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Going crazy with my 401k!

Discussion in 'Off-Topic Discussions' started by akm3, Jun 27, 2008.

  1. akm3

    akm3 Well-Known Member

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    =) It's been painful but I'm holding on.
     
  2. Banditfist

    Banditfist Well-Known Member

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    Dave must not be taking inflation into account. From 1969 to 1981....you would have lost money in real terms.

    I am no Boglehead, though someone sounds just like it "stay the course". If you have no interest in the stock market other than knowing that you need to be saving money, then stay the course is true. But, if you care about your money, learn. Learn how to read a chart. Learn that you can do just as well as a financial advisor. It isn't hard. What is hard is beating the market. Look at 95% of the mutual fund managers who can't beat the indices.
    If you want to be in charge and don't want to spend a lot of time, just look at the 20/50 WEEK simple moving average. When the 20 is on top, go into the market. When it is below the 50, sell. It does not happen that often, but you will produce much better average gains. You only need to look at the charts once a week at most and you will only trade very seldom.


    Icebaby! I took econ 101. Looks like a perfect supply and demand chart.

    Akm, expect a bit more pain. We are coming up on a level of support around the 7600 dow level. We break that...."the gates of hell, here we come!" I hope that does not happen. I am positioned so that it won't hurt my portfolio. But, what it will do to the global economy is too bleak to imagine.
     
  3. Shamie

    Shamie Senior Member

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    This is a little off the subject, but now might be an opportunistic time to convert IRA's to Roth IRA's. You have to pay taxes on the gain the year you convert. Since the stock market went down, your gain might be small or non existent. The benefit of a Roth IRA is that the taxes are not just deferred like an ordinary IRA. There are no taxes when you take out the money, since you already paid the taxes when you contributed or converted.

    As for 401K's, unless you are getting close to retirement, having the stock market go down is actually a benefical thing. Since as you continue to contribute, as the stock market has gone down, you are buying more shares for less money. 401K's need to be looked at as long term investments.
     
  4. Zilla

    Zilla Well-Known Member

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    Let me start by saying that you can do with your money as you see fit.

    With that in mind, I'd suggest you do a Google search. That search should look something like this- Obama + 401k plans and read up about the possible changes that could possibly occur with your plan.

    We're not supposed to discuss politics here, and I can't be totally cryptic about what I'm trying to get at as you need to look into these issues and make your own decision on how to handle it. What I can tell you is that we're looking into rolling our 401K into a CD or IRA CD due to these possible upcoming changes.
     
  5. Justitia

    Justitia Elite Member
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    I would agree with the above advice. Though I am not planning to rollover my 401K (mine is technically a 403B-- but it is the same idea), but I am planning to increase my savings and direct it towards CDs for the immediate future which can be as long as a couple of years.

    At age 60, I lost nearly half of my rather substantial retirement fund in the last year -- most of that lost in the last several weeks.

    Though I always planned to work until 70 and expected to ride out this economic crises -- it was nice to think I had the option of retiring at 66 or 67. For me that option is now gone.

    I don't want to be a harbinger of doom -- but until the last couple of weeks, I figured things would be restored at least by the end of 5 years.

    Now I am no longer so sure.

    Here are some facts: First as probably many people realize, the current collapse mirrors pretty closely the October 1929 crash. The only difference I have seen so far is that the triggering gamble then was in the stock market when people were allowed to put only 10% down to purchase stock seeing it as not a risk because the stock market was always rising. People who had not business buying stock were being allowed to do so with such low margin requirements. When the stock market peaked and started to fall, the first round of purchasers didn't have the funds to pay off the rest of the debt. (The presumption had been they didn't need to worry -- since stocks were always rising in value-- when it was time to pay off the loan they would just sell some of the now more valuable stock and use the funds to pay off the loan. Of course this doesn't work when stock prices begin to fall, which they always do eventually and that triggered a whole implosion.)

    The comparable triggering gamble for the current economic crises was (is) the sub-prime mortgage crises in which people who had no business buying houses were being given loans anyway on the assumption that if they could not pay their mortgage, since the housing market price was always rising, they could sell the now more valuable house, pay off the mortgage and keep the profit -- or in the alternative the bank could foreclose and sell the house which was worth far more than the mortgage now because of the rising home prices, at no risk to the mortgagor (the bank),

    And just like buying stock on minimal down payment, extending mortgages to people who couldn't afford them only worked in a rising market. As soon as it starts to fall (which all markets do -- nothing is ever a straight ascent and the question is always how long is the descent going to last and how deep), the falling prices creates a spiral down even more severe. If the exponential rise in market prices was fueled by the speculative activity -- which for the stock market rise in the 20's and the housing rise in the 2000's was, the collapse is going to be more severe -- which is exactly what we are witnessing.

    So up until a couple of weeks ago -- I felt that this was going to be rough ride -- but since I also believed that the fundamentals of the economy were strong, I thought we would ride back up in around 5 years. (It took about 3 years post 9/11.)

