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If we look at VTSMX over the past 5 years, we notice something stunning, so unusual and mind defying that it may cause you to lose sleep. Over this time frame according to bigcharts it went from around 33 5 years ago to 28.62 today. This is the entire stock market over a 5 year time frame. If we back up it is trading around the range it was in July 1998, around 27.

So we have endured around 7 years of basically no gains for those who are invested in index funds. Are we really sure that index funds are a good place to invest? Further, are we really sure that the domestic stock market is really the only game to play in town?

This also tells me that some people buying stocks, probably about half, ended up on the short end of the stick. Whether it was in mutual funds, individual stock picks, or index funds on the wrong sector- they ended up actually worse off for taking on their risk over a 7 year time frame.

A money market yielding 2.5%, with no risk, would have gained me 18% in that time period, while the entire stock market gained us 0.83% a year. Hopefully bigcharts is not including the dividend, because that will at least bring us back into money market range. But still, investments dumped into prepaying a mortgage would have kicked the stock markets a$$ up and down wall street with zero risk. How exactly am I being compensated for risk here?

Well, now you might start arguing that you should have been investing in SPY, but basically that is starting to look like a repeat of the nifty fifty, and if you actually look is has taken a substantial loss since 2000 (from 150 to 120)

Or you may turn your head around five times excorcist style and then point out that the stock market has been gaining 10.8% a year for decades, therefore it will continue to do so. You are ignoring the past 7 years, because if you back those out, you are looking at more like 8.9% Also, you will pointedly ignore the rising P/E during that time which accounts for 2-3% of that growth, ignore inflation accounting for another 2-3, and also ignore that we are at a historically high P/E right now. Our expectation of the future should be diminished accordingly. WEB tell us so because he hoards his cash, hoping for a rainy day, waiting for the values to roll in like breakers on the ocean.

So basically some of us, like WEB, are hoping for a crash, so we can get in while the getting is good. Many of us appear to be buying up houses like hotcakes, to make up for our portfolio failures in the market. Others are looking for inefficiencies, either through mutual funds or individual stocks. Some of us are looking the other way and shoveling money onto the market like crazy, and simply crossing our fingers.

We all know the stock market will go back up.

But what if- what if the stock market simply took a while to go back up? What if it didn't crash and offer a slew of opportunities to WEB, but merely hovered up and down, slowly gyrating towards a normal historic P/E, or even undershooting it a bit and dropping down to around 12 over a longish time frame?

That could easily mean 10 years of basically no growth for sitting in an index fund, and you would be better off shoving it in a money market account

The problem is that even if the market is going to go back up- many of us are going to be retiring at some point where those 10 years actually should a, would a, could a, made a difference to our retirement portfolio.

Thus, it is no mystery why all the large corporate pensions are going belly up- they figured, just like you are- there would not be a protracted bear. Fortunately, they have the taxpayer to fall back on- so all those lucky dudes and dudettes who worked under congenial big brother will have you to pick up their retirement tabs when their portfolio managers optimistic projections fall short. But what about those of us who have been slaving away without a congenial big brother to pull us out of the muck? I suppose many of you have an investment advisor who has contacts in the government and will see to it that a special handout is devised for you if their carefully tailored mathematical model falls apart.

It is an interesting question. I am not advocating here not to invest in stocks. I am merely musing on diversifying my own portfolio more fully into foreign stocks, REITS (which seem overvalued), bonds, and other investment vehicles. I am also musing that indexed funds may not be as great an investment vehicle when the market is overvalued- if you are not exploiting the inefficiencies in the market in an overvalued market, then you are merely taking on risk with no reward.

Indexed funds make a ton of sense in an undervalued, normally valued, or even slightly overvalued market- because the time frame for growth is small enough you are guaranteed to come out ahead before you retire. But as the stock market climbs, that time frame moves further and further out. Add strange unaccountability on the parts of those handling the deficit and other large uncertainties, and it seems that time frame moves even further away. At a certain point, when that time frame begins to border on when you are sailing through life in a bed, perhaps it is time to look, or at least glance, at the other investment opportunities on the grand buffet of risk.
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So we have endured around 7 years of basically no gains for those who are invested in index funds. Are we really sure that index funds are a good place to invest? Further, are we really sure that the domestic stock market is really the only game to play in town?

Reading only the first half of your post one could get the impression that you're taking retrospective potshots at index investing. No doubt there are people who put all their eggs in the index fund basket and those folks have fared poorly of late. OTOH index investing is long term investing and if their horizon is long enough they should come out just fine ... not over-the-top wealthy but ahead of where they'd have been with savings or money market accounts. When I say "long term" in this context I mean start investing in your twenties or thirties and keep investing until retirement. Index fund investing is about relying on the country's (world's) economy growing over a long period.

At a certain point, when that time frame begins to border on when you are sailing through life in a bed, perhaps it is time to look, or at least glance, at the other investment opportunities on the grand buffet of risk.

You mean we should invest more actively? That's what index fund investing bypasses. Or do you mean that we should invest in other categories like bonds and real estate? Some people won't hear of it. e.g. I have a relative whose entire portfolio is annuities.

KennyO
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I am not sure what the final moral of the story is, but I am thinking that correctly selected mutual funds is preferable to index funds in general.

Also I am thinking uncorrelated asset classes is important if you actually want to see gains in a decade.

Also I am thinking of buying an investment property at some point, and I think it makes sense, but hopefully this bubble will crack first.

Also I am hoping to draw out ideas of how to overcome an investing field where most asset classes seem overvalued.
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Greetings yttire,

So we have endured around 7 years of basically no gains for those who are invested in index funds. Are we really sure that index funds are a good place to invest?

That is for those who took at Total Stock Market only approach. What about the past 7 years for those in say a Balanced Index Fund, hmm? What about someone that invested 25% in each of a small-cap value, small-cap growth, large-cap value and large-cap growth combination?

Further, are we really sure that the domestic stock market is really the only game to play in town?

No, I'm sure that it isn't. Why do you so easily throw out bonds and international stocks? These are other games though I suppose there are others like the Slice & Dice approach. Do these not merit some respect?

A money market yielding 2.5%, with no risk, would have gained me 18% in that time period, while the entire stock market gained us 0.83% a year. Hopefully bigcharts is not including the dividend, because that will at least bring us back into money market range. But still, investments dumped into prepaying a mortgage would have kicked the stock markets a$$ up and down wall street with zero risk. How exactly am I being compensated for risk here?

Well, if you didn't have the occassional loss in the stock market, wouldn't there be no risk? Part of taking on some form of risk is that eventually there should be some loss some where, right? If the stock market always went up without fail then where is the risk?

Well, now you might start arguing that you should have been investing in SPY, but basically that is starting to look like a repeat of the nifty fifty, and if you actually look is has taken a substantial loss since 2000 (from 150 to 120)

Hey now, VTSMX has a 5 year annualized loss of .95% while VFINX has a 2.22% annualized loss over the past 5 years so I would be tempted to say that there should be some recognition here that the S & P 500 is NOT the entire stock market and that VTI would be the suggestion if you want to capture the return of whole stock market rather than just the large-cap stocks that make up only 4/5ths of the market.

Or you may turn your head around five times excorcist style and then point out that the stock market has been gaining 10.8% a year for decades, therefore it will continue to do so. You are ignoring the past 7 years, because if you back those out, you are looking at more like 8.9% Also, you will pointedly ignore the rising P/E during that time which accounts for 2-3% of that growth, ignore inflation accounting for another 2-3, and also ignore that we are at a historically high P/E right now. Our expectation of the future should be diminished accordingly.

Stock market predictions are often a funny thing. Do you remember back when John Bogle had a prediction for the market of the 1990s? IIRC, it was for a high single digit return which was rather off the mark. Thus, I think there is something to be said for how wide a set of returns one expects in the future with regards to stocks. This is something that I don't think gets considered and it really ought to be. If I take the returns of large-cap stocks from 1926-1998 according to http://www.efficientfrontier.com/BOOK/chapter2.htm then I see that the average return is 11.22% while the standard deviation is 20.26 which should mean that there will be down years which will bring down the average from time to time.

So basically some of us, like WEB, are hoping for a crash, so we can get in while the getting is good.

While there are some value managers with sizeable cash stakes there is also some nibbling going on in the markets or did you not hear about WEB's buying of some BUD?

Many of us appear to be buying up houses like hotcakes, to make up for our portfolio failures in the market.

Could you state what % of the population is buying houses or is this based on home sales and not on the # of americans actually doing the buying.

Others are looking for inefficiencies, either through mutual funds or individual stocks.

Doesn't this depend on believing in some form of EMH?

Some of us are looking the other way and shoveling money onto the market like crazy, and simply crossing our fingers.

Which may not be a bad thing IF the investment plan we have calls for that.

But what if- what if the stock market simply took a while to go back up?

That is a possibility and is something that could well be the case. Therefore if someone is just starting out and will likely be making larger contributions in the future, why not add now and then add later?

What if it didn't crash and offer a slew of opportunities to WEB, but merely hovered up and down, slowly gyrating towards a normal historic P/E, or even undershooting it a bit and dropping down to around 12 over a longish time frame?

