Thanks for another thoughtful article Adam. I love that (attributed to) Mark Twain quote. Items 1-2 and 5-6, I agree very much with your points. Items 3 and 4, I see differently. "3. Bubble worries." "Quite frequently, investors will challenge me to explain why a crash like the one we saw in 1929—when the stock market dropped 90%—couldn’t happen again. There are several reasons I believe a crash of that magnitude would be unlikely." At the top of the list: I believe the Federal Reserve would step in and wouldn’t let markets simply plummet." It still amazes me how many smart people continue to make the case that the Federal Reserve will always be able to control the market as it sees fit. I concede that for at least the last 15 years the Fed has continued to increase its role in the stabilization of markets through each "crisis" we have faced. As you also seem to imply, it has become accepted by many that this has created an implied floor to the financial markets. To me, this confidence in the Fed has played a large role in the stock market advance of recent years. However, I consider this a great risk the longer this goes on. Normal economic and market cycles are being "managed" to an extreme. Can the corresponding money printing and government debt levels continue higher forever? Honestly, none of us knows. "But there’s another, more basic factor to understand: The crash that started in 1929 didn’t come out of nowhere. It was preceded by a period of excess—the Roaring Twenties—that caused the market to become extremely overvalued. The Dow Jones Industrial Average had risen six-fold in the eight years leading up to the crash. It was clearly in dangerous territory. That’s another reason we shouldn’t view 1929 as the sort of thing that could happen again at any time and with no warning." DJIA recent high of 45k is also up six-fold since the 2009 financial crisis low and has a roughly 14-15% compounded return during that 15 year period. Has this been a "period of excess" and has the "market become extremely overvalued?" Yourself and many others don't think so. Again, none of us really knows. "4. Market valuation." Is the CAPE ratio less relevant today as you imply? Maybe, but the argument sounds a lot like "this time is different." As Chuck Prince said “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance.” For now, the music continues to play. Whatever the markets bring, best of luck to all in 2025.
While each of your points has some validity regarding lowering the risk of a 1929 type crash, the only two that make a serious impact are Fed intervention and Government deficit spending, IMHO.“With the ability to essentially print money, the Fed has enormous firepower to head off crises”. “What we know today, of course, is that the government should do the opposite during crises. It should run deficits to help support the economy.” I have read countless articles over the last 15 years or so referencing how money printing and deficit spending have been the saviors of our economy and stock/bond markets. Well, I don’t take this as a good thing. (US debt $36T, Fed Balance Sheet, $7T) Can it go on forever? Maybe not something to lose sleep over tonight or next month, but at some point I fear this massive level of “control” of the economic cycles and financial markets will cause way more long term harm than good.
“Following that idea is how people get into trouble- using money intended for one purpose for another.” Actually, spending beyond their means is what gets people into trouble. As has been pointed out here by others, you seem to be unwilling to accept that someone could have been financially successful in life, saved aggressively, built a comfortable net worth, chose to retire early, may have multiple bank/brokerage accounts (pre and post tax), and pays expenses from accounts based upon rmd requirements, portfolio balancing, annual tax considerations, life events, etc. In this way, he/she takes an aggregate portfolio view when spending vs designating individual accounts for specific purposes. While not average, many such people exist.
The average retirement age may or even should be moving up for the reasons you state. As for Humber Dollar readers, the idea that a higher than average number may be retiring earlier really should not be that surprising. I suspect many readers here are above average savers/planners. I see no disconnect. You are simply trying to compare a small group to the total group and are surprised that differences could exist.
Let me see if I understand this. Let's use a simple example. As of today, retired 75 year old single female, no pension, $500k in cash, $500k in intermediate bonds, and a 401k with $500k in stocks. No other assets or liabilities. Each year, this young lady pays for some expenses with a combination of cash interest and bond dividends. Each year, she takes the required RMD and uses roughly 1/2 of those funds to pay the remaining expenses. The other 1/2 of the RMD she splits between her cash account and buying more bonds. What is her net worth today? I say her net worth is $1,500k (assets minus liabilities). Since her cash, bonds and 401k are each being used as "income", you seem to be implying that the 401k, or maybe all three, should be excluded from net worth, correct?
Adam, I very much agree (and have seen) that the market can seem irrational and can remain that way for long periods of time. Also, irrationality is certainly in the eye of the beholder. As you point out, this is a good reminder of why the SPY or better yet the total market index fund approach has been so successful since inception. No one knows whether growth will continue to outperform value for 10 more years or 10 more days. The same goes for large cap vs small cap stocks and for one market sector vs another.
“The market will go down, and it will go up, but the government is much smarter now when it comes to dealing with it.”
This may be the funniest financial line I’ve ever seen written. Thanks. “The debt as a percent of government income is within normal range.” This statement as written has no meaning.
If you can be more clear, I’ll be happy to look it up.