    But there is another factor I had not really considered as a possibility. One of the longstanding debates about the '29 crash and the 10 years depression that followed is whether the stock market crash caused the Great Depression or whether the economic business cycle caused the Stock market crash.

    Business cycles have always existed in all economies since the dawn of the market place. In olden times it was more driven by the vagaries of the agricultural cycle, when economies were primarily agrarian -- but with the advent of the Industrial revolution in the early 1800's, the business cycle has become much more of a mystery. There have been hundreds of economists over several decades trying to understand what causes a business cycle -- both theoretically or empirically. Nobody has an explanation. Business cycles appear to be complete random not only to when they occur but for how long they occur and how steep the decline and how high the peaks are.

    Now it was believed -- and I was certainly raised with this understanding (my parents both being economists as I am, though now my work is primarily in law) -- that with advent of Keynesian economics -- we would never suffer anything like the Great Depression again. We had and have far more economic policy tools that could blunt the worst parts of the business cycle than people had at the time of the Great Depression. (Keynes published his General Theory which is the main basis of Keynesian economics in 1936 but as economists are so fond of pointing out (because economists love to undercut each other -- which is one of the reasons I have no great love for the profession), The General Theory was pulling together theories and ideas that were "in the air" so to speak among many economic thinkers. But Keynes did pull them together into a coherent framework and developed the ideas further.)

    So the debate over the causes of the Great Depression is how much of it was business cycle driven. In the efforts to understand business cycles, economists were able to tease out empirically that there wasn't just one business cycle going on at a time -- but a multitude of them -- some with wider swings and some with smaller peaks and valleys -- and they seem to occur independently of each other -- so some cycles would be in an up phase while others would be in a down phase -- so the net effect at any given time would be the aggregation of these cycles in any given time. So this would explain why some business cycle peaks were higher than others and why some economic downturns were less severe that others. It depended on how in sync the different business cycles are -- if they are all in sync during a downturn -- the recession is going to be deep.

    And it was clear post '30's that Keynesian economic policy could effect and, to some extent, help soften the downward turns and perhaps help boost the upward turns.

    But what was and is absolutely clear -- economic policy cannot control the swings. It sort of acts like supplements when working out. Supplements can only enhance what is already a good workout and dietary program. Their contribution – it seems from my gatherings here is about a 10% augmentation at best. That I believe is a pretty fair assessment of degree of impact of government economic policy in business cycles. (That is why one can't blame an incumbent president for a messy state of the economy that happened on his watch or credit him with any boom. -- but politics always does -- regardless of political party. The most you can criticize a President for is whether he used the best economic tools to get that 10% effect.)

    So now I am going to tell you what I think -- this is not as a result of any in-depth study -- that it is a result of casual observation and fairly extensive reading in my former profession for over 3 decades.

    I believe now that the Great Depression was the result of a confluence of a number of business cycles most of which were in their downturn phase. That is why the downturn was so severe. Whether the speculative nature of stock market purchase throughout the 1920's exacerbated it, I don't know. It may have only made the fall seem greater because the speculative conduct drove a sense of economic well being very high for a short period (several years) so that when it came to its inevitable contraction, the contraction was far more intense in its depth. Did that exacerbate what was already going to be a very severe recession because the confluence of downturns in a number of business cycles -- I now believe yes.

    Also note that the Great Depression did not just happen in the US -- it was a worldwide phenomenon just as we are seeing now.

    So here are some sobering facts I was researching today about the Great Depression:

    WRT the stock market crash, though it started in October 1929 and it had its ups and downs over the next couple of years in a downward trend, it did not bottom out until 1932 -- nearly 3 years later!

    (I am using the Dow Jones Industrial avenge figures for all this, which was in existence then though there have been some modifications over the years -- you can google it and go to their website to see the historical evolution of the components (i.e. the firms) included for the purpose of calculating the average.)

    Point number 2: When the stock market did bottom out -- it had lost 89% of its value!!! The numbers at the time were as follows: the Dow in the late 20's just before the 29 crash peaked at just under 400 (remember the numbers were smaller back then.) when it bottomed out, the Dow was 40!!!.

    Put in today's terms, the Dow peaked in the last year at a little over 14,000. The comparable fall would be that in about 2 years the Dow would 1/10 that value or 1.400 -- a loss of 90% of the market value. That is about the level it was around 1980.

    Point 3: with respect to riding out the decline, people who owned stock pre the 1929 crash did not recover their value enough just to break even until 1954!!!. In other words, just for the market to get back to the level it was prior to the crash took 25 years. That is with no return on that value -- meaning it was the same as if you stuck that money in a mattress and left it there for 25 years and then took it out -- instead of leaving it in -- at the very least -- a savings bank were one could get 3-5% interest compounded over that time --which if you left the interest in the account would have meant that the money would have tripled (approximately) in value over that 25 years. Instead, leaving the money in the stock market for the 25 years only enabled you to take out the exact same sum in 1954.

