It took a long time for the excesses of the 20′s to be washed out of the system. It will take a longer time for the excesses of the 90s to wash out.

Stock investing has a serious psychological component that most people miss. Our investing philosophy is created during our initial exposure to it. People who started investing in the late 80-90s have a great sense that the market will recover and continue to go up. People who started in 2000 have a very different thought to it.

As demographics change, and the 80s folks become more risk averse and the 2000′s folks have more money to invest. We will see a dramatic shift away from equities which will be part of the driving force to return P/Es to reasonable levels.

http://www.askthewealthsquad.com/blog/why-you-should-get-out-of-the-stock-market-now/

Should you expect great returns in the market right now? I don’t think so. But one day we will have a great opportunity too invest.
.-= Scott Lovingood – The Wealth Squad´s last blog ..Video Interview – Tony Robbins Frank Kern John Reese – Change your mindset =-.

Thanks, I thought as much.

Thanks for your question, Will.

I am objecting to the widespread promotion of the Passive Investing concept. The thing that Passive Investors are passive about is their stock allocation. If you are passive about your stock allocation that means you are not taking price into consideration when setting your allocation. This is a terrible, terrible, terrible idea, an idea that none of us would give two seconds consideration to if we were thinking of buying anything other than stocks.

Can you imagine not taking price into consideration when buying cars? How would you react if you were thinking of buying a car with a fair market value of $20,000 and the dealer told you that his price was $60,000 but he added that that’s okay because cars are always a good buy in the long run regardless of price? You would laugh in the guy’s face, right? Why do we not all laugh in the faces of the people who tell us that stocks are always best in the long run and that timing doesn’t work (that’s another way of saying that “price doesn’t matter”)? The messages are equivalent.

We buy into this stuff because it has been repeated hundreds of thousands of times. We have been told so many times that timing doesn’t work that we just assume that there must be something to it. There is nothing to it. I know because I’ve checked the historical data for myself.

The reality is that the historical data show that short-term timing (changing your allocation with the expectation of seeing a benefit within six months or a year) never works. The same historical data shows that long-term timing (changing your stock allocation in response to price changes with the understanding that you may not see benefits for five years or perhaps even ten years) ALWAYS works. There is not a single exception in the historical record.

So those who say that “timing never works” have legal protection if they are sued for making this claim. There really is data showing that short-term timing never works. But a hugely dangerous misimpression has been caused by the millions of reiterations of this marketing slogan. If middle-class investors had known that long-term timing always works, they would have known to lower their stock allocations when prices got to insanely dangerous levels. Then we would not have seen the great loss of middle-class wealth that we have experienced and the economic crisis that followed from it.

The root problem is that most of the people who are quoted as stock “experts” have ties to The Stock-Selling Industry. Their primary area of expertise is in selling stocks. They are not even a tiny bit unbiased. We should not be relying so heavily on such highly biased sources of information for advice on how to finance our retirements.

There is nothing wrong with an industry promoting its product. I expect a car salesman to try to sell me a car and it makes sense that a stock salesman would try to slant the case as strongly in favor of stocks as he possibly could. But problems are created for our entire economic and political system when we permit the promotion of stocks to get as our of control as we let it get during the years when middle-class people were being told on a daily basis that they should be buying stocks to finance their retirements regardless of the price at which those stocks were being sold. That idea is a dangerous idea that has done us all a great deal of harm, in my opinion.

The claim that stocks are always best for the long run is not the product of some sort of scientific investigation of the question. It is a marketing slogan, nothing more and nothing less. Millions of us have come to believe in that message because it is a marketing slogan that has been repeated more than any other that I can think of. I believe that we need to create courses of independent information on stocks so that middle-class investors have a hope of learning the realities.

I am not anti-stock. I love stocks. I think that those of us who love stocks should want both the pros and cons of stocks to be presented fairly and accurately. When we say things about stocks that cannot possibly be so (or sit in silence when others do so), I believe that we cause stocks to be perceived in a negative light in the long term.

Stocks are good enough just as they are. There is no magic asset class that offers a strong long-term value proposition regardless of the price at which it is sold. I personally find it an insult to my intelligence that there are people who expect me to believe that there ever could be such a thing.

Rob
.-= Rob Bennett´s last blog ..Podcast #138 — Why the Stock Market Does Not Set Prices Properly =-.

This claim makes no sense whatsoever.

Can you provide some sort of evidence of this?

This is the most important question of all, Dave C. The historical data shows that stocks are by far the best asset class for the middle-class worker seeking financial freedom. They show that stocks are so great that there’s really only one way to mess up buying them — to invest passively (to fail to change your stock allocation in response to price changes). Naturally, The Stock-Selling Industry has devoted hundreds of millions of dollars promoting Passive Investing over the past 30 years!

That sort of thing doesn’t happen by accident. The root problem is that what works from a long-term investing standpoint is precisely the opposite of what works from a short-term marketing standpoint. There was lots and lots and lots of money to be made from the promotion of Passive Investing. So long as we live in a free-market economy, it’s hard to see how we are ever going to be able to rely on the “experts” (almost always people with ties to The Stock-Selling Industry) for investing advice that stands much chance of working in the real world. So there are indeed many who believe that we will just continue destroying ourselves over and over again.

I don’t believe that. For four reasons.

