I don't want to ruffle too many feathers here but people often ask why someone would invest in alternative investments like a hedge fund or private equity fund rather than hold an ETF.
This is one of the reasons, and there are many more. If you held a Nasdaq ETF from 2000 until now, you would have had to wait to 15 years to make back most of your gains. The Nikkei has been even worse... http://www.bloomberg.com/quote/NKY:IND
That doesn't mean everyone should try to add alternative investments, I think most people should hold ETF's. But rather most people should not blindly follow the dogma of holding an ETF that represents the market regardless of market conditions.
I can't believe I'm going to recommend a Tony Robbins book, but his latest book on investing is actually pretty good, actually you just need to read chapters 5 and 6 to save you some time.
I'd recommend most people check out his "All Seasons" portfolio that he got from Ray Dalio. I mean if you can get Ray Dalio's expertise working for you, you've got a great chance of having things work out for you!
Yes, the investor who somehow only invested all of their money one time at the peak of the dotcom bubble would only now get their nominal value back. However, some of those component company are presumably throwing off dividends, so it may not be that bad...
The short answer is that index investing is a different asset class to hedge funds and private equity, with a very different risk profile. And remember, there are plenty of different hedge funds with different strategies, industry focus, capital structure, etc. and the same goes for private equity. For example, private equity is very similar to a VC, they give LPs access to a type of company which is not public... and we all know how varied the VC industry is. Investors need to build a portfolio, and this requires a wide range of asset clases.
Buying the NASDAQ doesn't seem as prudent as buying a more representative fund covering the whole market. Not everything has done as badly as the NASDAQ. And you could do a lot worse than a whole-market index fund.
When it comes to investments, boring is a feature.
100% agreed. I've sat down with a few family members and friends who want to understand "investments" and it takes many conversations just to drill into their head that for most average people, boring is good. There are certainly complex, fast moving financial instruments that are exciting, but these should be steered clear of. It takes quite awhile to wash away the preconceived notions about what "investing" is. Investing shouldn't be like playing poker - it might be fun to have "action" and "excitement", but save that for the trips to Vegas.
Let's compare like with like. If you take the peak of a random hedge fund or PE fund just before a big crash, how does its performance compare? And what proportion of indices do as badly as the Nasdaq or Nikkei?
However, when evaluating a course of action, I think looking at the upper and lower bounds of possible outcomes is a very wise thing to do, so in that sense it's relevant...
It's not the worst time horizion as you can oviously do worse than break even ex: 1999:2002.
There are many stratagies where you would have gotten significant returns over that time period. EX: If you held say 50% nasdaq and 50% cash and then rebalanced your portfolio you would have been well ahead of the curve.
The funny thing for me was that when I first heard about 401k programs the talks discounted the period of time during the depression as that was 'anomalous'. Having run the experiment you've proposed (although I started putting money into a 401k in '86) I think when we did the calculation my rate of return from that period to today for the 401k it was like 3.2%. (and there are things that drag it down like fund loading etc and my initial exuberance as a young investor for 'risk' as I figured I had plenty of time to make it back later if it went down. ) Not the sales pitch they investors want you to hear :-)
> If you held a Nasdaq ETF from 2000 until now, you would have had to wait to 15 years to make back most of your gains.
Not if you buy at regular intervals. If you had, say, $10K in a Nasdaq ETF in 2000, and invested the same amount at regular intervals between then and now, you'd have a 95% profit by now.
While inflation can be seen as a pricing factor, the way the Dow is calculated is unique (in a bad sense), and it's the worst example and not applicable to Nasdaq. Here's the methodology behind Nasdaq (very similar to other international indices) https://indexes.nasdaqomx.com/docs/methodology_COMP.pdf
On one channel it was asserted the inflation adjusted number would be 7000. And of course had you been an a NASDAQ index 'fund' it means you would still be negative from 2000 as you're 15 years of fund fees would still have been subtracted. Mostly it is a pretty robust signal that the 'stigma' of Tech has largely past. So we're ready for another bubble!
Yes - definitely more of a symbolic lesson. I remember a comment from Jim Rogers [0] that I can't seem to find to the effect of, "The lesson from Japan is bubbles take decades to recover form, not years." This is symbolic that we've finally recovered.
>An unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes.
