The Housing Bubble

The return on real estate is deceiving because it doesn’t include rents. Imagine the return on bonds if it only included appreciation.

Bond holders have no PITI.

“S&P 500 through 1999.” And what has the SP500 and QQQQ done since 1999??? Ouch!!!!

I’m into Vanguard 500 Index fund, (my basis is $107 per share while Friday’s close is $125), Vanguard Prime Money Market Fund, Vanguard Small Company Growth Index Fund, and the Vanguard High Yield Long Term corporate Bond Fund (VWESX). I have a Vanguard brokerage just to invest in Dodge & Cox International Fund because I like its performance more than any Vanguard international fund. That aside, I think individual stocks in large companies paying steadily increasing dividends is a good idea too. You can set trailing stop parameters in case a big disaster such as 9/11/01 takes out the market. I have a comfortable stop loss set in my other brokerage account. My 401ks and IRAs are fully into stock mutual funds, and very aggressive. Whenever a Vanguard fund is available in my 401k, I take it. I have the Vanguard Primecap fund in one 401k.

Naysayers fail again to understand the advantages of dollar cost averaging. You buy more shares when the NAV is depressed. You buy fewer shares when the price is too high. Hence my $107 basis in my Vanguard 500 index fund. My net worth grew from $50,000 in 1995 to many times that by now, mostly because of dollar cost averaging. And the market timers still are in denial. When I tell someone my net worth was from dollar cost averaging and not owning real estate, they are shocked.

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Agreed. I’m 37 and ironically, in 1995 my net worth was also just $50K. Now I’m at $1.3M+ - and not from RE! Dollar cost averaging and “staying the course” has also served me well. The only two stock funds I own are the VG Index 500 and the VG Health Care Fund - both since 1995.

Well my disclaimer is that I increased my income quite a bit in 2000, but I’ve been dollar cost averaging since 1989. My tax deferred investments make up half of my net worth. the other half from using my extra income to dollar cost average into more mutual funds, and to buy Savings bonds, T-bills, individual stocks, and precious metals. But primarily, I’m into DCA of mutual funds.

Let’s compare apples with apple pie. –>> How about SP500 and QQQQ from 1999 thru Oct, 2006.

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Why f*ck with Savings bonds, T-bills, individual stocks, and precious metals???

Why not use tax-exempt money markets, tax-exempt bond funds, and just VG stock funds?

And precious metals? What and why?

“And precious metals? What and why?”

because we’re in a long-term bear market where they’ll(and are now) drastically outperform stocks.

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we are?

Dow hits another record high
Late-day momentum builds as benchmark closes in on 12,000; earnings barrage set for next week.
By Steve Hargreaves, CNNMoney.com staff writer
October 13 2006: 5:08 PM EDT

the dow is down almost 50% in terms of gold.

“And precious metals? What and why?”
My precious metals is not an investment. My holdings in PMs don’t show up in my Quicken net worth. I consider them just an alternative form of currency to fiat money.

“Why f*ck with Savings bonds, T-bills, individual stocks, and precious metals???”
Savings bonds, T-bills - Zero expense, compared with 0.2 to maybe 0.5 in Vanguard. Individual stocks: Trailing stops. I have trailing stops imposed at all times in case all hell breaks loose like it did on 9/11. Computer-based selling at my stop limits will limit my losses. Mutual funds will just tank when all hell breaks loose. Precious metals: See my answer above.

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what specifically do you buy in PM? actual gold bars? other? storage? what allocation % of total portfolio?

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what specifically do you buy in PM? actual gold bars? other? storage? what allocation % of total portfolio?

Gekko: I have 460 oz of silver, which I store in a special place. Bought it all in the mid-90s when silver was between $4 and $5 per ounce. I stick mainly now to gold and platinum bullion coins. I like variety in my gold, due to the aesthetics of various coins. I store all of them in a safe deposit box. I will have enough warning in advance to move them into a private safe outside a bank if government grows into a dictatorship. I buy 2 to 4 ounces of gold every month and occasionally substitute the monthly purchase with an ounce or two of platinum bullion. I’m doing 5% but am trying to get to 10% of my total net worth. But then that would mean 110% of what my Quicken net worth total shows.

