle there, too.  Just for grins, go look at your chart and see what the annual returns were from 1983 when he retires until say, 2003 when presumably he dies at age 85.  I know.  Pretty amazing. 

One thing Lance is too stupid to realize is that you don't want the market to go up during the accumulation phase.  You want it to stay low, so you can buy more stocks.  Intelligent people don't give a shit about maintaining an specific annual return, they realize there will be volatility.  The thing Lance described as a "problem" is actually the best thing that could happen to you.  Frodo spent more than a decade buying stocks at a P/E of 10 or less, but the price didn't go up so Lance views that as a failure.    You want to avoid that?  Really?   That's literally insane.  Frodo should have been doubling down.  Good thing Lance wasn't there to "save" him. 

I'm piling on, but there was layer after layer of stupidity in the article.  It is like an onion.  You peel back one layer of stupid, and there is a stronger, more powerful stupid beneath.   I would be very interested to see Lance's clients' actual returns, after he has extracted his fees and commissions from them.  Everything about that article screams "Scam Artist" in big, red flashing letters.   In a just world, Lance would be in jail instead of being loose on the streets separating good citizens from their hard earned money.   

[Jack]

The fact that the stock market (including dividends) lost inflation-adjusted money for the 20 year period starting in 1963 is backed up by other sources.

http://www.crestmontresearch.com/docs/Stock-Matrix-Tax-Exempt-Real3-11x17.pdf

Hey, two out of three ain't bad.  Just for the sake of argument, let's use your numbers and we'll agree you would have lost money in that time frame.  However, Lance is still being deceptive.    He's  clearly talking about the accumulation phase.  Right before he introduces those charts, he says:

This leaves most individuals with just 20 to 25 productive work years before retirement age to achieve investment goals.

Here is the problem. There are periods in history, where returns over a 20-year period have been close to zero or even negative.

He's saying the poor slob who don't start saving until only 20 years to retirement won't get much by being in the market by the time he retires.   We'll call the poor slob Frodo.    Frodo guy started buying stock in 1963.  Now it is 1983, he retires and because he's been making monthly contributions or whatever, he has a decent stash, but it is pretty much all principal.  He's got nothing in the way of stock returns.    Poor bastard. 

Lance uses this as a warning.  Don't be like Frodo.   And for a fee, he can save you from the problem (his word) of winding up like Frodo.   Whew!  Glad a smart young man like that can help us dodge that bullet!   Only the real problem is Lance is completely full of shit.   Frodo is a fucking genius. 

You see, Frodo was loading up on stocks at probably the best time in history to buy stocks.   And just as he retires, the market takes off like a rocket!   Frodo sees his portfolio explode with double digit returns year after year after year.   Frodo is now in physical danger---from falling off his wallet and breaking an arm.  And if he had bought a few bonds along the way, he would have made a bundle there, too.  Just for grins, go look at your chart and see what the annual returns were from 1983 when he retires until say, 2003 when presumably he dies at age 85.  I know.  Pretty amazing. 

One thing Lance is too stupid to realize is that you don't want the market to go up during the accumulation phase.  You want it to stay low, so you can buy more stocks.  Intelligent people don't give a shit about maintaining an specific annual return, they realize there will be volatility.  The thing Lance described as a "problem" is actually the best thing that could happen to you.  Frodo spent more than a decade buying stocks at a P/E of 10 or less, but the price didn't go up so Lance views that as a failure.    You want to avoid that?  Really?   That's literally insane.  Frodo should have been doubling down.  Good thing Lance wasn't there to "save" him. 

I'm piling on, but there was layer after layer of stupidity in the article.  It is like an onion.  You peel back one layer of stupid, and there is a stronger, more powerful stupid beneath.   I would be very interested to see Lance's clients' actual returns, after he has extracted his fees and commissions from them.  Everything about that article screams "Scam Artist" in big, red flashing letters.   In a just world, Lance would be in jail instead of being loose on the streets separating good citizens from their hard earned money.

I LOL'd. Good job!

[Tyler]

One thing Lance is too stupid to realize is that you don't want the market to go up during the accumulation phase.  You want it to stay low, so you can buy more stocks.  Intelligent people don't give a shit about maintaining an specific annual return, they realize there will be volatility.  The thing Lance described as a "problem" is actually the best thing that could happen to you.  Frodo spent more than a decade buying stocks at a P/E of 10 or less, but the price didn't go up so Lance views that as a failure.    You want to avoid that?  Really?   That's literally insane.  Frodo should have been doubling down.  Good thing Lance wasn't there to "save" him. 

