Future of stock market?

[Joe Frickin' Friday]

I was told recently that Clark Howard claimed that if a kid saves $2000 per year from age 16 to age 22 and puts it in a Roth IRA, the money will grow to over $1M by the time the kid reaches 65.

 

Sounded incredible to me, so I ran the spreadsheet, and yes, with an annual return of about 9.5%, you can get there. This seemed like a pretty generous ROR, so I finally dug up the video in which he makes that claim. Waddya know, he says 9.4% is the average annual ROR since the stock market began. 9.4% still seems somewhat optimistic, given that we recently erased the past decade of gains.

 

I also read a book a couple of years ago, in which John Bogle (founder of Vanguard Investments) predicts more tepid returns over the next couple of decades, something like 5%. IOW, if you save/invest for retirement consistently you may be able to live comfortably in your golden years, but don't expect to retire a bazillionaire.

 

And so I wonder - like everyone else, I suppose what does the future hold? Might I be able to expect ~9% per year until I retire, or is Bogle's prediction more likely?

 

Waddya think?

[Nice n Easy Rider]

My bet would be on Bogle's prediction - but I'd be very, very happy if Clark is right.

[BFish]

i am a very long-term investor that has ridden the peaks and valleys. over time 25+ years (s/b 35+ but wasted my $$ on beer, etc early on) i can attest to the net upward trend.

 

the only future prediciton is that it will go up and it will go down. not very technical, but it's a fact.

 

ps...when we forecast for retirement i tend to be very conservative. my returns guesstimate pretty much stay slightly ahead of inflation.

[philbytx]

Mitch,

 

This is all age dependent of course but the the real question is can/will your investments cover your expenses in retirement and beat inflation over the long term.

A 9 percent return across a broad spectrum of investments appears extremely unlikely now and into the foreseeable future.

 

Remember, past performance is no indicator of futures results. IMHO, given the death of the onward and upward "American Dream", the reality looks as if we will be in a similar environment to that experienced in Japan over the past 15 or so years.

And, the good news is, that the folks who lived within their means, managed their expenses well, paid themselves first and that have a small to zero debt load, always had but now REALLY have, the least to worry about.

An investor needs to be truly diversified and on top of their investments now (even if they are managed) and be quick to move from both the expense and income/investment sides, if the economy moves against them.

 

After all the above sentiments, I believe a 5 to 6 percent return to be a fair number. In fact, it is the number we work with.

 

 

 

 

[Patallaire]

I concur, the market will go up and down over the next few decades. Diversification across asset classes as well as across borders will help achieve a market rate of return. When people talk about the market, they are generally discussing the S&P 500, a small market basket of large cap stocks. We try to build portfolio's with more than just that, even non-corrolated asset classes.

 

I am convinced that the discipline of accumulating will overcome any statistical rate of return study.

[Dave McReynolds]

The joker in the deck, of course, is whether our economy will continue to chug along as it has in the past. The possibility of game-changing spectres has always loomed, like the prospect of atomic war in the '50's, or the prospect of a USSR-like economic meltdown today. It is hard to believe that the USA and our economy will still be chugging along 1,000 years from now, or even 500 years from now, so it has to end sometime. Could be tomorrow.

 

Keeping that in mind, I always like to hedge my bets. One way I hedge my bets is to keep a fair amount of money invested in the stock market, following the advice above, since the likelihood of any particular dire prediction happening is small, though the likelihood of some dire prediction happening sometime may be large. I don't carry any debts and carry a fairly large bank balance to help carry me through bad, though less than dire, times. I also keep some gold and guns for the really dire times, although I don't kid myself about the prospects of being able to use them effectively if society is falling apart. The fourth thing I do, as I'm sure most of you do, or you wouldn't be on a BMW motorcycle board, is to stockpile some good times, as that's one thing nobody is going to be able to take away from me.

