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Barry Ritholtz: What I Suspect And Fear For the Stock Market
"Here we are, 10-plus months into the year, and we have nothing to show for it. "
I count 9 ½ months. I guess if we are trying to be accurate at least get the calendar right.
As for the corrections, maybe so but a reference would be nice.
I agree John, I'd love to see more references. A lot of "data" is thrown around the financial media by authors of all sorts, and usually the source is not given.
@rjb112, I agree. It's possible he is right but this might be one of those statements based on years of statistics. The bad years that saw huge declines might throw off the end results as would big up years. The purpose of the article is to tell the buy and hold faithful to hang in there. It's not as bleak as you might think.
Ritholtz is no different than any of the other financial advisors looking to market their name and business to increase assets under management (AUM). AUM is the name of the game.
Ritholtz is no different than any of the other financial advisors looking to market their name and business to increase assets under management (AUM). AUM is the name of the game.
I'm hoping he is different, but you may be right. I tend to read him as a higher priority, thinking he is more honest and trustworthy. I think Josh Brown works with him, and I'm thinking Josh Brown is also one of the more honest and trustworthy guys out there.
Ritholtz is no different than any of the other financial advisors looking to market their name and business to increase assets under management (AUM). AUM is the name of the game.
I'm hoping he is different, but you may be right. I tend to read him as a higher priority, thinking he is more honest and trustworthy. I think Josh Brown works with him, and I'm think Josh Brown is also one of the more honest and trustworthy guys out there.
Same difference, is what it is. They rely on "good calls" getting press and "bad calls" getting forgotten. What a game!
It seems that most of these guys are good but when they get a lot of media time then they start playing to their audience. I would agree that Ritholtz is more believable compared to the ones who hawk their newsletters in their columns.
I couldn’t agree more. Whether its gambling, stock speculation, or long-term investing, its always a necessary policy to know the odds and the likely payoff matrix.
That’s an easy assignment when tossing a pair of fair dice. All that is needed is to count the number of combinations that produce a desired outcome. The probability of throwing a “7” is exactly 6 out of 36 possible outcomes, or 16.667 %, with complete certainty.
Complete certainty is never possible given the complex interactions, the vicissitudes of unknowable events, and the emotional responses to the markets from both professional and amateur investors. Since calculation of precise odds are an impossibility, defaulting to an examination of historical records offer an appealing compromise. These data are especially practical when estimating the likelihood of severe market meltdowns to gauge portfolio risk and recovery times.
I’ve identified two references that provide this requisite frequency data. The data comes from two respected sources and considers two long periods to allow timeframe comparisons.
The first data set covers 50 years and was generated by the Ned Davis organization. It records the DJIA returns. Here is the Link:
The second data set covers a far more extended timeframe, and is an American funds product. It too shows DJIA past market declines dating from 1900 to 2013. Here is the Link:
Both references provide useful market downturn frequency tables that are subdivided by decline magnitudes. Please visit these resources. Both include some limited discussion of lessons learned and offer guidelines on how to soften the blows.
Good luck and good investing decisions to everyone. Being familiar with the hard statistical market meltdown data will improve your likelihood for good decision-making.
@MJG, thanks for posting that. Quite helpful. Nice to see that data.
Off topic, but would very much appreciate you posting your thoughts on the bond market and fixed income investing. Hopefully with some of the nice attachments/references that you always seem to come up with.
Actually, since the last market "trough" on 3/6/2009, which is the start of the current bull market, the SP500 has drawn down at least -5.1% twelve times. Or about twice a year. The worst being -18.6% on 10/3/2011.
Ritholtz is no different than any of the other financial advisors looking to market their name and business to increase assets under management (AUM). AUM is the name of the game.
I'm hoping he is different, but you may be right. I tend to read him as a higher priority, thinking he is more honest and trustworthy. I think Josh Brown works with him, and I'm thinking Josh Brown is also one of the more honest and trustworthy guys out there.
Riotously funny, describing his self-made 3rd category of investors: "Cautious contemplation: These are the investors who approach markets with a zen-like calm. They spend much of their time carefully thinking about the impact of their own actions on their returns. They are, for the most part, sociopaths who can disengage their emotions from their trading."
I rarely, if ever, post on Bond and fixed income issues because I consider myself rather naïve on these matters. I plead an embarrassing level of ignorance. Many MFO members are far better informed on this subject than I am, so I suggest you address your income questions to these fine folks.
Since you asked, and since I have been investing in various forms of the fixed income universe for decades, I will submit a few incomplete thoughts on bond/fixed income investing. As usual, I will document my thoughts with a couple of references.
Using a ship as an analogy, equities are the power-plant that drive the ship towards a target safe harbor. Fixed income and bond components serve as a rudder to more closely align the ship on the desired compass heading. The rudder does slow the ship a little.
Volatility is very acceptable when you are young and accumulating wealth, but losses its attractiveness when approaching retirement. Hence, I morphed from a heavily weighted equity portfolio a few years ago to a more neutral portfolio (50/50 mix) today.
