Will This All End Badly?

"Timing the market is a fool's game, whereas time in the market will be your greatest natural advantage." -- Nick Murray.

I own stocks that I know will fall 50% someday. I'm fine with it. I have no intention of predicting when the next crash might occur, or to sell shares before it comes. Big market pullbacks are inevitable and unpredictable. Your ability to stick through them with your head on straight is far more valuable than your ability to dodge them. 

This is an increasingly important topic because we are entering a phase in the economy we haven't known for five years: optimism. Stocks are back at all-time highs. Money managers are bullish. Last week, actress Mila Kunis announced she was getting into stocks, signaling a contrarian's dream. Former Fed chairman Alan Greenspan gave his blessing, too. "It's still got a ways to go as far as I can see," the maestro said of the stock rally, reminding us that track records have no effect on humility.

One of the hardest investment lessons to learn is that risk moves in the opposite direction of optimism and confidence. "In investing, what is comfortable is rarely profitable," says Robert Arnott. The better people feel, the lower future returns will be. I'm as thrilled as anyone that stocks are at all-time highs. But it means they offer less opportunity today than they did six months ago.

To boot, Greenspan's successor has dumped monetary support throughout the economy and shows no sign of letting up. No one knows how that might end, but history isn't kind. Journalist Ron Suskind noted last month:

When you [underprice risk] you create bubbles. It's like a law of physics! It's like the sun rising in the east! And it's no different than it has been since the 1980s in the United States -- every bubble bigger, every burst a little harder to recover from. And literally the question is not whether there is now a bubble, but where; where it will express itself, where it will inflate.

Will this all end badly?

The answer is yes, I'm afraid.

There will be more market crashes in the future. It's one of the few things you can count on with certainty. Take the highest point the S&P 500 has traded at during each decade since 1880, and stocks have declined at least 10% at some point over the subsequent decade every single time, with an average decline of 39%. An investor asking whether there will be a big market decline in the future is like a Floridian asking whether there will be a big hurricane in the future. Yes, of course there will be. There is no doubt whatsoever that there will be. 

But while we know there will be more market crashes, we also know that investors who trade the most earn the lowest returns. That's partly because of trading fees and partly because markets, like hurricanes, are unpredictable -- we know something bad will happen, but we have no idea when. We also know that average investors earn a rate of return below the funds they invest in because their emotions consistently lead them to buy high and sell low. We know, in other words, that those who try to avoid pullbacks and crashes usually do so at their own peril.

Volatility -- even the really severe stuff -- doesn't preclude big returns. While the S&P has crashed at least once a decade since the 1880s, it did so while increasing 28,000-fold. An investor who purchased stocks a decade ago and sat tight experienced two wars, an oil shock, a financial crisis, a 60% plunge and multiple 10% pullbacks -- all while more than doubling his money. This is where Murray's wisdom comes in: "Timing the market is a fool's game, whereas time in the market will be your greatest natural advantage."

So, yes, this will all likely end badly. But what am I doing about it? Nothing different. Not selling. Not taking money off the table, rotating out, or moving to the sidelines. When prices get extreme, I'll do less buying; When a crash occurs, I'll do more. Until then, I'll just be spending a lot of time in the market.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 


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  • Report this Comment On March 19, 2013, at 12:00 PM, jlclayton wrote:

    I always appreciate articles such as this. When I started actively investing about 12 years ago, there were so many so-called experts predicting that the market would do this or that, and it became difficult to not be driven by the herd mentality. But the articles at MF had the kind of common sense advice that I could relate to and understand, and I credit my membership to keeping me fully invested during the last pullback. I couldn't be happier with my results and am preparing myself for the next market drop in anticipation of opportunities instead of worrying about it and being fearful.

  • Report this Comment On March 19, 2013, at 12:49 PM, SkepikI wrote:

    It's not easy being green...uh serene. (apologies to Kermit). And as a think, or reminder story, this one has great value, Morgan. Perhaps a timely reminder for me to not forget my five P's. Or maybe Six P's I'd have to add Patience to the end, my worst fault when it comes to investing- not enough of it. I was recently tempted to revise my longstanding disgust of the Bond market and give in to a whim to start buying some again...just a whim, not a real analysis or thought. An excellent time to read this, no matter how trite I might have at first glance believed it to be.

