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Bogle Warns of Two (as high as) 50% Market Declines in Next Decade
He is saying that these 50% declines are normal and part of investing life. He is advising that people should be mentally prepared...
I do not see it is uncharacteristic of what Bogle has said in the past.
"Why it doesn't bother me is if you hang on through the cycle, that's the only way to invest. Trying to guess when it's going to go way up or way down is simply not a productive way to put your money to work."
So, it is not very much different from what he has said all along. Financial press is trying to make headlines again...
Reply to @Investor: I'm not sure if two 50% declines within a decade are entirely normal in the long-run (although maybe that's the new normal), but either way, I think it speaks to the continued importance of dividends for those who are buy-and-hold.
Reply to @scott: Normal or not... He is not really a forecasting guy. When he mentions "It could ...", he wants our ducks (portfolio) allocation to be ready for such possibilities and don't freak out when it happens. I am personally sure, I'll go through a number of these before I retire.
Bogle was born in May 1929 a few months before the onset of the Great Depression - which may have influenced his usually cautious outlook. At 84, by his own long-standing investment doctrine, he'd be 84% invested in investment grade bonds at this point in time. Along with Warren Buffet and a few others, I find Bogle one of the most charismatic and intriguing financial spokesmen out there. However - Caution! Always caution when listening to these guys and other gurus. Free advice is often worth what you pay for it (including here at MFO:-) and their fortunes don't necessarily rise and fall along with yours.
But, if you really want something to worry about, look at David's impressive list of the dozens of fund managers who are currently holding (hoarding?) mega-bucks in cash (April commentary). Now, that's an eye opener. ... - I suspect Bogle is factoring in here (1) future big market gains along with (2) the herd mentality of investors which he has long derided and (3) his own generally cautious approach, in what otherwise on the surface appears a dire forecast.
My best guess is that 95% of individual investors (being monies placed into retirement plans; 401k, 403b, 457's) have few clues or care about investments in particular, and their investment holdings mix is from info/recommendations from co-workers or a blend of holdings based upon literature from the plan vendor. The next 10 years will find the large remainder of boomers going into retirement (if they can afford the situation). If there were to be two more large down periods in the overall market place in the next ten years, a large portion of the remaining market players will be the big trading houses, pension funds and sovereign wealth funds, as I feel more individual investors will be chased away from the "gambling house". This trend is already in place. Two more big market whacks (in ten years) would drive away individual investors for years going forward. Sadly, the offered retirement plans (401k, etc) and wise budgeting through one's working period are now the major opportunities for one to "form" a retirement plan. Such a plan is also now only in place to those fortunate enough to have access to a plan; meaning they have full time employment, and that even with full time hourly work actually have the monetary standing to save anything for retirement, as the low wage jobs many have today and will have going forward will only afford them to have a "daily living" standard. Would many individual investors "bail" with two more major market downturns in the next ten years? Probably not in the beginning of the event; as with the market melt in 2008-2009. But, eventually; if the downturn lasted over a 6 month period as the last melt; too many would unload at the wrong time and find large portfolio losses. I know of too many folks who followed this path in early 2009. Bad market scenarios going forward in the next 10-20 year period would not be good for anyone; including we here who attempt to understand and react to drastic market changes. If there is less monies going into equity markets from too many individuals, the forward gain momentum is reduced accordingly; and will affect "our" holdings, too.
Much of this has been discussed previously here.
I don't know that Mr. Bogle has the expectation that there would be many equity or equity like areas that would not receive an equal butt kicking in any coming equity market downdraft. I can not envision equity sectors that would fare much better than another.
My 2 cents, and back to my other work I must go....now.
If I were a kid, a drop in the market would be an opportunity to dollar cost average into a cheaper market.
Over the next decade, myself and many other baby boomers will not only need to navigate the ups and downs of the market, but understand how to draw from our nest egg in a way that there doesn't end up causing "too much life at the end of the money"... my take on "too much month at the end of the pay check". How one cracks open (and preserves) their nest egg will become a primary concern for a large number of investors.
Remember, a 50% loss requires a 100% gain to just get back to even. Selling locks in gains or losses. Yet selling, not buying, will be a bigger dynamic for retirees. This may have an impact on the market that we have not fully understood just yet...Retirees will be net sellers. I believe there are many who have already sold at tremendous losses in '08-'09. Positioning your portfolio for retirement is as important as any other retirement consideration...maybe the most important.
A 50% loss in the equity market doesn't neccessarily mean a 50 % portfoilio loss. Selling stocks when they are outperfoming, owning non-correlated assets, creating an income stream from dividends / rental property, or annuitizing part of one's wealth (for the purpose of meeting income needs) are just a few ways to hedge against the stock market's ups and downs.
Maybe others could comment on how they are creating income for themselves.
Most of you are aware that I admire and trust John Bogle. He is an innovator and true giant in the mutual fund industry. Although I have never been a member of the Boglehead clan, I listen very carefully whenever John Bogle ventures a forward directed opinion. That opinion may not always be on-target, but it is an honest assessment.
His recent forecast of a near-term (10 year timeframe) equity market downturn of order 50% is the hot topic of this MFO exchange. A dire prediction of that magnitude from such a distinguished mutual fund hero deserves the attention given by our Board participants. Unlike many forecasts it has the three needed elements of a complete forecast (direction, magnitude, and time scale), and the authority of a seasoned, influential veteran insider possessing considerable prestige.
But, keep in the forefront of your judgments, that it is merely a singular forecast, a projection of the uncertain future. Regardless of his elite status, John Bogle is no more prescient than any MFO member. His guesstimate has no more power nor has any higher likelihood of precision than those that we choose to make. So curb your enthusiasm.