So if suddenly, a new player shows up in the markets buying trillions of dollars worth of securities, due to the law of supply and demand, one can expect price of stocks to go up. You can check out the Feds balance sheet here [1]. Check out "Securities held outright" [2], yeah, that's 4.3 trillion with a "t". This figure used to be on the billions before the financial crisis [3], which means that the Fed flooded secondary markets (stock exchanges among them) with more than 3 trillion dollars, to put this into perspective, this the value of all the goods and services that the US produces in 2 months, or two and a half years in the case of Mexico.
So yeah, the causality between QE and inflation of stock prices seems very plausible.
Disclaimer: Central banking operations is not one of my main strengths, so you are more than welcome to fact check, correct or complete my comment.
[2] The amount of securities held by Federal Reserve Banks. This quantity is the cumulative result of permanent open market operations: outright purchases or sales of securities, conducted by the Federal Reserve. Section 14 of the Federal Reserve Act defines the securities that the Federal Reserve is authorized to buy and sell.
> a new player shows up in the markets buying trillions of dollars worth of securities, due to the law of supply and demand, one can expect price of stocks to go up.
> which means that the Fed flooded secondary markets (stock exchanges among them) with more than 3 trillion dollars
QE does not involve buying stocks. QE decreases bond yields making stocks relatively attractive vs. bonds.
There is a great documentary on Netflix entitled "money for nothing" that does a good job connecting the Feds policies over the past decade, including QE to asset inflation, which is the rise of stocks and real estate but not general consumer goods. Japan's economy went through a cycle of asset inflation and it can be very dangerous.
It's been really interesting watching the media constantly trying to predict the "End of America" over the last 7 years since 2008.
As far as I can tell, the only reason this saga continues is because of the marketing hype it builds. Most of the people I know who watch only mainstream news all believe that we are going to have a massive crash that will completely kill our country in a few years.
When you actually ignore the hype and look at purely the numbers you'll see that the US is doing incredible compared to the rest of the world right now. The Euro is crashing, Russia is in ruins, Saudi Arabia's OPEC squeeze is now hurting all of the other "US enemies" while the net effect of the oil crisis on the US is mostly zero-sum.
I'm incredibly bullish on the US right now. Sure we'll probably have another small crash in the next few years but we'll recover quickly and keep on surging for the foreseeable future. That's the nature of market cycles! It's super easy to be negative and for some reason that's the cool trend for people to take right now but frankly the macro-view of the facts say differently.
Well, for an anti-hyper, there's a ton of spin right there ;)
The Euro is not crashing, it's pretty stable against most currencies except (re)surgent USD and GBP. It has some structural issues to overcome, not unlike USD, but "crashing" it is not.
The Euro lost 21% of its value against the global reserve currency in 9.5 months or so. For a major currency, that is pretty close to crashing. It's going to get worse yet, given the US is on the upswing (strengthening the dollar), and Europe is still mired in economic disaster and moving into QE mode (weakening the Euro).
Unless you also imply that other reliable currencies like AUD are "crashing", that's just the USD growing again after living in hell since 2008. AS I said, there are some structural issues to overcome, but it's not like the USD is heaven on Earth: US debt is still huge and the US government keeps having silly lockdowns every few months.
The US will be fine until the promises of the governments, more state and city oriented, come to fruition. The pension debts are so high; think Greece times almost a hundred; that cities will have to bankrupt to avoid them and even then some may not be able to without changes to state Constitutions. (estimates are near four trillion dollars)
All this happens in the background as the can gets kicked down the road again and again but courts are starting to push back forcing cities and states to pay.
Then you have the Chicago experiment, where the public unions are ganging up to put one of their own into the mayor slot so they can pay their members what they are "owed". As in, the power of the public employee unions may come to the point where they run their cities top to bottom and the payout will damage the economy.
So be bullish, Europe is already suffering through their own pay the piper with Greece as the first in line. Liberalism will collapse like communism for the same reasons, you cannot promise people everything and not pay up.
A market crash may or may not happen on its own, there is definitely some very overvalued companies out there; Uber and Tesla come to mind; but watch carefully the play in courts as the tax man will be coming hard and businesses are the first to pay because they are easy to brand as evil
The public unions are just a tip of the entitlements that need to be paid out. Public union retirees were people with steady employment for 20+ years, they probably have houses and other investments. What about all the other people hitting retirement age who were bounced around many jobs and never even got a pension?
This is how basic income will begin, a critical mass of retirees who either lost pensions through company fraud, municipal bankruptcy, or who never even had a pension in the first place. All it takes is a few southern populists to throw off the chains of fiscal conservatism and the money will flow.