  • Report this Comment On March 19, 2013, at 9:29 PM, daveandrae wrote:

    I am going into my fifteenth year of experience investing in equities. Thus, I speak from a tremendous amount of personal experience when I say "will this all end badly?" makes no financial sense to me.

    Back in 2009, when things were really, really, "bad," I was buying all of the Dow Chemical stock at 7-8 bucks a share, all of the General Electric stock at 9-12 bucks a share, all of the Pfizer at 11-14 bucks a share, and all of the Harley Davidson stock at 10-12 bucks a share that I could afford. Back in 2002, I was buying as much McDonald's at 13-12 bucks as I could afford, too.

    I still hold all five stocks today.

    Thus, if you're a relatively young investor, right now, you should be on your hands and knees praying for another BIG SALE. For that's all a "bear market" really is if you are truly buying small pieces of great businesses.

    The one thing we must never lose sight of as investors is not being in the market during the next 30% decline, which is inevitable. The one thing we must never lose sight of as investors being OUT of the market during the next 150% advance...which is also, Inevitable!

    Unfortunately, the one and only way to capture 100% of the next 150% advance, is to be fully invested all of the bloody time. Thus, the price to pay for inevitable wealth at the end of your life, is being able to stomach all of the temporary, gut wrenching, declines along the way at the beginning of your investment life.

    Its a package deal.

    From where I stand, most people are unable to stomach the temporary declines. Which is yet another reason why most people are not wealthy.

  • Report this Comment On March 20, 2013, at 11:47 AM, StopPrintinMoney wrote:

    @daveandrae - good point.

    To summarize, stay on side with cash and wait for an imminent collapse (sometime this year). Read zerohedge if you want real information.

  • Report this Comment On March 20, 2013, at 1:08 PM, SkepikI wrote:

    ^ if people follow your advice, and the collapse does not happen (as all of 2012 and 2013 to date has proved out) they get antsy and then buy at the top, which is inevitably when the collapse will occur. I speak from 40+ years of painful experience. And occasionally joyful experience when I held on to my 6th P, Patience. So here we all are crashing through the brush, maybe in Bear Country.....WAIT, was that a Bear I just heard? Shhh Patience, then the Bear is our friend.

    There are obvious times in hindsight that conditions are just awful and you should have stayed out. Its rare, and one has to pay attention to serious analysis that you can tell with FORESIGHT that conditions are bad and you should stay out..... I think that can be said about Bonds right now but not stocks. A careful buyer of good businesses at less than 10 P/E and over 3% yield, I am betting it will be hard for me to regret buying some stocks now....but wholesale, extra allocation to stocks? No thanks....

  • Report this Comment On March 20, 2013, at 1:19 PM, daveandrae wrote:

    @Stop-

    Please keep in mind, with the sole exception of emergencies, "cash", as an investment, is an irrational holding in the portfolio of the long term equity investor. For once you subtract inflation and its evil twin, taxation, from the interest rate cash currently offers, (which as I type, happens to ZERO) the real rate of return from cash, as an asset class, is quite negative.

    The only reason why people hold an excessive amount of "cash" in their accounts is because they believe the future returns from all other asset classes, i.e.. stocks, bonds, gold, real estate, etcetera, etcetera, with be even MORE negative. Thus, cash isn't an investment as much as it is a hedge against the next apocalypse dejour.

    The problem with this kind of hedging strategy is that over the course of your lifetime, the stock market is going to go UP over 70% of the time. Thus, the odds of the market going down while you're sitting on say, a 30% cash position, is no greater than putting four bullets in a six shooter and playing russian roulette.

    I don't know about you, but this does not sound like very good odds to me, so I remain fully invested regardless of how "high" the market may be.

    Good day.

  • Report this Comment On March 20, 2013, at 3:14 PM, Darwood11 wrote:

    "I own stocks that I know will fall 50% someday. I'm fine with it."

    That's an acceptable point of view, if one has a long timeline and no expectation to live off of the proceeds via RMDs. Of course, an option is to transfer stock from sheltered accounts to taxable ones, but I assume that most of us will have to liquidate assets to live in retirement.

    The fact is, if one is fully invested, has no other source of income besides SS in retirement and then a 50% hit occurs, then one should expect a substantial decrease in income and lifestyle.

