Stocks: DJIA Futures Down 400 Before Opening Bell

[Vanadium 50]

I don't understand why you'd have 50% in a fund that guarantees at least 3%... [unless] ...or you are close to retirement

Anyone who has been contributing since 1985 is close to retirement. A professor who started at 32 would be 62 by now. The Vanguard 2020 target date fund is 40% in fixed income, so this is only a little more conservative than that.

 

[Student100]

Student, this is a very important point. The consensus negative market outlook is already priced in. A put and hold strategy works if the market outlook is not just negative - but if is more negative than the present consensus.

There are essentially three ways to make money in the stock market:

1. Take advantage of dividends and long-term market gains of the market as a whole.
   
2. Take advantage of dividends and long-term market gains of individual stocks.
   
3. Time an individual stock or the market as a whole and buy when it is underpriced and sell when it is overpriced.

A few comments. One is that Strategy #1 is not the same as buying and holding the individual stocks that make up an index. Unprofitable companies are dropped and profitable ones added. Today Apple is a member of the DJIA, and the Pacific Mail Steamship Company is not. So there is a reason for prices to increase - it's not just magic.

Strategy 2 has a large number of followers - indeed, for many years, that was the way people invested. The problem with #2 is that you are taking on more risk than a diversified fund, and rarely are the returns enough to compensate you for this additional risk. (In the interest of full disclosure, 8.5% of my portfolio is in individual stocks) You can make a fortune if you invest in the next Apple at the right time. Or lose a fortune on the next Pets.com or Polaroid.

Strategy 3 on a short term basis looks to me a lot like gambling. One a long term basis, it works if you can buy a stock that you have reason to do better than the consensus (or sell it when you have reason to believe it will do worse). I have done OK here (again, 8.5% of of my portfolio is in individual stocks), mostly when I have reason to believe that the company's management is better or worse than the consensus. But it takes a lot of work. If you have $10,000 and manage to get a yield of 4% over the market - something very, very good - by studying stocks for an hour or two a week, you're making minimum wage or less on this.

For number 3 I agree, it is a lot like gambling, and risk adjusted returns are never better than market averages.

To me, however, with the middle of the road job reports and if China manages to stabilize their market a fed increase seems more likely than not. Corrections correlate pretty well with the actual increase, although it could be different this time since they've taken so long to actually raise rates.

In a sense I'm betting the rate hike will occur, and the market will enter correction in the short term. If I had to choose between a casino, or the market, I'd pick the market. My thinking isn't completely gambling, but it's easy to draw comparisons. I think being younger than most investors allows me to take more risk. That's my current rationality, anyway. I could be completely off base and lose money I could have safely put into an index. Ideally, I'd like to see a higher rate of return than just doing that-for more risk.

 

[Student100]

Anyone who has been contributing since 1985 is close to retirement. A professor who started at 32 would be 62 by now. The Vanguard 2020 target date fund is 40% in fixed income, so this is only a little more conservative than that.

True, I had assumed jtbell might have started in graduate school/before, in which case retirement could still be a decade or more off.

 

[Vanadium 50]

In a sense I'm betting the rate hike will occur, and the market will enter correction in the short term

Actually, you are betting that the rate hike will occur sooner and/or be larger than the folks at Goldman-Sachs and other investment houses think. Remember, the consensus view is already priced in. I'm not going to discourage you from gambling - just want to make sure you know what number you are putting your chips on.

 

[Student100]

Actually, you are betting that the rate hike will occur sooner and/or be larger than the folks at Goldman-Sachs and other investment houses think. Remember, the consensus view is already priced in. I'm not going to discourage you from gambling - just want to make sure you know what number you are putting your chips on.

I still think we're pretty far from any consensus that could be priced in already, if we're truly to believe in an efficient market. Goldman seems to be betting on December, while banks are thinking September. Others institutional investors are talking October, while still others believe next year. While the general feelings of an oncoming rate hike might be baked in, the actual rate change will still affect stock prices. Or so I'm speculating.

I understand your point, it is a bet, something that might not occur/have any bearing on prices/be smaller than anticipated/be already priced in/etc.

 

[lisab]

Remember, the consensus view is already priced in.

Over the years, I've observed this to be the case for any number of financial situations in the West. Like the Fed raising/lowering interest rates, for example. Rumors circulate for a while about what might happen, the markets adjust slowly (I suppose as consensus builds, or as leaks are confirmed?). Then when the anticipated action actually happens, the markets just shrug - 'Meh, we (kinda) knew it was coming.'

