On the risk of investing in stocks for the long run

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unemployable
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Re: On the risk of investing in stocks for the long run

Post by unemployable » Thu Jul 18, 2019 11:35 am

jacob wrote:
Thu Jul 18, 2019 7:31 am
The point that c_L makes is the important one. Within the traditional investing framework, presuming that we're looking at a 60 year horizon, there is no difference between a 90% drop after 10 years and spending oneself out of money and a 30% drop after 40 years that doesn't quite recover and running out of money in years 59. They both count as equal failures, but they are materially very different. The latter sucks but the former is catastrophic. Yet this is obscured when one statistically calculates the 5% failure rate ... Or even a 0% failure rate insofar the sampling space was inadequate.
This is simply sequence-of-returns risk in a different dress. I (still) don't see anything here that isn't routinely discussed in ER-land. Besides, people are implying these are the only two ways portfolios could fail. They aren't. What if either of those scenarios occurs in year two? What if we're about to hit a 1929-32 sequence this October?
In terms of "actionable" strategies, this suggests that the somewhat common or at least not uncommon strategy to have N months of cash at hand to ride out recessions is a smart idea.
Yes, and in recent years I have come to appreciate the benefits of a fixed-income allocation in a wasting portfolio. It's not so much that bonds give you some vague sense of "diversification". It's that they give you something to sell that hasn't crashed yet while you wait for stocks to come back. (I mean, that is diversification in so many words, but materialized as an actionable benefit). So take the longest time horizon you think stocks will be down for, and allocate that period of living expenses towards bonds. It doesn't need to be the whole period, just long enough to make you feel secure you'll have ridden out most of the worst times.

Note "bonds" in this context broadly means "some asset that at least tracks inflation and has extremely low chance of defaulting". So shorter-term Treasuries, TIPS, MLPs and maybe consumer staples stocks (as mentioned before, if the USD hyperinflates, Pampers will become priced in euro or gold or some similarly more stable asset). I in fact have a portion of my portfolio thusly allocated, to savings bonds, back when you could buy a lot more of them than you can now and at far more attractive terms.

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Re: On the risk of investing in stocks for the long run

Post by Seppia » Thu Jul 18, 2019 12:21 pm

7Wannabe5 wrote:
Thu Jul 18, 2019 8:59 am
@Seppia:

Interesting article. What is your subjective judgment that Ray Dalio's subjective judgment is correct?

Ray Dalio (and others that I follow) are orders of magnitude smarter and more knowledgeable than me, so I usually read them trying to take something away from them rather than to "criticize" if you see what I mean.

I did find the article to be very interesting

One thing that came to mind though is that Japan has had zirp and QE for much longer than Europe and the USA, and hasn't seen any big disruption.
Instead, their stock market just went nowhere for 30 years. Bad, but not catastrophic for the average person.
Has to be noted though that Japan is very stable, very safe, does not have any immigration (almost) and CEOs make 20 Times as much as the regular employee, not 700.

Another thing that nobody in the "zirp has created a bubble of all asset classes" camp seems able to explain is why European stock market valuations are much more in line with historical norms VS the USA, even if rates are much lower than in the USA.

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Re: On the risk of investing in stocks for the long run

Post by unemployable » Thu Jul 18, 2019 12:43 pm

Seppia wrote:
Thu Jul 18, 2019 12:21 pm
One thing that came to mind though is that Japan has had zirp and QE for much longer than Europe and the USA, and hasn't seen any big disruption.
Instead, their stock market just went nowhere for 30 years. Bad, but not catastrophic for the average person.
Actually that IS catastrophic for anyone who ER'd. NKY was down 82% from 1989-2009. Approximating inflation at zero (correct to one sig fig), a ONE PERCENT withdrawal rate would have failed, as you would have spent 20 percentage points of initial value, and 20 + 82 = oops.
Has to be noted though that Japan is very stable, very safe, does not have any immigration (almost)
Oooooh, spot the correlation!
and CEOs make 20 Times as much as the regular employee, not 700.
Mainly because the stock options they receive were in a declining stock market rather than an up-11-percent-a-year one.
Another thing that nobody in the "zirp has created a bubble of all asset classes" camp seems able to explain is why European stock market valuations are much more in line with historical norms VS the USA, even if rates are much lower than in the USA.
Many, many explanations:
  • US has all the tech companies. Name one great disrupting European tech company. If you can, I'll name 10 US ones.
  • US has more flexible labor market, making it easier to hire, fire and relocate, and thus take risks
  • US has less onerous taxation and social welfare costs, meaning more revenue is retained by shareholders and more is available for R&D/investment
  • US has had better GDP growth -- pretty sure this is now true for all possible lookback periods
  • Then because of all this, US is a more attractive relative value. This is why US Treasuries are yielding so little too, at least it's not negative.
I say this as someone who has held 40-50% international stocks for a few years now and feels like a goddamed fool. Europe's a value trap.