Then those putting in money may lose some over that time frame though there is a question to be said of what is so special about 12?

That could easily mean 10 years of basically no growth for sitting in an index fund, and you would be better off shoving it in a money market account

Ah, but can you guarantee that the next 10 years will be exactly like that?

The problem is that even if the market is going to go back up- many of us are going to be retiring at some point where those 10 years actually should a, would a, could a, made a difference to our retirement portfolio.

Isn't this where the idea of a balanced portfolio where one has something other than pure stocks is important?

Thus, it is no mystery why all the large corporate pensions are going belly up- they figured, just like you are- there would not be a protracted bear.

Though isn't another possibility that some corporations used higher expected returns as a way to raise earnings that is now coming to bite them in the butt?

Fortunately, they have the taxpayer to fall back on- so all those lucky dudes and dudettes who worked under congenial big brother will have you to pick up their retirement tabs when their portfolio managers optimistic projections fall short.

So you don't think there is any chance that some executives would have had very optimistic projections for the sake of earnings?

But what about those of us who have been slaving away without a congenial big brother to pull us out of the muck?

Isn't this what 401(k)s were to replace, the company pension plan?

I suppose many of you have an investment advisor who has contacts in the government and will see to it that a special handout is devised for you if their carefully tailored mathematical model falls apart.

Isn't social security supposed to be a bail out in those retirement years? (Meant mildly tongue-in-cheek)

It is an interesting question. I am not advocating here not to invest in stocks. I am merely musing on diversifying my own portfolio more fully into foreign stocks, REITS (which seem overvalued), bonds, and other investment vehicles.

Yes this is interesting, but where does it get us?

I am also musing that indexed funds may not be as great an investment vehicle when the market is overvalued- if you are not exploiting the inefficiencies in the market in an overvalued market, then you are merely taking on risk with no reward.

Aren't you assuming that one is looking at just the TSM only school though? What about a slice & dice portfolio? I would note oddly enough that VTSMX is in the top third of large-cap blend funds over the past 5 years.

Indexed funds make a ton of sense in an undervalued, normally valued, or even slightly overvalued market- because the time frame for growth is small enough you are guaranteed to come out ahead before you retire. But as the stock market climbs, that time frame moves further and further out. Add strange unaccountability on the parts of those handling the deficit and other large uncertainties, and it seems that time frame moves even further away. At a certain point, when that time frame begins to border on when you are sailing through life in a bed, perhaps it is time to look, or at least glance, at the other investment opportunities on the grand buffet of risk.

So are you advocating then that one study on how to know how over or undervalued the market is and then get in or out based on this? Oddly enough, when in the 1990s would such an approach have caused you to get out? What I mean is that if you are now saying that the market is overvalued and thus not necessarily a great place to be, how would this have worked in the past?

This is something that I think one should be aware of since you seem to think that one should jump ship at some point, "taking on risk with no reward" does kind of suggest not being there, but you don't state that you have tested such a theory to see if it would work out well or not. While VTSMX is down .95% annualized over the past 5 years, the past 3 years the return is up 7.13% though wouldn't you say that the market has been overvalued for most of the past 5 years?

It isn't so simple as you think is my point.

Regards,
JB
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Greetings jbking,

I agree that the note was somewhate simplistic. However, I was trying to address the notion of- is VTSMX a good investment or not? And the conclusion I had by the end is- not by itself. I think you addressed this as well in your commentary.

That is for those who took at Total Stock Market only approach. What about the past 7 years for those in say a Balanced Index Fund, hmm? What about someone that invested 25% in each of a small-cap value, small-cap growth, large-cap value and large-cap growth combination?


Yeah I would like to see some slices and dices particularly which included foreign indexes.


No, I'm sure that it isn't. Why do you so easily throw out bonds and international stocks?

I actually own bonds and international stocks in my portfolio. However, it is amusing to look at VTSMX as a thought experiment to see how it performed historically. Also, if we are at a high relative valuation then some extra dosage of bonds/ other flavors may make sense.

These are other games though I suppose there are others like the Slice & Dice approach. Do these not merit some respect?

Not in an analysis of VTSMX by itself- but in a real portfolio I think they deserve some respect.

Well, if you didn't have the occassional loss in the stock market, wouldn't there be no risk?

Well, the general thesis is that if you buy the entire stock market, over a long enough time frame, if capitalism continues to succeed then there actually is no risk.

Part of taking on some form of risk is that eventually there should be some loss some where, right? If the stock market always went up without fail then where is the risk?

It remains only in your timeframe. If you have a short time frame, then you have real risk. A long time frame, no risk. That is the argument anyway.

Hey now, VTSMX has a 5 year annualized loss of .95% while VFINX has a 2.22% annualized loss over the past 5 years so I would be tempted to say that there should be some recognition here that the S & P 500 is NOT the entire stock market and that VTI would be the suggestion if you want to capture the return of whole stock market rather than just the large-cap stocks that make up only 4/5ths of the market.

I own VTI actually in my real portfolio, but am thinking of ditching it. The previous message was sort of my "ode to VTI". I generally do things slow like- and like getting critical feedback on it, indirectly like, thanks for the feedback by the way.

While there are some value managers with sizeable cash stakes there is also some nibbling going on in the markets or did you not hear about WEB's buying of some BUD?

Yes, but he still has a large cash position.

Could you state what % of the population is buying houses or is this based on home sales and not on the # of americans actually doing the buying.

"Second Homes - Vacation Homes and Investment Property Now 1/3 of Market"

http://www.mortgagenewsdaily.com/382005_Second_Homes.asp

I don't know what percentage of the population that is, but probably a pretty high one, you can read the details of the article perhaps that will clarify any outstanding questions you may have.




That is a possibility and is something that could well be the case. Therefore if someone is just starting out and will likely be making larger contributions in the future, why not add now and then add later?

Simply because they may be better off with a different investment vehicle, perhaps dumping some money in their mortgage and some in the market rather than all of it in the market.

Then those putting in money may lose some over that time frame though there is a question to be said of what is so special about 12?

Simply it is slightly below the historic P/E (depending on the time frame you use of course)

Ah, but can you guarantee that the next 10 years will be exactly like that?

No, but it indicates that perhaps some careful mutual fund/stock selection is in order.

Isn't this where the idea of a balanced portfolio where one has something other than pure stocks is important?

Yes, and I was really trying to shake those who are only holding stocks into commenting on why there strategy is preferable. You are preaching to the choir.

Though isn't another possibility that some corporations used higher expected returns as a way to raise earnings that is now coming to bite them in the butt?

Well, these are really one and the same thing- over expectation of pension (reducing required future payments into it and increasing short term earnings). It galls me though that the government backs these pensions up without backing up everyone.

Isn't this what 401(k)s were to replace, the company pension plan?

The 401 k is a clever way of changing the distribution of risk away from those that can afford to absorb onto those who can not afford to. You and me.

Isn't social security supposed to be a bail out in those retirement years? (Meant mildly tongue-in-cheek)

Have we hit 20 questions here? I am not sure. After 20 questions I hope we end up landing on the final answer. But in any event, my belief is that social security should be eliminated for anyone with a lot of money in their pockets, and increased for those who have nothing to be livable- barely livable, but livable.


Yes this is interesting, but where does it get us?
It gets me personally out of VTI and into Clipper fund (probably) or another which the kind denizens of this board will wholeheartedly fall behind.

Aren't you assuming that one is looking at just the TSM only school though? What about a slice & dice portfolio? I would note oddly enough that VTSMX is in the top third of large-cap blend funds over the past 5 years.

Yeah I would like to see some historic returns of slice and dice if you have one please show it off.


So are you advocating then that one study on how to know how over or undervalued the market is and then get in or out based on this?

It sure sounds like that, huh. Good idea. I don't like market timing in principal though but it sure sounds like I actually do. My brain is melting.

It isn't so simple as you think is my point.

It is certainly not as simple as your representation of my own representation is, so I agree with that. And also I agree that my comprehension of the world simplifies it considerably, which is why we debate here to improve each others understanding.

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yttire:

If we look at VTSMX over the past 5 years, we notice something stunning, so unusual and mind defying that it may cause you to lose sleep. Over this time frame according to bigcharts it went from around 33 5 years ago to 28.62 today. This is the entire stock market over a 5 year time frame. If we back up it is trading around the range it was in July 1998, around 27.

$$$ Was directed here by JBKing through the Index Funds board.
I think the keyword on your statement above is "over the past 5 years":
http://finance.yahoo.com/q/bc?s=VTSMX&t=5y&l=on&z=m&q=b&c=

The chart would look totally different at different periods:
(2 years)
http://finance.yahoo.com/q/bc?s=VTSMX&t=2y&l=on&z=m&q=b&c=

(1 year)
http://finance.yahoo.com/q/bc?s=VTSMX&t=1y&l=on&z=m&q=b&c=

(Max, ~8+ years)
http://finance.yahoo.com/q/bc?s=VTSMX&t=my&l=on&z=m&q=b&c=


I am also musing that indexed funds may not be as great an investment vehicle when the market is overvalued-

Indexed funds make a ton of sense in an undervalued, normally valued, or even slightly overvalued market ....


$$$ Another keywords, being "overvalued", "undervalued" or "normally valued" since I don't think nobody can ever justify their assessment on this, i.e.: hypothetically, if the P/E of S&P for the last 50 years is 14, the last 75 years is 13 and today is 26, can we automatically assume that the S&P today is "overvalued"?

