Saturday, August 25, 2012

One-Year U.S. Stock Market Return = Almost 20%

Top 20 Stock Market Returns Over the Last Year
With all of the bad news coming out of Europe, and the ongoing gloom and doom in America with predictions of a pending double-dip recession, it might be counter-intuitive that some stock markets have actually registered impressive returns over the last year, see the table above of one-year returns based on MSCI data that includes both developed and emerging markets.  Denmark leads the list with a 26.1% return over the last year, and other European stock markets like Belgium (15.8%) and Ireland (13.3%) have achieved returns higher than the world average over the last year of 10%.  Of course one-year returns in markets like Greece (-52%), Portugal (-33%) and Spain (-24%) have been pretty dismal, but it's not like the entire continent is doing that poorly.  

Some of the Asian markets like the Philippines (18%), Thailand (11%) and Korea (9.8%) are doing quite well, and one-year returns in the U.S. of almost 20% (and 15.5% per year over the last two years and 11.4% per year over the last three years) place the U.S. as the No. 3 stock market in the world over the last year for this group.  And the one-year return in the U.S. over the last 12 months of almost 20% is almost three times the 7% average annual return over the last 60 years, and twice the world stock return over the last year of 10%. 

Note: The S&P500 is up by 19.8% over the last year and the NASDAQ has gained 24.4%.  

Update: The chart below shows corporate profits after tax (through Q1) and the S&P 500 Index (through August) over the last ten years (data here).  One of the main drivers of stock prices is corporate profits, and one of the main reasons stocks have gained almost 20% over the last year is probably because corporate profits are at record high levels (at least through Q1).  



265 Comments:

At 8/25/2012 11:13 PM, Blogger VangelV said...

Create enough liquidity and the stock market will go up. What matters is valuation and at this point most stocks are too pricey.

 
At 8/26/2012 12:07 AM, Blogger Hydra said...

Geez. I'm only doing around 11%.

Part time.

maybe I need o pay more attention.


=====================

Pricey only matters if you are buying, or if you have a negative outlook on the US.


You can always invest (or move) elsewhere.

 
At 8/26/2012 12:10 AM, Blogger Hydra said...

"The stock market is doing great"


"It has not helped me"

"You just proved that trickle down Economics does not work"

 
At 8/26/2012 1:47 AM, Blogger Benjamin said...

Where is Morgan the Bear?

If the Fed would stop asphyxiating this economy, we could see another 20 percent easy.

Maybe after Romney wins.

 
At 8/26/2012 4:51 AM, Blogger Jon Murphy said...

Where is Morgan the Bear?

Probably asleep like the rest of you should be! :-P

 
At 8/26/2012 6:25 AM, Blogger Larry G said...

re: 20%

how about the 5, 10, 15 year returns?

I did not see anywhere near 20% over the 5 yr span... until about a year ago, it was static and before that it was losing money....

it's a good thing we did not "invest" social security money in the stock market. Be interesting to compare what the 10 yr return on special issue treasury notes were compared to the 10 yr return on the stock market.

If you look at many pension funds invested in the market, their unfunded liabilities INCREASED over the last 10 years as many got killed when the economy dorked.


 
At 8/26/2012 6:31 AM, Blogger Jon Murphy said...

Well, don't forget this is an average. Some stocks performed better than 20%, some worse. Ideally, if one is going to invest Social Security in the stock market, then one would like to invest it in safe stocks, like GE or something like that. You don't get rich doing that way, but you don't lose too much, either.

For the record, I am not advocating for or against investing SS in the stock market.

 
At 8/26/2012 7:20 AM, Blogger The High Priest said...

that stimulus sure makes my account increases feel good for now.

 
At 8/26/2012 7:59 AM, Blogger rjs said...

the 25 year zero coupon has beat them all...

 
At 8/26/2012 8:13 AM, Blogger Methinks said...

Create enough liquidity and the stock market will go up.

What? Liquidity doesn't influence the direction of the market. In fact, liquidity prevents price spikes. Perhaps you mean "print enough money"? Well, yes. That would make the prices go up.

 
At 8/26/2012 8:15 AM, Blogger VangelV said...

that stimulus sure makes my account increases feel good for now.

Until it goes away or the funds have to be paid back people will be able to party and enjoy themselves.

 
At 8/26/2012 8:20 AM, Blogger Methinks said...

it's a good thing we did not "invest" social security money in the stock market.

A good thing why? Because the "lock box" would actually contain positive returns? This you consider a bad thing, Larry? What moronic drivel.

Despite the ups and downs, the stock market is up over any period that would span the beginning to the end of a man's working life. In real dollars.

 
At 8/26/2012 8:29 AM, Blogger Methinks said...

According to Wharton professor of finance Jeremy Seigel, adjusted for inflation, the average annual return for the stock market over the past 100 years is 6.6%.

And this makes sense. Has anyone noticed the improvement in your own lives over your lifetime? We went from horses to cars to electricity to flying machines to computers to mobile phones to mobile computers and massive increases in expected lifespan.

What's the average return of the squandered SS surplus again? Oh that's right...it's negative.

Government squanders and individuals create. Our task is to ensure that government is not allowed to squander what we create.

 
At 8/26/2012 8:30 AM, Blogger Larry G said...

Despite the ups and downs, the stock market is up over any period that would span the beginning to the end of a man's working life. In real dollars.


I dunno..does the stock market beat inflation?

 
At 8/26/2012 8:31 AM, Blogger Larry G said...

the average annual return for the stock market over the past 100 years is 6.6%.


call me a skeptic on that over the last 10 years or so ...

 
At 8/26/2012 8:36 AM, Blogger Methinks said...

"Skeptic" is not the word I would use to describe you, Larry.

 
At 8/26/2012 8:39 AM, Blogger bart said...

rjs said...
the 25 year zero coupon has beat them all...


Same with corn and most grains, as would be expected during a hard asset (as opposed to the paper based one) cycle.

Heck, staying totally in cash has had one way ahead of US stocks for well over a decade.


 
At 8/26/2012 8:42 AM, Blogger VangelV said...

What? Liquidity doesn't influence the direction of the market. In fact, liquidity prevents price spikes. Perhaps you mean "print enough money"? Well, yes. That would make the prices go up.

When the Fed talks about liquidity it is talking about printing money.

 
At 8/26/2012 8:44 AM, Blogger bix1951 said...

I think this is called cherry picking regarding statistics. People love to go back to a peak or trough and measure change from that point. It is a deceptive practice.
For example, in the last three months the US markets are up around 10%. But over the last five months the markets are down a little.
Similar to employment statistics.
There was a bubble of jobs leading up to the recession.But the doomsters always count from the absolute peak and count all the lost jobs.
This is not looking at reality. It is an unrealistic way of measuring performance.

 
At 8/26/2012 8:48 AM, Blogger Larry G said...

"Skeptic" is not the word I would use to describe you, Larry



nor how I would describe you Methinks!

wanna go on some more?

 
At 8/26/2012 8:51 AM, Blogger Methinks said...

Yes, Bix, and last year the market was completely flat and in the late 90's the market was soaring at 20+% per year.

I think Mark Perry is trying to use it to illustrate the fact (and I'll call it a fact) that the world is not going to collapse into misery. The sky is not going to fall. The market is forward looking and it's telling us that the doomsayers are wrong. The bumps in the road are natural parts of life, not the beginning of the end of human existence and overall progress.

The patient will live and will live well.

 
At 8/26/2012 8:54 AM, Blogger Larry G said...

The patient will live and will live well


not according to the "unfunded liability" folks ....

when many of your public and private institutional pension funds - run by supposed stock market professionals are 10, 20 years behind on their projections... what does that mean about the stock market?

 
At 8/26/2012 8:59 AM, Blogger Methinks said...

It doesn't say a damn thing about the stock market, Larry. It says something about funding. I know facts are inconvenient and all.

 
At 8/26/2012 9:03 AM, Blogger Mark J. Perry said...

Methinks: Thanks, that's exactly the point I was trying to make. Corporate profits have been rising and reached a record high in Q1 (after-tax), and are about 37.5% above pre-recession 2007 levels.

Stocks have gained 20% over the last year, 15.5% per year over the last 2 years and 11.4% per year over the last 3 years, all far above average annual returns.

Those positive stock market facts seem inconsistent with the gloom and doom narrative of pervasive pessimism, and inconsistent with an economy in recession (ECRI).

 
At 8/26/2012 9:04 AM, Blogger Larry G said...

It doesn't say a damn thing about the stock market, Larry. It says something about funding. I know facts are inconvenient and all.


the facts are that the funding did not change but the stock market failed to perform as predicted.

this has happened not to one or two badly managed funds - it has happened pretty much across the board.

 
At 8/26/2012 10:05 AM, Blogger VangelV said...

I think Mark Perry is trying to use it to illustrate the fact (and I'll call it a fact) that the world is not going to collapse into misery. The sky is not going to fall. The market is forward looking and it's telling us that the doomsayers are wrong. The bumps in the road are natural parts of life, not the beginning of the end of human existence and overall progress.

But the bond market is telling a different story. People are so scared that they are willing to lend the government short term and take a loss for the privilege. Over the long term they are not calling for much economic activity and growth as the rates are expected to be at the projected inflation rate.

Now you could argue that the bond market is fixed because of the action taken by governments and central banks looking to save the financial system. But those actions would add an artificial prop to the stock market as well so the dead cat bounce that we are seeing will not be indicative of a recovery.

The way I see it there are too many headwinds getting in the way. We have threats of war in Africa, the Middle East and Central Asia. We have a fragile consumer and a labour market that is extremely weak at a time when many of the purchasers of our products are in financial difficulty. We have weak currencies across the globe. We have a problem with the American corn, wheat, and soy crops. We have a problem with oversupply all along the consumer supply chain and serious shortages in the energy sector supply chain. People in Africa, the Middle East, Europe, and Asia have taken to the streets in protests against their governments. We have seen Australia strangle its mining sector with carbon taxes. We have seen the UK kill consumers with high energy costs that are designed to support worthless wind generation schemes even as Parliament is scrambling to ensure a new supply by running high capacity cables through the service tunnel of the Chunnel. We have seen billions of waste on wind and solar power in China, Spain, Germany, UK, and US. The power grids are in trouble and in need of repair and upgrades at a time where there is little in the way of savings to finance those upgrades. Pipelines for petroleum products are near the end of their useful lives at a time when approval for new construction is hard to obtain. Coal plants are being shut down. Government is meddling in all markets and getting in the way.

I am sorry but given all of the problems created by bureaucrats and policy makers I don't see a sustainable recovery.

 
At 8/26/2012 10:24 AM, Blogger Methinks said...

But the bond market is telling a different story.

The bond market does not tell a different story when the stock market rises. Bonds have been selling off as the stock market rises and that's as expected.

Vange, your list of problems is both short term and illustrative of every single generation in history. Has there ever been a time when the entire world was basking in the sunshine of peace, calm weather and perfect crop yields? I can't think of one. Yet, what have we done? Adapted and lived better than ever.

Certainly government meddles in the markets and keeps them from being efficient. Certainly the government of every country is the enemy of efficiency. Certainly, things are not as good as they COULD be. But, none of the problems you mention are unique to this period of time and while we may go through nasty periods of sub-optimal growth because of them (and other as yet not revealed problems), we are not headed toward the end of civilization and human progress.

BTW, I don't understand the concept of a "sustainable recovery". What is that? I can't find an official definition of that term. Is it a steady growth rate in perpetuity? Nirvana? We will go up and down. Although you know that I agree that on net government makes things much much worse than they would otherwise be, these ups and downs would be with us with or without government idiocy.

 
At 8/26/2012 10:58 AM, Blogger bart said...

VangelV said...

The way I see it there are too many headwinds getting in the way.


As a realist, I see it that way too.

And the wilful disregard of many many facts and elements, like all time record low Treasuries, puts the real facts out there about how historical times like these are actually unprecedented, let alone issues like debt levels as noted by Reinhart and Rogoff.


VangelV said...

I am sorry but given all of the problems created by bureaucrats and policy makers I don't see a sustainable recovery.


Indeed, and Jesse probably said it best ands simplest out of everyone I've read:


"The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained recovery."

 
At 8/26/2012 11:09 AM, Blogger Buddy R Pacifico said...

Is it not another reason to think that we are very fotunate...

because of the ability to invest in other markets through individual equities, mutual funds and ETFs...

and to have further ability to move investible funds around the globe?

 
At 8/26/2012 11:22 AM, Blogger bart said...

Methinks said...

Has there ever been a time when the entire world was basking in the sunshine of peace, calm weather and perfect crop yields?



Logical fallacies that apply to a greater or lesser degree:

* Argument from fallacy: if an argument for some conclusion is fallacious, then the conclusion is not credible.

* Negative proof fallacy: that, because a premise cannot be proven false, the premise must be true; or that, because a premise cannot be proven true, the premise must be false.

* Historian's fallacy: occurs when one assumes that decision makers of the past viewed events from the same perspective and having the same information as those subsequently analyzing the decision. It is not to be confused with presentism, a mode of historical analysis in which present-day ideas (such as moral standards) are projected into the past.

* Regression fallacy: ascribes cause where none exists. The flaw is failing to account for fluctuations.

* Proof by example: where examples are offered as inductive proof for a universal proposition. ("This apple is red, therefore apples are red.")

etc

 
At 8/26/2012 12:50 PM, Blogger Buddy R Pacifico said...

From the Credit-Suisse GLOBAL INVESTMENT RETURNS YEARBOOK 2012:

"In every country, local equities outperformed local
government bonds and Treasury bills. Over the long term, bonds and bills have on average provided
investors with low – sometimes negative – real returns"


Here Real Returns, 1900–2011 in U.S. dollars:

Equities (world index), 5.4%

Bonds, 1.7%

Gold, 1.0%

Housing, 1.3%

Bills, 0.9%


Hmmmm.

 
At 8/26/2012 1:25 PM, Blogger Methinks said...

That's an impressive list, Bart. If only you had the mental capacity to could apply it correctly.

 
At 8/26/2012 1:42 PM, Blogger bart said...

Methinks said...

That's an impressive list,


Nice start on learning from your betters.

Please continue.

 
At 8/26/2012 2:18 PM, Blogger Ron H. said...

"Skeptic" is not the word I would use to describe you, Larry."

