Interesting Market Fact Heard Early This Morning

In all the talk about Social Security, and the plebes who think they should handle their own money in private accounts, blah, blah, blah; i heard a very interesting fact this morning. I checked it, and it's absolutely correct.

The proponents of private accounts like to spew nonsense about how the market goes up 9 or 10% every year, over the long haul. The problem is, they never explain what the long haul is. Well, it turns out that OVER THE LAST 7 YEARS(!), THE S&P HAS RISEN 12%. Yes, 12% over 7 years. That's a little over 1.6% per year. I have BANK ACCOUNTS that are better than that!

At the same time, the Dow is worth a slightly above 8% more than it was in 2000. That's 1.5% annually!

So, without even considering the effect of equity inflation, and potential market corrections, due to extra tens of billions of dollars entering a market with no financial performance to justify the increased pricing, the MARKET DOES NOT GO UP 9 OR 10% OVER THE LONG HAUL NECESSARILY!

Boy, if you're a proponent of private accounts, this would sure be an inconvenient fact, huh?
The Professor

is it depends entirely on what years you are in the market as to what kind of return you're going to get on your money. Those fortunate enough to enter when the market's low and retire when it's high will potentially reap tremendous benefits. While those unfortunate enough to enter and leave at the opposite end of the bubble will -- in the words of the Bible -- reap the whirlwind.

The question to be asked, of course, is whether as a society we wish to place our citizens at risk to the vagaries of chance and circumstance.

We obviously agree completely on the folly of this idea.
The Professor

achieved with high risk when compared with Bank CDs.Most Americans cannot afford those risks. In effect, Bush is proposing that all of us become gamblers, not just with our own futures but with the futures of our children.It works if your last name is Bush,so there!

Market risk for 1.6% annualized returns over 7 years. Seven years is not a blip in time. It's 10% of most people's lives and it's an eighth of most people's working life. I know it might be superior over a 40 year period, but the market is NOT guaranteed, it carries substantial risk, but the proponents keep touting that 9 or 10% nonsense.
The Professor

...Asking us to become 'gamblers'! How can ANYBODY be falling for this nonsense!!

I've heard that too. The 10 to 12% return is almost guaranteed if you leave your money in long enough. I never thought to break it out by year. They are lucky to get 2% per year. A CD does better than that and at less risk. Thanks for applying logic to the "known facts".

Is the historical rate of return - over the last 70-80 years or so. You get this return if you leave your money in the market FOREVER and if you never pay any costs associated with your holdings. Basically you take $10,000 and leave it in forever and it will grow by 10%.

If you want to look at a real-world horror show look at the market growth in the 70's. It was basically flatlined for a ten year period. Tough luck if you were in your 50's and in the market with your retirement funds.

in 10 year, 15 year, and 20 year periods randomely chosen by start date. I never heard of it reaching 12% except for 10 year studies that started post 1980 and finished before the Bush years.

It had been 7 to 8% to 9% before the Clinton Years - and has since fallen back to 7% to 8% for results post 1950. Current actuarial assumptions for long term equity return top out at 8% and are usually 7.5%. However there is an ongoing discussion of the value of non-risk adjusted return numbers like the 7.5%.

In any case, it assumes no admin cost.

. . .the recent performance of the S&P and Dow are FAR worse than the numbers you referenced.

My point is whether the market is good investing, especially over some indeterminate long run. It's that the proponent are saying one thing, and the actual market performance is far below that for 7 years. This isn't a short term window. It's 7 years. That's at least medium term, right?

I just think this is ammunition against the Bushbots who think this is a good idea. You can take a beating, even over terms of 7 years. And, in order to get the 10% now, including that 7 years, one would have to make >10% for the next 22 years. That requires some excellent market performance for the, you guessed it, long term.
The Professor

mortgages and not get yelled at when you say the purchase was to match 10 year liabilities (Mortgage duration is really more like 7-8 when recent repayment results are factored in - but the point is to get past the meeting with the boss).

I have forgotten the steps the SS actuaries go through to get their interest rate in the 75th year - but the results are of course posted for review by anyone.

10 years is considered long term (as least the start of long term thinking) and we're at 7 years now with an S&P up 12% over that term. 70% of long term is not a time blip. This is a fixed trend that indicates the proponents are wrong, wrong, wrong, wrong.
The Professor

future blah blah blah?

So to take an average over eighty years and pretend it is going to be the return for your individual window is a guess.