    Pont 4: FDR was the first politician to put Keynesian economics into practice. And though one can point to some less than successful ways he implemented it -- recall it was the first time in history that it was viewed that the government had an obligation to protect and help its citizens. Prior to FDR, the vagaries of economic life were the business of its victims and its successes.

    One of the critical elements of Keynesian economic policy is to try to reverse and economic decline by putting money in the hands of citizens. So FDR developed Social Security to put money in the hands of retirees, the Civil Conservation Corps which employed 1/4 of a million workers to work on projects in rural areas, he arranged for rescues of mortgages, he restructured the banking system so money was safe to put in banks again and so forth.

    But though the economy grew significant during FDR's tenure over the 30's, the rate of growth is somewhat misleading because the collapse of our economy was so substantial. A 50% increase of a small number is still a small number (the increase was 58% over FDR's tenure up to the war) and unemployment still remained extremely high throughout the 30's hovering around 17-19%. (We are freaking out over the fact that our unemployment rate has just risen to 6.5% in October from 6.1% in September. Last February, it was 4.9%. The last time unemployment rate was as high as it is now was during Bush I years (which cost him the election -- this is not a political statement -- remember my caveat that the President in Office has little to do with the state of the economy and can't be blamed or given credit for it -- he can only be held accountable for how he managed to mitigate the harm or enhanced the good time with that 10% impact that government policy has.)

    So our current 6.5% unemployment rate which is freaking us out puts the 17-19% that FDR was able to get the rate down to (from a high of 25% when he entered office) shows that even with all the innovative economic policies he implement -- still after 10 years the economy and the unemployment rate was horrendous.

    We did not pull out of that economic disaster after 10 years, despite all the fiscal policies FDR implemented, until we entered World War II, which reduced our unemployment rate to under 2% because we were sending so many men overseas to fight the war. There was in fact a labor shortage so severe -- that women were encouraged to leave the hearth and home and in an act of patriotism come to work in the factories. Rosie the Riveter was an icon of that era. Short hair also became the fashion because women's long hair was getting caught dangerously in the machinery. Many of Hollywood's most famous movie stars, in an act of patriotism, cut their hair short in front of a newsreel camera to encourage short hair to become the glamor style so women would not be reluctant to cut theirs short.

    When WWII ended, policy makers were terrified that when the men came back we would be right back in the depression we were in for the 10 years prior to the war. So policies such as the Veterans administration housing loans were developed to stimulate the economy by causing mass building of homes -which led to the standard expectation today of every family owning their own home -- something that was not at all the case before. Women were encouraged now to go back into the home to allow the returning men to take those jobs -- hence the "happy" homemaker of the Leave It To Beaver and Father Knows Best era. (Ah yes, the days when women vacuumed their rugs in high heels, extravagant shirtwaist dresses and pearls. :D )

    So the point of all this was that despite the use of all the Keynesian policies that FDR implemented -- the Great Depression still lasted 10 years. So I now believe that the economic collapse was due to the confluence of the downturn of many business cycles at the same time.

    So what am I thinking now compared to 2 weeks ago?

    -- I no longer think we have hit bottom in the stock market. I think the trading public thinks that as well which is why they are pulling their money out forcing the DOW to drop further. I believe this latest precipitous drop (over the last day) is not reaction to Congress's hesitancy of a rescue plan for the auto industry -- but because people see the auto industry is not the last of it -- we are going to see a lot more of other industries collapsing. And I believe that too, now.

    When this will end...I don't know (obviously no one can see into the future) but I no longer think a 10 year recession/depression is not well within the bounds of strong possibilities.

    And do I think the market will stay depressed for the next 25 years? --- well that -- I don’t think so. But might it stay depressed for the next 10 years and drop lower from where it is now -- yes I think that is a strong possibility.

    So for the moment I am not pulling what is left of my pension fund out of equity accounts because I still have some hope that I am wrong. But I am going to increase significantly my personal contribution to my retirement fund (as opposed to my employer's who gives a fixed percentage of my salary no matter what I put in -- so there is no matching fund.)

    But I am not going to put it in stocks -- I am going to put it in CDs -- that way I am hedging my bets -- if the market rebounds in the next 5 years. I will be fine. If it sinks lower – well I will have the CDs and Social Security.

    So it has been a long time since I have written such a long post. It was helpful for me to write it to clear my thoughts. I hope it is helpful for others to read.
     
    #25 Justitia, Nov 21, 2008
    Last edited: Nov 23, 2008
  6. Carole

    Carole Well-Known Member

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    Wow, Justitia…………thanks for taking the time to “clear your thoughts” here. They were interesting and sobering, much like the times. :nod:
     
  7. iceweaselsarecool

    iceweaselsarecool Well-Known Member

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    Fascinating when you put it that way. Credit can sure be dangerous. I don't think we'd be able to screw things up half so bad without it.
     
