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Why Investors Could Have A Really Bad Year

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Indian tribes in the Pacific Northwest often tell stories of the Raven. This mythological character is sometimes helpful. But he’s also a trickster who can cause a lot of trouble. Raven is a lot like a stock market puppeteer. He helps some investors. But he sabotages most. He loves to lay traps, giggling like crazy when people get snared.

 

 

 

https://assetbuilder.com/knowledge-center/articles/why-most-stock-market-investors-could-have-a-really-bad-year

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Here is the link to the Bogle interview on how to calculate future returns:

 

http://news.morningstar.com/cover/videocenter.aspx?id=718639

 

Here is a chart of the Buffet indicator overlapped w/ future 10 year returns.

 

http://postimg.org/image/wh6sb3mnj/

 

"The chart updates the current valuation picture. The blue line shows the ratio of market capitalization to corporate gross value added on an inverted log scale. The red line shows actual subsequent S&P 500 nominal annual total returns over the following 12-year period. We associate current valuation levels with likely S&P 500 total returns of only about 2% annually over the coming 12 year period, and zero total returns over the coming decade. Regardless of shorter-term cyclical outcomes, I view this long-term outcome as essentially baked-in-the-cake. -Hussman http://www.hussmanfunds.com/wmc/wmc160222.htm

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How is this information going change a fully diversified, world wide, low cost VG boring portfolio that has appropriate stock/bond split?

 

Remember "the death of equities" the famous 1979 magazine article: http://www.bloomberg.com/bw/stories/1979-08-13/the-death-of-equitiesbusinessweek-business-news-stock-market-and-financial-advice 1979!!!! Right before the longest bull market of our lifetime.

 

Nobody knows the future, not even John Bogle, who I adore.

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Steve,

 

What Bogle & others are telling us is just be prepared for 0-3% return from a stock/bond 60/40 portfolio. Yes death of equities is a prefect example of when to "buy equities" The indexes traded at Price to Earnings ratio's of 6-8X in 1982 & nobody wanted to buy stocks.

 

here is the article. today we are nowhere never that type of negative sentiment regarding stocks (gold yes Stocks no)

 

http://www.bloomberg.com/bw/stories/1979-08-13/the-death-of-equitiesbusinessweek-business-news-stock-market-and-financial-advice

 

in 1982 no one wanted stocks.because you could get 15% on a insured CD from the bank.

 

So today the S&P 500 has about $100 worth of combined earnings. The index trades at a price of $1944 today (PE=19.4X)

 

PE valuation levels

  • 20X = 2000 current PE level on SPX
  • 15X =1500 (25% decline to reach this level)
  • 10X=1000 (50% decline to reach this level)

 

and if this market got as bad as it did in 1980-82 then the index would fall to $700-800 again like 2008

 

Bogle stopped at 15X in his calculation & still expects the index only to earn 4% per year for the next 10 years

 

Here is a matrix of earnings & returns for the last 100 years. Anytime the Index has traded above 20X the next ten years of returns were flat.

 

http://www.crestmontresearch.com/stock-matrix-options/

 

The data is there if you care to look

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You're funny Ken! Gotta love you!

"The data is there if you care to look". With all due respect to your awesome knowledge about past performance, once again, WHO CARES? The data is always past performance. You didn't answer my question. How is this suppose to change our portfolios? The pundits and yourself keep warning us. What are we suppose to do?

 

Please do NOT recommend precious metals, that will go NOWHERE. I will NEVER invest in a precious metal sector fund or Browne's Permanent Portfolio. I will NEVER invest in sector funds period. Sector funds are never diversified and besides I am already invested in those companies with my broad based index funds the total stock market index ETF at .05%. That's the data I pay attend to. I want a boring portfolio.

 

I have a portfolio that can stand both bear and bull markets. I care about the data that shows me low costs, fully diversified portfolio, covering all the major asset classes world wide and a variety of short and intermediate term bonds, ibonds, both corporate and treasuries. I take cap. gains and dividends from my taxable accounts and spend it in retirement and if I need more I take it out from the Roth. You said that my portfolio is fine. What am I to do with your (and all the pundits") gloom and doom outlook?

 

One last point that isn't discussed enough. My follow Vanguard investors are more likely to stay put with the buy and hold strategy when Mr. Bear comes roaring. We are all in this together. It is not a "zero sum game." I loath competition.

 

Have a great weekend. I am using some of my money to travel to Copper Canyon Mexico. Thats how I like to spend my time.

Steve

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  • "precious metals, that will go NOWHERE."
  • "Sector funds are never diversified"
  • "I care about the data that shows me low costs"
  • Vanguard investors are more likely to stay put with the buy and hold strategy when Mr. Bear comes roaring
  • It is not a "zero sum game

 

Yup that is where we agree to disagree.

