Who will trust the stock market?

[Ivan Seeking]

The truth of investing in the market has come to light - it is gambling. What a shock!

Will the current crisis change the face of personal investment?

One comment from a CNN viewer was that she would have been better putting her money in her mattress rather than trusting so-called safe investments. I can't help but wonder if stories like this are representitive of a general distrust of stocks that will exist for many years to come.

I think it is safe to say that we won't be privatizing Social Security.

 

[mgb_phys]

You can now that science has found a way to breed better traders http://sites.google.com/site/artmarcovici/rat-traders

 

[Ivan Seeking]

Monkey Trumps Wall Street With 200 Percent Gain
Dart-Throwing Monkey Returns to Wall Street With New Picks For Year 2000

http://www.krannert.purdue.edu/faculty/rau/funny/DartThrowing.html

 

[Ivan Seeking]

https://www.youtube.com/watch?v=o3FVBKic5Ek

 

[russ_watters]

The truth of investing in the market has come to light - it is gambling. What a shock!

Of course it is gambling - but unlike in a casino, "the house" doesn't win over the long term.

We are in the exceedingly rare situation right now where a 10 year investment in the stock market loses money (I think this is the 3rd or 4th time that that's happened, but I can't remember offhand). There has never been a 15 year period in the history of the stock market where it is a losing proposition (for a sufficiently diversified fund).

Will the current crisis change the face of personal investment?

In light of the above facts, it certainly will not change the rules of the game. The stock market is now and always has been the best investment for very long term growth (in particular, retirement savings). But of course:

One comment from a CNN viewer was that she would have been better putting her money in her mattress rather than trusting so-called safe investments.

People are people and they are dumb and emotional. It won't change the rules of the game, but it will change how people play it. And for the most part, unusual situations (whether a boom or a bust) will cause people to break the rules because they stop believing that the rules still apply. It is a fact that people put less money into the market when it is down and more money into it when it is up. This is, of course, the exact opposite of what one should do, but people are stupid and emotional and as a result, they make bad decisions even when they know what the right decision is.

Also, the term "safe investment" is kind of useless. There is no such thing as an absolutely guaranteed investment, never has been, and never will (of course, the same is true of pretty much everything in life). One has to understand the risk and potential return involved in any investment before investing. The most secure are things like savings accounts and CDs, which are government insured and therefore the only way you could lose your principle is if the United States fails. And if that happens, you'd have bigger problems than worrying about your savings account.

I can't help but wonder if stories like this are representitive of a general distrust of stocks that will exist for many years to come.

No doubt they will. One thing that history shows us repeatedly is that people are dumb and they act more often on emotion than logic. Current events will scare people for decades, causing them to make (more) bad investing decisions. This, of course, means that a smart investor has greater potential for profit in the future than before the current problem.

I think it is safe to say that we won't be privatizing Social Security.

That was never very likely, but it certainly won't happen with a democratic president and congress. But it doesn't have a lot to do with the subject of the thread - the current crisis does not in any way imply that a private, stock market-based retirement account is inferior to social security. Except, of course, the obvious flaw I mentioned above with any investing: investing requires discipline and resisting irrational emotions. To some extent, though, laws governing 401ks and IRAs help protect people from their own stupidity by forcing them to invest for the very long term.

Investing for retirement has simple rules that if faithfully followed will enable anyone over any time period in history to successfully save for retirement via the stock market.

 

[russ_watters]

"Monkey Trumps Wall Street With 200 Percent Gain
Dart-Throwing Monkey Returns to Wall Street With New Picks For Year 2000"

http://www.krannert.purdue.edu/faculty/rau/funny/DartThrowing.html

Those types of things have been done many times and they tell us something fundamentally simple: there is no reason to invest in a managed mutual fund. Any honest advisor will tell you that the best investment for a retirement fund is an S&P Index fund. But, of course, investment companies don't really want you to do that, since their profits are based on transactions and management fees. So you can't really trust someone who stands to profit from the advice they are giving you. But then, how is that different from asking the kid at Best Buy which TV to buy and if you should get the insurance (you shouldn't)?

