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Does the stock market create wealth?


KandJBm

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The purpose of the financial markets, is to aggregate the large amounts of capital necessary for private enterprise. It is used to buy plant and equipment and finance operations. So, in this respect, it does crate wealth. Keep in mind municipal bonds are how roads, schools, hospitals get built. So, they are an important part, not only on the US Economy, but our society as well.

 

I suppose that plant and equipment should be considered wealth or at least it is necessary for the production of wealth such as clothing, food, housing, transportation, other stuff that supports human life. So if the stock market (some index of course) goes up by 5% does that mean that these publicly traded corporations have increased their plant and equipment by approximately 5%? Or their ability to produce more good stuff (wealth) by 5%?

 

This is more like what I am trying to understand about the stock market and does it create wealth. How? When? And how do we measure the wealth or the increase in wealth? By the stock market money values? But they fluctuate so much - does wealth really fluctuate that much? Doubling in 5 to 6 years and cut in half in 1 or 2 years?

 

J

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The stock market is the place where people buy and sell shares in COMPANIES they think will return a profit on their investment. That's all it is. Now you can buy stock in the company that runs the market, so that could create wealth. Otherwise you are investing in companies you think will grow and increase in value. Or, if you are a risk taker, there are ways to get against companies and make money when they fail.

 

Now, why the Hangup on 'wealth'. The wealthiest people we know don't need X amount of dollars to validate themselves.

Barb & Dave O'Keeffe
2002 Alpine 36 MDDS (Figment II), 2018 Ford C-Max HYBRID
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J,

Read this that I just posted on another thread. http://www.tflguide.com/2011/04/how-investors-react-in-different-market-situations.html

 

Pay close attention to those first two illustrations in the article if you don't want to read the whole two pages. The market goes in those cycles and they are predictable only in that they will happen. Individual stocks may or may not coincide with those cycles. For a bad example, Enron caused good investors and employees to lose all in a few days once exposed. Bernie Madoff ring a bell? People tend to be greedy in their financial perspectives, others not so much so. Some are envious of successful people to the point of hatred. Man if they put all that energy into research they'd make millions. Most folks want a Guru to tell them. Others want to hire a wealth maker. If I can afford the advisor then I can't afford them from my perspective. I am not satisfied with the "norm." My tax lady worked with a financial planning company and kept silent all the time I told others to invest in it. My company owner at that time needed an investment and her boss advised him to buy X stocks and he lost a lot because he panicked and did not understand that if the company invested in is not an Enron or a pump and dump. Then when the cycle reverts the smart money sells if needed. If he had held on and not sold low in a panic, he would have made some really nice gains on his money but not more than 10% on those investments. He actually could have invested a $100k block or more and been possible a billionaire now had he kept investing at buy opportunities when others sell.

 

So your question become when to sell and when to buy. Go back to the chart in that link and realize that when the market gains have peaked no one knows so some who ride it out as it slides down to below where they bought sell in a panic.

 

Others, like with Tesla, who bought at 17 then sold at $50 might feel they made an error in judgment. Not so. Smitty said that a smart investor makes a plan and sticks to it. If more than doubling their money was the goal they need to move on. I am not that well informed about individual stocks and investing. I just happened to follow Musk and write about what he was doing here on the forums long before the Are you still in thread started in 2011. The reason Smitty says that is because no one can time the market let alone an individual stock. I can't tell you when Tesla will have peaked, but I will not evaluate my holding Tesla shares until 2020, maybe 2017/8. So I have no crystal ball, nor does anyone else, here, in financial advisor offices, banks, or anywhere else because they don't know what will panic folks next.

 

Some try to influence that with scare tactics in the media. The big popular financial advisors like Cramer and his ilk say sell Tesla get out loudly on Monday and say buy it the next Monday. No crystal ball. But for some they scare enough folks to make a few bucks per share selling on the way up with any stock after a successful scare. That works great if you have enough money to buy a million shares and then sell at two bucks a share profit. Those folks are wealthy beyond mine. I'm just a retired enlisted guy that was lucky in several tech businesses as diverse as satellite TV sales and services, Computer sales in our store and service and Internet in Europe 91-95, as well as many gun trades and restoring classics and value cars for my self and doubling the capital investment not counting my labor because that was done for stress relief. Now I can't get under cars and turn wrenches like before but that's OK. I can invest in the next wave of disruptive cars today. I still take the old computers as payment then refurbish them to better than new with new SSDs, more RAM and a thorough cleaning. Doubling my money every time. A few hundred here and a few hundred there eventually adds up to serious money.

 

So far I'm batting 1000 in the markets and took all my initial money off the table and token $5k profit only to be able to say I made a profit even if it failed. The trouble with that was it never got that low again. So I upgraded my vehicles cash and have invested regularly since with buy opportunities as they come. I believe they have a way to go yet.

 

Remember when Apple was thought to have topped out at $50 in 2005 when they announced they were going to Intel hardware developed and used by Windows from the start. If you were here you saw me know to invest in them and I only had about $10k then to invest. But you also saw me chicken out because basically, I am not a gambler. But I knew that Apple would charge the same for hardware that essentially cost half what they were paying and be more powerful, and wrote that here too. I did not kick myself in the butt too long as I was preparing for Tesla to IPO and held the money and more for the next big opportunity. An old friend Bob Wilcox helped me get over the jitters and open my first investment account in early 2010 on news that Tesla was indeed going to go public. I closed my eyes and clicked on buy Tesla online at USAA.

 

When Space X IPOs I will likely see an opportunity to diversify and own two stocks or put all of my Tesla into it. Musk is predictable. He knows what to do, does it, then after he has it down pat and ready to get serious with his next step, he goes public. The Tesla Roadster was sold out for the entire production run. But folks forget that the first year of full production 2008, all the reservations were for the full amount ~$100k depending on options. Then he looked for his factory, found a good deal and went public two years after he put the very first highway capable full EV for sale, not lease, on the road in full production.

 

The question to ask is not whether he is pumping to dump, but why did he wait two years to go public after he had a runaway hit in the Roadster. The answers to that are easy and many.

 

So wealth can only be made the old fashioned way, real work in research or doing a product yourself and knowing where you are going with it, like Musk continues to do. The rest are like all gamblers, they won big and lost big and are ahead or behind an amount never stated percentage wise.

