Stocks and Trading Thread - Channeling your inner Mono

[MadImmortalMan]

But fixed income assets should be essential components of a balanced portfolio.  Bonds strike a balance with equities (whose value fluctuates greatly) and cash (whose income is too small and there is almost no appreciation in value).  Not having any bonds is itself a risky proposition.  When we are young we can afford to put everything in equities.  But as we approach retirement age, we need to become more conservative.

Of course they are. I don't trade with my retirement account though. That's where the bonds and funds are. I trade with an account that's just for trading. Speculation. The risky shit. It's nowhere near the size of our real retirement accounts. I don't trade with those. The sad thing is, I've done WAY better with my speculative account than I have with the 401k or either IRA over the last year. 

[Monoriu]

But fixed income assets should be essential components of a balanced portfolio.  Bonds strike a balance with equities (whose value fluctuates greatly) and cash (whose income is too small and there is almost no appreciation in value).  Not having any bonds is itself a risky proposition.  When we are young we can afford to put everything in equities.  But as we approach retirement age, we need to become more conservative.

Of course they are. I don't trade with my retirement account though. That's where the bonds and funds are. I trade with an account that's just for trading. Speculation. The risky shit. It's nowhere near the size of our real retirement accounts. I don't trade with those. The sad thing is, I've done WAY better with my speculative account than I have with the 401k or either IRA over the last year. 

I don't have all those different accounts.  Just one single account fully controlled by me and me alone.  You guys probably have lots of different tax regulations.  We don't.  The government doesn't tax our investment incomes, and doesn't add anything to our retirement accounts. We're on our own.  My pension is there as a job benefit. 

[Richard Hakluyt]

I'm investing virtually all of our net savings in shares atm and expect to continue to do so for the forseeable future, can't be bothered with those pesky bonds 

OTOH, we do own two houses outright and also both have government-guaranteed and inflation-protected final-salary pensions to look forward to. So I think that the share purchases are actually putting our finances into a more balanced state.

[Monoriu]

The U.S. stock market is wrapping up what is likely to be its worst decade ever.
In nearly 200 years of recorded stock-market history, no calendar decade has seen such a dismal performance as the 2000s.
Investors would have been better off investing in pretty much anything else, from bonds to gold or even just stuffing money under a mattress. Since the end of 1999, stocks traded on the New York Stock Exchange have lost an average of 0.5% a year thanks to the twin bear markets this decade.
Worst Decade Ever

See an interactive chart of annual returns, by year and decade


The period has provided a lesson for ordinary Americans who used stocks as their primary way of saving for retirement.
Many investors were lured to the stock market by the bull market that began in the early 1980s and gained force through the 1990s. But coming out of the 1990s, the best calendar decade in history with a 17.6% average annual gain, stocks simply had gotten too expensive. Companies also pared dividends, cutting into investor returns. And in a time of financial panic like 2008, stocks were a terrible place to invest.
With two weeks to go in 2009, the declines since the end of 1999 make the last 10 years the worst calendar decade for stocks going back to the 1820s, when reliable stock market records begin, according to data compiled by Yale University finance professor William Goetzmann. He estimates it would take a 3.6% rise between now and year end for the decade to come in better than the 0.2% decline suffered by stocks during the Depression years of the 1930s.
The past decade also well underperformed other decades with major financial panics, such as in 1907 and 1893.
"The last 10 years have been a nightmare, really poor," for U.S. stocks, said Michele Gambera, chief economist at Ibbotson Associates.
While the overall market trend has been a steady march upward, the last decade is a reminder that stocks can decline over long periods of time, he said.
"It's not frequent, but it can happen," Mr. Gambera said.
To some degree these statistics are a quirk of the calendar, based on when the 10-year period starts and finishes. The 10-year periods ending in 1937 and 1938 were worse than the most recent calendar decade because they capture the full effect of stocks hitting their peak in 1929 and the October crash of that year.
From 2000 through November 2009, investors would have been far better off owning bonds, which posted gains ranging from 5.6% to more than 8% depending on the sector, according to Ibbotson. Gold was the best-performing asset, up 15% a year this decade after losing 3% each year during the 1990s.
This past decade looks even worse when the impact of inflation is considered.
Getty Images CLICK ON IMAGE: Markets during the '80s and '90s were fixated on the cheap and powerful computing power created by Microsoft's Bill Gates. Click on the image to see the annual returns, by decade, for a broad measure of stock-ownership.



