Comments on: The major risks of buy and hold index investing http://earlyretirementextreme.com/2008/04/the-major-risks-of-buy-and-hold-index-investing.html Financial independence, frugality, self-sufficiency, ecology, capitalism, and voluntary simplicity Fri, 25 Jul 2008 15:52:56 +0000 http://wordpress.org/?v=2.6 By: AJC @ 7million7years http://earlyretirementextreme.com/2008/04/the-major-risks-of-buy-and-hold-index-investing.html#comment-989 AJC @ 7million7years Mon, 14 Apr 2008 02:28:02 +0000 http://earlyretirementextreme.com/?p=199#comment-989 For a start, so-called Index Investing isn't 'investing' at all ... it's 'saving', as there is no income being generated and only a speculative capital gain. However, as a 'savings' vehicle, it can be valuable ONLY if (a) 80+ years of history is any guide and (b) you keep your money in for at least 30 years - there has been no 30 year period when the Dow Jones has returned less than 8%. For a start, so-called Index Investing isn’t ‘investing’ at all … it’s ’saving’, as there is no income being generated and only a speculative capital gain.

However, as a ’savings’ vehicle, it can be valuable ONLY if (a) 80+ years of history is any guide and (b) you keep your money in for at least 30 years - there has been no 30 year period when the Dow Jones has returned less than 8%.

]]> By: Debbie M http://earlyretirementextreme.com/2008/04/the-major-risks-of-buy-and-hold-index-investing.html#comment-988 Debbie M Sun, 13 Apr 2008 15:45:32 +0000 http://earlyretirementextreme.com/?p=199#comment-988 Thanks for the reply, Jacob. Based on a recent visit to some older relatives, you might also look into companies that make/sell vitamins and other supplements, which they use basically as nonprescription medicine! Also, wheelchairs, or the cooler-looking scooters. Well-run nursing homes and "mature" subdivisions. Companies that make things to convert your house into an "accessible" house: grab bars, elevators. Good ideas. I have some research ahead of me! Hmm, boomer websites. Thanks for the reply, Jacob.

Based on a recent visit to some older relatives, you might also look into companies that make/sell vitamins and other supplements, which they use basically as nonprescription medicine! Also, wheelchairs, or the cooler-looking scooters. Well-run nursing homes and “mature” subdivisions. Companies that make things to convert your house into an “accessible” house: grab bars, elevators.

Good ideas. I have some research ahead of me! Hmm, boomer websites.

]]> By: Steve Austin http://earlyretirementextreme.com/2008/04/the-major-risks-of-buy-and-hold-index-investing.html#comment-987 Steve Austin Sun, 13 Apr 2008 14:45:24 +0000 http://earlyretirementextreme.com/?p=199#comment-987 ERE, also add to the list: * emigration (from the US) Re: dividend stocks, share price is a non-trivial concern for the mgmt of a small / young public company. Lots of upper and middle managers have latent compensation tied up in stock options. They want more buyer interest so that their share prices maintain an upward trajectory. So if a consumer investor trend tilts toward dividend-paying stocks (and thus against non-dividend-payers), the smaller companies may be encouraged to retain some share sellers by beginning a quarterly payout. (My former employer, a smallish, middle-aged software producer, did just that, began a payout of 1% or so yield.) What you say about mgmt paying a dividend when growth mitigates is what *good* mgmt does, but not all mgmts are good. Re: realizing capital gains vis dividends, that could work but it puts more and regular selling pressure on the shares than does a payout (which encourages retention of shares). Not sure why it would be cheaper w.r.t. taxes. Right now long-term capital gains and qualified dividends enjoy the same low tax rates. Tax laws change, of course, but right now it's 15% for the highest earners, down to 0% for us lowest earners. I definitely concede that realizing capital gains vis dividends gives one much more *control* over the timing of realizing investment tax liability. That can be very useful when one is carefully navigating various taxation thresholds / brackets / limits / etc. ERE, also add to the list:
* emigration (from the US)

Re: dividend stocks, share price is a non-trivial concern for the mgmt of a small / young public company. Lots of upper and middle managers have latent compensation tied up in stock options. They want more buyer interest so that their share prices maintain an upward trajectory. So if a consumer investor trend tilts toward dividend-paying stocks (and thus against non-dividend-payers), the smaller companies may be encouraged to retain some share sellers by beginning a quarterly payout. (My former employer, a smallish, middle-aged software producer, did just that, began a payout of 1% or so yield.) What you say about mgmt paying a dividend when growth mitigates is what *good* mgmt does, but not all mgmts are good.