Bogle would quickly acknowledge the wisdom of my assertion. He is a humble man. During his long and successful lifetime, he has consistently conceded that the future is an uncertain unknowable. He has consistently recognized the merits of longer-term committed investing, and has just as consistently argued against shorter term market timing strategies.
Most likely, John Bogle’s recent announcements were motivated from an historical perspective, and from worry over the tumult of the world’s current economic condition. It is more a general longer term recognition of the investment environment than a specific forecast. It is a cautionary generic warning. Bogle knows he is not a soothsayer.
I really like your composite commentary on this matter. It demonstrates a mature understanding of the marketplace and what moves the marketplace. It recognizes retirement issues. It is insightful. Your many observations and suggestions should benefit the MFO membership overall.
Your remarks that emphasize the pathway dependence in both the accumulation and the distribution phases of the investment process are spot on-target. A recent retiree will face a tough road indeed if cruel fate delivers him a recessionary equity market immediately following his retirement decision. The opposite would be true if the markets generate positive outcomes.
Since these outcomes are so uncertain, it is prudent to be overly cautious, especially in the earlier retirement years.
A diverse portfolio with low correlation coefficient holdings is one partial answer. That protection translates into a slightly lower projected returns for that near-term. A healthy cash reserve would be helpful as a safety net. A low retirement portfolio drawdown schedule (typically below a 4 % annual rate) plan is almost mandatory. That plan must be sufficiently flexible to permit some minor adjustments to the planned schedule (like no inflation increment) during poorly performing market years.
Planned flexibility is a key to retirement survival. Perhaps the retirement itself might best be executed using small steps. In my own case, I worked part-time and later consulted for a few years after my official retirement date. Many such alternate options exist and should be considered before completely severing the knot. Given the existence of unknowable unknowns, an incremental approach is a wise compromise.
I want to thank all you guys for participating in this fine and worthwhile idea exchange. You added practical tips.
Reply to @MJG: Thanks for weighing in. A confession. I hadn't read the story before commenting earlier. Apologies there. However, having now looked at the (first) linked story, I'd say It doesn't do justice to either Bogle or to the fine contributions here from various members with its skimpy presentation. Couldn't view the video, as my IPad doesn't support flash-player, but suspect I'm not missing much. As for CNBC, their motto might well be: "All hat. No cattle." ... As you say, Bogle is a giant of the investment world. I plodded through one of his lengthier books in the mid-90s. Unfortunately, can't recall for certain its title. But it did leave a lasting impression - in particular his emphasis on "regression to the mean". --- Regards
I took his interview and comments about market declines as "generally speaking", you must be prepared for that ANY TIME you invest in the market. I don't believe he was making a prediction per se, but saying "you have to accept that these things happen from time to time".
Reply to @Investor: That's my take, too. Though I'm already retired. Often the MANNER in which a statement is presented can cause alarm, particularly from such a trusted name. But economics is as much Art as Science---like theology. You can make a convincing case, but there's always another angle to be considered. And "2 huge declines in the next DECADE?" That's as safe and unremarkable as saying that there will be earthquakes in California.
The media love to create a scary headline, even when there is nothing to back it up, at least in the way they intend. That was certainly the case here. They think most people who watch CNBC and the other market-babble shows are only interested in the hype of the day. And they are right to a large extent. Mr. Bogle did not say anything different than what he and other smart investors already know. Market declines, some of them severe, occur from time to time. Ususally they follow economic cycles pretty closely, but not always. Well...duh! CNBC would have us believe he was making a prediction. He wasn't, but it sells advertising.
I think it's fine and good that people have a long-term view (declines are to be bought, etc.) I think a significant yield and some lessons learned/a bit of restructuring has allowed me to probably have more of a buy-and-hold mentality than ever before and I think that's been a positive in a number of ways.
However, I'm curious: I tend to think that this group is rather different than the majority of investors. No one can forecast markets, certainly, but after the 2001 decline and 2008 decline, does anyone honestly think the majority of average investors are going to stick around and practice a buy and hold discipline IF another 2008 happened? I don't think many people still feel secure enough to continue to take that risk, especially those at/near retirement. People are only now sorta/kinda coming back to stocks (although significant fixed income inflows continue) after going heavily into fixed income after 2008.
Take away the "scary headline" and the fact that no one can forecast the market - I just think that IF (and I emphasize IF) there were to be two "2008-like" declines in the market over the next decade, you're A:) not going to see people buy-and-hold again either, (all the discussion about buy-and-hold and long-term and investor discipline statistics will continue for years) and B:) CNBC will be hosted by tumbleweeds (which, in some ways, would probably be an improvement.)
I don't think there will be one 50% decline over the next decade (I think even a mild recession will probably be met with more QE), but all I'm saying is that I don't think investor mentality has healed from the last decade nor do I think this advice to be disciplined and "buy and hold" is going to matter again to the majority of average investors if there are a couple of "2008 repeats."
Weight loss is difficult. It requires to be disciplined over a longer term. Few people are actually successful.
Buying on the face of big market declines is extremely difficult. Even professionals have hard time doing it. But if you can do this you are rewarded well.
Buy-and-hold and re-balance is difficult. It requires a level of discipline. It requires someone has though of their asset allocation and have a plan.
So, people trying to be traders at the worst possible times. They use "I can't stand it anymore" timing strategy. They leave the market after the damage is done and don't come back after much of the run-up has already occurred and worse they try to catch up by taking more risk than possible. In other words, they experience the worst days of the market and also miss the best days. Even those that left earlier (by luck or by skill) in the declines had hard time coming back. While those buy-and-hold'er did experience the decline but aready caught up and surpassed these that stayed out.
If we accept that we will experience such large declines from time to time and segregate our assets according to our liabilities (short term liabilities are invested in shorter term, safer products) than it may be possible for us to leave the long term assets to the long term plan and try to ignore the movements on that group. Just maybe...