    If one has a diversified retirement fund and an emergency fund and 5 years of living expenses in "safe" cash like investments, then I'll accept your perspective.

    As with most things about financial planning, there are an awful lot of caveats.

    The fact is, a lot of people are just discovering the true cost of the 2008 financial disaster. They expected 7-9% annual returns on their portfolios. But what did they get? A possible 33% decline followed by 5 years of mediocre performance for a portfolio distributed among CDs, bond and stock funds. After the "lost decade" that means perhaps 15 years, or 33% of one's financial accumulation lifespan spent spinning wheels.

    How many can handle that? In particular, those who say "I'm okay, I'm saving 5% for retirement."

    Perhaps that's why the recent WSJ article "Workers Saving Too Little to Retire" which pointed out the decrease in retirement confidence among current workers.

  • Report this Comment On March 20, 2013, at 5:15 PM, kyleleeh wrote:

    <<The fact is, if one is fully invested, has no other source of income besides SS in retirement and then a 50% hit occurs, then one should expect a substantial decrease in income and lifestyle. >>

    <<what did they get? A possible 33% decline followed by 5 years of mediocre performance for a portfolio distributed among CDs, bond and stock funds. After the "lost decade" that means perhaps 15 years, or 33% of one's financial accumulation lifespan spent spinning wheels. >>

    Both of these statements neglect the fact that stocks continued to pay out dividends during down markets, and SS payments do not get cut in a recession (at least not yet). If your drawing down the recommended 4-5% annually after retirement you should not have to sell much stock in a down market after dividends, And if you reinvested your dividends during this "lost decade" you did fine.

  • Report this Comment On March 20, 2013, at 6:26 PM, hbofbyu wrote:

    Regarding your headline. It always ends badly. If it wasn't bad it wouldn't be the end.

    Consider the depression a black swan. Also consider that the next black swan has a 50% chance of being worse than that.

    "The biggest worry is the things you are not worrying about." - Morgan Housel

    And I am not a pessimist..wait...yes I am.

  • Report this Comment On March 20, 2013, at 6:50 PM, drborst wrote:

    Morgan,

    When I read this, I decided to remodel my retirement account.

    At first, I wanted to use my old model to agree with you. I put retirement money into a 401K for 8 years and then switched to a Roth, When I had assumed a constant 6% return the Roth doesn't catch up to the 401K for about 15 years (24 years at 8% return),

    But then I decided to add a random number to the return assumptions, and that's where I got scared, a few bad years near retirement really kill the whole thing.

    I get it that your point is buy and hold is the best option, but it really hit me that luck has a lot to do with it. The timing of a few bad years is the difference between retiring comfortably and hoping my kids will support me.

    DRB

  • Report this Comment On March 20, 2013, at 7:11 PM, devoish wrote:

    kyleleeh,

    Even after significant dividend cuts in 2008, 2009 became the worst decade for dividend declines since 1938 with the S&P losing 22% of its dividends. Obviously if you are retired you are probably overweight in dividend payers because those dividends are the money you've been investing over the last thirty years to get. So you probably lost more than that 22% average, probably lots more.

    If your dividends represent 33% of your retirement income and SSI 67%.

    If you were earning 50% more than the median income when you retired in 1995 then you can expect SSI to have been paying you $1200/ month. Those dividends represent another $600 but you just lost $200/ month and now you are living on $400/ week and gasoline just also hit $4.00/gallon and now it is time to dim the lights, lower the heat and stay home because the only gas you can afford is to mow the lawn. And I'm sorry son, I cannot help with your daughters tuition any more. I'm sorry if she has to drop out with no degree and $15k in loans to pay back.

    It is not safe to think that stocks continued to pay out dividends during this down market or the next.

    Best wishes,

    Steven

  • Report this Comment On March 20, 2013, at 7:42 PM, remmdawg wrote:

    We are currently headed towards financial catastrophe due to the insane unsustainable policies of the current party in power - record spending with trillion dollar deficits, Obamacare inflating health care costs even further, almost unlimited subsidies for unemployment, steadfast resistance to any reasonable reforms of unsustainable Medicare and SS, greater and greater regulations and taxes which stifle economic growth, greater and greater interference or even outright takeovers in the private economy, crony capitalism etc.

    Will luck, in the form of greater growth, help us avert disaster? Or will the American people finally look past short term greed and vote these corrupt politicians out of office? I'm not optimistic. They faced a clear choice in November and voted for short term goodies, corruption and incompetence.

