How far down will the DOW Industrials go down tomorrow?

[Huzurdaddi]

In light of the melt down in Asia for two days and the crushing europe took today, how many points will the DOW close down tomorrow?

I should have made this a poll, dang it.

UP 400! (Emergency Fed rate cut of 75 basis points)
Even ( the decoupling theory saves us)
Down 200
Down 400
Down 600
Down 800
Down 1000 (omg, there goes the summer home)
Down 2734 (same as 1987)

I'll go for down 800. I am going to get obliterated.

[SlyFrog]

I don't know, one could argue that Asia and Europe were following our wonderful last few weeks.

I'm just annoyed that I'm somewhat stuck. I actually sold off all of my IRA stuff Friday and am in cash there, but my 401k (considerably larger) I left alone; I just do not have as many options in that and am trying to be more "rational" about just leaving it sit for the long haul.

[Bahimiron]

Tom Brady was seen today in a cast.

I foresee a major crash.

[Miramon]

It will go down just far enough to tease eager speculators into selling short.

[Nick Walter]

It will go down just far enough to tease eager speculators into selling short.

Heh, I've been sterngly telling myself not to do that.

[ridge]

Today should offer something for everyone--fears of global recession, of deflation and of stagnation. I say a 400 to 600 drop. A global slow down is the last thing that the real economy needs.

The Federal Reserve(s) and the financial economy need to sit down, to open their books, and to make a plan for these global contracts for credit default swaps. The "insurers" like AMBAC and MBIA are done unless they get capital injections, renegotiations.

The monetary contraction underway is exasperated by expected inflation making the Feds lowering of rates a less effective tool to combat recessionary pressure. The result is a prolonged recessionary period. Plus Krugman an expert in financial crisis points to estimates of 6 years for the housing market to unwind. It is turning out as nasty a mess as the contractionary money supply in the you-know-what, early last century.

[MyNameIsWill]

You guys are insane. I don't think the market will let DJI fall below 12000...

[Andrew Mayer]

I'm pulling a few things under the virtual mattress until I see how it shakes out.

I'm thinking it'll be 11,500 in the next day or two. That seems like a solid point for everyone to take a breath and see what happens next.

[Huzurdaddi]

DAX opened down 4.3% tonight. oy.

I was optimistic with 800 points down.

[AndrewM]

Fed cut rates (http://money.cnn.com/2008/01/22/news/economy/fed_rates/index.htm?cnn=yes) today by three quarters of a point, the largest drop in 24 years. Yikes.

[WarrenM]

Why aren't you guys buying like crazy? It's a fire sale.

[JeffL]

Well the market dropped 400 on open, but has gained about 200 back. I'm kinda queasy about my 401K, I've lost a ton so far in the last couple of months, but I've always had a pretty hands off/longer term approach (although I moved the money I had in a real estate fund out last year.)

If the market can somehow manage to only be down a hundred or so today, I think a lot of people will breath a sigh of relief. The British market had a sharp upturn on the announcement of the Fed cut, while the Asian market was already closed.

I'll take money that we are NOT going into a recession. That means two quarters of negative growth, and while the recent quarters have had lowered growth, it just doesn't seem likely that we'll end up with two consecutive negative growth quarters.

[JeffL]

Wow, at one point the market was 50 points up - back down close to 200, looks like a roller coaster today. Really need it to end up as close to even as possible, to calm people's nerves.

[Nick Walter]

Man, things are certainly nuts today. I have no idea what the market is like, but I've spent the last 10 minutes waiting for tdameritrade.com to load and it hasn't timed out or succeeded.

[JeffL]

I'll bet day traders are going wild today.

[Lunch of Kong]

Why aren't you guys buying like crazy? It's a fire sale.

Probably because most of our cash is already invested.

I'm not a hedge fund. I don't leave piles of cash around waiting for some prime opportunity of market timing.

[WarrenM]

Kong

That's fair. I guess what puts me off most are the sellers. If you're sitting still, that's reasonable. Selling off and locking in losses seems ... foolish, at best.

[Nick Walter]

I'll bet day traders are going wild today.

Must be. I'm not a day trader but I did want to log in and see what kind of hit my portfolio was taking. Alas, it's not to be. It seems tdameritrade.com is melting down under the volume. I'm rather upset, this is the kind of day they need to provision for and I hate it when an online service I pay for cuts corners on capacity to save a few bucks.

Anyone got good recommendations for an online broker that isn't tdameritrade? Looks like I'm shopping for a new one.

[WarrenM]

Nick

I've had nothing but joy with Share Builder (www.sharebuilder.com).

[SlyFrog]

Kong

That's fair. I guess what puts me off most are the sellers. If you're sitting still, that's reasonable. Selling off and locking in losses seems ... foolish, at best.

You're not locking in losses if the market continues to go down. If you did not buy a month ago, were you "locking out gains?"

I have no intention of staying out of the market for the rest of my life. Just the next six months or so, where I have taken an educated guess that the market is going to drop. If it increases and I miss out on some gains, I'll live with my decision.

[Brian Rucker]

Baltimore, Md.: Steven: Your Cassandra-like warnings, issued early last summer as I recall, are coming to fruition, so congratulations (I think).

I do have one question. I heard on one of the chat shows that Barney Frank had been warning for a number of years about the threat posed by the subprime market, securitizing of mortgages, etc.

I know that the Democrats have only had a majority for a year, but I am wondering why no one in government seems to have heeded Frank's warnings, given his acknowledged expertise in finance, or those of others who warned that this trend was a time bomb. Are both Dems and Republicans too beholden to Wall Street to have acted responsibly, or was this a case of people thinking that there had been a fundamental, permanent shift in the way financial markets operate? (Much as, until 2001, many were declaring that the dotcoms had changed the operating paradigm for business forever.) Thanks.

Steven Pearlstein: Barney wasn't the only one -- there were a number of groups, and regulators knew it had gone too far. But they were just too bureaucratic in moving against in, in part because of oppostiion from the White House and Congress that were doing the bidding of powerful financial interests such as the mortgage bankers, brokers, large banks and the real estate industry. And this is where I put a lot of the blame, with those organizations, which were really piggy and didn't see that they had pushed things too far and that, in the end, they will wind up in much, much, much worse shape than if they had accomodated the criticisms in a positive way rather than dismissing it all as carping from lefty, pinko community activists.
http://www.washingtonpost.com/wp-dyn/content/discussion/2008/01/22/DI2008012200953.html

[WarrenM]

You're not locking in losses if the market continues to go down.
If you sell at a price lower than what you bought at, you're locking in losses.

The fact that the market might go down more doesn't really factor in. You locked in your losses.

I have no intention of staying out of the market for the rest of my life. Just the next six months or so, where I have taken an educated guess that the market is going to drop. If it increases and I miss out on some gains, I'll live with my decision.
The greatest investors known to man have all advised against trying to time the market. But I'm sure you'll do fine.

Buy or don't buy, but make that decision based on your long term goals - not what you think the market will do in the next 6 months.

[Andrew Mayer]

The greatest investors known to man have all advised against trying to time the market. But I'm sure you'll do fine.

Buy or don't buy, but make that decision based on your long term goals - not what you think the market will do in the next 6 months.

I'm also out of most of my more volatile investments. I had good gains over the last year, mostly in international mutual funds, but I'm not comfortable with that right now, so I've pulled back to a more conservative position.