  8. Shamie

    Shamie Senior Member

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    Justita,
    Great post. I agree that this whole economic disaster is going to have a long duration. I don't think it will be a 3 year recovery like after 9/11. One of my concerns is another terrorist attack, that would be the thing that drives the economy into a real depression, apart from all the devastation that it would cause.

    I also am keeping my 401K as is, and hope for the best. While I have a longer time frame before I need the money, it is nevertheless scary to look at those 401K statements.
     
  9. Seltzer

    Seltzer Elite Member

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    Justitia thanks for sharing your thoughts.
     
  10. KT Monahan

    KT Monahan Active Member

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    You talking individual stocks or the indexes?
     
  11. Robert2006

    Robert2006 Active Member

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    I can't get multiquote to work. :doh: Either that or it's an intelligence test I've just failed :lol:

    I think subprime gets too much of the blame. The most horrific default estimates are at about 50%. I don't think it's even a fraction of that now. If you wanted bad imagine if all those ARMs had reset without the interest rate cuts.

    The market make up is different now. 50+% of the S&P 500 earnings come from outside the US. I wonder how comparable the industry make up is.

    Point 3 I guess ignores dividends. Dividends in those days [and once again today] represent a large amount of total return. Memory wants to say 1/2 of total return historically has been dividends. The DJIA numbers just don't reflected reinvested dividends. I also forget how it handles spin offs.

    What's the particapion rate? While the difference between headline unemployment numbers seem huge I don't think the difference between labour force is that high. I also wonder how high the rate would have been if todays standards for actively looking for work was used during the 1930s. Even the BLS own studies admit small changes in actively looking for work lead to large swings in the rate. IIRC the study a few years back claimed the US rate would be 1% if the Cdn standard was used. The Cdn standard is hardly the toughest possible. Thats why I point to the particaption rate.

    Final point you don't need to buy indexes. My history is rusty but I want to say IBM was kicked out of the DJIA during the 30s. During the 20 or so years it was out of the index it had some of it's best returns. Of course the minute it went back into the index it slowed down.
     
  12. DFS

    DFS Well-Known Member

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    I have no source to reference this, but I've heard it several times that the most millionaires in this country were made during the Great Depression, both by number and percentage of population.

    Anyone hear that before too?
     
  13. goofnut

    goofnut Well-Known Member

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    Nice post Justitia! I lost a third of my total assets during the last several months, having most of my money with a well respected active management team. (Harris bank). I was looking forward to increasing my money so I could buy a home in the next few years and I'm getting close to 60 so I want it sooner, not later. Anyway, I sent Harris Bank a short email just to remind them my number one priority is capital preservation. Their response was they believe the best thing to do at this point is remain in strong companies who will recover after the current problems sort out. Well that's fine but I thought one of the main advantages of having "expert and experienced" advisors instead of a mutual fund, is so they can remain watchful and implement defensive strategies to protect your money during the downturn. My opinion is they failed miserably, and I pay the price. Of course I know if I pull my money out from their control now, the market will go up....if I leave it in, it's likely to keep falling. Anyway, what I learned is, it's best to take the time to learn how to manage your own money. There might be some good active management services but my impression is it's mostly a scam...they gain your confidence to sign you up, showing you the likely returns you can get, and if things go bad they can just point their fingers at how the economy is bad all over. If you push them they can always protect theirself with that "past performance not a guarantee" crap.
     
  14. Justitia

    Justitia Elite Member
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    Though that is a nice thought -- in fact using credit is at most an exacerbation. European countries do not use credit the way we do here in the US and it is not anywhere near as wide-spread as it is here -- but they are experiencing economic calamity at this time as we are.

    I agree that there has been an overemphasis on the sub-prime mortgage crisis as the cause of the current recession. Just to note -- there was a comparable collapse when the internet and technology bubble burst in the late 90's and though a lot of people who were invested in that industry lost a lot of money (in many cases all of their money) -- it did not trigger a severe recession. That is why one has to consider the role of business cycles. We just weren't in a downturn of business cycles at that time -- so the economic and financial losses were pretty much contained to those industries --as the rest of the economy did fine.

    (BTW NASDAQ was over 5000 then. The VP of NASDAQ's Market Watch Division was also a student of mine (in my Securities Regulations class) at the time of the Technology bubble burst. (The Market Watch Division oversees and closely monitors all trades throughout every day and e.g., calls for trading halts when something is out of kilter with particular stocks.) During this period, as the NASDAQ average, which listed the bulk of the technology stocks, when through its precipitous slide, the VP would be late for every class. When she walked in -- we would stop class -- and let her speak and tell us what happened that day -- to the extent that the information was not confidential. Definitely interesting. Of course, my managed funds were only slightly invested in the tech stocks -- so I suffered no pain :))

    I am not sure what you are asking -- if you are asking whether the in come from the S&P 500 that comes form abroad are from European and other continents' industries -- I don't know but I suspect it most likely is. And the rest of the world is suffering as we are.

