If something is worthless then it has no worth - so how can something be less than an absolute lack of something?
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I am interested in knowing about what potential impact the availability of information in the current age will have on market trends. Are past (long term) results reliable for use as forecasting the future? Or has something fundamentally changed now that there is so much more transparency about market-influencing forces that more stability can be anticipated?
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Quite right. I did research on stock market forecasting. There was a way to do it when conditions were "normal" with regression analysis. But you could only forecast one quarter ahead, anyone who claimed to be able to forecast farther ahead was lying or crazy. Since 2008, conditions have not been normal and nothing works. Before 1980, you couldn't get the data in time, so the only time you could do good forecasting was 1980 to 2007 and there were people doing it. Regression is not all that difficult. You can do it with Excel.
4
A while back I read what I considered sound advice and still do: invest based upon your age (and, of course, risk tolerance) and pay way less attention to what the market is currently doing. It has worked well for me.
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Stock investors take outsized risks by investing in stocks when the market's forward PE is as high as it is today. Because our country's increasing debts will serve to slow down the economy in the near future, the recent rate cuts by the Fed have served only to delay the next recession and stock market plunge. The yield on the 10-year Treasury bond is unable to break 2%, affirming a problem with future economic growth. In fact, its current yield of just 1.87% is screaming a warning to stock market investors. Investors can keep up with inflation in the bond market and get back into stocks after the next plunge.
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An excellent advice to all. If economics is "dismal science", according to Thomas Carlyle, then the prediction of stock-market moves is nothing more than "despicable pseudo-science". The only truth is J. P. Morgan's word "They [the stock prices] will fluctuate".
I gave up decades ago on trying to understand the Bourse and let the professionals of a very big university retirement fund do the job, for good or for bad. I think that it has been mostly good. In my retirement, it allows me cigars and leisure to write trilingual reader's comments, look at the birds dancing in the air in my wife's garden, and little animals "gyring and gimbling in the wabe" of the lawn.
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I tell my children and anyone who would listen:
Start with an asset allocation that’s appropriate for your goals/age/risk tolerance. Be diversified (ETFs and mutual funds, mot individual stocks). Start investing early and stay invested for a long time due to compounding. Don’t try to time the market as it is counterproductive. These are the top basic principles of investing successfully.
Add: live below one’s income; put away money in an investment account at the source because what you don’t see you can’t spend. Contribute to your employer-sponsored pension plan ti the fullest extent and then save some more. The best way to compete with one’s peers is not through the best clothes, toys, cars, large houses, vacations but who’ll have the largest net worth at a reasonable age and therefore peace of mind.
This assumes having mature, proactive parents or other elders growing up, a good education (a liberal arts degree and a 2-year or longer graduate degree), an outstanding work ethic, and a bit of luck.
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All of this is very wise but counts on larger trends, such as the viability of democracy in the United States, and more important than that, global warming not being catastrophic soon. Hmmm.
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The stock market has for many years been up for one reason only, a complicit fed. A “real economy “ in America has not existed since the fifties, when we actually made product people wanted to buy and paid people a living wage. We had real money backed by gold set at $35/ ounce, not a printing press and trillions in IOUs, and a Milton Friedman utopia for the 1%, we invested in infrastructure, had great public schools that produced something besides financiers, many of whom should be in prison along with a generation of quick buck artists looking for the next big score: “we work” is the latest but far from last best example. Preceding the current fake economy was the dot com boom and bust preceded by numerous real estate booms and busts. We have Wall Street peddling everything, short sellers driving things into the ground, vulture capitalists strip mining companies as they destroy lives, in short we are living through one big scam
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Much too generous comments for most wall strategists whose job is sell stocks to lemmings.
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Two things that I always try to remember when investing:
1. There is a theorem in finance, taught in business school, that nobody can be right about stock picks more than 51% of the time. If your financial advisor says s/he can beat that they are lying. In fact if they provably are right 52% of the time they are a genius. This is almost random.
2. Sometime in the 90s I was watching Wall Street week on pbs and they were interviewing John franklin templeton the legendary investor who said that he was never any good at timing the market. If he isn’t, then I should give up I decided.