I'm just going to sit tight until March and see where things are at after some of this volatility shakes out.

[WarrenM]

But why? I'm trying to understand why people do this. Are you going to need the money soon? Why incur the expense of moving your money around only to incur it again in a few months when you sense that things are stabilizing?

Do you have a real legitimate fear that you're going to lose everything or that the international stock markets are going to zero out and go away?

Why pull money out?

[Elton]

If you sell at a price lower than what you bought at, you're locking in losses.

The fact that the market might go down more doesn't really factor in. You locked in your losses.

Okay ... I am not an active investor and you obviously are, but this sounds strange to me. Are you saying that, no matter what your future expectations are for the market, one should hold onto any stock which is below the original purchase price to avoid "locking in losses"?

I would say the original purchase cost is a sunk cost, and the sole gauge for whether to hold or sell (aside from a short-term need for cash) is how you expect that stock to perform in the time horizon you're investing for.

[WarrenM]

Okay ... I am not an active investor and you obviously are, but this sounds strange to me. Are you saying that, no matter what your future expectations are for the market, one should hold onto any stock which is below the original purchase price to avoid "locking in losses"?
I'm hardly any kind of expert, but I invest in a very few individual stocks (this is outside of my 401K) so maybe my criteria differs. I'm investing in companies like General Electric, Coke, 3M, etc. Companies with long track records of good stock behavior.

Selling those kinds of stocks when the market goes down is not logical since they are going to go back up. When they go on sale like this, it makes sense to buy.

If you're investing in riskier stocks or you're speculating, then maybe it makes sense to cut and run. I don't know. I just know that, for me, selling into a dropping market makes no sense at all.

And, what I said is still valid. If you sell for below what you bought a company for then you're locking in losses. That's what locking in losses means. You've sold the stock so you've locked in the resuls.

However, if you're invested in quality companies it makes more sense to hold and ride out the storm.

[Matthew Gallant]

The greatest investors known to man
Yes, but what about the great investors that have thus far eluded discovery? I think they're probably even better investors, since they have made billions of dollars without anyone noticing. We should find them and ask them what they think, if possible.

[Elton]

However, if you're invested in quality companies it makes more sense to hold and ride out the storm.
Ah, I see what you're saying. I'd say the main message is "Don't panic and sell fundamentally strong stocks" instead of "Don't lock in losses". If you have a long-term horizon and carefully chose your stocks, then dumping them is probably dumb no matter what price you bought them at.

[Phil_Stein]

I don't think investors should by and large change their allocations significantly in response to 10-20% moves in the market. If you have a certain amount in stocks, you should probably keep roughly that amount in stocks.

However, there can be good reason to sell your losers. If you are holding a stock or a mutual fund at a loss to it's basis (roughly, what you paid for it, with adjustments for splits, spin-offs, interim capital gains and perhaps a few other things), then it may be wise to sell the stock/fund, realize a loss, and invest the proceeds in a similar stock/fund (though there's trickiness here, too - you can't buy something TOO close to what you just sold within a short period of time or you run the risk of running afoul of "wash-sale" rules).

Also, I think EpicBoy may be a bit too caught up in the concept of "quality companies". It's probably true that a large company like GE or 3M is unlikely to go bust anytime soon, but that doesn't necessarily mean that their stocks are particularly safe or that those stocks will necessarily rebound from short term falls. At one point, GM and Ford probably looked like "quality companies" too. GM and Ford probably won't go bust anytime soon, but their stocks have done poorly for a long time.

IMO, most small-investors should invest most of their stock-market money in low-cost mutual funds. Diversification is, by and large, a good thing. There are many caveats and exceptions to this general rule, but my post is probably too long already. :)

[Andrew Mayer]

But why? I'm trying to understand why people do this. Are you going to need the money soon? Why incur the expense of moving your money around only to incur it again in a few months when you sense that things are stabilizing?

Yeah. In the case of this particular MF it is intended to be shorter term cash. Something I would go to if I was out of work over an extended period.

Do you have a real legitimate fear that you're going to lose everything or that the international stock markets are going to zero out and go away?

Why pull money out?

I had decent gains on the international last year, and I don't want to see them evaporate. Like I side, I figure there's going to be a lot of volatility in the next few months, and to be honest I don't feel like riding it.

[Phil_Stein]

I had decent gains on the international last year, and I don't want to see them evaporate. Like I side, I figure there's going to be a lot of volatility in the next few months, and to be honest I don't feel like riding it.

This may be ok if you're money is in a tax deferred account (a 401K, perhaps).

If the money is in a taxable account, then selling at a gain now, and hoping to time a re-entry a few months from now strikes me as probably unsound.

[WarrenM]

Yeah. In the case of this particular MF it is intended to be shorter term cash. Something I would go to if I was out of work over an extended period.
I know it's not my business, but IMO that money should really be in a money market account with a decent percentage on it (ING or something like that). A mutual fund doesn't work that well as an emergency account since the market might tank right when you need the cash.

[SlyFrog]

But why? I'm trying to understand why people do this. Are you going to need the money soon? Why incur the expense of moving your money around only to incur it again in a few months when you sense that things are stabilizing?

Do you have a real legitimate fear that you're going to lose everything or that the international stock markets are going to zero out and go away?

Why pull money out?

Because rather than wait for stock X to drop from $40 to $20, and then go back up, I can sell at $35 (when I get that feeling that it is not doing well, and will not be for awhile) and buy it again at $20. If I believe the stock is going to drop, why would I not get out and buy it at the lower point (if I do believe it is going to rebound eventually)? I'm not "locking in losses," I'm avoiding future losses that I would incur by holding the stock, or increasing my gain by not riding the stock down to the point where it will begin to uptick again.

You have every right to argue with my ability to actually time the market (which is perfectly reasonable, I admit that part of this is fundamentally unsound), but it is strange that you have a problem with getting out of something just because there is already a loss, if you take as a given that the stock will decline further. It's really not that different from shorting something (e.g. I'm selling my own stock now (as opposed to borrowing someone else's to sell) with hope of repurchasing it at a lower price, earning the spread in the meantime).

Bear in mind, I'm not exactly churning thousands of dollar of trading fees here. I've held this stuff for years; if I did not believe that the market is going to tank, I would not do it. I also know that I may very well be wrong, and will lose out on some gains and trading fees. I'm willing to take that risk.

But you can not look at the past. It does not matter whether you have a loss or not (in fact, I have a gain on these, but I've lost a portion of the gain due to recent market activities). All that matters is where the price is right now, where you think it is going, and your time horizon.

I should mention that yes, I am not recognizing gains because this stuff is retirement account related.

[ravenight]

I think his point mainly that playing the market isn't even a sound money-making strategy for experts in the field, so pulling out your money because of a general decline in the market (as opposed to changing which stocks you've invested in based on information about how those companies can be expected to do relative to others) is just not a sound strategy for long-term investments. It is certainly a reasonable strategy for investments that are likely to be needed soon, but then, a better strategy for those is to keep them in a more liquid form, so that you don't get hit by big fluctations and short-term gains taxes.

[Phil_Stein]

a better strategy for those is to keep them in a more liquid form

I think you should have said "relatively liquid and safe" instead of "more liquid".

Stocks are liquid (you can buy/sell them quickly, with low transaction costs), but volatile (a stock you buy for $100 today may be at $80 or less in a month).