    The current market value of a particular stock depends completely on the expected flow of future dividends (apart from purely speculative demand, which is gambling of the market price of the stock from day to day as opposed to the estimate of the long run future profitability of the company -- from which dividends are derived.) Though I do not have time at the moment to research the data back then to back of the following statement -- my educated guess is it is accurate: The fact that the stock market stayed so depressed for 25 years is that flow of dividends stayed depressed, which means that corporations did not return to levels of profitability that they had in the 20's.

    Of course, the market value of stocks in the 20's were probably overinflated over that time because of the high speculative demand and the ability of people to purchase stock with only 10% down payment.

    The relevant numbers are the price/earnings ratio -- where price refers to market price of the stock and the earnings refers to the profits of the company calculated on an annual basis.

    The issue of dividends over the 25 year period is not relevant to the question of how long it took for the share value to rise again to the level it was before, i.e. to break even. If the shares had retained their value throughout those 25 years, the owners would still have received dividends on top of that, regardless. Whether the owners decided to reinvest that money form returns is a separate issue -- that is really a matter of buying more shares of stock.

    What is relevant is the market value of the stock. We are talking about the Dow's average value of the stocks it keeps track of and yes indeed over that period of time some companies were dropped while others replaced them. But the bottom line is that the typical share value in the companies tracked by the Dow remained deflated at around 10-20% of their value before the 29 crash for 25 years. As stated earlier, this probably reflected that the companies' profitability remained low as well as the dividends distributed from those profits or the part of the profits that were retained by the corporation.

    With regard to spin-offs and divestitures -- that is a good question. But I admit I am assuming that the economists and financial analysts who report this history are well aware of this question and have adjusted for it and so on that basis, their analysis holds.

    What matter is the consistency of application of standards of measure of being in the labor market and being unemployed in the labor market. As long as they are consistent, the relative changes, particularly in large swings (a change from 4% to 6 1/2% -- a more than 50% increase in the unemployment rate over a relatively short period of time is a large swing) are what matters.
    Comparing the measure of the unemployment rate today with the unemployment rate during the great depression has two issues.

    During the Nixon era when unemployment was rising (i.e., early 1970's), there was a significant change in the definition of what constituted being unemployed. People who dropped out of the market and no longer actively seeking for a specified period of time-- which is sometimes referred to as the "discouraged worker effect" -- were no longer counted among the unemployed. This had the effect of reducing the reported unemployment rate. I presume this is what you mean by the "participation rate."

    Of course, the political charge was made then that the change was designed to hide the extent of unemployment to help mitigate its impact on the elect-ability of the political party in power at the time.

    As I have not been actively pursuing economic scholarship for the last 20 years -- I do not know if any subsequent significant adjustments were made to the definitions of what constitutes participating in the labor market -- but I suspect at most there were some modifications as it is likely significant ones would hit the mainstream newspapers and I would have probably noticed it. But I could be wrong. I was living in Europe on and off for a number of years and the US news was not well-reported abroad.

    Nevertheless, the impact would be (assuming I am correct that there have been no major modifications since the early '70's) that today's measure of unemployment rates would be understated compared with he standard during the Great Depression -- which means if applied the standards then -- our unemployment rate would be reported as higher than it is reported now.

    On the other hand, the reporting process today is far more accurate than in the '30's. Economist have long suspected that the estimate of 25% unemployment rate was too low -- because of significant under and non-reporting issues.

    SO it may be a wash.

    BTW -- they are predicting an unemployment rate as high as 9% sometime next year. We have not seen a rate that high since the major recession during the early '80's. And there is no indication that anyone would project that the unemployment rate will max out then.


    My discussion regarding the Dow Jones Industrial average was not recommending that one buy index funds - which personally I would not. Tracking the Dow Jones Industrial average just serves as a good barometer as to what is happening to stocks in general. There will be of course stocks that are doing better than the Dow average and stocks that are doing worse -- but the Dow is a good bell-weather of what is happening overall -- that is why it is reported in the news regularly.

    I do not know but I don't think so. That was probably a true statement in the 50's and 60's but I suspect by the end of the '80's, I think that no longer held true. Just the shear number of millionaires increased dramatically -- but of course being a millionaire today does not mean the same thing as it did 35 years ago. Being a millionaire keeps one still in the middle class today. If you look at the current list of the top 100 billionaires, you will see that most comes from wealth newly created -- mostly since the 1970's. Not a lot of inherited wealth created from before then.

