Enjoying the Bull Market?

And excluding dividends, US small-caps are up about +34%, equity REITs almost +50%, since that day, based on the Russell 2000 and DJ Real Estate index respectively. Large international stocks per the MSCI-EAFE index are at about +24%, partly lower due to a dollar gain, but their yield has been a bit higher.

That's in 46 days.

-Tad

I would prefer that it did not start so early.

You mean in *my* book. :)

-Will

P.S. I'm taking suggestions for a title...

william dot trice at ngc dot com

"How I made a lucky call that wasn't quite as lucky as the guy who called it a day earlier. Both of whom are patting themselves on the back way too early"?

Naw. Too long. -- Doug

We saw a suckers rally from March to May in 2008, so there are no guarantees.

Interestingly, the American dollar seem to have broken out from the trading range and is now weakening quite quickly. For many years the American dollar has been in decline but late in 2008 it rose sharply possibly due to investors selling off risky assets and paying off margin loans denominated in US dollars. Once the de-levering stops, perhaps the US dollar will continue its decline.

It's a bull market within long-term secular bear market conditions. Notice how the previous bull market (2003-2007) only reached about as high as the previous 2000 peak--and then it collapsed before our eyes.

The current bull market hasn't a chance of exceeding the previous two market peaks.

Growth Fund Guide did a study of previous bull markets within long-term secular-bear conditions (such as the 1968-1982 period), and found that the average rise was about 48%.

Such a rise (up to about 1100 on the S&P 500) would still leave the S&P

500 down 27% below its peak in early 2000. Even a 70% rise off 741 would leave the S&P some 18% below it's peak in early 2000.

So anyone who invested in the stock market in the late 1990s and held on for all this time would still have taken a sizable loss.

In the light of these findings, the often-heard advice that people can expect good returns in stocks over the long term should be taken with caution. It woud seem that "the long term" has to be at least 20 years, if not 30. Holding for only 10 years would seem to be quite risky.

Don this really doesn't apply to your post - rather, your well-done post triggered some thoughts.

Has anyone else noticed that the consensus definition of "long-term" varies with the stage of the economic cycle? By that I mean that during expansions the definition shortens to less than 10 years, while during contractions it lengthens to well beyond 10 years with both definitions heavily influenced by current market conditions. Permitting current market conditions to influence or define long-term strategy is something I've found unwise.

On a related subject, my opinion is that some people use the word "risky" when the appropriate term should be "volatile". Assuming we are talking of a diversified, low-cost investment, I prefer "volatile" because it corresponds with my observation that while a diversified account will be volatile in the near term, the longer term trend has been consistently positive. Therefore a diversified investment is only "risky" if the investor sells at the wrong time - so the appropriate strategy would not be to avoid or get out of stocks, but to hold stocks while building a cash fund that could be accessed if necessary during "down" markets.

Bottom line: It's a cash fund that reduces "risk" to mere "volatility".

-HW "Skip" Weldon Columbia, SC

For sure, I have noticed that people are ready to think of "the long term" as 5 years when the market is rising and 10 years or more when the market is low. Perhaps you could say that a "volatile" stock or fund is risky" for someone who is focused on the short term, oriented toward getting rich quick, etc, or prone to buy or sell impulsively. For someone who is disciplined and not constantly worried about short-term movements, many highly volatile stocks or funds with large up and down movements can do very well over a period of many years. You might say that a large part of "risk" is contained in the attitude of the person who is doing the investing.

This is nonsense. If holding for 10 years risky, holding for 20 years is even riskier (and also, ON AVERAGE, more rewarding), because there is NO GUARANTEE that a bad decade will not be followed by another bad decade. You and Skip (based on his comments in this thread) are clueless about the nature of risk.

The standard deviation of the average return drops as the time increases. I believe that including dividends, there were no periods greater than 15 years that showed a negative return.

From 1871 to 2008:

1 yr Average 10.1% Std Dev 18.5% 5 yr Ave 9.2 7.8 10 yr 9.2 5.0 20 yr 9.2 3.3

Maybe you are defining risk differently than I do, or Skip does, but a difference in definition does not equate to clueless in my book. Joe

The above slovenly ignores the difference between mathematical theory and practical economics/finances.

I can give you an example that shows this to be untrue.

Let's say that stocks return 7% per year and have 20% annual volatility (both lognormal). And let's assume, for simplicity of illustration if not realism, that returns are normally distributed and independent year from year.

If so, the expected return over 10 years would be approximately

1.07^10, or 96% and volatility 20% * sqrt(10), or about 60%. This means that the starting value of stocks would be about 1.7 times standard deviation below expected value.

Over 20 years, expected return will be 1.07^20 = 286%, and volatility

20%*sqrt( 20 ) = 90% (that is 90% of starting value). So the starting value would be 2.06 times standard deviation below expected, so the probability of you losing money is less over 20 years (and expected return is greater).

In reality, returns are not completely independently distributed, so the result is even more dramatic.

How can the one year average be higher than the 5 year, 10 year or 20 year averages, I can imagine some statistical quirk that can make these very slightly different but not by 0.9%. Doesn't this imply that if I cash out on Dec 31, and immediately buy back in again, I magically get an extra 0.9% a year?

This is an interesting thread, and I would like to thank everyone for some great comments and for doing a good job of trimming the previous post. Except that everyone seems to carefully preserve the part about how clueless I am.

-HW "Skip" Weldon Columbia, SC

"HW \"Skip\" Weldon"

I wish the moderators could crack down for awhile on posts where a finger is pointed at a particular politician or political party. Any posts that use names of political officials are out of line. Besides, thinking people know there is much blame to be shared by both parties, and the American consumer in general, for the present financial crisis. More importantly, these posts (that give politicians' or their appointees' names) subtract mightily from this group having the appearance of objectivity and careful thought when it comes to financial planning.

Included in this post at Skip's request.

This is probably worth discussing. Risk does increase with time if you are talking about risk as the chance of something bad happening. For example, any company is more likely to go belly up in 20 years than in 10 years.

However, Modern Portfolio Theory has defined risk to mean the standard deviation of returns. As noted above, that decreases with time. But, I continue to question why that is a measure of risk I care about.

Assuming I don't have to sell at a particular time, and I can sell on the upswing, a high standard deviation is good for me. Right? How does the MPT definition of risk tell me anything about the chances of bad things happening?

-- Doug

It would be very difficult to discuss sensibly the current financial crisis and how it impacts on people's financial plans without mentioning the policies of the Republican party during the new century or the policies of the Democratic party during the years 1992-2000. Financial discussion would seem to be very forced and artificial if it completely avoided mentioning the name "Bush." Of course, these days it would be hard to get around mentioning the name "Madoff," if you wanted to alert investors to the dangers of Ponzi schemes. But if Madoff were a politician, would he be off limits?

I believe it has to do with the use of 'average' vs 'annualized'. The average of +50% and -50% is 0%, as 1.5 and .5 average 0, correct? But in this case, the return over two years is .75, or .866/yr showing

13.4% per year. The effect only happens when you do the jump from one year to multiple years. I hope that's clear. Joe