“Data from the Federal Reserve show that over the last decade and a half, the proportion of family income from wages has dropped from nearly 70 percent to just under 61 percent. It’s an extraordinary shift, driven largely by the investment profits of the very wealthy. In short, the people who possess tradable assets, especially stocks, have enjoyed a recovery that Americans dependent on savings or income from their weekly paycheck have yet to see. Ten years after the financial crisis, getting ahead by going to work every day seems quaint, akin to using the phone book to find a number or renting a video at Blockbuster.”
In a late January post titled “Market Downturn” I wrote, “Our mutual fund company provides an unusually helpful service that helps me keep historical perspective. When I log on to its website there’s a “Portfolio Watch” that shows our asset allocation. Currently, it’s short-term reserves, 3.5%; bonds, 38%; stocks, 58.5%. Then there’s a link to “Historic Risk/Return, 1926-2006.” Average return, 8.8%. Best year, 35.7% (1933). Worst year, -25.9 (1931).
Then I added, “This won’t sell many papers or fill much time on cable television, but after an unusually strong six year run, the market is returning to the mean.”
What I meant to write was, “The market is mean, very, very mean.”
I was thinking the market might end down 10-15%. -25.9% was from so long ago, it seemed fictional. I doubt I was alone in not taking the previous worst case scenario seriously. If I had seriously considered it, my aforementioned asset allocation would have been more conservative. With five/six weeks left in the year, I’d be thrilled with the previous worst year of -25.9%.
Can’t believe I just wrote that.
Here are the first few sentences from Jason Zweig’s commentary in Saturday’s Wall Street Journal titled, “1931 and 2008: Will Market History Repeat Itself?”
“Over the two weeks ended Nov. 20, 2008, the Dow Jones Industrial Average fell 16%. Over the two weeks ended Nov. 20, 1931, the Dow fell 16%. If you think that is scary, consider this: In the final five weeks of 1931, the Dow fell 20% further. Then it went on to lose yet another 47% before it finally hit rock-bottom on July 8, 1932.” Later he adds, “When the Dow finally stopped going down, in July 1932, it had lost 88% in 36 months.”
How does anyone learn to invest? My hunch is for better or worse most of us learn from our parents’ modeling and then trial and error. Sure some study it in school, but I suspect that’s a small number of people in higher education. Few K-12 schools do anything to promote financial literacy.
I am self-taught. In my 20’s and then 30’s I inherited a little money, and although I wasn’t very materialistic, I wanted to be a good steward of it. I understood it represented a unique opportunity to establish more savings than I normally would be able to as an educator. So I parked most of it in CD’s.
In the meantime, I asked a wealthy friend in his 60’s for advice and he recommended his financial planner to me. I was a naive numbskull and followed the planner’s advice too passively. As a result, I ended up in poor investments that paid him nice commissions. It took some time and money to start over.
In the end, that setback was a blessing, because at a relatively young age, I realized no planner anywhere cares half as much about my family’s future as I do and so I resolved to educate myself. I began reading. The seminal book was Bogle on Mutual Funds. His writing was accessible enough for me to understand and embrace his recommendations regarding asset allocation and passive index fund investing. I knew I wasn’t smart enough to pick individual stocks and was relieved to learn I didn’t need to be.
Starting over, I invested in low-cost index mutual funds right as the bull market was beginning. Long story short, by the end of the 90’s I felt like making money in the markets was a piece of cake.
Fast forward to this week when my brother asked me the conventional question a lot of people are wondering, “Where’s the bottom?”
Of course the only people who really care about that question are those with cash reserves. I’m not among them so I’m not obsessing about perfectly timing the bottom. Each Friday I think if this isn’t the bottom it’s darn close and if I had cash reserves, I’d go in now. Then, after this morning’s run, I read Zweig’s commentary over a mountain of cereal, and felt like hurling.
Maybe I’m wrong again and there’s still along ways to go.
I suggest asking two different questions. First, what’s your time horizon? If you invest in stock index funds now with money you don’t need for five to ten or ten to twenty years, I’d invest now despite Zweig’s horrific historical data. Many index funds are on sale at 35-60% off their December 31, 2007 prices.
Second, what’s your “sleep at night” asset allocation? If you’re distracted on a daily and nightly basis by your portfolios declining values, adjust it. The downturn has adjusted mine all by itself. My former 3.5% cash-38% bonds-58.5 stocks split is now 3-47-50.
The litmus test of whether I’ve learned a valuable lesson from this historic downturn is whether I adhere to Bogle’s suggestion that your bond holdings should always equal your age. I turn 47 in February so right now I’m spot on.
What will happen when the market eventually picks up steam again though? Will I get greedy and “forget” to rebalance like many of my higher education colleagues did seven/eight years ago before the correction mucked up their retirement plans?
Please do me a favor. Every few years from now until I expire, stop me and ask, “Byrnes, what percentage of your portfolio is in bonds?” If I fail to answer quickly and clearly, and if my answer is not within 3% of my age, you hereby have my permission to rough me up.