Coronavirus: when do we reach the bottom of the dip?

Bojack · May 29, 2020, 11:29am

what’s going on, guys? Please, no 10-year bear market! It would be so terrible to see your friends invest in real estate and either saving on rent or earning rent from others and you’re just sitting there with a portfolio of shares that only made losses for 10 years. An inflationary crisis is really bad, because it lets indebted people have their debt devalued. Currency loses 50% of its value over 10 years, so cash holders lose purchasing power and shareholders may think their shares held their nominal price, but inflation also ate half of that.

A 10-year bear market is a lost decade, I don’t know why would anybody want that! Seriously, rethink your logic! It’s just a decade of zombie economy, kept alive by bailouts, money printing, cheap credit, “stimulation packages”, and not letting free market weed out bad businesses.

Myfirstme · May 29, 2020, 11:40am

@yakari Older I only really looked into the dream of retiring by 40 when it became impossible.

@Cortana Just looking at the price at which I could invest my savings of this decade, yes a bear market would be great. But not for my accumulated savings of the last decade. Ideally, I should invest them at the end of a bear market, not the beginning.

And @Bojack is right of course, if a 10 year bear market is coming, there might be really bad wider fallout that more than wipes out any isolated gains from cheaper investments.

Cortana · May 29, 2020, 11:41am

I wouldn’t mind buying VT at 50$ for 10 years to see it go to 300$ afterwards

lsnguy · May 29, 2020, 12:21pm

But to buy VT at 50 means that you are waiting the bear market to hit bottom, otherwise you would be buying at all sorts of levels

covfefe · May 29, 2020, 12:25pm

I wish life and markets were that simple, and our greed and fears that manageable

Bojack · May 29, 2020, 12:51pm

I think your logic is: “the average market growth is 7%, so if we get a bad decade, it will be made up for in the next decade, to return to the average. And conversely, after a decade of growth we are bound for a crash”.

I think it’s the wrong way to look at it. Economic growth is an effect of technological advancements, demographics, politics, laws and trade deals. A lost decade is a lost decade, you see no growth, and it won’t be made up for, ever. Would you seriously like for some breakthrough technological advancement (idk, self driving cars? fusion power?) to wait 10 years until you have saved enough money? That’s faulty logic.

Tino · May 29, 2020, 1:08pm

Just a remind

trotro · May 29, 2020, 1:14pm

Damn, even if the effect on technology/innovation/knowledge wasn’t there, why would anyone want that?
I, for one, like to see my welfare improve alongside the welfare of others.

Your_Full_Name · May 29, 2020, 1:18pm

“In bear markets, stocks return to their rightful owners.”

J.P Morgan

San_Francisco · May 29, 2020, 8:34pm

I may sound a bit like a cynic here, but I now tend to believe that the virus’s effects on public health are overblown. At least in the grand scheme of economics. They will be manageable. Even so-called hotspot countries don’t see that badly affected. Take Brazil, for instance: statistically (corona cases, deaths), the economically pivotal states in the south aren’t that far off from the southern states in Germany, being the economic powerhouses within their respective countries.

But In light of the latest market trends, I can’t heel but feel as if the costs of this crisis haven’t yet been paid for. But somebody will have to pick up that tab, somehow. Not necessarily only over the short term, but maybe long-term.

One of the first possible casualties: The unemployed. I wouldn’t be surprised if companies haven testing the waters an unprecedented rate, to see how much they can slim down their operations, costs - and in the end their workforce. By digitization, automation and flexible and zero-hour contracts, etc. I doubt that bodes well for most jobseekers.

Secondly: debtors. I wouldn’t be surprised to see large-scale defaults or a debt crisis. Maybe in corporate debt. Maybe emerging market debt…

Thirdly: taxpayers: governments need money to pay their debt. It won’t help consumption.

Increasingly likely, I believe. At least growth might flatten.
Sure, the world isn’t Japan, and the Japanese stock market only partly reflects Japan’s economy. Japan has had close to zero interest rates since the mid-nineties. And since then, their stock market has more or less stalled as well. But we might approach (or at least get closer to something like) a Japanese scenario. Valuations are skyrocketing for little reason in the actual economy - and interest rates are falling to rock-bottom. And/or will be staying there for a long time.

Just a gut feeling.

Cortana · May 29, 2020, 9:43pm

Real GDP growth rate

Already happening. Only reason why the US stock market kept going was more debt. CAPE not looking good, we might live through a 40 year period of deleveraging and low stock returns (something like 3% real).

Cortana · May 29, 2020, 10:03pm

Btw, also extremely interesting:

6 out of 500 stocks from the SP500 accounted for all the returns of the last couple of years.

Wolverine · May 29, 2020, 10:30pm

ETA: Reading @Myfirstme 's posts again, I realize that we are basically saying the same thing. I should have read better before quoting, sorry if I sound condescending.