I'd tempted to say yes, quickly but after putting some elements into the mix, my answer would be "I don't know" or "perhaps" or "maybe not" (since I don't think I'm qualified to give an assessment on this). Main reason being the economy, the companies, earnings quality, reporting quality, Accounting regulations, etc. today would not be 100% comparable to those for the last 50-100 years and those elements today won't be the same with 50-100 years from now.

It's not unsimilar with someone who say "housing price in San Francisco and San Diego today is overvalued" or "the house that I paid $500k last year in Los Angeles is now worth $800k, so I already got 60% gain in 1 year". To me, the concept of "overvalued" or "undervalued" is more relative than absolute. Yes, it is probably true that the housing prices are overvalued or the gain is 60% in 1 year BUT apply it to personal situation, what's the meaning of 60% gain if they don't sell the house? virtually nothing since tomorrow the same house can fetch only $400k. Unless the house is sold today and the money is being transferred to a house in Arizona.

If someone is paying $500k for a house in San Francisco with 75% debt ratio, I'd say this guy is "overpaying" compared to someone who is paying $700k for an identical house next door with 10% debt ratio since to me the main 'issue' is not the absolute amount of $500k or $700k since nobody knows where they'll be priced tomorrow BUT it's more important to relate the house price to their overall financial situation. The $500k guy who seemed to have got a deal will be more prone to trouble if he can't satisfy his debts and is forced to sell the house at the lowest point.

Now back to equity investing, I'm relating that to our discussion here since I firmly believe that success/failure in our investment does not depend on individual fund or (Gosh, help me .... stock selections) BUT on our asset allocation and if our selection of asset allocation is consistent with our objectives/constraints (I've repeated Investment Policy Statement/IPS hundreds of times on the "Index Funds" board). If our IPS dictates that we can stomach gyration or we'll need all our money in 6 months, then 100% cash is good to me.

Otherwise, it's like a marathon instead of a sprint since nobody knows what VTSMX or REIT or Commodity Indexes will return in the next 1, 2, 5 or 10 years BUT (I believe) everybody should know what kind of risk tolerance, return objectives and their investment constraints are. If one is adept on their objectives/constraints, monitoring/rebalancing their asset allocation as needed, I think they'll be OK in the long-run. Again, this is for we who have full-time jobs other than taking care of our investments.

Even though I'm a huge fan of Indexes, I'm not writing off active funds completely since I have 1 active fund and 1 semi-active fund in my (slice and dice-styled) holding, so this is not meant to be an argument for indexes vs. actives. It's just that I can't go writing off indexes in an "overvalued" or "undervalued" period since I don't believe in the absolute concept of "overvalued" or "undervalued" to begin with.

I suspect I've gone off-tangent but to summarize, I don't think a fund or an index or VTSMX or REIT index can or should be analyzed in 'vacuum' and be determined whether or not it's a good or bad investment at a certain point in time. I just humbly think the efforts should be put more toward analyzing our personal situations and selecting asset classes to be invested in based on that.


CHEERS,
--H
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Greetings,

Well, the general thesis is that if you buy the entire stock market, over a long enough time frame, if capitalism continues to succeed then there actually is no risk.

Not sure I can say that I agree with that assessment. There are definite risks to investing in stocks and sometimes I don't think that gets enough attention.

It remains only in your timeframe. If you have a short time frame, then you have real risk. A long time frame, no risk. That is the argument anyway.

Somehow I don't see it that way. In the long run, we're dead and in the almost long run there are major qualms about what if the market doesn't meet that goal of delivering the returns we wanted. Thus, if the market does fall short where do we go? In some cases we can put off retirement though this also makes the question of how long does the portfolio last an interesting question, e.g. for example consider someone retiring at 60 that lives to be 110 and thus has to have 50 years of living out of the portfolio in contrast to the 60 year old that expects to live for only another 20 years.

Simply because they may be better off with a different investment vehicle, perhaps dumping some money in their mortgage and some in the market rather than all of it in the market.

Well this is the sure thing vs risky investment choice and is a classic debate that like the Slice & Dice vs. Total Stock Market can go on and on and on...

Yes, and I was really trying to shake those who are only holding stocks into commenting on why there strategy is preferable.

I would think the answer to this is faith which while not quite a great answer, is likely why one invests the way they do.

Well, these are really one and the same thing- over expectation of pension (reducing required future payments into it and increasing short term earnings). It galls me though that the government backs these pensions up without backing up everyone.

I suppose I'm seeing this more as those running the companies with pensions able to get a boost to their earnings without paying a price until they have to deal with what happens when the pension gets into trouble. I do find surprising that there isn't tighter regulation on pensions myself either.

Have we hit 20 questions here?

19 questions at that point. There were 25 questions in total in my reply.

It gets me personally out of VTI and into Clipper fund (probably) or another which the kind denizens of this board will wholeheartedly fall behind.

FWIW, I hold a couple of mid-cap funds(VHCOX and VASVX being their tickers if you care to look them up) that I'm quite happy with for the moment. I used to hold a few other funds which I have since sold for various reasons.

It sure sounds like that, huh. Good idea. I don't like market timing in principal though but it sure sounds like I actually do.

My initial take was that this seemed like a half thought out idea and thus just wanted a little more details if you wanted to try to determine at which point is the market slightly overvalued and thus go a little further down the rabbit hole.

And also I agree that my comprehension of the world simplifies it considerably, which is why we debate here to improve each others understanding.

That is part of why these boards are here, that's for sure. Not that I have all the answers or even most of them but I do find it odd how Real Estate now seems to be viewed like internet stocks were 10 years ago as a sort of magic formula for getting rich. For some it'll work and for others there may be a rude shock coming depending on how the markets eventually do discover gravity.

Regards,
JB
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Author: yttire | Date: 6/2/05 7:25 AM | Number: 12865
If we look at VTSMX over the past 5 years, we notice something stunning, so unusual and mind defying that it may cause you to lose sleep. Over this time frame according to bigcharts it went from around 33 5 years ago to 28.62 today. This is the entire stock market over a 5 year time frame. If we back up it is trading around the range it was in July 1998, around 27.


One thing that you have failed to include are the dividends. Even when dividends are at 1% they make a big difference in long term returns. The 5 year returns aren't nearly as bad as you made them out to be.

So, including dividends, here are the annual returns for VTSMX:

VTSMX
1 yr = 9.37%
3 yr = 6.80%
5 yr = -0.65%
10 yr= 10.07%

To me, the 5 yr figure simply indicates that we have come through a severe bear market, and we are now on the other side. Bear markets are a regular feature of investing, and you simply have to expect them.

One of the best ways to mitigate the effects of a bear market is to diversify, and the first level of diversification (and the most important) is into bonds.

If you look at a portfolio of 60% VTSMX and 40% VBMFX (Total Bond Market Index) over the same periods, you will see the following:

60% VTSMX + 40% VBMFX
1 yr = 8.56%
3 yr = 6.65%
5 yr = 2.92%
10 yr= 9.10%

Another good way to mitigate bear markets somewhat is with high dividend value index fund like VIVAX. Here are its returns:

VIVAX
1 yr = 14.47%
3 yr = 7.78%
5 yr = 2.52%
10 yr= 10.33%

However, the problem with an all-stock approach like VIVAX, is the high volatility. It's standard deviation is over 16% vs. 8.5% for the 60/40 stock/bond mix. This won't hurt you if you are a long term investor, but it could hurt you if you are taking distributions from your retirement portfolio.

Russ
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The best way to mitigate bear markets is to go to cash when the market is declining. Or bonds, if the fed is lowering interest rates and the market is not responding.

Of course, that requires paying attention, and putting in some thought.
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Author: joelxwil | Date: 6/2/05 7:31 PM | Number: 12873
The best way to mitigate bear markets is to go to cash when the market is declining. Or bonds, if the fed is lowering interest rates and the market is not responding.

Of course, that requires paying attention, and putting in some thought.


No, it requires pure guessing and dumb luck! There is no other way to time the market!!
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joel said: "The best way to mitigate bear markets is to go to cash when the market is declining. Or bonds, if the fed is lowering interest rates and the market is not responding.

Of course, that requires paying attention, and putting in some thought."


RK replied: No, it requires pure guessing and dumb luck! There is no other way to time the market!!

I have to disagree with the latter statement.

What I'm about to say is, I think, a phenomenon of the current climate, and might not apply in all eras or in all economic situations. Anyway...

It has been pretty obvious that the broad market has been rangetrading for a while. Depending on whom you ask, it has been trading within a really broad range for a really long time. Within my own limited experience, I have seen it bounce up and down for just a few years. I first started noticing this with individual stocks, and although some stocks do go screaming upward, and others go screaming down to oblivion, it seems a great many stocks create charts that just look like perfect sine waves with no particular impetus.

Just about eight years ago -- May 1997 -- the S&P500 was at about 800.

By December 1999 it hit the 1400 range, where it stayed for months with only a glimpse of 1500, then started sliding.