Bottom line: investing is no different than any other service. You have to educate yourself and you have to not be gullible. But as with buying a car or a TV, there is a proper way to ensure you get the most for your money.

 

[russ_watters]

This is worthy of repeating and expansion:

There has never been a 15 year period in the history of the stock market where it is a losing proposition (for a sufficiently diversified fund)...

Investing for retirement has simple rules that if faithfully followed will enable anyone over any time period in history to successfully save for retirement via the stock market.

What is perhaps more important is that over any twenty year period in history, the stock market has produced more growth than bonds and savings accounts. Over any 15 year period, it has made money - and over any 20 year period, it has made more money than a savings account or bond fund (fixed income investments that never lose money). That makes stocks the obvious correct choice for a retirement account.

I got these facts from a book, but if anyone can find a link with stock market growth in table form (I'm looking), this is easy to prove with a spreadsheet...

 

[mgb_phys]

Any honest advisor will tell you that the best investment for a retirement fund is an S&P Index fund.

If everybody buys tracker funds doesn't the stock market cease to function?
If nobody takes any notice of company news/earnings/financials then there is no price movement.

I can't help but wonder if stories like this are representitive of a general distrust of stocks that will exist for many years to come.

Can you even trust the tracker funds - if the same S&P were willing to rate junk mortgages as AAA for their clients can you trust their index?

 

[russ_watters]

If everybody buys tracker funds doesn't the stock market cease to function?

If nobody takes any notice of company news/earnings/financials then there is no price movement.

People invest for different reasons than retirement, but in any case, if everyone bought index funds, then yes, only index funds would make money. But that's not a useful hypothetical - it is akin to saying that if everyone had master's degrees, then you'd need a masters' degree to get a job as a ditch digger. It may be true in theory, but it is a useless hypothetical.

The rule holds.

Can you even trust the tracker funds - if the same S&P were willing to rate junk mortgages as AAA for their clients can you trust their index?

I'm glad you asked that - the title of the OP asks about "trust" and I didn't really comment on it directly: The concept of "trust" is not relevant in investing. What one needs is to understand how the game works and have the discipline to follow the rules and probabilities. Trust is an emotional thing, not a logical thing and not a relevant concept here (except insofar as people wrongly make decisions based on it).

So to answer your question: yes, the S&P is technically similar to a managed fund and yes, it sometimes poor decisions are made in its rating process. But unlike a typical managed fund, it is based on the same solid rules that people should be using to invest (diversification and solid, stable long term growth) and thus provides a good basis for that investing. In short, the S&P Index is an attempt to rate the market, not beat the market.

 

[mgb_phys]

The rule holds. I'm glad you asked that - the title of the OP asks about "trust" and I didn't really comment on it directly: The concept of "trust" is not relevant in investing. What one needs is to understand how the game works and have the discipline to follow the rules and probabilities. Trust is an emotional thing, not a logical thing and not a relevant concept here (except insofar as people wrongly make decisions based on it).

You have to know the game is honest.
So you have to know that the exchange doesn't meet with a few special clients every morning and agree what the published market changes will be that day. Or that groups of brokers don't meet up to agree who is going to buy a particular share that day.

Just like you had to believe the S&P risk ratings or the certified Enron accounts.

 

[Gnosis]

I've always advised against investing in the stock market when paying down a mortgage is a far better and safer investment. Many at work thought this idea was the least profitable until the Enron fiasco, the ".com" failures, and the 911 attack came along to shake confidence in our economy. People at work were crying the blues daily about all the money they lost on investments, but I didn't lose a cent. I just kept paying down my mortgage like I advised others to do. When they were crying the blues, I had my house nearly paid in full. I felt like the little pig who built his house with bricks!