CDs are safe, but not very liquid (hard to sell on short notice).

Money markets are generally both safe and liquid (they are VERY unlikely to go down in value, and they're generally easy to get in and out of).

[SlyFrog]

I think his point mainly that playing the market isn't even a sound money-making strategy for experts in the field, so pulling out your money because of a general decline in the market (as opposed to changing which stocks you've invested in based on information about how those companies can be expected to do relative to others) is just not a sound strategy for long-term investments. It is certainly a reasonable strategy for investments that are likely to be needed soon, but then, a better strategy for those is to keep them in a more liquid form, so that you don't get hit by big fluctations and short-term gains taxes.

I agree, and I tried to admit that point (playing market timer is generally not wise).

Only point I would make is that I am not selling because the market is down, I'm selling it because I believe it will go down. I should have done it 3 months ago, when I also believed we were heading for a fall.

Selling simply because there is a downturn is a bad idea. Selling because you believe things are going to get worse may be a bad idea.

[WarrenM]

Well, again it depends on your goals. If you're looking at a 5 year time horizon or longer, there's little point to selling unless you believe that the companies you are invested in aren't going to ever recover.

[SlyFrog]

Well, again it depends on your goals. If you're looking at a 5 year time horizon or longer, there's little point to selling unless you believe that the companies you are invested in aren't going to ever recover.

Okay, I think we are really missing something in what each other is saying here.

If (and I admit, that is a big if) I know the price of something is going to go down, even if there were to be a rebound, I would be nuts not to sell now.

Let me use a concrete example, and that is Dell stock (just because I happen to have some, unfortunately).

Dell stock was at a high of $45 a few years ago (let's say three years). Since then, it has fallen over time to around $20. Let's say I knew (again, big if, I know) it was going to fall. Let's also say, to keep consistent with your argument, that it will in the next three years jump back up to $50.

I bought at $45. Let's say 100 shares, so $4,500 total. If I keep it until it hits $50, I make $5,000 on the sale, and profited $500 total over 6 years.

Let's say I knew it was going to go down, and so I sold it at $40, "locking in my loss." I now have $4,000, but I have that money when it is on its way down, somewhere between the initial purchase and year 3.

So as to avoid all possible laughter, let's say I do not time the market perfectly, and I buy it again at $25 (doesn't really matter whether I hit it on the way down or the way back up). I spend $2,500 to do that (again buying 100 shares), and have $1,500 left in cash. I then sell it once it hits the same $50 point in the example using your system. I make $5,000.

Under my scenario, I now have $6,500 in cash after selling the stock. Under your ride it out because it will go back up and you don't want to lock in your losses scenario, I have $5,000 in cash after selling the stock. So there is definitely a point to selling, even if you do think they are going to recover, so long as you believe they are going to drop from where they currently are.

[WarrenM]

This is dragging out but your example assumes that I'm not buying more on a monthly basis, which I would be. In your example, sure you come out ahead. My plan includes monthly installments so I'll be buying a whole pile of Dell stock on sale over those 3 years and when it gets back to $50 you'd be so far behind it wouldn't even be worth discussing.

But yeah, we're talking about different things so ... let's move on. Heh.

[Andrew Mayer]

The fund I pulled out of dumped 4% today.

[magnet]

This is dragging out but your example assumes that I'm not buying more on a monthly basis, which I would be.

I hope you're not advertising that you believe the dollar cost averaging hype (http://moneycentral.msn.com/content/P104966.asp).

I'll be buying a whole pile of Dell stock on sale over those 3 years and when it gets back to $50 you'd be so far behind it wouldn't even be worth discussing.
Is your goal to collect Dell stock certificates, or to make money? If it's the former, by all means buy it "on sale". Somewhere, there is a Dell owner trying to make money who will thank you.

I would bet that nearly all of the legendary investors you mentioned made some of their money from short sales. While it's not a good long term strategy, if you think that a stock price is going to fall, then you should sell it. This is true regardless of whether you own any of it. Naturally, the proceeds of the sale should be reinvested in some vehicle that you don't think is going to lose value. That's a much better strategy than riding a stock on its way down as you suggest, but it also requires a little more sophistication.

[Coca Cola Zero]

I hope you're not advertising that you believe the dollar cost averaging hype (http://moneycentral.msn.com/content/P104966.asp).

Why would you jump to that conclusion? The more likely situation is he simply invests some percentage of his regular income into the market, which is what long-term investors who aren't already independently wealthy have to do and which is perfectly sound.

[RepoMan]

Because rather than wait for stock X to drop from $40 to $20, and then go back up, I can sell at $35 (when I get that feeling that it is not doing well, and will not be for awhile) and buy it again at $20.
That's exactly what I'm doing in the housing market now. (http://www.quartertothree.com/game-talk/showthread.php?t=41528) We'll see whether I make it -- things are crashing so fast that even getting the house on the market in five weeks may be too slow. (We can't possibly go any faster without going batshit insane, but still....)

[magnet]

Why would you jump to that conclusion?
I didn't jump to that conclusion. I said I hoped it wasn't the case. People who practice DCA like to think it gives them a better "deal" when they buy stock, but I'm aware that there are perfectly good reasons for installment investing, like the ones you mentioned.

[WarrenM]

That's a much better strategy than riding a stock on its way down as you suggest, but it also requires a little more sophistication.
But you'll eating transaction fees on the front and back end as well as paying taxes on the realized income. Why is that preferable to holding and investing over time?

And I only said Dell because that was the example we were working with. Substitute Dell with whatever company fits the idea of a company that grows in value over time for you.

[WarrenM]

I didn't jump to that conclusion. I said I hoped it wasn't the case. People who practice DCA like to think it gives them a better "deal" when they buy stock, but I'm aware that there are perfectly good reasons for installment investing, like the ones you mentioned.
It's dollar cost averaging in practice but that's not a choice I actively make as opposed to a lump sum. I only make a certain amount of money each month so I invest a percentage of it.

And there are conflicting schools of thought on DCA. I could see how it might give you better results over time than lump sum investing. It's perfectly plausible.

[magnet]

But you'll eating transaction fees on the front and back end as well as paying taxes on the realized income. Why is that preferable to holding and investing over time?
I think most of the investing around here is through tax-deferred retirement accounts. Even if it isn't, I think it's generally unwise to intentionally make a poor investment in order to avoid making a taxable gain.

And I don't transaction fees are really relevant, either. I'm not advocating day trading, after all. You don't seem to mind paying transaction fees every month - perhaps you could use those fees to make a sale instead of a purchase.

[Sidd_Budd]

And there are conflicting schools of thought on DCA. I could see how it might give you better results over time than lump sum investing. It's perfectly plausible.
If you know of any empirical studies that demonstrate the superiority of DCA over lump sum investing, I'd love to review them. I used to believe DCA was superior, but the studies I've read using historical returns is convincing to me (actually, I think I started to come around when magnet posted his link in an earlier thread). In practice, I end up DCAing (e.g., percentages taken from each paycheck contributing to a 403(b)), but I'm trying to get us to the point where we lump sum as much as possible. For example, I'd prefer it if we could fully fund my wife's and my Roth IRAs on the first trading day of each year. This year we bought at a discount by partially funding them in the last week or so, after most of the decline, but over multiple years, we'd do better lumping it all on Jan 1.