    Well -- a couple of points here:

    1. There was no way that anyone could predict the declining market that we are experiencing now so you cannot blame that on your financial managers. I do not know who they are -- but that means nothing. As a university prof I have had access to an extremely well-managed group of mutual funds throughout my career- TIAA-CREFF -- so though 20 years or so ago, I paid attention to who the good management organizations were -- I haven't really since then. But I presume that you are correct that the Harris Bank performs well. Based on the little on-line research that I did -- it is a conservative outfit, which is what you want at your age. TIAA-CREFF has decades long history of out-performing pretty much all other funds in the long run and I still lost 45% of my portfolio value.

    2. Unless you have an excellent financial analytic mind and a minimum of 2 hours per day plus to spend on managing your portfolio -- you should never do so. It is much better to put your retirement funds into a well managed mutual fund and/or CDs. That is what I do and not only am I a trained economist (with a PhD from an Ivy League school) but one of my areas of expertise in law is securities, i.e., stocks and bonds. That does not make me a top-flight financial analyst but it puts me well above the average -- and I would never manage my own investments.

    3. Though I would never manage my own investments -- I do make decisions (TIAA-CREFF allows me to do so) as to how much my portfolio are in equity (stocks) funds whether they be aggressive ones (i.e., targeted for growth) or conservative mature funds (targeted to maximized dividends), or whether I want to be more conservative, oriented to preserving the capital first and dividend growth second - typically mutual bond funds.

    4. The best advice 35 years ago was if you were young -- keep your all your funds in equity (in a well-managed mutual fund such as the CREFF part of TIAA-CREFF) and wait until you are 10 years out from retirement and then switch all the funds over to a mutual bond fund -- or if you were really conservative to a bond annuity fund such as the TIAA portion of TIAA-CREFF.
    That advice changed as our life expectancy grew longer and bond funds could not keep up with economic growth and inflation in the long run -- so about 15 years ago, it was starting to be recommended that you keep a portion of your portfolio in equity funds (perhaps the more conservative that emphasized dividends rather than growth). But how much that "portion" should be has never really been settled on.

    So personally, when I started earning a living, all my retirement funds went into the aggressive growth mutual funds in CREFF. Other funds at the time that were also good were Dreyfus and Fidelity, particularly Fidelity's Magellan Fund. There were of course others -- those were just the funds I chose for my IRAs, which were outside of TIAA-CREFF.

    I did very well with that philosophy. And I still recommend that for people young starting out and who have 20 or more years away from retirement.

    As this is my 60th year and nominally, I am 10 years away from retirement -- this would be the time that I would decide how to reallocate my portfolio. I had already begun gradually shifting some of my allocation over to bond mutual funds over the last few years. This winter was when I planned to do a major re-evaluation of how much of my portfolio I wanted in mutual bond funds and if I wanted to put any in the TIAA annuity fund -- which basically guarantees the capital, offers some growth in value over time but invests very conservatively in very high-rated (sometimes called "investment-grade") low-risk bonds, etc. Probably I would have settled on putting around 20% in TIAA, 25% in CREFF bond funds and leave 55% in CREFF's mutual equity funds.

    Unfortunately, the market collapse happened before I did that. But assuming I had done it las spring when I turned 60 before the decline -- I still would have lost about 25% of my pension's value -- which admittedly is better than 45% but it still would have been a bit of a blow. Yet, I would not have said to myself I made a stupid decision and should have put it all in TIAA. I still don't say that. The time I planned to do my re-assessment of my portfolio was this winter because I have been so overloaded with work. Otherwise I would have done it last spring. But c'est la vie.

    5. I will say -- and this casual observation -- I don't sense that people have that good of an experience when they turn their portfolios over to banks to manage. Though this is purely anecdotal -- my observations are that banks generally do not have the first rate portfolio managers -- those are hired away by first rate mutual finds and private investment groups. Banks tend to invest very conservatively to avoid being criticized-- so there is not much growth in value which could have been gained at very little risk to capital in a conservative, well-rated mutual fund. And banks tend to bumble and not react well to declining markets -- plus they do not tailor their investment strategy -- to the extent they even have an investment strategy -- to the individual's situation -- plus they charge large fees relative to their performance and they tend to do a some churning (i.e., buying and selling to no particular advantage) in order to generate commissions. (This can happen in mutual funds as well -- which is why you have to be careful to investigate the quality of the mutual fund you are considering.)

    So here is an example. A friend's mother is 95 years old -- and in very good health. At her age -- her life expectancy is very short. A very well-known and highly respected bank (which I will not name) manages a trust her husband left for her when he died over 10 years ago. For the last 2 years, my friend, who is a trustee as well, has begged the bank to take the trust out of equities (i.e., stock) and put the funds in CDs. With the short horizon the mother faces -- that is the only sound investment strategy. For two years, the bank has refused. My friend got lawyers, the bank's lawyers got involved -- the bank's lawyers stalled throwing one statute after another justifying why the bank was not going to do what my friend asked. Most of the assets of the trust were invested in financial instruments owned or sold by the bank -- so there is a certain amount of conflict of interest. There is also indications of a some churning going on (selling the trust's holdings in one of their assets to buy into another of their assets -- allowing them to collect double commission for the transaction and no real justification as to enhancement of the portfolio.)