 

http://www.goodreads.com/quotes/tag/doomed-to-repeat-it

 

Have a great trip

 

Ken

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Hi Ken,

 

I have a few quotes myself. I believe you like B. Graham. Take a look at the bold and underlined quotes below:

 

For the record, I learned everything from the right experts that have the same philosophy of investing as I do. They tell me not to invest in sector funds, they tell me not to invest in precious metals, Paul Merriman said in one of his podcasts that a study found that Vanguard investors stayed put during the 2008 meltdown more than investors in other mutual fund companies and finally this is what John Bogle said about competition: "Competition is a part of life. But again I ask, competition for what? For test scores rather than learning? For form rather than substance? For prestige rather than virtue? For certainty rather than ambiguity?" (leading up to the zero sum game).

 

I am surprised that you are so different from the philosophies of these great investment thinkers and writers of the indexing era: Ferri, Swedro, Roth, Bernstein, Schultheis, Zwieg, and others who follow the low-cost, diversified, passive strategy portfolio with a stock bond split. Its sooooo simple. That's why I don't listen to anybody who thinks they can use past data to make intelligent choices. Chartists are great on TV for 100% entertainment. Fast Money on CNBC is HILARIOUS! I watch them for a minute or two and just laugh at the complete and utter ridiculousness of what are they talk about!

 

I read a lot and it took many years to get to this point. I did not make this stuff up. I found an investment philosophy that fits my values.

 

Graham was not only one of the best investors who ever lived; he was also the greatest practical investment thinker of all times.

Jason Zweig compiled these quotes from Ben Graham

 

  1. "The one risk no investor can ever eliminate is the risk of being wrong."
  2. "The investor's chief problem--and even his worst enemy--is likely to be himself."
  3. "The majority of investment funds, even with all their experienced personnel, have not performed so well as the general market."
  4. "Everyone must keep some assets in the riskless haven of cash."
  5. "It is no difficult trick to bring a great deal of energy, study, and native ability into Wall Street and to end up with losses instead of profits."\
  6. "By speculating instead of investing, you lower your own odds of building wealth and raise someone else's."
  7. "One thing that never suffers a bear market on Wall Street: dopey ideas."
  8. "The case for investing in a REIT fund is weaker if you own a home."
  9. "Allocating at least 10% of your retirement assets to TIPS is intelligent."
  10. "Never forecast the future exclusively by extrapolating the past."
  11. "The only indisputable truth that the past teaches us is that the future will always surprise us--always!"
  12. "The worse the future looks, the better it usually turns out to be." (I LOVE THIS QUOTE because of the doom and gloom everywhere at the beginning of 2016)
  13. "The primary cause of failure is that investors pay too much attention to what the stock market is doing currently."
  14. "The key to rebalancing is having a predictable schedule"
  15. "The people who now claim that the next 'sure thing' will be health care, or energy, or real estate, or gold, are not more likely to be right in the end than the hypesters of high tech turned out to be."
  16. "The intelligent investor (unless in the advanced stage of retirement) dreads a bull market, since it makes stocks more costly to buy."
  17. "The future of security prices is never predictable."
  18. "The investor may vary his holding of common stocks between the 25% minimum and the 75% maximum."
  19. "For most investors, intermediate bonds are the simplest choice, since they enable you to get out of the game of guessing what interest rates will do."
  20. "For most investors, bond funds beat individual bonds hands down."
  21. "In most cases, the high expenses of owning an annuity will overwhelm its advantages."
  22. "Selectively adding stocks to an all-bond portfolio can increase its income yield--and raise its potential return."
  23. "Beginning in 1949, the average annual return produced by stocks over the previous 20 years was 3.1%, versus 3.9% for long-term Treasury bonds."
  24. "If you had invested $1 in U.S. stocks in 1900 and spent all your dividends, your portfolio would have grown to $198 by 2000. But if you had reinvested all your dividends, your portfolio would have been worth $16,797." (Stock indexes do not include dividends.)
  25. "It is essential that (the intelligent investor) entrust himself only to firms of the highest reputation."
  26. "The one thing the widow must not do is to take speculative chances in order to 'make some extra income.'"
  27. "We urge the beginner in security buying not to waste his efforts and his money in trying to beat the market."
  28. "A permanent autopilot portfolio, can defend you against the need to dedicate a large part of your life to stock picking."
  29. If you find yourself trading more than twice a year--or spending more than an hour or two per month on your investments--then something has gone badly wrong."
  30. "A defensive investor runs and wins the race by sitting still."
  31. "Your very refusal to be active, and your renunciation of any pretended ability to predict the future, can become your most powerful weapons."
  32. "The ideal way to dollar-cost average is into a portfolio of index funds, which own every stock or bond worth having."
  33. "If you started investing $100/month in September 1929, your money would have grown to $15,571 by August 1939. That's the power of disciplined buying--even in the worst bear market of all time."
  34. "The knowledge of how little you can know about the future, coupled with the acceptance of your ignorance, is an investor's most powerful weapon."
  35. "Alan Greenspan said on January 7, 1973: "It's very rare that you can be as unqualifiedly bullish as you can now." (1973 and 1974 turned out to be the worst years for the stock market since the Great Depression.)"
  36. "For most investors, market timing is a practical and emotional impossibility."
  37. "If and when trouble should come, the owner of foreign obligations has no legal or other means of enforcing his claim."
  38. "A junk-bond fund is only a minor option--not an obligation."
  39. "The more you trade, the less you keep."
  40. "A great company is not a great investment if you pay too much for the stock.