[AndrewM]

I hope you're not advertising that you believe the dollar cost averaging hype (http://moneycentral.msn.com/content/P104966.asp).

That link is a little silly. If you invest your money all at once you make more money than if most of it sits around earning nothing for the year. That's not surprising. I think the main lesson there is to invest money as soon as you can.

[bago]

DOW! How low can you go?

[bloo]

Skid row. What a broker knows.
Once again, back is the incredible
The sub-priminal
The incredible Fed!
OMC Number One
Market said "screech" and they cut the fund
Can you tell we're really in a bear run
But its the house that bank dereg begun
Now they got me in a cell cause I get commissions when you sell
Cause a broker like me said, well...
Bernanke's a prophet and I think you ought to listen to
What he can say to you, what you ought to do.
Follow for now, power of the reserve, say,
Make a miracle, B, pump the stimucal
The Fed is back, all in, were gonna win
Check it out, yeah yall, here we go again

[deccan]

That link is a little silly. If you invest your money all at once you make more money than if most of it sits around earning nothing for the year. That's not surprising. I think the main lesson there is to invest money as soon as you can.

Yeah, that was immediately obvious. Personally, I find that calculating the correct rate of return based on a regular DCA system or just random piles of money from time to time non-trivial since I suck at maths, so anyone suggest an easy way to do it?

[WarrenM]

The comparison is entirely arbitrary because if you invest the lump when the market is high you'll get very different results on a yearly basis than if you invest it when the market is low.

The idea behind DCA is that you will get the average price of the market over the year, smoothing out the highs and lows. This might give you a better return if the guy with the lump invested at a bad time.

However, over a 5-10 year or longer time line it doesn't matter anyway. Both methods are valid.

And yes, I'm talking from the point of view of someone investing outside of his retirement account. Other than rebalancing occasionally, I see no benefit to shuffling your 401K money around. That money is on a VERY long time line - 20+ years at least for most people on this board I would think. No reason to mess with it based on market fluctuations.

[Huzurdaddi]

Another fun day. Personally I have gotten clobbered very badly. Time to start working again, sigh.

[SlyFrog]

Another fun day. Personally I have gotten clobbered very badly. Time to start working again, sigh.

It's pretty much Mr. Toad's Wild Ride at this point. Sheesh, now it's up a bit on the day, after being down a few hundred at one point. Great fun.

[JeffL]

go - go - go up 100 right now.

As emotive and reactive as the market is, a nice finish in the green would be nice. Day traders are going bananas right now.

[Kool Moe Dee]

go - go - go up 100 right now.

As emotive and reactive as the market is, a nice finish in the green would be nice. Day traders are going bananas right now.

The ones that covered their shorts or the ones that are crapping their shorts?

[Nick Walter]

*phew* Up almost 300 points today. Guess I won't have to commit suicide after all. The news man lied to me!

It was a nice nice day for me. One stock I've been eyeballing, one I've wanted to buy into for awhile now but thought a bit too pricy, finally dropped in price this morning along with the rest of the market so I grabbed a chunk of it quick. Then it promptly jumped up sharply, again for no good reason except the whole market was moving, so I'm already showing something silly like a 10% gain on an investment I made at 9am this morning. I'm no day trader but single day results like that do make me understand the allure of day trading.

[JeffL]

It was a nice nice day for me. One stock I've been eyeballing, one I've wanted to buy into for awhile now but thought a bit too pricy, finally dropped in price this morning along with the rest of the market so I grabbed a chunk of it quick. Then it promptly jumped up sharply, again for no good reason except the whole market was moving, so I'm already showing something silly like a 10% gain on an investment I made at 9am this morning. I'm no day trader but single day results like that do make me understand the allure of day trading.


Yep, I would love to have the money and freedom to day trade. Although I knew a guy who lost his marriage that way - he started day trading, sounded very cool when he described it (basically, gambling but with no guaranteed edge for the house,) but he got so addicted that he was neglecting his day job, etc. Lost money, dipped into the savings without telling his wife, borrowing money, convinced he'd make the big hit that would make him rich. It was as sad as watching someone with a casino gambling addiction.

I also suspect, with no real knowledge, that day traders may depend on being better than other day traders to win. And if that's true, I'd probably get killed as quickly in day trading as I do in online games going against people who play 12 hours a day.

[WarrenM]

I guess what you have to ask yourself is - how many millionaires are day traders? I'm going to guess the number is extremely small.

[Coca Cola Zero]

http://www.youtube.com/watch?v=87OnSTN3SHk

http://www.break.com/index/stock-future-trader-gets-slammed.html

Edit: used a different source for second video due to YouTube pulling it.

[Shadarr]

basically, gambling but with no guaranteed edge for the house
That's retarded. Unless your trades are free there's still a vig on every trade.

[Huzurdaddi]

The ones that covered their shorts or the ones that are crapping their shorts?

I read a great quote last night: how can you cover your shorts when you have lost your shirt?

I'm no day trader, I am totally a buy and hold kind of guy, but when the market lights up like this it freaks me out. My losses (paper I suppose, if you belive in that kind of thing, I am a loss-is-a-loss-is-a-loss kind of guy) far outweigh any amount of money I can make at my day job so it is pretty terrifying (lost 3 years of salary over the last couple of weeks). I am always worried that demographics are going to annihilate the market, but you have to stay invested since historically it has done the best of all asset classes and I do not work as GS so I do not know better.

BTW Nick, I wish I had luck like that once in the market! Holy cow, put a trailing stop loss on it and you are golden. Congratulations on the mini-loto ticket.

edit: Great videos Coca Cola.

[espressojim]

Yep, I would love to have the money and freedom to day trade. Although I knew a guy who lost his marriage that way - he started day trading, sounded very cool when he described it (basically, gambling but with no guaranteed edge for the house,) but he got so addicted that he was neglecting his day job, etc. Lost money, dipped into the savings without telling his wife, borrowing money, convinced he'd make the big hit that would make him rich. It was as sad as watching someone with a casino gambling addiction.

I also suspect, with no real knowledge, that day traders may depend on being better than other day traders to win. And if that's true, I'd probably get killed as quickly in day trading as I do in online games going against people who play 12 hours a day.
You aren't really competing with other day traders. You're competing with the firms, and the automated trading systems that execute trades in milliseconds. I work with a guy who was at the british equivalent of the NSA for a number of years (worked as a cryptographer), then went on to work in hedge funds for a while (he's a mathematician of the highest order, written up in the NY Times in the last year, now doing genetics.) He likes to tell war stories about how trading worked, how the models he created worked, etc.

One of the things he says when talking about day traders is: "Do you have a huge amount of money to leverage, a team of 12 PhDs, huge amounts of data, and sophisticated models to help you analyze trends? Great, why don't you just hand me your money now." Day traders for the most part are an inefficiency in the market, and the big firms will sweep (most) of you up over the long term.

He also likes to joke about the fact that many hedge funds money was powered by dentists - people with some extra cash who were looking to gamble, and often lost.

An in law of mine is one of the heads of a long term investment group (they by power plants, mines, etc), and spent a fair amount of time on wall street. He tends to tell very similar stories (though he has time for more interesting commentary.) They both seem to think that you'll do much better over the long term with index funds, then trying to gamble in the system.

Given all that, I know squat about actually investing, other than getting hugely diversified index funds for my 401K and maxing them out every year...