*like*

 
At 8/26/2012 2:26 PM, Blogger Ron H. said...

"I dunno..does the stock market beat inflation?"

Huh? What do the emphasized words below mean to you, Larry?

(1) "Despite the ups and downs, the stock market is up over any period that would span the beginning to the end of a man's working life. In real dollars."

(2) "According to Wharton professor of finance Jeremy Seigel, adjusted for inflation, the average annual return for the stock market over the past 100 years is 6.6%."

 
At 8/26/2012 2:54 PM, Blogger Buddy R Pacifico said...

Larry asks:

"I dunno..does the stock market beat inflation?"

Larry, read the Crdit-Suisse report I linked to above for a comprehensive answer.

Real rate of return is adjusted for inflation.

 
At 8/26/2012 2:57 PM, Blogger Methinks said...

Can't convince even yourself that you're better at anything without extreme parsing, bart?

You really are adorable. Are you Larry's brother?

 
At 8/26/2012 2:58 PM, Blogger Methinks said...

What do the emphasized words below mean to you, Larry?

Ron H., I think those of us who have read enough of Larry's comments can answer that question: nothing.

 
At 8/26/2012 3:28 PM, Blogger bart said...

I so love your continuing and consistent foot bullets Methinks, and especially love how well you followed my orders to continue.

Please continue the foot bullets (including the worship of logical fallacies) as long as you must.

 
At 8/26/2012 3:51 PM, Blogger Methinks said...

Oh, I can see the clever dilemma you have going there, bart. You have some kooky delusion of grandeur you're nursing (if your website and dumb comments are any guide). Why would I deny you your one pleasure in life, darling? I'm not that mean, old dear.

 
At 8/26/2012 4:08 PM, Blogger bart said...

Good boy!

Nice to see you following orders so well.

You may continue to try and assuage your very real feelings of inferiority until you manage to achieve the levels of the delusions of the Greek politcos, etc.

 
At 8/26/2012 4:55 PM, Blogger bart said...

The last 6 months, gold against major stock markets:

http://stockcharts.com/freecharts/candleglance.html?$INDU:$GOLD,$SPX:$GOLD,$COMPQ:$GOLD,$RUT:$GOLD,$NYA:$GOLD,$DAX:$GOLD,$FTSE:$GOLD,$CAC:$GOLD,$HSI:$GOLD,$NIKK:$GOLD,$BSE:$GOLD,$USD:$GOLD|C

 
At 8/26/2012 5:12 PM, Blogger Larry G said...

thanks Buddy.. an excellent report!

" There is in fact an extensive literature which indicates
that equities are not particularly good inflation hedges. Fama and Schwert (1977), Fama (1981),
and Boudoukh and Richardson (1993) are three classic papers, and Tatom (2011) is a useful review
article. The negative correlation between inflation and stock prices is cited by Tatom as one of the
most commonly accepted empirical facts in financial and monetary economics."

this seems to at least partially explain why so many pension funds have fallen behind projections and their unfunded amount - increasing.

 
At 8/26/2012 5:50 PM, Blogger Methinks said...

Huh. That's curious. Do you have some weird dyslexia that compels you to call women boys or can you just not tell the difference between them, bart? That might explain a couple of things.

 
At 8/26/2012 6:35 PM, Blogger Methinks said...

this seems to at least partially explain why so many pension funds have fallen behind projections and their unfunded amount - increasing.

Huh? Inflation has been low to non-existent over the time period you've been panicking about. And what in God's name makes you think that pension funds are invested entirely in equities in the first place?

 
At 8/26/2012 6:41 PM, Blogger Larry G said...

Huh? Inflation has been low to non-existent over the time period you've been panicking about. And what in God's name makes you think that pension funds are invested entirely in equities in the first place?


but the funds have underperformed and over time have not kept up with even modest inflation.

tell me what other parts of pension funds have underperformed besides equities?

again - this is not one or two funds - this is both public and private institutional funds, and 401(k) personal funds... - many have lost value resulting in individuals having to delay retirement and institutional funds sustaining unfunded liabilities.

wrong?

 
At 8/26/2012 6:50 PM, Blogger Methinks said...

but the funds have underperformed and over time have not kept up with even modest inflation.

Underperformed what? Their goals? The stock market? For what period?

tell me what other parts of pension funds have underperformed besides equities?

You tell me. You're the one making the assertion. And again - underperformed what?

and 401(k) personal funds

Whatha talkin' about, Willis? My 401K did not underperform anything.

many have lost value resulting in individuals having to delay retirement and institutional funds sustaining unfunded liabilities.

I don't know a single person who had to delay retirement because of the stock market. I do know quite a few people who had to delay retirement or embark on a more modest lifestyle because the Fed has driven the interest rate so low that they cannot earn enough on their investments to retire without having to take an unacceptable amount of risk.

 
At 8/26/2012 6:56 PM, Blogger bart said...

Methinks said...

Huh. That's curious. Do you have some weird dyslexia that compels you to call women boys or can you just not tell the difference between them, bart?


ROFL!!!!!!

You're so amazingly uneducated too! Not surprising how you have so little clue about how obvious your logical fallacy worship is.

In this country, 'boy' also means slave. You just keep following my orders, just like a slave who knows and admit it to their betters.

Great foot bullet, again and as usual.

Continue, slave! lol

 
At 8/26/2012 6:59 PM, Blogger Larry G said...

Underperformed what? Their goals?


underperformed he assumptions/projections that would occur that would result in payment pf pensions without incurring unfunded liabilities.

I don't know a single person who had to delay retirement because of the stock market


you mean the news reporting is wrong across the board? wow!

http://online.wsj.com/article/SB124744102811929845.html

are you in denial girl?

 
At 8/26/2012 7:01 PM, Blogger bart said...

Methinks said...
Huh? Inflation has been low to non-existent over the time period you've been panicking about.


ha ha ha!

Yet another quality foot bullet with yet another display of your lack of a real education and lack of actual facts.

 
At 8/26/2012 7:14 PM, Blogger Methinks said...

Larry,

The stock market is not responsible for delivering on managers' projections.

Since you haven't mentioned any specific funds, I'll have to make a general statement:

Nobody likes to fund pensions. Without proper funding, the manager must make up the difference with projections to make the numbers work. The projections become pie in the sky. To meet the projections, the managers must take more risks. If the investments go against them, they lose a lot of money. Thus, a fund can underperform it's crazy projections very easily - and that has nothing to do with the stock market in general.

you mean the news reporting is wrong across the board? wow!

I dunno, Larry, you tell me. The total return for the S&P 500 for 2009 - 2012YTD is 26.46%, 15.06%,2.06%, and 12%. Where exactly are these "plunging stock values"?

 
At 8/26/2012 7:24 PM, Blogger Methinks said...

Yet another quality foot bullet with yet another display of your lack of a real education and lack of actual facts.

I think I finally understand what the source of misunderstanding between us on this issue, bart. Unlike you, I don't live in Zimbabwe.

 
At 8/26/2012 7:25 PM, Blogger Larry G said...

has nothing to do with the stock market in general.

then why do institutional funds project stock market performance when they figure fund growth and stability?

and why do these funds end up with unfunded liabilities even when they pay the amounts theoretically needed to keep them solvent?

and do funds that market to people's individual 401(k)s do the same thing?

and why does WSJ say this: " Plunging stock values are prompting many older workers to delay retirement,"

are you just ignoring things you do not agree with?

I think it's pretty clear that retirement for many people depends a lot on stock market performance.

If you don't build your retirement fund on equities - what would you build it on instead?

what would most people do instead of equities?

 
At 8/26/2012 7:45 PM, Blogger Methinks said...

then why do institutional funds project stock market performance when they figure fund growth and stability?

Because it's part of the process.

and why do these funds end up with unfunded liabilities even when they pay the amounts theoretically needed to keep them solvent?

I just told you. To make underfunded pensions look solvent, they make crazy projections. Risk and return are inexorably positively linked. To meet those lofty projections, they have to take huge risks. If those risky investments don't pan out, they're even deeper in the hole. If they don't take crazy risks, they can't meet projections. I don't understand what part of that confuses you.


and why does WSJ say this: " Plunging stock values are prompting many older workers to delay retirement,"

How the f**k would I know? Did you see my name on the byline?

I showed you the returns for the S&P 500. Maybe you should show them to the WSJ. Use your head for once in your life. Show me the plunging stock values. Where are they? Maybe the reporter was talking out of his ass (the part of the anatomy reporters use most often)?

I think it's pretty clear that retirement for many people depends a lot on stock market performance.

And that's probably one reason nobody has ever asked you to invest their retirement portfolio. The stock market is relatively risky (that's why the returns are higher). Generally speaking, a person who is close to retirement has a lot more invested in bonds, which are relatively less risky because they can't withstand the large losses that a more risky portfolio can deliver. So, what's happening with bonds is far more important to people near retirement. That's why Bernanke's manipulation of the interest rate is so detrimental to them.

That said, even if your foolishness were true, there shouldn't be a problem. The stock market, as I've pointed out to you, has been performing spectacularly well. So, what gives, pussycat? You don't just believe everything you read when reality is staring you in the face, do you? If tomorrow the WSJ writes that the sun rises in the West and sets in the East will we be inundated with posts from you screaming that the media can't be wrong?



 
At 8/26/2012 7:54 PM, Blogger Larry G said...

. To make underfunded pensions look solvent, they make crazy projections

we're talking about an entire industry girl.

not just one or two fly-by-night types.

we're talking about thousands of public and private institutional funds and millions of IRA and 401(K) and most of them invest in the stock market in an effort to outpace or stay even with inflation for their retirement funds.

the GOP thinks we should invest SS in the stock market also...

this is not some arbitrary bad advice from some incompetent broker - we're talking about an entire industry.

when a person is "close" to retirement he/she will switch to bonds or buy an annuity but in the years before that what would they invest it if not the stock market?

have you answered that question?

 
At 8/26/2012 8:00 PM, Blogger bart said...

Buddy R Pacifico said...

From the Credit-Suisse GLOBAL INVESTMENT RETURNS YEARBOOK 2012:


I just looked at some of the data and assumptions, and the inflation data by country is sourced from "Triumph of the Optimists" - hardly a realistic and unbiased source.

They use a number for the US that boils down to about 15% lower than the CPI-U, and my never successfully and factually challenged CPPI proves that the CPI-U is low since 1900 by about 50%.

 
At 8/26/2012 8:36 PM, Blogger Methinks said...

we're talking about an entire industry girl.

You mean like when an entire industry levered up portfolios of shit mortgages? Or an entire industry lobbied the SEC to let them report a value of $1 even when the value is below $1? Yeah...it's very sad when the whole industry does stupid shit, but that's the way it is.

we're talking about thousands of public and private institutional funds and millions of IRA and 401(K)

Whoa, Nelly! What the hell do IRAs and 401K's have to do with this issue? Don't tell me you don't understand the difference between a defined benefit plan and a defined contribution plan. Maybe that's why your 401K has been doing so poorly - you're not supposed wait for somebody ELSE to fund it and invest it. Jeez, Larry.

the GOP thinks we should invest SS in the stock market also..

How did the GOP make it into this discussion. But, you're wrong about what they want and they're wrong too. We shouldn't have SS at all.

when a person is "close" to retirement he/she will switch to bonds or buy an annuity but in the years before that...

So are you saying the article was talking about 30 somethings delaying retirement, Larry? I don't think so. And you still haven't shown me any evidence of plunging stock values.

 
At 8/26/2012 8:43 PM, Blogger Methinks said...

and my never successfully and factually challenged CPPI proves that the CPI-U is low since 1900 by about 50%.

That's because you and your Zimbabwe fantasy index are immune to facts. They bounce right off your protective forcefield of idiocy.

 
At 8/26/2012 8:49 PM, Blogger bart said...

Obviously you have nothing but ad hominems, the mark of those who have admitted to an epic fail in the area. You may continue with your failures of course.


As I have said and proven, "... and my never successfully and factually challenged CPPI proves that the CPI-U is low since 1900 by about 50%."

 
At 8/26/2012 9:02 PM, Blogger Methinks said...

You're like the guys on the weather channel who are still willing Isaac to become a hurricane pummeling SOMETHING! ANYTHING! If you just repeat it enough times, maybe it'll become true!!!

fingers crossed!

 
At 8/26/2012 9:17 PM, Blogger bart said...

Thank you for the additional ad hominems, as ordered.

You have nothing factual to disprove CPPI, and keep proving it again and again, just like PT and the others.

Orwell is #winning.


 
At 8/26/2012 9:58 PM, Blogger Buddy R Pacifico said...

Larry,

You cite this sentence, among others in the Credit-Suisse Report:

"
" There is in fact an extensive literature which indicates
that equities are not particularly good inflation hedges
.

Larry, equities as inflation hedges refers to a situation where inflation is over 10% annually.

So, "When inflation has been moderate and stable, not
fluctuating markedly from year to year, equities have performed relatively well."

 
At 8/26/2012 10:13 PM, Blogger Buddy R Pacifico said...

bart,

You claim that inflation has been under reported by 50% since 1900.

Maybe, but the Triumph of the Optimists authors present a chart, figure 1 on page 6, that shows...

"The bars portray the corresponding decline in purchasing power: one dollar represents (2012) the same value as 3.8 cents in 1900".

This does not seem to be deliberate misleading, on the ravages of inflation over the last century.

Will you be penning Triumph of Negativity soon?

 
At 8/26/2012 10:38 PM, Blogger Jet Beagle said...

Larry: "how about the 5, 10, 15 year returns?

I did not see anywhere near 20% over the 5 yr span... until about a year ago, it was static and before that it was losing money...."


When one invests a fixed amount regularly over 20 or 30 or 40 years, he benefits from dollar cost averaging. Effectively, one buys more shares of the total market when the market is low and fewer shares when the market is high.

The second thing to remember about investing is diversification. IMO, investing in only a fewer equities or in one asset class will not, over the long run, generate the returns realized from a diversified portfolio. So I invest broadly in U.S. equities, international equities, U.S. corporate bonds, and commercial real estate. I'm sure some who comment here are even more diversified.

If you haven't made money with your investments over the past 20 years, then I suspect it's possible you either are not dollar cost averaging or you are not sufficiently diversified.

 
At 8/26/2012 11:11 PM, Blogger Methinks said...