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Quick stock market forecast: Trump (or family member) needs some fast cash. Trump tweets on (pick a market or trade related topic) in negative fashion. Stocks drop. Trump (or family member) swoops in for big buy. Trump tweets correction or more positive update on same topic. Trump (or family member) unloads those stocks - and cashes in. Rinse, Repeat.
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@David I totally believe this.
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Second Trump Investment Prediction: it’s early September 2020. The US election is right around the corner. The two candidates are close in the poles, either could win. In late September 2020 there is a news flash...”US and China end Trade War”. The stock market zooms upward. The elections happen and Trump wins by a small margin .
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"Nobody knows nutin' " has been the best advice I have ever received.
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In economics the efficient-market hypothesis says that the price reflects all publicly available information which implies it is not possible to consistently beat the market. If forecasters cannot beat the stock market then does that mean the stock market is the epitome of an efficient market?
I do prefer the lazy strategy of buying low cost index funds but if everyone adopts the same strategy then will that eventually make the market inefficient? In an inefficient market do we expect managed investments to net better returns than passively investing?
The stock market may be efficient but what about the smaller markets where an individual company operates and specializes? I think the analysts are needed and valued on a much smaller scale where they can spot and capitalize on market inefficiencies.
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If analysts are convinced they are right the “efficient” way to invest would be to use their own money. The market is only efficient if those with the most information take a risk instead being paid whether they are right or wrong.
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Good advice for most people most of the time. The tricky years are the ones just before and just after retirement, when most people are most likely to have their maximum wealth and when further investments decrease or cease and drawdowns begin. A market drop at this time can cause a significant loss that is near impossible to make up. I have not seen a good rule for allocating during these specific years. My gut is that something like 40/60 is appropriate, but I'd rather have some research and a rule.
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Unless you're desperate for growth at that stage, I'd be going straight bonds for preservation.
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Depends on your criteria / framing:
Median forecast was a 9.8 increase vs. 5.5 in reality.
Not perfect, but it got the direction correct and was in the ballpark in terms of magnitude. That's better than nothing.
Median forecast was for 20 years of increase, but 6 were downturns. That means they were right 14 times, 40% better than pure chance.
If you think you're smart enough to outsmart the market, you probably also think you're smart enough to outperform the sports betting markets.
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Since I'm five years from retirement (or less, depending on my employer), my assumption now is that I have enough time to recover from a serious downturn. In about two to three years, that will shift to a vastly more conservative portfolio. We'll ride this market as long as it lasts, although 2018 was a good test for what could happen. Just not a drastic test.
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@SWC
You will certainly want to have a share of your assets in stable value investments since you will be drawing from that pot of money. However, I would not move all my assets into a vastly more conservative portfolio. Keep in mind that your assets will need to provide income for 15-20 years, potentially more if you are married.
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For many decades investment professionals have known that no single investment management firm has consistently beat the market using the S&P500 reference. But that thousands if not tens of thousands of investment managers make substantial incomes here and abroad suggests there’s more to investment than just performance. Warren Buffet, the Sage of Omaha, had perhaps the very best advise. Namely “bet on America”. We’ve outperformed every other nation. If in doubt just walk up and down 5th Avenue. And with a large portion of US equities owned aboard its a good bet that for the foreseeable future the investment world “likes America”. Land of the free and home of the brave.
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The reason investment managers and stock brokers make tons of money is not from their investments. It’s because they make a percentage every time a stock or bond is bought or sold. Repeat- THEY MAKE MONEY whether their predictions are right or wrong. So even when the market crashes, and Joe Blow is selling, the brokers make money. Sound like a scam? It is.
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I agree with your comments on a managed portfolio. The only thing that beats an unmanaged portfolio of idnex funds is inside information.
However, I take issue with your advice to older investors to go with a 25:75 mix of stocks and bonds. With current bond yields hovering below 2%, this is a recipe which guarantees substandard performance.
31
After making a couple of (small) mistakes in trying to time the market, I became a Bogle-head back in the 1980s and boy has that paid off.
Dollar-cost-averaging in low-cost funds through rain or shine -- this works for most of us. When I see headlines of "expert" forecasts I ignore them!