[espressojim]

I hope you're not advertising that you believe the dollar cost averaging hype (http://moneycentral.msn.com/content/P104966.asp).


Was that supposed to "prove" that all 3 investment methods were the same? I'd say that the example was a poor simulation, and I could easily build one that might actually...you know...prove something?

Do you have a better reference?

For an experiment, I'd do the following: get 2 years data for a stock price (more years would be nice too, but I'll take 2.) Arbitrarily pick a 1 year window. One data point is the performance of investing all of your money on the 1st day of the window. Second is the random investment, and 3rd is the dollar cost averaging method.

Now, don't just do it once, that's crap. You can hit any random fluctuation, and not learn a thing. Do this thousands (or millions) of times. Do it with different sets of stocks. Look at the mean and variation in each of the 3 results. Now use statistics to test if the means are truly different from each other.

Then, I'll believe that one method has an advantage, or that no method does. If no method does, then I've thing DCA is just as good as anything else. What I'm going to guess is that the variation of 1 time investing is going to be the highest, and thus most risky (though if you do it enough times, you approach the true mean.)

I've got to believe that someone's already tried this experiment - it's too easy not to do (I could write this over lunch!) But it would be much more informative than some completely arbitrary example.

[Sidd_Budd]

I've got to believe that someone's already tried this experiment - it's too easy not to do (I could write this over lunch!) But it would be much more informative than some completely arbitrary example.
I agree. It would have been much better if the author in the linked article first summarized a finding from multiple academic studies, then did a flawed, but quick and dirty study to replicate this finding, and finally cited a few of these more rigorous studies in the final paragraphs of his column, so interested folks could seek out and read the more sophisticated research for themselves.

Maybe the author just decided to cut corners, because he figured some folks with attention issues wouldn't make it through the whole article, and yet would deliver confident judgments regarding its content despite incomplete understanding. Why bother exerting oneself with citations when some folks aren't even going to read the details of your work?

:)

For the record, I do agree with you that it makes sense that DCA has a greater likelihood of reducing variability of returns, relative to lump-sum investing, although the cost of this is lower returns. Surprisingly though, results from the empirical studies I've read (some of which incorporate Monte Carlo sampling as you suggest) are fairly split on the issue -- from my recollection, about half of them don't find DCA has any advantage over lump-sum investing in either raw returns, or risk-adjusted ones.

[espressojim]

For the record, I do agree with you that it makes sense that DCA has a greater likelihood of reducing variability of returns, relative to lump-sum investing, although the cost of this is lower returns. Surprisingly though, results from the empirical studies I've read (some of which incorporate Monte Carlo sampling as you suggest) are fairly split on the issue -- from my recollection, about half of them don't find DCA has any advantage over lump-sum investing in either raw returns, or risk-adjusted ones.

But the big question in my mind is: does it have disadvantages? You just said DCA has lower returns, AND empirical studies are fairly split on if DCA provides any advantages. I'm not sure those two statements support each other - but perhaps there's some subtley that I'm not catching.

[Nick Walter]

BTW Nick, I wish I had luck like that once in the market! Holy cow, put a trailing stop loss on it and you are golden. Congratulations on the mini-loto ticket.

It's not that big a deal. It's a very small investment in absolute dollar terms because I'm not the kind of investor who has a lot of cash sitting around so I can play silly market timing games. Most of my moolah was already in various funds.

That 10% on-paper gain is on a small potatoes investment so I'm not breaking out the champagne or anything like that.

[Sidd_Budd]

But the big question in my mind is: does it have disadvantages? You just said DCA has lower returns, AND empirical studies are fairly split on if DCA provides any advantages. I'm not sure those two statements support each other - but perhaps there's some subtley that I'm not catching.
No, I think you were catching my blatantly confusing sentence structure. Apologies for being unclear. The studies I've read:

1) generally find lump-sum investing results in higher raw returns, relative to DCA techniques (65-80% in favor of lump-sum)

2) sometimes find DCA techniques result in higher risk-adjusted returns, relative to lump-sum investing (50-50 split). This supports your idea of lower volatility.

3) hardly ever include formal statistical tests, so the historical results may simply be due to chance

In practice, I'll concede this distinction is unlikely to make much difference. Most of us end up DCAing for our retirement over the course of our working lifetimes anyhow. People who come into a sizeable inheritance or windfall at some point may find the information useful (e.g., what are the tradeoffs if I invest all at one time, versus DCAing over some time period), but I don't know what proportion of people that applies to. I haven't been lucky enough to receive a windfall, and I'd rather keep my parents alive than receive an inheritance.

[Huzurdaddi]

That 10% on-paper gain is on a small potatoes investment so I'm not breaking out the champagne or anything like that.

Hey 10% in a day is great stuff! Why not break out the champagne? I am sure you made a lot more than a bottle of bubbly. Take your wins when you can :)

I am overreacting simply due to the market taking me out to the woodshed the last few weeks, it is an emotional reaction but at least I recognize it.

[Jason McCullough]

I don't understand why there's even a controversy on dollar cost averaging (http://en.wikipedia.org/wiki/Dollar_cost_averaging). It sounds straightforward to me - you're straight-up trading off risk for volitality by not transferring your cash (lowest risk) into stocks (the riskest asset class) all at once.

Assume you can't time the market. So you know nothing special about where prices are going, other than up over the long term. Assume you're going to invest in something like an S&P 500 index fund. Assume the only way to get higher returns in general is to either take on more risk, or be less liquid - the risk + liquidity against return tradeoff is ironclad. Now, what do you do to maximize your rate of return?

Over an infinite time horizon, it doesn't seem to matter. If you never sell, there's no reason to do the DCA thing to adjust for unexpected drops in the early years - who cares? You don't have to sell early. Of course, in an infinite time horizon you wouldn't be investing very much in the first place, but bear with me.

Over a very short time horizon, you want risk but not that much risk. Assume you still stay in stocks, though. So you should buy the stocks, but you should also buy a put option or something to make sure you don't suddenly lose a ton. This is more less equivalent to just buying bonds, I'd expect, but hey, same approach. Or you could keep cash in lower volatility investments, then slowly move them to the higher volatility investment for no apparent reason (DCA).

Extend the time horizon from short - you're willing to absorb more volatility, so you buy less options, figuring you don't need to insurance against a loss in value from today to today + 30 years.

Start moving the date you sell closer to today, which is what happens as you get older. You're just moving back towards the short-term scenario.

Am I missing something? I'd expect regressions in this area to be useless - what you're scared of here, and what would reduce your return, is enormous drops you can't possibly predict, no matter the time horizon, so I don't see how you'd statistically estimate the frequency of that regardless of how much past data you have. Looking at past stock histories and trying to get a expected value calculation out of that will give you insanely different results depending on the time frame chosen, too.

[magnet]

Do you have a better reference?

As Sidd_Budd pointed out, there were references at the end of the article. Here are some more, including a working link to the Constantinides paper:

http://web.archive.org/web/20030319011045/http://gsbwww.uchicago.edu/fac/george.constantinides/JFQA_1979.pdf
http://www.fpanet.org/journal/articles/2006_Issues/jfp1006-art8.cfm
http://www.moneychimp.com/features/dollar_cost.htm
http://www.fpanet.org/journal/articles/1997_Issues/jfp0697-art1.cfm
http://www.alphainvestmentopportunities.com/cgi-bin/finance101article.cgi?article=DollarCostAveraging
http://www.sigmainvesting.com/advanced-investing-topics/dollar-cost-averaging
http://www.efficientfrontier.com/ef/997/dca.htm


They are not entirely consistent with each other - no surprise there - but it's clear that DCA is not a panacea.