Re: realizing capital gains vis dividends, that could work but it puts more and regular selling pressure on the shares than does a payout (which encourages retention of shares). Not sure why it would be cheaper w.r.t. taxes. Right now long-term capital gains and qualified dividends enjoy the same low tax rates. Tax laws change, of course, but right now it’s 15% for the highest earners, down to 0% for us lowest earners. I definitely concede that realizing capital gains vis dividends gives one much more *control* over the timing of realizing investment tax liability. That can be very useful when one is carefully navigating various taxation thresholds / brackets / limits / etc.

]]> By: Jacob http://earlyretirementextreme.com/2008/04/the-major-risks-of-buy-and-hold-index-investing.html#comment-970 Jacob Sat, 12 Apr 2008 15:34:24 +0000 http://earlyretirementextreme.com/?p=199#comment-970 @amanda - To invest in individual companies yourself, I'd say you have to turn investing into a major hobby. Bonus points if you got a degree (or just the equivalent knowledge) in accounting, management, ... The way I started was to read economic comments on financialsense.com This lead me to a few fund managers. I put a few bucks in their funds and started reading their newsletters. Generally you can get the newsletters without putting money down. This will give you the philosophy and "experience". The technical part is harder. I like aaii.com. It's way above smartmoney, money magazine, etc. in how it teaches you to invest e.g. it's not articles about "fashionable companies of the month", "best vacations in the world", or "how to pick a dentist". @steve - In isolation. Here are some more *) Petrodollars partially connected to the massive deficits. This money is invested back in the US (which is really funny, because that is not where the US spends the money). *) Immigration. @mattg - My "problem" is that first investing was institutionalized. Next it was put on autopilot. Where's the value added now? If people are buying and selling indices simply according to their retirement needs and not according to the underlying economy, it really is a retirement regulated supply and demand problem (Rather than a future earnings supply and demand problem). Dollar cost averaging simply means you pay the average price over a period. If the price is lower than the average at the end, you lost. I note that a lot of proponents of DCA always draw a curve that is upwards slanting at the end [convex]. @debbie m - Hedgefunds, private equity, ... stuff that the hoipolloi can't get into. There are even SEC regulations that say you have to have a certain income before you get to play. That burns :-( For the boomers I'm buying companies that make the products that they are going to spend their money on. They might spend some money on dividend stocks and bonds, but my money is on (haw haw :O) ) prescription medicine, hip replacements, vacations, diabetes treatments, and financial services (insurance). @steve and debbia again - I'm not sure that companies would retain less earnings to please shareholders. A company will start paying a dividend when its earnings are predictable and it thinks its growth is lessening. Retirees could simply start realizing capital gains on autopilot instead of demanding dividends. It would be cheaper in taxes too. @p - Right on! And it doesn't help that the fed in collusion with the government keeps borrowing their way to "prosperity" instead of increasing taxes (if they really feel the need to spend that much). @amanda - To invest in individual companies yourself, I’d say you have to turn investing into a major hobby. Bonus points if you got a degree (or just the equivalent knowledge) in accounting, management, … The way I started was to read economic comments on financialsense.com This lead me to a few fund managers. I put a few bucks in their funds and started reading their newsletters. Generally you can get the newsletters without putting money down. This will give you the philosophy and “experience”. The technical part is harder. I like aaii.com. It’s way above smartmoney, money magazine, etc. in how it teaches you to invest e.g. it’s not articles about “fashionable companies of the month”, “best vacations in the world”, or “how to pick a dentist”.