    But how will it affect the stock market? Nobody really knows. The stock market is higher in nominal value but lower in real value since the dollar has been devalued. The dollar will continue to be devalued and maybe the stock market will keep pace by rising higher. It certainly doesn't make sense to stay in cash given its waning value.

  • Report this Comment On March 20, 2013, at 8:10 PM, Darwood11 wrote:

    @ kyleleeh

    Let me elaborate on a few things which were the basis of my original comment.

    For those near retirement, with the market back to it's old highs, then one could assume a lot of retirement accounts are back where they were in 2007, plus dividends reinvested plus additional retirement funds saved during that period. That's a bitter pill for near retirees. Why? Because back in 2007 there were a lot of people expecting 8-9% annual returns. That has not happened. A $500K account may have lost 25% if it was heavy certain stock sectors. If the owners didn't panic, then their portfolio value might be back where it was in 2007, or it might not. It depends upon the makeup of that portfolio. There were some permanent losses.

    Most of us probably expect to live 30 years in retirement, We also would have a diversified portfolio. I assume we probably have mutual funds. That includes large, mid- and small-caps, an emerging markets fund, other foreign fund, bond funds and TIPS and perhaps some commodities and a REIT fund.

    That type of portfolio cannot provide a 4-5% annual average yield.

    Now, I suppose one could load up on dividend payers or go for MLPs, etc. But such an approach might be a bit risky for a 30 year retirement portfolio. By risk, I mean it might not provide the cash stream spun off for that 30 years.

    Yes, we can go with the RMDs and live off of that. But if we do then the source of those dividends will decrease unless we've transferred the stocks into a taxable account.

    I don't know how much the average person or couple will need in retirement. Let's assume $50K a year for chuckles. That includes everything including various taxes and even long term care insurance.

    Using the $50K example, the average individual SS income in 2013 is $14,880. That leaves $35,120 from other sources.

    It would take a portfolio of $1.17 million yielding 3% to do that. if we can get 5% then we only need a portfolio of $702,400.

    A few years ago, a lot of retirees could live off of the returns from their CDs plus SS and any pension. Not today.

    I have no idea what the future will be.

  • Report this Comment On March 20, 2013, at 11:12 PM, dgmennie wrote:

    kudos to Darwood11; remmdawg; and devoish!!

    The problem with buy-and-hold is twofold and getting worse, not better:

    (1) For MOST INVESTORS it is impossible to tell what is a good buy and what is not. There is simply too much conflicting information available, masking what nuggets may be particularly significant. Yes some investors will find and act on the critical data some of the time. So what? Some gamblers win the progressive slots despite the odds. Does this mean YOU will?

    (2) For MOST INVESTORS there is a very real timeline within which they MUST make the nut or their investment strategy (even if eventually successful) is irrelevant. Your life is very finite, as are the lives of those you love. The idea that you will have 20 to 50 years to "manage" a growing portfolio of investments is mostly nonsense as personal emergencies and disasters (never mind the global and economic ones you have no control over) will eventually derail your best investment intentions.

    You might also consider simply looking through an old LIFE magazine from the 1950s or 1960s the next time you find one at a yard sale. Examine carefully all the ads from big, well-known companies that no longer exist. This should give pause as you enthusiastically buy up today's blue chips. It is MOST UNLIKELY they will still be here many years down the road when you want to retire. What does this say about buy-and-hold?

    And as further complication/risk -- all equities investors must now contend with the growing scourge of programmed trading. Computers pushing huge amounts of money around in microseconds now determine your net worth. While you can come along for the ride, you are not matching wits with humans anymore.

  • Report this Comment On March 21, 2013, at 4:21 AM, kyleleeh wrote:

    @ devoish

    If Dividend yields drop 22% and stock prices drop 50% that is one the best years for dividend reinvestment you will ever experience in your life. In fact in 2009 I acquired the largest number of shares of any year in the last decade, not because I contributed more money but because my dividend reinvestments bought back more shares.

    Also a 22% decrease in dividends from someone who gets 33% of their income from dividends comes out to a net decrease in income of about 8%, that in a year when literally EVERYTHING on the planet became cheaper in price, is this a retirement killer?....hardly.