 

There are several next big things that just came out of CES. Remember when Netflix raised its price and all thought that they were through? I have great hopes for the Bolt and the Faraday Future, just not the Batmobile they showed at CES. But I could be wrong.

 

None strong enough to make me cash out and invest in them especially now. Maybe later but not when the price is down like today.

RV/Derek
http://www.rvroadie.com Email on the bottom of my website page.
Retired AF 1971-1998


When you see a worthy man, endeavor to emulate him. When you see an unworthy man, look inside yourself. - Confucius

 

“Those who can make you believe absurdities, can make you commit atrocities.” ... Voltaire

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I suppose that plant and equipment should be considered wealth or at least it is necessary for the production of wealth such as clothing, food, housing, transportation, other stuff that supports human life. So if the stock market (some index of course) goes up by 5% does that mean that these publicly traded corporations have increased their plant and equipment by approximately 5%? Or their ability to produce more good stuff (wealth) by 5%?

 

This is more like what I am trying to understand about the stock market and does it create wealth. How? When? And how do we measure the wealth or the increase in wealth? By the stock market money values? But they fluctuate so much - does wealth really fluctuate that much? Doubling in 5 to 6 years and cut in half in 1 or 2 years?

 

J

 

Plant and equipment are considered assets that the company owns to produce a product or a service that in-turn will produce income.

 

When the value of a company goes up by 5% it means that something has changed to cause people to perceive that the company is 5% more valuable.

 

When a stock market index goes up by 5% it means that the sum total of the value of all companies that comprise the index is now perceived to be 5% more valuable. The estimate of their ability to produce future earnings, profits, and cash flows has increased by 5%.

 

A publicly traded company’s value is constantly being evaluated by the people buying and selling its stock on the stock exchange. I don’t think most of those people are really factoring “wealth” creation into that equation in the sense that I believe you are defining wealth in this discussion. More commonly, I think, most people consider cash and other liquid assets to be wealth in both their private life and in their investment portfolio. Cash can readily be exchanged for pretty much anything you want so it’s just a convenient way to make exchanges of all other assets very easy.

 

One way analysts estimate the value of a company is the discounted value of all future cash flows. Typically, discounting means cash flows beyond 10 or so years are negligible in the equation. Many people hold to a theory that the current price at which a stock is trading already incorporates all the information (efficient market hypothesis) that is available about that company’s value. So, those who buy or sell the stock at more or less than that price believe they have some insight or facts that is not (widely) known by others in the market at the time they make the trade.

 

The stock’s price (the perceived value of the company per share) can change very rapidly based on new information becoming available. It wasn’t very long ago that many “experts” predicted that we’d soon see oil at $200/bbl. Even Goldman Sachs got it totally wrong. Now many of those same people predict we won’t see it above $70 again. The recent drastic change in the price of oil has had a huge impact on the calculated discounted cash flows (and even the ability to avoid bankruptcy) of many companies both those that own oil still in the ground and those providing services to the oil industry. I don't think anyone predicted the policy that Saudi Arabia has adopted; new information, new calculations, new valuations.

 

Every time a company files a quarterly report they disclose new information about their income, balance sheet, cash flows, pending lawsuits etc. Investors factor this new information into their estimate of the company’s value and the price at which the company trades adjusts accordingly.

 

Most people work to earn “money” and the more money they have the wealthier they feel. That’s because they know they can readily convert it to any other form of wealth. Many spend their life working for a weekly paycheck and once they have enough money and “stuff” they stop working and retire. Others might earn money by starting or buying a small business and build up “wealth” that way. Those that buy e.g., a small restaurant to operate generally hire an accountant to go through a very similar evaluation process as the person deciding how much a share of General Motors is worth.

 

This is all a very high level view of what a lot of people believe. There are other theories and one could spend years studying and evaluating them.

 

hope this helps a little,

Ron

Ron Engelsman

http://www.mytripjournal.com/our_odyssey

Full-Timing since mid 2007

23' Komfort TT

2004 Chevy Avalanche 4x4 8.1L

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When the value of a company goes up by 5% it means that something has changed to cause people to perceive that the company is 5% more valuable.

 

When a stock market index goes up by 5% it means that the sum total of the value of all companies that comprise the index is now perceived to be 5% more valuable. The estimate of their ability to produce future earnings, profits, and cash flows has increased by 5%.

 

 

 

One way analysts estimate the value of a company is the discounted value of all future cash flows. Typically, discounting means cash flows beyond 10 or so years are negligible in the equation. Many people hold to a theory that the current price at which a stock is trading already incorporates all the information (efficient market hypothesis) that is available about that company’s value. So, those who buy or sell the stock at more or less than that price believe they have some insight or facts that is not (widely) known by others in the market at the time they make the trade.

 

The stock’s price (the perceived value of the company per share) can change very rapidly based on new information becoming available.

 

Every time a company files a quarterly report they disclose new information about their income, balance sheet, cash flows, pending lawsuits etc. Investors factor this new information into their estimate of the company’s value and the price at which the company trades adjusts accordingly.

 

 

 

This is all a very high level view of what a lot of people believe. There are other theories and one could spend years studying and evaluating them.

 

hope this helps a little,

Ron

Thanks Ron for a very clear explanation. I have a few questions.

 

My most basic question is about your sentence, "This is all a very high level view of what a lot of people believe." I would you to expand on this. Why do you think people believe this? Is their belief or theory based on scientific research that involves collecting data or perhaps interviewing people who invest in stocks? Or some other sort of research method that observed stock investors or analysts? In short, is the theory founded on the scientific method of observation ( I don't mean to sound so scientifically astute). I just want to find out how scientific the theory or belief is. I see that it is very mathematical, but that is not the same thing as scientific.

 

Do other readers here who manage their own stocks calculate "discounted value of all future cash flows" before they buy a stock or stock fund? And those who work with a financial manager, do you talk with your manager about "discounted value of all future cash flows" when you meet to discuss your portfolio? I have never read anyone here refer to doing these calculations.

 

The theory sounds very orderly and mathematical, seems like a very logical way to manage (buy or sell) one's stocks. In other words, if I see the market going up (or down) it is because (quote) "something has changed to cause people to perceive that the company is 5% more valuable." So I wonder why so many people talk about "buy and hold" as the best strategy instead of recalculating "discounted value of all future cash flows" and buying stock to get that extra 5% or whatever it might be and of course selling when stocks are being recalculated down?