When wisely assembled, a balanced portfolio can almost maintain the annual returns of an all equity portfolio while reducing volatility (standard deviation) by half. Volatility always functions to attenuate compound returns below annual return levels.
Bond diversification helps to reduce overall portfolio volatility just like equity category diversification does. The bond market offers about as many subcategories as does the equity marketplace. Just like equities, these bond subcategories deliver a random checkerboard of annual returns; so the bond segment of my portfolio has many components to smooth the journey. Here is a Link to a Vanguard Bond Table of Periodic Returns:
Just like the famous Callan Periodic Table of Investment Returns, the annual fixed income rewards bounce all over the space. Predicting future winners is an impossible task, so diversification is a reasonable strategy.
Likewise, forecasting future inflation rates and interest rates is also hazardous business. History suggests that the best guess for interest rates 10 years from now is what the current value is.
I do believe that just like market professionals have improved their skill sets, so has the Federal Reserve. I don’t expect wild inflation rate changes like those recorded in the late 1970s. The Fed actions can not guarantee a “soft” landing, but I do believe that they have sufficient control and data to pilot the economy to a “softer” landing.
However, I do not fully trust my projection of a more stable interest rate environment. Therefore, the bond portion of my portfolio emphasizes short duration elements as well as TIP components. Once again, uncertainty pushes me in diversification’s direction.
Costs always matter. That’s especially the case when investing in bonds. Very, very few actively managed bond funds outdistance their passive rivals. Given today’s low interest rate environment, costs are extraordinarily critical. I control costs by doing most of my bond business with passive Vanguard products (exceptions included later). They have served me well.
Even given the present low interest rate levels, bonds are still an important segment of an individual’s portfolio. Vanguard has a nice recent report that illustrates this point. Here is its Link:
When my portfolio was rather thin, I decided to diversify into the bond market by using Balanced mutual funds. I was lucky and selected some winners. After decades, I still own these funds. They are the exceptions I noted earlier. These are Dodge and Cox, Wellington, and Wellesley mutual funds. I report these merely for the record, and do not necessarily recommend them for anyone.
I hope this is a little helpful. Sorry for this unorganized post; it is a series of random, real-time thoughts on your question. I’m lazy and commit little time to the bond marketplace. Please consult with better informed MFOers on this topic.
As for the "curators of financial content", we have a hard time believing that, from the tri weekly appearances on CNBC (representing expert views on everything from the Palestine conflict to bank bailouts ) to writing content about Ferraris and the music business, that they would be able to put in the time needed for deep quant research and advisory.
Glad to see Max posting again. My reaction to the article is pretty ho-hum. I don't think he's trying to game anybody. Probably as confused as most of us. I'm OK with 10% and 20% corrections. You don't invest $$ you're going to need this year or next. It's long term money. What I do worry about however is something like what we went through in '08 or similar. But ... Hey - Nobody knows. At least I don't claim to know.
Thought it interesting he chose to cite the Dow as the index that's gone nowhere. It is of course not generally regarded as representative of the overall market. And got a laugh out of his final comments on the 3 investor types. So ...... If you are able to detach your emotions completely from the investing process, that makes you sociopath?
I learned early on one should leave their emotions at the door when it comes to decisions, especially in investing and business. Calling someone who follows that rule a sociopath is a bit too much.
Who was the person who was quoted "never marry a stock." Was it Buffett?
I suspect "sociopath" was intended to get a laugh. That's all. True sociopaths, as we know, do damage and violence without the emotional connection that society deems "normal---" which would prevent any of us from doing such heinous things.
Comments
"Since 1928, markets have averaged about three 5 percent corrections each calendar year"
Were most MFOers aware of this? (I wasn't)
I count 9 ½ months. I guess if we are trying to be accurate at least get the calendar right.
As for the corrections, maybe so but a reference would be nice.
A lot of "data" is thrown around the financial media by authors of all sorts, and usually the source is not given.
I tend to read him as a higher priority, thinking he is more honest and trustworthy. I think Josh Brown works with him, and I'm thinking Josh Brown is also one of the more honest and trustworthy guys out there.
I couldn’t agree more. Whether its gambling, stock speculation, or long-term investing, its always a necessary policy to know the odds and the likely payoff matrix.
That’s an easy assignment when tossing a pair of fair dice. All that is needed is to count the number of combinations that produce a desired outcome. The probability of throwing a “7” is exactly 6 out of 36 possible outcomes, or 16.667 %, with complete certainty.
Complete certainty is never possible given the complex interactions, the vicissitudes of unknowable events, and the emotional responses to the markets from both professional and amateur investors. Since calculation of precise odds are an impossibility, defaulting to an examination of historical records offer an appealing compromise. These data are especially practical when estimating the likelihood of severe market meltdowns to gauge portfolio risk and recovery times.
I’ve identified two references that provide this requisite frequency data. The data comes from two respected sources and considers two long periods to allow timeframe comparisons.