As far CNBC, I think people will continue to watch it. It is entertainment. They will find gurus and talking heads and if people actually trying to time, they will be watching these shows more. It is buy and holders that CNBC tells little.
Thanks for your initial reference to Bogle and your summary comments. Both were excellent.
I do not believe that the two options that you identified near the end of your submittal with regard to investor persistence is inclusive enough.
I believe MFO’s Investor understands the “average” individual investor about perfectly. I wish I had written the piece that he contributed. It too is excellent. I am in total sympathy with his assessments of this sad cohort.
The evidence is overwhelming. That evidence most assuredly does NOT support the proposition that private investors are either smart, prescient, or persistent. They display none of these necessary attributes for successful investing over the long haul. The reverse is closer to the truth. Any opinion to the contrary has a politically correct tinged incentive.
I always revert to the numerous DALBAR, Morningstar, S&P scorecards, and academic studies that backstop my valuation of the matter. In total, these studies demonstrate that private investors are either not aware of the overall market data, or do not fully understand it, or choose to ignore it, or elect to be risk takers and speculate to secure the golden egg.
In 1841, Charles Mackay published his classic “Extraordinary Popular Delusions and the Madness of the Crowds”. Not much has changed since then with respect to crowd mischief and misbehavior. We still invest in the lottery and in market Bubbles. The lure of quick and outsized profits overcomes any better judgment that we might possess in other circumstances. The quick Buck is king. Some of us still trust fortune-tellers and market forecasting gurus to guide us to the pot of gold. Fat chance!
Year after year the S&P scorecards show that Index funds outperform their actively managed counterparts in most categories, especially over slightly extended timeframes. Yet private investors only populate their portfolios with a 15 % weighting to Index products. In contrast, Institutional agencies commit roughly 50 % of their portfolios to Index-like holdings.
DALBAR, Morningstar, and academia consistently establish that individual investors trade far too frequently to their end wealth detriment. They underperform the stocks and funds that they momentarily hold, and then exit with poor timing. The products that they trade away subsequently do better than their replacement investments. That’s a sad story.
Regardless of their claims, individual investors do NOT practice long-term, buy and hold strategies. DALBAR data sets demonstrate that equity mutual fund investors only keep their positions for a little over three years. Fixed income mutual fund and balanced fund holders preserve their positions slightly longer, but all less than 5 years. That’s barely enough time to be exposed to a full cycle even without any serious market disruptions.
I have little doubt that private investors will bale quickly and stay away for nearly a generation for any single market disruption, much less two major meltdowns following one another in rapid succession. Historical data supports this observation.
Crowd psychology is often irrational and easily swayed. Investing crowds are exactly those studied by Mackay in his book, and are victims to greed and targeted by charlatans who have some imagined prestige that compel individual investors to abandon whatever good judgment and reflective thinking they would ordinarily apply. Most investors succumb to defective, emotionally driven reflexive behavior, Their investment outcomes suffer the ravages of those poor decisions.
We investors are not as smart or as successful as we think.
Reply to @MJG: >>>I always revert to the numerous DALBAR, Morningstar, S&P scorecards, and academic studies that backstop my valuation of the matter. In total, these studies demonstrate that private investors are either not aware of the overall market data, or do not fully understand it, or choose to ignore it, or elect to be risk takers and speculate to secure the golden egg.<<<<
Have you ever wondered why the average investor underperforms? Could it be they rely on others for their investing advise? They attend seminars, subscribe to all sorts of advisory services, try to emulate the latest and greatest investing guru, etc., yet all the while spend little to no time trying to craft their own personal investing strategy suited uniquely to their personality.
I couldn’t agree more. You are absolutely spot on-target. Rather than developing an investment philosophy, and then a policy and strategy to execute it to satisfy their own special circumstances and goals, most investors show a strong preference to select and follow the advice of a leader.
Of course under some circumstances that decision is warranted given the limited knowledge and market sophistication of the investor. Hired advisors are often needed, and do provide a valuable guidance service.
But I suspect we’re talking about that group of private investors who consider themselves capable and independent. In truth, this cohort is often in search of a hot tip or a prescient guru who can guide them to the promised land. These folks seek an investing Holy Grail that does not exist, and they seek it from perceived experts who are powerless to provide the road map or even admitting that they do not possess that map.
Individual investors are part of an investment crowd. In general we more resemble Mackey’s “madness of the crowds” than James Surowiecki’s “wisdom of the crowd”. The wisdom of the crowd can only be captured when the crowd members are truly independent, have some diverse special skill sets, and do not fall pry to groupthink. As a general observation, most investors fail all three criteria.
We expose ourselves to media (of all types) influence, we have relatively poor market skills (especially in a statistical understanding), we seek affirmation from like-minded souls (groupthink susceptibility), and we search for leadership (gurus, experts) to give us direction. It is much easier to allow a leader to decide than to formulate a plan and decide for yourself. If the investment fails we can always blame someone else.
Reply to @MJG: We seem to agree 110% and nice commentary above. I could really tell you some stories about some of the so-called trading gurus. I once wrote a piece titled "Crooks, Con Men, and Charlatans." Even you would not believe some of the back stories of the Dream Merchants who infest the trading spectrum of Vendorville.
The response of many of my coworkers to a recent change in retirement plans at my employer made me a bit thoughtful about Scott's pessimistic forecast about retail investors fleeing the markets in future downturns.
My question is: might those who default into Target Date Retirement funds because their employers "greased the skids", just stay in those funds through the downturns?
It’s so good to hear from you. It has been too long in coming.