I respectfully disagree.  Aside from the fact that most investors are not blithely bullish enough to take losses to their life savings for 20 straight years without changing course, the author's point is that not everyone's goals are more than 20 years out.  IMHO, recognizing that everyone is different and planning accordingly is wise, not stupid. 

I do completely agree with you that active management is not the solution.  But ignoring how your investments should be matched to the timeframe of your goals is not the solution, either.  I believe there's a middle ground where people can evaluate a variety of passive portfolios with different returns and levels of volatility and pick one that works for their personal goals.  Putting all of your money in the stock market is one valid option, but it is not the only one or even the best one for all people.   

[sol]

First off, let me just state that the op is apparently full of it.  I hate it when people claim to have foreseen things that have already happened.  If you really predicted a coming crash, please point to your published and unedited prediction dated before it started, as distinct from all of your other failed predictions of a coming crash that came before that.

Second, the market is up 5% in the past week.  At what point does that crystal ball say you should buy back in to the market before it rises again?  Avoiding losses by timing your sell doesn't help you unless you can also capture the subsequent gains by timing your buy. 

Oh great and powerful market timing prognosticators, ye who have foreseen the future so clearly, please call the bottom for us just like you (retroactively) claim to have called the top.

[Telecaster]

I respectfully disagree.  Aside from the fact that most investors are not blithely bullish enough to take losses to their life savings for 20 straight years without changing course, the author's point is that not everyone's goals are more than 20 years out.  IMHO, recognizing that everyone is different and planning accordingly is wise, not stupid. 

But that's not what he said.   He specifically used a 20 year time frame as his accumulation period before retirement.   That was his chosen investing horizon,  which he claimed was problematic.    As proof, he then gave the example of the period 1963-83 as a particularly bad time to be buying and holding stocks prior to retirement because of poor returns during that time frame.  There are, he said, MAJOR problems with buy and hold (emphasis his). 

He is completely, totally, full of shit.  The period 1963-83 (again, his example) was one of the best possible times in history to be buying and holding stocks.  This is the time frame he chose as an example supporting his thesis that buy and hold doesn't work.   Yet buy had hold worked incredibly, fabulously well!  Almost unbelievably well.  It would have been a monumental mistake not to buy stocks back then.  Yet here he is, advocating people make the same epic mistake and pay him for the privilege.     

Does that make any sense at all to anyone?  I mean, we're talking hindsight here.  He's saying people should avoid doing something in the future that that would have made them fabulously rich in the past.    Is that advice anything other than ridiculously stupid? 

You're right, a lot of people emotionally aren't going to invest in a down or sideways trending market.  But it doesn't follow the emotional decision is automatically the right one.   We should strive to make decisions based on reason and logic, at least some of the time.  A bad decision based on emotion is still a bad decision. 

And if you can't make the right decision in hindsight.... Good lord, this guy an idiot.   

[Cycling Stache]

I respectfully disagree.  Aside from the fact that most investors are not blithely bullish enough to take losses to their life savings for 20 straight years without changing course, the author's point is that not everyone's goals are more than 20 years out.  IMHO, recognizing that everyone is different and planning accordingly is wise, not stupid. 

But that's not what he said.   He specifically used a 20 year time frame as his accumulation period before retirement.   That was his chosen investing horizon,  which he claimed was problematic.    As proof, he then gave the example of the period 1963-83 as a particularly bad time to be buying and holding stocks prior to retirement because of poor returns during that time frame.  There are, he said, MAJOR problems with buy and hold (emphasis his). 

He is completely, totally, full of shit.  The period 1963-83 (again, his example) was one of the best possible times in history to be buying and holding stocks.  This is the time frame he chose as an example supporting his thesis that buy and hold doesn't work.   Yet buy had hold worked incredibly, fabulously well!  Almost unbelievably well.  It would have been a monumental mistake not to buy stocks back then.  Yet here he is, advocating people make the same epic mistake and pay him for the privilege.     

Does that make any sense at all to anyone?  I mean, we're talking hindsight here.  He's saying people should avoid doing something in the future that that would have made them fabulously rich in the past.    Is that advice anything other than ridiculously stupid? 

You're right, a lot of people emotionally aren't going to invest in a down or sideways trending market.  But it doesn't follow the emotional decision is automatically the right one.   We should strive to make decisions based on reason and logic, at least some of the time.  A bad decision based on emotion is still a bad decision. 

And if you can't make the right decision in hindsight.... Good lord, this guy an idiot.

Telecaster, these are great posts.  And it highlights the much bigger problem--buying high and selling low, which is the overwhelming behavioral problem from which people suffer.  Buying index funds with each available dollar each paycheck is something that people can handle, and handling it makes people rich.

