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Thread: stock market contraction

  1. #1
    . Delphi's Avatar
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    stock market contraction

    Here's something that I've been wondering about lately. Let's assume the following:

    The economy and the stock market have essentially expanded throughout the last century. They contract during recessions, but overall there has been expansion.

    The stock market has been the best longterm investment vehicle for every 10-year period there was in the last century. Outpaced bonds, gold, real estate, numismatic investments (art, etc).

    Part of the reason for the last two incredible bull markets (and continued market expansion) has been the steady input of retirement money into IRA's, 401(k)'s and the like.

    America is aging, and in a few years the baby boomers will hit retirement and start cashing in their nest eggs.


    So what will happen to the economy and the stock markets then:

    Will the retirement money being spent eventually go back into the stock market and preserve its value?

    Will stock values drop as more and more people want to sell shares?

    Will mutual funds and individual stocks continue to be the best vehicles for longterm investments?

    Am I going to lose my ass because all my retirement money is in mutual funds and the baby boomers are going to cash out before I do????

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    Senior Member Miss Rezza's Avatar
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    Cardio bunny Alex.V's Avatar
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    Dude... if you've got AOL, head to keyword bwtalk and ask that question. Because that's interesting, and I wanna hear what the guest says. Chat from 4:30 to 5:30, I'll make sure that question gets asked.
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    Now I'm no CFA, so this is not an expert opinion.

    But.

    the boomers aren't going to take their money and bury it

    they're gonna SPEND it

    money doesn't disappear, it just moves around

    So Joe and Jane Boomer retire and buy a condo in Florida... what happens to their RSPs?

    They withdraw them from their investments and spend the money... on whatever old people buy... this money goes back into the market through the various businesses that the oldsters patronize. The money circulates and at some point gets re-invested.

    The population bulge caused by the boomers MAY cause a reduction in unemployment when they kick off/die... but this will prolly be mitigated by the tendency of people to work till later in life and/or semi-retirements which are becoming more common

    IMHO smart mutuals companies will start 'grey funds' that will capitalize on the increasing health and recreation expenditures needed by an aging population; this sector of the economy ought to do quite well over the next 20 years...

    just some thoughts

  5. #5
    Party of "No." Tryska's Avatar
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    you're still doing that gig b?


    and i think there are jsut as many successive generations putting money into 401ks that it's not gonna jsut go ahead and implode on you delphi. btw i thought you were a babyboomer?

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  6. #6
    . Delphi's Avatar
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    I guess I'm at the tail end of the boom- born in 1959.

  7. #7
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    Re: stock market contraction

    Originally posted by Delphi
    The stock market has been the best longterm investment vehicle for every 10-year period there was in the last century. Outpaced bonds, gold, real estate, numismatic investments (art, etc).
    Not 100% true. Take real estate as an example (just one of many). You buy a house, in absolute terms (i.e. the current value of the house vs. the purchase value of the house) over 10 years the absolute value of the stock market has increased more than the house but when you add in the tax savings and the cost to rent a comparable property over that time period, most people gain significant advantage through the house. It's not all about the absolute values. Not to mention the massive leverage that you can take on a house vs. the market.

    Part of the reason for the last two incredible bull markets (and continued market expansion) has been the steady input of retirement money into IRA's, 401(k)'s and the like.
    Not sure where you get this.

    America is aging, and in a few years the baby boomers will hit retirement and start cashing in their nest eggs.
    Unlikely to see a massive "cash in" but rather a slow movement to fixed income.

    Am I going to lose my ass because all my retirement money is in mutual funds and the baby boomers are going to cash out before I do????
    Depends on what you are invested in. 'Mutual funds' doesn't say much. Are you diversified across asset classes within your mutual funds? Did you assess your risks or just look at the potential returns? Do you have balance outside the stock market or is everything in that one basket?

    Odds are, you'll be fine if you have enough time before you retire, as long as you become more conservative as you get closer to retirement. It does sound like you do what most individual investors (and in all honest, most professional investors) do which is look at returns but ignore not risks.
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    Re: Re: stock market contraction

    Originally posted by Tiare

    Not 100% true. Take real estate as an example (just one of many). You buy a house, in absolute terms (i.e. the current value of the house vs. the purchase value of the house) over 10 years the absolute value of the stock market has increased more than the house but when you add in the tax savings and the cost to rent a comparable property over that time period, most people gain significant advantage through the house. It's not all about the absolute values. Not to mention the massive leverage that you can take on a house vs. the market.


    Not sure where you get this.


    Unlikely to see a massive "cash in" but rather a slow movement to fixed income.


    Depends on what you are invested in. 'Mutual funds' doesn't say much. Are you diversified across asset classes within your mutual funds? Did you assess your risks or just look at the potential returns? Do you have balance outside the stock market or is everything in that one basket?

    Odds are, you'll be fine if you have enough time before you retire, as long as you become more conservative as you get closer to retirement. It does sound like you do what most individual investors (and in all honest, most professional investors) do which is look at returns but ignore not risks.
    Agree 100%. If you ask say 100 millionaires how they got rich a large majority will answer through real estate and only a hand full will say the stock market. It is a really good investment vehicle but to say it is the best is overstating it.