I've had my house paid off for several years now and I managed to pay it off in just under 9 years. I saved a ton of $$,$$$.$$ in interest that never had to be paid. I proved which was the wisest choice and many regretted not heeding my advice in the first place.

"You can lead a jackass to water, but you cannot force him to drink."

 

[Evo]

Some people were stupid enough to get mortgages with early payment penalties. When I was investigating getting my first mortgage, the first thing they said to look for was if you could pay off the backend of your loan and that you wouldn't incure penalties for paying off early. They are "pre-payment penalties". I am amazed by how few people are aware of common mortgage clauses.

 

[russ_watters]

You have to know the game is honest.

No, you don't - you just have to understand the probability and sources of dishonesty. That's just a fact of life that exists everywhere and has to be dealt with - whether buying a stock or a used car or trying to meet new people at a bar.

So you have to know that the exchange doesn't meet with a few special clients every morning and agree what the published market changes will be that day.

Well that's just paranoia.

Or that groups of brokers don't meet up to agree who is going to buy a particular share that day.

That kind of thing used to happen a hundred years ago, but the market is too big now for a single individual or small group to affect it that way.

Just like you had to believe the S&P risk ratings or the certified Enron accounts.

The S&P and Dow have a track record and structure that doesn't lend to comparisons with Enron - that's that "understanding" thing I was talking about earlier. You're letting emotion/paranoia get in the way of logic.

 

[russ_watters]

I've always advised against investing in the stock market when paying down a mortgage is a far better and safer investment.

There have been times in history when that was good advice, but this isn't one of them. Since the stock market has an 8% average return after inflation, your mortgage rate has to be upwards of 10% for paying down your mortgage to be the better investment over the life of the mortgage.

Now paying down credit cards is, of course, the better bet.

Many at work thought this idea was the least profitable until the Enron fiasco, the ".com" failures, and the 911 attack came along to shake confidence in our economy. People at work were crying the blues daily about all the money they lost on investments, but I didn't lose a cent. I just kept paying down my mortgage like I advised others to do. When they were crying the blues, I had my house nearly paid in full. I felt like the little pig who built his house with bricks!

They were reacting with emotion, not logic. You picked a strategy and stuck with it, which is commendable, but you don't really know if that strategy was the correct one.

I've had my house paid off for several years now and I managed to pay it off in just under 9 years.

If 9 years is your timeframe, you've certainly done better than the stock market with that investment - but what what about the next 9 years? Those who invested in the stock market may be crying now, but in 9 more years, their choice will likely end up being the better one. Heck, the proper choice for you right now, given how low the stock market and interest rates are, is probably to take out a home equity loan and invest that money in the stock market!

 

[misgfool]

Heck, the proper choice for you right now, given how low the stock market and interest rates are, is probably to take out a home equity loan and invest that money in the stock market!

This kind of thinking paves the way to over-leveraging, which made the crisis as bad as it is.

 

[russ_watters]

This kind of thinking paves the way to over-leveraging, which made the crisis as bad as it is.

A home equity loan isn't leverage, it is essentially borrowing money from your own bank account. Leverage is money you are loaned that you don't already have.

 

[misgfool]

A home equity loan isn't leverage, it is essentially borrowing money from your own bank account. Leverage is money you are loaned that you don't already have.

I said this kind of thinking leads "paves the way" to leveraging. House is an atom in the original meaning of the word.

 

[Astronuc]

A home equity loan isn't leverage, it is essentially borrowing money from your own bank account. Leverage is money you are loaned that you don't already have.

This is true if one borrows against the money already spent in the purchase or principal repaid. It is not true if one borrows money against the appreciated value of the real estate, which apparently many folks did over the last decade. That's one reason that people are defaulting and many are now underwater because the value of their properties have dropped below what they owe in principal and interest.

Home/house is an illiquid asset. It only counts when one sells it and has the cash in the bank.