 

 

Finally, "There are other theories..." Are these other theories based on some sort of scientific research, analysis?

 

Thanks Ron.

 

J

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<<snip>> I have a few questions. <<snip>>

 

<<snip>> My most basic question is about your sentence, "This is all a very high level view of what a lot of people believe." I would you to expand on this. Why do you think people believe this? Is their belief or theory based on scientific research that involves collecting data or perhaps interviewing people who invest in stocks? Or some other sort of research method that observed stock investors or analysts? In short, is the theory founded on the scientific method of observation ( I don't mean to sound so scientifically astute). I just want to find out how scientific the theory or belief is. I see that it is very mathematical, but that is not the same thing as scientific. <<snip>>

 

My reply probably wasn’t stated very clearly. “Theories” was probably a poor choice of words – I really only meant that term to apply in reference to the “efficient market hypothesis or theory”. More broadly what I mean is that people who invest in common stocks have a wide variety of methods and techniques for selecting and timing their investments. It’s possible to view them in three major categories; fundamental analysis, technical analysis, efficient markets.

 

Fundamental Analysis has long been studied and is widely taught in business schools. In short, it depends on evaluating all aspects of a company’s financial reports and often comparing various ratios and metrics to other similar companies. The goal is to find companies that seem mispriced by the market relative to their peers. For a nice summary of some of the most popular approaches you might take a look here.

 

Technical Analysis is used by investors who believe that markets and individual stocks move in cycles. They believe they can forecast future movement based on historical price and trading-volume data. Here too there are a wide range of techniques and metrics. Since you seem to be quite mathematically inclined you might take a look this since it’s the most mathematically rigorous one I’ve seen.

 

The third “category”, “efficient markets”, really isn’t a category since it basically says any analysis is a waste of time. The hypothesis is that the markets are so liquid and there are so many investors that any and all available information gets reflected instantly into the price of a stock. What a fundamental analyst sees as a pricing discrepancy they often attribute to differences in the risk of one stock vs. another that is reflected in the relative prices. Over the past 10 or 20 years many (most?) individual investors seem to have concluded that this hypothesis is a fact. It is widely advocated by investment advisors who now recommend investing exclusively in index funds or other passively managed funds. Personally (just my opinion) I don’t believe it is “settled science” at all. To understand a little more about why some experts believe this hypothesis and others don’t read this and this.

 

 

<<snip>>...So I wonder why so many people talk about "buy and hold" as the best strategy instead of recalculating "discounted value of all future cash flows" and buying stock to get that extra 5% or whatever it might be and of course selling when stocks are being recalculated down? <<snip>>

 

Most of the “buy and hold” folks believe that it’s best to select an investment that is a “good solid business”, take part ownership in it, and hold on to it until there is some major reason that you no longer want to be an owner of that business. Not much different than if you bought your own little restaurant business – you wouldn’t sell it to buy a different restaurant every time profits were down a little some quarter – you’d make adjustments to your business plan and keep working to improve things. Other investors fall more into the category of “traders”. They don’t purchase a stock to “own a small portion of a company” rather their goal is to profit from fluctuations in the price of the stock. At one extreme so called “day traders” often buy and sell stocks multiple times per day and many of them sell out all their holdings before the end of each day. Others trade less frequently, perhaps every few days or every few months, but the mentality and goals are the same – they intend to make their profits simply due to price fluctuations; they aren’t really interested in dividends or anything else about the particular business. This is different than the mentality of a “buy and hold” investor who intends to make his profits from the dividends and/or the expected change in the company’s value over the long term.

 

There’s not a fine line between “buy & hold investors” and “traders”. Some investors use the same techniques and discipline as B&H investors but are not willing to actually “hold” through various market reversals or an individual company’s reversals in fortune. It’s really a continuum of holding periods.

 

Often investors that use fundamental techniques are of the opinion that technical analysis is all “hocus pocus”. Often those that use technical analysis believe that fundamental analysis is a total waste of time because the future can be predicted from their “charts”. But there are many investors that use fundamental analysis to do most of their research and also use some technical analysis to support their decisions or the timing of transactions. Day traders, or “very frequent traders”, I’d say, rely almost exclusively on technical analysis.

Ron Engelsman

http://www.mytripjournal.com/our_odyssey

Full-Timing since mid 2007

23' Komfort TT

2004 Chevy Avalanche 4x4 8.1L

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Ron,

Wow!

 

"Most of the “buy and hold” folks believe that it’s best to select an investment that is a “good solid business”, take part ownership in it, and hold on to it until there is some major reason that you no longer want to be an owner of that business. Not much different than if you bought your own little restaurant business – you wouldn’t sell it to buy a different restaurant every time profits were down a little some quarter – you’d make adjustments to your business plan and keep working to improve things. Other investors fall more into the category of “traders”. They don’t purchase a stock to “own a small portion of a company” rather their goal is to profit from fluctuations in the price of the stock. At one extreme so called “day traders” often buy and sell stocks multiple times per day and many of them sell out all their holdings before the end of each day. Others trade less frequently, perhaps every few days or every few months, but the mentality and goals are the same – they intend to make their profits simply due to price fluctuations; they aren’t really interested in dividends or anything else about the particular business. This is different than the mentality of a “buy and hold” investor who intends to make his profits from the dividends and/or the expected change in the company’s value over the long term.

 

There’s not a fine line between “buy & hold investors” and “traders”. Some investors use the same techniques and discipline as B&H investors but are not willing to actually “hold” through various market reversals or an individual company’s reversals in fortune. It’s really a continuum of holding periods.

 

Often investors that use fundamental techniques are of the opinion that technical analysis is all “hocus pocus”. Often those that use technical analysis believe that fundamental analysis is a total waste of time because the future can be predicted from their “charts”. But there are many investors that use fundamental analysis to do most of their research and also use some technical analysis to support their decisions or the timing of transactions. Day traders, or “very frequent traders”, I’d say, rely almost exclusively on technical analysis."

 

Nicely put. Thanks.

