And yet there is still a remarkable correlation between stock values and age demographics. I’m not trying to argue the point. But it is possible that the common usage of past stock performance to justify future aggressive stock investment may be overly simplistic thinking. There are ways that the next 10-50 years will be significantly different than the previous 10-50, with an aging population being the most obvious. Demographics may be the elephant in the investment room that a lot of people are ignoring.
The above paragraph is full of supposition and strawmen.
Correlation is not causation.
Everything is (generally) possible.
No one argued for blind future aggressive stock investment (strawman).
“There are ways” … with respect, “no duh.” Again, no one claimed that the next 10-50 years will be the same as the last 10-50. It is NEVER the same. Another strawman.
But here, I will provide you with some actual data that could support your hypothesis (doing the work for you! )
. Does Population Aging Affect Financial Markets?.
In concluding, Poterba notes that economic theory clearly predicts that a baby boom should drive asset prices up and asset returns down for its cohort. However, he writes, “none of the empirical findings provide a strong and convincing measure of the amount by which asset prices will change as the population of the United States and other developed nations ages.” Nonetheless, given the inherent difficulties in estimating this relationship, he believes that “the theoretical models should be accorded substantial weight in evaluating the potential impact of demographic shifts.”
On why you can’t look at just the US, even if the hypothesis is correct (as the authors argue may be the case):
Snip:
This discrepancy between theory and observation tends to
disappear with the decrease in transactions and informational costs and
the development of financial markets,49 so that the future path of U.S.
equity prices may well depend more on the joint demography of countries
participating on the U.S. equity market than on U.S. demography alone.
Most developed countries have similar demographic perspectives for the
next thirty years, with a baby-boom generation going into retirement, low
birth rates, and a lengthening of life expectancy—all factors leading to a
high elderly dependency ratio (the ratio of retired to working agents). The
only real prospect for offsetting the effect of a small generation of middleaged agents buying the equity of a large retired generation comes from
increased participation in the U.S. securities market by investors from the
developing countries.
Yet it often is. If there is a strong correlation between eating a particular mushroom and getting severe stomach cramps, ignoring that correlation may not be brightest thing to do. Folks who take “correlation is not causation” to the extreme tend not to contribute to evolution.
Correlation is not causation, but it is a reason to test for causation.
Given that several posts here argue for the reasonableness of hoping to double investments in 10 years based on prior market performance, I don’t think this qualifies as a “straw man”.
Thanks. If you read this and other studies on the issue, what you find is few argue against the notion that an aging population will put downward pressure on equity values. The main question is how much. Given that most of the entire industrial world is aging, and doing so rapidly, IMO such an impact is likely to be significant.
Add to this that in most industrial countries, population growth is also slowing significantly, if not actually contracting. This suggests that investments whose rising values largely depend on growing demand from populations where the working population is rapidly increasing may not do as well going forward. Real estate is one example. Commodities are another. Will companies like Starbucks grow as quickly if populations stagnate?
Perhaps shift investments to younger nations like India and Africa?
This is my bias speaking, but I need to follow your posts more, as I completely agree and have been largely short or in cash since end of 2021, with the occasional (often fruitless) attempt to btfd on select names here and there.
Too much price-anchoring going on.
I believed market was rich in late 2019.
The covid crash was incredibly short-lived and then ponzi-like fomo ensued and valuations got even richer. This kept going, in certain pockets, thru about Nov 2021.
So as markets/stocks reverted back a bit in 2022, many look at how high off the 2020/2021 highs a stock is and declare “bargain!” when I go back further to 2018/2019 when the tech stock valuations really started ramping out of control.
There is a long way to potentially fall.
Yes, companies have grown revenues, if not profits, in the years since, but they have also inflated their market caps and diluted investors heavily with SBC, so you have companies back in June 2022 lows that had stock prices similar to 2018 or 2019 levels, yet their market caps were double the size from back then, thanks to dilution.
How is it that I, an average investor armed with nothing more than warnings posted by Wendy and Mungofitch, knew to cash my bonds by the end of 2021, and the top banks did not?
I long ago realized that I lacked the ability to time the market or find bottoms. For that reason I tend to do a variation of dollar-cost-averaging by buying incrementally at what I consider to be significant dips and “trimming fat” when I think the market is frothy. Just bought a bit of bank stocks and will likely do so again if the crisis continues.