[philbytx]

+1

Remember to properly diversify. Thusly, if it all goes to crap, the only investment that will never lose value is your stock of ammunition.

[Ken H.]

To me there two key questions – Does the stock market still accurately reflect the fundamentals of stocks and the economy in which they exist today, are they truly are a barometer of the health of a nation, or has it become an out of touch institution where traders, both human and more and more computer algorithms, are playing a giant margin driven game for profit with little touch with reality?

 

Personally I think it’s more and more the latter. While us here may dabble in the markets (definition of “dabble” having varying amounts of zeros in the dollars), ‘every day people’ are still a small percentage of any day’s trading. Something around 2% I’ve read. Add in institutional trading and the number goes to something like 5%. The rest is just trading for profit, each person/system trying to outsmart the other guy to gain a 0.002% or whatever advantage at a given moment in time. It would be interesting to study - how many traders, even more computerize trading, actually even know what the companies they trade in really do? Or are they just symbols on a screen to be manipulated for profit? How long can a stock (or more and more commodities for that matter) market so corrupted away from its original mission (to create capital for stock issuers to use to fund growth) continue? Not much longer IMHO. So from that perspective, IMHO the future of the stock market is grim. Like a poker game, an endless loop of a limited number of players can’t continue forever. Sooner or later some walk away rich(er) the others poor(er), but for sure the game ends/collapses.

 

The second key question, even assuming, or accepting the above is BS, is – can stocks / stock markets continue to climb, grow absent a strong growing economy? I don’t see how. The top of an economy - money to create, buy, trade, stocks is fueled by constant influx at the bottom – demand for goods, services, purchasing power and the stability to do so. The ability to grow the bottom is influenced by a lot of factors; everything from birth rates, to immigration rates, to quality of (and utilization of) education, continuing innovations, to social/political/economic design to enable/allow growth, and more. All of those things are absent or in decline. With little real (so far at any rate) ideas, plans, programs, initiatives (in any sector public or private) to reverse them. From this perspective, IMHO the future of the stock market is grim.

 

I think either the stock market will continue to become more and more of an isolated ‘rich man’s club’ out of lack of a better term at the moment, subject to whimsical waxing and waning with almost no predictability or basis in reality, where some of us can kind of attach to its coattail and hope for the best, or reality will set in and the whole thing will reset in a big way (down, waaaay down) to become once again more in sync with the real world. Either is a poor investment strategy in my book.

 

[jimfastcar]

To me there two key questions – Does the stock market still accurately reflect the fundamentals of stocks and the economy in which they exist today, are they truly are a barometer of the health of a nation, or has it become an out of touch institution where traders, both human and more and more computer algorithms, are playing a giant margin driven game for profit with little touch with reality?

 

Personally I think it’s more and more the latter. While us here may dabble in the markets (definition of “dabble” having varying amounts of zeros in the dollars), ‘every day people’ are still a small percentage of any day’s trading. Something around 2% I’ve read. Add in institutional trading and the number goes to something like 5%. The rest is just trading for profit, each person/system trying to outsmart the other guy to gain a 0.002% or whatever advantage at a given moment in time. It would be interesting to study - how many traders, even more computerize trading, actually even know what the companies they trade in really do? Or are they just symbols on a screen to be manipulated for profit? How long can a stock (or more and more commodities for that matter) market so corrupted away from its original mission (to create capital for stock issuers to use to fund growth) continue? Not much longer IMHO. So from that perspective, IMHO the future of the stock market is grim. Like a poker game, an endless loop of a limited number of players can’t continue forever. Sooner or later some walk away rich(er) the others poor(er), but for sure the game ends/collapses.