Moreover, an average return is just an average. Some do worse, by definition. Why would an individual asssume that they are as clever as the average investor at this time? How do you know that the industry smarties aren't going to dump their stocks on all the newbies coming in and driving up profits, take their profits fleecing the average american, and low and behold, look, the AVERAGE RETURN is still good while the AVERAGE AMERICAN loses.

That's the equity inflation thing i keep mentioning, but is not part of the public debate. Billions and billions of new money is going to flow into a market for which there is no rationale for increased value. The companies' financials are going to be better. There's just going to be more money chasing after the same amount of equities and corporate bonds, driving up the prices. The current holders will make a fortune, but eventually the market will correct to equilibrium and the inflated price equities will fall in value.

So, at some "long term" point the average return will go down. That's EXACTLY what happened in the tech bubble of the 90's. Inflated prices for stocks in companies with little financial merit. The early entrants got rich. The late entrants got fleeced.

But, beside all of that, the market isn't even performing over the last 7 years the way the proponents claim it does. They're wrong! And the numbers are abundantly clear.
The Professor

companies are out of business now,,,they just add a new name to it---so factor that in and the picture changes more----make no mistake wall street exists to transfer money

if you were in the right funds, for example a fund here at work, which I missed out on has been up 30% each of the last two years. But even given that I still agree with your post.

The easiest way to invest is through something like an ETF, Index Fund etc that tracks the general market and as you pointed out it hasn't done much, not even CD rates worth.

Just my own personal story here. In the last 6 months my Oil ETF is up 30%.. wow great you say. However back in 2000 I bought oracle for 30 bucks a share..... I lost half of my investment and even given putting more money back in and my good returns lately I'm still NOT back to break freakin even after all these years.

For the most part I just stay out of it and buy bonds, CDs etc. The stockmarket really is just one big Vegas casino. You know what stinks if this did pass the SS 'reform' then a bunch of Americans will loose their ass and the rest of us will just end up bailing them out anyways.

. . .are considered overall market inidicators, especially by two dimensionl thinkers like the idiots who support this plan. If the market, as a whole, is performing this modestly, then the funds you mention were bringing the average of the whole market UP! That means some stocks and bonds were doing worse.

My whole point isn't whether the market can make you money. It certainly can. It isn't whether in the very long term, with nobody taking major profits in gain, the return will be high. It will be.

My point is that the 7 year period, directly prior to this foolish idea shows that in the medium term, the market can underperform even a CD. But, their sales pitch is always this 9% a year nonsense. The most recent history indicates that it's just not so. And, 7 years is not a snapshot. It's a trend.
The Professor

is that the average returns that are touted assume that all accounts are treated and managed the same. Which usually is not the case.

Smaller accounts have less potential for liability and often tend to be reviewed less frequently. For example, a financial institution may review all accounts annually - but also review large accounts and accounts with significant relationships monthly.

So, the granular compound rate used to compute these returns are different. That would shift the average quite a bit.
The Professor

and the technology he has available to him.

I used to work as a money manager. I worked first for a very large financial institution and had several very complex custom software packages available to me. I could identify, view and trade on all accounts having similar characteristics and holdings simultaneously. That meant I had the functional ability to treat all accounts the same when trading in them. It also meant that accounts received less personlized attention. I also worked for a smaller more-upity company that managed money and touted itself for offering personal attention. Their technology was minimal and cumbersome. Large accounts and significant relationships certainly did receive priority attention.

My experience from working in the industry is that unless you have over $10 million or so to invest you will probably get better service from a large national or multi-national bank than you will get elsewhere. This is because they have the technology to manage smaller accounts and make money through volume. Ten million seems to be the cut-off these days for what constitutes high net worth. Smaller independent investment firms would place that figure lower but their measure is relative to the kinds of clients they can attract - and a result of their limited ability to purchase or perform state of the art market research.

. . .a guy that used to work for one of the big Chicago banks as an portfolio manager. More than $5 billion in his group's portfolio. (He taught a Finance class in an MBA program i taught a class in.)

Now, he works out of his basement as a financial manager for individuals. You can't even talk to him without being able to transfer $2.5 million to him. That's the starting point.

So, i see your point. This guy won't even talk to someone without two-and-a-half million dollars, so why would a small fry get any service at all at the boutique financial managers?

The Professor

Telemarketing aimed at the elderly from so-called "financial advisors" who will help them "manage" their funds in the stock market.

Bogus "financial advisors" fleecing the gullible who like the snake-oil concept of private accounts but then find themselves clueless in how to manage them.