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Re: On the risk of investing in stocks for the long run

Post by Seppia » Thu Jul 18, 2019 1:06 pm

About Japan:
What's the chance one bought everything at the peak and thus had assets go down 82% on their cost basis?
Your selective quoting make me sound like an enthusiastic anti-immigrant, but I have been an immigrant most of my adult life, there's a misunderstanding here.
About CEO pay, you're good at math, you know your observation is incorrect. There is immensely less inequality in japan than in the USA.

About Europe/usa:
I think the absence of a clearly dominant sector is actually a positive for Europe's long term returns prospect. Looking back, when a sector had been responsible for the bulk of the gains in decade N, its returns in decade N+1 were abysmal.
See: energy sector, finance sector, late 90s tech sector.

All the other observations have been true for the last 50 years at least, but all of the divergence in performance has come in the last 10.

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Re: On the risk of investing in stocks for the long run

Post by unemployable » Thu Jul 18, 2019 1:55 pm

Seppia wrote:
Thu Jul 18, 2019 1:06 pm
About Japan:
What's the chance one bought everything at the peak and thus had assets go down 82% on their cost basis?
Actually pretty high, as bubbles form precisely because everyone is buying right now. But that's irrelevant -- no matter when you bought in/RE'd, if you were at a 1% WR in 1989, you would have failed within 20 years. At 4% in 1989 you would have failed possibly as early as 1998 -- nine years! -- and definitely by 2001.
Your selective quoting make me sound like an enthusiastic anti-immigrant
No it doesn't, and that wasn't my point. I concede it's not relevant to the main discussion though.
About CEO pay, you're good at math, you know your observation is incorrect. There is immensely less inequality in japan than in the USA.
No, I know what I wrote is a statement of fact -- it is a manner in which American executives get rich that has eluded most of their Japanese counterparts. I don't care about income inequality anyway, or why it matters in the context of RE failure rates. Actually, if billionaire CEOs are a necessary side effect of a stock market that clips along at 10%, bring 'em on! Otherwise how much money Jeff Bezos has doesn't affect me, except that he has all that wealth ("money" is the wrong word) because he's created a service that makes my life better. Both you and I are in the global 1% anyway, so when "they" come after all those horrible rich people...
I think the absence of a clearly dominant sector is actually a positive for Europe's long term returns prospect. Looking back, when a sector had been responsible for the bulk of the gains in decade N, its returns in decade N+1 were abysmal.
See: energy sector, finance sector, late 90s tech sector.
You didn't really present any counterarguments to my bullet points, although I agree one sector getting too big can be problematic. However, what counts as "tech" had broadened over the years. AMZN, MSFT, TSLA and NFLX, to name just four, do completely different things but all are considered "tech", and all certainly have acted as major disruptors. Meanwhile energy companies do what they always have done, take things out of the ground and turn them into sources of fuel. Similar with "finance", which just borrows money at A% to loan it out at B% and collect the spread. Banks have better computers now but that's what they're still doing.

Tech is 20% of the SPX right now. That doesn't strike me as outsized. Mind you, I'm not taking a three-year view here, but a rest-of-my-life view. US has had most of the tech since at least the 90s, when it shared it with Japan, not Europe.
All the other observations have been true for the last 50 years at least, but all of the divergence in performance has come in the last 10.
Yeah, thanks for reminding me. I first tried to act on this divergence (tilt more internationally) back in 2014. I still believe the gap will close somewhat, but I don't see where Europe will get 4% GDP growth when the US is in some sort of extended recession.

