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Would now be a good time to take a nice big positing in a total index fund? With the DOW and S&P off 16% and 17% respectively, wouldn't buying in now gurantee yourself returns of those magnitudes when the markets recover and eventually reach new highs? When we return to new highs is anyones guess, but eventually it will get there.

Thoughts?
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I balk at the usage 'guarantee yourself returns', because I think it's very dangerous to consider anything guaranteed in investing. But I think what you're asking is whether this is a good time to buy the fund, and I'd say the answer is yes. The S&P is pretty close to recent lows. While that doesn't promise success, I also know that if I had a chance to buy the index for 1300 rather than 1550, I would rather buy at the much lower price.
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Would now be a good time to take a nice big positing in a total index fund? With the DOW and S&P off 16% and 17% respectively, wouldn't buying in now gurantee yourself returns of those magnitudes when the markets recover and eventually reach new highs? When we return to new highs is anyones guess, but eventually it will get there.

Thoughts?


Thoughts? The first one I had when reading this was: I'd never use the word "guarantee" when talking about the stock market! ;-)

Also, keep the math in mind. Let's use the S&P, and the numbers you provided (I'm not checking, so I'm assuming you must mean its all-time high? Or is that its 52-week high?)

Anyway, if any investment is down 17% from some arbitrary point, and you want it to get back to 100% of that original value, then it has to rise by MORE than 17%.

Start with $1000. Down 17% = $1000-$170 = $830

Start with $830. Rise 17% = $830+$141 = $971

In fact, to get back to its former high, the S&P actually has to go up by a bit over 20% from its current level.

That doesn't destroy your basic theory, but it does hamper it a bit. If nothing else, it could expand the time window required for an investor to achieve the goal that you described, and if stock growth upward is slower than its decline has been, then the investor might run into a problem unless he/she has a really long time horizon.

Since that time question is different for every individual, I think it's something each person should consider for him/herself.

As for the current health of the market as a separate question, if I get a chance I'll reply to that in a separate message.
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...if I had a chance to buy the index for 1300 rather than 1550, I would rather buy at the much lower price.

Hi. It may sound nitpicky, but I'd want to clarify this.

Simply as numbers on a graph of an index, the only reason 1300 would be more attractive than 1550 is if 1300 is the figure after a sell-off, and 1550 is the price after a run-up. And one would need pretty high certainty that the decades-long record of endless price growth would support our decision. But I don't think that's such a great investment thesis, despite what traditionalists say.

According to historical prices on Yahoo Finance, the current level of the S&P 500, just under 1300, was last reached around March 2006. The market was on its way up, but as we now know, it didn't stay up. Before that, the last time it was at this price level was around January of 2001. It was on the way down at that time. Before that, it was around this price level in March of 1999, at which time it was going up.

Imagine what people thought of that number 1300 during each of those different periods! What we can see now is that the index has passed this same price point four times in the past 9 years. Owning it would have had an essentially flat return for somebody who held it during that particular time frame.

So, will this time be different? Whew, it seems like a big leap of faith to me.

If nothing else, we can't be sure the short-term (6-month) sell-off is over. I grant you, the past few days have kinda seemed like capitulation, but the bad turn on Friday probably resulted from the release of the most recent employment figures. Job creation is low and job loss is high -- and multi-year marks in both cases.

On top of that, inflation is high, but the Fed isn't going to worry about it because it's trying to boost the economy by lowering rates some more. The dollar keeps going lower, which drops our purchasing power overseas (and for oil), which in turn means our balance of trade is unlikely to improve soon.

Congress is trying to pump cash into the economy by way of tax refunds, whose impact on American business is uncertain, but whose impact on the Federal budget is guaranteed: bigger deficits. That is another inflationary pressure.

Okay, so we'll have a bunch of unemployed people getting tax refunds, who will most likely use that money to pay for rent, gas and food -- not on discretionary stuff. Retail businesses can't sell anything without customers, so they will cut staff to avoid losing money and stockholders.