[WarrenM]

They are not entirely consistent with each other - no surprise there - but it's clear that DCA is not a panacea.
It entirely depends on your data points (when the lump sum was invested, time period being studied, what the market did during that period, etc). It's not really something that can be studied with concrete results.

But, logically, DCA reduces risk by smoothing out the variances in stock prices month to month. And I'm not convinced that comes at the expense of returns because if the market is down most of the year that you did the study, DCA should come out ahead since you'll be getting more shares than the guy who invested in a lump.

[espressojim]

As Sidd_Budd pointed out, there were references at the end of the article. Here are some more, including a working link to the Constantinides paper:

http://web.archive.org/web/20030319011045/http://gsbwww.uchicago.edu/fac/george.constantinides/JFQA_1979.pdf
http://www.fpanet.org/journal/articles/2006_Issues/jfp1006-art8.cfm
http://www.moneychimp.com/features/dollar_cost.htm
http://www.fpanet.org/journal/articles/1997_Issues/jfp0697-art1.cfm
http://www.alphainvestmentopportunities.com/cgi-bin/finance101article.cgi?article=DollarCostAveraging
http://www.sigmainvesting.com/advanced-investing-topics/dollar-cost-averaging
http://www.efficientfrontier.com/ef/997/dca.htm


They are not entirely consistent with each other - no surprise there - but it's clear that DCA is not a panacea.

The paper I read (fpa) basically boils down to one thing: Is the market going up or down across your frame of reference? If it is going up, putting money in earlier results in a larger return. If it is going down, putting money in incrementally results in a larger return. That makes perfect sense to me.

Now, the real question is: During what window of time are you considering if the market is going up or down? Historically, it looks like the market has been going up overall more than down. Is this destined to remain the same?

[Phil_Stein]

But the big question in my mind is: does it have disadvantages? You just said DCA has lower returns, AND empirical studies are fairly split on if DCA provides any advantages. I'm not sure those two statements support each other - but perhaps there's some subtley that I'm not catching.

There are 3 possible disadvantages to DCA (versus lump-sum) that I can think of (aside from any direct difference in raw returns):

1) Higher transaction costs
2) More difficult accounting (i.e. varying basis for each small investment)
3) Requires more time to implement (i.e. your own time)

All 3 can be reduced or perhaps eliminated in certain circumstances, but at least potentially they are issues.

[Phil_Stein]

Also, I think the discussion about DCA misses more important issues. i.e. Any difference in expected returns between DCA and lump-sum is likely to be dwarfed by other issues:

1) Controlling costs
2) Asset allocation
3) Savings rate (i.e. how much of your income you are tucking away...)

Also, I said "expected returns" above, because actual returns are subject to a lot of noise from the market's random walk. The choice to use DCA or not may look good or bad purely as a result of random market moves over the course of time you are DCA'ing. But the actual results don't necessarily prove sound theory, just as a player getting lucky on red at the roulette wheel doesn't prove that roulette wheels are a good investment strategy (the opposite can also be true - a good theoretical strategy going south due to bad luck).

[SlyFrog]

You aren't really competing with other day traders. You're competing with the firms, and the automated trading systems that execute trades in milliseconds. I work with a guy who was at the british equivalent of the NSA for a number of years (worked as a cryptographer), then went on to work in hedge funds for a while (he's a mathematician of the highest order, written up in the NY Times in the last year, now doing genetics.) He likes to tell war stories about how trading worked, how the models he created worked, etc.

One of the things he says when talking about day traders is: "Do you have a huge amount of money to leverage, a team of 12 PhDs, huge amounts of data, and sophisticated models to help you analyze trends? Great, why don't you just hand me your money now." Day traders for the most part are an inefficiency in the market, and the big firms will sweep (most) of you up over the long term.

I do think that is the case for investing generally. Where I do still think there is some opportunity (though I do not do it myself) is for certain "Buffet" style trades, where you simply recognize an indicator that a company is on the leading edge of something that no one else noticed. The hard part of this for me is to take what is "obvious" and just common sense to you and to realize that others have not noticed it yet. Things like the success of the iPod (and the corresponding huge boom for Apple) are obvious in hindsight, and should have been particularly obvious to geeks like us.

I do not believe in the average shmoe trader's ability to beat the market on day trading with things like charting, fundamentals analysis, etc.

[WarrenM]

1) Higher transaction costs
2) More difficult accounting (i.e. varying basis for each small investment)
3) Requires more time to implement (i.e. your own time)
I know you probably know this already but 1 and 3 can be alleviated by signing up with a broker like ShareBuilder. I have 6 free trades each month so I tend use those via an automatic installment plan. Which means I'm not paying transaction fees on those purchases nor does it take any time because it's automatic.

The accounting sucks, yeah, but that's not really avoidable.

[Phil_Stein]

Things like the success of the iPod (and the corresponding huge boom for Apple) are obvious in hindsight, and should have been particularly obvious to geeks like us.


I was thinking about that example this morning.

I don't recall the exact specifics at the time, but I think it was something like this:

Apple was a company known for whiz-bang designs, but with a mixed record for translating those designs into sales. Cool designs often failed to sell because Apple overpriced them and/or they were tied to the Apple platform, with a very small market share.

The iPod was not the first MP3 player on the market, or even, IIRC, the first hard-drive based MP3 player. It did have a better design, but it was very pricey, and I think, the first version only worked with Macs. There was no guarantee that portable MP3 players were even going to be a durable platform (other formats like DAT and MiniDisc had failed), and legal issues around MP3s and DRM presented a further cloud. Finally, even if Apple had a lead at launch in design issues, it was plausible that other companies would improve their designs and negate Apple's advantage there.

Of course, we now know how things turned out. But, to twist a Yogi-ism slightly, it's a lot easier to make predictions about the past than about the future.

[Sidd_Budd]

Now, the real question is: During what window of time are you considering if the market is going up or down? Historically, it looks like the market has been going up overall more than down. Is this destined to remain the same?
Of course there are no guarantees that it will be the same. Historically, the US equity market has ended up more years than it has ended down (I want to say 67% of years were up, but I'm not sure). Thus, one-time investments have historically beaten DCAing. Will this continue? I think so, but Hume showed a long time ago that you can never prove future behavior from past behavior.

I've got historical evidence that the US market trends upward, and have no convincing evidence that this is going to reverse over the remainder of my investing career (40 years or so). In any decade, I suspect you can find some economist or financial professional stating that some risk factor was going to cause US markets to stagnate or decline for ten or twenty years. To date, none have been correct. I can't find a compelling reason why this generation of doomsayers will be right.

If you are absolutely convinced US stocks will tend to end down rather than up for the next 20 or 30 years, DCAing would be superior to lump-sum investing. You would do even better avoiding domestic stocks and lump-sum investing in foreign equities, domestic bonds, or some other asset class that your crystal ball indicates will have a positive return over the next quarter century.

