Down goes the Dow

So, you got out at high 12,000s, so about June 2008, and you stayed out until the market had dropped and then rebounded to 9,000, so until about May 2009. So, for ease of figuring, you were out for a year. During that time that you were out, the Dow averaged about 9,000. Did you invest that money that you took out of the market during that time? Did you invest any of your INCOME during that time? Statistically, you didn't, because that's what people do when they leave the market...they either hold the money in some low-interest MMA account or they keep it in cash, thus LOSING value as inflation eats away at it.

Wow. You are so in denial. I did out my money on the sideline for a year or whatever. So when I got back in at 9,000 and got the ride up to 15,000, I had a much larger pile than I would have had I stayed in for the ride down from 12,000 plus to 6,800 and so have a much larger pile today.

This really isn't rocket science. I guessed right and it saved me hundreds of thousands of dollars. I was extremely happy to be on the sideline as the marker collapsed.

Unclear why you cannot accept this.

in the end, Mr K, the stock market has gone up 10% a year, as long as you have the patience to wait out the bad times. That's an outstanding return. Thinking you can do better than that by going on hunches and feelings is hubristic and unnecessary.

isn't it easier and less risky to just buy and hold a diversified portfolio? Even over the last 15 years of boom and bust, most stocks are up 10% per year. Emerging markets are up 12% per year over 15 years.

the chance of f'ing up a market timing decision is just too large to go on feelings and hunches. Esp when just buying and holding works.

(note that buying and holding just the Dow or SP500 doesn't work as well - those are non-diversfied indices - I'm talking a global portfolio of all kinds of stocks)

agip wrote:

Klondike5 wrote:

Agip.

Shall we start the day before, in which case I am way ahead in my bet?

You are cherry picking. I got out in June at 14,900. The Dow is nor 14,855 so I am break even.

Talk to me after the collapse -- if I am right and it does come.

well, we'll talk either way, collapse or no collapse.

I said you were dead even since June, no disagreements there.

Do I sense a little tension, a little nervousness in your post? I think I do. I hope you don't mind accountability.

Hmm...ECONOMIC REPORTS FROM TODAY - today the GDP for the last quarter was revised UP to 2.5% growth. Jobless claims just dropped. Expect the Fed to start curtailing in the stimulus sooner rather than later...this might have a minimal negative effect on the market, but this realization is already baked in to some degree.

A war with Syria might make the Dow drop a bit, but as already stated somewhere in this thread, that would be a temporary drop. Based on economic factors alone, there is no reason to believe in a BIG drop that would make taking money out and then putting it back in a good idea.

We might have a correction, and Mr. Klondike, I hope for you sake that if we do that you decide to get back in and declare that you've won (for I only hope for your long-term prosperity). Then, going forward, I'll hope for your sake that you stop with this trying to time the market silliness.

[quote]agip wrote:

in the end, Mr K, the stock market has gone up 10% a year, as long as you have the patience to wait out the bad times.

Depends where you being measuring from.

It had an annual return of 0% from October 1929 to the mid 1950s.

You call staying in the market while it melts down being patient.

I call it a mistake.

if you have strong reason to believe the market will have a significant downward correction, why stay in?

Sure you are guessing but it is an educated guess. You can't be sure what the big players are up to but you can read the signs.

And the signs say to me watch out. Too big to fail banks are now bigger and as unregulated as they were five years ago. We are about to launch another war in the Middle East. More attacks on the poor and middle class by the powers that be (Dem and GOL alike) -- not a good idea in a consumer based society. The Dow's volatility. Trouble ahead say the signs.

Dividends were an even bigger part of owning stocks during the time period you mention, and so, during that very bad time, investors still gained ~5.5% during that time.

You need to listen to Agip. There are ALWAYS bad signs out there...ALWAYS...let me repeat that one more time so that I have clarity tonight...ALWAYS. And still, the market has averaged OVER 10% (closer to 11%) annually over time. There is no need for this silly getting in and out of the market.

Klondike5 wrote:

So when I got back in at 9,000 and got the ride up to 15,000, I had a much larger pile than I would have had I stayed in for the ride down from 12,000 plus to 6,800 and so have a much larger pile today.

Why didn't you get back in closer to 6800?

Klondike5 wrote:

[quote]agip wrote:

in the end, Mr K, the stock market has gone up 10% a year, as long as you have the patience to wait out the bad times.

Depends where you being measuring from.

It had an annual return of 0% from October 1929 to the mid 1950s.

See, that is where you get it wrong, northerner.