But what I've observed in the last few weeks: the market is super twitchy about that China does. China's actions are *not* already priced into the market. China is opaque - they don't give clues or leak information. No one sees it coming.

So I think I've learned: The market can be a bear or a bull, but its personality is definitely like a bear. It doesn't like surprises.

 

[Vanadium 50]

China's actions are *not* already priced into the market. China is opaque - they don't give clues or leak information. No one sees it coming.

Which means they add risk. Do you think that you and I are the only ones who know this? Nobody from Goldman-Sachs does? If not, then I would argue it is priced in - as best it can be. When the wavefunction collapses, and China - or the Fed - commits to an action, the market gains information and may move, of course.

 

[Student100]

China isn't doing to bad for the day so far, being slightly up and down. Volatility still seems high, however, and China's central bank chief came out as saying he believed the rout was almost over.

 

[russ_watters]

Don't forget the time value of money. The market works by attempting to price in today what it expects will be the value in the future, after the cause.

The second part is true, but doesn't have anything to do with the first part. The time value of money is referring to a future prediction of how much your money will be worth, based on interest rates.

Interest rates haven't changed yet, so you can't buy a CD (for example) at better rate than you could two weeks ago. If interest rates go up in a month, it will make sense to move some money out of the market, reducing prices. But if you wait until then, it's too late to take money out, so you do it earlier -- at the first hint that they are going to go down. So the drop is based on a large number of people trying to out-panic each other.

As V50 stated, we know that part of the attempt is always psychological and part of is based on economics, but we can't know exactly which is which.

Could you try to explain in more detail how you think an effect preceding a cause can be anything but psychological?

 

[russ_watters]

I don't think there's a lot of guessing in picking good valued value companies.You look at the company, and you look at the stock price and determine if it makes any sense. Generally it does. Then look at the future of the company, possible product pipelines/restructuring etc and determine if it would be a good investment. There's no reason to get into the voodoo that is "technical" or even most of "fundamental" investing to see a good investment.

1. That takes an awful lot of work if you aren't a professional who does it all day, every day.
2. Studies have shown that professionals don't even beat the market regularly/significantly.

 

[russ_watters]

In a sense I'm betting the rate hike will occur, and the market will enter correction in the short term.

The market is already in a correction. The S&P is down 10% from its high in mid July and last Monday was at -12%.

 

[jtbell]

I don't understand why you'd have 50% in a fund that guarantees at least 3%, inflation would basically wipe out any return at the minimum value.

The stable-value part isn't for returns, although 3% (4% in my case) looks pretty good right now compared to other fixed-income options like bond mutual funds. It's for stability. During the 2008-09 meltdown, my total accumulation dropped by "only" about 20%; and during the dot-com bust 2000-03 it was almost flat, on average. Of course, continuing my monthly contributions also helped.

In retrospect, it's easy to see that if I had sent a higher % of my contributions to the stock fund, say 75%, I'd be even better off now. But it would have come at the cost of more stress during the dips along the way. I remember during about 1998-1999 I was thinking maybe I should shift my contributions from 50% stock to 75% stock. But I never got around to doing it.

And I am getting close to retirement. I started my retirement account when I became eligible for the TIAA-CREF 403(b) plan at my first teaching position, one year after finishing grad school. At that college, new faculty had to wait a year unless they were already in TIAA-CREF at a previous employer.

 

[Student100]

The market is already in a correction. The S&P is down 10% from its high in mid July and last Monday was at -12%.

I thought corrections typically exceed ~10% and were closer to 20%. Isn't the S&P only a little over 9.5% from the high right now? Maybe I'm wrong.

1. That takes an awful lot of work if you aren't a professional who does it all day, every day.
2. Studies have shown that professionals don't even beat the market regularly/significantly.

1. It certainty does take time, but I don't normally spend more than I couple hours a week.

2. No one beats the market when their portfolio is adjusted for risk, I think that's the cornerstone of efficient market theory. Beating the market isn't really the goal, it's finding a riskier strategy that when gains are risk adjusted more closely follow the index (and result in a higher absolute gain) than passive/actively managed funds. The best index funds normally trail the market at ~1 percent, others closer to two. Managed funds are better, but the fee's stifles their returns in the long run. This could be quite a bit of money at my age, when I still have 35-40 years to retirement. Obviously, the extra risk could go either way though.