RV/Derek
http://www.rvroadie.com Email on the bottom of my website page.
Retired AF 1971-1998


When you see a worthy man, endeavor to emulate him. When you see an unworthy man, look inside yourself. - Confucius

 

“Those who can make you believe absurdities, can make you commit atrocities.” ... Voltaire

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Thank you Ron for a great explanation of the two leading approaches to stock market analysis or market timing and to the efficient market theory that argues that market timing can't be done.

 

I appreciate your explanation. I repeat, however, that I am not trying to figure out how to time the market.

 

I originally asked 3 questions and the 1st one was the most important - Does the stock market create wealth? Since that question keeps getting turned into a question of market timing, I think I need to change my question into a more pointed one.

 

Have the "easy money" (credit) policies of the Federal Reserve since about the 1980s caused the stock market to swing from boom to bust valuations with increased frequency and increased range between highs and lows? IMO the answer is yes, but more importantly, my fear is that if and when the Federal Reserve stops inflating the stock market with "cheap money" then stock valuations will bottom out and then grow slowly or more normally. That would mark the end of the "roaring 80s, 90s, 00s...."

 

J

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Technology. Before computer trading programs you didn't have the capability to move millions of shares at a split second. The Fed worries about inflation set the stage, but technology provided the platform by which huge swings could happen.

 

BTW - why ask the question when you have already determined your answer?

Barb & Dave O'Keeffe
2002 Alpine 36 MDDS (Figment II), 2018 Ford C-Max HYBRID
Blog: http://www.barbanddave.net
SPK# 90761 FMCA #F337834

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BTW - why ask the question when you have already determined your answer?

BTW, - when I use "IMO" it means what it says and that means I am open to other opinions.

 

It seems to me that high frequency trading (https://en.wikipedia.org/wiki/High-frequency_trading) does explain the huge moves in stock market values at the opening bell on many days and sometimes at the end of the trading day, but I'm talking about the steep peaks and bottoms that happened in 2000 - 2003, and 2007-2009, and 2015-201x? How does High-Frequency-Trading explain that?

 

J

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Faster trades means more trades. More trades means more rapid movement. When it takes a day or two to get a trade done, things slow down and market swings will be smaller. Still swings, and at the time people worried, but lower volumes, etc., meant you don't see the steep peaks & valleys you do now. But then I remember the day the Dow hit 1,000 and a 100 point swing would have meant that market was crashing, not the opening bell.

 

Barb

Barb & Dave O'Keeffe
2002 Alpine 36 MDDS (Figment II), 2018 Ford C-Max HYBRID
Blog: http://www.barbanddave.net
SPK# 90761 FMCA #F337834

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Thank you Ron for a great explanation of the two leading approaches to stock market analysis or market timing and to the efficient market theory that argues that market timing can't be done.

 

I appreciate your explanation. I repeat, however, that I am not trying to figure out how to time the market.

 

I originally asked 3 questions and the 1st one was the most important - Does the stock market create wealth? Since that question keeps getting turned into a question of market timing, I think I need to change my question into a more pointed one.

 

Have the "easy money" (credit) policies of the Federal Reserve since about the 1980s caused the stock market to swing from boom to bust valuations with increased frequency and increased range between highs and lows? IMO the answer is yes, but more importantly, my fear is that if and when the Federal Reserve stops inflating the stock market with "cheap money" then stock valuations will bottom out and then grow slowly or more normally. That would mark the end of the "roaring 80s, 90s, 00s...."

 

J

J it's likely that you have may have answered your own question........sorta...maybe...

 

History has proven that the worlds Fed's and bankers seem pretty content to operate with OPM (Other People's Money .....us little folks) and rightly so since they sure can't depend only on the "1% folks" .......so......What if..........the world-powers simply........"Let-Them-Eat-Cake" as the famous queen once said........

 

The world powers have imposed ZERO interest rates on the OPM and let some concerns crater and then "save" the AIG's and plenty of bankers with the assets pledged from OPM........

 

Am I seeing "black helicopters" here .........maybe......maybe not......history is tends to prove that money is a very flexible animal so it seems that with a Estimated +$550 Trillion in off the books "protection" it seems like a prime time to perhaps just start Quantitative Easing #11 or # whatever.......Just print baby, print........

 

Maybe our former VP was right ......deficits really don't matter......

 

Consider that your question might have some merit in the "Old-Stock-Market" but maybe the "New-Market" maybe more about "wealth-redirection" than actual wealth gathering.........

 

As the old Chinese proverb says......"may you live in interesting times"

 

Stay tuned.....maybe we have not seen anything yet....

 

Drive on..........(Markets..........move)

97 Freightshaker Century Cummins M11-370 / 1350 /10 spd / 3:08 /tandem/ 20ft Garage/ 30 ft Curtis Dune toybox with a removable horse-haul-module to transport Dolly-The-Painthorse to horse camps and trail heads all over the Western U S

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Faster trades means more trades. More trades means more rapid movement. When it takes a day or two to get a trade done, things slow down and market swings will be smaller. Still swings, and at the time people worried, but lower volumes, etc., meant you don't see the steep peaks & valleys you do now. But then I remember the day the Dow hit 1,000 and a 100 point swing would have meant that market was crashing, not the opening bell.

 

Barb

Please take it one step at a time.

 

"Faster trades means more trades." That makes sense on some days, like on those few days when the trading volume shoots through the "ceiling" and is sometimes even twice or more than the average daily trading volume. But on most(?) days the volume of trading is pretty close to the running average, either above or below.

 

"More trades means more rapid movement." Movement in what? Stock ownership - yes. Prices in one direction- why?

 

"When it takes a day or two to get a trade done, things slow down and market swings will be smaller." A day or two - really? Please explain the reasoning or logic behind, "...and market swings will be smaller." I just don't understand why you think this would be true.

 

"...lower volumes, etc., meant you don't see the steep peaks & valleys you do now." Again, please explain how this works. I don't see the reason or logic which would support this claim.

 

"The Fed worries about inflation set the stage,...." Inflation going up or down or what?

 

J

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Take a step back - when I first began investing, in the early 70s, the Dow was LESS than 1000. There were no computer trading programs available to the average person and it could take up to 2 days to get your trade made if you were a personal investor, especially if you were on the west coast. Slow trades and smaller volume of trades meant that a rumor took longer to get around and people had a chance to determine whether it was real or not. And you can't have a 1000 point fall when the Dow is only at 1000 to begin with.