I only read the summary section of your referenced Target Date Retirement Fund study so many of its subtleties may easily escape my notice. Sorry, but at this stage in my life I do not have the zeal to attack a detailed 24 page technical document. Most recently, I husband my time commitments more carefully.
Even given that noteworthy reservation, I still do not hesitate to venture an opinion (perhaps guesstimate would be more appropriate) for a friend.
I am not completely baffled by the finding that many purchasing Target Date investment products are loyal to that commitment, even given hell, high water, or a challenging stock market. My lack of surprise is greatly reinforced for those individuals who are pre-assigned the investment decision, and would be required to take a definite action to do otherwise.
Typically, neophyte investors are a little lazy and a little intimidated by puzzling choices, so they take the easy pathway = the route offered as a default option. They rationalize their decision by posturing that the professional investors know best. Data suggests that could be a very dangerous assumption.
Richard Thaler, one of the founders of behavioral investing research, discovered that characteristic in one of his earlier projects. His book “Nudge” documents some of those studies.
For example, in those countries where motorist are pre-assigned to generously give body organs if they suffer a mortal motor accident, the donation rate is extremely high compared to those nations that do not offer that simple pre-checked box format. The simple task of physically checking an alternate box in the form dissuades the motorist from making any change to the pre-assigned option. The same bias might also be present in the investment decision case; Thaler has test data to prove it is so.
I would speculate that many of those folks who freely and quickly accept the Target Date option when making a company savings decision are not much interested in the investment process. It is the easy and convenient way out of a vexing decision, made more troublesome by an unfamiliarity with the investment universe. There is an implied trust in the portfolio construction skills of professional management.
So, I’m not at all shocked by the perseverance of those Target Date Fund holders who stay the course during investing hard times. I suspect many of these same folks (a disproportional segment of the population) do not carefully follow the ups and downs of the marketplace. I make no judgments about the merits of that judgment. But that just might be the way it is.
It is just a slightly disquieting result of the libertarian paternalist analysis here that as more of the new money is routed into TDF funds by more or less beneficent fiduciaries, the new and very naive money may end up doing better than the traditional "average investor"'s money, even though the average investor probably knows more, and is definitely more interested.
Reply to @GregFromBoston: Well, I think if people do move into lower risk investments and they are okay with the returns they are seeing, that may not be enough to save for retirement in the long-term, but maybe it's a symptom of whiplash - people had more risk than they realized in 2008 and they have snapped back the other way into investments that are maybe lower than their risk tolerance. Is there something to be said about people being more conservative than they should be for their long-term needs if it means they continue to participate consistently in the market? Does time bring things back into balance? I don't know.
I have a portfolio of stocks that certainly has risk, but yields at this point about 4.5%. I like the businesses long-term and get paid to wait. The reworking has been a nice change and the yield has allowed less concern about the day-to-day.
What does it take to allow someone to participate comfortably long-term? I think it's going to be different for everyone and it takes people time to find their sweet spot in terms of risk tolerance, plan, etc.
Are my views on retail activity pessimistic? I guess, but I think in a way it's realistic - I mean, look at fund flows up until this year. People are still funneling money heavily into fixed income. You had 2001, 2008 and if you have another 2008, I think in terms of demographics, you're just not going to see people in/near retirement age want to take the risk again. I don't think you're going to see another 2008, but if one happens sooner than later, I think the effect on investor mentality long-term is going to be rather dire.
Thanks for your reply to Greg’s question. Yes, both fear and inertia exist when making investment decisions. It is next to impossible to predict which will prevail in a given scenario.
Likely it changes from circumstance to circumstance. I suspect that the way we assess events constantly evolves as we evolve. Irrespective of it being a laudable target goal, I don’t expect consistency from anyone, especially from myself.
I particularly enjoyed your most recent contribution to the discussion. It added extra meaningful dimensions to the exchange. Overall the submittals have beneficially increased scope to Bogle’s market projections in terms of addressing inconvenient personal decision issues. Your posting probed some of these nuances in fine fashion.
I greatly appreciate your commentary, and wholeheartedly agree with your closing conclusion that “…. The effect on investor mentality long-term is going to be rather dire”. Thank you for your wise words.
One of my continuing themes is investor overreaction susceptibility. We are victims to investment decision traps. By harping on this topic I hope to alert folks to its ubiquitous presence with an intended goal to reduce its impact. Fat chance; I suppose I’m hopelessly tilting at windmills.
The behavioral scientists have identified a couple of personal action biases that increase the likelihood of us making faulty investment decisions. These more current findings are consistent with observations and interpretations that I referenced earlier with regard to Charles Mackay’s “madness of the crowds” book published in the mid-19th century. We’ve been making bad investment decisions and failed Crusades for untold centuries.
The behavioral wizards would likely propose that we investors have a recentcy bias and an anchoring bias to mention just two deficiencies. We place far too much emphasis on the most recent short-term market performance (rather than using all the available history), and we anchor on specific current market prices or purchase price (again neglecting longer term prospects) to the detriment of our end wealth accumulation. Many of us are also overconfident in our perceived investment acumen.
I suspect that overconfidence is NOT one of the biases that some of the folks that Greg references experience. But I do believe they will prove to be very much influenced in their decision making by recentcy and anchoring effects. These biases will trigger unwise capitulation at precisely the wrong time. The historical record of the “average” private investor supports my assertion.
Best Wishes to you and for the success of your plan.
Reply to @BobC: How about this for a scary headline, "if your not substantially invested over the next year or two, you will miss the opportunity of a lifetime"
Hope you're doing well. I think it's probably a combination of inertia and fear. For younger workers with only a 401K, they'll probably contribute and ride out any down turns. Most of the boomers that are still working are fearful - or should be - because they're too close to retirement. Same goes with the older boomers that are now in their dis-investing stage. Forget it. Recall that the baby boomers, on average, hit their peak earnings years in 2009/10.