You are looking at just the Dow Jones from 1929 to the mid 1950s. I read a great study of that period that showed that the average stock was up in the 7% per year range during that period.

Yes, the Dow stagnated for decades, but that is because 1) the Dow is just 30 monstrously giant stocks 2) the index was manipulated many times - stocks in, stocks out, 3) you were starting at a riduculous bubble time. Money invested through the 1920s even in the Dow recovered by 1943.

(I believe that if they had just left the Dow alone and not changed its composition, it would have recovered much earlier. Remember when those nitwits added Microsoft and Intel to the Dow in Sept 1999? Those stocks are less than half their value today - I'm sure the stocks they kicked out have done far better)

A US stock/bond balanced portflio recovered from the 1929 crash by 1936. Small stocks by 1943. World markets by 1937.

Not great returns, but your assumption of decades of stagnation for stocks is dead wrong. Diversify and prosper, ice cream bar fan.

right, and as FP has pointed out, you are probably ignoring dividends

Onty wrote:

Klondike5 wrote:

So when I got back in at 9,000 and got the ride up to 15,000, I had a much larger pile than I would have had I stayed in for the ride down from 12,000 plus to 6,800 and so have a much larger pile today.

Why didn't you get back in closer to 6800?

I was making an educated guess. I was not sure it had reached the bottom

agip wrote:

right, and as FP has pointed out, you are probably ignoring dividends

I am pretty sure losing out on 3% dividends is more than made up by avoiding a 50% drop in value

Flagpole wrote:

Steve Martin wrote:

Gas prices are going up at the same time. Obama needs to stop beating the war drums against Syria.

I'm an Obama fan, but I'm not a fan of going to war with Syria. I agree that due to international law we CAN do it, but it's enough already. We can't police the world, and ultimately what it does when we do is it makes other countries view us as bullies and it helps raise a whole new crop of young people who hate the US.

You clowns gnashed your teeth against Bush when he attacked Iraq, so you are hypocrites.

Klondike5 wrote:

agip wrote:

right, and as FP has pointed out, you are probably ignoring dividends

I am pretty sure losing out on 3% dividends is more than made up by avoiding a 50% drop in value

well I was referring to the 1929-1953 Dow stagnation period. Even without compounding, 24 years x 3% = 72%, which is a lot of money and further puts a stake in the myth of a decades long stagnation.

agip wrote:

Klondike5 wrote:

I am pretty sure losing out on 3% dividends is more than made up by avoiding a 50% drop in value

well I was referring to the 1929-1953 Dow stagnation period. Even without compounding, 24 years x 3% = 72%, which is a lot of money and further puts a stake in the myth of a decades long stagnation.

What do I care about the dividends paid in 1942 when I am luckily out of the market during a massive meltdown (well over 50% from top to bottom, over 33% during the period I was out)?

Klondike5 wrote:

agip wrote:

well I was referring to the 1929-1953 Dow stagnation period. Even without compounding, 24 years x 3% = 72%, which is a lot of money and further puts a stake in the myth of a decades long stagnation.

What do I care about the dividends paid in 1942 when I am luckily out of the market during a massive meltdown (well over 50% from top to bottom, over 33% during the period I was out)?

__

look, reread my longer post about the myth of a decades long stagnation - that is the much larger point.

Onty wrote:

Why didn't you get back in closer to 6800?

Klondike5 wrote:

I was making an educated guess. I was not sure it had reached the bottom

Ok, but why wait until 9000 to get back in? Why not 7500? 8000? 8500? Clearly the market was rebounding well before it reached 9000.

Klondike5 wrote:

agip wrote:

right, and as FP has pointed out, you are probably ignoring dividends

I am pretty sure losing out on 3% dividends is more than made up by avoiding a 50% drop in value

You don't have the right mindset to be a stock market investor. Who gives a crap about the VALUE if you're not about to sell? It's just a sponge that has dried out when the market drops a lot like that, ready to swell back up when the market goes north again.

1) Get and stay debt free. Are you? If you carry ANY debt other than a reasonable mortgage and MAYBE a large student loan, then you shouldn't be investing anyway.

2) Put 15% or more of your income into growth and income mutual funds, buying more bonds after age 35.

3) Have 3-6 months of expenses saved in a liquid account.

4) Pay off house early and BEFORE retirement.

Timing doesn't work. You were GREEDY when the Dow dropped to 6400 and you didn't put money back in then, thinking it would drop even further. When you're driven by greed, you miss out. I say you had a wash both times you tried this, and that's a good result. You could have made some BARGAIN purchases and gained on all the dividends at 6400 or so had you stayed in. Too risky what you're doing.