The way I see it, the market can go up, down or sideways anytime. Meanwhile, inflation can go up, down or sideways anytime too. It’s a matter of risk tolerance and diversification through asset classes to me. I’d ask myself these questions:

Do I need this money for the next 10 years (my expected cash flow, security of my job position, unemployment benefits and disability insurances taken into account). If I do, that money doesn’t belong to stocks.
What do I plan to do with this money? Retirement? Special project (real estate, life projetc)?
Do I need to invest this money to reach my goals? (Don’t keep playing when you’ve won the game.) What returns do I need to do it and what risks do I need to take? Am I willing and able to take them (if not, I’ll have to adjust my goals)?

Then I’d go through the process of:

Allocating funds to my emergency fund (I’d usually go with 1 month but, in these times, I’d ramp it up to 6 months because risk factors are starting to pile up and several of them could come together at the same time (health, loss of employment, family members needing support, etc.)).
Building my investment strategy: type of assets (stocks, bonds, real estate, commodities), asset allocation, active vs passive. If I’m confident enough with what I’m doing, I’d go by myself and right in at my desired allocation. If I’m less confident and/or very risk averse, I’d probably want to start with a low allocation to stocks in order to better assess my risk tolerance, then reassess it at a target date (make that a year). A financial advisor can add value by keeping me on track if I am subject to anxiety and/or panic (start by talking with your bank client advisor, then go to a fees only one if you want to). I think a single session with one could add value, but it also comes with a price (I’ve done it and it helped me feel more confident about my plans so it’ll pay itself out for me but your experience may vary).
Choose a broker and set up an account. Spend a few months only dabbling with it with low amounts of money, just to get the hang of it and get acclimated.
Start with a conservative asset allocation. Make that 20/80 (Stocks/Bonds or cash) or even 10/90. Track the behavior of my whole protfolio and not only the stocks part for a set amount of time (make that 6 to 12 months). The purpose is to see how I react to the evolution of my savings as a whole, not how I’d react to a 100% stocks exposure, which the stocks part will have. You don’t need to ever be 100% invested in stocks (though you may want to later on). 40/60 is a perfectly legitimate asset allocation and if you’re risk averse, you don’t have to expose yourself to the risk of loosing everything on a market downturn at any point if you don’t want to.

ETA: thinking about it, the better way to do it would be to choose a single fund at my starting AA and track that, that avoids any kind of ever looking at the global stock performance and just show me the results of my investment strategy).

Reassess my risk tolerance, switch to my new asset allocation and keep that one from then on (or set a new target date to reassess it. The point being to not reassess it due to circumstances but to still keep the opportunity to get to know my real risk tolerance and act on it at given times in my investing career).
Keep investing at my desired AA for the rest of my investing career.

The point is to be, at all times, fully invested at your desired AA. Except that, well, you don’t know your desired AA yet because you don’t know your risk tolerance. Now is an excellent time to try it. The market will go up, and down, and sideways and the gloom and doom people will be out preaching the end of the CHF/dollar, and stocks, and why we should invest in gold, and bitcoin, and beans and ammo. This is a golden opportunity to see how we actually react when risk shows up.

Alternatively, you may want to study things like the all weather portfolio. You sacrifice returns but, if you are really risk averse, it should help reduce drawdowns. Of course, nothing is ever guaranteed so we may get into a crisis where even that would fail at some point. We should take as much risk as required to reach our goals but not more than we need to.

All this to say, the important thing is to start. You don’t need to be all in but you need to see how you’ll react and get accustomed to having money in the stocks market. Or you can choose another kind of investments, real estate has worked for our (mine?) parents. Just make sure that you can reach your goals and live happily.

FIREstarter · May 30, 2020, 9:18am

I really love your post, and especially this last quote! I think everyone in this thread should print it out in size 72 bold to watch it every day!

It’s been interesting to see this thread evolve over the last three months.
Disclaimer: please don’t get offended by my personal summary

We’ve seen stockpicking+market timing at it’s finest (@glina), people going all-in (@bojack), others speculating about leveraged ETFs (@cortana), people making “bold” moves when others were fearful (@MrRIP) and various other things.

What we tend to forget: everyone has a different knowledge, different amounts to invest (people with 20k in their depot vs people with 500k+), different risk tolerance etc. Some of the advice in this thread has been really dangerous, especially for people who just started with investing.

My personal learning from this thread:

Educate yourself first!
Take everything you read on an, almost anonymous, forum with a grain of salt
If something looks like a good idea, check if your starting points are the same
Before following anyone’s advice, make sure you understand what your he/she is doing and why
Almost everyone of us thinks he/she is smarter than the market and will outperform the rest

Nobody of us knows what the market will do in the next week, next year, next 10 or 30 years.
We all just hope that the stock market will continue to grow over time, and we don’t experience a Japanese scenario. I assume most of the people in here are younger than 50, and that almost none really invested before 2000. Another assumption is that most people only started investing after the financial crisis in 2007/09, where the market only knew one direction: UP. (me included)

I think the corona situation is an interesting experience for all of us. We’re able to learn about ourself (psychologically, risk tolerance, not taking other opinions of others as the truth), about others, about economy.