 

The second key question, even assuming, or accepting the above is BS, is – can stocks / stock markets continue to climb, grow absent a strong growing economy? I don’t see how. The top of an economy - money to create, buy, trade, stocks is fueled by constant influx at the bottom – demand for goods, services, purchasing power and the stability to do so. The ability to grow the bottom is influenced by a lot of factors; everything from birth rates, to immigration rates, to quality of (and utilization of) education, continuing innovations, to social/political/economic design to enable/allow growth, and more. All of those things are absent or in decline. With little real (so far at any rate) ideas, plans, programs, initiatives (in any sector public or private) to reverse them. From this perspective, IMHO the future of the stock market is grim.

 

I think either the stock market will continue to become more and more of an isolated ‘rich man’s club’ out of lack of a better term at the moment, subject to whimsical waxing and waning with almost no predictability or basis in reality, where some of us can kind of attach to its coattail and hope for the best, or reality will set in and the whole thing will reset in a big way (down, waaaay down) to become once again more in sync with the real world. Either is a poor investment strategy in my book.

Well said !!

[Patallaire]

An interesting perspective you brought to the table. If the reality of the market is driven by large traders, then why buck the system, in your hypotheis you should just get on the trend and let it flow. The market still has the same goal, that is to increase shareholder value, so there is an accountability for that outcome. The fact that the market can move in large swings does not dictate that it is doomed or grim, it is just volatile, and it is from a number of sources.

To suggest that the markets can not countinue to climb is to suggest that capitalism is destined to fail. All markets, bonds, global,domestic, Reits and commodities will have winners and losers, but it is unlikely that all will go down at the same time. When people talk of the market being doomed, I am at a loss as to which market they are talking about.

As to it being a "rich mans club," aside from Mutual funds, it is already. If you want to really have an impact on your wealth, than you need to be buying in 1000 share lots, and have great diversification, thus, a rich mans club.

Ask yourself where else are you going to get a rate of return, Real Estate won't cut it for at lease another decade, CD's are low in returns, collectables spotty, gold, trendy, you really need to be in the game and understand it. Everyday you will not make money and everyday you will not lose money. Someone always makes money and somone always looses, everday.

More importantly, you should look at your goals and objsctive and your risk tolerance and time horizons and then design a program around it. It is neither all good going forward nor all bad, if you think you will live to age 95 {which is what we plan around} then a rate of return is imperative to counter the impact of inflation.

History, which is all we have to look at , suggests that it is not only not different this time, but that time produces returns.

[Mark K]

Might I be able to expect ~9% per year until I retire, or is Bogle's prediction more likely?

 

Waddya think?

 

 

Back when I was in the financial planning biz, I used 6% for most people under -- say age 55.

 

5% for those older individuals and could go even lower. It really depended on an individual's risk tolerance.

 

 

 

 

[Tom R.]

Some years ago, someone on this board asked the question, "what makes stocks or the stock market go up?" It may have been you Mitch. The simple answer to that question is earnings. So, ask yourself, are the fundamentals in the country or countries in which you invest as conducive to generating earnings in the future as they have been in the past?

 

If you are asking what rate of return to use when attempting to measure at what point in time you can retire, or with what amount of income can you retire, these are really two different questions.

 

Investing for income is different from investing for accumulation. Portfolios from which withdrawals are needed or taken need to be invested with an eye towards lesser volatility. Consequently, if using a globally diversified portfolio, I would assume 7% during the accumulation phase and 4% during the withdrawal phase.

[Selden]

Some years ago, someone on this board asked the question, "what makes stocks or the stock market go up?" It may have been you Mitch. The simple answer to that question is earnings. So, ask yourself, are the fundamentals in the country or countries in which you invest as conducive to generating earnings in the future as they have been in the past?

I used to think so, but an article in the WSJ on Sept. 24 raises interesting questions: "'Macro' Forces in Market Confound Stock Pickers".

[Jake]

And so I wonder - like everyone else, I suppose what does the future hold? Might I be able to expect ~9% per year until I retire, or is Bogle's prediction more likely?

 

Waddya think?

 

Mitch - Assuming/projecting a rate of return is far too simplistic. You should look into Montecarlo simulations.