By September 2002 it was back down to nearly 800 again. Once again, it parked for a few months.

Then it started climbing again, ever so slowly, and by December 2004 got back to 1200 again. And that's more or less where it still is today, six months later.

IF, I say IF, there is a cycle at work, well, it surely must be time to expect a downturn, because the pattern has repeated twice.

This is purely playing with numbers. It doesn't even qualify as Technical Analysis, at least, I hope not, because I'm just winging it! <g> But the point is that an awful lot of investing is done on the basis of charts and momentum, with no concern over fundamentals. It makes no difference whether such trading practices "make sense" -- the point is that we all must take them into account, because they are common enough to affect the value of stocks for us and everybody else.

Joel is far more practiced at reading various signals than I am, but I rather agree with him. The market has been rallying rather enthusiastically lately, but is there any support for higher numbers? Or, conversely, is there "resistance" above the current numbers?

The S&P500 seems to have bounced off a bottom of 800 repeatedly. So, I think I'd feel confident buying VTSMX (or VFINX, choose your poison) if we ever see such a dip again. It also bounced off 1400 once, and lately has not shown much ability to get near that number again. Since that 1400 figure came during the dot-com bubble, I am reluctant to expect that much of a rise in the current climate, with so many different factors in the mix than there were back then.

Joel mentioned bonds, but I suspect a lot of people have been bitten in the backside by their surprising behavior in the past year. Last year, every advice column was telling people to move to shorter maturities because the Fed was busily raising rates. In theory, any existing LT bonds on the market should have lost value by competition with new paper coming onto the market. But the chart shows that ain't what happened:
http://finance.yahoo.com/q/bc?s=VBLTX&t=1y&l=on&z=m&q=l&c=VBISX

Some of this message would seem to support your argument that timing boils down to "guessing and dumb luck." But if you look at that last chart again, you should notice that there was at least a month during which the paths of long-term bonds and short-term bonds really started to diverge. The Fed was already in the midst of its tightening, and things were not going as the pundits predicted. So, I submit that this could be read as a reason to ignore their advice -- which is what I did, for instance.

Being green, I was not brave enough to buy more bond funds at that time, but I did stop selling shares in the funds that I had, which I had been doing little by little. And when I saw that my intermediate-term bond funds were holding their own, even going up in value, I dismissed any notion of buying short-term bonds with their lower yields.

So even a relative beginner can read signs and make informed decisions if he/she stays alert and thinks independently. One can reduce the "dumb luck" component and make decisions based on an *intention*, not a "guess," and have success in so doing. Perhaps not everybody has the mindset or patience for it, but I don't think blanket statements like the one above can be supported.

Just my view. :-)
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I am not sure what the final moral of the story is, but I am thinking that correctly selected mutual funds is preferable to index funds in general.

I agree.

Also I am thinking uncorrelated asset classes is important if you actually want to see gains in a decade.

I agree.

Also I am thinking of buying an investment property at some point, and I think it makes sense, but hopefully this bubble will crack first.

I disagree. If you can find it, I recently wrote a lengthy message that included a lot about real estate investing. Basically, the "bubble" concept is something that applies to "the broad market" of real estate (if at all). We both know that individual stocks can outperform the broad market, and we agree that selective mutual funds can, too.

WELL... the same is obviously true for real estate as well! All those properties are owned by different people and sold by different agents. Generally everybody wants to max their profit on the sale, but there will be times when they need speed rather than price, or some other consideration, and that's when you can buy at less than the market value. At that point you are protected against a slight market decline.

And I have not heard anybody, anywhere, suggest that housing would go through a massive decline such as the stock market in 1929 (or 2000, for that matter). Historically, most housing price corrections have been reasonably mild, reasonably brief, and have only harmed people who were in for the short term.

There are many people out there right now trying to buy houses and flip them for a profit, and I hope every one of them gets squashed. I say that mostly because they are corrupting the natural dynamics of the housing market, thus keeping many low-income families from getting their own home. In other words, residential housing is not supposed to be an investment like stocks or bonds or gold coins. Its primary purpose should be to shelter people from bad weather and give them a safe place to sleep.

I have no argument with professional real estate investors -- I just have a problem with opportunists who have gotten fat and greedy. But I'll stop the rant now. <g> The main point is that I think you should not rule out this option because interest rates may well change at the same time prices start moderating (IF they do), and I don't think you gain anything by waiting.

Also I am hoping to draw out ideas of how to overcome an investing field where most asset classes seem overvalued.

I think we're all struggling with *valuation* per se, in all asset classes. We try to look at PE ratios, whether historical or predictive. We try to look at ROE, cash flow, all sorts of metrics. One of the most amusing (for cynics like me) is oil -- every day, it seems an "expert" somewhere is willing to stick out his/her neck and predict where the price will go, when, and why. These poor folks are like meterologists --it snows when they predict sunny weather, and so on.

Perhaps it's best to boil it down to this: Own things that are not replaceable. Like oil, like water, like land. Anybody can start up a new software company with a few engineering students, some PCs, and a good idea. But nobody is making new land. The supply of water is limited, variable, and not always located where people need it. No matter what the Saudis do about their production quotas this week or next, the fact is that every single day reduces the amount of petroleum trapped in the earth and there is no more being created. And with demand suddenly pushed upward by huge new entrants to the world economy, people with an eye on the future may not buy into the theory that oil will subside in price the way it has in previous cycles -- when China and India were still largely agrarian.

Simplistic advice, perhaps, but it puts "valuation" into perspective.
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This is not really about VTSMX per se ....

So we have endured around 7 years of basically no gains for those who are invested in index funds. Are we really sure that index funds are a good place to invest? Further, are we really sure that the domestic stock market is really the only game to play in town?

Even Jack Bogle says you should always own bonds. That ain't much diversification in this day and age, but it's better than just stocks.

...Many of us appear to be buying up houses like hotcakes, to make up for our portfolio failures in the market.

I think what happened is that during the 1990s, people recognized that housing was slightly undervalued. A slight climb began. Then the dot-com bubble burst, and trillions of dollars exited the stock market. Those dollars needed some place to go. It seems to me they just made a beeline directly into housing.

This seems so glaringly obvious to me, I don't know why it isn't laid out like this when people discuss it. Anyway, by the 4th or 5th year of this process, the early buyers had accumulated "gift" equity (by way of appreciation, not investment) which they often monetized by way of 2nd mortgages or refinancing.

So the cash that left the market early was returned to the people who bought real estate early. As often as not, those people spent their money on "consumer discretionary" products and services, which helped the economy come back a bit. Home builders of course made tons of money as did people who invested in them, directly or through REIT funds.

People who bought houses later did not get quite the benefit, and I suspect that the stiffness of housing prices now is helping sustain the flow of money back into equities and bonds (or keeping that money from leaving in the first place).

But it may well be that we're hitting equilibrium, a point at which everything is equally "expensive" -- which is sorta what you said elsewhere. Of course, that is the same as saying that everything is equally "cheap" -- in essence, there is no pressure to move money into any one asset class rather than another.

I have my own opinions on that, as noted elsewhere, but as a bottom line, I agree with you that the wisest course is to diversify. That way, when the winds of change finally show us which way they're blowing, we'll have at least one or two flags ready to fly.
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> No, it requires pure guessing and dumb luck! There is no other way to time the market!!

Pure guessing and dumb luck??? Just because one cannot accomplish something in a certain way, does not mean NO ONE can do it. I have to agree that it may be difficult for mutual funds to time the markets, as their movements shake the world, but you or I can jump in and out of stocks with minimal impact on the overall market.

I think "timing" is a slight misnomer. I agree that you cannot always sell out at the exact top, or buy at the exact bottom. But a reasonable approximation can be made. Are you telling me John Henry (primary owner of the Boston Red Sox), went from being a farm boy from Arkansas to a billionaire by timing the commodities market did it purely by luck and chance? If so, I'd love to find out which star he is wishing upon...

If you think about it, what really makes technical analysis more "guessing" and "dumb luck" than fundamental analysis, where you are trying to predict future cash flows, and profit growth in order to value the company? The success of TA or FA both depend on the rigor of the analysis and investment discipline.

While I am a young 'un yet to make oodles of money in the market, I think logically, why get into the holy war of TA vs. FA? Why not use both? If you can find a fundamentally sound company, with healthy growth and good technical movement, then why not go for it? Always stack the decks in your favor. Being dogmatic doesn't help you win at investing. Good analysis (whether it be technical or fundamental or BOTH) and hard work do.

Illini2001
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My current method of trading stocks is to buy and sell, based on technical analysis, from a list of stocks with allegedly good fundamentals.

Yestersay I went to an INVESTools sales pitch. They do provide the most comprehensive collection of fundamental data for stocks the I know about, and it is all on one site. This includes insider trading information. The fact that it is all on one site, and available in a well organized way, may make this worth the money. I have not decided yet, and I am doing OK at this point in any case.

The point is that they demonstrated the methodology, which I find very compelling: make a watch list based on fundamentals. Buy based on technical triggers. Sell based on technical triggers. So every night you look at your holdings and see if any rate a sell. Then you look at your watch list of potential buys and see if any rate a buy (assuming you have any cash left, or will generate cash from a sell).