Jet, if you're just getting longer, you're not benefiting from dollar cost averaging. All dollar cost averaging means is when the price of the asset is lower $1,00 buys you more shares than when the price is higher. What you benefit from is an increase in the value of the asset over the time horizon. The key isn't the total number of shares you own but the value of those shares.

 
At 8/27/2012 4:08 AM, Blogger Larry G said...

I would wager that the vast, vast majority of people believe (rightly or wrongly) that pensions - private and public, defined contribution and defined benefits, 401(K) and IRAs - and others are best invested in equities as a way to preserve and increase their holdings and also as a hedge against inflation.

Folks like Methinks are not average folks. Their knowledge and expertise far exceeds what the average person has and likely exceeds what the average broker has.

But all I am saying here is that the conventional wisdom has been to put one's money set aside for retirement into equities rather than mattresses... or ordinary interest-earning bank accounts.

There have been proposals from the GOP as well as others including conservative and libertarian think tanks to invest SS into the stock market or to let people invest their ss in the stock market.

If you think about it - when you buy an annuity - what do the companies that sell you that annuity do to invest that money so as to beat inflation AND make them a profit?

And finally, what does it mean when a large number, perhaps a majority of pension funds - public and private that were initially set out to be funded annually with enough to keep them from being under-funded now have unfunded liabilities?

this is yet another report detailing the connection between pensions and the stock market:

" it is important to recognize
how the stock market decline since
2008 affects pensions’ unfunded
liabilities. The liabilities, assets and
the resulting unfunded liabilities
are based on 2008 estimates, with
most estimated by June 2008. The
dramatic drop in the stock market
during the latter part of 2008 that
continued through the beginning
of 2009 increases the unfunded
liabilities reported for 2009"

http://www.ncpa.org/pdfs/st329.pdf

but I'd ask the question again...

if the stock market is the wrong asset class for pensions, then what is the right asset class and why do the vast, vast majority of public, private institutional, IRA, 401(K), etc, still primarily focus on the stock market and equities for investing?

 
At 8/27/2012 4:10 AM, Blogger Larry G said...

Larry, equities as inflation hedges refers to a situation where inflation is over 10% annually.

thanks Buddy, I did not see that.

 
At 8/27/2012 6:28 AM, Blogger Methinks said...

I would wager that the vast, vast majority of people believe (rightly or wrongly) that pensions - private and public, defined contribution and defined benefits, 401(K) and IRAs - and others are best invested in equities as a way to preserve and increase their holdings and also as a hedge against inflation.

And you would lose that wager.


Folks like Methinks are not average folks. Their knowledge and expertise far exceeds what the average person has and likely exceeds what the average broker has.

The average broker is a guy with one of those useless college degrees who knows as much about finance as you know about flying to the moon, so that's not really saying much. Brokers are kept on a short leash and used to peddle to an unsuspecting public whatever securities the firm happens to have gotten stuck with. I've heard them ask really intelligent questions like "how do you calculate a P/E?" and "what's the ticker symbol for GDP?" But you don't need degrees in finance or to be a professional trader to put together a portfolio for yourself. Following Jet's advise to diversify and to invest regularly (another way of saying "save regularly") add avoidance of stock picking and that'll get you pretty close. And, once again, over the past 100 years, the stock market has returned 6.6% above inflation every year. When I ran my own calculations in 1997 (the last time I ran my own numbers), the market returned 12% over the prior 60 year period.


But all I am saying here is that the conventional wisdom has been to put one's money set aside for retirement into equities rather than mattresses..

That's probably because the real return is 6.6% over the past 100 years. I wonder how many times that'll have to be pointed out to you before that soaks in.


And finally, what does it mean when a large number, perhaps a majority of pension funds - public and private that were initially set out to be funded annually with enough to keep them from being under-funded now have unfunded liabilities?

That they're underfunded.

For the 100th time.

 
At 8/27/2012 6:43 AM, Blogger Jet Beagle said...

methinks: "Jet, if you're just getting longer, you're not benefiting from dollar cost averaging. All dollar cost averaging means is when the price of the asset is lower $1,00 buys you more shares than when the price is higher. "

Methinks, I've been dollar cost averaging for almost 40 years, and I've accumulated a decent nest egg as a result. I have a good idea what the term means.

What I neglected to point out, because I thought it was obvious, is that over time, U.S. equities - in total - will increase in value.

If you will notice, Larry G referred to broad market returns and not to individual stocks. My response to him also referred to a broad market.

You may, of course, disagree with my premise: that the total U.S. market will rise in value over the long term. If so, I would appreciate hearing why today would be different than the last 200 years or so.

 
At 8/27/2012 7:10 AM, Blogger Methinks said...

Jet, that was not your premise. You claimed to benefit from dollar cost averaging. I disagree with the meme that dollar cost averaging delivers a special benefit.

All dollar cost averaging means is investing regularly (usually a set amount) over time. That on its own delivers no particular benefit except that you save money.

If you dollar cost average into any asset (and by "asset" I think you misunderstood me to mean a single stock, but an asset can be an index fund) and the asset declines over your time horizon, your return will be negative.

If you dollar cost average into an asset that increases in price over time then your return will be positive.

The point is that any benefit is derived from an increase in the value of the asset you invested in, not from dollar cost averaging. Dollar cost averaging did not deliver a positive returns.

Yet, I hear this meme from very intelligent people all the time. I have to wonder who started it.

 
At 8/27/2012 9:37 AM, Blogger Jet Beagle said...

methinks: "You claimed to benefit from dollar cost averaging."

I did benefit from dollar cost averaging with an index fund which increasedin value over timet I was trying to make is that it was both decisions which provided me that benefit:

1. the decision to invest in an index fund which grew over time; and

2. the decision to time my investment so that the normal fluctuations of that index fund worked in my favor.

Because the broad index fund does not increase at a constant rate, it is possible for the timing of purchases to affect the final return one receives from the investment. And the greater the fluctuation in asset prices, the greater the impact of timing (or absence of timing).

Sorry, but I disagree with you. The choice of a particular investment timing strategy does provide value. IMO, dollar cost averaging provides the most value for the typical equity investor.

methinks: "Dollar cost averaging did not deliver a positive returns."

Yes, it did. It provided a greater return than I would have realized had I attempted to time the market.

 
At 8/27/2012 9:50 AM, Blogger Larry G said...

Methnks - are you saying that the majority of people who are building pension funds do NOT invest in the stock market?

 
At 8/27/2012 9:52 AM, Blogger bart said...

Buddy R Pacifico said...
bart,

You claim that inflation has been under reported by 50% since 1900.

Maybe, but the Triumph of the Optimists authors present a chart, figure 1 on page 6, that shows...

"The bars portray the corresponding decline in purchasing power: one dollar represents (2012) the same value as 3.8 cents in 1900".

This does not seem to be deliberate misleading, on the ravages of inflation over the last century.



You need to more carefully read what I said.

Credit Suisse's numbers did show a 3.8 cents 1900 based dollar value.

But as I said above, just using the bogus CPI shows the 1900 dollar worth 3.3 cents, about 15% less as I stated.

Using the much more accurate CPPI, thew 1900 dollar value today is 1.4 cents. 1.4 cents is actually substantially less than 50% of 3.43 cents.

As I said, please read what I actually said more carefully.

Also note that both 1.4 cents and 3.3 cents (as opposed to the 3.8 cents from CS) actually do show that the CS data is both incorrect and misleading.

 
At 8/27/2012 10:03 AM, Blogger Methinks said...

This comment has been removed by the author.

 
At 8/27/2012 10:03 AM, Blogger Methinks said...

Jet, please tell me you are not deluding yourself with the fantasy that you've got some special market timing skills. Market timing is a fool's errand if ever there was a fool's errand.

Market timing relies on accurate projections of the future. That the market has generally gone up over your investment horizon is not evidence of your crack market timing skills.

Yes, it did

No, it didn't. The market went up and you won overall. I'll bet if we look over your trades you bought plenty before a trough and plenty at peaks. The market went up over time and you won because of that, not because of market timing. If your predictive powers were that awesome, you would have quit your other job a long time ago.

 
At 8/27/2012 10:06 AM, Blogger bart said...

Methinks said...
According to Wharton professor of finance Jeremy Seigel, adjusted for inflation, the average annual return for the stock market over the past 100 years is 6.6%.



Which just proves that folk like Seigel, who completely missed the housing bubble, crisis, etc. have been incorrect and unable to see the nose in front of their faces and/or are somewaht trapped in intellectual conformism.

It's not surprising that they use the bogus CPI to calculate "real inflation".

Using a much more correct inflation measure like CPPI or SGS-CPI, (and taking fees, commissions, survivor bias etc. into account) the real return is under 2.5% per year.

 
At 8/27/2012 10:07 AM, Blogger bart said...

Methinks said...

Market timing is a fool's errand if ever there was a fool's errand.


Just because you can't do it doesn't mean that no one can successfully do market timing.

 
At 8/27/2012 10:22 AM, Blogger Methinks said...

Yeah, you're right, bart. An old fart who used to run a camera shop can sure school a professor of finance.

Who the hell does that guy think he is insisting that wealth has been created over the past 100 years when the signs of poverty - larger houses, longer life expectancy, the machine you're typing on, improved medical care, airplanes, cell phones, more access to more stuff - are all around us.

You make a super convincing argument that we're doomed. I'm sure your market timing skills are just as excellent and convincing.

 
At 8/27/2012 10:40 AM, Blogger bart said...

I'm glad you trust people like so many economists that completely blow it on prediction. You probably have never heard of Galen and Harvey either.

It's especially interesting how you buy into that I'm a doomer, when all I'm doing is just providing actual proof that the CPI is too low (that remains completely unchallenged with actual facts, etc.), and also posting other facts... and the funniest and saddest part is that you also apprantly believe that intellectual conformity is not good. Quite a contradiction in logic!




As far as wealth, your lack of a full education and good understanding is showing again.

Just because inflation is much higher than is generally understood and granted does not mean that productivity and many improvements in standard of living have not occurred in the last 100 years... and no points for the spin that you attempted, although you do get an *epic fail* point.


Thanks for the ad hominem (and likely some jealousy) on my and others timing skills, you proved my point again. People with good timing skills do exist, but you have to dare to actually look to see them.

 
At 8/27/2012 11:04 AM, Blogger Jet Beagle said...

methinks,

I don't like it when I argue with you, because we agree so much more than we disagree.

The last few comments from you were a bit insulting. You know that I do not delude myself into believing that I can time the market.

If you read carefully what I wrote, you will see that I was arguing against exactly the type of market timing you were referring to.

But the truth is that everyone who invests times his purchases in some fashion. My argument is that dollar cost averaging will produce superior returns over almost any other timing of purchases - for an asset which rises and falls in value in the short term but increases over time.

The fact that you "hear this meme from very intelligent people" ought to make you question a little more carefully whether you understand what they are talking about. I don't think you yet understand what I have been referring to.

 
At 8/27/2012 11:06 AM, Blogger Larry G said...

The last few comments from you were a bit insulting.

this seems to be part of Methinks basic personality.

I bet she's a HOOT to live or work with!

 
At 8/27/2012 11:07 AM, Blogger Methinks said...

I'm curious, bart, what is it about a professor of FINANCE calculating the real total average rate of return of the stock market over the PAST hundred years that spells "economist making predictions" to you?

but, you're mistaken, "doomer" is not my preferred description of you.

Listen, dear, if you look in the mirror and hallucinate a James Simon or a Jeff Yass staring back at you, good for you. I wouldn't want to burst your bubble. And obviously, I'm extremely jealous of a retired camera store clerk who can't get anyone to buy his inflation index. If it improves your life in some way to go with that story, I'm game.

 
At 8/27/2012 11:29 AM, Blogger Methinks said...

Jet,

I was utterly shocked to read your comment on market timing. In a million years I wouldn't have expected something like that from you! Not because we agree on so much but because you are most definitely anything but a fool. I read your comment several times.

Unfortunately, Jet, you are in fact saying exactly what you think you're not. I understand you're not saying that you sell at the peaks and buy at the troughs. I'm familiar with your strategy. I also understand how easy it is to be lulled into thinking this way, but it is still a mirage.

Unless your return on your index fund has outperformed the benchmark, you haven't won to that strategy. You've won because the market has gone up.

I hear a lot of stupid things from otherwise intelligent people all the time. And so do you. Does it give you pause when you hear protectionist rhetoric from otherwise intelligent people? Well, I am similarly unmoved when I hear about the glories of market timing from otherwise intelligent people like yourself. Particularly since there is zero evidence that it works and it is never touted by anyone respected in the profession.

 
At 8/27/2012 11:30 AM, Blogger bart said...

Very funny methinks, it's so obvious that you have absolutely nothing but ad hominems, and apparently just love flailing around and losing every point... while pretending actual understanding.
Congratulations - it's so "American".


I remain quite amused how you trust economists that have completely missed truly major events like the housing bubble, the financial crisis, etc.

But continue as long as you must.

 
At 8/27/2012 11:34 AM, Blogger Methinks said...

Also, Jet, I'm sorry you find my telling you that you're deluding yourself with this insulting. I don't mean to insult you at all. I am merely being blunt. You know I have much respect for you and I understand the allure. In fact, at school, I ran a strategy just like this for a mock portfolio and I thought I was a GENIUS.

You are among the commenters I most respect and admire here and at Cafe Hayek, but you are wrong on this one, my friend.

 
At 8/27/2012 11:46 AM, Blogger Methinks said...

You're so wrong, bart. I love you. I love you with all my heart! I would be so much poorer without you and people like you!

 
At 8/27/2012 11:52 AM, Blogger Larry G said...

You're so wrong, bart. I love you. I love you with all my heart! I would be so much poorer without you and people like you!.

but that won't keep her from insulting you.. so no real love...

:-)

 
At 8/27/2012 12:04 PM, Blogger Methinks said...

Oh, Larry, I love bart BECAUSE he's a dope. Dontcha see, man? Dontcha see?

 
At 8/27/2012 12:05 PM, Blogger bart said...

Larry G said...

but that won't keep her from insulting you.. so no real love...

:-)



LOL and yes! I have been married before...

 
At 8/27/2012 12:34 PM, Blogger Jet Beagle said...