Greece will never happen here, because we can print as much money as we want. We have spent trillions in Iraq and interest rates haven't even gone up. We could easily put trillions into the hands of the poorest Americans and the Fed would still be able to sell debt below 5% interest.
The Fed can set its discount rate, but the market determines the interest rate it will buy bonds at. And there is still a ton of money buying 30 yr bonds that only pay ~2.5% interest.
The Fed keeps rates low because its in their best interest; they are owners, they want inflation to be as low as possible. As long as they can sell enough debt at current rate they would never raise interest rates. The same reason a company who could sell plenty of debt at 5% wouldn't raise their rate to 7%.
> ...the market determines the interest rate it will buy bonds at.
No, most newly issued government debt in the US, EU and Japan is now bought by their respective central banks at below fair market interest rates.
Consider that some European banks now charge savers and pay borrowers [1]. Do you really think that a fair market would accept negative interest rates?!
Rates, and more importantly inflation, haven't soared because the US controls the global reserve currency, and printing a trillion dollars is barely relevant to that scale.
The rest of the world absorbs a sizable portion of US inflation because of that reserve standard. Fair or not, that is how it works and will continue to for at least several decades. Every other country on earth is partially subsidizing US fiscal irresponsibility.
The Fed can raise rates, and the US Govt can afford to pay another $500 billion on interest that would be incurred. It wouldn't be pretty, spending would either have to be frozen for five years to allow tax revenues to catch up, or the Fed would have to pay the bill for an extended period of time (again, at part cost to the rest of the world reliant on the dollar).
> ...the Fed would still be able to sell debt below 5% interest
The Fed doesn't sell debt, the Treasury does. The Fed buys Treasury debt at below market interest rates with its magical money printing machine, and that is the problem.
In general the pension "debt" in most states and cities, like in the US Post Office, is overstated. Bizarre accounting assumptions that require the full pension cost for every current employee (or in the case of the USPO, employees not yet born) to be held in liquid assets in the present day are unrealistic. Yes, you may represent the presumed liability as a debt, but it's a debt that we know will not have to be paid out in full and which is constantly being paid off every cycle.
In short, pension liability "concerns" are often an effort to create an artificial budget crisis to use for political purposes, rather than an actual crisis. When you have to estimate costs 75 years into the future (as the Post Office is required to), the numbers look big, but you also have 75 years to bring in the revenue to pay for it.
Moving forward, many governments are doing away with or reducing pensions for newer employees (for example, in Washington State where I work, the old PERS 1 pension was replaced with a choice of a lesser pension or a 401(k) style plan instead). Only "grandfathered in" employees have PERS 1 pension.
However, I think the promises made to that generation must be considered. In many cases, working for the government is less cash salary in exchange for other benefits. For example, I make $87k working for the state but was offered $110k+bonus at Microsoft. Why the difference? The state can compensate me in additional non-monetary ways, which make up the difference of the value proposition. If that ceases to be true, so be it, and I will seek employment else; but don't try to go back in time and retroactively revoke something earned.
If those promised, contracted benefits are taken away with the swipe of a pen, why should that be a legal or moral thing to do? I'm ok with saying "moving forward, we won't be offering pensions to anyone new", but to go back in time and invalidate the contracted benefit from past work? It's like if you contract with someone and say "work for a month and I will pay for $5000." Then at the end of the month, you say "Well, I don't have the money. That's too bad." Of course that would be a violation and the courts would step in. Should it be any different with the state?
Nice to meet you, I'm the guy that sells you put options and makes money off your "bullish" beliefs.
Could you tell me what MainStream Media on Earth has been predicting the crash of the US economy for 7 years? To me the MSM seem to have been cheerleading the Fed all along. Haven't they been making fun of Peter Schiff all along or am I living in a parallel universe?
And if you're so good with numbers and are up for a challenge, you could try and explain the horrible numbers that get posted daily on zerohedge. They need educated Keynesians such as yourself to disabuse them of those horrible graphs they keep showing.
I just wanted the answer to my question, but I guess if you had one you'd just give it to me and not hide it.
They haven't published a positive sentiment in 7 years of ZIRP? You don't say?
And they profit from stirring up the hype? OMG, call the profit police. This "they profit from it" argument does not work with capitalists. I'd hope they profit from doing what they do, because that means they'll be in business that much longer. I am not against anyone profiting from speaking their mind. I am endowed with critical thinking skills and I can judge their arguments for what they are.
