I'm genuinely asking. It seems like I'm being forced to make bets more so than 10 years ago.
The fact is there is not an investment that exist which will both perform as well as the stock market and be anti-correlated to the stock market during downturns.
Imo, this is not something to worry about too too much. If there is a big stock market crash, then you just hold on to your stock throughout. You'll get "poorer", but so will everyone else, since they are all invested the same as you are. For a member of the investor class, whose true needs are likely to be met under any foreseeable circumstance short of complete social collapse, the most important thing isn't maintaining a certain absolute level of wealth. It's maintaining a certain relative level of wealth. And the main way to do that is to avoid consumptive activities that significantly drain your capital at the bottom of a downturn.
To be clear, I don't assert that maintaining relative wealth is the sole concern of an investor. There are others. But I think it's the most important aspect of sudden downturns provided that you still believe in the long term real growth of the productive capacity of the economy you're invested in. Also, if you don't believe in that, then the only practical alternative I'm aware of is to invest in an economy you believe in more, or to invest in a slice of the overall economy you think is more likely to grow. Failing that, there simply aren't any good options.
No, that's obviously false. How could I believe that? I am observing that Japan's economy has had very little real growth over the 30 year period referenced by my parent commenter, and that that is the primary problem for investors over there. (The real GDP of the United States as measured by the Federal Reserve bank increased by 33% from 2010 to 2020 immediately before the pandemic, see: https://fred.stlouisfed.org/series/GDPC1.)
> How many decades do you think it takes for USA to triple its productivity for real, so that it catches up to the stock market? That is how many decades the crash could set you back if this really is such a bubble.
I think there are a bunch of assumptions here about how asset prices track the growth of GDP that may not be correct. But, the way I model it, it doesn't really matter if my absolute assets recover to a particular nominal dollar amount after a crash. What I'm mainly concerned about is that my share of the productive capacity of the US economy doesn't decrease, and that that economy as a whole (particularly the portion represented by publicly traded companies) continues to grow. As long as those two conditions are satisfied, I'm not terribly concerned about the dollar amount assigned to my portfolio.
What I'm chiefly concerned about is the amount of real consumption that my investments and labor entitle me to. And I believe that the best way to think about my investments in this context is the fraction of real production in the country that they represent, times the total amount of real production.
But that can still result in negative returns on your investments, it protects you from losing everything but it doesn't protect you from losing a lot.
Negative nominal returns, especially in the short term, yes. I don't dispute it, and if I said anything in the thread to suggest otherwise, I apologize. I'm concerned about long term real returns, in terms of something like purchasing power parity.
Or the folks who held S&P 500 in the 2000s. But the lesson is simple: diversify.
A 60/40 Japan equities/bonds portfolio would have ben fine:
* https://gfmasset.com/2020/01/60-40-has-worked-well-even-in-j...
Same as for the S&P 500:
> Yes, the data does show that 2000-2009 was a lost decade for the S&P 500. Passive investing has been unfairly attacked in response to this data, however, because of a misperception of what a proper passive investing strategy is.
> Passive investing does not mean one should buy-and-forget, but rather that one should limit trading to periodic portfolio rebalancing. Those who proactively rebalanced their portfolios actually profited, even when investing in funds that tracked that S&P 500.
* https://www.forbes.com/sites/investor/2010/12/17/the-lost-de...
these days 60/40 is considered pretty conservative. in this environment holding to bonds means you're losing out to inflation.
2. While they may dampen returns (but also dips), one has to examine how much risk is actually needed to meet financial goals. Sure, more money is generally better, but not necessarily at the cost of other factors.
It's hardly ever been true. Erb and Harvey wrote two papers on this and found gold isn't useful:
* https://www.nber.org/papers/w18706
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2639284
Harvey's main claim to fame is his observation of the yield curve inversion occurrence before US recessions.
> If there is a big stock market crash, then you just hold on to your stock throughout.
Good investing fable that runs the numbers:
> Meet Bob.
> Bob is the world’s worst market timer.
> What follows is Bob’s tale of terrible timing of his stock purchases.
* https://awealthofcommonsense.com/2014/02/worlds-worst-market...
In the accumulation phase of your financial journey there is only one rule:
After a certain point you can't buy your way out of that. Do you think you could guarantee your fuel prices for the rest of your life, no matter what happens? Can you guarantee that your consumer goods prices will remain the same despite a global shipping jam? Do you think the prices of labour that you buy can be kept stable when a million more people are dead than expected in the US due to a pandemic? So how can you really inflation-protect an investment?
You have to invest in other things; personal, community and national resilience. Got to plant the occasional tree in whose shade you will not sit.
Growth provides more wealth. If the economy contracts - degrowth - somebody has to lose wealth. You can insure against that, move it to someone else, but like any kind of risk transfer that also costs money.