 

If you don't understand the history of the Fed involvement re Greenspan, do some reading.

Barb & Dave O'Keeffe
2002 Alpine 36 MDDS (Figment II), 2018 Ford C-Max HYBRID
Blog: http://www.barbanddave.net
SPK# 90761 FMCA #F337834

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Take a step back - when I first began investing, in the early 70s, the Dow was LESS than 1000. There were no computer trading programs available to the average person and it could take up to 2 days to get your trade made if you were a personal investor, especially if you were on the west coast. Slow trades and smaller volume of trades meant that a rumor took longer to get around and people had a chance to determine whether it was real or not. And you can't have a 1000 point fall when the Dow is only at 1000 to begin with.

 

If you don't understand the history of the Fed involvement re Greenspan, do some reading.

If I promise to do some reading will you promise to please answer my questions? I really would like to understand your "theory" about high frequency trading.

 

J

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<< snip >> I appreciate your explanation. I repeat, however, that I am not trying to figure out how to time the market.

 

I originally asked 3 questions and the 1st one was the most important - Does the stock market create wealth? Since that question keeps getting turned into a question of market timing, I think I need to change my question into a more pointed one.

 

Have the "easy money" (credit) policies of the Federal Reserve since about the 1980s caused the stock market to swing from boom to bust valuations with increased frequency and increased range between highs and lows? IMO the answer is yes, but more importantly, my fear is that if and when the Federal Reserve stops inflating the stock market with "cheap money" then stock valuations will bottom out and then grow slowly or more normally. That would mark the end of the "roaring 80s, 90s, 00s...."

<< snip >>

 

 

<< snip >> Have the "easy money" (credit) policies of the Federal Reserve since about the 1980s caused the stock market to swing from boom to bust valuations with increased frequency and increased range between highs and lows? IMO the answer is yes, but more importantly, my fear is that if and when the Federal Reserve stops inflating the stock market with "cheap money" then stock valuations will bottom out and then grow slowly or more normally. That would mark the end of the "roaring 80s, 90s, 00s...." << snip >>

 

Your opinions about the fed policy’s effects on stock values and about stock valuations “bottoming out” could well be the case but I don’t think you’ll be able to find data that supports a direct causal relationship – at least I’ve never seen it. I have my “opinions” and everyone else has theirs but they are just opinions and I wouldn’t try to “take any of them to the bank”. It’s pretty well accepted that; 1) the fed is likely to try to let interest rates rise over the next few months/years, 2) the market is always “discounting the future”. So I expect that the best information about what the fed is likely to do is already built into the price of stocks.

 

Many experts believe the fed does not have nearly the control over the economy and asset prices that it might have once had. The US economy has gotten so complex and is part of World economy that is so complex that it’s very hard to control any aspect of it with just one “lever”.

 

Certainly the fed policy can have some affect on asset prices but this seems to be more often true when it is easing than when it is tightening. There is an old axiom that all investors have probably heard – “don’t fight the fed”. I think that’s probably still good advice in that “not fighting the fed” can improve your odds of success in the market but it’s certainly not the “whole story”.

 

I, and many, many, other “investors” have concluded that it’s impossible to “time the market”. Some very astute “speculators” who are “traders” are able to do this but very few people that try it for any length time are successful. You’ve already said you’re not interested in “timing the market” but it appears to me that you are trying to decide if this is a good or bad time to invest. I see that at timing the market – I guess you don’t.

 

Some good reading about fed policy and the stock market can be found here. When you read this article carefully you’ll be able to recall several instances when the market did not follow the fed’s “script”.

 

Take a look at this chart and see if you think it infers any relationship or correlation that would suggest interest rates determine stock prices. Probably the best that could be deduced from this is that extremely high interest rates are nearly always associated with low stock prices.

 

When the fed changes policy other countries might also respond by changing their policies. All these changes affect the World economy, all are linked, all react and interact. I’m totally convinced that no one can predict the future of the market with any reliability. But many folks who make a living selling investment newsletters or books and other forms of advice would like to have you think they can as they go about making a living preying on the fear and greed of gullible people.

Ron Engelsman

http://www.mytripjournal.com/our_odyssey

Full-Timing since mid 2007

23' Komfort TT

2004 Chevy Avalanche 4x4 8.1L

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Please clarify your question; "Create wealth" for whom?

A very good question.

 

I don't want to narrow it down to some particular group. Of course I mean stock holders, but I don't know if that only includes "buy and hold" or "day traders" or other "market timers" or "financial planners" or "bankers" or ...?

 

If I remember right John Bogle, (see a list of his books at ( https://www.google.com/search?q=John+Bogle&ie=utf-8&oe=utf-8#q=the+little+book+of+common+sense+investing&stick=H4sIAAAAAAAAAONgFuLUz9U3MLU0SC9Q4gIxjQpNi0rStQQcS0sy8otC8p3y87P983IqAbeIxbArAAAA ) in one of the two books we have read by him, seemed to take a pretty strong stand that the "financial specialists" (brokers, mutual fund managers, financial planners, others) were making the most wealth by not only charging too much for their services/products, but also taking no risk with their fees being a fixed rate on the amount invested regardless of the returns/losses generated for the investor and thus putting all the risk on the investor. I recall some numbers he used to support this contention that were pretty shocking and I could hardly believe them until I worked through the math myself and then I understood his argument. I should have made a note of this to reference, but I didn't. My best guess is his book titled, Don't Count On It.

 

J

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<< snip >> Have the "easy money" (credit) policies of the Federal Reserve since about the 1980s caused the stock market to swing from boom to bust valuations with increased frequency and increased range between highs and lows? IMO the answer is yes, but more importantly, my fear is that if and when the Federal Reserve stops inflating the stock market with "cheap money" then stock valuations will bottom out and then grow slowly or more normally. That would mark the end of the "roaring 80s, 90s, 00s...." << snip >>

 

Your opinions about the fed policy’s effects on stock values and about stock valuations “bottoming out” could well be the case but I don’t think you’ll be able to find data that supports a direct causal relationship – at least I’ve never seen it. I have my “opinions” and everyone else has theirs but they are just opinions and I wouldn’t try to “take any of them to the bank”. It’s pretty well accepted that; 1) the fed is likely to try to let interest rates rise over the next few months/years, 2) the market is always “discounting the future”. So I expect that the best information about what the fed is likely to do is already built into the price of stocks.