Jas, I studied this stuff since 1991, although my specialty is software engineering. I may not know as much as you on this stuff. But that’s the point. Dollar cost averaging into various assets is the no-brainer way to financial independence. The lucky 1% of market timers are full time managing their investments. But most people are busy with their jobs that have nothing to do with investing. Note the 37-year old’s post above. He dollar cost averaged into Vanguard S&P 500 and Vanguard Health Care. He went from $50,000 to $1.3 million with those two funds and no RE. Tell me Jas, where did he get scammed?

“Tell me Jas, where did he get scammed?”

Hello Bill,

LOL. I am too skeptical for that!

I have sufficient information, beyond reasonable doubt, that the current stock market is indeed a Scam Market. I realize that a blog is not a place to convince someone.

You have been warned. If you are still on this blog I will be gald to “I Told You So” in 2009.

You don’t really know the detailed history of stock investments by ordinary people in England and then in US, do you?

Have a good day. I have nothing much to add to your understanding.

Jas Jain

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The time period for the historical returns I posted above is 1926 to 2005. I’ll take it.

There are people with different time horizons, of course. For those people, differing points on the avg-return vs variation-in-avg-return curves that are appropriate.

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That’s the point of Diversification!

Time you MAY need the money = Asset Choice
0-5 Years = Cash
5-10 Years = Bonds
10+ Years = Stocks
10+ Years = RE

Right on! Which is why I have lots of savings bonds. I’m going to be out of a job very soon and these things are going to be my cushion. As for cash, you made an interesting point. It seems that the people who want cash should primarily be into T-bills. I just got started in those things this summer. It’s never too late to be into those. I had lots of cash in a passbook savings, so I put a big chunk of it into money market funds with good yields. I’ll use those MM funds in case I cannot find a job before I’m asked to leave my current job.

Time you MAY need the money = Asset Choice

It turns out that by combining asset classes, you achieve the same level of return with less variation.

Or you can achieve a higher avg return for the same variation.

One of the first method of optimized combination was from 1972. Surprisingly, the Nobel prize that was awarded for this work did not cause it to be better known.

I mean people are saying it because the stocks are high NOW.

I think your uncorrected statement may be more correct.

“The people who are high now are saying that stocks are the best investment.”

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10+ years is your time horizon for stocks. And you don’t dump all your money in at once. You dollar cost average and you TAKE ADVANTAGE of the dowturns. Unfortunately, you can’t dollar cost average into RE.

An index fund is only PART of a portfolio.

Gekko;….

Can you leverage your stock to lets say 80% and have the dividend pay the loan ???

Can you shelter some of the dividend through depreciation ???

Can PERSONALLY add value through manipulation of the stock ??

Can you tax deffer your gain on the stock by trading it for another stock ???

I can keep going if you like …..

NO. Have you ever heard of US Treasury Bills and bonds?

Ah, can you tell me the annual returns on the long-term USTs for the past 25 years??????????

Some in gold ain’t a bad idea.

Jas Jain

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jas - you’ll barely keep up with 3% inflation if you have no stocks in your portfolio. you need some growth. do you want to eat cat food when you’re 65?

My formula is (100 - Age) = Stocks %. The rest is in Cash and Bonds.

I apologize, by you have been duped, my dear sir (or madam).

USTs have out-performed inflation by more than 5% a year for the past 25 years. THEY WILL DO EVEN BETTER OVER THE NEXT 5 YEARS!

In my speculative family-and-friends accounts, my returns in USTs, for the past three years, could easily be among the best in the world. But, most people should simply buy US T-Bills and long-term bonds directly from US Treasury Direct.

Jas Jain

What happens when all the boomers need to sell the stocks they own in their 401ks, IRAs, and pensions in order to finance retirment?

That is going to be another Ponzi scheme like social security where the young buyers paying into the stock market will not be enough to offset the money being taken out.

Without continued significant foreign investment, there is going to be a looong bear market soon.

Yes, Sd, 95% buy mostly during the highs and sell mostly during the lows. Such is the fate of 95% if the invesuckers in scams. It is not about math but about Human Behavior.

Jas Jain

“What happens when all the boomers need to sell the stocks they own in their 401ks, IRAs, and pensions in order to finance retirment?”

I saw something on the web the other day. Several things are going against the mass retirement theory of BB’s. First, 90% of American workers have saved less than $50,000 toward retirement. A great percentage of boomers - same way. Many of them put too much money into second homes, which are going to lose value fast when the FBB’s understand that there is a birth dearth (far fewer Gen-Y’s and Gen-Zs to sell to). The item I saw was that more than 60% of boomers expect to work at least part time after retirement age. This will slow down the withdrawal of money from stock mutual funds in the future. The BB’s are starting to recognize that they do not have the ability to retire. Maybe they are starting to get real. One news show I listened to when living in Los Angeles a few months ago mentioned the average Southern California boomer needs to have $2,000,000 in savings, besides a paid-off house, in order to retire comfortably.