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You think predicting the stock market is tough? Try predicting future Bitcoin prices. That's the wild west of punditry.
3
Why would anyone be in bonds the past 5 years, other than high yield?
If one has time to keep on it, why not pick individual stocks like NRZ, OXLC, AMD, NVDA, DX, EDF, etc ?
How many boomers here own GE, IBM and other blue chips which have been lackluster these past few years?
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@Jake I'm a boomer and my grandmother owned GE and IBM.
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An important point not mentioned here is whether or not you rely on your market investment for daily living expenses.
Most equity investors don't need to sell their stocks for daily living expenses, so a steep downturn in the market is only a loss on paper. If you resist selling your stocks during the downturn, you lose nothing.
If you rely on your stocks' dividends to pay your bills and those stocks cut their dividend during a downturn, that essentially cuts your income and may force you to sell some stock which is the last thing you want to do in a downturn. This is why smart investors keep a year's worth, or more, of living expenses in cash.
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While I agree in general, it all depends on the future that nobody can predict. Look at the fall in Japan, were things didn't get back after 7 months, but perhaps 20 years.
11
The data provided is at odds with the advice.
Over any reasonably long period (5 years plus), the stock market outperforms the bond market. Even when the market crashes, it bounces back reasonably quickly.
Thus, the best advice is to consistently, over the course of a working lifetime, invest 100% in a stock index fund and forget about it. Then, during retirement of 20 +/- years, draw 5%-10% of the savings as income to supplement your social security.
And during retirement, leave the money 100% in stock. That's where it will - over that long term - do best.
If the market crashes and keeps going down, stop worrying about your retirement savings. You likely have greater worries - apocalypse of some kind of another.
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@Sam I Am Or just a deep slump as occurred in Japan. It's wise to go safer when you know you'll need the money soon.
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@Sam I Am
Here’s a simple example of why holding stocks during a falling market is a very bad idea. Suppose the market drops 50%. A $100 portfolio is then worth only $50. Now suppose the market recovers and goes up 50%. The portfolio is worth now only $75. So after recovery we’re down 25%.
That’s why wealthy individuals employ professional money managers. And we appreciate the business !
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@Peter I Berman
There is no 'falling market' except in hindsight. The whole point of the article is that your foresight will never measure up to hindsight. Suppose the stock market goes up and down, but averages 9% per year over the long term. That's where you want to be.
@David
Index funds diversify internationally.
Retirement savings are, by definition, not money you 'need soon.' Even if you plan on taking the money as income during retirement, you shouldn't be taking more than 10% maximum from the account. Long-term average stock returns will generate that; bond returns never will. Retirement is a long-term thing, so the account will do better over time as a stock account. Ensuring substandard performance is never wise.
13
What they teach you in your first course in financial planning is that, LONG TERM, NOBODY will outperform the market. Brokerages talk about their "benchmarks", but not one uses actual market performance as a benchmark.
IMF predictions by the experts are always off, too.
5
It's been said that the only people helped by the plethora of "self-help" books are the authors. The same holds true for these "forecasters." I never paid any attention to these clowns. I got out before the crash of 2007, while Abby Joseph Cohen, the "guru" at Goldman Sucks was predicting a 30,000 Dow.
14
@george eliot You are so correct,even I read some where even more aggressive in predicting Dow 50,000. Instead what happened was Dow dropped down to below 7,000 in 2009 March.
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@Phytoist
And today the dow is knocking on 29,000. So if you had stayed the course and continued to invest when the dow was below 10k, 15k, 20k, even 25k...you'd be sitting on a lotta nice gains.
5
But the point of this article is that your sell off was luck. The market might have continued to rise and you would have been a chump. You didn’t know what would happen at the time. You were a product of the bell curve of probability.
5
Take your current annual expenses (almost all will continue into retirement) and subtract your expected annual pension(s). Take the remainder and divide by .05 (5% average return on S&P, NASDAQ). The result will be the necessary size of your nest-egg required to pay for your expected expenses.
You have between now and retirement to get there.
