Here’s what happens when you buy stocks at their all time highs

Sovereign Man ^ | 12/05/2014 | Simon Black

[SeekAndFind]

One of the great myths about investing that we’re told by the mainstream investment education is that we should “buy and hold” for the long term.

I remember being taught in a personal finance class long ago that I should just buy the S&P 500 index, walk away, and that years later I will have achieved huge gains.

The premise is that over a long period of time, it doesn’t really matter at what point you get in and out. The long-term trend of the stock market portends that you will make money.

It’s those kinds of investing myths that become axiomatic through repetition. You keep hearing the same thing over and over again and pretty soon people believe it.

Let’s look at the data.

It’s true that stock markets have plenty of peaks and troughs. Going back to the last relative peak, the Dow Jones Industrial Average (DJIA) hit just over 14,000 in October 2007; back then this was an all-time high.

If you had bought the DJIA back then, your return on the increase in share prices through today would work out to be a measly 3.5% on an annualized basis.

If you adjust that for taxes and inflation (even using the government’s own monkey numbers for inflation), you’re looking at a real rate of just 1.2%.

Now just think about everything that you saw in the last 7 years. The volatility. The risk. The turmoil.

Was it worth it? Probably not.

But if we go back further and hold an even longer-term view, the picture must brighten, right?

Let’s go to the peak before that. In early 2000, stocks once again reached what back then was an all-time high.

If you had bought the S&P 500 index back then (which is exactly what I was told at precisely the time that I was told), your annualized rate of return through today would be just 2.17%.

If you adjust that number for taxes and inflation, your real rate of return would be a big fat 0.14%… as in less than 1%. It’s practically ZERO.

Think about what you saw over the last 15 years in the markets—the collapse after 9/11, interest rates cut to zero, interest rates ratchet up again, huge swoons in markets, the credit crunch, Lehman’s collapse, the debt ceiling debacle, etc.

Is all that really worth a return of 0.14% per year? (i.e. 14 cents on every $100 invested)

It makes absolutely zero sense to do this with our money. But that’s what we’re forced into right now with most conventional investments at their all-time highs.

Bottom line—you don’t HAVE to be invested in the market. Sometimes the best investment you make is the investment you don’t make.

The challenge is, of course, that if you’re not invested in the market, your money is just sitting at the bank, earning less than the rate of inflation.

Welcome to the world of mainstream financial options. You’re damned if you do and damned if you don’t.

The conclusion here is very simple. It’s time to move on from the mainstream. There’s too much technology and too many global options now to be lulled into conventional investments that are born to lose.

 

[SeekAndFind]

From Zero Hedge

As long as corporations continue borrowing money to buy back their own stocks and the yen keeps dropping, the SPX will continue lofting higher.

Why is the S&P 500 rising, even as valuations are getting stretched, profit growth is declining and sales are stagnant? Two charts explain it all. Here is a chart showing the S&P 500 companies that have been buying back their own stocks (often by borrowing cheap money to do so) and companies that haven't bought back hundreds of billions of dollars in their own stock.

BOTTOM LINE:

As long as corporations continue borrowing money to buy back their own stocks and the yen keeps dropping, the SPX will continue lofting higher. If either of these drivers fades or reverses, the rally in SPX will reverse, too.

[Cecily]

He is leaving out the dividends and long and short term capital gains many stocks and mutual funds pay.

[AppyPappy]

Yup. ConocoPhillips(COP) is paying a 4.2% dividend now that the stock price has fallen due to low gas prices. AT&T(T) is at 5.4%.

[RC one]

it seems an awful lot like a sucker’s market right now.

[eyeamok]

So you can’t go to the casino everyday and be guaranteed to win just for going?

[bkepley]

Also stock splits.

[Hugin]

Most financial advisors wouldn’t recommend plopping all your money in at once. Invest equal amounts over time to take advantage of any drops, ie. dollar cost averaging. The alternative is “market timing”, basically trying to guess what’s going to happen in the near future. Generally that’s much riskier.

[cicero2k]

You have many all time highs within many years.

I think the average is 40 (out of 250) index high closes per year.

To analyze, you must average all 40 starts.

Then you must decide how long you are going to hold. A month, quarter, year, forever. Then average out those hold lengths.

Then add in dividends.

This article is bad advice. It’s not that simple. There were similar articles in the 2013 run up. So if you put you money in cash then, you would have missed 2014.

Best you can do today is add new money slowly over time. You will average your entry point cost in case the market crashes soon. If it crashes later, then much of your loss is paper loss, not original contributions.

[proxy_user]

Even in the highest markets, there may be some stocks worth buying. Some people have money that they have to invest in order to get a stream of income to live on.

It is up to you to evaluate each company and decide whether you want to own it at the current market price.