I'll admit I'm quite biased regarding the long-term upward trend of the US stock market, and can bring to mind more instances where dire economic forecasts turned out to be wrong than instances where they were correct. Humans can use terribly flawed reasoning when making decisions, and I may be doing just that.

[SlyFrog]

I was thinking about that example this morning.

I don't recall the exact specifics at the time, but I think it was something like this:

Apple was a company known for whiz-bang designs, but with a mixed record for translating those designs into sales. Cool designs often failed to sell because Apple overpriced them and/or they were tied to the Apple platform, with a very small market share.

The iPod was not the first MP3 player on the market, or even, IIRC, the first hard-drive based MP3 player. It did have a better design, but it was very pricey, and I think, the first version only worked with Macs. There was no guarantee that portable MP3 players were even going to be a durable platform (other formats like DAT and MiniDisc had failed), and legal issues around MP3s and DRM presented a further cloud. Finally, even if Apple had a lead at launch in design issues, it was plausible that other companies would improve their designs and negate Apple's advantage there.

Of course, we now know how things turned out. But, to twist a Yogi-ism slightly, it's a lot easier to make predictions about the past than about the future.

Yep. I've often used Microsoft as an example as well, where "geeks" have an edge in the information market. The average geek would have known well before the average person, probably even the average trader, of the fact that everything ran on Microsoft software at a fundamental level, and the impact that could have.

At the same time, you can always look back and look at break points where, if they would not have happened, things would have changed, and the amazing explosion of the company was therefore not inevitable.

I still think there is a point, however, at which you have an information advantage (if you can recognize you have the information), where it is "safer" than trying to predict sight unseen whether a new product will catch on. You may have noticed the extremely positive internet buzz, or the key lead adapter types going nuts over the product.

Google is another example for me. I recall telling people about how freaking amazing their search engine was for about 2-3 years before anyone heard of them. I was the person who actually turned the law firm on to using it. It never occurred to me to put my thoughts (this thing is so far better than any competing engines that they are not even comparable) into action (admittedly for Google, this probably would have meant trying to get in on an early inside round somehow before it went public).

Again there though, you could easily look back and see where it was not inevitable. So they've got an amazing search engine, are they just going to be another company with a stunning technology that can not find a model to make money from it? Etc.

So I admit there are drawbacks, but I do believe there are real opportunities with things like that. I believe they are mostly generated by your job and station in life; things you do and know that others do not that will give you an information edge. For example, I do not expect to know that a particular automotive feature, etc. is going to be the next incredibly hot thing, but someone that works on people's cars for a living might.

Of course there are no guarantees that it will be the same. Historically, the US equity market has ended up more years than it has ended down (I want to say 67% of years were up, but I'm not sure). Thus, one-time investments have historically beaten DCAing. Will this continue? I think so, but Hume showed a long time ago that you can never prove future behavior from past behavior.

I've got historical evidence that the US market trends upward, and have no convincing evidence that this is going to reverse over the remainder of my investing career (40 years or so). In any decade, I suspect you can find some economist or financial professional stating that some risk factor was going to cause US markets to stagnate or decline for ten or twenty years. To date, none have been correct. I can't find a compelling reason why this generation of doomsayers will be right.

Interestingly enough, the Economist recently noted that this is a U.S. phenomenon, there have been other western countries where there have been market losses for long periods of time, and there is no real reason to presume that the U.S. markets will continue to generally trend upward forever.

It is actually somewhat creepy to think about (as I think we have transformed an observation into a law without necessarily having good reason other than that it has happened for awhile now). In particular, I note the complete change over in our society from real pensions to 401ks and other investment driven vehicles. To be blunt, our society is relying on a constantly upturning market (at least over 5-10 year periods) for the retirement of its people. If we have a Japan-like period of 15-20 years of stagnation, I'm not sure what that is going to mean here, but I think it won't be pretty.

[Phil_Stein]

So I admit there are drawbacks, but I do believe there are real opportunities with things like that. I believe they are mostly generated by your job and station in life; things you do and know that others do not that will give you an information edge. For example, I do not expect to know that a particular automotive feature, etc. is going to be the next incredibly hot thing, but someone that works on people's cars for a living might.
But I think the people setting the prices for various tech stocks at the margin ARE, by and large, quite familiar with the leading edge of buzz. While Grampa Jones might hold a few shares of Microsoft, the price of Microsoft (which is basically a calculation of it's future probabilities of success across a variety of fields) is driven mainly by the biggest investors, who, I think, are likely to be guided by expert analysis.

If you have any real chance of beating the market in individual stocks, it's more likely to be in a very niche-y area, with a small stock for a company that relatively few people understand well.

Also, Google is not a great example. Yes, some people clued into Google's value earlier than others, but the company did not go public until it was already well established. IIRC, the uncertainties when Google went public were not mainly about the superiority of it's search engine, but rather, how well it could hold that lead, both technically, and from a marketing standpoint, and how well it could monetize the traffic it had.

[Phil_Stein]

One interesting case study over the last ~25 years has been the surprising dominance of Microsoft for the first half (though ~1996), and the surprising non-dominance for the second half (since ~1996).

While MS's early success might look inevitable now, I don't think it was. IBM dropped the ball early on, letting MS grab most of the value from the PC's success. Even as late as ~1991, IBM could have regained dominance, had OS/2 been a success. And I don't think we should assume that MS's dominance in operating systems meant that they would inevitably be able to grab control of the office productivity market. MS did a lot of things well, but they also benefited from competitors' mistakes.

Conversely, by around 1996, MS looked like a 600 pound gorilla that would be able to grab control of just about any tech area that they focused on. Internet Explorer was beating Netscape, and it looked quite possible that despite MS's slow start, they'd be able to grab control of the internet (content and technology), or at least, the most profitable parts. Having grabbed control of the office productivity market, it seemed plausible that they would also grab other large segments of the desktop software business (perhaps the areas controlled by Adobe, Quark, Autodesk and the like).

As a game developer, I remember that there was talk that the DirectX standards would allow home PCs to squash consoles. (Why buy a stand-alone machine when most homes already had a PC?) Later, they made a direct play for the console market.

Most of these initiatives have been mild to severe failures. In some cases, they've generated revenues, but little in the way of profits. And other tech industry players (Google, Yahoo!, Apple, and perhaps even Nintendo) have been able to build or expand large, profitable businesses by dancing around MS's toes.

[SlyFrog]

But I think the people setting the prices for various tech stocks at the margin ARE, by and large, quite familiar with the leading edge of buzz. While Grampa Jones might hold a few shares of Microsoft, the price of Microsoft (which is basically a calculation of it's future probabilities of success across a variety of fields) is driven mainly by the biggest investors, who, I think, are likely to be guided by expert analysis.

If you have any real chance of beating the market in individual stocks, it's more likely to be in a very niche-y area, with a small stock for a company that relatively few people understand well.

That I do not fully agree with, because I'm not sure it is necessarily possible to be fully familiar with that type of soft information. It's sort of like saying that marketers are immediately aware of what will be the next teenage fad. They can't be, because they're not teenagers. They can do all of the study and focus groups they want to try to determine what is gaining momentum and what will be hot, but in the end, they are still getting that information from numbers (which by necessity lag behind) and the people who know, the users. I think there is a natural lag there that could be exploited.

Now again, easier said than done. I'm fully familiar with the counterarguments, that it is all easier in hindsight, that the trend you may foresee may be local and never pick up nationally, that it may be a great product but have low margins, etc.

