Post #46,227
7/20/02 3:04:02 PM
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I respect that, but disagree
There are lots of places to put money. My 401K is in treasuries. Barring visions of the US government financially collapsing, that is safe. If it doesn't make money, it isn't losing it either.
As for the market sustaining itself at historically high levels, I don't buy it. Investors who believe that are IMHO still lost in fantasies from the late 90's. The historic levels were the historic levels because that was a fair valuation of risk/return for stocks. It is still a fair valuation.
As for everything else being risky, wake up and smell the coffee. Do you think that bonds were safe in the 80's? How about commodities in the 70's? There is always lots of risk in the world, and more in stocks than elsewhere. After 400 years of having stock markets, that appears to be a given. Unless you tell me something fundamental about the world that has changed, I am going to continue to believe that stocks will return to a more usual valuation within 5 years. Which means that I believe that this train isn't done being wrecked.
Finally your timing comment would ordinarily be worth listening to. That is a great way to manage short-term volatility. But we are in what is so far the second largest devaluation of the US market in the last century. The only one larger came after a run-up which has only been exceeded once, which suggests that when all is said and done, we may lose even more this time around. We likely will never again see such a bad time to invest in stocks in our lives.
I don't care about missing a few percent, or even a few dozen percent, off of the bottom. I just don't want to be there until I feel confident that the wreck is over.
Your mileage apparently does vary. I also note that in 25 years, the question of which of us is right will be ancient history. We will probably both be fine. What is at stake is most of what we have invested so far in our retirement funds. Which isn't all that much in my case because I haven't been working for very long...
Cheers,
Ben
"... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything."
--Richard Feynman
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Post #46,237
7/20/02 7:05:23 PM
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Perhaps I'm crazy
but I find treasury funds about as nutty as growth funds. The government's Social Security shenanigans (and other practices that would make an Enron CEO blush with shame) are going to have to come to roost *sometime*.
I try to diversify (as much as our 401K plan allows) between companies that actually *make* things. GE and P&G may drop 30-40% (pulling numbers out of my ass) but with employer matching and tax benefits that still translates into a net plus.
Famous last RPG quotes: "I'll just shoot this fireball down the dungeon passageway..."
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Post #46,240
7/20/02 7:37:09 PM
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Perhaps not so crazy
I agree with you about our government. However until there is a sign of something to cause the markets to re-evaluate that, I will act like the textbooks do and consider short-term treasuries to be "riskless" investments.
Furthermore with my opinion about where real company valuations and worth stand relative to each other, I prefer the less risky investment for now.
Cheers,
Ben
"... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything."
--Richard Feynman
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Post #46,263
7/21/02 1:32:34 AM
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You might enjoy Bogle's latest speech.
He founded Vanguard - one of the largest mutual fund companies. [link|http://www.vanguard.com/bogle_site/sp20020612s.html|Here]. He shares much of your caution. Make no mistake about it, then: It was speculative return that drove the Great Bull Market. The fact is that, based solely on investment return, $1 invested in the S&P 500 at the outset would have grown to $7\ufffda handsome seven-fold enhancement. But the leap in the P/E multiple alone increased that investment return to a market return of $24\ufffdnearly twenty-four times over, 3 \ufffd times (!) the hardly inconsequential investment gain. Yes, we had literally never had it so good.
Can it happen again? I can't imagine how. To understand why, let's take Lord Keynes' advice and look at the sources of the past returns on stocks and then apply them to the decade ahead. Today, the S&P 500 Index yields not 5% but 1 \ufffd%, reducing this key contributor to stock returns by fully 3 \ufffd percentage points. When we add an assumed 6% earnings growth (corporate earnings, truth told, grow at about the same pace as our economy), the investment return on stocks would be just 7 \ufffd% per year. Will speculative return add to or detract from this figure? While the 33% decline in the S&P 500 since the March 2000 high has brought the P/E ratio down to 21 (based on "normalized" earnings at that), that's still quite high relative to the long-term norm of 16 times. So, I think the P/E is unlikely to rise, and could easily decline, perhaps to 18 to 20 times.
[...]
It is hardly farfetched, then, to expect future bond returns that are likely to parallel those of stocks. If so, the traditional 3% equity risk premium\ufffdthe amount by which stock returns have exceeded bond returns over the past century\ufffdmay be far smaller, perhaps even non-existent. There are, of course, those who say that there is some God-given mandate that an equity premium must exist. Yet history tells us that bond returns have exceeded stock returns in one out of every five decades. The reality is that restoring an equity premium to stocks will require either (a) lower interest rates, or (b) some combination of higher earnings growth, higher dividend yields, and lower P/E ratios, which is likely only if there is another downward leg in the stock market. In any event, my view is that we are entering an era of lower returns on financial assets. His book, "Common Sense on Mutual Funds" is excellent. I remember the 1973-1974 recession and the stock doldrums that continued for many years. I remember pre-breakup AT&T at $19 and I remember IBM at $40. Stocks and markets go up and down. You're right that equities are still pricey at these levels, but I feel much better about the US markets than about e.g. Japan's. Perhaps foolishly, I'm willing to ride out the current drop in equity values because I'm basically optimistic about the future and because I know that I won't be able to know when to get back in on the way up. I know you're not a trader, and I know you're not advocating market timing. You're doing what's best for your comfort level and that's what every investor should do. Nobody knows the future and we'll see what happens. :-) Cheers, Scott.
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Post #46,276
7/21/02 10:20:07 AM
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I did, thanks
And he corrected me on some facts as well. I had forgotten about the magnitude of the 1970's slide.
If only more fund managers felt like he does.
Cheers,
Ben
"... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything."
--Richard Feynman
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Post #46,290
7/21/02 1:23:51 PM
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That was an excellent link. Thanks!
Alex
"Television: chewing gum for the eyes." -- Frank Lloyd Wright
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Post #46,325
7/22/02 12:48:59 AM
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So if I'm reading you aright...
... if I indirectly hold any stock - i.e. in a managed investment portfolio -, the right thing to do is to leave it there.
Wade.
"Ah. One of the difficult questions."
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Post #46,436
7/22/02 8:16:37 PM
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Sorta...
I think that right now, not holding stock is a wise idea.
Long-term the short-term reasons that I believe that are irrelevant, it doesn't matter which you do.
But I would suggest that you read that speech by Bogle. A managed investment portfolio is something that I don't believe is a very good idea for reasons that he explains very well.
Cheers,
Ben
"... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything."
--Richard Feynman
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