Since the end of 1999, the Standard & Poor's 500-stock index has lost an average of 3.3% a year on an inflation-adjusted basis, compared with a 1.8% average annual gain during the 1930s when deflation afflicted the economy, according to data compiled by Charles Jones, finance professor at North Carolina State University. His data use dividend estimates for 2009 and the consumer price index for the 12 months through November.
Even the 1970s, when a bear market was coupled with inflation, wasn't as bad as the most recent period. The S&P 500 lost 1.4% after inflation during that decade.
That is especially disappointing news for investors, considering that a key goal of investing in stocks is to increase money faster than inflation.
"This decade is the big loser," said Mr. Jones.
For investors counting on stocks for retirement plans, the most recent decade means many have fallen behind retirement goals. Many financial plans assume a 10% annual return for stocks over the long term, but over the last 20 years, the S&P 500 is registering 8.2% annual gains.
Should stocks average 10% a year for the next decade, that would lift the 30-year average return to only 8.8%, said North Carolina State's Mr. Jones. It is even worse news for those who started investing in 2000; a 10% return a year would get them up to only 4.4% a year.
There were ways to make money in U.S. stocks during the last decade. But the returns paled in comparison with those posted in the 1990s.
Of the 30 stocks today that comprise the Dow Jones Industrial Average, only 13 are up since the end of 1999, and just two, Caterpillar Inc. and United Technologies Corp., doubled over the 10-year span.
So what went wrong for the U.S. stock market?
For starters, it turned out that the old rules of valuation matter.
"We came into this decade horribly overpriced," said Jeremy Grantham, co-founder of money managers GMO LLC.
In late 1999, the stocks in the S&P 500 were trading at about an all-time high of 44 times earnings, based on Yale professor Robert Shiller's measure, which tracks prices compared with 10-year earnings and adjusts for inflation. That compares with a long-run average of about 16.
Buying at those kinds of values, "you'd better believe you're going to get dismal returns for a considerable chunk of time," said Mr. Grantham, whose firm predicted 10 years ago that the S&P 500 likely would lose nearly 2% a year in the 10 years through 2009.
Despite the woeful returns this decade, stocks today aren't a steal. The S&P is trading at a price-to-earnings ratio of about 20 on Mr. Shiller's measure.
Mr. Grantham thinks U.S. large-cap stocks are about 30% overpriced, which means returns should be about 30% less than their long-term average for the next seven years. That means returns of just 1.6% a year before adding in inflation.
Another hurdle for the stock market has been the decline in dividends that began in the late 1980s.
Over the long term, dividends have played an important role in helping stocks achieve a 9.5% average annual return since 1926. But since that year, the average yield on S&P 500 stocks was roughly 4%. This decade it has averaged about 1.8%, said North Carolina State's Mr. Jones.
That difference "doesn't sound like much," said Mr. Jones, "but you've got to make it up through price appreciation." Unless dividends rise back toward their long-term averages, Mr. Jones thinks investors may need to lower expectations. Rather than the nearly 10% a year that has been the historical average, stocks may be good for only about 7%.

[citizen k]

The U.S. stock market is wrapping up what is likely to be its worst decade ever.
In nearly 200 years of recorded stock-market history, no calendar decade has seen such a dismal performance as the 2000s.
Investors would have been better off investing in pretty much anything else, from bonds to gold or even just stuffing money under a mattress. Since the end of 1999, stocks traded on the New York Stock Exchange have lost an average of 0.5% a year thanks to the twin bear markets this decade.

That's why individual stocks are the way to go.

Apple    Jan. 1, 2000  25.94   
           Dec. 1, 2009  202.10


Google  Sep. 1, 2004   102.37
           Dec. 1, 2009   611.68

[Monoriu]

Well, if you have the ability to pick winning stocks AND avoid poor performing stocks, sure.  Thing is, I certainly don't have this ability, and I will be very, very skeptical of anyone who claims they do. 

I buy individual stocks not because I think I know better than the market, but because stocks with a higher dividend yield than average suit my needs better.   

[DGuller]

What do you people think about safe withdrawal rates? 