All y'all are astute investors and still playing. Most normal folks are not and will not. They've been burned or they've been run over by the economic bus of woe and have been forced to liquidate their investments (in whatever form).
This market is being held up by QE$ and the lack of any suitable ROI alternative. Any more, the retail investor makes up such a minor percentage of this market I believe you can discount them out of the picture completely.
Also, boys and girls, if you don't think this market is getting way overblown - I want some of what you're smoking.
As for Sir John, he's just beating the same old drum. B&H forever and quit complaining. The problem with that approach is that if you're near or in retirement, you might not have sufficient time to recover. This is particularly true if you're taking income from your investments. This means you simply cannot afford to not be cautious.
Easiest way is still to continue to rebalance, diversify your accounts and most importantly, diversify your wealth.
Reply to @rono: :Same goes with the older boomers that are now in their dis-investing stage."
And if that's the case (and I think it is, to a good degree), I don't think younger generations (many of whom have a mountain of student debt) will step up to replace older investors as they go into that dis-investing stage.
I'm not going to predict what the market is going to do, but in terms of demographic issues, I agree with you.
Scott brings up a huge point that was never taken into the equation - the albatross of student debt around all the would be investors, home buyers, consumers, . . .
Apologies for tardy personal reply. I do not check this board as often as I sometimes did the old fundalarm board. Hence conversations I am in sometimes stagger, rather than flow...
All your points are right on, in particular that one about not being able to afford to not be cautious in the dis-investing stage. In recent years I had to choose how to generate some income from investments for me dear old ma and found meself trebly cautious, and attempted to limit the risks of everything including that of my own stupidity.
You and Scott have also highlighted the tidal wave of student debt on which current twenty- and thirty-somethings are floating: ca. $1 trillion market, 1/2 of all loans in deferral, 10-15% default rate, interest rates on variable rate loans expected to rise, student loans not being dischargeable in bankruptcy -- quite the mess. This may drive both another financial crisis and a restructuring in higher education. Problems for a future day.
Comments
I do not see it is uncharacteristic of what Bogle has said in the past.
"Why it doesn't bother me is if you hang on through the cycle, that's the only way to invest. Trying to guess when it's going to go way up or way down is simply not a productive way to put your money to work."
So, it is not very much different from what he has said all along. Financial press is trying to make headlines again...
Moving on.
But, if you really want something to worry about, look at David's impressive list of the dozens of fund managers who are currently holding (hoarding?) mega-bucks in cash (April commentary). Now, that's an eye opener. ... - I suspect Bogle is factoring in here (1) future big market gains along with (2) the herd mentality of investors which he has long derided and (3) his own generally cautious approach, in what otherwise on the surface appears a dire forecast.
The next 10 years will find the large remainder of boomers going into retirement (if they can afford the situation).
If there were to be two more large down periods in the overall market place in the next ten years, a large portion of the remaining market players will be the big trading houses, pension funds and sovereign wealth funds, as I feel more individual investors will be chased away from the "gambling house". This trend is already in place.
Two more big market whacks (in ten years) would drive away individual investors for years going forward.
Sadly, the offered retirement plans (401k, etc) and wise budgeting through one's working period are now the major opportunities for one to "form" a retirement plan. Such a plan is also now only in place to those fortunate enough to have access to a plan; meaning they have full time employment, and that even with full time hourly work actually have the monetary standing to save anything for retirement, as the low wage jobs many have today and will have going forward will only afford them to have a "daily living" standard.
Would many individual investors "bail" with two more major market downturns in the next ten years? Probably not in the beginning of the event; as with the market melt in 2008-2009. But, eventually; if the downturn lasted over a 6 month period as the last melt; too many would unload at the wrong time and find large portfolio losses. I know of too many folks who followed this path in early 2009.
Bad market scenarios going forward in the next 10-20 year period would not be good for anyone; including we here who attempt to understand and react to drastic market changes. If there is less monies going into equity markets from too many individuals, the forward gain momentum is reduced accordingly; and will affect "our" holdings, too.
Much of this has been discussed previously here.
I don't know that Mr. Bogle has the expectation that there would be many equity or equity like areas that would not receive an equal butt kicking in any coming equity market downdraft. I can not envision equity sectors that would fare much better than another.
My 2 cents, and back to my other work I must go....now.
Take care,
Catch
Over the next decade, myself and many other baby boomers will not only need to navigate the ups and downs of the market, but understand how to draw from our nest egg in a way that there doesn't end up causing "too much life at the end of the money"... my take on "too much month at the end of the pay check". How one cracks open (and preserves) their nest egg will become a primary concern for a large number of investors.
Remember, a 50% loss requires a 100% gain to just get back to even. Selling locks in gains or losses. Yet selling, not buying, will be a bigger dynamic for retirees. This may have an impact on the market that we have not fully understood just yet...Retirees will be net sellers. I believe there are many who have already sold at tremendous losses in '08-'09. Positioning your portfolio for retirement is as important as any other retirement consideration...maybe the most important.
A 50% loss in the equity market doesn't neccessarily mean a 50 % portfoilio loss. Selling stocks when they are outperfoming, owning non-correlated assets, creating an income stream from dividends / rental property, or annuitizing part of one's wealth (for the purpose of meeting income needs) are just a few ways to hedge against the stock market's ups and downs.
Maybe others could comment on how they are creating income for themselves.
Most of you are aware that I admire and trust John Bogle. He is an innovator and true giant in the mutual fund industry. Although I have never been a member of the Boglehead clan, I listen very carefully whenever John Bogle ventures a forward directed opinion. That opinion may not always be on-target, but it is an honest assessment.