Methinks,

I still believe you do not understand what I am arguing. And I'm surprised at your apparent arrogance in stating that you understand better what I am saying better than I do:

"Unfortunately, Jet, you are in fact saying exactly what you think you're not."

I was not arguing about lump sum investing versus spreading investment over a time period.

Most investors do not start out with $1 million to invest. Rather, they accumulate investment funds over time as they earn them as part of a salary.

The distinction I was trying to make was between three investment timing strategies:

1. investing a fixed sum each pay period as one earns it;

2. purchasing a fixed number of shares each period, varying the amount invested according to the share price;

3. holding earnings as cash and trying to invest when the market is down.

The first strategy effectively achieves dollar cost averaging - buying more shares when prices are low and fewer when prices are high The third is attempting to buy only on the lows.

The second strategy would actually require one to periodically have uninvested funds - assuming that the investor's cash available for investment did not vary exactly as the asset price rose and fell.

Is there some fourth investment timing strategy you believe works better than any of these?

 
At 8/27/2012 1:14 PM, Blogger Methinks said...

No, I don't think any market timing strategy is superior to any other market timing strategy because I don't think anyone is clairvoyant. Using any one of those methods will get you to the promised land if you happen to be investing in an appreciating asset. But it gets you there not because of the strategy but because the asset is appreciating.

Let's see, Jet...

you said:"2. the decision to time my investment so that the normal fluctuations of that index fund worked in my favor."

From this I "arrogantly" concluded that you added to your investment (which I "arrogantly" assumed was probably an index fund) on the dips. Was that just arrogance on my part or is that just a normal interpretation of that sentence? We must all be similarly arrogant over here because I showed that two three other people and they all arrogantly assumed the same thing

At first, I assumed you meant #1. because you wrote this:

"When one invests a fixed amount regularly over 20 or 30 or 40 years, he benefits from dollar cost averaging. Effectively, one buys more shares of the total market when the market is low and fewer shares when the market is high."

You're kind of all over the place, so one kind of has to arrogantly try to decipher what you mean.


I was not arguing about lump sum investing versus spreading investment over a time period.

You wouldn't be arrogantly assuming that this is what I was talking about, would you?

Most investors do not start out with $1 million to invest. Rather, they accumulate investment funds over time as they earn them as part of a salary.

I don't understand the relevance of this sentence. Everyone is in this position. And I mean everyone. As my firm makes money, I have to deploy the additional capital. You're not saying anything profound here.

The distinction I was trying to make was between three investment timing strategies:

Yep. And I'm telling you none are superior to each other. I know you believe you've benefited from whichever one you chose, but what you've really benefited from is investing over time in an asset that has increased in value, not the strategy you used to so so.

To demonstrate that your specific activity has led to superior performance, you would have to have outperformed the index in which you invested and that the other strategies wouldn't have. Then, you would have to find a way to prove that it wasn't just dumb luck.

I am not aware of a single study on market timing that has been able to prove that a specific market timing strategy is superior. And I've looked!

So, choose any of those methods. The method doesn't matter. Unless you're clairvoyant.

 
At 8/27/2012 1:30 PM, Blogger Jet Beagle said...

me: "the decision to time my investment so that the normal fluctuations of that index fund worked in my favor."

methinks: "From this I "arrogantly" concluded that you added to your investment (which I "arrogantly" assumed was probably an index fund) on the dips"

Why did you make that assumption? I was always referring to dollar cost averaging - which is certainly not investing on the dips.

Every investment decision is a timing decision. Once can decide to invest funds immediately - or to hold funds and invest later.

Most investors have a fixed amount to invest each pay period. When such an investor makes the timing decision to invest all those funds immediately, he will achieve dollar cost averaging. His intent may be to not hold cash but rather to be in the market for the maximum amount of time. The side effect is that he does achieve dollar cost averaging.

 
At 8/27/2012 1:44 PM, Blogger Jet Beagle said...

methinks: "I am not aware of a single study on market timing that has been able to prove that a specific market timing strategy is superior. "

As I have tried to make clear, I am not referring to market timing but to investment timing.

There are studies which compare:

1. the investment timing strategy of investing funds as soon as they become available;

2. the investment timing strategy of holding cash until the market is perceived to be undervalued (which is market timing).

Those studies show investment timing strategy 1 to be superior.

For most people, funds become available in a relatively fixed amount, as a regular salary is earned. The decision to invest that fixed amount as soon as it becomes available is one of the three I provided in the previous note.

 
At 8/27/2012 1:53 PM, Blogger Jet Beagle said...

me: "Most investors do not start out with $1 million to invest. Rather, they accumulate investment funds over time as they earn them as part of a salary."

methinks: "I don't understand the relevance of this sentence. Everyone is in this position. And I mean everyone."

I think you are overlooking millions of investors. Many people realize windfalls:

- from inheritance (my neighor did last year);

- from insurance settlements (my sister did upon the death of her executive husband);

- from pension agreements (pilots retiring from legacy airlines receive $1 million at retirement).

I made this statement so that you would understand I was not referring to one of those special but common situations. Dollar cost averaging would not be a smart strategy for such persons.

 
At 8/27/2012 1:56 PM, Blogger Methinks said...

Jet, okay, so I was right the first time and read you wrong the second time. I didn't do so out of spite or arrogance.

To the point I'm trying to make, it doesn't matter which you're doing. As long as you're using SOME method to invest in an asset that has been rising, you're going to achieve a positive return.

Any of the three methods will get you there. Where your skill and intelligence really have an effect is in diversification. You understand that you will not be compensated for diversifiable risk and you diversify in order to not take uncompensated risk. You would not believe how many people do not diversify. Well, at least not until you read about how many people are completely broke after Nadel, Madoff and a host of other Ponzi schemes go bust.

And just so you know, my personal portfolio is not actively managed and it is built to fund mine and Mr. Methinks's liquidity needs, lifestyle requirements, time horizon and according to our risk tolerance. We add to our various investments whenever we withdraw from our firm (where the bulk of our money is and will continue to be invested in it).

 
At 8/27/2012 2:04 PM, Blogger Methinks said...

I think you are overlooking millions of investors. Many people realize windfalls:

Okay. I understand, but it's irrelevant. The only difference is you invest $100 every month (for example) and they invest when one of their relatives dies. It's basically the same thing - you're investing when the funds to invest become available.

For me that's whenever I want to reduce capital in my firm, for you it might be every month, for another person it might be whenever someone in his family dies (that last part is cheeky, I know).

 
At 8/27/2012 2:05 PM, Blogger Jet Beagle said...

methinks: "I know you believe you've benefited from whichever one you chose, but what you've really benefited from is investing over time in an asset that has increased in value, not the strategy you used to so so."

I'm sorry, but I think you still do not understand what I am arguing. Suppose the S&P index oscillates between 1300 and 1500 in real dollars for the next ten years, and ends up exactly where it is today (in real dollars). Through dollar cost averaging, an investor still makes money even in this non-growing asset. That's because constant dollar investing enables him to unconsciously buy more shares on the dips and fewer on the highs.

 
At 8/27/2012 2:18 PM, Blogger Methinks said...

Jet, thank you for your response. It's the last 40 minutes and after a slow day which has allowed me to goof off, my presence is demanded on the floor until the close.

I'll respond after 4pm.

 
At 8/27/2012 2:58 PM, Blogger Ron H. said...

"thanks Buddy.. an excellent report!"

Larry quotes from page 9 of the Credit-Suisse report:

" There is in fact an extensive literature which indicates
that equities are not particularly good inflation hedges. Fama and Schwert (1977), Fama (1981),
and Boudoukh and Richardson (1993) are three classic papers, and Tatom (2011) is a useful review
article. The negative correlation between inflation and stock prices is cited by Tatom as one of the
most commonly accepted empirical facts in financial and monetary economics.
"

This seems to directly contradict the information Buddy posted, including a quote and Figure 3 found on page 14, which indicates equities outperformed inflation by 5.4%

What do you suppose is going on here?

No doubt you also noticed Fig. 1 on page 6 that shows the spectacular loss of purchasing power of the USD between 1900 and 2012. Another byproduct of inflation.

There is also an interesting comment on hyperinflation on page 6:

"Prior to the 20th century,
there was one hyperinflation; during the 20th century
there were 28; and in the 21st century, just
one (Zimbabwe).
"

One can't help but notice that the vastly higher number of hyperinflations during the 20th century, as well as the great loss of purchasing power, correlate well to the elimination of the gold standard, and the proliferation of fiat currencies world wide.

It's really astounding that a report such as this Credit-Suisse GLOBAL INVESTMENT RETURNS YEARBOOK 2012 can evaluate inflation to the extent it does, and discuss all manner of relationships to inflation, without ever any discussion of the cause of inflation.

It's as if inflation is an unexplainable, random phenomenon like the weather. Something that can be analysed and measured ad nauseam, but never understood as to cause.

What do you think, Larry?

 
At 8/27/2012 2:58 PM, Blogger Jet Beagle said...

methinks: "The only difference is you invest $100 every month (for example) and they invest when one of their relatives dies. It's basically the same thing - you're investing when the funds to invest become available."

The reason I think it might be relevant:

There is a research study which compares alternatives for investing a lump sum:

1. investing the entire lump sum immediately;

2. investing a fixed amount in stages over time, which the study refers to as dollar cost averaging;

3. variations on 2 which involve varying the amount invested in stages based on prior period market movements.

The authors found that investing the entire sum immediately produced superior results.

I wanted to be clear that I was not referring to the relative merits of lump sum investing vs staged investing (which the GersteinFisher authors refer to as "dollar cost averaging")

Now, what I refer to as dollar cost averaging - which might really be constant dollar investing - actually pursues the investment strategy 1 above. That is, as the constant dollar amount from one's paycheck becomes available, it is immediately invested. So there is no staging of the funds from a single pay period. Funds are invested immediately. According to the GersteinFischer research, superior returns will be realized for the funds invested from that paycheck.

Because the paycheck is received at fixed intervals, the effect is a combination of immediate investment of funds and constant dollar investing. I still believe that the constant dollar investing unconsciously enables buying more shares when proces are low and fewer when prices are high. And I believe that such unplanned variation in shares purchased leads to even higher total returns.

 
At 8/27/2012 3:01 PM, Blogger Ron H. said...

"Also note that both 1.4 cents and 3.3 cents (as opposed to the 3.8 cents from CS) actually do show that the CS data is both incorrect and misleading."

As if the dollar shrinking to 3.8 cents weren't bad enough! :)

 
At 8/27/2012 3:05 PM, Blogger Ron H. said...

"wrong?"

Yeah, that's wrong.

 
At 8/27/2012 3:29 PM, Blogger Ron H. said...

"Maybe that's why your 401K has been doing so poorly - you're not supposed wait for somebody ELSE to fund it and invest it. Jeez, Larry."

LMAO

Oh that's a good one!

 
At 8/27/2012 3:33 PM, Blogger Ron H. said...

"it is important to recognize
how the stock market decline since
2008 affects pensions’ unfunded
liabilities. The liabilities, assets and
the resulting unfunded liabilities
are based on 2008 estimates, with
most estimated by June 2008. The
dramatic drop in the stock market
during the latter part of 2008 that
continued through the beginning
of 2009 increases the unfunded
liabilities reported for 2009
"

LOL

Good work Larry! You have just made Methink's point for her.

 
At 8/27/2012 3:54 PM, Blogger bart said...

Ron H. said...

As if the dollar shrinking to 3.8 cents weren't bad enough! :)


First *rimshot* of the day... -g-

 
At 8/27/2012 4:01 PM, Blogger Larry G said...

re: what is going on.

Buddy pointed out that that passage applied to higher inflation like 10%.

but the report also stated that since 2008... stock market performance has been less than in the year prior.

and my original conversation was touching on the issue of unfunded liabilities across the board in pension plans - and why - and the related issue that pensions seem predominately invested in equity assets and got badly hurt from 2008 on.

 
At 8/27/2012 4:03 PM, Blogger Larry G said...

so..I'm wrong that most pension funds do invest in the stock market?

 
At 8/27/2012 5:49 PM, Blogger Ron H. said...

"and my original conversation was touching on the issue of unfunded liabilities across the board in pension plans - and why - and the related issue that pensions seem predominately invested in equity assets and got badly hurt from 2008 on."

Your original statement was this:

"f you look at many pension funds invested in the market, their unfunded liabilities INCREASED over the last 10 years as many got killed when the economy dorked."

This and much more has been explained to you. Methinks explained that fund managers make optimistic projections to avoid funding the pension plan. When the stock market doesn't perform as well as these projections, the funds are underfunded. Nothing surprising or magical about that.

As Methinks pointed out, that says nothing about the stock market, but a lot about fund managers.

As she also pointed out, the S&P has shown positive gains since it's bottom in Mar 2009, in fact has more than doubled in value since then, so it's not clear why you think equities are a bad investment.

The fact that the market didn't follow rosy predictions by fund managers in 2008 is not a good argument against the stock market.

"the facts are that the funding did not change but the stock market failed to perform as predicted."

That means the predictions were wrong, Larry.

If you are interested in what funds are invested in, ask them look them up. Most such information is public record.

You should understand that one thing that hurt public employees retirement funds is that many held GM corporate bonds that were rendered nearly worthless when your boyfriend stiffed bondholders and gave GM to the UAW.

 
At 8/27/2012 5:54 PM, Blogger Methinks said...

Jet,

Utterly fascinating. I ran an example in excel. Since you're not insane and thus don't pretend to special abilities to buy at troughs, I used even odds of buying at either trough or peak. I ran the numbers with 2% up and down changes, 5%, 10% and 30%. Of course, that means that I assumed that the market’s probability of being at a peak or trough is 50/50 as well.

The return was always positive (which is what you claim). But, it is also incredibly path dependent. The higher the volatility, the higher return. Testing at 10% over 4 periods it's 1% and only 25bps at 5%. Well, that’s appealing.

Also, the reason that this example generates a positive return is NOT because you bought more shares at the trough but because the percentage gain to revert to the mean from the trough is greater than the percentage loss from the peak to the mean. The lower the volatility of the index, the less difference between the two and the lower the return. The higher the volatility, the higher the return. That part makes me suspicious. Why wouldn’t everyone just get longer the index as the market collapsed if there’s such positive expectancy? Why are retail brokers always pushing this strategy on their customers, but Institutional managers never peddle it as a strategy?