 

Many experts believe the fed does not have nearly the control over the economy and asset prices that it might have once had. The US economy has gotten so complex and is part of World economy that is so complex that it’s very hard to control any aspect of it with just one “lever”.

 

Certainly the fed policy can have some affect on asset prices but this seems to be more often true when it is easing than when it is tightening. There is an old axiom that all investors have probably heard – “don’t fight the fed”. I think that’s probably still good advice in that “not fighting the fed” can improve your odds of success in the market but it’s certainly not the “whole story”.

 

I, and many, many, other “investors” have concluded that it’s impossible to “time the market”. Some very astute “speculators” who are “traders” are able to do this but very few people that try it for any length time are successful. You’ve already said you’re not interested in “timing the market” but it appears to me that you are trying to decide if this is a good or bad time to invest. I see that at timing the market – I guess you don’t.

 

Some good reading about fed policy and the stock market can be found here. When you read this article carefully you’ll be able to recall several instances when the market did not follow the fed’s “script”.

 

Take a look at this chart and see if you think it infers any relationship or correlation that would suggest interest rates determine stock prices. Probably the best that could be deduced from this is that extremely high interest rates are nearly always associated with low stock prices.

 

When the fed changes policy other countries might also respond by changing their policies. All these changes affect the World economy, all are linked, all react and interact. I’m totally convinced that no one can predict the future of the market with any reliability. But many folks who make a living selling investment newsletters or books and other forms of advice would like to have you think they can as they go about making a living preying on the fear and greed of gullible people.

Much to agree with here!

 

I don't think of myself as a market timer, but perhaps flatter myself by leaning strongly toward and practicing what some call "risk management." I suppose it certainly could be a type of market timing, but it does not use fundamental or technical analysis theories. It does involve balancing a portfolio and even many "buy and hold" investors and money managers seem to be OK with that. Risk management is probably a bit more aggressive in adjusting the balance of a portfolio, but not necessarily any more often than quarterly and sometimes not more often than annual adjustment. Surely, however, after the current 6 to 7 years of stock market values climbing to ever higher levels - until May, 2015 - in a macro economy that has been growing far less than normal, risk adjustment becomes more pressing.

 

J

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K,

If the International Monetary Fund statement below is correct, then perhaps you might want to direct your Question to the 62 folks in the top 1% bracket..........likely the rest of the folks here are just riding on the 1%'s coat-tails......and our wealth seems to be fleeting at times.....

 

 

 

In 2015, just 62 individuals had the same wealth as 3.6billion people –the

bottom half of humanity. This figure is down from 388 individuals as recently as 2010.

 

The wealth of the richest 62 people has risen by 44% in the five years since

2010 –that's an increase of more than half a trillion dollars ($542bn), to $1.76

trillion.

 

Meanwhile, the wealth of the bottom half fell by just over a trillion dollars in the

same period –a drop of 41%”

 

Seems like the 1% folks have a track record that could best answer your "Wealth-Questions"......

 

Drive on............(Hang on the the 1% coat tails..........what a ride)

97 Freightshaker Century Cummins M11-370 / 1350 /10 spd / 3:08 /tandem/ 20ft Garage/ 30 ft Curtis Dune toybox with a removable horse-haul-module to transport Dolly-The-Painthorse to horse camps and trail heads all over the Western U S

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K,

If the International Monetary Fund statement below is correct, then perhaps you might want to direct your Question to the 62 folks in the top 1% bracket..........likely the rest of the folks here are just riding on the 1%'s coat-tails......and our wealth seems to be fleeting at times.....

 

 

 

In 2015, just 62 individuals had the same wealth as 3.6billion people –the

bottom half of humanity. This figure is down from 388 individuals as recently as 2010.

 

The wealth of the richest 62 people has risen by 44% in the five years since

2010 –that's an increase of more than half a trillion dollars ($542bn), to $1.76

trillion.

 

Meanwhile, the wealth of the bottom half fell by just over a trillion dollars in the

same period –a drop of 41%”

 

Seems like the 1% folks have a track record that could best answer your "Wealth-Questions"......

 

Drive on............(Hang on the the 1% coat tails..........what a ride)

And then there is this from a different source: http://davidstockmanscontracorner.com/the-astonishing-gift-of-the-money-printers-the-worlds-richest-1-now-have-more-wealth-than-the-rest-of-humanity/

 

"The richest 1 percent is now wealthier than the rest of humanity combined, according to Oxfam, which called on governments to intensify efforts to reduce such inequality."

 

And so goes the power of wealth to influence the distribution of income and wealth in the world. Or did they make money the old fashioned way, "they earned it?" Imagine how many hours per week they must work and how productive they are and how much their productivity has been increasing compared to the rest of us, eh?

 

J

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The Oxfam report, titled: "AN ECONOMY FOR THE 1% How privilege and power in the economy drive extreme inequality and how this can be stopped," can be found here http://policy-practice.oxfam.org.uk/publications/an-economy-for-the-1-how-privilege-and-power-in-the-economy-drive-extreme-inequ-592643.

 

To read the report you need to download the "English paper" pdf which is 44 pages long or the "English summary" pdf which is 12 pages. Or here are a few highlights from the paper:

 

"There is no getting away from the fact that the big winners in our global economy are those at the top. Our economic system is heavily skewed in their favour, and arguably increasingly so. Far from trickling down, income and wealth are instead being sucked upwards at an alarming rate. Once there, an ever more elaborate system of tax havens and an industry of wealth managers ensure that it stays there, far from the reach of ordinary citizens and their governments."

 

 

"A powerful example of an economic system that is rigged to work in the interests of the powerful is the global spider’s web of tax havens and the industry of tax avoidance, which has blossomed over recent decades. It has been given intellectual legitimacy by the dominant market fundamentalist world view that low taxes for rich individuals and companies are necessary to spur economic growth and are somehow good news for us all. The system is maintained by a highly paid, industrious bevy of professionals in the private banking, legal, accounting and investment industries."

 

"The financial sector has grown most rapidly in recent decades, and now accounts for one in five billionaires. In this sector, the gap between salaries and rewards, and actual value added to the economy is larger than in any other. {{Does the stock market create wealth?}} A recent study by the OECD8 showed that countries with oversized financial sectors suffer from greater economic instability and higher inequality. Certainly, the public debt crisis caused by the financial crisis, bank bailouts and subsequent austerity policies has hurt the poorest people the most. The banking sector remains at the heart of the tax haven system; the majority of offshore wealth is managed by just 50 big banks."