[Uncle Miltie]

Dollar cost average into a variety of broad low-cost index funds that match your risk tolerance.

I dare anyone to beat those returns over long periods of time with a similar level of risk.

See “The Efficient Investing Frontier”.

[Lurkina.n.Learnin]

Ignorance! Had you put $100 dollars a month in you would have done quite nicely. Why doesn’t he show what would happen if you put your money in at the low points?

[Uncle Miltie]

[Yo-Yo]

What tripe. This assumes that you spend all of your cash in one lump sum at the peak of the market, which is not a realistic scenario.

For an equally ridiculous example, what would your return have been had you purchased all of your stock at the bottom of the market on February 1, 2009, when the S&P was at 735.09? The S&P closed at 2075.37 today, a gain of 283%!

[Attention Surplus Disorder]

ZH has been bearish for about 5 years now, since 2009. If you’ve listened to him, you have been out of this and missed easily a once-in-a-generation runup in prices. I am not telling you that I have the ability to be blithely permabullish, I certainly am not.

That does not mean it is over. That does not mean it will or will not stop tomorrow. And the money isn’t yours until you sell. Nothing means nothing. Nobody can predict the future, though we all try and always will.

As I have said on a few other threads, it is my belief that the market will continue for quite a while, yes, with corrections. It would not surprise me to see a good sized correction early next year.

On another thread I posted:

It’s my belief that the dollar is going to stage a jaw-dropping multi-year rally that will leave all other currencies in a smoking heap. Just my view.

I think that gold & silver will do essentially nothing in dollar terms, but that means they will rise in “other-currency” terms.

But I think the stock market is likely to be the biggest beneficiary, for the simple reasons that other currencies are going to degrade, and folks from all over the world can buy the finest companies in the world, with the best mgmt in the world, paying the best divs in the world, in the world’s strongest currency! People are going to have to buy dollars or be left behind, and while they might buy bonds versus stocks and will no doubt do so in many cases, I believe that bonds will not have to pay any reasonable coupon for quite a while.

[Uncle Miltie]

For example, Vanguard will show you the historic rate of return on a sample portfolio of low cost index funds. You can blend out any combination you’d like. Then, they will show you the historic rates of return, best and worst years, etc. You can pretty much pick where on that curve you want to be.

I’ve been at about the 9% annual rate of return point on the efficient investment frontier since the mid 1980s. In other words, I’m well out there in stocks, international exposure, with few bonds and relatively little cash. I can and did withstand a 50% haircut in 2008. I’m still up an annual rate of over 9% in the last 10 years, including that huge -50% dip.

If you can’t live with a -50% year, stay towards the left hand side of the graph.

You pick.

Just don’t try to time the market or choose high cost funds. Both have been shown to fail compared to dollar cost averaging and low cost index funds respectively.

(*ducks the slings and arrows of the “I’m smarter than the market set”*)

[windsorknot]

“All time high”. Which will be followed at some future time by another “all time high”. Then there are the doomsayers who tell us that the market is going to “crash”; but what they can’t tell us is when, how much, or for how long.

[servantboy777]

I think I'd rather have 4-6% certificates of deposit.

Although the wife and I have done relatively well in the market, it could dramatically shave those returns with one big correction.

I believe the markets have been artificially buoyed by injections of capital.

The U.S. is not financially sound. There is lots of cooking the books and massaging data to give an appearance of moderate economic growth and job gains.

No one I know truly believes the economy is recovering. On the contrary, folks in my sphere are trying to eek out a living with taxes, insurance, fees and higher food prices. Fuel cost are giving families a lil breath of fresh air for a change.

[plain talk]

The author mentioned investing at a peak in 2007. what is the investment time horizon? He compared returns as of 2014 - seven years. If one only has a seven time horizon they should not put all of it into stocks. In fact maybe they should not invest at all.

Even if one buys at the top of 2007 but held it for 40 years they would do fine - IF they stay diversified across asset classes. Studies have looked at investing money at all sorts of peaks over the years and compared them — including investing right before the great depression. The time when they invested affected returns far less than asset classes they invested into.

Having said all that I don’t believe in putting it all in one index fund for 40 years and just leaving it — and I dont believe in day trading either. I believe in something in between. diversify and adjust monies in and out of asset classes as conditions change. Perhaps every so many months. Years ago China and international were on a roll and I took advantage of that. Not now. With rising dollar and low sustained interest rates domestic US is good now. One has to consider these things and asset classes. However if I was young and had a long investment horizon I might be buying more emerging markets. At my age I have less and less in the market anyway

[subterfuge]

I’m no expert, but to me it’s stupid not to be in the market now. If only to keep up. Edward Jones financial has really done me right over the last 5 years, and I’m only in moderate risk mutual funds, etc.