[sgendler]

I was told recently that Clark Howard claimed that if a kid saves $2000 per year from age 16 to age 22 and puts it in a Roth IRA, the money will grow to over $1M by the time the kid reaches 65.

 

Sounded incredible to me, so I ran the spreadsheet, and yes, with an annual return of about 9.5%, you can get there. This seemed like a pretty generous ROR, so I finally dug up the video in which he makes that claim. Waddya know, he says 9.4% is the average annual ROR since the stock market began. 9.4% still seems somewhat optimistic, given that we recently erased the past decade of gains.

 

I also read a book a couple of years ago, in which John Bogle (founder of Vanguard Investments) predicts more tepid returns over the next couple of decades, something like 5%. IOW, if you save/invest for retirement consistently you may be able to live comfortably in your golden years, but don't expect to retire a bazillionaire.

 

And so I wonder - like everyone else, I suppose what does the future hold? Might I be able to expect ~9% per year until I retire, or is Bogle's prediction more likely?

 

Waddya think?

 

9% was never a realistic number. You'll lose a good chunk of that to paying for trades. Then there's the fact that you cannot possibly keep your entire nest egg in stocks after a certain point in your career. At some point, you must start moving money into more secure, but lower paying, investments. And you have to factor in that inflation will eat up a good chunk of your gains, too. $1 million sounds like a lot right now, but it won't be all that much by the time that 22 year old actually gets to retirement age. A $100K salary at the start of my career is equivalent, 15 years later, to $135K. By the time I am at retirement age, I imagine That $100K salary will be closer to $200K, if not more. So $1 million is 5 years of middle class income. Care to bet on whether you can retire on 5 years of income?

 

Then again, no one is claiming that the 16 year old should stop saving at 22.

 

But in general, these stories of saving from an early age and then being set for life are pretty much fantasy for most folks. Crap happens, often involving significant hits to savings, both retirement and otherwise. My generation has been hit by two really heavy bouts of high unemployment in the 20 years since we entered the job market. Folks just a few years older than I have had 3 of them. I know plenty of folks who suffered long periods of unemployment during all 3 of them - periods that necessitated digging into retirement accounts, including paying a 10% penalty, just to stay afloat. Then you also have to factor in investment losses as well as gains. A lot of folks are looking at investment accounts in 2010 that don't look much different than they looked in 2000 - except possibly the addition of some principal from the intervening 10 years.

[sgendler]

To me there two key questions – Does the stock market still accurately reflect the fundamentals of stocks and the economy in which they exist today, are they truly are a barometer of the health of a nation, or has it become an out of touch institution where traders, both human and more and more computer algorithms, are playing a giant margin driven game for profit with little touch with reality?

 

Personally I think it’s more and more the latter. While us here may dabble in the markets (definition of “dabble” having varying amounts of zeros in the dollars), ‘every day people’ are still a small percentage of any day’s trading. Something around 2% I’ve read. Add in institutional trading and the number goes to something like 5%. The rest is just trading for profit, each person/system trying to outsmart the other guy to gain a 0.002% or whatever advantage at a given moment in time. It would be interesting to study - how many traders, even more computerize trading, actually even know what the companies they trade in really do? Or are they just symbols on a screen to be manipulated for profit? How long can a stock (or more and more commodities for that matter) market so corrupted away from its original mission (to create capital for stock issuers to use to fund growth) continue? Not much longer IMHO. So from that perspective, IMHO the future of the stock market is grim. Like a poker game, an endless loop of a limited number of players can’t continue forever. Sooner or later some walk away rich(er) the others poor(er), but for sure the game ends/collapses.