@steve - In isolation. Here are some more
*) Petrodollars partially connected to the massive deficits. This money is invested back in the US (which is really funny, because that is not where the US spends the money).
*) Immigration.

@mattg - My “problem” is that first investing was institutionalized. Next it was put on autopilot. Where’s the value added now? If people are buying and selling indices simply according to their retirement needs and not according to the underlying economy, it really is a retirement regulated supply and demand problem (Rather than a future earnings supply and demand problem).
Dollar cost averaging simply means you pay the average price over a period. If the price is lower than the average at the end, you lost. I note that a lot of proponents of DCA always draw a curve that is upwards slanting at the end [convex].

@debbie m - Hedgefunds, private equity, … stuff that the hoipolloi can’t get into. There are even SEC regulations that say you have to have a certain income before you get to play. That burns :-( For the boomers I’m buying companies that make the products that they are going to spend their money on. They might spend some money on dividend stocks and bonds, but my money is on (haw haw :O) ) prescription medicine, hip replacements, vacations, diabetes treatments, and financial services (insurance).

@steve and debbia again - I’m not sure that companies would retain less earnings to please shareholders. A company will start paying a dividend when its earnings are predictable and it thinks its growth is lessening. Retirees could simply start realizing capital gains on autopilot instead of demanding dividends. It would be cheaper in taxes too.

@p - Right on! And it doesn’t help that the fed in collusion with the government keeps borrowing their way to “prosperity” instead of increasing taxes (if they really feel the need to spend that much).

]]> By: P http://earlyretirementextreme.com/2008/04/the-major-risks-of-buy-and-hold-index-investing.html#comment-969 P Fri, 11 Apr 2008 21:48:02 +0000 http://earlyretirementextreme.com/?p=199#comment-969 The trouble with the stock market is that alot of investing is done on autopilot, including indexing. Month after month, zombie investors treat the market as if it were a bank account. I suspect this often way over capitalizes the mega corps, who can't figure out what to do with all that money, other than to give their exec's gigantic pay raises and stock options (share inflation). When it comes time for investors to claim corporate profits (en mass), they are likely to be sorely disappointed because the CEO and friends have already lay claim to much of them. Things should get really interesting when Baby boomers start cashing out their IRAs and 401k's to pay big medical bills and assisted living. Maybe they won't have to cash out if Government picks up the tab, but that will create an interesting tax / inflation burden for Gen X. The trouble with the stock market is that alot of investing is done on autopilot, including indexing. Month after month, zombie investors treat the market as if it were a bank account. I suspect this often way over capitalizes the mega corps, who can’t figure out what to do with all that money, other than to give their exec’s gigantic pay raises and stock options (share inflation). When it comes time for investors to claim corporate profits (en mass), they are likely to be sorely disappointed because the CEO and friends have already lay claim to much of them.

Things should get really interesting when Baby boomers start cashing out their IRAs and 401k’s to pay big medical bills and assisted living. Maybe they won’t have to cash out if Government picks up the tab, but that will create an interesting tax / inflation burden for Gen X.