His recent forecast of a near-term (10 year timeframe) equity market downturn of order 50% is the hot topic of this MFO exchange. A dire prediction of that magnitude from such a distinguished mutual fund hero deserves the attention given by our Board participants. Unlike many forecasts it has the three needed elements of a complete forecast (direction, magnitude, and time scale), and the authority of a seasoned, influential veteran insider possessing considerable prestige.
But, keep in the forefront of your judgments, that it is merely a singular forecast, a projection of the uncertain future. Regardless of his elite status, John Bogle is no more prescient than any MFO member. His guesstimate has no more power nor has any higher likelihood of precision than those that we choose to make. So curb your enthusiasm.
Bogle would quickly acknowledge the wisdom of my assertion. He is a humble man. During his long and successful lifetime, he has consistently conceded that the future is an uncertain unknowable. He has consistently recognized the merits of longer-term committed investing, and has just as consistently argued against shorter term market timing strategies.
Most likely, John Bogle’s recent announcements were motivated from an historical perspective, and from worry over the tumult of the world’s current economic condition. It is more a general longer term recognition of the investment environment than a specific forecast. It is a cautionary generic warning. Bogle knows he is not a soothsayer.
I really like your composite commentary on this matter. It demonstrates a mature understanding of the marketplace and what moves the marketplace. It recognizes retirement issues. It is insightful. Your many observations and suggestions should benefit the MFO membership overall.
Your remarks that emphasize the pathway dependence in both the accumulation and the distribution phases of the investment process are spot on-target. A recent retiree will face a tough road indeed if cruel fate delivers him a recessionary equity market immediately following his retirement decision. The opposite would be true if the markets generate positive outcomes.
Since these outcomes are so uncertain, it is prudent to be overly cautious, especially in the earlier retirement years.
A diverse portfolio with low correlation coefficient holdings is one partial answer. That protection translates into a slightly lower projected returns for that near-term. A healthy cash reserve would be helpful as a safety net. A low retirement portfolio drawdown schedule (typically below a 4 % annual rate) plan is almost mandatory. That plan must be sufficiently flexible to permit some minor adjustments to the planned schedule (like no inflation increment) during poorly performing market years.
Planned flexibility is a key to retirement survival. Perhaps the retirement itself might best be executed using small steps. In my own case, I worked part-time and later consulted for a few years after my official retirement date. Many such alternate options exist and should be considered before completely severing the knot. Given the existence of unknowable unknowns, an incremental approach is a wise compromise.
I want to thank all you guys for participating in this fine and worthwhile idea exchange. You added practical tips.
Best Wishes.
However, I'm curious: I tend to think that this group is rather different than the majority of investors. No one can forecast markets, certainly, but after the 2001 decline and 2008 decline, does anyone honestly think the majority of average investors are going to stick around and practice a buy and hold discipline IF another 2008 happened? I don't think many people still feel secure enough to continue to take that risk, especially those at/near retirement. People are only now sorta/kinda coming back to stocks (although significant fixed income inflows continue) after going heavily into fixed income after 2008.
Take away the "scary headline" and the fact that no one can forecast the market - I just think that IF (and I emphasize IF) there were to be two "2008-like" declines in the market over the next decade, you're A:) not going to see people buy-and-hold again either, (all the discussion about buy-and-hold and long-term and investor discipline statistics will continue for years) and B:) CNBC will be hosted by tumbleweeds (which, in some ways, would probably be an improvement.)
I don't think there will be one 50% decline over the next decade (I think even a mild recession will probably be met with more QE), but all I'm saying is that I don't think investor mentality has healed from the last decade nor do I think this advice to be disciplined and "buy and hold" is going to matter again to the majority of average investors if there are a couple of "2008 repeats."
People tend do the easy things...
Weight loss is difficult. It requires to be disciplined over a longer term. Few people are actually successful.
Buying on the face of big market declines is extremely difficult. Even professionals have hard time doing it. But if you can do this you are rewarded well.
Buy-and-hold and re-balance is difficult. It requires a level of discipline. It requires someone has though of their asset allocation and have a plan.
So, people trying to be traders at the worst possible times. They use "I can't stand it anymore" timing strategy. They leave the market after the damage is done and don't come back after much of the run-up has already occurred and worse they try to catch up by taking more risk than possible. In other words, they experience the worst days of the market and also miss the best days. Even those that left earlier (by luck or by skill) in the declines had hard time coming back. While those buy-and-hold'er did experience the decline but aready caught up and surpassed these that stayed out.
If we accept that we will experience such large declines from time to time and segregate our assets according to our liabilities (short term liabilities are invested in shorter term, safer products) than it may be possible for us to leave the long term assets to the long term plan and try to ignore the movements on that group. Just maybe...
As far CNBC, I think people will continue to watch it. It is entertainment. They will find gurus and talking heads and if people actually trying to time, they will be watching these shows more. It is buy and holders that CNBC tells little.
Hi Scott,
Thanks for your initial reference to Bogle and your summary comments. Both were excellent.
I do not believe that the two options that you identified near the end of your submittal with regard to investor persistence is inclusive enough.
I believe MFO’s Investor understands the “average” individual investor about perfectly. I wish I had written the piece that he contributed. It too is excellent. I am in total sympathy with his assessments of this sad cohort.
The evidence is overwhelming. That evidence most assuredly does NOT support the proposition that private investors are either smart, prescient, or persistent. They display none of these necessary attributes for successful investing over the long haul. The reverse is closer to the truth. Any opinion to the contrary has a politically correct tinged incentive.
I always revert to the numerous DALBAR, Morningstar, S&P scorecards, and academic studies that backstop my valuation of the matter. In total, these studies demonstrate that private investors are either not aware of the overall market data, or do not fully understand it, or choose to ignore it, or elect to be risk takers and speculate to secure the golden egg.