 

The second key question, even assuming, or accepting the above is BS, is – can stocks / stock markets continue to climb, grow absent a strong growing economy? I don’t see how. The top of an economy - money to create, buy, trade, stocks is fueled by constant influx at the bottom – demand for goods, services, purchasing power and the stability to do so. The ability to grow the bottom is influenced by a lot of factors; everything from birth rates, to immigration rates, to quality of (and utilization of) education, continuing innovations, to social/political/economic design to enable/allow growth, and more. All of those things are absent or in decline. With little real (so far at any rate) ideas, plans, programs, initiatives (in any sector public or private) to reverse them. From this perspective, IMHO the future of the stock market is grim.

 

I think either the stock market will continue to become more and more of an isolated ‘rich man’s club’ out of lack of a better term at the moment, subject to whimsical waxing and waning with almost no predictability or basis in reality, where some of us can kind of attach to its coattail and hope for the best, or reality will set in and the whole thing will reset in a big way (down, waaaay down) to become once again more in sync with the real world. Either is a poor investment strategy in my book.

 

To expound upon this - I think a good bit of the pressure to 'privatize' social security is an attempt by the folks who are actually making all of the money on the stock market to get a huge new influx of capital into the stock markets in order to provide that bottom-up growth in value without the otherwise necessary growth in demand. Throw a couple trillion dollars at the stock market without a corresponding increase in demand and what will happen to share prices? They will inflate in perfect proportion to the influx of new money. So those of us who are fighting over the 2% of shares that are traded by consumers will inflate share prices massively for the folks who already own 97% - who will promptly cash out and walk away with the nation's retirement money. It really cannot play out in any other way.

[John Ranalletta]

To expound upon this - I think a good bit of the pressure to 'privatize' social security is an attempt by the folks who are actually making all of the money on the stock market to get a huge new influx of capital into the stock markets in order to provide that bottom-up growth in value without the otherwise necessary growth in demand.

Don't need to privatize to accomplish this as it's already being done by the fed though POMO (Permanent Open Market Operations).

• Bank buys a bond: Bank gives Government cash, Government owes bank money.
• Government buys bond from bank: Bank gets newly-printed cash, Government "owes" itself money.
• POMO puts net new cash into the system.

While it's true that some of that new cash goes into the bond market - and the gold market, for that matter - the idea is that the net new liquidity helps prop up all asset prices. This net new liquidity particularly props up the long bond and stocks market.

 

[Patallaire]

Wow, there is a conspiracy theory I have not heard. There is no market efficiency, just evil doers manipulating the markets and the world. Love it.

[John Ranalletta]

Never heard of POMO or Fed? What do you think happens with the cash infusion? Does it molder in the banks' basements?

 

Obvious

 

Are you putting your clients into a market you don't understand?

 

 

[Ken H.]

To expound upon this - I think a good bit of the pressure to 'privatize' social security is an attempt by the folks who are actually making all of the money on the stock market to get a huge new influx of capital into the stock markets in order to provide that bottom-up growth in value without the otherwise necessary growth in demand. Throw a couple trillion dollars at the stock market without a corresponding increase in demand and what will happen to share prices? They will inflate in perfect proportion to the influx of new money. So those of us who are fighting over the 2% of shares that are traded by consumers will inflate share prices massively for the folks who already own 97% - who will promptly cash out and walk away with the nation's retirement money. It really cannot play out in any other way.

Bit of a hijack to the privatizing SS subject, but I think you’re exactly right. The market makers have been salivating at getting their hands on that pool of funds (or should I say pool of IOUs) for some time. With little regard for increasing solvency of SS, but rather with an eye toward all the opportunities for personal enrichment it affords themselves.

[Ken H.]

Wow, there is a conspiracy theory I have not heard. There is no market efficiency, just evil doers manipulating the markets and the world. Love it.

You don’t seriously think all those rows and rows 1000s of traders sitting in 100s of offices trading as fast as they possibly can day after day, even as I type this, are doing so for anything other than how to make their commission check bigger this week do you? It’s nothing BUT market manipulation. Indeed that’s the whole point – manipulate the markets, to increase volatility, to create a margin gap, to take advantage of in a moment in time.