I also note there are very few things you can buy a 25 year supply of and store conveniently in your house (apart from "housing" itself as a good!), but solar panels almost count as this and are a good hedge against inflation.
We all know the saying that staying 100% invested in a low cost index fund (like S&P 500) is one of the best ways to increase wealth historically. And yet we all also know that in certain periods and countries this strategy failed miserably (such as investing in the U.S stock market before the great depression, before the dot com, or in Japan before Nikkei collapsed). When I say miserably I mean a lost decade or sometimes 2-3 decades like in Japan.
Grantham builds a strong case why this is now happening in the U.S. I hope he's wrong, I'm sure there will be a correction but hopefully it won't be that devastating, but I can't ignore what he's saying. Historically extreme overvaluation ended in corrections.
> All asset classes around the world dropped except for US treasuries
kind of invalidate your first statement?
> there is no such thing as diversification anymore
https://portfoliocharts.com/portfolio/golden-butterfly/
This time there's a good chance of runaway US dollar inflation getting worse. In the 2008 crash, the dollar was reasonably steady.
Ben Felix of the Rational Reminder podcast looked at different asset types as possible inflation hedges and came to the conclusion that there really aren't any:
* https://rationalreminder.ca/podcast/150
> I'm genuinely asking. It seems like I'm being forced to make bets more so than 10 years ago.
You're no worse off than any other human being that has ever lived. The fact that we have better understanding of economics simply allows us to actually know about the problems that people in the past went through blindly.
Generally speaking, humans have never had it so good as we do now:
> ou can't make people happy by law. If you said to a bunch of average people two hundred years ago "Would you be happy in a world where medical care is widely available, houses are clean, the world's music and sights and foods can be brought into your home at small cost, travelling even 100 miles is easy, childbirth is generally not fatal to mother or child, you don't have to die of dental abcesses and you don't have to do what the squire tells you" they'd think you were talking about the New Jerusalem and say 'yes'.
* Terry Pratchett, http://groups.google.com/group/alt.fan.pratchett/msg/ee9e9fb...
You probably have a warm and comfortable place to live that doesn't take much effort/energy to keep going. You have easy access to food and aren't subsistence farming or worrying about starvation. You have clean water and sanitation. You have the access to the best medicine that humanity has ever known.
Take a step back and reflect on the blessings you have compared to your (great-(great-)grand-parents.
For money, personal finance isn't that complicated: spend less than you make and save a little each month for retirement:
* https://en.wikipedia.org/wiki/The_Index_Card
It'll work out if you don't go crazy/stupid with your paycheque.
That's not really accurate - the goal of the Fed and all central banks is to keep prices stable and employment levels optimal. If inflation is going out of control then prices won't be stable and employment won't be optimal, in such a case the stock market might have to take a hit. Also, it's pretty clear most central bankers understand the current inequality level is not good.
The only problem is that the fed really doesn’t have much more it can do. Interest rates are too low right now and the market can easily lose faith in the Fed which means utter chaos could occur and deflation will run rampant.
The entire edifice of the global financial system is anchored around real estate valuation (the dirt, not so much the improvements and not so much the price) and the network effects wrung out of it by the infrastructure accreted around it (most often paid by public taxation and the bulk of its monetization privatized), only made possible by the structural support embedded into credit finance, accounting and tax policies granted it as an asset class unique unto all others. There can be temporary price corrections, even deep ones, even lasting as much as a generation or two, but at this point so much is secularly bound to real estate valuation that it is one of the pins on the OR-gated-multi-pin hand grenade of single-planet-forever-growth economics.
Real-estate-the-dirt valuation is like the core tranches and/or core dynamic allocation strategy of one's investment thesis/theses, or the ballast in a ship. Forex dwarfs real estate as both a market and asset class, but policies do not treat forex as favorably over the long-term and in credit structures.
Also, for those who feel hard real estate market data (including visibility into contract terms) is opaque and inscrutably difficult to obtain, you're in for a treat when you get into the forex market (or for that matter, bonds, derivatives, etc.); pricing data is only the tip of the iceberg, and uniform cross-exchange visibility into order books is not seriously available in those markets the last time I investigated trading each of them (would love to be pointed in the right direction if I have my information wrong, though).
Depending upon how one models it, residential housing prices are like a second or third derivative off of the above opinionated, personal take on the key interrelationships with my embedded biases/prejudices/blindsights.
Once the first two tiers of Maslow's hierarchy are secured functionally into perpetuity at a stable "price", if I had to choose between putting wealth into dirt or into technological advancement to improve our mastery over energy (information being a valuable subset of energy), matter, and spacetime (solving distribution problem spaces being a valuable subset of spacetime), I'd choose the latter every time. In my personal opinion (YMMV of course), as a species we've sufficiently implemented the hypothesis that technological advancement is key to ever-improving conditions for the majority, such that it is worth at maybe a plurality subset of the species seeing where that path leads.