It isn't just Wall Street that acts in a predatory manner; it's all those unscrupulous con men and con women who will have a new pack of the financially naive upon which to prey. At least Social Security is safe from such elements. Can we even begin to imagine what would happen to our "private accounts" if identity theft enters the picture? Are they safe, or are they subject to tampering?

I don't understand this whole thing. Maybe my ignorance blinds me t something or other, but I simply can't make it make sense.

Here's the deal -- I know there's no "lock box," that the SS funds aren't sitting in a separate bank account or anything. Okay, fine. But if the money is there and the Social Security Administration has control over it, why isn't SSA "investing" all this money in the stock market and making SS solvent by itself? I mean, isn't that the logical solution if the stock market is the best place to make money? Obviously, my take on this is that even SSA knows this is not a good deal, becausse SSA would lose the money and still be committed to paying it out. Not smart.

Of course, to my way of thinking, it's all a scheme to turn the money working people have earned over to the rich (the guys who CAN put $2.5 million into their financial advisor's hands). SSA can't steal quite that blatantly, so the alternative is to feed the poor and the working folk a big fat lie about how they can make MORE by investing in the stock market. The guppies will swallow this, opt out of social security, take their money and put it on the table to be scooped up by the aristos' croupier, and when retirement time comes, someone will tell them, sorry, sucker.

Because, if I understand the information in this thread correctly, the AVERAGE return in about 1.6% (not counting any dividends that might be rolled back into the fund????) which means the lucky will buy the stocks that return 3% or 6%, and the unlucky will buy the ones that return -14%. And since the productive stocks will be higher priced, I'm sure there will be "advisors" who will funnel the funds of the less-informed in the direction of the non-performing stocks and the well-informed who have the time to watch the markets and the businesses will be the ones investing in the performing stocks. I mean, if I were a financial advisor, would I want to waste my time on the guy who comes in with $1000 every December, or with the one who shows up every month with $500K and says, "Here, make me some more of this."

Some years ago there was a discussion, I think here on DU, about the wisdom of putting the money in the market and leaving it there for 30 years because the ups always more than cancelled out the downs. But it seems to me, unless I understand everything wrong, that if you've invested in a stock, like say Enron or WorldCom or Global Crossing, when it goes belly up, your money is gone and it can't be just transferred to something else that's going to grow. Maybe I'm missing something here. I suppose, if you're in some kind of mutual fund (I have no real idea what they are and I'm not at this point looking for an explanation), there's money to smooth over the bumps. But how does one "leave the money in the market" if the money is essentially no longer there?

Personally, and this is off the thread topic, I think the way to "save" social security is to start taxing the non-wage income of the rich. Exempt the first $90,000 -- earnings on which an employer would have paid half the tax anyway -- or even up to $200,000. Everything over that gets hit with a 1% or even 1/2% SS tax. Cloak it in terms of the wealthy having a moral obligation to provide something for the elderly from whom they have received so much already. Whether that income is capital gains, rents and royalties, stock dividends, whatever -- anything over $200,000 gets a hit.

Of course, I know the aristos won't go for that, but it makes sense to this poor person.


Tansy Gold

is a LOAN. When you retire, you have to give Uncle Sam the loan payment back and you get to retire on any interest earned over the percent you "borrowed".

It's based on the overall value of the markets and not on how much money is invested in stocks. What people don't understand is that there are winners and losers. The market is only worth so much money. If you put in more money than a stock is worth it ends up in the hands of brokers that short sell the stocks of their clients. Putting billions in doesn't necessarily mean that stocks will go up. All people have to do is look at the tech stock bubble for an example. There was too much money from 401K accounts going into the market in the late 90's. The brokers and account managers didn't have any stocks of value to put it in. The end result is that money doesn't actually get invested in companies. It gets skimmed off by brokers that profit by selling high and buying low and the people that get hurt the most are the small investors.

That is why the benefit of investing outside the USA (because USA market is mature and middle class exists). Middle Classes will be erupting in Russia, China, Brazil & India for the next 40 years. So outside investment is great... if you can save the money to invest .. on top of your regular SS. That means that the tax code has to be rewritten to give people a tax break on the money they put into a 401K. Repukes will not allow this because they want to redo the tax system & get rid of income tax (progressive) and replace it with sales tax (regressive) that would mean tax breaks for 401Ks could no longer exist.

That is why Bush SS is a total hodge podge of ideas. Because they are trying to make SS reform out of a system that is gutted by tax changes.. before the tax changes have take place. Not talking about what is in his SS plan also exhausts and drives opposition to wear themselves out.