Nice article Jonathan. I strongly agree with list #1-4. I have to admit after decades of following the approach of ignoring market fluctuations and staying heavily invested in stocks, I have recently started to waver. My concern is mainly around your point #5 on the economy and specifically your comment “What about recent decades, during which the government has been quicker to step in and help revive economic growth? The U.S. economy has been far less rocky.” For decades I have watched the economy and the stock market shake off all sorts of temporary setbacks and march forward. Today, however, feels different. (Yes, how many times have we all heard that before.) Our national debt was $6trillion in 2000 after 224 years. Now, just 24 years later, it is $35trillion. Additionally, the Federal Reserve Balance sheet was well under $1trillion from inception until 2008. Since then it rose steadily to $9trillion in 2022, and is still at $7trillion today. In summary, there has been a massive amount of economic and stock market “influence” from fiscal spending and federal reserve actions. These actions have been in response to economic downturns in 2000, 2008 and Covid. Up until now, this massive fiscal spending and Fed action has seemed to have had only positive benefits, certainly for the stock market. (We are finally seeing some inflation impacts certainly, but those with plenty of stock market gains may hardly notice.) So what’s my point? Our government is spending in very aggressive and unprecedented ways to keep the economy humming along. Can we continue to do this with no consequences into the future? Is this just another “hurdle” the stock market will jump as it climbs the “wall of worry” into the future. Well, I don’t know. Nor does anyone else. So I guess I have to add myself to the list of “nervous investors” who are at least somewhat skeptical of the economy’s “remarkable resilience”. Have I made or will I make any portfolio changes? Everyone’s situation (age, goals, assets, etc) is different, so I will keep that to myself.
I think Marjorie did a good job of avoiding the all too familiar political rant we see everywhere. As I read it, she simply expressed a hope that voters would make a sincere effort to make a well informed vote. As she correctly states, the challenges we face are enormous. It's hard for me to see how anyone with an open mind could view this as MAGA propaganda. If you like, please convince me by sharing which of her comments are propaganda (not true).
Comments:
Thanks for another thoughtful article Adam. I love that (attributed to) Mark Twain quote. Items 1-2 and 5-6, I agree very much with your points. Items 3 and 4, I see differently. "3. Bubble worries." "Quite frequently, investors will challenge me to explain why a crash like the one we saw in 1929—when the stock market dropped 90%—couldn’t happen again. There are several reasons I believe a crash of that magnitude would be unlikely." At the top of the list: I believe the Federal Reserve would step in and wouldn’t let markets simply plummet." It still amazes me how many smart people continue to make the case that the Federal Reserve will always be able to control the market as it sees fit. I concede that for at least the last 15 years the Fed has continued to increase its role in the stabilization of markets through each "crisis" we have faced. As you also seem to imply, it has become accepted by many that this has created an implied floor to the financial markets. To me, this confidence in the Fed has played a large role in the stock market advance of recent years. However, I consider this a great risk the longer this goes on. Normal economic and market cycles are being "managed" to an extreme. Can the corresponding money printing and government debt levels continue higher forever? Honestly, none of us knows. "But there’s another, more basic factor to understand: The crash that started in 1929 didn’t come out of nowhere. It was preceded by a period of excess—the Roaring Twenties—that caused the market to become extremely overvalued. The Dow Jones Industrial Average had risen six-fold in the eight years leading up to the crash. It was clearly in dangerous territory. That’s another reason we shouldn’t view 1929 as the sort of thing that could happen again at any time and with no warning." DJIA recent high of 45k is also up six-fold since the 2009 financial crisis low and has a roughly 14-15% compounded return during that 15 year period. Has this been a "period of excess" and has the "market become extremely overvalued?" Yourself and many others don't think so. Again, none of us really knows. "4. Market valuation." Is the CAPE ratio less relevant today as you imply? Maybe, but the argument sounds a lot like "this time is different." As Chuck Prince said “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance.” For now, the music continues to play. Whatever the markets bring, best of luck to all in 2025.
Post: Reality Check
Link to comment from January 19, 2025
While each of your points has some validity regarding lowering the risk of a 1929 type crash, the only two that make a serious impact are Fed intervention and Government deficit spending, IMHO. “With the ability to essentially print money, the Fed has enormous firepower to head off crises”. “What we know today, of course, is that the government should do the opposite during crises. It should run deficits to help support the economy.” I have read countless articles over the last 15 years or so referencing how money printing and deficit spending have been the saviors of our economy and stock/bond markets. Well, I don’t take this as a good thing. (US debt $36T, Fed Balance Sheet, $7T) Can it go on forever? Maybe not something to lose sleep over tonight or next month, but at some point I fear this massive level of “control” of the economic cycles and financial markets will cause way more long term harm than good.