Permanent structural differences in world markets absolutely exist and temporary ones persist for decades. The US was a horrible place to be invested in the 1970s for two or three reasons, meanwhile Europe piggybacked off Germany's postwar recovery.

Edit: Oh by the way, that chart compares US to non-US, not US to Europe, or even US to other developed. That runup in the 80s was mostly Japan, although that gap would have closed later..

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Re: On the risk of investing in stocks for the long run

Post by Seppia » Thu Jul 18, 2019 3:14 pm

unemployable wrote:
Thu Jul 18, 2019 1:55 pm
Actually pretty high, as bubbles form precisely because everyone is buying right now.
Prices going up do not equate with higher number of transactions.
I do not have the precise data, but the way people save would suggest the likelihood of someone accumulating all their wealth within a very short timeframe is fairly low.
We are getting off track though. If someone retires at CAPE 100 and expects to be able to withdraw 4% a year he/she has bigger issues.
unemployable wrote:
Thu Jul 18, 2019 1:55 pm
No, I know what I wrote is a statement of fact --
It is not. Compensation in Japan differs immensely VS American way.
https://www.rsfas.anu.edu.au/media/2458 ... -Japan.pdf
unemployable wrote:
Thu Jul 18, 2019 1:55 pm
I don't care about income inequality anyway, or why it matters in the context of RE failure rates.
I do because I believe high inequality is an extremely inefficient way to allocate resources (poorer people are more likely to buy stuff and help the economy move along)
unemployable wrote:
Thu Jul 18, 2019 1:55 pm
You didn't really present any counterarguments to my bullet points,
I don't need to, I'm saying there is clearly no correlation between those bullet points and the supposed justification of the valuation spread between the USA and Europe/rest of the world.
They have persisted for decades, but the spread has only happened in the last 10.
unemployable wrote:
Thu Jul 18, 2019 1:55 pm
Edit: Oh by the way, that chart compares US to non-US, not US to Europe, or even US to other developed.
If you look at cap weights, and interest rates/equity valuations, you will notice your point here is irrelevant.

I have a feeling this is turning into a pissing contest though, so I'll stop arguing :)

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Re: On the risk of investing in stocks for the long run

Post by Dream of Freedom » Thu Jul 18, 2019 3:34 pm

The Dalio article was interesting but I am puzzled how he got charts for the euro going back to the 1960s when the euro started as a currency in 1999.

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Re: On the risk of investing in stocks for the long run

Post by unemployable » Thu Jul 18, 2019 3:58 pm

Seppia wrote:
Thu Jul 18, 2019 3:14 pm
Prices going up do not equate with higher number of transactions.
Incorrect. Rapidly increasing transaction volume is one of the BEST signs of a bubble. Consider house flippers, tech-stock day traders, tulip bulb merchants in 1637 Holland.
We are getting off track though.
Actually the performance of the Japanese stock market since 1989 is MORE directly relevant to the issue of ER portfolio failure than anything else we are arguing. It's, like, the most relevant thing there is -- here's what could go wrong, here's what a bubble looks like and why you don't go all in at the top, here's why you diversify, here's why you don't rely on 4%.
If someone retires at CAPE 100 and expects to be able to withdraw 4% a year he/she has bigger issues.
Agreed but not the point I was making
It is not. Compensation in Japan differs immensely VS American way.
https://www.rsfas.anu.edu.au/media/2458 ... -Japan.pdf
Doesn't refute any kind of point I was making. We seem to agree the US and Japan are fundamentally different in this regard, but I claim this accrues as a benefit to the US and to investors in its stock market.
I do because I believe high inequality is an extremely inefficient way to allocate resources (poorer people are more likely to buy stuff and help the economy move along)
Irrelevant to the issue of portfolio failure rates, or at least no citation provided. I'm pretty sure rich people buy more things than poor people, anyway.
I don't need to, I'm saying there is clearly no correlation between those bullet points and the supposed justification of the valuation spread between the USA and Europe/rest of the world.
Citation needed on "clearly no correlation". You don't "need to" because you don't care to argue. You asked for reasons the US market has diverged from Europe and Japan despite the same monetary policy, I gave you multiple reasons and you dismissed them because feelings. You even argued the existence of a structural difference between the US and Japanese economic landscape -- then somehow decided it doesn't matter when I stated it better fits my thesis that the US has been, and remains, a better investment environment.