My point is this.

The "experts" tell us to not try and time the market and to just stay in always and it will work out for the best. This is generally in their self interest as the more we have invested, the more money they make.

While saying don't try to time the market, that is exactly what the speculators and big time players do every single day.

Why not pay attention to what is going on and make educated guesses? We have seen two massive meltdowns of over 50% since the year 2000. Personally I was very happy to be out of the market for most of each of those. It saved me a ton of money. As I noted before, I am no expert but do have common sense and guessed right twice -- I am sure I am not the only one

On the Street wrote:

Investor wrote:

You lose nothing until you sell.

Klondike5 wrote:

Really?

So when your 401(k) equity holdings drop from $1 million to $450,000, in your mind you have lost nothing?

Investor wrote:

That is correct. Gains and losses are not realized until investments are sold. That's Investing 101.

100% correct.

I have been hesitant to answer such drivel, as it has seemed to me that nobody could actually believe this nonsense about 'You haven't gained or lost anything until you sell'. But seeing folks post this stuff over and over again gives me pause. Do you actually believe something so patently ridiculous?

Well, on the off chance that some of you are not just trolling and are truly having a hard time thinking clearly about something so simple I will provide you with enough here so that if you are honest and have an IQ over 85 you will finally get it. If not, there is no helping you.

- - - - - - -

The True Story of Mr. Hold and Mr. Sell

Let us imagine two individuals, Mr. Hold and Mr. Sell. They are identical in all ways, save for their names and their future actions. Both have invested $1M in the stock market on the very same day and in the exact same bucket of stocks. They also each have $500,000 in cash.

The market goes up for a couple of years. It goes high enough so that the identical portfolios that Mr. Hold and Mr. Sell have are now valued at $1.6M each. At that point Mr. Sell decides to (surprise!) sell his entire portfolio to realize capital gains of $600,000.

But then Mr. Sell has second thoughts and instantly plows the entire $1.6M back into the exact same bucket of stocks, the prices of which have not changed so that he again holds the exact same portfolio of stocks as before (the exact same portfolio that Mr. Hold still holds). (We are going to ignore transaction costs here since they are trivial and, more importantly, irrelevant to the simple logic involved).

Of course, Mr. Sell did in fact sell his portfolio and will owe taxes on his gains. Let's say, for the sake of argument that his tax liability upon selling will be $100,000 and that he will pay for this out of his $500,000 in cash.

So now, what can we say about Mr. Hold and Mr. Sell?

First, what is indisputable:

Mr. Hold now has a portfolio consisting of $1.6M in a basket of stocks and $500,000 in cash.

Mr. Sell now has a portfolio consisting of $1.6M in the identical basket of stocks plus $400,000 in cash (he has sent off $100,000 to his friendly neighborhood tax man).

Thus, Mr. Hold is momentarily $100,000 richer than Mr. Sell (but with a lower basis for his stock holdings which will have as yet undetermined tax consequences down the road).

What else can we say about Mr. Hold and Mr. Sell?

Well, according to several folks here we can say that Mr. Hold has made nothing (remember, you have made nothing until you sell). Meanwhile Mr. Sell has made $600,000 (remember, he has sold - before buying back - and therefore, according to LetsRun logic he has indeed made real money, $600,000 before taxes to be exact).

Now, does that not strike you as odd?

Mr. Hold is $100,000 richer than Mr. Sell. And, aside from their difference in cash on hand they now own precisely the same portfolio of stocks. This, while Mr. Sell has made $500,000 (after taxes) and Mr. Hold has made exactly zero (after all, you have not made anything until you sell, right?).

This story has been brought to you as a public service by the same guy who has repeatedly demonstrated that intentionally dollar cost averaging is a tool fit only for fools. I truly feel for those of you for whom this story was necessary. And for those who still cannot connect the dots from here, there is no hope - I will pray for you (figure of speech).

Onty wrote:

Onty wrote:

Why didn't you get back in closer to 6800?

Klondike5 wrote:

I was making an educated guess. I was not sure it had reached the bottom

Ok, but why wait until 9000 to get back in? Why not 7500? 8000? 8500? Clearly the market was rebounding well before it reached 9000.

Because he wanted to be sure. There is no sure thing in investing. Actually, when the Dow had gotten back up to 9,000, there was some talk then about a double-dip recession, and fear was still pretty high, so realistically (if going on a fear meter), that was not a good time to get back in...lucky for him though that he didn't wait too much longer.

This kind of investing on a hunch is going to bite him more than it has already.