Anyway, I do not like some of the high-pressure sales pitch that I saw, but the method is good, no matter how implemented.
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I do not like some of the high-pressure sales pitch that I saw, but the method is good, no matter how implemented.

If the method was so good they would not need the high-pressure sales pitch. I guess there are some who could make this kind of mechanical investing work, but it seems to me that the person who makes the most money is the one selling the service.

Fuskie
Who also avoids free vacations if a timeshare sales pitch is involved...
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>> If we look at VTSMX over the past 5 years, we notice something stunning, so unusual and mind defying that it may cause you to lose sleep. Over this time frame according to bigcharts it went from around 33 5 years ago to 28.62 today. This is the entire stock market over a 5 year time frame. If we back up it is trading around the range it was in July 1998, around 27. <<

Keep in mind that dividends and capital gains reduce the NAV but are part of the real return. You can't look at the NAV of a mutual fund to determine its return over time.

#29
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Author: Littlechap | Date: 6/3/05 1:32 AM | Number: 12875
So even a relative beginner can read signs and make informed decisions if he/she stays alert and thinks independently. One can reduce the "dumb luck" component and make decisions based on an *intention*, not a "guess," and have success in so doing. Perhaps not everybody has the mindset or patience for it, but I don't think blanket statements like the one above can be supported.

The ability to predict future market direction has been debunked by nearly every reputable investment professional over the last 50 years. Spotting trends in the market seems easy, but making decisions based them, is simply not reliable, and it is a beginners' trap in investing.

Patience is required not for studying the 'signs' of the market, but for allowing the market to work its wonders on long term investments based on the principles of Modern Portfolio Theory (ie, proper asset allocations, and rebalancing). That takes lots of time.

Just read a few of these books and you'll see what I mean.

William Bernstein, 'The Intelligent Asset Allocator' and 'The Four Pillars of Investing'

Burton Malkiel, 'A Random Walk Down Wall Street' and 'A Random Walk Guide to Investing'

Peter Bernstein 'Against the Gods, the Remarkable Story of Risk'

John Bogle, 'Common Sense on Mutual Funds'

Jeremy Siegel 'Stocks for the Long Run' and 'The Future for Investors'

James O'Shaughnessy 'What Works on Wall Street'

Robert Shiller 'Irrational Exuberance'

Larry Swedrow 'The Only Guide to a Winning Investment Strategy You'll Ever Need'

David Chilton 'The Wealthy Barber'

Bill Schultheiss 'The Coffeehouse Investor'

In addition, Warren Buffett and Peter Lynch, say exactly the same thing, and they are two of the most successful investors who have ever lived. Neither one has ever claimed to be able to 'read the signs'. Their special talent is that they know how to value companies better than the average person, so they are able to buy at prices better than what ordinary people can. But they have no ability to time the market.

These experts, and many more, all present overwhelming evidence and statistical proof that says that if you are successful in predicting the direction and timing of the market, you are simply lucky. And, you may be lucky several times in a row, just like you can throw sevens on a pair of dice several times in a row, but you won't be lucky over the long term. Being lucky several times in a row is what has destroyed thousands of market timers.

Perhaps you think all the professionals in the world are wrong and you are right?

Russ
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Author: Littlechap | Date: 6/3/05 2:21 AM | Number: 12877
This is not really about VTSMX per se ....

So we have endured around 7 years of basically no gains for those who are invested in index funds. Are we really sure that index funds are a good place to invest? Further, are we really sure that the domestic stock market is really the only game to play in town?

Even Jack Bogle says you should always own bonds. That ain't much diversification in this day and age, but it's better than just stocks.


Bogle is absolutely correct!! Statistical analysis shows us that by mixing only the Total Stock Market and the Total Bond Market, you can achieve 95% of all diversification possible. It is amazing to me that so many people go to so much effort (and additional expense) to inculde all sorts of additional diversification when the potential rewards are so small.

Russ
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Those books are comfort for the lazy. Total nonsense, of course.

If you want to read a decent book with good mathematics in it, try Mandelbrot's "Misbehavior of the Markets". While this book will not teach you how to trade, it clearly debunks the efficient market hypothesis, as well as the mathematical foundations of most of the market analysis, starting in particular with the idea that stocks vary according to a normal distribution, and the random walk stuff.

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Author: joelxwil | Date: 6/3/05 12:59 PM | Number: 12884
Those books are comfort for the lazy. Total nonsense, of course.

If you want to read a decent book with good mathematics in it, try Mandelbrot's "Misbehavior of the Markets". While this book will not teach you how to trade, it clearly debunks the efficient market hypothesis, as well as the mathematical foundations of most of the market analysis, starting in particular with the idea that stocks vary according to a normal distribution, and the random walk stuff.


I have read Mandelbrot's book. And, I am a mathemetician. And I have studied fractal mathematics. The significant point that Mandelbrot presents is that the outliers do not quite conform to a Gaussian distribution. There are too many of them, indicating that the market process is non-stationary. This has been known for many years before Mandelbrot wrote about it. This means that the EMH cannot be 100% correct. However, historical backtesting over the last 100 years shows that using EMH as a basis for investing is close enough and indeed valid. It is just that there is slightly more risk than a stationary stochastic process should have. This means that theoretical gains will be slightly less than those predicted by Gaussian based statistical analysis, and there is a higher probability that you may get struck by extremely bad luck (a market bolt of lightning) that could wipe you out. EMH does not predict as high a possibility of such an event.

There are several companies who are trying to incorporate chaos theory into their models as we speak. So far, none of them have proved better than using MPT.

So, Mandelbrot's results, while interesting, do not seem to have much implications concerning the methods that the average investor should use.

Russ
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Vis-a-vis the performance of VTSMX or VFINX, Ziggy said:

Keep in mind that dividends and capital gains reduce the NAV but are part of the real return. You can't look at the NAV of a mutual fund to determine its return over time.

This was a topic that caught my attention and I meant to comment on earlier. I think the yield from the S&P 500 index is somewhere around 1.5%, give or take. And as far as I can tell, most of the handy charting services don't take yields into account. So that's an issue when trying to do quickie chart comparisons.

However, I'm not sure that's true of the typical "Total Return" figures provided by M* and sources like that in their tables and analyses. One could double check this if one could find a fund that (for example) has a monthly dividend distribution, but which hasn't changed in price all year. Then check to see if Morningstar reports a "Total Return" YTD above zero. Either that, or pore through the M* help screens. Obviously I am displaying my laziness in not having done any of this already. ;-)

The other consideration is that any fund that yields roughly 1.5% is only giving back what inflation takes away, more or less. It's much too small a number to talk about when discussing the past 5 or 10 years, in any case -- especially when the NAV has jumped up and down so massively.
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Russ,

I suggest you go back and read what you wrote, and see it through the eyes of another person. That is one of the most condescending, pompous, pedantic and pretentious messages I've ever read here. And I should know, I get accused of those traits all the time!

The ability to predict future market direction has been debunked by nearly every reputable investment professional over the last 50 years.

This is total, complete, utter rubbish. If "every reputable blah blah" includes the names you cited -- Buffett, Lynch, not to mention several well-regarded fund managers -- then Good Golly Miss Molly, there are a whole bunch of people who've demonstrated the ability to outperform the so-called "Efficient Market" on a longstanding, consistent basis.

You say Buffett doesn't time the market. Pure shinola. Did he make Enron an offer for its natgas pipeline properties when they were swimming in money? NO -- he waited until they were bankrupt and desperate, so he could buy it for pennies on the dollar.

Same goes for the utility company he recently bought, with the sector all beat up, and power plants underutilized and going for a bargain. Buffett does NOT overpay for stuff, and I don't know what else on earth you can call that but TIMING one's purchase. Buffett buys at the TIME the thing is CHEAP. Duh.

Patience is required not for studying the 'signs' of the market, but for allowing the market to work its wonders on long term investments based on the principles of Modern Portfolio Theory (ie, proper asset allocations, and rebalancing). That takes lots of time.

LOL yeah, right. I got my education in this stuff the hard way, by sink or swim. After a life of peaceful ignorance I was thrust into the role of taking care of some money for somebody a few years ago. I asked some presumably smart people for advice, and they told me to buy a couple of funds from Janus. I knew absolutely nothing, and although I thought that the Janus Balanced Fund looked more stable at the time, I was pressured to buy the Janus Fund and the Mercury Fund. Even as a neophyte, my instincts were better than theirs.

Anyway, guess when this was: mid-2000. <LOL>

I was a beginner THEN, and when I saw those funds going down consistently, I called Janus every couple of months, and those jackals said exactly what you just said: "Oh, you have to THINK LONG TERM."

They kept saying that while the money went flying out of the account. Finally I decided that they were liars, and I left Janus. I moved that money into short-term bonds, and later on, into other investments. Those two funds have NEVER recovered, but by having dumped them after a few months, I have slowly recouped much what they frittered away. What if I had put my money into VFINX right then? I'd be even WORSE off!

LONG TERM, MY BUTT. It took me a couple more years of total immersion in this stuff, jabbering with people here and elsewhere, learning how to lose money in stocks (but also learning WHY I did, which made it worthwhile). And I try to be modest, but I learned an awful lot. One of the things I learned is, anybody who watches a security decline in value for more than a year at a time is either dumb, lazy, or awfully optimistic. (Or perhaps they need a tax write-off.)