 

"This global system of tax avoidance is sucking the life out of welfare states in the rich world. It also denies poor countries the resources they need to tackle poverty, put children in school and prevent their citizens dying from easily curable diseases."

 

"Almost a third (30%) of rich Africans’ wealth – a total of $500bn – is held offshore in tax havens. It is estimated that this costs African countries $14bn a year in lost tax revenues. This is enough money to pay for healthcare that could save the lives of 4 million children and employ enough teachers to get every African child into school."

 

"The current system did not come about by accident; it is the result of deliberate policy choices, of our leaders listening to the 1% and their supporters rather than acting in the interests of the majority."

 

 

J

 

PS (edited 1/20)

As if these numbers were not obscene enough, consider Oxfam’s projection in last year’s report: “If this trend continues of an increasing wealth share to the richest, the top 1 percent will have more wealth than the remaining 99 percent of people in just two years.”

 

Well, it didn’t take two years. It happened by the end of 2015.

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Your opinions about the fed policy’s effects on stock values and about stock valuations “bottoming out” could well be the case but I don’t think you’ll be able to find data that supports a direct causal relationship – at least I’ve never seen it.

 

My concern begins with the idea (not my original idea!) that the Fed has been boosting stock valuations far above what they otherwise would be for the last 2 or 3 decades with easy money policies and that the subsequent busts are the inevitable result of each artificial boom. If they finally stop these policies what will the final recovery from a bust look like? How rapidly will the stock market recover and how much will it recover without the artificial stimulus? I agree that the question is hard to answer if at all, with any great confidence - and certaily not by me, but how about others?

 

Here is an article related to this topic from Hoisington Investment which references a new book by the 2001 Nobel prize winner, Michael Spence, and Kevin Warsh, a former Fed Governor, titled "Where Did The Growth Go?": http://www.advisorperspectives.com/commentaries/20160121-hoisington-investment-management-hoisington-quarterly-review-and-outlook-4q2015

 

"A Causal Mechanism Explaining the Counter-Productiveness of QE and Forward Guidance"

"The Spence and Warsh point is that the “the post-crisis policy response” contributed to and helps to explain the slower economic growth during the past several years. Their line of reasoning is that the adverse impact of monetary policy on economic growth resulted from the impact on business investment in plant and equipment. Here is their causal argument: “...QE is unlike the normal conduct of monetary policy. It appears to be qualitatively and quantitatively different. In our judgment, QE may well redirect flows from the real economy to financial assets differently than the normal conduct of monetary policy.” In particular, they state: “We believe the novel, long-term use of extraordinary monetary policy systematically biases decision-makers toward financial assets and away from real assets.”

Quantitative easing and zero interest rates shifted capital from the real domestic economy to financial assets at home and abroad due to four considerations:...."

I think it makes for interesting reading on the booms and busts since 2000 and the more general topic of where does wealth come from or does the stock market create wealth?

J

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Some interesting points to ponder about "Long-Term" Wealth Gathering in the stock market.......some food for thought about how much time most humans have to stay invested in the market......

 

Wall Street’s “Buy And Hold” Advice—–A Deep Dive Into Its Fallacies by Lance Roberts

January 25, 2016

 

I recently received an email from an individual that contained the following bit of portfolio advice from a major financial institution:

“Despite the tumble to begin this year, investors should not panic. Over the long-term course of the markets, investors who have remained patient have been rewarded. Since 1900, the average return to investors has been almost 10% annually…our advice is to remain invested, avoid making drastic movements in your portfolio, and ignore the volatility.”

First of all, as shown in the chart below, the advice given is not entirely wrong – since 1900, the markets have indeed averaged roughly 10% annually (including dividends). However, that figure falls to 8.08% when adjusting for inflation.

SP500-Real-Nominal-TotalReturns-012416.p

It’s pretty obvious, by looking at the chart above, that you should just invest heavily in the market and “fughetta’ bout’ it.”

If it was only that simple.

There are TWO MAJOR problems with the advice given above.

First, while over the long-term the average rate of return may have been 10%, the markets did not deliver 10% every single year. As I discussed just recently, a loss in any given year destroys the “compounding effect:”

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

Math-Of-Loss-10pct-Compound-011916.png

The
“power of compounding”
ONLY WORKS when you do not lose money.
As shown, after three straight years of 10% returns,
a drawdown of just 10% cuts the average annual compound growth rate by 50%
. Furthermore, it then requires a 30% return to regain the average rate of return required.
In reality, chasing returns is much less important to your long-term investment success than most believe.”

Here is another way to view the difference between what was “promised,” versus what “actually” happened. The chart below takes the average rate of return, and price volatility, of the markets from the 1960’s to present and extrapolates those returns into the future.

SP500-Promised-vs-Real-012516.png

When imputing volatility into returns, the differential between what investors were promised (and this is a huge flaw in financial planning) and what actually happened to their money is substantial over the long-term.

The second point, and probably most important, is that YOU DIED long before you realized the long-term average rate of return.

The Problem With Long-Term

Let’s consider the following facts in regards to the average American. The national average wage index for 2014 is 46,481.52 which is lower than the $50,000 needed to maintain a family of four today.

  • 63% of can’t deal with a $500 emergency
  • 76% have less than $100,000; and
  • 90% have less than $250,000 saved.

If we assume that the average retired couple will need $40,000 a year in income to live through their “golden years” they will need roughly $1 million dollars generating 4% a year in income. Therefore, 90% of American workers today have a problem.

However, what about those already retired? Given the boom years of the 80’s and 90’s that group of “baby boomers” should be better off, right? Not really.

  • 54% have less than $25,000 in retirement savings
  • 71% have less than $100,000; and
  • 83% have less than $250,000.

(Now you understand why “baby boomers” are so reluctant to take cuts to their welfare programs.)

The average American faces a real dilemma heading into retirement. Unfortunately, individuals only have a finite investing time horizon until they retire. Therefore, as opposed to studies discussing “long term investing” without defining what the “long term” actually is – it is “TIME” that we should be focusing on.