I am not an economist, and I'm just pulling a few news items out of a hat, simply to suggest the possibility that the current index level isn't necessarily a bottom. Perhaps some other user might be posting a message here in three months, to which we'd reply, "Yeah, I'm sure glad to be buying the S&P here at 1050 than back at 1300!" ;-)

Honestly, seriously, I have the same feeling as many people, like: "this has been a pretty big drop, so gee, shouldn't stocks go back up now?"

But there's another part of me that says, stocks go up and down for a reason. It's not always based on rationality, but there is a good dose of logic involved. So I'd be looking for a thesis here, not just a blanket assumption that the market is necessarily an elastic bungee cord, whose upper attachment point is some mystical price level way up in 5 or 6 digits. <g>

What catalysts could start off a solid, sustained rally in domestic stocks? And are there any such catalysts on the horizon? Honestly, I don't see any nearby, given the people in power and the forces at work right now. I believe some such catalysts are in our power to create, but I have not heard anybody talk about actually doing it.

Plus, there is a lot more affecting our economy in 2008, compared to earlier times, that is not in our power to control.

- Our economy is overly dependent on oil to start with, and to make it worse, a lot of that oil comes from places where governments (and the supply lines) are unstable.

- We have become overly dependent on cheap manufactured goods from China, but we are now discovering the true cost, in the form of contaminated food, toys, and other products. Remediation will cost money and eventually make those things more expensive.

- Much of the capital in the world has left the United States, and now we have to rely on foreign banks, and foreign private equity, to buy our treasury bills, or our real estate, or our public companies. Few, perhaps none, of those entities are controlled or regulated by our country, and as ownership leaves our shores, so does control.

What's up with this "control" thing? It boils down to Littlechap's Principle of Investing (or whatever I called it, when I first named it a few weeks ago). As I've always said: uncertainty is the enemy of stock price.

So as for whether this is a good time to buy the broad U.S. stock market, I think the best way to decide that is to find at least a few indicators coming along that have some degree of certainty and predictability -- even if it's not all happy news, at least make it stable news, reliable news, news that you can count on being true for more than a couple of months. And when you find something like that, then you might feel like buying.

Why not just buy the U.S. total market, regardless? Y'know, the old LTBH, set-it-and-forget-it kind of purchase? Well, if the investor has that mindset, I do not know why he/she would *ever* be on the sidelines, honestly. And if I were such a person, I'd have been buying this market at each step of its decline.

And in any case, I wouldn't be looking at the broad market as some kind of magic pony waiting to give me a ride right now. If the market rallies, I'd rather be in a fund that outperforms the index.

In other words (this question is for the original poster), why view the current low level of the index as the reason to buy *the index*? I use the Wilshire 5000 as a convenient thermometer to take the temperature of the market -- but if I think the climate is good for domestic stock funds, it would not be the Wilshire 5000 that I'd buy!

And if one is not a diehard index investor, then one should have a reason for buying. If there is a better investment thesis in (let's say) Germany, or Brazil, or Canada, or wherever, then one should consider putting money there if one wants to maximize one's return.

No, I do not know for certain that such a thing exists! I'm just saying, I wouldn't buy the broad market -- or anything else -- just because it's lower today than it was at some earlier point. It could be a case of trying to catch a falling knife.

Maybe. :-)
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Be that as it all may, I'd still rather obtain more shares for the same dollar amount.
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>> With the DOW and S&P off 16% and 17% respectively, wouldn't buying in now gurantee yourself returns of those magnitudes when the markets recover and eventually reach new highs? <<

The only thing you would "guarantee" is that you bought at an entry point 17% below the high, and thus will have a higher return than someone who bought in at the high.

Having said that, in the short term no one knows what will happen -- whether a rally is around the corner, whether the market will continue to tank, or if it will languish near its current levels. But long term, unlike the slide in 2000, valuations are pretty reasonable so I wouldn't think it's likely that a similar slide is in the cards here, and this seems like a reasonable valuation level to buy in if you're going to establish a position and leave it alone for years.

#29
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In the last major decline, the S&P went down over 40% from its high. So if that is any guide, there is over 23% more due off its high.

Of course, that really means nothing.

The credit crunch has not been resolved. Housing prices have probably not bottomed. Unemployment has risen, and may rise further.

I do not see a bottom here.
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