The happy news for me is that I rarely find myself owning such securities anymore. I bought a piece of a total market index fund, but I did it when the broad market was in a trough last year, and it's up nicely since then.

IF I had not paid close attention to the "timing" of that purchase, most likely I'd have lost money. But I did pay attention. And why? Because now, I can ride out the next rough spot and still end up even.

If there are nothing but successive troughs, then I will give up on the index. But I am thinking TOP DOWN. I only bought the broad index because I expected positive macroeconomic developments, and because the total market index has more small caps in it than the S&P 500.

So in a recovering economy, it's more likely to do well than big caps. THAT is yet another fact that was predicted by lots of folks -- but not by the "Efficient Market" -- and was then born out by reality. So I was overweight in small caps in recent years, and HAPPY about it, too! I am only slowly raising the market cap balance in these various portfolios because those stocks (and funds) are not showing much spunk just yet.

Just read a few of these books and you'll see what I mean.

Pfft. Take a look at THIS and you'll see what *I* mean.

Perhaps you think all the professionals in the world are wrong and you are right?

Hmm, no, right now I think that YOU are wrong. But perhaps you think I'm just a moron and that I needed a good head-beating or something.

I don't usually talk about stuff like this, but a very long time ago they gave me tests to see how I'd do in college. English, Math, some other stuff. I took some other tests later on, when I went to another school. Every time I ever took a test, it told me that I was much more clever than the vast majority of folks. Possibly including you.

And when I was younger I took the wrong attitude about that. But nowadays, I realize that people have all sorts of gifts that don't show up on tests, and they can do things I can't, and understand things in different ways than I do. So I enjoy all people, and I've learned that in an online community, one can almost always find something to like in any correspondent one meets.

So I suggest you take this opportunity to demonstrate something more appealing than that last message, and give me a chance to like you, too.
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I wrote:
<<The ability to predict future market direction has been debunked by nearly every reputable investment professional over the last 50 years.>>

You replied:
This is total, complete, utter rubbish. If "every reputable blah blah" includes the names you cited -- Buffett, Lynch, not to mention several well-regarded fund managers -- then Good Golly Miss Molly, there are a whole bunch of people who've demonstrated the ability to outperform the so-called "Efficient Market" on a longstanding, consistent basis.

Have you read any of the books that I listed?

Russ
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Have you read any of the books that I listed?

Russ


Gee, have you read my last message? Like the part where I suggested that you drop the confrontational tone and try to be civil?

I expressed a willingness to forgive the obnoxiousness of your previous message to me, and to make friends. But I guess you find it more important to bolster your self-confidence by demonstrating a suffocating pedantry, rather than just getting along.

Too bad.

I already know what you think. Evidently you have no idea what I think. So, I'll follow your example and provide some lists. Let me know when you've finished your homework, and maybe it will be easier for us to communicate. These lists are not exhaustive, they're just for starters.

Reading:
JP Sartre, Being and Nothingness
K Kesey, The Electric Kool-Aid Acid Test
D Brown, Bury My Heart at Wounded Knee
R May, Love and Will
S Sontag, Against Interpretation
J Kerouac, On The Road
C Castaneda, Don Juan

Viewing:
Any 5 films by the Coen Brothers
Any 5 films by Federico Fellini
Any 5 films by Martin Scorsese
Any 5 films by Stanley Kubrick
Any 5 films by Tim Burton
Any 5 films by Werner Herzog

Listening:
All nine Beethoven symphonies, twice
Brahms 2nd Piano Concerto
Vaughan Williams, Variations on a Theme by Thomas Tallis
Debussy, La Mer
Barber, Adagio
Hindemith, Symphonic Metamorphosis on Themes of Carl Maria von Weber
Copland, Rodeo; also, Fanfare for the Common Man
Miles Davis, Birth of the Cool
The Beatles, Revolver
Django Reinhart, anything you can find on disk
Bela Fleck and Edgar Meyer, Music for Two

You should of course also see at least three plays each by Shakespeare, Arthur Miller, Clifford Odets, Ben Hecht, Tom Stoppard, and David Mamet.

Somewhere along the line, get a look at La Jetee by Seurat. Just stare at it for about four hours. Then do the same thing with Guernica by Picasso, with the Pieta by Michaelangelo, and anything by Calder.

All that should keep you busy for a while. But there's one last step.

Find a local pub near MIT, Stanford, Caltech, or some such place. Pick whatever type of alcoholic beverage you prefer -- even if you do not normally drink -- and drink far more than you ought to. Do not get drink enough to get sick. But drink enough to make the room spin.

Then grab a grad student from among the patrons, and attempt to discuss the inevitable failure of String Theory as a way of uniting relativity and quantum physics. Feel free to pick either side of that opinion, the point is to attempt to debate it while extremely inebriated.

(Make sure you have a designated driver on hand, of course.)

By the way, I have not exactly done that last step personally. But I've done much more foolish things, so I'm actually going easy on you in this case.

Now, this whole message might seem to be terribly off-topic. But my goal is to promulgate one simple notion.

And that is, that the so-called "Efficient Market" is not at its heart a bunch of numbers printed on pieces of paper. At its heart, that market is comprised of millions of HUMAN BEINGS. Each of them has a heart and soul, thoughts and feelings. The literature and artworks listed above are ways that some folks have tried to express themselves, while also achieving resonance with other people who willingly experience those expressions on a repeated basis.

Resonance among individuals. An audience in a theater. It is a "mass market" of consumers of drama (or music or whatever). It is not dissimilar from a distributed "mass" of people who collectively invest money in various ways. The sum total of those actions can be summarized by mathematicians in a handful of figures, but that is not where those actions ORIGINATE.

So I kinda think that a person who believes he can understand people by looking at the end result of their actions, in a limited sphere such as finance, does not really get it. If the market were ever "efficient" then how could it also be "irrational" or "exuberant?" I mean, really.

Some of the same people who put money into index funds may also go skydiving or bungee-jumping on weekends. They may fear risk with something as meaningless as money, while taking extreme risk with the most precious possession of all, i.e. life itself. Is this sensible?

No, but it's human. If people can get worried or happy, then a person who knows people may be able to anticipate when that worry, or that happiness, will be translated into investment behavior. And there are a lot of people making money by that precise method. If it were not true, it would not be possible for pump-and-dump scams to work. But they do.

So it does not matter if you refuse to admit how well I rebutted your point in my last message. People like Warren Buffett do, indeed, "time" the market. You'd rather try to drag the discussion back to some books and theories, rather than just look at the real-life actions of a real-life person, who demonstrates an ability to make money that is not tied to following the crowd and waiting endlessly for results.

I ain't Buffett by a long shot, but I do know a lot about him. And I know he did not become a billionaire by owning index funds, or by buying high and selling low. This is common sense -- something that a person with far less education than you or I can figure out. So I think you're trying to make it harder than it is, for the sake of showing off a bunch of rather pointless erudition. But hey, I could be wrong. ;-)
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1) You seem to misunderstand the concept of 'long-term investing.' 7 years is not it. Nor is 5. At the end of 1994, VTSMX was 11.27. Now it is 28.62. That's a very nice return.

ignore inflation accounting for another 2-3

2) That doesn't make any sense. Inflation is not the cause of the market's rise. Yes, it makes your real return less than your nominal return, *exactly* like every other asset class.

and also ignore that we are at a historically high P/E right now.

3) The SPX is nowhere near a historically high PE [62 in Spring 2002]. In fact, it is 19.6 today, much, much lower than the monthly average of the past ten years, which was 27.47 according to bloomberg.

best,

Naj
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1) You seem to misunderstand the concept of 'long-term investing.'

It was supposed to be a "thought experiment"- an analysis from a particular point of view, and a common point of view. I have perhaps 100 different viewpoints which I consider all to have some legitimacy, and it is useful to plan by using different frameworks. I still hold by the thesis that in an overvalued market, you should seriously consider looking at other asset classes and plays within the market which do not encompasse the whole thing.

2) That doesn't make any sense. Inflation is not the cause of the market's rise.

Inflation surely is part of the markets rise. It is important to consider it when evaluating your return over periods, if you are interested in the real return.


3) The SPX is nowhere near a historically high PE [62 in Spring 2002]. In fact, it is 19.6 today, much, much lower than the monthly average of the past ten years, which was 27.47 according to bloomberg


Now that is some interesting information. However, I would posit that perhaps the last ten years is not necessarily indicative of its future- that its future will resort to the long term relationship of SPX with interest yields. I don't know the answer to that, but suspect as yields rise it should reflect something lower than what it is now.
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3) The SPX is nowhere near a historically high PE [62 in Spring 2002]. In fact, it is 19.6 today, much, much lower than the monthly average of the past ten years, which was 27.47 according to bloomberg.

This snippet is excerpted from http://www.finfacts.com/stockperf.htm -- it cites an article published in mid-2004, so take into account the one year difference in the data points.