    On a side note, what does $4 a gallon gas matter to someone who is retired? What daily commute do you have in retirement?

    @Darwood11

    I didn't say a portfolio should yield 4-5% I said you should be drawing down 4-5% in retirement...you're supposed to drain principal in retirement, in fact your last check should ideally bounce.

    If your able to make 3% in dividends (not hard even in a down market) then you should not need to draw down more then 2% of principal a year. If the market drops 50% then you should draw down 4% a year, again NOT a retirement killer. If your expenditures are so high or your savings are so low that 4-5% is not adequate then your screwed either way, and nothing that happens in the economy will change that....we don't all get happy endings.

  • Report this Comment On March 21, 2013, at 7:00 AM, TMFMorgan wrote:

    dgmennie,

    The solution to all the questions you raise can be: Buy an index fund and keep a safety net of cash.

  • Report this Comment On March 21, 2013, at 7:24 AM, devoish wrote:

    Kyleleeh,

    8% income loss requires the assumption that once in retirement you are not overweight in dividend stocks for the income you invested to have in retirement.

    I would assume what I described and the larger drop in income that comes with it.

    Best wishes,

    Steven

  • Report this Comment On March 21, 2013, at 11:18 AM, TopAustrianFool wrote:

    Only Keynesians have trouble timing deflationary drops. Try looking at real inflation once in a while. Here is a hint gas and asset prices are at an all time high. Last QBR inflation was 9.6% not 2.0% the Fed reported. You watch how the Fed allows interest rates this Spring when gas prices start going up and wait for the deflationary drop at the end of the Summer or early Fall.

    The Fed Business Cycle never fails.

  • Report this Comment On March 21, 2013, at 12:39 PM, kyleleeh wrote:

    @devoish

    I made my calculations based on this quote you made:

    <<Even after significant dividend cuts in 2008, 2009 became the worst decade for dividend declines since 1938 with the S&P losing 22% of its dividends. Obviously if you are retired you are probably overweight in dividend payers because those dividends are the money you've been investing over the last thirty years to get. So you probably lost more than that 22% average, probably lots more.

    If your dividends represent 33% of your retirement income and SSI 67%.>>

    Yes, someone who was getting 33% of their income from dividends in 2009 would see an 8% decline in net income, but your overlooking the fact that in 2009 consumer prices dropped dramatically. I can't think of one single thing that cost more in 2009 then it did in 2008. So, it would not be that much of a decrease in standard of living.

    Also, most dividend cuts came from financials, if you're overweight dividend payers (like a dividend ETF) then you should be mostly in consumer staples. In 2009 I was invested in DEO,PM,JNJ,PG, and ED, with DEO and PM making up about 2/3 of total holdings. All classic dividend paying consumer staples, that did not see a 22% decrease in dividends.

  • Report this Comment On March 21, 2013, at 2:57 PM, devoish wrote:

    "If your dividends represent 33% of your retirement income and SSI 67%."

    "Yes, someone who was getting 33% of their income from dividends in 2009"

    100% of income x .33 from dividends x .33 drop = 10.89% income loss.

    Best wishes,

    Steven

  • Report this Comment On March 21, 2013, at 3:00 PM, Darwood11 wrote:

    "The solution to all the questions you raise can be: Buy an index fund and keep a safety net of cash."

    Perhaps. But it is our choice; our money and our individual futures. Freedom is a great thing!

    In my case, I decided to 1) Save more than the statistics would indicate, 2) Build a more diversified portfolio than "an index fund" and 3) Be a bit conservative and build a 5-year cash stash for retirement; that is outside the vagaries of the market.

    Yes, my "cash stash" will erode due to inflation if compared to the possible returns from a high flier. However, at present, inflation is very tame. I consider the current loss on that cash stash to be the risk premium I pay to not only sleep well and night, but to avoid the work and risks required to achieve maximum yield.

    I also decided to save more because I was highly suspicious of talk about "8-9% annual returns." That is true only for short time periods or perhaps for very long ones. I think of likely 10 year returns which is about 1/3 of the duration of a retirement portfolio while in retirement.

    Today, the S&P 500 has a yield of 0.8% and a typical short term bond fund about 1.8%.

    As for risk, which I define as a "failure to achieve objectives" I like to use firecalc. That is like a dose of cold water. Yes, my best laid plans could result in a balance of between $-300,739 and $4,259,606, with an average of $1,323,668 somewhere in my retirement.

