Category Archives: Long term investing

A Great Casino

By Larry Luxenberg  

After one of the worst endings to a year in stock market history, it’s easy to despair and bash the market. When the stock market is collapsing, it’s hard to take the long view and be optimistic. But if you do, you’ll soon realize that the U.S. stock market is generally a friend to investors.

We have good data on the U.S. stock market since 1926. For those 92 years, including 2018, the stock market has been negative for a calendar year only 25 times. That’s using the Standard and Poor’s 500 as a measure for the stock market and including dividends. Of those 25 negative years, 15 years, including 2018, had losses of 10 percent or less. In 6 of those years, the market declined by less than 5 percent. In only 3 of the 92 years has the S&P declined by 30 percent or more. Only 4 times has the market declined for a second consecutive year.

The 4 bad times — with two or more consecutive years of losses — were during the Great Depression (1929 to 1932), the start of World War II (1939-41), the deep recession in the 70s after the Arab Oil Embargo and Watergate (1973-74) and the recession and tech collapse around 9/11 (2000 to 2002).

Other than those 4 times, the broad market has never had two or more straight declines. Of the 92 years, we’ve had 67 positive years or 73 percent of the time.

Following the most recent financial crisis, in 2009, after the Great Recession, the year started terribly, down more than 20 percent in the first few months but ended up by 26.5 percent. In 1987 following the crash that included the single worst day in U.S. stock market history, the market closed the year up by 5.2 percent.

Most people think of the stock market as a casino. But if you are a long-term investor, over the last century, you are the house and 3 out of 4 years, you are a winner, often by a large amount. I like those odds. Over the course of my 36 year investment career, the Dow Jones Industrial Average has gone from 800 to more than 23,000 as of year-end 2018. If you ask me, that’s a great casino and no cause for alarm just because of the recent unpleasantness.

 

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Paying for a Child’s Retirement for the Price of a Car

By Larry Luxenberg  

One of the best presents you can give a child is to fund their retirement. And it costs about the same as a modest car. The key to the gift is time. Having a long time to invest is critical but it costs you nothing but patience.

First let me explain how this works and then the four ways it could go wrong.

The initial step is to fund a Roth IRA. A child must have earned income but you can contribute an equivalent sum up to $5,500 a year to the child’s Roth. A Roth provides no deduction on the way in but if you hold it until age 59 1/2, there’s no tax on the way out. A $5,000 contribution to a Roth at age 20 and invested 100 percent in a diversified stock fund, earning the long-term return of stocks, would be worth $587,000 at age 70.

This sounds too easy so what could go wrong?

First, Congress could change the law so that the withdrawal would be taxed.

Secondly, inflation could eat up some or all of the returns. At the 3 percent inflation which has been the U.S. average in recent years, inflation would drive down the purchasing power by a third. Still, it would be a nice bundle to have in retirement.

Third, stocks could have disappointing returns. The longer one owns a diversified fund of stocks, the more likely that returns will be good but there are no guarantees in the stock market.

Finally, the child could mess things up in a variety of ways: invade the account early, change the investing approach or some other, unanticipated way.

Still, for the price of a regular car or less than a full semester at a good college, a parent could prepay a child’s entire retirement. An interesting idea and one I believe in strongly enough to try it.

 

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Good News for Investors

By Larry Luxenberg  

Recently, economic columnist Robert Samuelson wrote a column explaining why so many ordinary Americans perceive their situations as terrible despite what is frequently described as a great economy with record low unemployment.

His argument is that these workers are comparing their situations — lack of raises. a struggle to support their families and to get ahead — with that of a recent golden era. Samuelson maintains that the previous golden era was the result of unrepeatable forces.

This may not seem like good news for investors but their fortunes are not closely tied to workers. The long sluggish recovery that has lasted nearly 10 years is better for investors than the boom/bust of earlier, more robust recoveries with stronger growth but more frequent recessions. Often, what’s good for workers is also good for investors but not always and this may be one of those cases.

What economists at Pimco have termed “The New Normal” may leave workers pining for a bygone era but investors may applaud. Investors have been fretting that the Great Bull Market that began in August, 1982 and carried the Dow Jones Industrial Average to 10,000 in the late 1990s before resuming in March, 2009, may be nearing its end.

Instead, despite trade wars and unraveling of international alliances and general disquiet and upheavel, the long-term picture for investors might remain bright.https://wapo.st/2mClCV4?tid=ss_mail&utm_term=.5a152b7d96be

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The Sun Will Shine Again

By Larry Luxenberg  

The U.S. stock market is off to its worst start ever — down nearly 12 percent in just three weeks. Standard & Poors searched records back to 1897 and couldn’t find anything worse.

While the market has been drifting lower since summer — including a brief but scary decline in late August — this drop has seemingly come out of nowhere and is unremitting in its furor.

Yesterday, the Dow dropped 550 points by midday before rallying sharply. While there are always things to worry about, this seems to be the bear market about nothing.

The Chinese economy, the second largest in the world, may be getting unhinged. And the oil market has gone from boom to busted in 18 months but hey, nobody’s perfect.

If it weren’t for these minor issues, the outlook might seem bright. Job growth has been strong in the U.S. and corporate balance sheets are in the best shape in years.

Worldwide, corporations and investors are awash in cash and looking desperately for places to stash it (no place more frantic than Colorado where legal marijuana growers can’t access the banking system).

So what’s an investor to do? It’s usually best to hunker down and not panic. And if you feel like panicking, turn off the TV and the Internet and take a walk. You’ll feel better and in the long run, your portfolio will thank you.

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