As to the P/E multiple, if the current level remains static, then it will not affect capital appreciation. However corporate earnings do not remain static. Morrison refers to Irrational Exuberance by Robert Schiller, who calculated normalised earnings and adjusted them for inflation between 1871 and 2000. Over this period, the average P/E based on normalised, inflation-corrected earnings was less than 15. The present P/E is above this level and as Barnes has argued, it has always reverted to the mean.

Accordingly, Morrison claims that it would be unwise to expect a long-term expansion in the P/E multiple from here and with a real earnings-per-share growth in the past 130 years in mind, and an estimate of annual growth for the coming 20 years of between 0.25% and 2.25%, the real returns for stocks (excluding inflation) and with the P/E multiple static, is in the range 2.1% to 4.2%.

If the P/E multiple reverts back to the historic mean, instead of returns of 2.1% to 4.2%, the outcome would be from 1.25% to 2.5%. If the P/E multiple reverted to the mean in a short period such as one year rather than gradually, the market would drop about 40%. Morrison says that in the past, the P/E has spent about as much time below the mean as above it and a P/E below average could mean the 15-to-20-year return might be negative.

According to Schiller, in 1966, the normalised P/E was 24.1, similar to the current market valuation. The annual real total return for the following 15 years was -0.5%. In 1901, the P/E reached 25.2, and the annual return for the next 20 years was -0.2%. Whenever the market has reached valuations similar to current levels, returns have been poor during the ensuing 10 to 20 years. The chief reasons are a low dividend yield and contracting multiples.


In short, this particular source (citing Schiller) suggests that there is no precedent for PE ratios *rising* from levels like those we have at present, with the exception of the sudden appearance of the dot-com bubble, which was a once-in-a-lifetime event. One should also remember that that same bubble was comcomitant with an epidemic of non-internet corporate malfeasance on a massive scale, from Enron to Worldcom and beyond -- with false earnings reports fouling the data pool.

As for cherry-picking your data points to cite figures that seem to prove a point, that strategem is pretty transparent. It has no validity as a support for any particular time frame over any other. I mean really. That same web page has a chart of the S&P 500 that shows a 23.0% average annual return for the five year period from 1995-1999 -- but only a 13.7% average annual return for the TWENTY year period from 1970 to 1999.

So that's just playing with numbers. What one should do is THINK about this stuff, rather than just blindly following traditional "buy-and-hold" methods. If the analysis cited above has any validity, a person has to be more motivated and creative than that.

And in my view, it's inappropriate and rather presumptuous to tell another user "You seem to misunderstand the concept of 'long-term investing.'"

I mean, who died and appointed you Merriam Webster?

Seven years may not be the time frame envisioned by Old School investors, but life is not quite as staid and predictable as it was back in the days when everybody lived in Mayberry and had pie at Aunt Bee's house every Sunday. Sure, one puts money into an investment and hopes for the best, but in today's world, you might need to liquidate some of it for emergencies, like catastrophic healthcare needs or whatever, because a single visit to the ER can run a few thousand bucks.

I am not persuaded to believe in any investment strategy that says it's okay to watch a portfolio decline in value for 5 or 7 years, because hey, that's just not LONG TERM enough! I mean, really. We seem to be running into "money managers" who think that the only way to fight volatility is dollar-cost averaging, or basically sitting still with one's fingers crossed. What yttire suggests, and many of us agree with, is that diversification is a perfectly valid way to solve the volatility problem -- and if the article above is at all accurate, it may be necessary to buy something other than stocks -- particularly indexes -- just to get some kind of ROI at all.

Dollar-cost averaging into a rangebound market with low dividends and modest inflation is just not an attractive prospect. That's what he was saying, and he's looking for alternative approaches. But it seems all he gets lately are reasons why he's wrong -- no suggestions of ways to address these very serious issues.

And while I'm at it, not much attention paid to macroeconomics, psychology, or politics, either. I mean, in the past few years, we've seen the 30-year bond pulled off the market. And guess what -- now, they've decided to start selling them again!

Oh, and did I mention that we had a budget surplus when the market was starting to drop in 2000, but a massive deficit now? Is this supposed to be an inconsequential matter? I don't think so. And I am just waiting, I mean, really the suspense is killing me, to see what happens if China floats the Yuan. So much for Walmart's pricing advantages.

And what can you say when Alan Greenspan makes a speech, and on the subject of long-term bond rates dropping while the short-term rates are being tightened, he basically scratches his head and shrugs. Yep, it's a "conundrum" for sure.

The whole thing is a conundrum and this oversimplification is a disservice to everyone, particularly when it is laid out as a "correction" to a user who, in fact, is thinking in more complex terms than the person doing the correcting. In my opinion, anyway.

Trust me, I would LOVE to be able to trust old-style investing. I am old enough to remember when you would just put money in a savings account -- in an actual bank -- and you really felt like you were getting somewhere. You didn't buy everything on credit -- you saved up the money in advance to buy stuff. Basically, people were SANE. <g> But I just don't think there's an easy one-size model that fits everybody anymore, and for that matter, there probably isn't any easy model of any kind nowadays.

Some of us here are trying out different ways of diversifying, working out strategies and rationales, and seeing what works and what doesn't. We are experimenting, but we are doing it carefully and thoughtfully. And we compare notes, and share information when we stumble across it. If a new paradigm is needed for the 21st century, as I strongly suspect, then we won't find it without this kind of exploration.
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As most long term investors will tell you, it's not timing the market that's important, but 'time in the market' that makes for long term returns.

Dollar cost averaging into this market is probably one of the best long term strategies there is, assuming you will need the money in 20 or 30 years. Also, averaging into this market should be done across a broad spectrum of the entire market. There is no way to know which stocks or funds will bew winners and which will not, so using broad market indexes is probably the best way to go.

Losing over a 5 or 7 year period is a non-event when looking at the long term (20 or 30 years). If you have plans to withdraw money sooner than that, bonds should be included to stabilize the portfolio. If you need to withdraw a certain amount of money in 5 years or less, it should be set aside in a money market fund to avoid the chance of loss.

Don't fall into the trap of believing you can time the market. It has been proven to be statistically impossible to time the market or pick winners reliably over the long term.

'Old' investing principles are still valid and always will be. As soon as you start saying it is 'different now', you are setting yourself up for a big fall.

Russ
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3) The SPX is nowhere near a historically high PE [62 in Spring 2002]. In fact, it is 19.6 today, much, much lower than the monthly average of the past ten years, which was 27.47 according to bloomberg

Now that is some interesting information. However, I would posit that perhaps the last ten years is not necessarily indicative of its future- that its future will resort to the long term relationship of SPX with interest yields. I don't know the answer to that, but suspect as yields rise it should reflect something lower than what it is now.



Perhaps, but the past 10 years when rates were higher, the SPX was also higher.

Naj
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I am not persuaded to believe in any investment strategy that says it's okay to watch a portfolio decline in value for 5 or 7 years, because hey, that's just not LONG TERM enough!


If you think 5 years is LONG-TERM enough for *any* asset class, you are sorely mistaken. And I am not trying to persuade you of anything.

No one has to die to make that statement prima facie obvious.

Buying a house, a stock, a junk bond for 1-2 years is not an 'investment.' It is speculation, or a 'trade' if you like that word better.

Naj
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If you think 5 years is LONG-TERM enough for *any* asset class, you are sorely mistaken. And I am not trying to persuade you of anything.

Then why post at all?! You guys just recite stuff by rote. There does not even seem to be any thought process behind these slogans.

Like: wouldn't FIVE years be considered LONG-term for a TWO-year bond???

<LOL>

Or better yet -- how about Soybean Futures?

That's a legitimate asset class. But I guess you take commodities off the table because they don't fit into your model. Anything with a shelf life less than five years is *automatically* considered "speculation" --not investment. Hmmm... I've owned a commodities-oriented mutual fund for a while and besides more than holding its own in the price department, it's throwing yields at me like crazy (in a tax-exempt account, naturally).

Now, sure, I figure to hold onto that for a while -- because MOST of the commodities in question are of finite supply. Oil, copper, etc... But the managers have to trade in and out of derivatives to make the fund work, rather than actually buying the commodities directly. That may not suit your taste but they've done a great job, and I expect the fund to solidify that particular portfolio for years to come. I just LOVE how it tends to zig, when other asset classes zag.

Likewise, today, most domestic stocks AND bonds were down, but foreign bonds were up. That's what we're talking about here -- using diversification to hang onto money and grow it in a more stable way, rather than letting a fickle market throw it around like socks in a clothes drier.

Buying a house, a stock, a junk bond for 1-2 years is not an 'investment.' It is speculation, or a 'trade' if you like that word better.

I don't give a hoot about the words. That's your deal. I realize that words are not nearly as finite in meaning as you seem to believe. If I say a song is "good," well now just what does that mean, hmm? If I say I've had a "long term" relationship with a person, just what is the criterion for that? SURELY you must have a strict definition, in years, months or weeks, by which all such relationships are defined. And it applies equally to young people, old people, etc.

Because that's EXACTLY what we are talking about. A "relationship" between an investor and a chunk of money. I am not talking about people who "fall in love" with a stock -- which is clearly a bad idea. I'm talking about people who are fully aware that their investments serve a purpose in their lives, like providing for shelter, or allowing one to move up in social or educational status, or various other goals. Money is just a means to an end -- or several ends.