    Even though my friend has the right to pull of the money out of the trust -- there are limitations and ways the bank can stall it (if he does that, they will lose their commissions and management fees.)

    Now, since the market's collapse, the trust is worth about half of what it was a year ago -- which would not have been the case if the bank had done what my friend requested.

    Though one could argue that what the bank did in managing the trust was reasonable (which is a lower standard than "good") for the "average person" -- it was absolutely absurd for a person in their 90's. All of the mother's medical and living expenses are paid out of that trust. Though she is not currently at any risk -- this loss would have been completely avoided if the money had been transferred as it should have been to high yield, federally insured CDs.

    But as I say, this is purely anecdotal, not a rigorous study -- and I am sure one can find excellent banks to leave a trust in. But I know too many stories like the one above -- that I would stay away from banks.

    6. Another example of poor planning-- a colleague who is 65 and in poor health kept all of his pension fund in equity mutual funds. What was he doing, doing that!?! Well, the market has now collapsed and he too has lost somewhere around 40% of his asset wealth. I am not sure what he is going to do. He cannot work for another 5 years -- there is already pressure on him to retire because his performance is not up to speed because of his health --- but 10 years ago -- certainly 5 years ago -- 50% of his assets should have been very secure mutual bond funds or CDs. He has a financial manager. What was she doing? Frankly, my view of most financial counselors (and of course there are exceptions) is like my view of most psychotherapists (psychologists, MSWs and psychiatrist), most physical fitness trainers, and yes, both of my professions, lawyers and economists -- most are merely average and average is not worth anything in those fields. It is not like bricklayers, plumbers, car mechanics, school teachers, etc. where average still accomplishes some good. Probably lawyers doing every day average work that is not particularly challenging and just straight forward still perform a useful service -- but usually, when there is anything with a degree of complexity or requires individual tailoring -- which is almost always the case in the above named professions, 75% are not worth spending any money on.

    But I am no seer. Who knows if I will prove wrong. All investment in the future has a risk -- and there is no certainty as to when and where and how much the downside will be.

    The only comfort to take -- is that you are even younger than me -- and we are all in the same boat. :nod:
     
    #34 Justitia, Nov 23, 2008
    Last edited: Nov 24, 2008
  15. goofnut

    goofnut Well-Known Member

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    Thanks for your insightful posts!

    I've started doing some short term trading with part of my money. I'm losing so far but it still feels more safe than holding for the long term. I can exit a trade then evaluate what I did wrong or right and hopefully with experience improve my results enough to make steady income. I'm not smart but I don't think it's necessary to be smart for trading... I think I can be successful with enough experience and persistence.
     
  16. Justitia

    Justitia Elite Member
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    I don't mean to be a wet blanket --- but pretty much, day-trading is bound to lose... Even if you have some good days, they will be more than offset by losses on other days.

    It is not because you are not smart -- it is because the market is very efficient. It assimilates into the market price of a share almost instantly the value of any information or analysis. So there is nothing you can think of or know that hasn't already been thought of out there or known -- and whose ecoonomic value as a predictor of the course of the future price of the stock has not already been internalized into the stock's market price today (except for inside information -- which is not in the public domain anywhere. But it is illegal to trade on inside information if you are an insider or are tipped by an insider or are tipped by someone who has been tipped by an insder,. etc.) It is pretty much impossible to beat the market through day trading. It is only a matter of luck if you do. I have a lot of anecdotal evidence to support that -- including observations of well-known financial analysts who make recommendations on those serious shows.

    Every year I lecture my students about how it is almost a certainty that one will lose money day-trading. This is in my Securities Regulations course... so the students there are pretty savvy about business... some of them are professionals. They all plan to make careers in the legal/financial field.

    I always ask if anyone has done any day-trading to raise their hands. Usually about 10-20% of the class does. Then I ask for those who made money doing it to keep their hands up -- all hands go down. Everyone lost money. I do this every year and have for 15 years. I have never had a single person who did not lose money doing day-trading.

    Right now you are right it is unsafe for the near long run (i.e., at least the next 5 years or so) So if you want a better sense of control --- put your money in CDs -- look around for the best rate. Interest rates are going to be kept low for a pretty long time as part of the Feds monetary policy for economic stimulus... So I would try to get the highest rate for the longest term I could. And then just renew as the CDs become due.

    And you can feel comfort as you watch the market drop further... :cool:
     
    #36 Justitia, Nov 24, 2008
    Last edited: Nov 24, 2008
  17. Robert2006

    Robert2006 Active Member

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    Would be nice if the market regulators watched the market. The VW case this year [plus others] make it hard to believe anybody is awake. VW had more then 2x it's free float shorted. Nobody noticed until the squeeze happened. How is it possible to have 2x the free float shorted and nobody have a naked short?

