Scary as hell: the looming economic disaster

[aeroegnr]

Of course, your generation won't pay the price. Mine will.

We can only hope that this country begins taking steps in the proper direction. Otherwise, there will be an interesting time to be had.

We just need a way to get peoples' attention so that they can act on it.

 

[russ_watters]

I need to look into that graph some more - it doesn't make sense to me. If today's value is 10,000 and the inflation-adjusted value is 1,000, that's 1,000% inflation over 100 years - or 10% a year. Inflation historically has averaged more like 3%.

Ok, I'm still not sure about the inflation part (I'm guessing compounding interest is biting me...), but the long-term investing part I did figure out.

Here's what it says in my book:

...a person who bought shares in all the companies on the exchange on any day in its history would have made a profit over any 15 year stretch and would have beaten bonds and savings account oer virtually any period exceeding 20 years. [emphasis added]

For that to jive with the Dow graph, Aquamarine, I guess it means the Dow (being that its only 20 stocks) isn't diversified enough to show the true value of the market. The S&P is both more stable and outperforms the DOW, but its newer, so you can't get much of that early history from it.

Another thing to remember is that this is worst-case and unrealistic. If you picked the worst possible day to invest, it would take 15 years to break even. But when investing for retirement, you invest a constant (or increasing) amount every month for decades, which smooths out both the peaks and valleys giving you something closer to the actual average performance over the time period in which you are investing.

Another nugget though (I'm going to reread this book and start a new thread about it...):

From 1926 to the beginning of 2001...the total compounded annual rate of return you would have had from buying risk-free US Treasury bills was 3.8%; the return from slightly riskier corporate bonds would have been 5.7%; the return from blue-chip stocks would have been 11%; and the return from the stocks of small companies would have been 12.4%...The compounded annual rate of inflation durin the same period was 3.1%

(both quotes, pp 125-127, 2002 edition "The Only Investment Guide You'll Ever Need").

And one last thing - I haven't said it before because I wanted to keep everything as worst-case as possible: though I accept that I may be naive (I haven't seen a bear market like in the 70s or 30s, but I do remember 1989), I do also think there is reason to believe those events won't be repeated. The conditions that allowed the market to gain so much un-deserved wealth (mostly margin trading) don't exist anymore. Every time something bad happens, the rules change to make it less likely that it'll happen again.

 

[russ_watters]

The fact that 40 years ago people were not properly educated on methods of savings is not an acceptable reason for continuing an absurd government program. Vast amounts of information is available on the subject and anyone who is interested can learn to invest their money in low or high risk instruments. I can understand the plight of those short sighted enough to have believed social security would enable them to retire, and therefore suggest a gradual phasing out over time.

I largely agree but I'm willing to be a little more generous - it wasn't so much that guys like SelfAdjoint didn't know how, but the opportunities weren't as broad as they are today.

That said, that's not a good reason to perpetuate a system that is an anchor on the economy. One way or another, Social Security is going to change. I just hope we fix it before it utterly implodes (I'm not optimistic). I said in the last post that I think the conditions that caused the stock market to implode in 1929 don't exist anymore - social security is the one major danger I see right now. If we don't do something soon, we could actually end up with another depression.

Best-case scenario for SS would be for the government to start investing part (most) of the money. Had the government done that from the begnning, SS would be generating profit today instead of being tens of trillions of dollars in debt. That's the way corporate pension funds are required (by law) to operate. The government should not be above the law.

There is no reason the government should be responsible for supporting people for decades (sometimes up to a third) of their life. I do believe there should be a safety net for elderly who end up poor. That is a very different thing from a gigantic welfare system everyone is entitled to from 65 to death.

Though I trust myself to invest, I don't trust the general population. Part of me says screw the rest of them if they are too irresponsible to save - but that's unrealistic since eventually I'll have to bail them out if they don't.

By the way, those who lost their money in oct of 87 did so due to grievous personal error (and have probably been kicking themselves since). "Buy and hold" is not a joke. If they were to retire soon, they should have been invested in bonds. If they weren;t, they should have stuck with it (and would have earned healthy returns later on). This is basic information that was available and taught at the time.

Another (funny) quote from the book (page 139):

[Rule #2] Buy low and sell high. You laugh. Yet most people, particularly small investors, shun the market when its getting drubbd and venture back only after it has recovered and appears, once again, to be "healthy." It is precisely when the market looks worst that the opportunities are best [which is why I'm glad the market has taken its time recovering - more time for me to put money in]...

[from an article in an investment magazine about an investment club] A Washington, D.C., investment club purchased 200 shares of stock at 18. "Club sold all holdings at 12.5...due to decline in price; intends to reinvest when price moves up."

How idiotic is that?