The first data set covers 50 years and was generated by the Ned Davis organization. It records the DJIA returns. Here is the Link:
http://www.americansuperior.com/bear.htm
The second data set covers a far more extended timeframe, and is an American funds product. It too shows DJIA past market declines dating from 1900 to 2013. Here is the Link:
https://www.americanfunds.com/resources/basics/risk-and-volatility/living-with-a-market-decline.html
Both references provide useful market downturn frequency tables that are subdivided by decline magnitudes. Please visit these resources. Both include some limited discussion of lessons learned and offer guidelines on how to soften the blows.
Good luck and good investing decisions to everyone. Being familiar with the hard statistical market meltdown data will improve your likelihood for good decision-making.
Best Regards.
Nice to see that data.
Off topic, but would very much appreciate you posting your thoughts on the bond market and fixed income investing. Hopefully with some of the nice attachments/references that you always seem to come up with.
Thank you.
Derf
Through last Friday. So, last one now actually a couple % lower.
Regards,
Ted
I rarely, if ever, post on Bond and fixed income issues because I consider myself rather naïve on these matters. I plead an embarrassing level of ignorance. Many MFO members are far better informed on this subject than I am, so I suggest you address your income questions to these fine folks.
Since you asked, and since I have been investing in various forms of the fixed income universe for decades, I will submit a few incomplete thoughts on bond/fixed income investing. As usual, I will document my thoughts with a couple of references.
Using a ship as an analogy, equities are the power-plant that drive the ship towards a target safe harbor. Fixed income and bond components serve as a rudder to more closely align the ship on the desired compass heading. The rudder does slow the ship a little.
Volatility is very acceptable when you are young and accumulating wealth, but losses its attractiveness when approaching retirement. Hence, I morphed from a heavily weighted equity portfolio a few years ago to a more neutral portfolio (50/50 mix) today.
When wisely assembled, a balanced portfolio can almost maintain the annual returns of an all equity portfolio while reducing volatility (standard deviation) by half. Volatility always functions to attenuate compound returns below annual return levels.
Bond diversification helps to reduce overall portfolio volatility just like equity category diversification does. The bond market offers about as many subcategories as does the equity marketplace. Just like equities, these bond subcategories deliver a random checkerboard of annual returns; so the bond segment of my portfolio has many components to smooth the journey. Here is a Link to a Vanguard Bond Table of Periodic Returns:
http://www.vanguard.com/jumppage/international/web/pdfs/INTLCCRD.pdf
Just like the famous Callan Periodic Table of Investment Returns, the annual fixed income rewards bounce all over the space. Predicting future winners is an impossible task, so diversification is a reasonable strategy.
Likewise, forecasting future inflation rates and interest rates is also hazardous business. History suggests that the best guess for interest rates 10 years from now is what the current value is.
I do believe that just like market professionals have improved their skill sets, so has the Federal Reserve. I don’t expect wild inflation rate changes like those recorded in the late 1970s. The Fed actions can not guarantee a “soft” landing, but I do believe that they have sufficient control and data to pilot the economy to a “softer” landing.
However, I do not fully trust my projection of a more stable interest rate environment. Therefore, the bond portion of my portfolio emphasizes short duration elements as well as TIP components. Once again, uncertainty pushes me in diversification’s direction.
Costs always matter. That’s especially the case when investing in bonds. Very, very few actively managed bond funds outdistance their passive rivals. Given today’s low interest rate environment, costs are extraordinarily critical. I control costs by doing most of my bond business with passive Vanguard products (exceptions included later). They have served me well.
Even given the present low interest rate levels, bonds are still an important segment of an individual’s portfolio. Vanguard has a nice recent report that illustrates this point. Here is its Link:
https://personal.vanguard.com/pdf/s704.pdf
When my portfolio was rather thin, I decided to diversify into the bond market by using Balanced mutual funds. I was lucky and selected some winners. After decades, I still own these funds. They are the exceptions I noted earlier. These are Dodge and Cox, Wellington, and Wellesley mutual funds. I report these merely for the record, and do not necessarily recommend them for anyone.
I hope this is a little helpful. Sorry for this unorganized post; it is a series of random, real-time thoughts on your question. I’m lazy and commit little time to the bond marketplace. Please consult with better informed MFOers on this topic.
Best Wishes.
The statistical strength of a 4th qtr. rally unfolding would seem probable. http://stockmarketmap.wordpress.com/2014/09/15/market-map-update-09152014/
As for the "curators of financial content", we have a hard time believing that, from the tri weekly appearances on CNBC (representing expert views on everything from the Palestine conflict to bank bailouts ) to writing content about Ferraris and the music business, that they would be able to put in the time needed for deep quant research and advisory.
Talk about hitting the nail on the head, your comment sure did. Thanks for that.
Thought it interesting he chose to cite the Dow as the index that's gone nowhere. It is of course not generally regarded as representative of the overall market. And got a laugh out of his final comments on the 3 investor types. So ...... If you are able to detach your emotions completely from the investing process, that makes you sociopath?
I learned early on one should leave their emotions at the door when it comes to decisions, especially in investing and business. Calling someone who follows that rule a sociopath is a bit too much.
Who was the person who was quoted "never marry a stock." Was it Buffett?