When I give lectures and seminars I always take the same poll:

“How long do you have until retirement?”

The results are always the same in that the majority of attendee’s have about 15 years until retirement. Wait…what happened to the 30 or 40 years always discussed by advisors?

Think about it for a moment. Most investors don’t start seriously saving for retirement until they are in their mid-40’s. This is because by the time they graduate college, land a job, get married, have kids and send them off to college, a real push toward saving for retirement is tough to do as incomes, while growing, haven’t reached their peak. 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.

20-Year-Forward-Returns-122115.png

SP500-Rolling-20yr-Returns-122115.png

This has everything to with valuations and whether multiples are expanding or contracting. As shown in the chart above, real rates of return rise when valuations are expanding from low levels to high levels. But, real rates of return fall sharply when valuations have historically been greater than 23x trailing earnings and have begun to fall.

But the financial institution, unwilling to admit defeat at this point, and trying to prove their point about the success of long-term investing, drags out the following long-term, logarithmic, chart of the S&P 500. At first glance, the average investor would agree.

SP500-1963-Present-Real-Log-012416.png

However, the chart is VERY misleading as it only looks at data from 1963 onward and there are several problems:

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

2) From 1983 to 2000 the markets rose during one of the greatest bull markets in history due to a unique collision of variables, falling interest rates and inflation and consumers leveraging debt, which supported a period of unprecedented multiple
(valuation)
expansion.
(18 years)

3) From 2000 to Present – the unwinding of the stock market bubble, excess credit and speculation have led to very low annual returns, both a nominal and real, for many investors.
(15 years and counting).

So, as you can see, it really depends on WHEN you start investing. This is clearly shown in the chart below of long-term secular full-market cycles.

SP500-Full-Market-Cycles-010516.png

Here is the critical point. The MAJORITY of the returns from investing came in just 4 of the 8 major market cycles since 1871. Every other period yielded a return that actually lost out to inflation during that time frame.

The critical factor was being lucky enough to be invested during the correct cycle. With this in mind, this is where the financial institutions commentary goes awry with selective data mining:

“Among the key findings: On average, participants who kept contributing to their retirement plans throughout the 18-month period
(October 2008–March 2010)
had higher account balances than those who stopped contributing; Participants who maintained a portion of their retirement plan asset in equities throughout the entire period ended up with higher account balances than those who reduced their equity exposure amid the peak period of market distress.

SP500-Price-2006-Present-012416.png

Thus, retirement investors who kept contributing to their plan and who maintained some exposure to equities throughout the period were better off throughout the market’s 18-month bust-boom period than those who moved in and out of the market in an attempt to avoid losses. Retirement investors who kept exposure to equities amid the peak of the global financial crisis ended up with higher account balances on average than those who reduced their equity exposure to 0%.”

The main problem is the selection of the start and ending period of October, 2008 through March, 2010. As you can see, the PEAK of the financial market occurred a full year earlier in October, 2007. Picking a data point nearly 3/4ths of the way through the financial crisis is a bit egregious.

In reality, it took investors almost SEVEN years, on an inflation-adjusted basis, to get “back to even.”

Every successful investor in history from Benjamin Graham to Warren Buffett have very specific investing rules that they follow and do not break. Yet Wall Street tells investors they can NOT successfully manage their own money and “buy and hold” investing for long term is the only solution.

Why is that?

There is a huge market for “get rich quick” investment schemes and programs as individuals keep hoping to find the secret trick to amassing riches from the market. There isn’t one. Investors continue to plow hard earned savings into a market hoping to get a repeat shot at the late 90’s investment boom driven by a set of variables that will most likely not exist again in our lifetimes.

Most have been led believe that investing in the financial markets is their only option for retiring. Unfortunately, they have fallen into the same trap as most pension funds which is that market performance will make up for a “savings” shortfall.

However, the real world damage that market declines inflict on investors, and pension funds, hoping to garner annualized 8% returns to make up for the lack of savings is all too real and virtually impossible to recover from. 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.

With the economy on a brink of third recession this century, without further injections from the Fed to boost asset prices, stocks are poised to go lower. During an average recessionary period, stocks lose on average 33% of their value. Such a decline would set investors back more than 5-years from their investment goals.

This leads to the real question.

“Is your personal investment time horizon long enough to offset such a decline and still achieve your goals?”

In the end – yes, emotional decision making is very bad for your portfolio in the long run. However, before sticking your head in the sand, and ignoring market risk based on an article touting “long-term investing always wins,” ask yourself who really benefits?

As an investor, you must have a well-thought-out investment plan to deal with
periods of heightened financial market turmoil. Decisions to move in and out of an asset class must be made logically and unemotionally.
Having a disciplined portfolio review process that considers how various assets should be allocated to suit one’s investment objectives, risk tolerance, and time horizon is the key to long-term success.

Emotions and investment decisions are very poor bedfellows. Unfortunately, the majority of investors make emotional decisions because, in reality, very FEW actually have a well-thought-out investment plan including the advisors they work with. Retail investors generally buy an off-the-shelf portfolio allocation model that is heavily weighted in equities under the illusion that over a long enough period of time they will somehow make money. Unfortunately, history has been a brutal teacher about the value of risk management.

Drive on..........(How much time do.......You have?)

97 Freightshaker Century Cummins M11-370 / 1350 /10 spd / 3:08 /tandem/ 20ft Garage/ 30 ft Curtis Dune toybox with a removable horse-haul-module to transport Dolly-The-Painthorse to horse camps and trail heads all over the Western U S

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Yup, that is exactly right. Looking at only long term outcomes really leads to bad decisions if you simply observe the data from "afar". Aggregated data is all but useless when viewed that way. A closer look using Monte Carlo analysis provides some insights, but it is difficult to get the variables all sorted out. Your timeline is critical as is a PLAN. Without a PLAN you are gambling. I just had a conversation with one of my financial planners this morning about the plan for the next 12-18 months. You HAVE to plan. I use a see-saw visualization.....where I balance Good outcomes with potential BAD outcomes and try to mitigate the outcome. How much weight I put on each side of the see-saw varies with our view of the market. Plus I diversify outside of the market.

 

It is hard to get things right and there are no guarantees....well, except that you probably will not get LUCKY. :(

Jack & Danielle Mayer #60376 Lifetime Member
Living on the road since 2000

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