    -$300,000? No problem!!??!!

  • Report this Comment On March 21, 2013, at 3:07 PM, devoish wrote:

    ^ Oops, wrong quotes up above.

    "If your dividends represent 33% of your retirement income and SSI 67%."

    "So you probably lost more than that 22% average, probably lots more."

    Here is the math with a "probably lots more than 22%" drop of 33%

    100% of income x .33 from dividends x .33 drop = 10.89% income loss.

    Best wishes,

    Steven

  • Report this Comment On March 21, 2013, at 3:27 PM, kyleleeh wrote:

    @devoish

    How do you figure you lost lots more? If you're heavy into dividend stocks then you should be overweight in consumer staples, which as I pointed out did have large dividend cuts. The dividend cuts were primarily from financials. I was 100% in dividend stocks in 2009 and lost much less then a 22% dividend cut.

    Moral of the story:

    If you're retired and dependent on dividend income you should be invested in companies that make simple things like beer and toothpaste, and stay away from companies that make complicated things like credit default swaps, and adjustable rate mortgages.

  • Report this Comment On March 21, 2013, at 3:27 PM, kyleleeh wrote:

    * did not have large dividend cuts

  • Report this Comment On March 21, 2013, at 4:55 PM, jordanwi wrote:

    Hmm. Doubled 'his' money. Even as a male, this sounds sexist. Not that I care - as if there are any females reading this article amirite amirite

  • Report this Comment On March 21, 2013, at 7:32 PM, jlclayton wrote:

    Female investor here and love the discussion on this article!

  • Report this Comment On March 21, 2013, at 8:29 PM, devoish wrote:

    "How do you figure you lost lots more?"

    Somebody is always above average. As I said people who are retired and living on dividend income will be overweight in dividend paying stocks and get hit by more than the 22% the S&P took in 2009, a hit that followed dividend cuts in 2008 and preceded more dividend cuts in 2010.

    "If you're retired and dependent on dividend income you should be invested in companies that make simple things like beer and toothpaste, and stay away from companies that make complicated things like credit default swaps, and adjustable rate mortgages."

    You silly!

    If you are retired and dependent on dividend income you chase higher dividends!

    You gotta eat! And buy toothpaste afterward!

    Best wishes,

    Steven

  • Report this Comment On March 22, 2013, at 3:11 PM, Teo123 wrote:

    Of course, to some extent, this will end badly. But what do you do when you know a stock you own is substantially overpriced? I will take, as an example, Netflix. Now, maybe it is priced right. But suppose you bought at $39 (more than 12 months ago) and you see that it is now $180.

    If you take your money and keep it in the bank, I can see the argument that you are taking money off the table. But if you sell NFLX, you're taking your profits and finding another (more affordable) buying opportunity -- one that's not priced at 616 P/E. I don't see how there is anything necessarily wrong with that. Provided that you're willing to track commissions, earnings reports and other key pieces of information, this is what you have to do.

    To me, it makes no sense to just continue to hold a stock that is noticeably overpriced simply to stay with the a particular philosophy of buying and holding. You have to take a return when it's there because, yes, there will be a business cycle change.

  • Report this Comment On March 22, 2013, at 5:28 PM, kyleleeh wrote:

    @devoish

    In 2008 the Vanguard high dividend yield ETF which tracks the FTSE high dividend index paid out 1.44 a share, in 2009 they paid out 1.17 a share. That comes out to a decline of 19%. So the Average dividend investor did better then the S&P as far as dividend cuts. Your theory that investors who where overweight dividend stocks probably suffered the largest dividend cuts does not correlate with the facts. My results were not above average, they were average.

  • Report this Comment On March 22, 2013, at 10:26 PM, stevec5792 wrote:

    @Teo, I always sell some once I can get "my" money back out. If you still believe NFLX can move higher, keep some of it. :) When IBM reached 130% of my purchase price, I sold 40% of my shares, leaving the remaining in my "buy-and-hold/monitor" bucket. Of course, it's gone up even higher since then, but "my" money is now invested elsewhere.

  • Report this Comment On March 22, 2013, at 11:08 PM, stevec5792 wrote:

    @devoish, there are a few flaws that @kyeleeh didn't point out in your argument about dividends.