The “doom and gloom” narrative seems a bit overblown. The US economy looks pretty strong particularly with unemployment low and hiring still going on.
Cash them in and do what with the proceeds? Cash is a liability not an asset. They would be required to invest it in something or go bankrupt. Banks had way more cash than they could loan out. The only alternative is to invest it - and bonds are safer than stocks.
Unlike wendybg, however, I have already started averaging my excess cash back in because I expect prices to fall but I don’t know how far or for how long and I know I cannot time the market.
I also trim when stocks and/or bonds appear to be expensive and average back in when they are less expensive but when I try to explain my process I am accused of timing the market.
Correct. Bonds (and loans) are an asset. Cash is a liability. Bonds are an asset even when they are overpriced.
Keep in mind that bonds are not like stock. They have a fixed maturity date so even if a bond has a par value of $100 but is trading at $120 (overpriced), it will still very likely have a Yield to Worst that is positive and in line with prevailing interest rates.
Edit: Cash is a liability because it cost a bank money to hold it. It cost money for a bank to open an account, to pay the employees to service that account, to pay interest on that account. If a bank can’t turn that cash, that liability, into an investment in something (loans, bonds, stock), then they are guaranteed to lose money on it.
@btresist - I can respect your different POV. Going forward, I think it is important for me when I post to clarify what I am doing / thinking. Probably best that I qualify my posts with where I am in my investing career. I’ll need to remind myself to do that when posting.
Dollar cost averaging is a good strategy to follow I’d say. I’m thinking there is more pain to be had as the Fed continues to tighten to get the economy growing at their 2% target.
I’m in no hurry to invest. I just cannot pull the trigger even at these levels. I’ve been burned on stock purchases before when paying too rich a price and I really don’t need to put any of our positions at real risk.
We are retired and in good financial shape. Any investments that we choose to make would be with small amounts to see if we can juice our return with marginal risk.
" Bonds (and loans) are an asset. Cash is a liability. Bonds are an asset even when they are overpriced."
I get that this is the case for a bank. But for an individual, do you think this is the way to go?
My thinking, as an individual investor, is that cash is an asset in a falling market, and bond funds ( not individual bond holdings that are held to maturity ) are a liability in a rising interest rate environment. The business investing strategy of a bank is different than the individual’s investing strategy. At least that is how it seems to me. I raised cash up to the FDIC limit in IRA, and have been slowly buying stock. Do not own any bond funds, nor any individual bonds. Do own treasuries in taxable accounts. I guess time will tell what is the best way to go.
real wages, as a result, are weaker. Thus why Fed has to raise FFR until inflation finally gets tamed. That usually coincides with weakness in economy.
No, because an individual is not a bank and banks are not like other businesses. There is really no comparison. When you sit on cash (individually or as a business), there is no cost to you (not counting inflation) like there is to a bank.
A bank essentially BORROWS money from you much like you borrow from a bank when you take out a loan. If you don’t do something productive with that loan, you are stuck paying interest. Additionally, when banks borrow from you, it is a loan that you can demand repaid at any time - thus the recent bank run.
For the moment. I think the drivers of inflation are all near term, resulting from the pandemic and the Ukraine war. The pandemic caused pent up demand that coincided with supply issues, while also causing a labor shortage (3 million retirements above average). All this while Ukraine impacted energy and food costs. The US and world economies are still adapting, but rapidly doing so.
Meanwhile I think the drivers of the economy are more long term and resilient. There is a lot of infrastructure investment stimulating economic activity, which includes some pretty brilliant policy bringing microchip, EV, and battery manufacturing to the US. I find it remarkable that despite a significant slowing of the Chinese economy, the UK crashing post-Brexit, and Germany on the fringes of a recession the Fed is still having problems putting the brakes on the US economy.
The purpose of cash on a bank’s balance sheet is to be able to meet depositor’s withdrawal requests. If you do not have enough cash to meet those requests, the bank has failed and regulators step in.
That is what happened to SVB. They ran out of cash.
Now if you have too much cash, earnings can suffer. But low earnings doesn’t cause regulators to shut the bank down.
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