]]> By: Steve Austin http://earlyretirementextreme.com/2008/04/the-major-risks-of-buy-and-hold-index-investing.html#comment-968 Steve Austin Fri, 11 Apr 2008 18:43:40 +0000 http://earlyretirementextreme.com/?p=199#comment-968 Debbie M, I was hoping to imply that if dividend stocks are such an attraction to boomers (as you and I both seem to tentatively agree) then perhaps most companies will begin to grow their dividends, make it priority to return earnings that way vis through appreciation. If such a trend were to emerge, perhaps boomers won't go on the selling binge after all? . mattg, I'm in my late 30s, and I concur with and share your long-range time frame. Here's a reason why may wish to not be so firm about such time frames: companies go out of business, or may enter terminal stages of their economic lives due to drastic changes in their environments. A stock pick may have been a great pick 30 years ago, but will it still be great to hold 30 years from now? I think we stock investors who start young have to be ready to evolve our holdings and not imagine that a stock we have bought -- and held and closely and actively followed over the years -- will always be in our "long-term" portfolio. Another good Graham book is Security Analysis, 2nd edition. . mattg again, DVA is conceptually in between DCA and lump sum, perhaps consider it "smaller lump sum" or "bump sum" or something. I can't stomach DCA: if I put a lot of effort into making my initial investment at some deep discount to intrinsic value, it makes no sense for me to automatically reinvest dividends (or distributions) at the going market price. That's letting Mr. Market tell me what I'll pay, contrary to prudent value investment tenets. (Use Mr. Market to your gain, don't let him use you.) I like to collect all my dividends and distributions in cash and make additional (or new) purchases using the same techniques that I used to make my original purchases. Debbie M, I was hoping to imply that if dividend stocks are such an attraction to boomers (as you and I both seem to tentatively agree) then perhaps most companies will begin to grow their dividends, make it priority to return earnings that way vis through appreciation. If such a trend were to emerge, perhaps boomers won’t go on the selling binge after all?
.
mattg, I’m in my late 30s, and I concur with and share your long-range time frame. Here’s a reason why may wish to not be so firm about such time frames: companies go out of business, or may enter terminal stages of their economic lives due to drastic changes in their environments. A stock pick may have been a great pick 30 years ago, but will it still be great to hold 30 years from now? I think we stock investors who start young have to be ready to evolve our holdings and not imagine that a stock we have bought — and held and closely and actively followed over the years — will always be in our “long-term” portfolio. Another good Graham book is Security Analysis, 2nd edition.
.
mattg again, DVA is conceptually in between DCA and lump sum, perhaps consider it “smaller lump sum” or “bump sum” or something. I can’t stomach DCA: if I put a lot of effort into making my initial investment at some deep discount to intrinsic value, it makes no sense for me to automatically reinvest dividends (or distributions) at the going market price. That’s letting Mr. Market tell me what I’ll pay, contrary to prudent value investment tenets. (Use Mr. Market to your gain, don’t let him use you.) I like to collect all my dividends and distributions in cash and make additional (or new) purchases using the same techniques that I used to make my original purchases.

]]> By: mattg http://earlyretirementextreme.com/2008/04/the-major-risks-of-buy-and-hold-index-investing.html#comment-967 mattg Fri, 11 Apr 2008 18:08:58 +0000 http://earlyretirementextreme.com/?p=199#comment-967 I'm reading Graham's Intelligent Investor right now, and what I'm getting from that is that we've seen 10-20 year periods of no returns at times. It would follow that if you're purely buying-and-holding, you wouldn't want to be in the market any shorter than that. Even with that length of time, it would be precarious to be all-stock, because there's a chance you'll make nothing at all, so you'd want the stocks to be a part of . That's how I currently understand long-term as it pertains to the stock market. I'd love to retire at 55, but I can't guarantee that sort of thing when I'm still young, so I'm looking at an expected 30-40 years before I start drawing down, and something like a 75-80 term that I'll be investing for (being rather generous on my life expectancy). Seems to fit my above definition. Comments about the wisdom/folly of this are appreciated. DVA seems like a good idea to force yourself to buy lower and sell higher. Seems like an exaggerated version of DCA. I have read the studies that say DCA doesn't make money, but most of them have been comparing DCA vs. lump sum. Since most people DCA through a 401k or equivalent, they don't have the lump sum available all at one point in the first place, so IMHO the debate is often pointless... I’m reading Graham’s Intelligent Investor right now, and what I’m getting from that is that we’ve seen 10-20 year periods of no returns at times. It would follow that if you’re purely buying-and-holding, you wouldn’t want to be in the market any shorter than that. Even with that length of time, it would be precarious to be all-stock, because there’s a chance you’ll make nothing at all, so you’d want the stocks to be a part of . That’s how I currently understand long-term as it pertains to the stock market.