    1) You switched from S&P's 22% decrease in dividends to a 33% loss in Dividend income in your calculation. The actual loss of dividend income to total income works out to a bit over 7%.

    2) The most common way to invest in the S&P 500 is via a fund. No "average" investor owns all 500 stocks, much less weighted the same. The SPY's dividend "only" went down 20% during 2009. But, anyone DRIPping the SPY during this whole time did okay.

    3) The "average" investor sold out of the stock market during this time and sitting in money markets, savings accounts or coffee cans in the backyard. If they'd simply stayed invested, they still would have earned more dividend income from the SPY than any of those others. Remember, too, the "average" investor "buys high and sells low". Study after study show that.

    Personally, anybody taking the time to read investing articles here or elsewhere probably isn't an "average" investor, at least over time. Most would know that when they reach retirement, they should not have everything in one asset class and definitely not in one asset such as SPY.

    Additionally, many (most?) dividend investors learn what to watch for in their stocks, usually the hard way. Many will also look at companies raising dividends regularly, some companies you've never heard of are included. There are over 400 companies that that have raised their dividends for a minimum on 7 years, ie starting before the Great Recession. When I am hunting for new ideas, that's one of the first sources I go to.

  • Report this Comment On March 23, 2013, at 12:20 PM, SkepikI wrote:

    ^ "But, anyone DRIPping the SPY during this whole time did okay" - exactly. A great strategy over a bottom, and it helped me stay in and take the hits...HOWEVER it takes a lot of Patience and a fair amount of fortitude to carry out and not chicken out. I am usually most tempted at the bottom and this one was so long I was tempted to doubt many times. An easier strategy to stomach is to take some off the table and invest at those low prices over the bottom... of course the difficulty is seeing that in advance. Many claim to see it and most are usually proved wrong in short order...

  • Report this Comment On March 23, 2013, at 4:53 PM, DGReid wrote:

    I am an engineer and technical trader, and I really tire of hearing people say, "You can't time the market". I can't time the entire market, but timing individual stocks isn't that hard - not easy, and not always - but close enough. The problem is that people who have figured out how to pick highs and lows have no reason to want to share that knowledge. The exact high and low will always be problematic, but with a little math, getting very close most of the time is achievable.

    Just because most people can't do it, don't assume it can't be done.

  • Report this Comment On March 25, 2013, at 12:00 AM, thunderboltnova wrote:

    There's no way anyone could have been a good trader the past 3 years. Stocks acted very irrationally and just kept going up. If you sold, you had to wait for a pullback which never came. Maybe you made money, but the buy and hold folks were the ones who made out. The best time to be a trader is when the market is range bound which it hasn't been in years.

  • Report this Comment On March 28, 2013, at 12:15 AM, ChrisBern wrote:

    I used to believe in buy and hold, but after reading "The Ivy Portfolio", it's just a MUCH more effective method. Higher returns with less volatility--what's not to like.

  • Report this Comment On March 29, 2013, at 11:46 AM, AgAuMoney wrote:

    @Darwood11, RMD's have nothing to do with anything.

    All the RMD means is you have to take some assets out of your tax deferred account and pay taxes on them.

    You can immediately reinvest all but the tax payment. Some brokers will even let you transfer the assets without selling and rebuying (but it is still technically equivalent to a sell and rebuy so you will need to pay the taxes somehow). Either way your holdings continue to earn and grow and pay dividends.

    If you plan ahead you can greatly reduce your RMDs by converting some assets from tax deferred to tax free (roth) every year the tax hit will be less than your expected RMD taxes.

    And BTW, the S&P500 dividend drop of 22% means 78% of dividends remained intact. That's better than my job at the time, which lost 100%.

    More relevant, my dividends have increased every year including each of 2007 to 2012 (and some years before then). Yes I've had some holdings that cut or eliminated their dividend. But most of my holdings reliably increase their dividend every year as is their pattern, some for over 50 years.

  • Report this Comment On March 29, 2013, at 5:18 PM, Johny205 wrote:

    If my stocks drop more than 8 to 10 %; I sell them. I can always buy it back in the next couple days, if I want to. What's the point in watching the value tumble for months? The Apple stock I had, I sold when it went down about 7% and locked in my profit. I'm sure glad I did that or I would have lost 40%, I can always buy it back now.

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