How many people who believe e.g. Ford is amazing can put every available dollar there every paycheck for 20 years and not give in to the temptation ("smart valuation") that tells them to time the market becuase Ford looks particularly under or over valued?  Warren Buffett does it.  That's why you know his name.  How many can name 10 more Buffetts? 

I'm incredibly blessed to have sufficient money, no debt, and a ridiculous overage each paycheck that automatically goes in the market.  And I STILL have pangs of regret when the money goes in and the market quickly drops even though I know it's actually good for me because I'm still accumulating.  It's only because my contributions are automated and I don't need the money for other purposes that I'm able to stay committed to those dollars going in every couple weeks.

How many people can honestly do that buying individual stocks based on what they believe the valuations are at a given time, and then stick with it for years and years and years no matter what kind of beating they take over a short or medium time horizon?  I suspect very few.

The behavioral weakness (buy high sell low) exists because it is the overwhelming tendency of people trying to make non-automated decisions.  It doesn't mean that a person can't resist that temptation, but the number of people who believe they're special--special because they value a stock better, special because they can resist the temptation to buy or sell "value" stocks at the wrong time, special because they understand market trends better--is much greater than the number of special people out there.

I never beat the market, but I beat the people not in the market, and the people who continually get the market wrong.  And I've made a lot of money as a result.

And missing in all this is the MMM point that--at least at until shortly before FI--the money gained from additional savings often dwarfs the money made in the market from chasing an extra percentage point or two.  For the vast majority of people on this forum, the best possible approach is most likely make it, save it, and invest the extra in index funds--paycheck after paycheck after paycheck. 

[MrDelane]

Telecaster - I am only adding to this thread to thank you for the incredibly concise and simple way you laid out your explanation.  You just made a switch go off in my head.  Thanks for that.

[Interest Compound]

First off, let me just state that the op is apparently full of it.  I hate it when people claim to have foreseen things that have already happened.  If you really predicted a coming crash, please point to your published and unedited prediction dated before it started, as distinct from all of your other failed predictions of a coming crash that came before that.

Second, the market is up 5% in the past week.  At what point does that crystal ball say you should buy back in to the market before it rises again?  Avoiding losses by timing your sell doesn't help you unless you can also capture the subsequent gains by timing your buy. 

Oh great and powerful market timing prognosticators, ye who have foreseen the future so clearly, please call the bottom for us just like you (retroactively) claim to have called the top.

Agreed. Survivorship Bias at it's finest. Failed market-timers tend not to promote their blunders. Maybe we should bump this thread a year or two from now to remind them?

In all the trading forums I've been to, people rarely make calls ahead of time. And when they do, the public embarrassment is palpable, as they inevitably lose.

Seriously, to all the Market-Timers in the thread, to continually debate this is silly. Publicly post your prediction, including a live follow-up to the effect of:

1.  "Today I am reducing market exposure, as I predict the market will go down."

or

2.  "Today I am increasing market exposure, as I predict the market will go up."

If you believe in your reasoning, then you shouldn't object to the results being publicly verified. Hmm, maybe we should make a new thread specifically for this. A database highlighting the public failures/successes of the forum's market timers. That'd be much more fun to see, than continual debates about someone making a claim that they predicted the future, but only after it came true.

[Interest Compound]

I see what you're saying and I'm really trying hard to be convinced.  I mean, it would make my life so easy to just buy VTI with every spare dollar I have all the time.  You would have no argument from me if we weren't at one of the record high points of valuation in the history of the market

Here's an exercise for you. Look at your chart:



and hide it party behind another window on your computer, so you can only see the graph up to 1985:



Now move the window slowly to the right, so you can see what this chart would look like in real-time, with 0 knowledge of what the future years hold.

Now mark down the points on the chart where you think the market was "obviously expensive":



Then mark down the points on the chart where you would've started investing in the market again. Let me guess, you think you would've ended up putting all your money in the market at the bottom of the 2001 and 2008 crashes? Look at them from the perspective of someone who doesn't know the future, and tell me it doesn't look "obviously expensive",





Finally, go to IndexView, and see if it would've made any difference in your returns. I think you'll be surprised. I just tried this exercise, and ended up losing money. If you're feeling particularly brave, upload your marked-up chart for us all to see. :)

We are still waiting for your marked-up chart Keith123. In the absence of a live-post indicating which dates it became safe/unsafe to add/reduce market exposure, the least you could do is look retroactively at your chart, and tell us when you would've made your determinations. :)

Then we can go to IndexView and confirm, again with the benefit of hindsight, how your moves would've turned out.