  9. #9
    . Delphi's Avatar
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    I have 3 months' income in a money market account. All my retirement money is in a mutual fund indexed to the S&P 500. I've played the game in the past where you keep up with mutual fund performance and latch on to one of the best performers over long time periods (5-10 years). None of the funds stays in the top 10, and by the time you've figured out that your fund is no longer one of the top performers, your return is less than the S&P 500. Any balanced mutual fund will eventually return less than a broad index stock fund, from what I gather. I don't have the time or the stomach to mess around with sector investing. [/end of explanation of why I'm in an index fund]

    I disagree that real estate is a better long-term investment than the stock market through a tax-deferred mutual fund (SEP-IRA). Plus, I've seen several people take an absolute bath when their real estate investments don't go as planned.

  10. #10
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    your first mistake is having all your eggs in one basket

    even with an index fund your still at risk (if you haven't already noticed this as the S&P has dropped more than 20%)

    You should be balanced out in stocks/index funds, bonds (both corperate and treasury), and cash

    as you get older and closer to retirement, shift out of stocks and corperate bonds to cash and treasuries

  11. #11
    shot a man in reno Mik's Avatar
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    Originally posted by the doc
    your first mistake is having all your eggs in one basket

    even with an index fund your still at risk (if you haven't already noticed this as the S&P has dropped more than 20%)

    You should be balanced out in stocks/index funds, bonds (both corperate and treasury), and cash

    as you get older and closer to retirement, shift out of stocks and corperate bonds to cash and treasuries
    Doc just stole my words. By being in an S&P index fund you are totally exposed to the performance of the companies included in that index. It's important to be diversified not only among asset classes but geographically as well. Delphi, you raise a good point about index funds outperforming a balanced fund but keep in mind that's not comparing apples to apples (man I hate that expression). True, most of the time an index fund will outperform an all equity fund (studies have shown between 85-92%). However, in recessionary periods or market downturns, a "managed fund" ie. does not track an index, has a better chance of outperforming due to it's ability to move a portion to cash and or adjust weightings to different sectors within the economy. Bottom line I think is that index funds have their place but so does managed money.

    There are many quality investment firms that take a proactive approach to managing money for clients but the important things to consider are; time horizon, risk tolerance, tax considerations, and your willingness, desire, ability to manage your own portfolio.

    Sorry if this is long winded but I could talk on this subject for hours.

  12. #12
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    bonds are a complete waste of time. mutual funds are fine if you cant take risk. the stock market is by far the best place to invst your money. the reward far outweighs the risk. and when the babyboomers retire they will be right back into work within a year thanks to inflation. prices go up but their paycheck stays the same.
    "Intensity for Density!"

  13. #13
    shot a man in reno Mik's Avatar
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    Originally posted by Delphi

    I disagree that real estate is a better long-term investment than the stock market through a tax-deferred mutual fund (SEP-IRA). Plus, I've seen several people take an absolute bath when their real estate investments don't go as planned.
    I would agree. Stocks over the long haul have provided superior returns and will probably continue.
    The past couple of years have been trying times for stock investors for sure but it has been a much needed and long overdue correction of Alan Greenspan's "irrational exhuberrance". Stock returns are expected to return to somewhat "normal" returns over the next few years which means low double digits. And hey, in my books that ain't bad! I think anyone who is looking at a decade or longer should definitely be in the stock market. Sure real estate, bonds, treasuries etc...should be a part of most people's portfolios but I would argue that stocks should comprise a fairly hefty chunk of someone's assets.

    OK, now I'll stop this time. Promise..................

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    Cardio bunny Alex.V's Avatar
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    How 'bout them dividend stocks (and DRIPs), eh Mik? Go Bush package!
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    Originally posted by Mik


    I would agree. Stocks over the long haul have provided superior returns and will probably continue.
    The past couple of years have been trying times for stock investors for sure but it has been a much needed and long overdue correction of Alan Greenspan's "irrational exhuberrance". Stock returns are expected to return to somewhat "normal" returns over the next few years which means low double digits. And hey, in my books that ain't bad! I think anyone who is looking at a decade or longer should definitely be in the stock market. Sure real estate, bonds, treasuries etc...should be a part of most people's portfolios but I would argue that stocks should comprise a fairly hefty chunk of someone's assets.

    OK, now I'll stop this time. Promise..................
    WOW you call "low double digits" normal! What fantasyland do you live in? Can I get a pass?

  16. #16
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    IRA's are the biggest rip-off fraud ever played off on the US public by the Government. I say that because so many people are so hell bent to get into them. Especially for people who end up buying tax-minimizing investments like index funds.

    I can show you numerous times over the past 50 years where intelligent purchase of treasury backed securities outperformed the stock market over 5, 10 and even 30 years.

    I can show you why the risks of the stockmarket as compared to the return from it is average as an investment.