Regarding that chart, much of the way the non-US line kept up with the US line was also emerging markets. First South America and SE Asia, then China, and China has underperformed the US in recent years, accounting for part of that recent gap. And as I noted, the US had a lost decade in the 70s, but made up for it elsewhere.

There's no really good pan-European index, they all have faults and Europe isn't as homogenous as the US, Japan and China. But since 1998 here's the Euro Stoxx 50, during a period when the US SPX has more than tripled.

Image

Could Europe start doing 10% a year from here? Yes. But are there reasons it has gone nowhere for so long? Also yes.

I have a feeling this is turning into a pissing contest though, so I'll stop arguing :)
Fine, enjoy your inevitable bounty of riches from your 50/50 Europe/Japan stock allocation.

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Re: On the risk of investing in stocks for the long run

Post by anesde » Fri Jul 19, 2019 1:46 am

jacob wrote:
Thu Jul 18, 2019 7:31 am

The point that c_L makes is the important one. Within the traditional investing framework, presuming that we're looking at a 60 year horizon, there is no difference between a 90% drop after 10 years and spending oneself out of money and a 30% drop after 40 years that doesn't quite recover and running out of money in years 59. They both count as equal failures, but they are materially very different. The latter sucks but the former is catastrophic. Yet this is obscured when one statistically calculates the 5% failure rate ... Or even a 0% failure rate insofar the sampling space was inadequate.
I understand your premise here and the validity of challenging the 4% assumption. In reality though I would argue that if a failure were to happen to the FIRE crowd most would be better off having that happening early on (after 10 years, or better yet 2 as someone else mentioned). It’s much easier to return to work when you’re young vs it happening in year 59 of the 60 year horizon you mention above (see age discrimination thread)

For the true ERE crowd it doesn’t matter as much due to absolute numbers. For “traditional” retirements who are able to follow the “conventional” logic of cashing out when they hit ~65 it also doesn’t matter as much.

Thus I question who is really affected by this? The c. 45-50 year own corporate worker who hits 25x, has little (ERE) skills and decides they’re set for life at 4% withdrawal? Or the Fat FIRE crowd who’s spending is a little too fat?

I’m not sure how large that audience is (perhaps a lot?) but even MMM goes on about safety factors and the need to be able to flex one’s lifestyle accordingly.

Besides that I’m greatly enjoying the exchange between Seppia and unemployable. Suggest you continue the pissing contest :)

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Re: On the risk of investing in stocks for the long run

Post by Jason » Fri Jul 19, 2019 6:14 am

unemployable wrote:
Thu Jul 18, 2019 3:58 pm
Fine, enjoy your inevitable bounty of riches from your 50/50 Europe/Japan stock allocation.
The ERE version of "up your nose with a rubber hose."

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Re: On the risk of investing in stocks for the long run

Post by 7Wannabe5 » Fri Jul 19, 2019 7:38 am

I agree. Very good match. Fun and interesting to read.

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Re: On the risk of investing in stocks for the long run

Post by Jason » Fri Jul 19, 2019 8:07 am

The question of "what is tech" is relevant as it comes to sector investing. Isn't Netflix just a tech company that distributes media content?

I follow this company as I have invested in it and the CEO makes a good point:

https://finance.yahoo.com/news/okta-coo ... 10094.html

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Re: On the risk of investing in stocks for the long run

Post by unemployable » Fri Jul 19, 2019 1:27 pm

anesde wrote:
Fri Jul 19, 2019 1:46 am
Thus I question who is really affected by this? The c. 45-50 year own corporate worker who hits 25x, has little (ERE) skills and decides they’re set for life at 4% withdrawal? Or the Fat FIRE crowd who’s spending is a little too fat?
You're painting them both as sort of happy-go-lucky types, which may be appropriate, but I'd say the "ignorant FIREr" gets hurt more by an early, severe crash because he hasn't developed the non-fragility skills necessary to play the game for 40 years. These skills can absolutely be developed, I've done it, but they take time and a degree of willingness to accept them. Meanwhile the Fat FIREr, who say has been taking WRs in the 5 neighborhood and has had little reason to change, is more likely to get slowly killed by the later "gradual decline and stagnation" scenario.
anesde wrote:
Fri Jul 19, 2019 1:46 am
Besides that I’m greatly enjoying the exchange between Seppia and unemployable. Suggest you continue the pissing contest :)
I'm leaving on a hiking trip soon, so can't continue this for awhile, but when I return I'm sure the Nikkei will have doubled once the world wakes up to what a perfect investing environment Japan is.