13
@RonRich In general, this is good advice. But for most, your wages will go up throughout your life, so acquiring assets like a home that will paid off when you retire is wise. Also, this is only for those who feel they will live to a generalized "life span" vs. those who may have illnesses. It's nice when you have income to invest highly for the future.
3
"If you lay all the economists [or stock market analysts[ in the world end-to-end, they never reach a reliable conclusion."
24
Paul Krugman's forecast about the stock market never recovering from Trump becoming President surely was off the mark!
9
@justme Paul Krugman never publishes any specific forecasts about the market's direction. Rightwingers who accuse Krugman of being off the mark are peddling another conspiracy theory, while ignoring how Krugman predicted the 2007-2009 downturn more than a year before it actually occurred. Krugman also supported President Obama's infrastructure improvements that led to a quick recovery, contrary to the predictions of Republican politicians.
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@G Klepac
Although Krugman does not pick specific stocks, just after the election, he did indeed say that the world would go into a recession without end because of Trump. Still waiting.
And I would disagree with your statement of Obama being responsible for the recovery. The US was out of the recession by mid 2009, well before the spending occurred. However, there had been time for Fed policies (TARP, QE, and insuring commercial paper), approved before Obama took office, to have had an effect.
9
@luxembourg Krugman has admitted in print on multiple occasions that he was wrong about what would happen to the markets if Trump was elected.
But what do you think about Trump's claims that the success of the markets depends on him? There certainly wasn't much of a reaction when Trump was impeached.
11
I ignore analysts. I also ignore columnists. I've done very well, thank you.
16
I always remind myself that stock market analysts are trying to sell me something. That’s not bad per se, but one is allowed to say ‘no thanks’.
18
Although it’s interesting and often fun to read and listen to so-called securities analysts, I’ve never placed any stock in them, pun intended. 30 years ago I began reading and following the advice of Jonathan Clements, who was then a columnist for the Wall Street Journal. He’s always advocated investing in the same way as this article and Jack Bogle. I have never owned an individual stock, except that of the companies I worked for, who gave out some of their own stock for the company match in 401k’s. Everything else in my portfolio has been low-cost, diversified index funds or EFT’s.
I was able to retire a bit earlier than expected due to the growth in my retirement fund using this investment technique. I continue to utilize it in retirement, although I can no longer dollar-cost average (which worked especially well during downturns in the markets) into it since I don’t have an employment income stream now. I’ve rarely, if ever, lost any sleep over how my investments are doing, even during down markets.
36
While I'm in general agreement with Mr. Sommer, his using 1/1/2000 through December 2019 to say stock market returns were 5.3% can be a trifle misleading. The start of 2000 was the summit of the tech bubble when valuations of telecom and tech stocks were in cloud cuckooland. Over most rolling twenty-year periods, average stock market returns are closer to the 9% that his rash prognosticators tend to predict. 5.3% is unusually low because his starting point was unusually (insanely, for those two sectors) high.
19
["But be aware that in the 2007-2009 market catastrophe, that portfolio (aggressive) would have lost about 35.6 percent and have required two years to recover entirely."]
...and then went on to even greater heights.
If you have the time, aggressive is the way to go. Nothing else will provide enough of an income when you reach retirement age. At that point, you can put a few year's worth in a 'safe-haven' to weather a storm.
15
Here's a forecast . . . A house of cards fueled with cheap money - debt - ready to crumble any minute leaving a big economic mess for a Democrat to clean up in 2021 to stave off health care and tax policy reform the republicans loathe.
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@FarmCat Exactly. Trump has been gambling with out economy's future to produce short-term gains that he hopes will get him re-elected. For example, decreased regulation of airlines has led to Boeing's 737 failures which will severely impact the economy of the northwest.
7
I think lying to regulators was the underlying cause of Boeing's problems. Not everything comes from Trump
7
@FarmCat DJT wasn’t happy with fed chairman raising rates,the guy listened,reduced the rates,why? President doesn’t want market down turns to win 2020 elections,and so does Republicans too. There may be few more fed rate cuts to pop up markets which may work either way,pop up ya big POOP out scenarios. Can anybody guide US correctly?