 

[Ivan Seeking]

Of course it is gambling - but unlike in a casino, "the house" doesn't win over the long term.

With the exception of indexed funds, there is no such thing as "the house" in stocks.

We are in the exceedingly rare situation right now where a 10 year investment in the stock market loses money (I think this is the 3rd or 4th time that that's happened, but I can't remember offhand).

In how many years? Also, note that people don't put their money in all at once and then just wait; they continually invest. So it is unreasonable to look at a 15 year span and assume that everything was invested the first year. A fifteen-year performance curve only applies to the money invested 15 years ago. Is it acceptable to lose money invested [ignoring the idea that we actually want to make money and not just break even] over say the last eight years just because I made a profit on money invested 15 years ago?

Also, the term "safe investment" is kind of useless. There is no such thing as an absolutely guaranteed investment, never has been, and never will (of course, the same is true of pretty much everything in life).

Perhaps companies should quit peddaling mutual funds as retirement accounts. Keep in mind that many if not most people are invested through their employer.

Investing for retirement has simple rules that if faithfully followed will enable anyone over any time period in history to successfully save for retirement via the stock market.

What about a person who invested in 1999 and needs to get out today due to something like medical problems?

 

[Ivan Seeking]

Note also that most people invest more heavily as they approach retirement. The reason being that they have more money to invest. The bulk of a person's retirement investment often occurs by necessity during the last fifteen years or so of their working life.

 

[Vanadium 50]

There have been times in history when that was good advice, but this isn't one of them.

So, just out of curiosity, I looked at my own situation. I paid my home down early. Had I not, and put it in index funds instead, I would be down about $57,000 today. Of course the market is low today, but at no time would I have been ahead, although in late 2007 it was close.

Of course, if I had advance knowledge of the markets movements, I could really have made a bundle.

 

[Vanadium 50]

Perhaps companies should quit peddaling mutual funds as retirement accounts. Keep in mind that many if not most people are invested through their employer.

Just because they entail more risk than you are comfortable with?

My employer offers a bewildering array of retirement products - plain cash annuities, bond funds, stock funds of all ilks, life cycle funds, and more. Some of these have levels of risk that I think are absurd - but we're all grown-ups and can make our own decisions.

What about a person who invested in 1999 and needs to get out today due to something like medical problems?

What about them? They made a risky investment that didn't pay off. Does anyone seriously think there's no risk in the market? Again, people are grown-ups and can - and should - be able to make their own decisions.

If everybody buys tracker funds doesn't the stock market cease to function?

As pointed out, there is no risk of this happening. Some people would like a different risk/reward ratio than provided by index funds. Some people think they can do better than the market as a whole - indeed, there is some evidence for this, but the evidence is also that management fees don't usually cover the difference: the problem is not that managed funds are a bad idea. It's that they are a bad bargain.

I checked at TIAA-CREF, and their index fund has 10% of the capitalization as their largest managed fund.

Can you even trust the tracker funds - if the same S&P were willing to rate junk mortgages as AAA for their clients can you trust their index?

Why not? The index formula is public, as are the individual stock prices. If you wanted to, you could calculate it yourself.

 

[Astronuc]

I have friends and acquaintances who have ridden the stock market in ups and downs since the 1990's. They have yet to recover from the downturns. They are convinced that stocks and real estate will rebound. But since they rode the markets down, they may have a long time to wait to recover what they lost.

On the other had, if one of them had pulled his money out and put in cash or other stocks that were recommended, then he'd easily have doubled his money instead of losing more than 70%. At the time, my friend argued that there was no reason that the NASDAQ should go down - right before it descended about 70% between March 2000 and Oct 2002.

Another friend rode TVQFX (Technology Fund) up and invested on the way up. Then it reversed and dropped about 90% while the NASDAQ decline (Mar 2000 to Oct 2002). TVQFX still has not recovered even to the mid-leves of where it used to be in the late 90's - even though it's a diversified technology fund.