In 1841, Charles Mackay published his classic “Extraordinary Popular Delusions and the Madness of the Crowds”. Not much has changed since then with respect to crowd mischief and misbehavior. We still invest in the lottery and in market Bubbles. The lure of quick and outsized profits overcomes any better judgment that we might possess in other circumstances. The quick Buck is king. Some of us still trust fortune-tellers and market forecasting gurus to guide us to the pot of gold. Fat chance!
Year after year the S&P scorecards show that Index funds outperform their actively managed counterparts in most categories, especially over slightly extended timeframes. Yet private investors only populate their portfolios with a 15 % weighting to Index products. In contrast, Institutional agencies commit roughly 50 % of their portfolios to Index-like holdings.
DALBAR, Morningstar, and academia consistently establish that individual investors trade far too frequently to their end wealth detriment. They underperform the stocks and funds that they momentarily hold, and then exit with poor timing. The products that they trade away subsequently do better than their replacement investments. That’s a sad story.
Regardless of their claims, individual investors do NOT practice long-term, buy and hold strategies. DALBAR data sets demonstrate that equity mutual fund investors only keep their positions for a little over three years. Fixed income mutual fund and balanced fund holders preserve their positions slightly longer, but all less than 5 years. That’s barely enough time to be exposed to a full cycle even without any serious market disruptions.
I have little doubt that private investors will bale quickly and stay away for nearly a generation for any single market disruption, much less two major meltdowns following one another in rapid succession. Historical data supports this observation.
Crowd psychology is often irrational and easily swayed. Investing crowds are exactly those studied by Mackay in his book, and are victims to greed and targeted by charlatans who have some imagined prestige that compel individual investors to abandon whatever good judgment and reflective thinking they would ordinarily apply. Most investors succumb to defective, emotionally driven reflexive behavior, Their investment outcomes suffer the ravages of those poor decisions.
We investors are not as smart or as successful as we think.
Best Wishes.
Have you ever wondered why the average investor underperforms? Could it be they rely on others for their investing advise? They attend seminars, subscribe to all sorts of advisory services, try to emulate the latest and greatest investing guru, etc., yet all the while spend little to no time trying to craft their own personal investing strategy suited uniquely to their personality.
Hi Hiyield007,
I couldn’t agree more. You are absolutely spot on-target. Rather than developing an investment philosophy, and then a policy and strategy to execute it to satisfy their own special circumstances and goals, most investors show a strong preference to select and follow the advice of a leader.
Of course under some circumstances that decision is warranted given the limited knowledge and market sophistication of the investor. Hired advisors are often needed, and do provide a valuable guidance service.
But I suspect we’re talking about that group of private investors who consider themselves capable and independent. In truth, this cohort is often in search of a hot tip or a prescient guru who can guide them to the promised land. These folks seek an investing Holy Grail that does not exist, and they seek it from perceived experts who are powerless to provide the road map or even admitting that they do not possess that map.
Individual investors are part of an investment crowd. In general we more resemble Mackey’s “madness of the crowds” than James Surowiecki’s “wisdom of the crowd”. The wisdom of the crowd can only be captured when the crowd members are truly independent, have some diverse special skill sets, and do not fall pry to groupthink. As a general observation, most investors fail all three criteria.
We expose ourselves to media (of all types) influence, we have relatively poor market skills (especially in a statistical understanding), we seek affirmation from like-minded souls (groupthink susceptibility), and we search for leadership (gurus, experts) to give us direction. It is much easier to allow a leader to decide than to formulate a plan and decide for yourself. If the investment fails we can always blame someone else.
Thanks for your special wisdom on this matter.
Best Wishes.
My question is: might those who default into Target Date Retirement funds because their employers "greased the skids", just stay in those funds through the downturns?
Put another way, will inertia trump fear?
I found a little data that suggests it might: http://www.ebri.org/pdf/briefspdf/EBRI_IB_08-2011_No361_TDFs.pdf
Hi Greg,
It’s so good to hear from you. It has been too long in coming.
I only read the summary section of your referenced Target Date Retirement Fund study so many of its subtleties may easily escape my notice. Sorry, but at this stage in my life I do not have the zeal to attack a detailed 24 page technical document. Most recently, I husband my time commitments more carefully.
Even given that noteworthy reservation, I still do not hesitate to venture an opinion (perhaps guesstimate would be more appropriate) for a friend.
I am not completely baffled by the finding that many purchasing Target Date investment products are loyal to that commitment, even given hell, high water, or a challenging stock market. My lack of surprise is greatly reinforced for those individuals who are pre-assigned the investment decision, and would be required to take a definite action to do otherwise.
Typically, neophyte investors are a little lazy and a little intimidated by puzzling choices, so they take the easy pathway = the route offered as a default option. They rationalize their decision by posturing that the professional investors know best. Data suggests that could be a very dangerous assumption.
Richard Thaler, one of the founders of behavioral investing research, discovered that characteristic in one of his earlier projects. His book “Nudge” documents some of those studies.
For example, in those countries where motorist are pre-assigned to generously give body organs if they suffer a mortal motor accident, the donation rate is extremely high compared to those nations that do not offer that simple pre-checked box format. The simple task of physically checking an alternate box in the form dissuades the motorist from making any change to the pre-assigned option. The same bias might also be present in the investment decision case; Thaler has test data to prove it is so.
I would speculate that many of those folks who freely and quickly accept the Target Date option when making a company savings decision are not much interested in the investment process. It is the easy and convenient way out of a vexing decision, made more troublesome by an unfamiliarity with the investment universe. There is an implied trust in the portfolio construction skills of professional management.