4
I treat all stock analysts as worthless. One only need to watch the exuberance of the market every time dumpster Don announces he is close to a great trade deal with China at one of his all too frequent clown show rallies. Wall Street falls for it every single time. Doesn’t inspire much confidence.
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@Steve B And I wonder each time whether he and his cronies are committing securities fraud: sell before the announcement/tweet, buy a couple of days later. I wish someone would analyze their trading activity with this theory in mind.
12
There is a cult of "Index Fund Investing" which is based on misleading statistics.
Some of the claims supporting index funds which I have most often heard are that index funds beat most managed funds in most years and that there are no managed funds which always beat the index.
Although both statements are true, they are irrelevant. Most investors are in it for the long haul as their money is in retirement accounts. Managed funds do not have to beat the index every year to return a better result for investors; they just have to out-perform the index funds often enough to be positive over time.
90% of managed mutual funds fail to beat the market over time but 10% do. There are thousands of managed mutual funds which means that several hundred beat the market over time.
Decades ago, it was very difficult to find successful managed funds and one was at the mercy of salesmen who had a profit motive.
Today, with easy internet access to research and SEC filings, one no longer has to depend on index funds to keep them safe from predatory salesmen and can find the managed funds with a history of long-term success.
5
@Allen
Assuming the cited “10% of managed funds consistently beat index funds over time” is accurate, one has to be able to identify the funds that do so. It would be interesting to see how many funds have beaten the indices over, say, a 40-50 year time frame. 20 years simply isn’t enough; there are quite a number of funds that beat the indicies over SOME 20 year periods but not ALL of them, and how does one know what will happen with these funds over the next 20 years?
7
@Allen It is unclear what the future holds when the boomers retire and take all their money out of their investments.
2
@Allen Jack Bogle has acknowledged that some managed funds can consistently beat the S&P but he said at some point, their return averages will come back to the mean. So if a fund beat the S&P for 20 years, the odds of it continuing to do the same in the future are not going to be good. Also, consider we find an open fund that has a great management team that consistently beat the S&P. What happens when the key people managing that fund leave? Sure, you can move money to their new fund (if they didn't retire). Let's say you move your money to the new fund only to discover, like a rock band, they worked better as a team than as a solo act where there's no one to challenge their decisions. Conclusion: A very small percentage of people will beat the S&P 500 index over their lives.
4
Index funds are certainly NOT the answer. The most popular the S&P 500 has you investing in hundreds of stocks that are losing money and paying a fee to do it. I like the Motley Fool and doing your homework. It’s a winning combination!
@Bob McFeeters To say that index funds are not the answer depends on which question you're asking. On balance the S&P 500 tends to go up, the fees for corresponding index fund are minuscule, they require little expertise on the part of investors, and they take almost no time or energy to manage. That should be a good enough answer for most people. It's the answer if you want to grow your savings long term while you spend your life paying attention to things other than money that have value for you (perhaps family, career, fishing). It's the answer if you're just not interested in managing money or don't feel that you have the head for it.
Services like Motley Fool can make you more money than an index fund but they cost more and you do have to be committed to doing your homework. Really, you have to want to invest your time, energy, and cognitive resources in managing your own money (and believe that you can do that successfully). This is great for people who have the interest and ability, but at lot of people will want to know what they should do if they don't have the interest or ability.
67
Thank you for this. I know it has been said before but is worth repeating since the Wall Street firms all spend a lot promoting active management.
30
Analysts' predictions re individual companies are just as useless. Go to tipranks.com and check out the success rate of the average analyst. Instead check out the charts and see how the share price is doing.
1
Thank you so much for this article. I have been espousing this for a long time and I have lost many arguments about this. I cannot wait to share this article. Season's Greetings!
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@Adeyemo: Just because something is in print doesn't mean that it is true. Did you check the underlying assumptions?
2
@Allen I happen to have an educational background at the Masters level and was even considering my PhD on this topic especially on the efficient market theory. We are always trying to forecast the interest rate and this is the function of the Federal Reserve. By the way have you read the first audit of the Federal Reserve Bank. Try to as it is an interesting read. Seasons Greetings!
5