One has to do a lot of research for good investments.

 

[mheslep]

Note also that most people invest more heavily as they approach retirement. The reason being that they have more money to invest. The bulk of a person's retirement investment often occurs by necessity during the last fifteen years or so of their working life.

SOP for investing is that as one approaches retirement, or any other condition where you can't leave your money alone for 10-15 years, then you move out of stocks into fixed income securities like bonds.

 

[mheslep]

...On the other had, if one of them had pulled his money out and put in cash or other stocks that were recommended, then he'd easily have doubled his money instead of losing more than 70%...

Surely not via 2-3% cash.

 

[Al68]

I'm just glad there are people who are not too risk-averse to invest in stocks. When we lose them, we lose our economy altogether.

 

[Astronuc]

Surely not via 2-3% cash.

I gave my friend a couple of stock recommendations, which he poo-pooed as old tech dinosaurs. Those two stock doubled in value and paid reasonably good dividends (especially when measured against the purchase prices at the time of the recommendation), while his investment portfolio sank 70%. He has not recovered to the level of where he was in the decade since.

Certainly in cash or a guaranteed income fund, he would not have made much (a few percent perhaps), but then he wouldn't have lost 70% of the value of his portfolio.

 

[mgb_phys]

When we lose them, we lose our economy altogether.

You might have already.
Sabanne Oxley has (allegedly) increased the cost of an IPO so much that a stock market float is now not worth it for most new companies. It has gone fom being the cheapest to the most expensive way for a company to raise money. It has also ironically reduced maket transparency because most companies are now bought and sold pivately.

 

[mheslep]

You might have already.
Sabanne Oxley has (allegedly) increased the cost of an IPO so much that a stock market float is now not worth it for most new companies. It has gone fom being the cheapest to the most expensive way for a company to raise money. It has also ironically reduced maket transparency because most companies are now bought and sold pivately.

which also frees them from numerous other SEC public reporting requirements.

 

[kronon]

the state of pension plans these days is looking pretty scary. Quite a few plans are already at the point where they cannot possibly earn enough on their investments to dig themselves out of their liability hole.

the average plan in the US is only 80% funded and that is after a lot of accomodative acturial assumptions.

it begs the question as to whether pension funds will actually work out in the end. Barely the first generation of retirees have passed through the system and already it is buckling under the strain.

It seems to me that too much trust is placed in the stock market. By relying on it as the basis for the provision of one of the most basic features of any modern society is just asking too much from it, in my view.

meanwhile, money managers are enjoying exhorbitant incomes through high fees for delivering what is in the end looking increasingly like a disappointment.

 

[Karl G.]

Unfortunately, many of the hoi polloi fail to get a good grasp of the problem ... in the 1930's (when, despite political rhetoric to the contrary, things were a lot worse than they are now), the real winners were those who bought stocks cheap and made huge profits when the market eventually rose again. The loosers where those who sold out, which is the first reaction many people have. As a long-term invesment strategy, stocks are the best bet.

 

[Vanadium 50]

It's true that fortunes are made during recessions - but you don't know you're making them at the time. However it's also true that the market can stay irrational longer than you can stay solvent.

 

[Astronuc]

IBM has done quite well, even in the current economic downturn, although many IBM employees (and retirees) have not.

IBM in talks to buy Sun Micro: report
http://news.yahoo.com/s/nm/20090318/bs_nm/us_sunmicro_takeover_ibm

It's interesting to look at how Sun's stock has done over the past couple of decades.

At Tuesday's closing, Sun (JAVA: NASDAQ) was $4.97/share. Compare this with $258.75, the high during Aug/Sep 2000. On Oct 5, 1999 the stock was around $20 /share, so if one rod it to the top and sold out, one could have seen a 12-fold increase in value. But after September, it's been downhill ever since. Sun stock is down about 70 percent in the beginning of 2008.