Of course, mine is a highly contrived example. We are not interested in what my contrived example can produce but if we can actually produce positive returns with dollar cost averaging in the real world. We know the market does not oscillate evenly as it does in my example and it’s not mean reverting. A market usually moves up a little, up a little, up a little and then falls sharply. That's why the skew is in the put for index options. Based on this, I think that your opportunity (and therefore your probability) of buying at higher prices is greater than your probability of buying at lower prices and your expectancy is actually pretty close to zero. Of course, to provide you with adequate data, a little back of the envelope excel experiment using simplistic assumptions isn’t going to do the trick. I will have to look at some research that examines the actual market and controls for a lot of variables. A short cruise around the net has produced articles lambasting the strategy, but without any references. I’ll have to hit up my finance professor friends for real research.

 
At 8/27/2012 5:58 PM, Blogger Larry G said...

re: fund managers

naw... we're talking about the entire INDUSTRY... the "explanations" not withstanding.

the unfunded pension problem is not one or two badly run funds - it's wide and deep across all kinds of managers and companies affecting defined benefit, defined contribution, IRA, 401, 403, etc.

re: GM - likely a small percentage of the overall damage...and how much worse would it have been if GM went totally down taking with it all the ancillary companies?

don't forget it was YOUR BOYFRIEND - that signed off on the GM bailout BEFORE Obama did.

I love the way you guys blame Obama for essentially not undoing what Bush started - as if Obama - a Dem should have been more fiscally "responsible" than Bush.

Bush got into two wars and refused to pay for them... approved the greatest expansion to medicare in the history of Medicare, made excuses for what he could not (would not do to rein in Fannie/Freddie, had no clue the economy was getting ready to abort and stood in front of the podium like some kind of sheepie when telling the country that we had no choice but to bail out the auto companies and the banks on WallStreet...

and..it's Obama's fault for not undoing what Bush did.

LORD LORD.

 
At 8/27/2012 6:00 PM, Blogger Ron H. said...

"Buddy pointed out that that passage applied to higher inflation like 10%."

While I didn't see that in the report, and it's not clear what difference 10% would make, The question remains: compared to what?

Compared to what are equities a poor hedge against inflation?

 
At 8/27/2012 6:31 PM, Blogger Ron H. said...

"the unfunded pension problem is not one or two badly run funds - it's wide and deep across all kinds of managers and companies affecting defined benefit, defined contribution, IRA, 401, 403, etc."

You are confused. I see I have wasted my time explaining. Defined contribution plans, IRA, 401, and 403 plans cannot be underfunded, because there are no benefit amounts guaranteed. What you get is what you get. Only defined benefit plans can have unfunded liabilities.

When you disagree with people it's important to keep your facts straight whenever possible. Bush = GM bailout. Obama = GM bankruptcy including illegal stiffing of bondholders. Neither was good, but only stiffing of pension funds holding GM bonds hurt retirement accounts - corporate bonds being one of the things funds might hold in addition to equities so as to provide a safer investment. I guess they were wrong, eh?

"naw... we're talking about the entire INDUSTRY... the "explanations" not withstanding."

What, then, is your point?

"and..it's Obama's fault for not undoing what Bush did."

Yes. He is the President of the United States. He fought hard for that job and promised "change we can believe in". Who was he addressing with that promise?

It's his job to show some leadership and try to fix things that are wrong.

He has continued to blame Bush for problems, and claimed "it's not my fault.", but hasn't offered any solutions for those problems. He has continued every one of those bad policies and added some more of his own.

Are you OK that he's comfortable with his own incompetence?

What ever happened to "The Buck Stops Here"?

 
At 8/27/2012 6:38 PM, Blogger Larry G said...

re: unfunded

you are technically correct but you have to ask yourself what the meaning of unfunded liability is in the first place ...what does it really mean?

doesn't it mean that the PLANNED benefit won't be payable because the fund under-performed - and more money will have to be added if the intended full benefit is to be provided?

it affects all pension plans - the difference is who is responsible for making up the shortfall.

people with 401Ks end up with smaller fund, lower payouts if the market underperforms and in some cases, they have to delay retirement - i.e pay more into the fund by working longer to make up the shortfall.

"unfunded liability" just means that the original projections are not going to be met given the current performance - UNLESS some action is taken to make us the lost funding.

 
At 8/27/2012 6:43 PM, Blogger Ron H. said...

Methinks:

"I will have to look at some research that examines the actual market and controls for a lot of variables. A short cruise around the net has produced articles lambasting the strategy, but without any references. I’ll have to hit up my finance professor friends for real research."

I too would be interested in knowing what you find.

 
At 8/27/2012 6:51 PM, Blogger Ron H. said...

"you are technically correct but you have to ask yourself what the meaning of unfunded liability is in the first place ...what does it really mean?"

Yes I am correct, but no, I don't have to ask myself what an unfunded liability means.

Unlike you, I already KNOW what it means.

 
At 8/27/2012 6:59 PM, Blogger Larry G said...

Unlike you, I already KNOW what it means.


nope. clearly you do not understand that it is from a practical perspective the same issue.

the only difference is that govt is supposed to "guarantee" your benefits whereas you are free to not do so if the stocks underperform but the concept is exactly the same.

 
At 8/27/2012 6:59 PM, Blogger Methinks said...

Jet,

The authors found that investing the entire sum immediately produced superior results.

I'm aware of but will need time to lay my hands on studies that show the opposite. It really depends on the time period in question. If sometimes the edge each other out by a small amount, we can conclude that the expectancy for both strategies is close enough for investors to be indifferent - not that most people have a choice. I don't know anyone who receives all of the money they will ever have to invest in one lump sum.

 
At 8/27/2012 7:05 PM, Blogger VangelV said...

Methinks: Thanks, that's exactly the point I was trying to make. Corporate profits have been rising and reached a record high in Q1 (after-tax), and are about 37.5% above pre-recession 2007 levels.

But that is the problem Mark. Just like 2007 you are missing the fact that many of the 'profits' are fiction created by loose accounting standards. Mark to Model accounting may yield profits but that does not mean that there are real profits to be had. This is not only true for the financial sector but much of the tech sector and even sectors like oil and gas. If I assume a EUR that is three times the real number I do not depreciate the full costs and can report profits even as the companies have to keep borrowing to close the funding gaps. Just as the chip makers had to eventually write down manufacturing facilities that were still on the balance sheets even though they were incapable of producing the latest version product many of the banks will have to write down the loans that they carry on the asset side of their balance sheet and the energy companies will have to write off wells that are incapable of producing the amount of oil and gas that they were assumed to be capable of producing.

You also ignore the fact that since many of the companies depend on sales in faltering Europe and Asia their profits are going to collapse as sales fall and write-downs increase. And let us not forget that governments have yet to deleverage. The companies that produce most of their profits from dealing with governments will see those profits collapse once falling tax revenues force a retrenchments.

How the hell can you take seriously profit reports that were generated because the government and the Fed used TARP, QE, and ZIRP policies? If free credit and money is being handed out is it surprising that loose accounting will produce profits?

 
At 8/27/2012 7:13 PM, Blogger VangelV said...

The bond market does not tell a different story when the stock market rises. Bonds have been selling off as the stock market rises and that's as expected.

But it does tell the same story. The bond market is showing record low rates for treasuries. That is a sign of weakness because if high growth and high returns were expected the money would flow out of bonds and into stock markets. But if we look we find that the market volumes have been pathetic and that there was a flood of cash into bonds yielding next to nothing.

Vange, your list of problems is both short term and illustrative of every single generation in history. Has there ever been a time when the entire world was basking in the sunshine of peace, calm weather and perfect crop yields? I can't think of one. Yet, what have we done? Adapted and lived better than ever.

There is a huge difference today that was not present before. Today all countries are using paper money that can be created out of thin air and dropped out of helicopters. Today savers cannot protect their purchasing power by holding cash or leaving their money in the bank. And today the tax rates are at record high levels for your country. Once you count SS and medicare contributions, income taxes, property taxes, gasoline, tobacco and liquor taxes, sales taxes, license fees, regulatory compliance charges, etc., you are looking at a middle class worker seeing more than 70% of his earnings going to the government.

Acceptance of this condition is the triumph of the morality of slavery and a retreat for the advocates of liberty. That is not a foundation for a healthy economy and a sustained recovery.

 
At 8/27/2012 7:15 PM, Blogger Methinks said...

Ron H.

Compared to what are equities a poor hedge against inflation?

I haven't read the report, but you don't have to compare whatever index they're using as a proxy for the stock market to anything to make that claim. To say that equities are not a good hedge against inflation the return of their basket (index) of equities just has to be less than inflation.

Interestingly, NOTHING is a consistently good hedge against inflation. Milton Friedman's advice to a woman seeking a good hedge against inflation? "Live well".

Damn good advice, I think. Bernanke and Obana are always looking for ways to take it from you. Spend it before they can!

 
At 8/27/2012 7:21 PM, Blogger VangelV said...

Certainly government meddles in the markets and keeps them from being efficient. Certainly the government of every country is the enemy of efficiency. Certainly, things are not as good as they COULD be. But, none of the problems you mention are unique to this period of time and while we may go through nasty periods of sub-optimal growth because of them (and other as yet not revealed problems), we are not headed toward the end of civilization and human progress.

The meddling by government is the enemy of liberty and a healthy economy. And let me be clear that I do not blame the TSA, the US Military, the USPS, Amtrak, DOE, State Department, Congress, or the President for any of this. The fault lies in the individuals who are silent as their liberty is taken away without saying anything.

This is too bad because for my money the US is still one of the best countries around and the American people can still be great. But before they can be a shadow of what they used to be they have to stand up for the very principles that made the country great in the first place. And by stand up I do not mean acting like those idiots who dress in black and set fire to government buildings as they throw rocks at the police. Or those idiot extremists who try and kill innocents just because they happened to be a Christian, American, or simply looked white and Western. I mean by withdrawing the consent to being governed and saying no to policies that make no sense. If a small percentage of Americans actually stood up for their natural rights the country would be back on track and the envy of the world.

Sadly we are a long away from where we have to be and the path that we are on is taking us closer and closer to the abyss.

 
At 8/27/2012 7:24 PM, Blogger Ron H. said...

"the only difference is that govt is supposed to "guarantee" your benefits whereas you are free to not do so if the stocks underperform but the concept is exactly the same."

Government would indeed appear to guarantee benefits, but if you read the fine print, you realize that there are no guarantees of any benefits at all.

 
At 8/27/2012 7:26 PM, Blogger VangelV said...

BTW, I don't understand the concept of a "sustainable recovery". What is that? I can't find an official definition of that term. Is it a steady growth rate in perpetuity? Nirvana? We will go up and down. Although you know that I agree that on net government makes things much much worse than they would otherwise be, these ups and downs would be with us with or without government idiocy.

A sustained recovery is what you have once the market is allowed to clear malinvestments and government gets out of the way. Think of Harding instead of Hooer/FDR and you get the idea. One president inherits a severe economic collapse and decides that the best strategy is to cut taxes and cut government spending as the market liquidates the investments that no longer work. Another tries to prevent liquidation and props up the economy by encouraging high tariffs and high prices. The first sees the economy experience a huge contraction that is followed by a period of expansion. The second is thrown out of office and his successor, who uses the same approach of preventing a contraction, keeps meddling for years as the economy remains stagnant and does not truly recover until a decade and a half later.

 
At 8/27/2012 7:27 PM, Blogger Larry G said...

Government would indeed appear to guarantee benefits, but if you read the fine print, you realize that there are no guarantees of any benefits at all.


It's rare that the govt reneges on a pension once they start paying it.

not so rare for companies.

 
At 8/27/2012 7:27 PM, Blogger VangelV said...

Indeed, and Jesse probably said it best ands simplest out of everyone I've read:


"The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained recovery."


The banks control Congress through donations and the Fed through ownership. The solution is liquidation, not restraint.

 
At 8/27/2012 7:30 PM, Blogger Methinks said...

naw... we're talking about the entire INDUSTRY..

See, Ron H.? This here is Larry Lojick. An entire INDUSTRY can't be wrong! And did you know that IRA's and 401K's are defined benefit plans which are funded by companies and managed by PMs? In Larry Land things work differently.

That's the only explanation I can come up with to justify his incessant whining that returns of 26.46%, 15.06%, 2.05% and YTD 12% since 2008 are destroying the returns of the their portfolios. It's the stock market's fault these pension funds are so underfunded. After all, it's an ENTIRE INDUSTRY!!! You see, while the market has returned 6.6% annually over the past hundred years, these fund managers must project 300% returns to make goal with the exceptionally low funding rates preferred by the institutions offering defined benefits plans. So, Of COURSE the stock market owes it to them and anything less than 300% returns is just going to screw the industry - which cannot be wrong because it's an entire INDUSTRY!

I mean, Larry doesn't actually know of any funds and he can't point to anything to substantiate his drivel, but you know it's the ENTIRE INDUSTRY because...well...in Larry Land Larry's word is truth.

 
At 8/27/2012 7:30 PM, Blogger bart said...

Methinks said...

Interestingly, NOTHING is a consistently good hedge against inflation.


Horse puckey.

 
At 8/27/2012 7:30 PM, Blogger VangelV said...

I think I finally understand what the source of misunderstanding between us on this issue, bart. Unlike you, I don't live in Zimbabwe.

Is this an attempt at irony?

 
At 8/27/2012 7:32 PM, Blogger bart said...

Ron H. said...
Government would indeed appear to guarantee benefits, but if you read the fine print, you realize that there are no guarantees of any benefits at all.


Very much so grasshopper, even Greenspan admitted it.


"We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power."
-- Alan Greenspan (prior Chairman of the Federal Reserve US Central Bank), appearing before the Senate Banking Committee on February 15, 2005, in response to Democratic Senator Jack Reed of Rhode Island on the topic of funding Social Security.

 
At 8/27/2012 7:35 PM, Blogger bart said...

VangelV said...
Is this an attempt at irony?


Nope, just more proof (amongst many other "issues") that her mentors are people like Larry.

 
At 8/27/2012 7:40 PM, Blogger Larry G said...

a short GOOGLE search will confirm the fact that many people - even those with 401Ks and IRAs depend on the advice of brokers to select investments and a similar search would confirm that many, if not most people did suffer losses in their 401Ks, and IRAs since 2008.