Personally, I’m curious to see how the next year is going to evolve. The macro economic figures are looking really bad: unemployment will rise, external projects will get cut, restaurants only being able to server max. 50% of capacity etc (talking mainly about Switzerland here, but I think it will be the same almost everywhere).

The worldwide stock markets are currently decoupled from the real world due to QE from the national banks. It will be interesting to see how long they will be able to sustain that fire, when real world economy definitely took a big hit and will not be able to recover so fast.

To end my post: I just know that I know nothing. And coming back to @Wolverines post: make sure you can reach your goals and live happily!

ma0 · May 30, 2020, 10:03am

Just to add fuel to the fire:

US exit from WHO : first step against China. Are they going to pay everyone?
China vs. HKK
China vs. Taiwan? (TSMC is moving some Fabs to the US)
China vs UK because of HKK citizens’ possible visa
US coming of a wave of protest against Health costs (it’s coming…)
US protests against the police (If the police is trained by Army veterans… )

We are going to see how much world leaders are corrupted soon…

To me it seems like a “reset” is coming sooner or later. I don’t believe we will ever have a 10 year Japan-style market, at least not globally.

zack · May 30, 2020, 10:39am

Annualized return of the S&P 500 (inflation adjusted & dividends reinvested) from 1950 to 2020:
7.577%
Annualized return of the Nikkei-255 (inflation adjusted & dividends reinvested) from 1950 to 2020:
8.008%

If the only thing that you knew about the S&P 500 and the Nikkei-255 were these two numbers, then clearly investing in Nikkei-255 would be the superior choice.
The risk of long periods of underperformance is the main reason for which we get a premium for being invested in the stock market.
From 1965 to 1983 the annualized return of S&P 500 was less then 0.5%… during that time the Nikkei-255 gave 6.5%.
Diversification… Diversification… Get your free lunch.

Wolverine · May 30, 2020, 6:09pm

By the way, disclaimer here: I’m definitely part of the former. I’m at the start of my journey and my strategy hasn’t been tried much (I’ve started roughly one year ago). I’m putting my money where my mouth is but it’s definitely not a big stack as of now so don’t take whatever I write too seriously.

As @FIREstarter wrote: take what you read with a grain of salt and think your own strategy for yourself, making sure it fits your own parameters.

FIREstarter · May 31, 2020, 6:20am

The problem with your data is that they are cherry-picked (1950-2020). S&P500 really stank between 1965 and 1981. What you are missing: the inflation during those years was really high (some years more than 10%, see here)

That’s a general problem with backtesting: if you want to fool someone with a nice graphic, you can always twist data the way you need it.

Another thing to mention: S&P500 has outperformed most of the other asset classes in the last 7 years (SmallCap, 5y US treasuries, emerging markets). Check Ben Carlson for more information here

Will we know that this is going to continue? No! We hope that the regression to the mean will happen and that international/EM stocks are going to perform better in the future.

Another aspect to consider for S&P500: the real return over the last years was mainly driven by the tech giants (Google, Apple, Amazon, Microsoft). I saw a graphic the other day that S&P would really suck without those four (or five, if you include Facebook) stocks. Basically, we have a very top-heavy index and are hoping that tech companies are continuing to thrive.

If some of the tech companies are going to struggle, I (!!!, my point of view…) don’t see other existing companies taking over to sustain the return rate of the last years. But S&P500 being an index, there might be others successful new companies taking over.

Still, we’re pretty dependent on a few growth stocks atm.

Can you explain more about what you mean? This can mean anything and nothing
Diversify = spread over different asset classes (stocks, treasuries, real estate, gold etc)
Diversify = use VT/VWRL instead of S&P500, single market indexes or individual stocks
Diversify = invest in your own future

ma0 · May 31, 2020, 11:46am

You just saw it on this forum… 5 or 6 posts above this.

zack · May 31, 2020, 12:27pm

I took the range 1950-2020 because it was the maximal range for the Nikkei-255 (The index was created in 1950).
Using a 70 years window to compute annualized returns reduced the effect of cherry picking the start/end dates. For instance if let’s say that in 1949 the S&P 500 had +50% return and the Nikkei-255 had a -50% return, then the numbers become:

S&P 500: (1.5x1.07577^70)^(1/71) = 1.08082 => 8.1% annualized return
Nikkei-255: (0.5x1.08008^70)^(1/71) = 1.06843 => 6.8% annualized return

It’s still more or less the same, which was the point I was trying to make: over a long time horizon both indexes have a similar performance.

As you said they are many ways to diversity. My post was only talking about US vs. international equities. Sometimes I find it a bit depressing to look at the past ten years of VXUS, but then I remember that using the past 10 years of returns to predict the future of an index has the same predictive power as using rainfalls (graph on page 7)

Isn’t this already the case… since 1926? Only 4% of the listed companies explaining the return of the entire index.