I’d love to retire at 55, but I can’t guarantee that sort of thing when I’m still young, so I’m looking at an expected 30-40 years before I start drawing down, and something like a 75-80 term that I’ll be investing for (being rather generous on my life expectancy). Seems to fit my above definition. Comments about the wisdom/folly of this are appreciated.

DVA seems like a good idea to force yourself to buy lower and sell higher. Seems like an exaggerated version of DCA. I have read the studies that say DCA doesn’t make money, but most of them have been comparing DCA vs. lump sum. Since most people DCA through a 401k or equivalent, they don’t have the lump sum available all at one point in the first place, so IMHO the debate is often pointless…

]]> By: Debbie M http://earlyretirementextreme.com/2008/04/the-major-risks-of-buy-and-hold-index-investing.html#comment-966 Debbie M Fri, 11 Apr 2008 18:03:14 +0000 http://earlyretirementextreme.com/?p=199#comment-966 Yes, Steve Austin, dividend stocks are a subset of stocks. My point was that even if it's a bad idea to be holding most stocks when the boomers are cashing in, maybe dividend stocks are an exception. Yes, Steve Austin, dividend stocks are a subset of stocks. My point was that even if it’s a bad idea to be holding most stocks when the boomers are cashing in, maybe dividend stocks are an exception.

]]> By: Steve Austin http://earlyretirementextreme.com/2008/04/the-major-risks-of-buy-and-hold-index-investing.html#comment-965 Steve Austin Fri, 11 Apr 2008 17:05:44 +0000 http://earlyretirementextreme.com/?p=199#comment-965 several comments and question for mattg and Debbie M: . mattg, what *is* your definition of long-term? also, you mentioned dollar-cost averaging; I've largely written it off as another marketing component of the individual investor niche -- check out dollar-*value* averaging (DVA): http://en.wikipedia.org/wiki/Value_averaging . Debbie M, I note that you make a distinction *between* stocks and dividend stocks (w.r.t. boomer selling) -- wouldn't you rather consider dividend stocks as a subset of stocks? several comments and question for mattg and Debbie M:
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mattg, what *is* your definition of long-term? also, you mentioned dollar-cost averaging; I’ve largely written it off as another marketing component of the individual investor niche — check out dollar-*value* averaging (DVA): http://en.wikipedia.org/wiki/Value_averaging
.
Debbie M, I note that you make a distinction *between* stocks and dividend stocks (w.r.t. boomer selling) — wouldn’t you rather consider dividend stocks as a subset of stocks?

]]> By: Debbie M http://earlyretirementextreme.com/2008/04/the-major-risks-of-buy-and-hold-index-investing.html#comment-964 Debbie M Fri, 11 Apr 2008 16:46:29 +0000 http://earlyretirementextreme.com/?p=199#comment-964 Exactly, mattq. What are the alternatives? I get so tired of hearing that you should diversify, and then the idea of diversifying is stocks AND bonds. And maybe real estate and other commodities. I've always wondered whether the stock market has been artificially high due to the way more and more people can invest in it now. In the olden days, only rich people invested in the stock market, but now that there are discount brokers and stock funds, almost anyone can afford to invest in stocks. And I wonder, are rich people investing in some other way now? So, assuming boomers will be selling their stocks, stock will not be a good thing to be holding at that time. And boomers will be buying bonds? Or maybe also dividend stocks? So it will be good to be holding those? Exactly, mattq. What are the alternatives? I get so tired of hearing that you should diversify, and then the idea of diversifying is stocks AND bonds. And maybe real estate and other commodities.

I’ve always wondered whether the stock market has been artificially high due to the way more and more people can invest in it now. In the olden days, only rich people invested in the stock market, but now that there are discount brokers and stock funds, almost anyone can afford to invest in stocks. And I wonder, are rich people investing in some other way now?

So, assuming boomers will be selling their stocks, stock will not be a good thing to be holding at that time. And boomers will be buying bonds? Or maybe also dividend stocks? So it will be good to be holding those?

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