Many are just not getting back to what the value was in 2009.

I'm talking about ordinary people not those who themselves are involved in the financial community and more sophisticated and knowledgeable but even some of those folks got burned during the meltdown.

I'm not even sure what exactly Methinks is saying.

Is she saying that people did not get hurt during the downturn?

Is she saying that most with pensions do not invest in equities?

I know she likes to do "snarky" but sometimes she outfoxes her own self.

 
At 8/27/2012 7:49 PM, Blogger Ron H. said...

"I haven't read the report, but you don't have to compare whatever index they're using as a proxy for the stock market to anything to make that claim. To say that equities are not a good hedge against inflation the return of their basket (index) of equities just has to be less than inflation."

I only skimmed the report, but the quote Larry liked suggested that equities weren't a good hedge against inflation, referencing other people's work for support and later the report provided the chart which Buddy posted showing that since 1900 equities provided a real return of 5.4%, citing a "world index", whatever that is.

The report spends 64 pages discussing inflation without ever a word about the cause, as if inflation were a randomly occurring and unexplainable phenomenon. IMHO it's typical Keynesian nonsense.

 
At 8/27/2012 7:52 PM, Blogger Ron H. said...

""We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power.""

Oh Dear!

He couldn't have been much clearer than that, could he?

 
At 8/27/2012 7:53 PM, Blogger Methinks said...

But it does tell the same story.

No it doesn't, Vangie! Of late, when the equity market is going up, the bond market is going down and vice verse. Today, equities sold off a little and bonds were up. Bonds were rocking and rolling when equities tanked earlier this year.

The bond market is showing record low rates for treasuries.

Meh. That doesn't mean what you think it means. The Treasury market is the most liquid market on earth. Treasury rates are off their lows since the equity market started its latest happy dance and low rates say more about what investors think of other sovereign debt. Things in Europe do not look very good - particularly the sovereign debt market. Everyone is selling Eurocrap debt and parking money in Treasurys to avoid the next "voluntary" 50% Eurocrap bond devaluation.

Volume is always dies when the market quietly rises and during the summer. It always picks up during a good panic. Mmmmm....can't wait for the next big panic.


There is a huge difference today that was not present before.

errr....humanity has only recently survived rivers of blood as socialist dictators slaughtered huge numbers of people and tortured many more, two excruciating world wars, Hiroshima, Nagasaki, constant civil wars in Africa, Islamic terrorists, earthquakes,hurricanes, tsunamis, totalitarianism, Nazis and countless other calamities and you think PAPER CURRENCIES and HIGH TAX RATES in America are what's going to take humanity down?

I just don't think so.

I'll give you that the United States is not the land of opportunity it could be, should be, or has been. I'm not optimistic about the USA in the near future, but not everything is going to suddenly start sucking here either. It's going to take a long time to really decay - and that's assuming nothing changes in this long period of time. The probability of nothing changing is pretty low - not that the change will necessarily be positive either.

I have no intention of accepting anything from the U.S. government. I immigrated here and I have no problem immigrating right back out. And so will lots of people if there are better options.

 
At 8/27/2012 7:54 PM, Blogger Larry G said...

re: inflation and "nonsense"

you mean they treat inflation as a known quantity - a reality - regardless of cause?

sacrilege!

 
At 8/27/2012 7:54 PM, Blogger Ron H. said...

"It's rare that the govt reneges on a pension once they start paying it."

...and you know this how?

 
At 8/27/2012 7:58 PM, Blogger Ron H. said...

"Many are just not getting back to what the value was in 2009."

...and you know this how?

Is yours below 2009? Mine isn't.

 
At 8/27/2012 7:59 PM, Blogger Larry G said...

.and you know this how?


because it's a BFD when it happens.

when is the last time that GOVT reneged on a pension plan?

when is the last time a company did that?

Can you say PBGC? how many private pension plans do companies renege on and the govt (taxpayers) have to pick them up?


 
At 8/27/2012 8:00 PM, Blogger Methinks said...

A sustained recovery is what you have once the market is allowed to clear malinvestments and government gets out of the way.

Oh well, Vange, honey! That hasn't happened since Coolidge. If that's your requirement you might as well pack pack it in!

Look, I've already said that I agree that nothing is as efficient as it should be because of government meddling. But, it's not total collapse or no government intervention and nirvana.

Government has always frustrated the efforts of the productive, always tried to steal from everyone and always tried to meddle in things it cannot begin to understand and the stupid have always outnumbered smart people. Yet, somehow, we carry on and each generation is better off than the previous one. You do have to look past the U.S., though. The world is your oyster! Where is your immigrant spirit?

 
At 8/27/2012 8:00 PM, Blogger Larry G said...

re: many are JUST getting back...

yeah..it took 5 years to get back to where it used to be... from what I understand..not that unusual.

 
At 8/27/2012 8:01 PM, Blogger Methinks said...

Horse puckey.

I tried that. It wasn't consistently a good hedge against inflation either.

 
At 8/27/2012 8:03 PM, Blogger Larry G said...

I tried that. It wasn't consistently a good hedge against inflation either


did you insert it into the proper orifice correctly?

 
At 8/27/2012 8:05 PM, Blogger Methinks said...

Is this an attempt at irony?

Watcha mean, Vange?

 
At 8/27/2012 8:06 PM, Blogger Methinks said...

did you insert it into the proper orifice correctly?

No, Larry. You are the only person I know whose idea of hedging is shoving foreign objects up his *ss. BTW, I wouldn't be so open about that on a public forum.

 
At 8/27/2012 8:12 PM, Blogger Larry G said...

did I say _ss?

there are many orifices Methinks.

do you have such a dirty mind?

 
At 8/27/2012 8:14 PM, Blogger Methinks said...

IMHO it's typical Keynesian nonsense.

Ron H.,

The cause of inflation is irrelevant to the claim - and that's probably why they didn't go into it. The claim is simple and true - equities are not a good hedge against inflation. For that to be true, all they have to show is that equity returns do not keep up with general inflation when the inflation rate rises (probably beyond a certain level revealed by a series of studies), regardless of the cause of inflation.

 
At 8/27/2012 8:14 PM, Blogger Ron H. said...

"I'm not even sure what exactly Methinks is saying"

Obviously.

"Is she saying that people did not get hurt during the downturn?"

No.

"Is she saying that most with pensions do not invest in equities?"

No.

What I believe she is saying is that the world hasn't ended. People still have their retirement accounts and are still retiring in large numbers. Other than a short, sharp downturn in 2009, the stock markets are back in business and doing well, as are most retirement accounts.

"I know she likes to do "snarky" but sometimes she outfoxes her own self."

She doesn't have as much patience with your pretense of ignorance as I do.

You ARE pretending, right?

 
At 8/27/2012 8:15 PM, Blogger Methinks said...

do you have such a dirty mind?

Larry dear, since it was you I just assumed....

Why? Are you telling me that you tried to EAT the horseshit?

 
At 8/27/2012 8:17 PM, Blogger Larry G said...

pretending what?

you guys are so sharp and so snarky that ordinary folks have to be on their P's and Q's here or they get sliced and diced...

:-)

it's more fun sometimes to see you guys go after each other!

 
At 8/27/2012 8:18 PM, Blogger Larry G said...

Why? Are you telling me that you tried to EAT the horseshit?

puckey puckey

 
At 8/27/2012 8:24 PM, Blogger Methinks said...

People still have their retirement accounts and are still retiring in large numbers. Other than a short, sharp downturn in 2009, the stock markets are back in business and doing well, as are most retirement accounts.

Yup. More specifically, was saying that the WSJ was wrong in saying "Plunging stock values are prompting many older workers to delay retirement" as Larry cried "HOW you accuse the media of being wrong? Why did the WSJ say that then? WHY?".

Then, I got suspicious. How the hell did this drivel get past the WSJ editors? So, I revisited the article and glanced at the date. The article is from July 2009!!!! The damn article is THREE YEARS OLD! THAT'S why the WSJ would say such a thing. Larry the Magnificent has dredged up a three year old article to whine about stock market value destruction.

WHY? WHY? WHY do I EVER read any of his endless supply of crap?

 
At 8/27/2012 8:26 PM, Blogger Methinks said...

Larry, don't kid yourself. You're not ordinary (is that sounding like a prayer?). You have an extraordinary capacity for some things.

 
At 8/27/2012 8:29 PM, Blogger Larry G said...


5 Reasons Older Workers are Delaying Retirement

January 28, 2011

http://money.usnews.com/money/blogs/planning-to-retire/2011/01/28/5-reasons-older-workers-are-delaying-retirement

Not enough money saved. Most older workers are postponing retirement because they simply don’t have a big enough nest egg to support themselves without working (65 percent).

there are LOTS MORE...

 
At 8/27/2012 8:30 PM, Blogger Larry G said...

re: " is that sounding like a prayer?"

uh.....

 
At 8/27/2012 8:37 PM, Blogger Ron H. said...

This comment has been removed by the author.

 
At 8/27/2012 8:52 PM, Blogger Ron H. said...

"Why? Are you telling me that you tried to EAT the horseshit?"

Speak louder, he can't hear you at the moment. :)

"No, Larry. You are the only person I know whose idea of hedging is shoving foreign objects up his *ss. BTW, I wouldn't be so open about that on a public forum. "

I didn't realize it was a foreign object, I've only heard it referred to as his head.

 
At 8/27/2012 8:58 PM, Blogger Ron H. said...

"puckey puckey"

All right, but why are you being so picky?

"Why? Are you telling me that you tried to EAT the horsepuckey?"

 
At 8/27/2012 10:04 PM, Blogger Ron H. said...

"WHY? WHY? WHY do I EVER read any of his endless supply of crap?"

Norman Fox would also like to know.

When that fat, bald guy recorded this song in 1957 he was 16 years old and looked more like this.

 
At 8/27/2012 10:11 PM, Blogger Ron H. said...

"5 Reasons Older Workers are Delaying Retiremen"

That's nice to know. Is there a point here?

 
At 8/27/2012 10:35 PM, Blogger VangelV said...

No it doesn't, Vangie! Of late, when the equity market is going up, the bond market is going down and vice verse. Today, equities sold off a little and bonds were up. Bonds were rocking and rolling when equities tanked earlier this year.

You are looking at the noise again. I am looking at the medium term trend. As we have seen bond rates fall to historically low rates we have seen stocks rise close to their pre-crash highs (on very low volumes) and we have seen treasuries do better than corporates. Negative yields do not indicate a very strong economy.

Meh. That doesn't mean what you think it means. The Treasury market is the most liquid market on earth. Treasury rates are off their lows since the equity market started its latest happy dance and low rates say more about what investors think of other sovereign debt. Things in Europe do not look very good - particularly the sovereign debt market. Everyone is selling Eurocrap debt and parking money in Treasurys to avoid the next "voluntary" 50% Eurocrap bond devaluation.

Volume is always dies when the market quietly rises and during the summer. It always picks up during a good panic. Mmmmm....can't wait for the next big panic.


Yes, the US Treasury market is very liquid. But given the more than $100 trillion in debt and unfunded liabilities and no plan to eliminate the deficit over the next decade buying USTs is a fool's game over the long run. That said, if investors were as confident in the US economy they would be adding to their equity positions, not buying debt instruments that yield negative returns.

As for the low equity volumes, this summer is very unusual. Given the 'performance' we would have expected more activity.

errr....humanity has only recently survived rivers of blood as socialist dictators slaughtered huge numbers of people and tortured many more, two excruciating world wars, Hiroshima, Nagasaki, constant civil wars in Africa, Islamic terrorists, earthquakes,hurricanes, tsunamis, totalitarianism, Nazis and countless other calamities and you think PAPER CURRENCIES and HIGH TAX RATES in America are what's going to take humanity down?

Not humanity. They will take the economy down. And this may have escaped your notice but the US is no longer anywhere near the free economy that it used to be. This explains the more than 20% unemployment once you count the underemployed and those who have given up working because they can't find jobs. During the past few years there have been more people put on the disability rolls than have found newly created jobs.



 
At 8/27/2012 10:52 PM, Blogger VangelV said...

I'll give you that the United States is not the land of opportunity it could be, should be, or has been. I'm not optimistic about the USA in the near future, but not everything is going to suddenly start sucking here either. It's going to take a long time to really decay - and that's assuming nothing changes in this long period of time. The probability of nothing changing is pretty low - not that the change will necessarily be positive either.

The US has been having serious economic problems for decades. The progressives have encouraged the growth of government to unimagined levels and the welfare/warfare state has been destroying capital that so many generations worked so hard to build. What has been lost is the understanding that the US attracted so much investment because it protected property rights and had low taxes. Those advantages were slowly destroyed and the economy has transitioned from one that made real things that could be sold to other countries to one that is primarily driven by financial transactions that add very little value to the real economy.

I have no intention of accepting anything from the U.S. government. I immigrated here and I have no problem immigrating right back out. And so will lots of people if there are better options.

As I said, most people see little trouble with high corporate and personal income tax rates because they do not pay very much in income tax. And most people are naive enough to accept the argument that individuals need to be protected from themselves by a federal regulatory regime. Not only that but they keep cheering on the government whenever it picks new fights abroad even as they complain about keeping the troops engaged in those useless budget busting conflicts. The trouble is that there is no way for the government to keep the promises it has made to people who expect the welfare state to continue. It is in a terrible financial position and will have to choose between an outright default or a default through inflation. So far, the credit deleveraging has only taken place in the consumer and corporate sectors. This means that the government will follow suit, which means a collapse in profits for companies that depend on government spending and a significant loss of jobs in the public sector (which would be a very good but unpopular outcome) OR that the government will continue to spend money by borrowing money from other governments or the Fed. Neither option will lead to a good medium term outcome.

 
At 8/27/2012 11:02 PM, Blogger VangelV said...

Oh well, Vange, honey! That hasn't happened since Coolidge. If that's your requirement you might as well pack pack it in!

That is what I said. You might as well pack it in.

Look, I've already said that I agree that nothing is as efficient as it should be because of government meddling. But, it's not total collapse or no government intervention and nirvana.