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Re: On the risk of investing in stocks for the long run

Post by unemployable » Fri Jul 19, 2019 1:34 pm

Jason wrote:
Fri Jul 19, 2019 8:07 am
The question of "what is tech" is relevant as it comes to sector investing. Isn't Netflix just a tech company that distributes media content?
Lo and behold, S&P now labels AMZN as "consumer discretionary" rather than "information technology", meaning it's in XLY, not XLT. NFLX is under "communications services", which also has GOOG, FB and TWTR.

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Re: On the risk of investing in stocks for the long run

Post by Jason » Fri Jul 19, 2019 1:44 pm

I know Warren Buffet who was always averse to buying tech stocks, started picking up Apple when he came to understand it as a consumer product.

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Re: On the risk of investing in stocks for the long run

Post by unemployable » Fri Jul 19, 2019 1:50 pm

Jason wrote:
Fri Jul 19, 2019 1:44 pm
I know Warren Buffet who was always averse to buying tech stocks, started picking up Apple when he came to understand it as a consumer product.
I suspect back in 1999 when he said he didn't understand tech stocks, what he meant was he didn't understand why people paid so much for them. He bought out Level 3 at the bottom of the 2000-02 tech crash.

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Re: On the risk of investing in stocks for the long run

Post by Jason » Fri Jul 19, 2019 2:16 pm

Understood. My point is, and I think your point as well is, that the best companies in many industries are now the companies that use the most advanced technology. Does that make them a technology company? It's not a cut and dried answer. I mean Microsoft and Amazon offer "cloud products". Well, is it tech or a product?

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Re: On the risk of investing in stocks for the long run

Post by unemployable » Fri Jul 19, 2019 3:07 pm

Jason wrote:
Fri Jul 19, 2019 2:16 pm
Understood. My point is, and I think your point as well is, that the best companies in many industries are now the companies that use the most advanced technology. Does that make them a technology company? It's not a cut and dried answer. I mean Microsoft and Amazon offer "cloud products". Well, is it tech or a product?
An indirect answer is that what starts off as "technology" gets incorporated into everything we do. Internal combustion engines, radio and TV all used to be "technology". Any successful company nowadays is going to have entire IT-heavy departments doing logistics planning, inventory management, economic forecasting and whatnot. But whatever you define "tech companies" as, I feel like they're less correlated than ever, certainly less than in 1999. IT-sector value stocks certainly exist right now, actually in decent abundance. That's not to say they don't have idiosyncratic risk; someone could build a better social network than FB, as FB did to MySpace. But "social networking" isn't going to go away.

And America will invent it, Japan will refine it, China will mass-produce it and a few years later Europe will get around to regulating against it. As always has been.

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Re: On the risk of investing in stocks for the long run

Post by FIRE 2018 » Fri Jul 19, 2019 3:27 pm

I am a believer and buy and hold. Too many people I know got burned by critics saying the sky was falling, then sold off and left the market or not being invested at all because of so many excuses. To achieve ERE and FIRE, is a mind set change and continual adaption to reach financial goals. And a hell of a lot of risk taking.

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Re: On the risk of investing in stocks for the long run

Post by Seppia » Fri Jul 19, 2019 3:37 pm

FIRE 2018 wrote:
Fri Jul 19, 2019 3:27 pm
I am a believer and buy and hold.
The hard thing will be to keep doing both when markets are also going down.
For as much as I try to plan for it, I am not really sure how I will react when the next crash comes. I was able to hold steady in 2008/9, but I had much less money invested and I was 10 years younger.
Reality is that the next crisis will catch most investors by surprise, and most will panic.
I hope I won’t be one of them.

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