    The SP500 today is a world index. The US indexes during the 30s were much more US centric. The 500 today reflects the world. I don't believe it's really the same.

    If you treat dividends as a return of capital [easy enough to understand if you look at the banks] then the market price is less of a concern. I own some stocks that the total dividend paid to me over the years exceed what I paid for them.

    The defintion of actively seeking work has been continually tightened.

    The particaption rate is total number of people working divided by the adults between 16 and 65. Memory tells me the current figure is around 65%. During the depression it was high 50% to may just over 60%. We've been told unemployment was sub 5% yet we've also seen wages stay flat or drop for many. Less supply of labour leading to lower prices for labout :confused:

    The media reports the DJIA because it's something Joe the Plumber has heard of. If they reported some of the broader numbers eyes would glaze over.

    Most professionals are index trackers. Even those that aren't offical trackers are. Partly if you're large you've got not choice but to follow the money. Partly it's a way to protect your job. You can't underperform the market if you own the market.

    I've got to run hopefully didn't miss too much
     
  18. Justitia

    Justitia Elite Member
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    Well, that's why the news usually reports both the Dow Jones and S&_ (and NASDAQ). I did a little research and the Dow does take into account stock splits, etc. However, it is not without its criticisms on many fronts -- same with S&P, etc. No such thing as a perfect index.

    Well hopefully that would the case -- people would not invest in equity in a company if the dividends were not expected to pay out more than the investment price over time as there is no expectation of the company returning the investment itself as there is with bonds. Of course, the fact that corporations have perpetual duration complicates analyses because the stock then represents a "store" of value, so to speak, which allows one to sell shares, which represents their investment, to another party who will then stand in their shoes as the equity investor. Of course the price at which one sells the share will probably be different than what they paid, either up or down -- primarily depending on expected future flow of dividends at the time of sale. Short run swings in mkt prices are due primarily to speculation -- betting on what you think others in the market are going to think the stock is worth tomorrow or the next day or some time down the road in the short run.



    I have not looked at data in a long time but at some point the participation rate that you refer to was viewed to have increased due to the entry of women into the market place in larger numbers than historically -- thanks to women's lib...

    3% unemployment has historically been considered "normal" allowing for the flow of workers from one company to another and one industry to another with spells of temporary unemployment along the way. 4% is not considered a particularly tight labor market in the US.

    One of the explanations given for declining US wages is that the better paying jobs are going overseas -- outsourcing, etc. They go over there because corporations find the costs of labor less and the quality differential between US labor and foreign labor is very little these days compared with decades past. This is the result of the globalization of the marketplace --which you also alluded to re: the make-up of indexes -- and the fact that significant underdeveloped countries are no longer that -- they are the emerging economies, with better educated and better trained workers than in the past. And those workers are willing to work for less compensation than US workers of comparable skill, since in their country it is still a high standard of living.

    The bottom 20% of the income groups in the US actually had their income levels go down during the booming 90's. All part of the disappearance of the middle-class.

    :lol: that is certainly true --- but it is still amazing how many professionals, despite that, do underperform the market. And there is a separate issue with respect to how much of a person's portfolio should be invested in lower risk bonds as opposed to equities, where the emphasis is on interest and preservation of capital. In a declining market one hopes to have already moved more to bonds before it happens -- but of course that means being a seer -- other than the issues re: retirement I discussed in earlier posts.

    Have a great day!!!
     
  19. Banditfist

    Banditfist Well-Known Member

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    Indicies, specifially the S&P. Look on youtube. Great video on there by Karl Denniger (Market Ticker). You only have to check the markets once a week and you will beat the indices over the long term.

    Justitia! Haven't heard from you lately. Missed running by your residence during the Baltimore Half-Marathon. I almost died during that race!
    The only part that I will disagree with you is that I tend to recommend ETFs rather than mutual funds. Lower costs and better tax advantages. 95% of mutual funds can't beat the indices.

    I think that Keynesian economics has just about run its course. I understand the help that government can do by injecting a stimulous into an economy (look at Bush II tax breaks in coordination with the Fed's 1% policy), but when the economy gets rolling the politicians won't remove the stimulous.
    The bond market has yet to capitulate. I still believe that is coming. As soon as the bond market tells the US government no mas. The gig is up.

    I would love to hear your take on Austrian economics/Von Mises/Hayek.
    When I was looking at a doctorate in economics, I was specifically looking for a school that taught this point of view (Auburn is actually home to the Ludwig Von Mises Institute, but is not associated with the University directly).
     
  20. akm3

    akm3 Well-Known Member

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    This has turned into a great thread! Thanks for all the insights! Gives me something to do other than watching my money melt away...I can now worry about my money CONTINUING to melt away! Fantastic :D
     

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