45 comments
[ 3.6 ms ] story [ 88.9 ms ] threadThis is one of the reasons, and there are many more. If you held a Nasdaq ETF from 2000 until now, you would have had to wait to 15 years to make back most of your gains. The Nikkei has been even worse... http://www.bloomberg.com/quote/NKY:IND
That doesn't mean everyone should try to add alternative investments, I think most people should hold ETF's. But rather most people should not blindly follow the dogma of holding an ETF that represents the market regardless of market conditions.
I can't believe I'm going to recommend a Tony Robbins book, but his latest book on investing is actually pretty good, actually you just need to read chapters 5 and 6 to save you some time.
I'd recommend most people check out his "All Seasons" portfolio that he got from Ray Dalio. I mean if you can get Ray Dalio's expertise working for you, you've got a great chance of having things work out for you!
https://www.pwlcapital.com/en/Advisor/Ottawa/Cameron-Passmor...
EDIT Wow, based on the downvotes this struck a nerve. I don't think I said anything wrong here, do people just not want a balanced view?
When it comes to investments, boring is a feature.
If you'd been investing let's say starting 2000 in a 401k, you put in money at regular intervals. So you were buying the whole way down and up.
You wouldn't simply have "held" a NASDAQ ETF.
However, when evaluating a course of action, I think looking at the upper and lower bounds of possible outcomes is a very wise thing to do, so in that sense it's relevant...
There are many stratagies where you would have gotten significant returns over that time period. EX: If you held say 50% nasdaq and 50% cash and then rebalanced your portfolio you would have been well ahead of the curve.
Not if you buy at regular intervals. If you had, say, $10K in a Nasdaq ETF in 2000, and invested the same amount at regular intervals between then and now, you'd have a 95% profit by now.
Do not interrupt the discussion to meta-discuss the scoring system.
Add to that the fact that Apple's share price has exploded to become the largest company on earth... and voilà, the Nasdaq reaches the 5000 mark.
Edit: Here's a brief explanation using the DJIA as an example http://www.npr.org/blogs/money/2013/03/05/173515767/the-dow-...
[0] http://en.wikipedia.org/wiki/Jim_Rogers
>An unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes.
So if suddenly, a new player shows up in the markets buying trillions of dollars worth of securities, due to the law of supply and demand, one can expect price of stocks to go up. You can check out the Feds balance sheet here [1]. Check out "Securities held outright" [2], yeah, that's 4.3 trillion with a "t". This figure used to be on the billions before the financial crisis [3], which means that the Fed flooded secondary markets (stock exchanges among them) with more than 3 trillion dollars, to put this into perspective, this the value of all the goods and services that the US produces in 2 months, or two and a half years in the case of Mexico.
So yeah, the causality between QE and inflation of stock prices seems very plausible.
Disclaimer: Central banking operations is not one of my main strengths, so you are more than welcome to fact check, correct or complete my comment.
[1] Web: http://www.federalreserve.gov/releases/h41/current/ PDF: http://www.federalreserve.gov/releases/h41/current/h41.pdf
[2] The amount of securities held by Federal Reserve Banks. This quantity is the cumulative result of permanent open market operations: outright purchases or sales of securities, conducted by the Federal Reserve. Section 14 of the Federal Reserve Act defines the securities that the Federal Reserve is authorized to buy and sell.
[3] http://research.stlouisfed.org/fred2/series/WSECOUT
> which means that the Fed flooded secondary markets (stock exchanges among them) with more than 3 trillion dollars
QE does not involve buying stocks. QE decreases bond yields making stocks relatively attractive vs. bonds.
As far as I can tell, the only reason this saga continues is because of the marketing hype it builds. Most of the people I know who watch only mainstream news all believe that we are going to have a massive crash that will completely kill our country in a few years.
When you actually ignore the hype and look at purely the numbers you'll see that the US is doing incredible compared to the rest of the world right now. The Euro is crashing, Russia is in ruins, Saudi Arabia's OPEC squeeze is now hurting all of the other "US enemies" while the net effect of the oil crisis on the US is mostly zero-sum.
I'm incredibly bullish on the US right now. Sure we'll probably have another small crash in the next few years but we'll recover quickly and keep on surging for the foreseeable future. That's the nature of market cycles! It's super easy to be negative and for some reason that's the cool trend for people to take right now but frankly the macro-view of the facts say differently.
Well, for an anti-hyper, there's a ton of spin right there ;)
The Euro is not crashing, it's pretty stable against most currencies except (re)surgent USD and GBP. It has some structural issues to overcome, not unlike USD, but "crashing" it is not.
All this happens in the background as the can gets kicked down the road again and again but courts are starting to push back forcing cities and states to pay.