It’s really really hard as you get older and your hopefully accumulated savings are high relative to your current income and your expected remaining working life earnings.
In your 20s you can ride up a bubble, lose it all, and chalk it up to a cruddy learning experience. Later in life it gets exponentially harder because mistakes are permanent and irrecoverable. You can play the game and risk it in what seem like expensive assets. Or you can sit it out and fall behind without any compounding to create wealth and offset inflation. The latter option isn’t really an option unless you start with so much wealth that you can just spend down principal being eroded by inflation year after year and still have enough.
Good luck!
The problem with the future though is wide systemic problems vastly unlike seen previously. The US population will get smaller as the baby boomer generation is larger than its successive generations. That’s almost the definition of negative market growth and in some cases (health care) it is. That also looks like what Japan has undergone for the last several decades.
Climate change is a whole other bag of large systemic change likely to increasingly play out the younger the investor is.
My point here is the future 50 years will not be as rosey as the last 50 years. And the last 50 years haven’t been exactly rosey.
Edit-my proscription would be: people, not just investors, need to be willing to put in a lot of work and potentially ever increasing work into anticipating and acclimating to the world that’s headed our way. Study up on macroeconomics, micro, portfolio theory, some climate and migration patterns, and how your governments and institutions work. Maybe then you have a chance at survival. Also look for ways to make not just your life better but the conditions for life better for your neighbors, family, and future generations. Resist “tearing down the wall keeping the century-high tide away for the sake of a few pennies a brick.” Resist tearing down “the other” because while it might feel viscerally satisfying it actually creates an environment of prosecution and suffering that you will eventually suffer. Embrace the struggle of survival because it’s what we the living must do.
And all that money the boomers have accumulated, at least what they don't blow before dying, is going to be inherited. And the heirs are going to invest it, and the government is going to force them to spend it (or at least have it taxed) within 10 years of inheriting it.
No idea what effect this will have, but as usual, there are a lot of moving parts so it's hard to say how things will turn out.
Yes I know there have been ups and downs, but nothing remotely like the utter existential devastation that would randomly strike previous generations. Just take a good look at any 80 year period prior to WW2 and compare it to the post war period. The difference is stark.
I think this is actually unlikely in the 10-year horizon because everyone is so paranoid about it.
Right now mostly we're seeing supply-chain shocks, not durable inflation.
There is some data to back up the great resignation that there are fewer workers now and they have greater negotiation power. But we're a ways off from a general wage-price spiral, and I suspect that we're more likely to see aggressive policy action to kill that off, even if it tanks the economy.
Short term though I don't think this is the top of the bubble. Realistically the Fed isn't going to do that much over the next year or two, they move slowly. This correction will probably make them scared to act too quickly and they'll wait to see if it causes a reversion to stagnant wage growth.
What I would be most worried about right now is that over the next 2 years the wage growth seems to stick. That will cause the Fed to really panic about inflation and act like Volker to pop the bubble, which should unwind in a deflationary depression. The alternative is that the Fed does nothing and watches a 1970s-style wage-price spiral evolve (which I think would be the actual best outcome since it would be debt relief and would reduce wealth inequality). I don't think the Fed will do nothing though very clearly given how literally everyone is terrified of inflation and wants the Fed to tighten. Austerity is probably coming.
Invest in the one thing you have the most control over -- yourself. Open or buy a business in a sector that has a clear path to profits (think laundromat, not some tech startup with unknown product market fit). Or get a degree for a new, higher paying career.
Otherwise you'll always be taking a bet on the federal reserve board, or Fortune 500 CEOs or wherever you decide to put your money.
But you could also consider other commodity businesses like vending machines, cleaning services, corner stores, etc.
What exactly you buy to achieve that I'm not sure.
I also have a larger buffer of cash these days, and have a scheduled purchase of the target date funds weekly.
There's no magic safety net. You could try to bet against the market through the options market, but timing is everything.
https://www.mymoneyblog.com/vanguard-target-retirement-funds...
For smallish amounts (30k) you can buy i-bonds that have a 7% return.
Short answer is a bunch of different uncorrrlated plays/tools such as: -Volatility trades -multi leg options on any asset class really -credit markets -algorithmic hedge funds
Etc
Pay off your mortgage faster than required, if you have one?
If interest rates might go up significantly, I figure every $/£/€ you don't owe is a good one.
Keep the money in the market and ride it out for the long term.
I see no signs that this is going to change in the short term.
Backed by the United States Government, yield is some low percentage plus the inflation rate.
Not financial advice...