So, I’m not at all shocked by the perseverance of those Target Date Fund holders who stay the course during investing hard times. I suspect many of these same folks (a disproportional segment of the population) do not carefully follow the ups and downs of the marketplace. I make no judgments about the merits of that judgment. But that just might be the way it is.
Thank you for your comments and reference.
Best Wishes.
Well, yes.
It is just a slightly disquieting result of the libertarian paternalist analysis here that as more of the new money is routed into TDF funds by more or less beneficent fiduciaries, the new and very naive money may end up doing better than the traditional "average investor"'s money, even though the average investor probably knows more, and is definitely more interested.
Keep well.
GFB
I have a portfolio of stocks that certainly has risk, but yields at this point about 4.5%. I like the businesses long-term and get paid to wait. The reworking has been a nice change and the yield has allowed less concern about the day-to-day.
What does it take to allow someone to participate comfortably long-term? I think it's going to be different for everyone and it takes people time to find their sweet spot in terms of risk tolerance, plan, etc.
Are my views on retail activity pessimistic? I guess, but I think in a way it's realistic - I mean, look at fund flows up until this year. People are still funneling money heavily into fixed income. You had 2001, 2008 and if you have another 2008, I think in terms of demographics, you're just not going to see people in/near retirement age want to take the risk again. I don't think you're going to see another 2008, but if one happens sooner than later, I think the effect on investor mentality long-term is going to be rather dire.
Hi Scott,
Thanks for your reply to Greg’s question. Yes, both fear and inertia exist when making investment decisions. It is next to impossible to predict which will prevail in a given scenario.
Likely it changes from circumstance to circumstance. I suspect that the way we assess events constantly evolves as we evolve. Irrespective of it being a laudable target goal, I don’t expect consistency from anyone, especially from myself.
I particularly enjoyed your most recent contribution to the discussion. It added extra meaningful dimensions to the exchange. Overall the submittals have beneficially increased scope to Bogle’s market projections in terms of addressing inconvenient personal decision issues. Your posting probed some of these nuances in fine fashion.
I greatly appreciate your commentary, and wholeheartedly agree with your closing conclusion that “…. The effect on investor mentality long-term is going to be rather dire”. Thank you for your wise words.
One of my continuing themes is investor overreaction susceptibility. We are victims to investment decision traps. By harping on this topic I hope to alert folks to its ubiquitous presence with an intended goal to reduce its impact. Fat chance; I suppose I’m hopelessly tilting at windmills.
The behavioral scientists have identified a couple of personal action biases that increase the likelihood of us making faulty investment decisions. These more current findings are consistent with observations and interpretations that I referenced earlier with regard to Charles Mackay’s “madness of the crowds” book published in the mid-19th century. We’ve been making bad investment decisions and failed Crusades for untold centuries.
The behavioral wizards would likely propose that we investors have a recentcy bias and an anchoring bias to mention just two deficiencies. We place far too much emphasis on the most recent short-term market performance (rather than using all the available history), and we anchor on specific current market prices or purchase price (again neglecting longer term prospects) to the detriment of our end wealth accumulation. Many of us are also overconfident in our perceived investment acumen.
I suspect that overconfidence is NOT one of the biases that some of the folks that Greg references experience. But I do believe they will prove to be very much influenced in their decision making by recentcy and anchoring effects. These biases will trigger unwise capitulation at precisely the wrong time. The historical record of the “average” private investor supports my assertion.
Best Wishes to you and for the success of your plan.
Hi Greg,
Hope you're doing well. I think it's probably a combination of inertia and fear. For younger workers with only a 401K, they'll probably contribute and ride out any down turns. Most of the boomers that are still working are fearful - or should be - because they're too close to retirement. Same goes with the older boomers that are now in their dis-investing stage. Forget it. Recall that the baby boomers, on average, hit their peak earnings years in 2009/10.
All y'all are astute investors and still playing. Most normal folks are not and will not. They've been burned or they've been run over by the economic bus of woe and have been forced to liquidate their investments (in whatever form).
This market is being held up by QE$ and the lack of any suitable ROI alternative. Any more, the retail investor makes up such a minor percentage of this market I believe you can discount them out of the picture completely.
Also, boys and girls, if you don't think this market is getting way overblown - I want some of what you're smoking.
As for Sir John, he's just beating the same old drum. B&H forever and quit complaining. The problem with that approach is that if you're near or in retirement, you might not have sufficient time to recover. This is particularly true if you're taking income from your investments. This means you simply cannot afford to not be cautious.
Easiest way is still to continue to rebalance, diversify your accounts and most importantly, diversify your wealth.
peace,
rono
And if that's the case (and I think it is, to a good degree), I don't think younger generations (many of whom have a mountain of student debt) will step up to replace older investors as they go into that dis-investing stage.
I'm not going to predict what the market is going to do, but in terms of demographic issues, I agree with you.
Scott brings up a huge point that was never taken into the equation - the albatross of student debt around all the would be investors, home buyers, consumers, . . .
peace,
rono
rono:
Apologies for tardy personal reply. I do not check this board as often as I sometimes did the old fundalarm board. Hence conversations I am in sometimes stagger, rather than flow...
All your points are right on, in particular that one about not being able to afford to not be cautious in the dis-investing stage. In recent years I had to choose how to generate some income from investments for me dear old ma and found meself trebly cautious, and attempted to limit the risks of everything including that of my own stupidity.
You and Scott have also highlighted the tidal wave of student debt on which current twenty- and thirty-somethings are floating: ca. $1 trillion market, 1/2 of all loans in deferral, 10-15% default rate, interest rates on variable rate loans expected to rise, student loans not being dischargeable in bankruptcy -- quite the mess. This may drive both another financial crisis and a restructuring in higher education. Problems for a future day.
Keep well.
gfb