Then you have the Chicago experiment, where the public unions are ganging up to put one of their own into the mayor slot so they can pay their members what they are "owed". As in, the power of the public employee unions may come to the point where they run their cities top to bottom and the payout will damage the economy.
So be bullish, Europe is already suffering through their own pay the piper with Greece as the first in line. Liberalism will collapse like communism for the same reasons, you cannot promise people everything and not pay up.
A market crash may or may not happen on its own, there is definitely some very overvalued companies out there; Uber and Tesla come to mind; but watch carefully the play in courts as the tax man will be coming hard and businesses are the first to pay because they are easy to brand as evil
This is how basic income will begin, a critical mass of retirees who either lost pensions through company fraud, municipal bankruptcy, or who never even had a pension in the first place. All it takes is a few southern populists to throw off the chains of fiscal conservatism and the money will flow.
Greece will never happen here, because we can print as much money as we want. We have spent trillions in Iraq and interest rates haven't even gone up. We could easily put trillions into the hands of the poorest Americans and the Fed would still be able to sell debt below 5% interest.
That's because they're set by the Fed and not allowed to fluctuate according to market pressure. Surely you knew this?
It's the same reason why, some argue, the Fed can't raise rates now (because of leveraged derivatives).
The Fed keeps rates low because its in their best interest; they are owners, they want inflation to be as low as possible. As long as they can sell enough debt at current rate they would never raise interest rates. The same reason a company who could sell plenty of debt at 5% wouldn't raise their rate to 7%.
No, most newly issued government debt in the US, EU and Japan is now bought by their respective central banks at below fair market interest rates.
Consider that some European banks now charge savers and pay borrowers [1]. Do you really think that a fair market would accept negative interest rates?!
1. http://www.nytimes.com/2015/02/28/business/dealbook/in-europ...
The rest of the world absorbs a sizable portion of US inflation because of that reserve standard. Fair or not, that is how it works and will continue to for at least several decades. Every other country on earth is partially subsidizing US fiscal irresponsibility.
The Fed can raise rates, and the US Govt can afford to pay another $500 billion on interest that would be incurred. It wouldn't be pretty, spending would either have to be frozen for five years to allow tax revenues to catch up, or the Fed would have to pay the bill for an extended period of time (again, at part cost to the rest of the world reliant on the dollar).
The Fed doesn't sell debt, the Treasury does. The Fed buys Treasury debt at below market interest rates with its magical money printing machine, and that is the problem.
In short, pension liability "concerns" are often an effort to create an artificial budget crisis to use for political purposes, rather than an actual crisis. When you have to estimate costs 75 years into the future (as the Post Office is required to), the numbers look big, but you also have 75 years to bring in the revenue to pay for it.
However, I think the promises made to that generation must be considered. In many cases, working for the government is less cash salary in exchange for other benefits. For example, I make $87k working for the state but was offered $110k+bonus at Microsoft. Why the difference? The state can compensate me in additional non-monetary ways, which make up the difference of the value proposition. If that ceases to be true, so be it, and I will seek employment else; but don't try to go back in time and retroactively revoke something earned.
If those promised, contracted benefits are taken away with the swipe of a pen, why should that be a legal or moral thing to do? I'm ok with saying "moving forward, we won't be offering pensions to anyone new", but to go back in time and invalidate the contracted benefit from past work? It's like if you contract with someone and say "work for a month and I will pay for $5000." Then at the end of the month, you say "Well, I don't have the money. That's too bad." Of course that would be a violation and the courts would step in. Should it be any different with the state?
Could you tell me what MainStream Media on Earth has been predicting the crash of the US economy for 7 years? To me the MSM seem to have been cheerleading the Fed all along. Haven't they been making fun of Peter Schiff all along or am I living in a parallel universe?
And if you're so good with numbers and are up for a challenge, you could try and explain the horrible numbers that get posted daily on zerohedge. They need educated Keynesians such as yourself to disabuse them of those horrible graphs they keep showing.
Zerohedge hasn't published a positive sentiment in years. I know some of the guys that post there and they really do profit from stirring up the hype.
They haven't published a positive sentiment in 7 years of ZIRP? You don't say?
And they profit from stirring up the hype? OMG, call the profit police. This "they profit from it" argument does not work with capitalists. I'd hope they profit from doing what they do, because that means they'll be in business that much longer. I am not against anyone profiting from speaking their mind. I am endowed with critical thinking skills and I can judge their arguments for what they are.