Money is there to be used. I'm guessing it's safe to say that 100% of the people on this board have the same goal: to have more money in the future than they do today. That part is easily agreed on.

But some folks may say "I want to have a LOT of money." Now, we start to have semantic problems, because after all, what IS "a lot of money?" To Donald Trump it might be a billion, but to a homeless guy it might be five bucks. Here on the board we are all -- I'm just guessing -- somewhere between those two extremes. <g>

Meanwhile, we have other differences. Some of us are young, some are older, some even retired. Some of us own homes, some do not. Some readers have higher income than others, and depending on their lifestyles, family needs, and other issues, some readers can spare more cash in any given month than others can, above and beyond the money that is required to keep body and soul together.

But you preach a dogma that suggests we are all identical! You are talking through your hat, and don't like being called on it. Because the esteemed Jack Bogle, one of the original apostles of this creed, adamantly believes in regular rebalancing of a portfolio, at least once per year. And what criteria does one use for the choice of investment vehicles during that process? A ouija board? Or is it perhaps a look at the economy, and market dynamics, and responding to trends?

Moreover, let's say one has a new account with (for instance) 65% stocks and 35% bonds. The next year, rebalancing as Jack suggests, that person decides to change that balance to 70/30 because the Fed has undertaken a really aggressive interest rate raising policy that should drop bond prices, well I guess one is going to be selling some bonds after just one short year. Isn't that SACRILEGE? But Jack said to do it!

Oh and by the way, if you had been reading this board (I know you haven't, you're only here because of a cross-posting), anyway if you had been reading you'd have seen my reference to Bogle's recent appearance on CNBC, in which he was EXTREMELY bearish about the stock market. You could basically take everything written in that report that I posted here, and in essence that's what he said, paraphrased: that the prospects in US stocks are for low single-digit growth, for at least 10 years or more.

You can't fight macroeconomics. And when you say that things are always the same, I have to laugh. When I was a kid there was no such thing as a EURO. When I was a kid, Russia and China were massive economies in which there was virtually NO capitalist investment and no consumerism. When I was a kid, the world's need for oil was a fraction of what it is today, and the U.S. still supplied a large part of its own needs domestically. When I was a kid, people occasionally hijacked planes to Cuba (or away from Cuba) but nobody blew themselves up inside vehicles.

ALL that stuff has changed. And all of it has imposed massive change on how, when, and where we spend money. How can you say, with a straight face, that the world was always like this? My goodness.

Only time will tell whether my expectation of the future is accurate. But I did not make it up by myself. I've heard the same predictions from numerous sources, including the likes of Buffett and Bogle both -- that one should expect modest growth in the USA for the foreseeable future. In my view, that means one has to put money elsewhere if one wants a higher rate of return. This is not rocket science.

I've heard people claim that you one can get the same benefit by way of the U.S. stock market, because some American companies investing overseas or profiting from sales there. But there are lots of reasons not to buy into that, not the least of which is the apparent strengthening of the dollar in foreign exchange. And if it were really true, then we would not see so many predictions of stagnation in the domestic economy.

In any case, you can preach whatever you want (and yes indeed, that IS what you are doing), but don't expect everybody to bow down, because as far as I know, this "church" is non-denominational. And we're all entitled to a viewpoint without being disparaged left and right, and told that we "don't get it" or that we're "sorely mistaken."
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But you preach a dogma that suggests we are all identical! You are talking through your hat, and don't like being called on it.

I have no idea what you are talking about. I have no dogma. I have no hat. You must be thinking of someone else.

A 75-yr old investor should not be invested the same way as a 25-yr old investor. The older investor may only need/want 20, 10, or zero percent in stocks. A zero % allocation for a moderate 25-yr old is clearly wrong.

Conservative portfolios should be different than aggressive ones.

how about Soybean Futures?

That's a legitimate asset class


Is it? Prove it. Not everything that can be traded [like Derek Jeter cards or Ford Pintos] are an [legitimate] asset class.

How can you say, with a straight face, that the world was always like this? My goodness.


I never said anything of the sort. You are smoking something to believe otherwise. I think you are responding to the wrong poster.

Naj
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"But you preach a dogma that suggests we are all identical! You are talking through your hat, and don't like being called on it."

I have no idea what you are talking about. I have no dogma. I have no hat.


I assume you know that it's an idiomatic expression, and are just playing dumb. As used in that sentence it means you are saying stuff that you can't back up with empirical proof. Stating opinion as if it were indisputable fact.

And that, in turn, is a reasonable definition of being "dogmatic." I have already identified the things I felt were dogmatic.

A 75-yr old investor should not be invested the same way as a 25-yr old investor.

More dogma. Your assumption is that it's no big deal for a young person to lose large portions of their savings in a big market downturn because they can always earn it back. Tied up with this principle is an implicit suggestion that young people do not deserve to be anything more than cannon fodder for market makers, hedge funds, and other people who can profit from markets whether they go up or down.

Some of us believe that every investor has the right to challenge that suggestion, and to fight to keep their money -- whether it is by turning to managed funds, or diversifying in unorthodox ways, or by any method that works for them. I don't believe in telling people in entry level jobs that they should simply hand over their money to Vanguard and not complain if the broad market declines for two years in a row. I believe those people should be told that they can preserve their capital in bonds (or elsewhere) while a bear market runs its course.

Moreover: if the young person has no job security, and is at risk of losing his/her income, then he/she is in much the same boat as a retiree who has no new income other than investments.

"how about Soybean Futures? That's a legitimate asset class"

Is it? Prove it. Not everything that can be traded [like Derek Jeter cards or Ford Pintos] are an [legitimate] asset class.


"Legitimate?" <LOL>

There you go again, slapping a label on something with as much brass as if you hold the keys to the word processor at the dictionary company.

I did not mention collectibles, although you know as well as I that a lot of rich people buy art for its investment value, not just the aesthetics. Hmm, maybe you DON'T know that. It's hard to tell.

How can you say, with a straight face, that the world was always like this? My goodness.

I never said anything of the sort. You are smoking something to believe otherwise. I think you are responding to the wrong poster.


The quote was not from you, so it's true that I confused your preachiness with somebody else's. However, one can make such an error without smoking things.

Your decision to make the correction by way of such derisive phrasing suggests that you are trying awfully hard to distance yourself from the idea I erroneously ascribed to you.

Although the simple investment philosophy you're describing here -- bonds for old guys, stocks for young guys -- is a really OLD one, are you saying that the basic principles of investing today are NOT the same as in (say) 1985? Or that the underlying assumptions behind the strategies you describe are radically different from the ones preached by Jack Bogle in his first books?
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littlechap: I don't believe in telling people in entry level jobs that they should simply hand over their money to Vanguard and not complain if the broad market declines for two years in a row. I believe those people should be told that they can preserve their capital in bonds (or elsewhere) while a bear market runs its course.


In that case, are you going to explain to them how to time the market?
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I said "I don't believe in telling people in entry level jobs that they should simply hand over their money to Vanguard and not complain if the broad market declines for two years in a row. I believe those people should be told that they can preserve their capital in bonds (or elsewhere) while a bear market runs its course."

FMNH replies:

In that case, are you going to explain to them how to time the market?


American taxpayers already pay Alan Greenspan to do that. Trends in Fed funds rates correlate closely with bear and bull markets, and there are of course many other indicators to watch.

But it's not my job to help other people figure out when the stock market is tanking. All I said -- as you quoted above -- is that people should be told that it's possible. They should be told to question anything that is presented to them as a "rule" and to test that rule by experimenting for themselves.

It is not rocket science, although there are lots of people who will insist that it is, and that the only safe haven is found tucked deep inside a crowd of other people, sometimes known as "the index."

I'm guessing that mentality comes from a vestigial memory of ancient days, when human beings had to worry about being attacked by bears or saber-tooth cats. Like any vulnerable animal, you stood more chance of getting eaten if you strayed from the herd. But personally, I think market forces are quite unlike giant predators.

Barring the unforseeable disaster or whatever, I do not think the economy is ever going to change course suddenly and unexpectedly. So it's quite possible to see trends forming and to ride them. You can call it chasing performance and scowl while you say it, I don't care. It's a fact that if you only wait one stride to start "chasing" -- rather than waiting for a full lap around the track -- it works. You can still do quite well, without being the gold medal winner.

Anyway, it works for me. So believe whatever you want, I really don't care. Just please do not start with more lectures based on supposedly irrefutable authority that repeat the same old, same old, same old, same old, same old speeches that people have been filling up the board with lately, okay? Ain't nobody who has the magic key to the kingdom.

If there were only a single way to invest successfully, then capitalism would fail as an economic system. Since it hasn't, I believe that's an affirmation of the validity of individual choice. But again, that's my opinion. If you want to argue, please choose somebody else. I'm really weary of it.
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littlechap: But it's not my job to help other people figure out when the stock market is tanking. All I said -- as you quoted above -- is that people should be told that it's possible. It is not rocket science, although there are lots of people who will insist that it is...

Anyway, it works for me.



In that case, could you explain how you succeed in timing the market? My own investments (two thirds are index funds) have only returned 11% in the last year, and if there's a reliable way to top that by timing the market, it would be great to know how to do it.


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