    I can also show you the opposite of all of these things. Bottom line is that intelligent investing is not something you can jump into. If you have a little money then fine, shove it into an index fund but when you have serious money that needs protecting you need to do more work.

    As for your original question, I stand behind my previous statement
    Now in pain, only working out the walking sticks.

  17. #17
    . Delphi's Avatar
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    Cool beans. I guess I've always assumed the stock market outperformed other investments since that's what all the fund companies tell you. So if somebody wanted to invest in real estate with retirement in mind, how does one figure out how to start investing? Are you talking about buying individual properties or some type of fund?

  18. #18
    shot a man in reno Mik's Avatar
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    Originally posted by GonePostal


    WOW you call "low double digits" normal! What fantasyland do you live in? Can I get a pass?
    Actually, if you look at the average S&P returns over the last 40 years or so a buy and hold strategy has yeilded in the neighbourhood of roughly 12% (don't have the actual figures handy at the moment). I'm not suggesting that investors should expect that as the norm into the future, all I'm trying to say is that it is "expected" to occur over the next few years barring another terrorist attack etc.....

    You can get a pass but it will cost you ten dollars.

  19. #19
    shot a man in reno Mik's Avatar
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    Originally posted by Tiare
    I can show you numerous times over the past 50 years where intelligent purchase of treasury backed securities outperformed the stock market over 5, 10 and even 30 years.

    I can show you why the risks of the stockmarket as compared to the return from it is average as an investment.

    I can also show you the opposite of all of these things. Bottom line is that intelligent investing is not something you can jump into. If you have a little money then fine, shove it into an index fund but when you have serious money that needs protecting you need to do more work.

    As for your original question, I stand behind my previous statement
    Yes, there have been many times when Treasuries and/or bonds have outperformed stocks in the past. The point I'm trying to make is that stocks, in my opinion should form a portion of an investors portfolio and, in many cases a relatively large portion. The key is not to chase hot stocks or funds and look at what you are trying to achieve with your portfolio, consider the current economic environment and make subtle changes in attempt to capitalize on what is happening in the marlet.

    I agree with you, if you have serious money don't simply buy a hot fund or an index fund. Do your homework and determine what course of action is best suited for you. If you want to pick the next winner and are willing to takes risks look for hot funds/stocks and open a brokerage account. If you have sizeable assets seek out an Investment Counsellor who will help you determine an appropriate asset mix and manage it for you with your interests/objectives in mind.

  20. #20
    shot a man in reno Mik's Avatar
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    Originally posted by Belial
    How 'bout them dividend stocks (and DRIPs), eh Mik? Go Bush package!
    B, the Busch package has helped investors but as always it's the "large" investor" that will really benefit from it. Nonetheless, DRIPs are a great way to save money and invest in quality securities at a low cost. It enables investors to put away relatively small amounts of money, and over time see the assets grow.

  21. #21
    shot a man in reno Mik's Avatar
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    Originally posted by Delphi
    Cool beans. I guess I've always assumed the stock market outperformed other investments since that's what all the fund companies tell you. So if somebody wanted to invest in real estate with retirement in mind, how does one figure out how to start investing? Are you talking about buying individual properties or some type of fund?
    Delphi, it depends. Good answer eh?
    Actually, if someone doesn't have a sizeable potfolio they should consider investing in a fund that will do it for them. That way they are able to get a piece of multiple real estate holdings thereby reducing their risk of holiding only one property. With larger portfolios someone may want to invest in actual properties but it depends in large part on the amount they want to invest, do they want to be a landlord, hire a property manger etc.....

    For most however, the largest single investment a homeowner has is in real estate so you should take that into context as well.

  22. #22
    One crazy MOFO/Mail man
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    Originally posted by Mik


    Delphi, it depends. Good answer eh?
    Actually, if someone doesn't have a sizeable potfolio they should consider investing in a fund that will do it for them. That way they are able to get a piece of multiple real estate holdings thereby reducing their risk of holiding only one property. With larger portfolios someone may want to invest in actual properties but it depends in large part on the amount they want to invest, do they want to be a landlord, hire a property manger etc.....

    For most however, the largest single investment a homeowner has is in real estate so you should take that into context as well.
    Your home is not an asset. So the largest investment you have as a homeowner is not your home.

  23. #23
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    Originally posted by GonePostal


    Your home is not an asset. So the largest investment you have as a homeowner is not your home.

    In the US your home is usually quite an asset.
    Your home loan is a liability.
    Your ability to leverage the purchase of your home and to take advantage of favorable tax rules makes a 5% annual growth rate on real estate more valuable than a 12% annual groth rate on non-leveraged investments (if you are smart).
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  24. #24
    shot a man in reno Mik's Avatar
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    Originally posted by GonePostal


    Your home is not an asset. So the largest investment you have as a homeowner is not your home.
    How do you figure?

  25. #25
    One crazy MOFO/Mail man
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    Originally posted by Mik


    How do you figure?
    The statement that I made was quite bold. I should have not stated it like fact but more of an opinion. It really depends on your definition of an asset. Mine is anything that brings money in not out.

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