Secondly, few people mentioned this (and there was no fanfare when it took effect recently), but it’s officially signed into law that the 2001 tax cuts are permanent. That is, the amount of money you can put away in tax deferral plans will not be cut after 2010. And now there are Roth 401ks, which are a great bargain for younger people. They can save after-tax money and let the gains acrue tax-free and take everything out later tax-free.

I’m 47 and my sisters are all older. None of us is talking about retirement. I know only one person who is talking about retiring in his 50s. I would not discount the long term record of the S & P 500. Only a fool thinks “it’s different this time.” And everyone on this blog laughs at that “different” statement when it applies to real estate. DCAing is the way to go.

Jas wrote “Have you ever heard of US Treasury Bills and bonds?”

Jas, my investment philosophy is somewhere in between Gekko’s and yours. I don’t have all the answers. All I know is that my basis is much lower than my NAVs in most of my funds. Stock market crash? Bring it on! I don’t care. I intend to work much longer to withstand the upcoming crises. In support of your views: I like T-bills more and more. State tax free. And yes, I am convinced they keep up with inflation over the long run. I buy them on Treasury direct just like you do. No expense fees. That’s why I like them more than Vanguard’s short term treasury fund.

Peace.

Small potatoes when dividends are conundrumushly lower than the yield on bonds. Small compensation that makes for the risk of losing your shirt in a secular bear market.

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of course you can conveniently look at any short time period and any specific asset class can look bad. stocks are not a short term investment! 10-20 years+

Your stock market success since 1995 is short term in my book.

Gekko

I’m trying to run the numbers (spreadsheets are very helpful). You implied you started with $50K, which is today now $1.3 million, by investing in the stock market.

If you didn’t touch the 50K and started in 1995, you would have 150K today, if you put it only in the S&P 500.

My question - how much did you contribute every year to your stock funds during this 10 year period?

And, What’s been the growth rateof the Vanguard Healthcare fund?

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1. I contibuted/saved A LOT. i didn’t mean to imply that one can turn $50k into $1.3M without significant additional contributions. I was fortunate to have a nice income ~$200K over the last ~7 years and banked a lot of it. Also, I continually invested in the market when nobody else wanted to (2000-2003).
2. the 10 year return on the VG Health Care fund is about 17%.

2. the 10 year *ANNUALIZED* return on the VG Health Care fund is about 17%.

That’s the point. Some posters even on this blog boast of the mortgage interest deduction and the capital gains tax break on a house. They are fine. There is only one problem: They are not fine at the top of the housing market bubble. One should have bought a house in 1997 to profit from that capital gains tax break. Those who bought in 2003 and did not sell in 2005 are FBs. They should have been into Vanguard’s S & P 500 stock fund or at least Series I Savings Bonds instead of buy a house and get stuck with ARMs.

A few things to keep in mind:
Most index funds are not purely weighted equally across the index. For example, you should not necessarily expect that a given S&P 500 index fund would have equal amounts of shares of each stock; there is some active weighting going on such that a preponderance of a smaller number of companies is in the mix. Thus, a pure look at the historical record of the S&P 500 index over the last n years is not necessarily correlated directly with the fund’s performance.

When stocks are looked at historically over several decades, a good part of the return reported is actually dividends, and not capital gains. Take out the dividend, and the return is actually smaller. And companies over recent times have moved away from dividends, as a trend compared with a few decades ago.

Note also that any mutual fund incurs some risk when compared with CDs or T-Bills. Not just the immediate risk of stocks going down, but also the potential of a fund family ‘raiding’ from other funds to protect any sudden catastrophe’s in other funds. Although this has never actually happened to my knowledge, some (most?) fund families reserve the right to take investements to prop up big losers. Main point is, I would expect a definite better return for assuming more risk when compared to risk-free vehicles.

Other than that, it’s pretty universally common knowledge over the last decade that low-cost index funds have performed better than most narrowly managed (and loaded) funds.

Keep buying those stocks and let us know how the dollar cost averaging is going in 15 years.

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Will do. I project that I’ll be at $7,228,276 in 15 years. Where willl you be?

I expect I will be laughing if you report back what actually happens…