For those who don't know, it is a simple rule of thumb way to calculate the amount of assets needed for retirement.  It represents the amount of money you can withdraw from the portfolio every year without exhausting the portfolio.  Say, you need $50k a year after retirement.  Assume that you adopt a 4% SWR, then the initial asset requirement is $50k divided by 0.04 = $1.25 million.  How much money you need after retirement is really a matter of personal preference.  So the SWR becomes crucial.  The typical SWR regarded as safe is 4%.  Anything below 4% is conservative and stands a higher chance of success.  An SWR of 5% or above is risky - the portfolio may be depleted before you die. 

There is a huge amount of literature written on this.  Some say it is idiotic, because the strategy could be too conservative and leave a large unspent balance.  Some say they've tested the strategy with real data from the past century or so, and it can withstand a recession the scale of the Great Depression.  Some say the best idea is to buy an annuity.  Some say annuities are traps. 

What say you?

You know what I'm going to say, buy annuities.  They're designed to do exactly what you're trying to do, but due to the fact that you're pooling with many, many people, it allows you to do it with much less conservatism.

[Caliga]

Of course they are. I don't trade with my retirement account though. That's where the bonds and funds are. I trade with an account that's just for trading. Speculation. The risky shit. It's nowhere near the size of our real retirement accounts. I don't trade with those. The sad thing is, I've done WAY better with my speculative account than I have with the 401k or either IRA over the last year. 

Yes, this describes my situation exactly as well.  I'm talking about my "fun" portfolio here when I say I don't mess with bonds... and just like you I did much better with my fun portfolio than my IRA did.  LOL can I be: Wall Street broker.

[Ed Anger]

For my spare cash trades, I always look for trends. After the 2001 attacks, I moved into defense and security stocks. After the tech bubble burst, I bought good tech companies when they were on their lows. When the car makers went south, I bought some Ford at around 2.

And that GM goofyness that netted me 120 bucks. 

Worked well for me so far.

[Caliga]

Always look for a solid company going through a bit of bad news/publicity.  Assuming you believe they will weather the crisis, you will PROFIT.  I wish I was able to buy stock in whatever company makes Tylenol right after the news broke back in the early 80s that some weirdo was putting poison in Tylenol bottles.

[Ed Anger]

Always look for a solid company going through a bit of bad news/publicity.  Assuming you believe they will weather the crisis, you will PROFIT.  I wish I was able to buy stock in whatever company makes Tylenol right after the news broke back in the early 80s that some weirdo was putting poison in Tylenol bottles.

McNeil. Edit: looked it up, ans it was Johnson & Johnson.

Gotta watch out for companies that go under, like Chi-Chi's when that hep A scare hit the chain.

[Caliga]

Gotta watch out for companies that go under, like Chi-Chi's when that hep A scare hit the chain.

My dad worked for Prandium (Chi-Chi parent) as their Director of Facilities when that happened.  That was the end of his restaurant industry career.  Now he's semi-retired (he runs a small woodworking shop these days).

[Ed Anger]

Gotta watch out for companies that go under, like Chi-Chi's when that hep A scare hit the chain.

My dad worked for Prandium (Chi-Chi parent) as their Director of Facilities when that happened.  That was the end of his restaurant industry career.  Now he's semi-retired (he runs a small woodworking shop these days).

Ow.

[Caliga]

I doubt he had anything to do with it, but they blamed a bunch of their senior dudes and I think he got canned because of it, but he's "sensitive" about the topic and won't discuss it with me or my bro.  I know he got a nice severance package, so he probably made out better than the dudes who didn't get broomed and were still around when the company went under, and therefore didn't get jack shit.

[Monoriu]

You know what I'm going to say, buy annuities.  They're designed to do exactly what you're trying to do, but due to the fact that you're pooling with many, many people, it allows you to do it with much less conservatism.

NEVER    Reasons:

Annuities make sense for people who are so far from saving the needed amount of cash to retire early.  They need to export the risk.  I don't.  I am on track to achieve my goals.

I already have an annuity in the form of my pension. 

In HK, most annuities have variable payouts, depending on market conditions.  In effect, I am giving the insurance companies a discretionary mandate to manage the money for me.  I'll do that when hell freezes over.