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Steve

 

I am so glad you brought up Ben Graham he is one of my favorites. Here are some words of wisdom from him that line up with the facts I have presented. but you only need to read one

 

"People who habitually purchase common stocks at more than about 20 times their average earnings are likely to lose considerable money in the long run."

 

P/E Ratios (at what multiple does the S&P 500 trade at today?)

 

http://www.wsj.com/mdc/public/page/2_3021-peyield.html

Favorite Ben Graham Quotes:
  • The determining trait of the enterprising investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average. Over many decades, an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort in the form of a better average return than that realized by the passive investor.
  • The intelligent investor is a realist who sells to optimists and buys from pessimists.
  • The stock investor is neither right nor wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.
  • Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble to give way to hope, fear and greed.
  • The disciplined, rational investor neither follows popular choice nor plays market swings; rather he searches for stocks selling a price below their intrinsic value and waits for the market to recognize and correct its errors. It invariably does and share price climbs. When the price has risen to the actual value of the company, it is time to take profits, which then are reinvested in a new undervalued security.
  • Experience teaches that the time to buy stocks is when their price is unduly depressed by temporary adversity. In other words, they should be bought on a bargain basis or not at all.


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"The disciplined, rational investor neither follows popular choice nor plays market swings; rather he searches for stocks selling a price below their intrinsic value and waits for the market to recognize and correct its errors. It invariably does and share price climbs. When the price has risen to the actual value of the company, it is time to take profits, which then are reinvested in a new undervalued security."

 

I am not one of those "intelligent investor" except on Graham's one quote above, when I "recognized and corrected my errors." I will not sell when the going gets tough. I am not just talking, I lived it when my portfolio lost $1.1 million in the tech bubble crash. I waited till the market recovered for a year (2003) and then sold my tech sector stock funds in 2004 and 2005 and constructed the diversified portfolio that I have today. End of story.

 

I leave the "bargain price" stuff up to others. I only do what I have learned from the great thinkers about portfolio construction and the most important choice to make is to choose low cost funds the reflect broad cross section of small, med and large cap asset classes in domestic and international stock.

Steve

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Indian tribes in the Pacific Northwest often tell stories of the Raven. This mythological character is sometimes helpful. But he’s also a trickster who can cause a lot of trouble. Raven is a lot like a stock market puppeteer. He helps some investors. But he sabotages most. He loves to lay traps, giggling like crazy when people get snared.

 

 

 

https://assetbuilder.com/knowledge-center/articles/why-most-stock-market-investors-could-have-a-really-bad-year

 

Hi Tony,

We got a little off course with your original post and the link to this good article. Here is a quote from the article that fits my philosophy about sticking with a plan and ignoring the market noise and many financial advisers' scare tactics. The "raven, the trickster" whether its the volatile stock and bond market or financial advisers who are scared too must be recognized as trouble makers and be 100% egnored:

 

"Yesterday, an investor who identified himself as Dejan wrote, “In current market conditions it seems [a] better solution to keep the [money in] cash or invest in gold for a while till the markets stabilize.” Raven, again, is pulling at his strings.

Nobody knows how stocks and bonds will perform over the next year or ten. But one thing is certain. Raven rewards investors who have a solid, consistent plan. Build a low-cost portfolio of stock and bond market index funds. Add fresh money every month. Rebalance the portfolio once a year. You won’t make money every year. But over your investment lifetime, your returns should be decent. Sadly, we can’t say the same thing for most investors. Raven, the trickster, will keep having fun."

 

By the way, the author of this article is the author of the book Millionaire Teacher Andrew Halland. My review of his book got a heated discussion (including a response from the author!). Take a look at "Recommended by ignore Rule 9": http://www.amazon.com/review/R236II4CAS7W6P/ref=cm_cr_dp_title?ie=UTF8&ASIN=0470830069&channel=detail-glance&nodeID=283155&store=books

 

have a great day,

Steve

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Thanks for sharing Steve. Nice to know some reviews on Amazon are from real people. Sometimes I wonder which reviews are real and which are plants by the makers of the products or competitors. Ever since my experience with annuities salesmen I have become much more cynical of things in general when it comes to parting with my money.

 

I am enjoying Ken's posts and appreciate his comments but something in my gut says he may be over analyzing things. Certainly I am sure on some level he knows what he is talking about and is correct. But I just prefer to stay the course and not worry about what the market will do next. I guess if you keep saying a crash will happen I guess you will be proven right at some point in time. I am just happy to plow along on a low cost diversiied index fund portfolio and let the chips fall where they may. Ken please don't take this wrong. We want you to keep contributing. The discussions have been great.

 

Steve I have been using your portfolio model for further ways to add more bonds to my portfolio but I am proceeding slowly.

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