Meddling leads to total disaster because the can can only be kicked down the road for so long. Between Greenspan and Bernanke we have seen a massive amount of damage done to savers and producers. Both financed the growth of big government and became serial bubble blowers to please their political masters. The disasters that they created cannot be undone by following the same game plan that created them.

Government has always frustrated the efforts of the productive, always tried to steal from everyone and always tried to meddle in things it cannot begin to understand and the stupid have always outnumbered smart people. Yet, somehow, we carry on and each generation is better off than the previous one. You do have to look past the U.S., though. The world is your oyster! Where is your immigrant spirit?

Actually, in the US government was too small to do much harm for much of its history. Even a lefty anarchist like Kropotkin argued that the US did not need another revolution because it was nearly in a state of anarchy. While the federal government did do some damage through stupid tariff policies and some minor regulations its impact was insignificant before the Progressives gained influence.

And I do not live in the US. My commentary is about the US because most of the readers and Mark are American and because what happens in the US has a huge impact on much of the world. Let me point out that the US does not only meddle in its own economic affairs. It also meddles in political and economic affairs abroad. I lost nearly $30K because of blowback from the Libyan fiasco when some of the extremists gained weapons and decided to knock off the government in Mali. Most investments stopped and the value of the capital fell sharply because of that event. I suspect that many have seen or will see similar declines in Egypt, Syria, Iraq, Iran, Pakistan, Sudan, and elsewhere as the US and NATO create even more trouble for investors in those countries.


 
At 8/27/2012 11:04 PM, Blogger VangelV said...

Watcha mean, Vange?

I mean that the United States is following the Zimbabwe playbook. The Fed is even monetizing the debt.

 
At 8/27/2012 11:30 PM, Blogger Methinks said...

As much as I enjoy pondering how Larry and bart might use horseshit as reliable inflation hedges and why Larry might be eating it, I bet a few people here find the dollar cost averaging question more compelling.

Academicians laid to rest the DCA myth a long time ago and the papers are pretty hard to access now. I remember a long time ago when the world was young and I was in school we covered DCA briefly along with other myths, including "dynamic hedging", but I haven't revisited it since.

Most of the papers I found today compare DCA to lump sum investing. Most studies show that lump sum wins. By a long shot.

The problem is, as Jet Beagle points out, most people don't have lump sums available to them and are forced to invest periodically over time.

Jet does not claim that dollar cost averaging is superior to lump sum. Rather, he claims that he benefits from dollar cost averaging. That is, the investment style has a positive expectancy, but does NOT claim that it is superior to LS. I think I understand you correctly, Jet?

To figure out why Jet might think that, I ran a super simple analysis with uber simplistic assumptions. The problem is that my analysis is so simplistic and so contrived and deviates so severely from the real world that it's pretty much worthless. And I wonder if this is what "investment advisors" (most of whom are dumb as bricks) are showing unsuspecting clients to pitch DCA.

To test Jet's claim properly we'd have to run A LOT of Monte Carlo simulations over many different time periods to generate a probability distribution.

I'm not going to run a major research project on something that isn't going to become a strategy I actually use and I can't find any papers tackling the positive expectancy question (as opposed to DCA relative to LS). It's no longer of interest to academics.

Because of the way the market behaves, I doubt very much that the investment style (if you can call it that since most people invest periodically because that's when investible funds become available to them) has a positive expectancy. However, I have never known Jet Beagle to just blow hot air either. So, while I think he is wrong about the positive expectancy, I assume he is in possession of academic research based on multiple Monte Carlo simulations that concludes that DCA is a positive expectancy "investment style". If he doesn't, I don't think Jet can continue to claim that DCA is a positive expectancy style. I think he's wrong about hat, but Jet may prove me wrong.

Jet, can you provide a link or at least a reference? And I'm not throwing down the gauntlet. This isn't a smack down. The explanation you provided is not convincing and I can't find anything more substantial on the positive expectancy you're claiming, so I'm asking what you have.

 
At 8/27/2012 11:31 PM, Blogger Methinks said...

I mean that the United States is following the Zimbabwe playbook. The Fed is even monetizing the debt.

Oh! Yeah. LOL!

 
At 8/27/2012 11:41 PM, Blogger Methinks said...

But given the more than $100 trillion in debt and unfunded liabilities and no plan to eliminate the deficit over the next decade buying USTs is a fool's game over the long run.

Nope. We're the cleanest dirty shirt and the size and liquidity of the Treasury market cannot be underestimated. If you need to park a lot of money somewhere while Europe sorts itself out, that's where you'd do it.

That said, if investors were as confident in the US economy they would be adding to their equity positions, not buying debt instruments that yield negative returns.

These are not investors in the United States. They're fleeing scarier investments into Treasuries because the U.S. is in relatively good shape (note the word "relative") and because the Treasury market is so liquid that moving huge amounts of money in and out is easy. The equity market is smaller and it's much harder to park money there.

The Treasury market is saying much more about what's happening in Europe than anything else. And it's not predicting the end of the world.

Ups and downs will continue to happen. I don't think the U.S. is heading in a good direction, but I don't think the entire world is headed for Apocalypse. I'm sure you think we're going to find ourselves in a Kevin Costner movie in a couple of years, but I'm not THAT pessimistic.

That's all I have time for.

 
At 8/28/2012 2:59 AM, Blogger Jet Beagle said...

Methinks,

Academic studies definitely show that lump sum investing is superior to DCA. As you point out, I am not arguing about those studies which compare the options for the investor who suddenly possesses a lump sum.

I’m debating the options for the common investor - the one who contributes to a constant dollar investment program such as a 401K. I see two questions related to the choices of that investor:

1. Does the investor realize greater returns by investing the fixed amounts immediately or by employing a different investment timing scheme? (such as timing the market or staging the investment of his single monthly 401K contribution)

2. Are any of the greater returns from 1 due to the DCA nature of investing immediately?

If we treat each monthly 401K contribution as an individual lump sum investment, then we know from the available research that the best option is to invest it immediately. That is, investing immediately is a better option for the long term investor who is confident that the market will rise over the long term.

As I see it, investing regular and constant monthly contributions immediately does achieve DCA.

My thinking since Monday afternoon leads me to question my original assertion about DCA. I still believe DCA for 401K type investors achieves a real benefit: the reduced average cost basis from buying more shares at lower prices and fewer shares at higher prices. But maintaining that benefit for the long term could be contrary to another important investment principle.

Methinks and I agree that portfolio diversification will achieve better investment results. I believe, and I suspect she agrees also, that periodic asset class rebalancing is necessary to maintain the desired diversification and reduction in risk.

Simple DCA followed religiously would result in less than desired diversification.

I'm still believe DCA will provide a return benefit for a particular asset - but to realize this asset benefit one will risk an out of balance portfolio.

 
At 8/28/2012 4:30 AM, Blogger Larry G said...

If you felt like you had no clue how to invest and you turned that job over to a professional broker with the request to get the best return possible over the longer run -

what investment scheme would most professional fund managers most likely use?

bonus question: what scheme do most State pension funds use?

 
At 8/28/2012 4:32 AM, Blogger Larry G said...

re: horse puckey

actually some of the nicer fare served up by some in CD!

:-)

 
At 8/28/2012 7:35 AM, Blogger VangelV said...

Oh! Yeah. LOL!

The Fed's activity has been noted for a while. Because the US holds the reserve currency of the world and the process is a little bit more complex it can continue for a while. But in the end the unfunded liabilities, public debt, and large deficits will have to be dealt with and when that happens you are looking at massive deflation or hyperinflation.

For various reasons, the Federal Reserve cannot just up and start buying all the Treasury paper that becomes available in record amounts, week after week, month after month.

Instead, it uses this three-step shell game to hide what it is doing under a layer of complexity:

Shell #1: Foreign central banks sell agency debt out of the custody account.

Shell #2: The Federal Reserve buys those agency bonds with money created out of thin air.

Shell #3: Foreign central banks use that very same money to buy Treasuries at the next government auction.

Shuffle, shuffle, shuffle, shuffle, shuffle, SHUFFLE, shuffle! Confused yet?

Don't be. If we remove the extraneous motion from this strange act, we find that the Federal Reserve is effectively buying government debt at auction. This is exactly, precisely what Zimbabwe did, but with one more step involved, introducing just enough complexity to keep the entire game mostly, but not completely, hidden from sight. They can scramble the shells all they want, but the pea is still there somewhere - the pea being the fact that the Fed is creating money to fund the purchase of US debt.


I think that where the confusion stems from is the timing. Yes, the end is inevitable. But history teaches us that it does not have to be immediate, particularly when you have a great power that is in slow decline. The point, which Mark is missing, is that the primary trend is down and no dead cat bounce can reverse that trend. A true and lasting reversal will require major and fundamental changes that I cannot see taking place as long as the mainstream parties, which are two wings of the same bird of prey, remain in control of Congress, the judiciary, and the Oval Office.

 
At 8/28/2012 7:50 AM, Blogger VangelV said...

Nope. We're the cleanest dirty shirt and the size and liquidity of the Treasury market cannot be underestimated. If you need to park a lot of money somewhere while Europe sorts itself out, that's where you'd do it.

First, you are still a dirty shirt. Second, having a lot of fiat money that needs to be parked is not comforting for the real economy. Money is not savings and not capital.

These are not investors in the United States. They're fleeing scarier investments into Treasuries because the U.S. is in relatively good shape (note the word "relative") and because the Treasury market is so liquid that moving huge amounts of money in and out is easy. The equity market is smaller and it's much harder to park money there.

That is my point. Your argument is based on relative worthlessness. By trying to find the best looking horse that is heading for the glue factory you ignore the fact that it is also doomed to the same fate.

The Treasury market is saying much more about what's happening in Europe than anything else. And it's not predicting the end of the world.

I agree more with the first part. If the EU were healthy the US bond market would be behaving differently. But that would also be predicting collapse because investors would be dumping treasuries and the Fed would have little choice but to monetize as it is doing now. When the Fed backstops the market by buying bonds from the primary dealers weeks after they have purchased them there is a problem. In the end we will see an outright default or massive inflation.

Ups and downs will continue to happen. I don't think the U.S. is heading in a good direction, but I don't think the entire world is headed for Apocalypse. I'm sure you think we're going to find ourselves in a Kevin Costner movie in a couple of years, but I'm not THAT pessimistic.

I have not claimed that the world is heading for an Apocalypse. I am simply saying that the financial system as it is cannot be sustained. We either have to see deflation, massive losses and bank closures or a huge amount of inflation that destroys savers and equity investors who see a negative return in real terms. Neither scenario is an Apocalypse; in fact, the first would go a long way towards liquidating the malinvestments and putting the economy on a sound footing. I think the better path to follow is the one taken by Iceland, not Zimbabwe or the EU.

 
At 8/28/2012 8:30 AM, Blogger Methinks said...

Jet,

I think the reason the reason I can't find anything on the expectancy of DCA is because the answer is in the LS vs. DCA research. I hate it when something is staring me in the face and I don't see it.

I'll write more later on when I have more time.

 
At 8/28/2012 8:30 AM, Blogger VangelV said...

Academic studies definitely show that lump sum investing is superior to DCA. As you point out, I am not arguing about those studies which compare the options for the investor who suddenly possesses a lump sum.

Most people have around a 20-30 year investment horizon. Their outcome depends on the primary trend. If you use a lump sum to purchase stocks during the early stages of a primary bull market trend it will outperform DCA by quite a bit. But if you made the same purchase slightly before the primary trend reversed DCA would have won handily. Look at Buffett for an example. His big returns have come primarily because he sold out before the market peak and sat around in cash for a few years. His reputation was made because he bought back into the market when stocks became cheap and paid out high dividends after the market crashed in the early 1970s.

The trick to high returns is not the blind adherence to a particular purchasing strategy but also knowing when not to have a large exposure to any particular asset class.

 
At 8/28/2012 8:46 AM, Blogger Larry G said...

a lump sum can always be converted to an annuity - with a guaranteed payout with the seller of the annuity taking the risk of find the best way to grow the lump sum.

if the choice is between someone who is unsophisticated in investing who suddenly comes into a lump sum and someone who is an experienced professional - many will turn the job over to the professional.

The real question is - given the lump sum - what would most professionals do?

 
At 8/28/2012 9:06 AM, Blogger VangelV said...

a lump sum can always be converted to an annuity - with a guaranteed payout with the seller of the annuity taking the risk of find the best way to grow the lump sum.

Don't you see the problem? Insurance companies make a lot of money because they sell annuities to people who are scared. An annuity is guaranteed to offer a lower return than most reasonable portfolios.

And don't forget the risks that you have not mentioned. First, the seller of the annuity could die before you do and you become a creditor to a bankrupt company as you wait your turn to get whatever the senior creditors leave behind. Or the currency could lose so much of its purchasing power that the annuity is essentially worthless.

if the choice is between someone who is unsophisticated in investing who suddenly comes into a lump sum and someone who is an experienced professional - many will turn the job over to the professional.

That may be true. Of course, the experienced professional could be a reckless gambler or a Madoff type. Either case presents a set of problems.

The real question is - given the lump sum - what would most professionals do?

No it isn't. Most 'professionals' are nothing of the kind. They are just sales people who make money off commissions and managing the assets of other people. Most of them underperform the markets and can be beaten by a chimp flipping a coin or throwing darts.

 
At 8/28/2012 9:12 AM, Blogger Larry G said...

re: a professional vs a neophyte

the depiction of a professional as "nothing of the kind" implying that it's not possible to find a true professional is just plain lame.

you could have that problem with ANY selection of someone from a plumber to a doctor - to a investment professional.

in each case, there are charlatans but in each case there are also people who know what they are doing and know much more than a neophyte.

re: annuities

many people who get pensions - really get annuities....

their lump sum retirement funds are converted to annuities.

it's not unusual at retirement for a company to offer you the lump sum or the annuity and it's not unusual either that the annuity offered is pretty attractive compared to the jobs of trying to take the lump sum and make it perform like the annuity would.

there is risk in either approach.

individuals who have little or no schooling in investments are a lot like a lawyer who tries to defend himself.

 
At 8/28/2012 9:13 AM, Blogger Jet Beagle said...

methinks,

DCA for the typical 401K investor is actually both Lump Sum and DCA. For such investors, it is not an either Lump Sum or DCA issue. They are accomplishing both simultaneously:

1. investing the funds as soon as they are available to be invested, as if it were a LS;

2. investing equal $ amounts over time, because that's when the funds become available.