Also, Google is not a great example. Yes, some people clued into Google's value earlier than others, but the company did not go public until it was already well established. IIRC, the uncertainties when Google went public were not mainly about the superiority of it's search engine, but rather, how well it could hold that lead, both technically, and from a marketing standpoint, and how well it could monetize the traffic it had.

Which is exactly why I mentioned that you would have to have gone in on an insider private placement round there. :)

[Phil_Stein]

Ah, missed that, sorry...

[Sidd_Budd]

In particular, I note the complete change over in our society from real pensions to 401ks and other investment driven vehicles. To be blunt, our society is relying on a constantly upturning market (at least over 5-10 year periods) for the retirement of its people. If we have a Japan-like period of 15-20 years of stagnation, I'm not sure what that is going to mean here, but I think it won't be pretty.
Given the abysmal saving rate of our society, even if the U.S. market continues to earn its historical return, many folks will be heading into retirement with inadequate savings that will necessitate a sizeable change in standard of living. If the S&P goes the way of Japan's recent history, we'll just have a few more million unprepared retirees -- specifically, the ones who failed to globally diversify.

The future is uncertain, so I believe the best most of us can do is what Phil suggested a few posts ago -- control costs, continue to save, & have an asset allocation that we have the discipline to follow.

[JeffL]

There are opportunities in specific stocks if you do your homework (and have a touch of luck.) For example: I interviewed with a company called First Solar, one of the several leaders in solar panel technology. My homework in studying them as a potential employer led me to the assessment that they had some significant technical advantages over their competitor's approaches. They had some guaranteed contracts from countries like Germany. Also some countries subsidizing a couple of their new plants. While solar companies are studied by the big investment houses, I don't think they are analyzed to the penny like, say, GE is.

So they were at about $70 at the time (last February.) Today they are at $171.

One thing that I've found over the last couple of decades is that bigger companies, such as Apple, MS, GE, etc. are SO analyzed that it is hard for them to make huge surprise moves. But I've also found that smaller cap companies are not only not covered as well, but that some of the coverage is just plain, well, ignorant. I saw a recent article by an investment guru on a company that I just left - he made a buy recommendation, with claims that were just factually untrue (such as "they are the worlds leading seller of XXX" when they have just started to introduce that product and have about zero share in that market and are unlikely to gain even 10%.) I used to talk to the investment folks who covered that company when I was there, and it was clear that these guys just didn't really understand the market or the company. Whereas, when I spoke to the investment folks who covered the large global company that I used to work for, they were usually scary smart, and knew our business, financials, etc. at a level that was shockingly accurate.

[Jason McCullough]

Given the abysmal saving rate of our society.....

With the stock market boom and the (until just now) real estate boom, people had all the increasing savings balance they'd want. Why dump even more money into retirement when thanks to the house and the stock market you've already got plenty? If the asset prices stop going up, we'll probably see savings go back up.

[Sidd_Budd]

With the stock market boom and the (until just now) real estate boom, people had all the increasing savings balance they'd want. Why dump even more money into retirement when thanks to the house and the stock market you've already got plenty? If the asset prices stop going up, we'll probably see savings go back up.
Is this supposed to be sarcasm? I'm terrible at detecting it on this board. I don't know how much money people perceive themselves to have, but multiple studies have found that most folks aren't on track to be able to retire at 80% of their pre-retirement income (a typical rule of thumb).

For example, Fidelity's 2007 annual survey found working families had a median income replacement rate of 58%. (http://www.fidelityresearchinstitute.com/2007_retirement_index.html) The U.S. government's triannual survey of households found a median retirement account balance of $88,000 (http://assets.opencrs.com/rpts/RL30922_20060522.pdf) for households with the main earner between ages 55-64. That balance would be enough to replace 15% of that age range's median income.

Many folks will have some additional value from home equity, since 2007's real estate decline hasn't wiped out the huge gains of the last decade. I haven't seen anything to suggest this will make the difference for most household's retirement security, and I'm not sure most people realize that a worry-free retirement will require them to sell their homes for equity & rent in retirement.

[Jason McCullough]

No really (http://www.oecdobserver.org/news/fullstory.php?aid=28). From 1999:

The third reason for the boom is to be found in the behaviour of US households themselves. Quite simply, consumers have lowered their saving rates because their balance sheets are in good shape. Although debt has risen rapidly, financial assets have grown faster, while holdings of tangible assets have accelerated too. The net worth of households has increased over 10%, at an annual rate, in the last three years, reflecting stock prices that have grown 23% annually. Households now hold almost a third of their financial assets either directly or indirectly in corporate equities -- up from a quarter three years earlier.

Bunch of other stuff (http://www.google.com/search?q=united+states+savings+rate+asset+boom&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a). There's obviously, uh, "distributional issues" - which is why you get stuff like tons of families with jack shit for savings; that's always been the case, sadly - but the larger pattern is there. It wasn't exactly any more rational than the bubbles themselves, but the country didn't just irrational start to burn its seed corn.

[shift6]

Do equity markets always trend upwards? Hard to say. Here are two interesting graphs from Yahoo Finance:

http://finance.yahoo.com/q/bc?s=%5EDJI&t=my&l=on&z=m&q=l&c=
http://finance.yahoo.com/q/bc?s=%5EGSPC&t=my&l=on&z=m&q=l&c=

If you use the DJIA and/or S&P500 as a gauge of the "US Market", there are some flat decades: 1960-1970, 1970-1980, and so far 2000-2008. This is why it's good to diversify outside the US. People always talk about "the market" but it's important to know that means more than just the US Stock Exchange. Personally, I'm bearish on "the market" (US) for the next 4-5 years until oil prices get under control, more third world currencies stabilize and float, short-term mortgage problems reset out of the system, and we reign in our national debt.

Get some foreign market index funds. Hell, throw 10% into an emerging market fund if you like. And keep that 80/20 stock-to-bond ratio. Also, be an investor, not a trader.

[Sidd_Budd]

It wasn't exactly any more rational than the bubbles themselves, but the country didn't just irrational start to burn its seed corn.
Jason, I didn't find your linked study compelling, but maybe we're talking about different things. The notable finding from the '99 article (presumably using even older data) was that U.S. net worth of households had increased by 10% annually over 3 years. That doesn't say anything about whether most households are prepared for retirement; we need raw numbers. It's a 10% increase if a household had $11,000 in net worth in '97, up from $10,000 in '96, but those folks would still be hurting in retirement.

Half your Google hits were links to studies from the mid-90s, and even some of them weren't sanguine about the future of retirees. I find my two linked studies, both more recent than your submisions, more convincing.

I took your earlier post to mean that you felt most Americans were adequately preparing for retirement due to the stock market and real estate boom (both of which are no longer in effect), and that somehow explained the national decline in savings that we've seen since the mid-80s. Putting aside the fact that a household couldn't see their stock portfolio increase if they weren't saving money to invest in the market, I don't agree that most households are adequately prepared for retirement. While I can only speculate as to the causes of declining savings rates, I wish folks would save more. If you've got links to articles or studies from the last five years that indicate most households are well-prepared for retirement, I'd like to review them.

I'm a liberal, so I'll agree to higher taxes for myself in the future so everyone has a roof over their heads and something to eat, but it doesn't mean I'd rather not have to do that.