One, investing changed forever when we began incorporating academic research into the case made for various strategies. This development hurt us big time this time around because the academics got it wrong (it is a mistake that the academics made about efficient markets that caused the Passive Investing idea to get off the ground). But there have been scores of articles since the crash in which people have pointed out that the model that the experts have been using has been totally discredited by the academic literature for many years now. Rob Arnott, former editor of the Financial Analysts Journal, recently pointed out that today’s conventional investing advice is the product of “myth and urban legend.” The academics are soon going to feel free to do analytically valid studies. When they do, people are going to learn the realities in a more solid way than they ever did before. I don’t think we are going to forget the lessons this time because this time we are going to have hundreds of studies pointing out the realities in black and white.

Two, the damage done by Passive Investing has been growing greater over time. That’s because the percentage of the population that invests in stocks has been increasing. It’s not just rich people who own stocks today, it’s also middle-class people. You can’t give middle-class people the responsibility of financing their retirements and then deny them access to realistic investing information. I don’t think that will ever fly again.

Three, this crash is likely going to be so bad that people will never forget the experience of trying to survive it. The fair value P/E10 level is 14. Stocks always crash hard once we get to 25 (there’s not one exception in the record). In 1929, we went to 33. That brought on The Great Depression. In 2000, we went to 44. When we are done paying the price for this particular trip to Passive Investing Fantasyland, we are not going to forget it for a long, long time.

Four, I believe that we are moving to an understanding that what happens to the stock market is of concern not only to those who invest in stocks but to all who care about the future of the U.S. economic and political system. Passive Investing has not only caused huge financial losses for all who have employed it on each of the four times in U.S. history when it has been tried. It has also caused an economic crisis on each of those four occasions (from 1900 forward, there has never been an economic crisis in the United States that was not preceded by massive promotion of the Passive Investing “idea”). The health of the stock market is a matter of common concern, like the environment. We all need to protect it from the deadly pollution of the idea that the price you pay for stocks doesn’t matter. My guess is that the economic and political pain is going to be so great this time that we will never again permit The Stock-Selling Industry to have total control over what middle-class investors are able to learn about how stock investing works.

I believe that things are going to get worse before they get better. But I also believe that, when things get better again, this time they are going to get better for good. I believe that we are today about halfway to where we need to to enter The Golden Age of Middle-Class Investing.

Rob
.-= Rob Bennett´s last blog ..Stock Volatility Kills =-.

This is Rob Bennett, the author of the Guest Blog Entry. Thanks for your interest, Money Energy. I have a calculator at my web site that reports the safe withdrawal rate accurately. It’s called “The Retirement Risk Evaluator.” There’s a link to it at the bottom of this blog entry, where the description of my background is provided. If you scroll down the page where the calculator is housed, you will find several articles discussing how to use it and strategies that follow from the findings derived from use of it and that sort of thing.

The calculator shows that the safe withdrawal rate for an 80-percent-stock portfolio used by a retiree retiring at the top of the bubble was 2 percent (not 4 percent, as claimed in the Old School SWR studies). The odds of a plan that called for a 4 percent withdrawal surviving for 30 years was one in three. Millions are going to suffer failed retirements as a result of these demonstrably false claims (claims that have not been corrected in the seven years since I went public with what I knew about the analytical errors in the studies).

A portfolio comprised of 100 percent Treasury Inflation-Protected Securities (TIPS) had a SWR of 5.8 percent at the top of the bubble. That means that a TIPS investor with a $1 million portfolio could have lived in retirement on $58,000 per year (inflation-adjusted) while the stock investor was required to get by on $20,000 if he wanted his retirement plan to be safe.

For a retiree retiring today, the SWR for an 80-percent stock portfolio is 4.50.

If the P/E10 level drops over the next few years to 8 (it has ultimately dropped to that level on each of the three earlier occasions when we went to insane price levels for a time), the SWR for an 80 percent stock portfolio will rise to 9 percent. That would mean that a retiree with a $1 million portfolio could safely take out an inflation-adjusted $90,000 per year for 30 years running!

These numbers seem astounding to those who have become accustomed to the Passive Investing mindset. But they make perfect sense if you think it through for a few moments. Stocks were selling at three times fair value in 2000. If we go to a P/E10 level of 8, stocks would be selling at half of fair value. Wouldn’t you say that someone who pays $10,000 for a car with a fair value of $20,000 got a value proposition about six times better than the fellow who paid $60,000 for the same car? It works the same way with stocks. A P/E10 value of 44 is nearly six times higher than a P/E10 value of 8. An annual withdrawal of $90,000 is nearly five times greater than an annual withdrawal of $20,000. Wouldn’t you expect the difference in withdrawal rates to be something in that general neighborhood?

There are all sorts of exciting strategic possibilities that open up to us when we acknowledge that the price we pay for stocks affects the long-term value proposition obtained from them. I have another calculator that shows that those who make the switch to Valuation-Informed Indexing today can make up the entire amount of their loss in the stock crash over the course of the next 30 years as the result of doing so. The historical data shows that the single most important factor bearing on long-term investing success is the price level that applies on the day the stocks are purchased.

Rob
.-= Rob Bennett´s last blog ..Stock Volatility Kills =-.

But overall this just confirms two biases I already have: 1) I’d rather DIY than “trust” any advisor; and 2) I’m not interested in the old version of retirement and don’t think it’s going to work going forward.

It’s still scary though, because I want my parents to have the best use of their money and they are big into leaving it all up to the advisors. As always, the advice is just buy and hold, because it will keep going up, up. up…. no mention of the fact that one might be retiring at the same time as we go into a secular bear market with dividend cuts etc. etc.
.-= MoneyEnergy´s last blog ..Still A Good Time for Canadians To Purchase US Dollars While The Loonie Is High =-.