The LS vs DCA research refers to a different situation altogether. That research focuses on whether the investor benefits by holding most of the lump sum in cash and investing it in stages.

What is frustrating is that those who criticize DCA always refer to this LS vs DCA research in doing so. The conclusions of that research only seem applicable to the atypical investor.

 
At 8/28/2012 9:17 AM, Blogger VangelV said...

the depiction of a professional as "nothing of the kind" implying that it's not possible to find a true professional is just plain lame.

That is not what I said. What I said is that a professional is usually someone who makes his money from commissions, not performance. Many funds are closed because the people running them are not very good and lose customers tired of the underperformance. But the people running them still get rich from the management fees no matter how much the customers lose.

you could have that problem with ANY selection of someone from a plumber to a doctor - to a investment professional.

No. A monkey can't do a better job than even a bad plumber or doctor. But it does beat the average 'professional' in the financial sector.

in each case, there are charlatans but in each case there are also people who know what they are doing and know much more than a neophyte.

I am not talking about charlatans. I am talking about well meaning people trying to do a good job. It still works the same. If you are going to invest in equities a broad index fund that requires no active management or a dart board usually beats the average investment fund manager. The reason comes down to the fees.

 
At 8/28/2012 9:24 AM, Blogger Larry G said...

no matter how you want to generalize it - not all people who claim to be professionals are incompetent and you can find people who know what they are doing - and you should if you are a neophyte.

You cannot hope to know what someone who is trained and experienced knows and you'd be foolish to think so.

yes.. the world is full of doctors and plumbers and investment professionals who don't know their head from a hole in the ground but you don't go cutting out your own appendix or installing home plumbing system.

the original question is what would a professional do....???

it's still a question.

 
At 8/28/2012 9:25 AM, Blogger Jet Beagle said...

vangeiv: "Their outcome depends on the primary trend. If you use a lump sum to purchase stocks during the early stages of a primary bull market trend it will outperform DCA by quite a bit. But if you made the same purchase slightly before the primary trend reversed DCA would have won handily."

Did you read any research on lump sum vs dollar cost averaging investing> The authors of such research generally acknowledge that DCA will beat Lump Sum investing some of the time. But the probability is that LS will beat DCA over the long run.

GersteinFischer looked at 781 120-month periods from 1926 to 2010. They determined that, over the 120 month periods, Lump Sum investing in the S&P index would beat Dollar Cost Averaging the S&P index 71% of the time.

 
At 8/28/2012 9:29 AM, Blogger VangelV said...

Yes I am correct, but no, I don't have to ask myself what an unfunded liability means.

Unlike you, I already KNOW what it means.


The 'guy' seems to be as dumb as a post and totally incapable of comprehending what he is writing about. How many time will you have to explain basic concepts that my 12-year-old understands before you figure out that you are being played or that he is beyond hope? I am having a hard enough time explaining simple legal concepts that should be very clear to a young child and you think that he will be able to understand accounting? Sorry but I think that we are all wasting our time because Larry does not have a high enough IQ to deal with most of the issues being discussed.

 
At 8/28/2012 9:29 AM, Blogger Jet Beagle said...

vangeiv: "The trick to high returns is not the blind adherence to a particular purchasing strategy but also knowing when not to have a large exposure to any particular asset class."

In other words, you believe that market timing is an effective strategy?

 
At 8/28/2012 9:32 AM, Blogger Larry G said...

Yes I am correct, but no, I don't have to ask myself what an unfunded liability means.

Unlike you, I already KNOW what it means.


neither of you understand what it REALLY means because both of you are determined to use it as a club against government....and not understand the real purpose behind such an analytical.

 
At 8/28/2012 9:35 AM, Blogger Methinks said...

Jet,

I cannot believe I was so stupid that I couldn't see what was right under my nose. I engaged in endless complications to scramble my own mind to the point that only sleep and coffee could fix it.

DCA is NOT a positive expectancy strategy. You DO NOT benefit from DCA at all. Not only is there no positive expectancy, it is a negative expectancy strategy and that is precisely the question the LS vs. DCA research answered.

To test your claim that there is positive expectancy "because constant dollar investing enables [investors]to unconsciously buy more shares on the dips and fewer on the highs", we must compare the return of a DCA strategy to the return of the benchmark for the same period. In this case, we are comparing the return of the market index to the return of DCA in that market index over the same period of time.

Well, that's exactly what LS vs. DCA tests! In an LS investment, you invest all the money on day 1 and get the return of the the index for the peroid. Nothing more or less. In DCA, you invest the same amount periodically over the same period.

When the two returns are compared at the end of the period, DCA always underperformed the index. Often, significantly.

Jet, what the copius research shows is that DCA's expectency is NEGATIVE. You not only don't benefit from the strategy, you lose to it. The return you get is less than the index by a larger amount than can be accounted for by index fund fees. The claim you're making has been proven to be utterly false.

That said, since most people's alternative is to either not save at all or to save periodically as investible funds become available to them, DCA is the better alternative to not saving at all. If you don't save at all, you do not get ANY of the return of the index.

So, you DO NOT benefit from DCA even though it intuitively seems like you would for the reasons you mentioned. The only benefit is that which I originally asserted - saving (vs. not saving at all) and any price appreciation in the asset in which you're investing. There is absolutely nothing to gain from the strategy itself, it's just that most people are forced into that style by life circumstances.




 
At 8/28/2012 9:37 AM, Blogger bart said...

Jet Beagle said...

In other words, you believe that market timing is an effective strategy?


To assert that it doesn't work for some is to deny all the evidence that shows it does.

Ref: Galen & Harvey too.

 
At 8/28/2012 9:46 AM, Blogger Methinks said...

What is frustrating is that those who criticize DCA always refer to this LS vs DCA research in doing so. The conclusions of that research only seem applicable to the atypical investor.

Jet,

In that entire comment you're engaged in the exact brain scramble I was. It's easy to get sucked in.

The only reason there is a lump sum in the research is to measure the return of the index against which you are comparing the return of the DCA strategy. It's not really testing one strategy vs. another. It's all testing the expectancy of DCA - the very question we were trying to answer.

The answer is that DCA offers no additional benefit. You are not benefiting from an appreciating asset and DCA. You benefit from price appreciation and you are very likely losing on your DCA strategy.

If that were not the case, the DCA strategy would have produced a higher return than an LS investment. That is, DCA's return would have been greater than the return of the asset in which the strategy was deployed over the same period of time.

 
At 8/28/2012 9:49 AM, Blogger Methinks said...

To assert that it doesn't work for some is to deny all the evidence that shows it does.

Probability distribution means nothing to you, eh, bart?

 
At 8/28/2012 10:13 AM, Blogger Jet Beagle said...

methinks,

You are missing what I've been trying to show you. The LS vs DCA research does not apply to the typical investor. the research you've been looking at compares these alternatives for an investor who has a large amount of funds to invest all at once:

1. investing it all at once (LS)

2. investing equal sized portions of that same amount at regular intervals.

Some of the research studies add third and fourth alternate ways for delayed investing.

The important thing to come away from all that research is that it never applies to the typical 401K investor.

Please try to understand this next paragraph:

I never advocated DCA over LS. Never. I was always referring to the optimum investment strategy for the 401K investor - the investor for whom funds become available in regular constant dollar amounts.

The research you cite is applicable to that 401K investor, but not the way you are implying it is.

 
At 8/28/2012 10:16 AM, Blogger Jet Beagle said...

methinks,

My brain is definitely not scrambled on this issue. I know exactly what I am writing, and the research you cite supports my position.

 
At 8/28/2012 10:18 AM, Blogger bart said...

Methinks said...
Probability distribution means nothing to you, eh, bart?


Are you alleging that market timing doesn't work for some isn't a provable reality, like CPPI?

The FOMC uses (and many of the "very best" economists use) probability distribution in their models... that completely failed in predicting ort seeing the housing bubble, financial crisis, etc.

Another epic fail is yours, yet again, in logical fallacy ville.

 
At 8/28/2012 10:35 AM, Blogger Methinks said...

Jet,

How can you possibly think that I misunderstand what you're advocating when I clearly said earlier that you are not advocating spreading out a lump sum investment? And I agree - investing over time when you have no choice is much better than the alternative, which is not investing at all.

You are missing what the tests are actually measuring. This is the part you're missing:

"The only reason there is a lump sum in the research is to measure the return of the index against which you are comparing the return of the DCA strategy. It's not really testing one strategy vs. another. It's all testing the expectancy of DCA - the very question we were trying to answer."

The LS there only as a benchmark. I'm sorry, I can't figure out a way to say it more clearly, so I'll just leave you to think about it.

 
At 8/28/2012 10:39 AM, Blogger Methinks said...

No, bart. I'm asserting that you haven't the faintest clue how to calculate the expectancy of a strategy.

You're basically the twit who says that he feels safe riding a motorcycle without a helmet because he hasn't busted his skull wide open yet or that it's great idea to jump off the Golden Gate bridge because he knows this one guy who jumped and didn't die.

 
At 8/28/2012 10:48 AM, Blogger Jet Beagle said...

methinks: 'The LS there only as a benchmark. I'm sorry, I can't figure out a way to say it more clearly"

That's what you claim, but that's not what the authors of all the research I've seen state.

Please provide a link to the research about DCA which you believe is applicable to the typical 401K investor - the investor who does indeed have constant dollar amounts available for investment.

All the research I've seen is exactly about a different investor - the investor who has a large lump sum available at one time. That research compares the two strategies I provided before:

1. investing all the funds at once (described as the lump sum approach)

2. withholding most of the funds, and investing identical portions in in fixed intervals over time.

Have you seen any research which does not make that comparison?

 
At 8/28/2012 11:04 AM, Blogger Jet Beagle said...

methinks,

Please read what I am writing in this comment carefully.

The typical 401K investor each month or each pay period could make this decision:

1. invest that entire period's funds into the stock market;

2. hold some or all of the funds out of the market to invest later.

The research on LS vs DCA shows that investing all the funds from a particular period is the superior strategy. That LS strategy beats DCA. It beats Value averaging. It beats all attempts at market timing.

If you believe the research on LS vs DCA, then you should agree that investing funds as soon as they become available is the top investment timing strategy.

Assuming you agree, we have determined that LS is the correct strategy for handling the constant dollar amount available at fixed periods to the typical 401K investor.

Now, here's where I seem to have lost you.

Consider all the individual monthly or pay period investment decisions made by the typical 401K investor:

1. He makes a LS investment in Januray.

2. He makes a second LS investment decision in February.

3. He makes a third LS investment decision in March.

and so on.

The LS vs DCA research shows that each LS investment decision made each month was the probabilistically correct decision for that month.

At the end of the year, those 12 probabilistically correct LS decisions - taken all together - constitute Dollar Cost Averaging.

The 401K investor did not make the DCA decision cited in your research. He made the LS decsiion. But, at the end of the year, he achieved DCA for those 12 or 24 investment decision made throughout the year.

Those who cite the benefits of DCA are exactly referring to that type DCA - where constant dollar amountsd made available to the investor are immediately invested.

Research on DCA never refers to that type DCA. Instead, that research always incorrectly assumes that the DCA investor is withholding some investment from the market.

 
At 8/28/2012 11:23 AM, Blogger VangelV said...

Did you read any research on lump sum vs dollar cost averaging investing> The authors of such research generally acknowledge that DCA will beat Lump Sum investing some of the time. But the probability is that LS will beat DCA over the long run.

GersteinFischer looked at 781 120-month periods from 1926 to 2010. They determined that, over the 120 month periods, Lump Sum investing in the S&P index would beat Dollar Cost Averaging the S&P index 71% of the time.


A long time ago Bart and I used to argue about investment strategy. One of the commentators pointed out that the studies have to come to those conclusions because the they tend to miss the impact of the massive collapses that take place rarely but destroy investment portfolios. The outcome is based on the methodology and is fine as long as you don't live during a period where massive declines occur.

Of course, we now live at a time of managed markets where politicians and central bankers avoid liquidation. That also tends to favour LS investing but creates problems with real returns if the actual purchasing power were calculated properly.

I think that this subject is far too complex to reduce it to a few simple rules. It is too easy for all sides to make arguments that are flawed. My point is that the academics are not very good at figuring out what is best and have no method that can be followed to maximize returns in the future.

 
At 8/28/2012 11:25 AM, Blogger VangelV said...

In other words, you believe that market timing is an effective strategy?

Not in the way that TA and EWT people mean. I think that market timing is effective if you look at overall valuations and act accordingly. I tend to try to look to primary trend and ignore the noise. While that is painful it works a great deal more effectively than most strategies that I am aware of.

 
At 8/28/2012 11:25 AM, Blogger bart said...

Keep up the personal attacks and keep directly avoiding the actual topic that *some* have great and long term success with market timing.

I continue to enjoy how you virtually never deal with the points or facts brought up.

Have you gotten that wheelchair yet because of all the foot bullets?

 
At 8/28/2012 11:32 AM, Blogger bart said...

VangelV said...


I think that this subject is far too complex to reduce it to a few simple rules. It is too easy for all sides to make arguments that are flawed. My point is that the academics are not very good at figuring out what is best and have no method that can be followed to maximize returns in the future.


+1

It's usually the under educated or under experienced that try to locate and define simple or all encompassing rules (or economic models -g-).

 
At 8/28/2012 11:46 AM, Blogger Methinks said...

Have you seen any research which does not make that comparison?


Jet,

Let me see if I can approach this differently.

If you were to set up an experiment to test your claim that DCA is a positive expectancy strategy, how would you do it?

It was in the process of answering this question that I had my epiphany. I'm embarrassed to say it took that long given the profession I'm in.

 
At 8/28/2012 11:48 AM, Blogger VangelV said...

It's usually the under educated or under experienced that try to locate and define simple or all encompassing rules (or economic models -g-).

Actually my friend I think that it is the arrogant 'professionals' who tend to make the biggest errors. The fools who have no clue are soon out as they get wiped out by fees and bad decisions to buy high and sell low. That is as they should because money should flow to those best capable of using it properly. But in this atmosphere of manipulation the financial system insiders tend to take the riskiest bets in the expectation that they can leave the party before the alarms go off. Most get trampled and need a bailout from their friends in the central banks or treasury.

 

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