Post: Don’t Expect a Repeat
Link to comment from December 22, 2024
“Following that idea is how people get into trouble- using money intended for one purpose for another.” Actually, spending beyond their means is what gets people into trouble. As has been pointed out here by others, you seem to be unwilling to accept that someone could have been financially successful in life, saved aggressively, built a comfortable net worth, chose to retire early, may have multiple bank/brokerage accounts (pre and post tax), and pays expenses from accounts based upon rmd requirements, portfolio balancing, annual tax considerations, life events, etc. In this way, he/she takes an aggregate portfolio view when spending vs designating individual accounts for specific purposes. While not average, many such people exist.
Post: Is your net worth, worth it and what’s in it? RDQ
Link to comment from November 3, 2024
The average retirement age may or even should be moving up for the reasons you state. As for Humber Dollar readers, the idea that a higher than average number may be retiring earlier really should not be that surprising. I suspect many readers here are above average savers/planners. I see no disconnect. You are simply trying to compare a small group to the total group and are surprised that differences could exist.
Post: Is the (my) perception of early retirement all wrong? RDQ
Link to comment from November 2, 2024
Let me see if I understand this. Let's use a simple example. As of today, retired 75 year old single female, no pension, $500k in cash, $500k in intermediate bonds, and a 401k with $500k in stocks. No other assets or liabilities. Each year, this young lady pays for some expenses with a combination of cash interest and bond dividends. Each year, she takes the required RMD and uses roughly 1/2 of those funds to pay the remaining expenses. The other 1/2 of the RMD she splits between her cash account and buying more bonds. What is her net worth today? I say her net worth is $1,500k (assets minus liabilities). Since her cash, bonds and 401k are each being used as "income", you seem to be implying that the 401k, or maybe all three, should be excluded from net worth, correct?
Post: Is your net worth, worth it and what’s in it? RDQ
Link to comment from October 30, 2024
Adam, I very much agree (and have seen) that the market can seem irrational and can remain that way for long periods of time. Also, irrationality is certainly in the eye of the beholder. As you point out, this is a good reminder of why the SPY or better yet the total market index fund approach has been so successful since inception. No one knows whether growth will continue to outperform value for 10 more years or 10 more days. The same goes for large cap vs small cap stocks and for one market sector vs another.
Post: Mob Rule
Link to comment from October 13, 2024
“The market will go down, and it will go up, but the government is much smarter now when it comes to dealing with it.” This may be the funniest financial line I’ve ever seen written. Thanks. “The debt as a percent of government income is within normal range.” This statement as written has no meaning. If you can be more clear, I’ll be happy to look it up.
Post: Sticking With Stocks
Link to comment from October 12, 2024
Nice article Jonathan. I strongly agree with list #1-4. I have to admit after decades of following the approach of ignoring market fluctuations and staying heavily invested in stocks, I have recently started to waver. My concern is mainly around your point #5 on the economy and specifically your comment “What about recent decades, during which the government has been quicker to step in and help revive economic growth? The U.S. economy has been far less rocky.” For decades I have watched the economy and the stock market shake off all sorts of temporary setbacks and march forward. Today, however, feels different. (Yes, how many times have we all heard that before.) Our national debt was $6trillion in 2000 after 224 years. Now, just 24 years later, it is $35trillion. Additionally, the Federal Reserve Balance sheet was well under $1trillion from inception until 2008. Since then it rose steadily to $9trillion in 2022, and is still at $7trillion today. In summary, there has been a massive amount of economic and stock market “influence” from fiscal spending and federal reserve actions. These actions have been in response to economic downturns in 2000, 2008 and Covid. Up until now, this massive fiscal spending and Fed action has seemed to have had only positive benefits, certainly for the stock market. (We are finally seeing some inflation impacts certainly, but those with plenty of stock market gains may hardly notice.) So what’s my point? Our government is spending in very aggressive and unprecedented ways to keep the economy humming along. Can we continue to do this with no consequences into the future? Is this just another “hurdle” the stock market will jump as it climbs the “wall of worry” into the future. Well, I don’t know. Nor does anyone else. So I guess I have to add myself to the list of “nervous investors” who are at least somewhat skeptical of the economy’s “remarkable resilience”. Have I made or will I make any portfolio changes? Everyone’s situation (age, goals, assets, etc) is different, so I will keep that to myself.
Post: Sticking With Stocks
Link to comment from October 12, 2024
I think Marjorie did a good job of avoiding the all too familiar political rant we see everywhere. As I read it, she simply expressed a hope that voters would make a sincere effort to make a well informed vote. As she correctly states, the challenges we face are enormous. It's hard for me to see how anyone with an open mind could view this as MAGA propaganda. If you like, please convince me by sharing which of her comments are propaganda (not true).
Post: Stay Informed by Marjorie Kondrack
Link to comment from October 3, 2024
Dicey subject but well said Marjorie.
Post: Stay Informed by Marjorie Kondrack
Link to comment from October 2, 2024