One reason I'm holding on to my stock investments and buying more

[swag]

dividends:

ON Sept. 3, 1929, the great U.S. bull market of the Roaring '20s hit its peak. All seemed fine and dandy at the time, and plenty of flappers probably hit the speakeasies that night for an illegal drink or two.

But the celebration would be halted less than two months later by a stock market crash that ushered in the Great Depression. It took more than 25 years for stocks to again hit their Sept. 3, 1929, peak. In other words, the unfortunate soul who invested $1,000 in September 1929 still had that inflation-sapped $1,000 a quarter-century later.

But here's the silver lining of that tale, which is recounted in Jeremy Siegel's excellent book "The Future for Investors."

A person who invested that $1,000 in 1929 and then reinvested the dividends over 25 years ended up with $4,400 in 1954. That's a 6 percent annual return, which outpaced that of bonds.

In fact, the investor who kept investing actually ended up with more money in 1954 because of the crash. The crash allowed that brave person to buy more shares with the reinvested dividends when the market was down, thereby juicing returns when it recovered.

[TXDemGal]

1. Self-deleted n/t

[speedoo]

2. Thanks swag. Prof. Siegel is definitely worth a read. nt

[maseman]

3. Good story

Thanks for sharing.

[Jamastiene]

4. Smart move.

That's using your head. :thumbsup:

[MercutioATC]

5. I agree...but it's all about one's financial horizon.

If one buys at the bottom, they're guaranteed to make at least some money. The problem is that it's impossible to know where the bottom is. An equities investment made now could possibly LOSE 10%-20% over the next year, only turning a profit after 10 or 12 years.

If one has 15-20 years or more to wait, it's a sound move. If not, they might be more comfortable with more stable investments.



(this is only in reference to new investments...if one has already taken a beating in equities, there's a lot of incentive to keep those losses on paper and try to wait out the bear)

[swag]

9. Very true.

[zazen]

6. my grandfather bought up lots of land during the depression--it's how he made his fortune

He was pretty poor when he bought it, but I think it was relatively easy to buy it off the even more poor black folk (many were in 40 acre denominations). Son squandered the money so I'm in the highly educated but not very affluent middle class. I still have a few "downtown" lots in a little crossroads town near Fayetteville. It might be shorefront by the time my grandchildren are middle-aged. :- )

Looking back, we see that this post 30's trajectory followed the greatest exploitation of cheap, non-living energy in human history. So, it's hard for me trust the old it'll all return to "normal" reassurance.

There will be many new "normals," I think.

[pitohui]

10. one of my relatives did this too -- and she made her fortune 30 years later

you just have to be lucky enough to be the right age and born at the right time

plenty of people don't have 30 years remaining, actually, for my relative, she never got to enjoy her wealth, because she developed dementia, and her wealth ended up being used to 1) keep her alive but effectively brain dead in a nursing home while 2) others looted her money

so i dunno, if you're young, this might work out, if you're older, it doesn't have to have a happy ending

[yy4me]

7. Somehow, I don't think I am going to see any return on my

meager stocks. I was going to sell them but legal estate matters were delayed and in the meantime, everything crashed. Our retirement money, or what we had should one of us die is now worth 40% less. We didn't have much. It is now less and I am afraid. Getting old sorta limits your long term options.

[pitohui]

8. and this is relevant how? you don't get the same % dividends you as you did back then

modern stocks may not pay a dividend at all, and many of them have reduced their dividends substantially

you are making an argument that only works if you're getting the same percent dividends per share as you did in 1930, which is untrue

plus companies are STILL cutting dividends

example -- people were advised to buy F in 2001 because of the high dividend compared to the falling share price

they were all screwed because shortly thereafter F cut the dividend in half

i wouldn't be surprised if it pays no dividend at all by this point, and the stock has fallen from $30 a share and a 5 percent dividend to $2(!) a share -- practically a penny stock

you know that story about how all the evils of the world came flying out of pandora's box and the last one was hope? there's a reason that hope was considered to be an EVIL (despite the fact that many modern americans seem to miss the entire point of the story)

there's nothing wrong w. grasping for straws where there is no hope, but come on, this argument fails to convince

[swag]

11. Suit yourself.

A few months ago, the dividend yield on an S&P 500 index fund was about 2%.

Now it's up past 3%.

[girl gone mad]

25. This is why I'm buying foreign stocks in this downturn.

There are some profitable, high growth foreign companies that give as much as 9% in dividends per year and are trading at 2 or 3 times current earnings. I'm still using much caution, however.

[nichomachus]

12. All well and good for those people who have 25 years -- some of us don't n/t

[swag]

24. This is why people nearing retirement are advised to gradually reallocate from stocks to bonds

and cash equivalents.

[smoogatz]

13. Expect the Dow to continue to plunge, maybe as low as 3-5,000.

Don't buy yet, when it does. We'll see a substantial "dead cat" bounce that will look like a major rally. Don't be fooled--it'll be heady but short-lived. Hang onto your cash and plan to buy if/when the dow hovers in that 3-5,000 territory for a month or so. At that point the Dow PE ratio will be pretty damned attractive (something like 6x), and I think rational buyers will start to move in, looking for value. At those prices you'd be likely to do pretty well in the long-term, and the downside risk would be limited to an all-out meltdown in which the Dow companies basically all went bankrupt simultaneously. It could happen, but it's pretty unlikely.

[A HERETIC I AM]

17. If you're convinced of that and are willing to put your money where your mouth is, you stand to

make a pile.

Just sell short DDM and buy puts on it.

Hell, if you are REALLY sure you are correct, do the above on margin and you'll truly rake it in.

I mean, if you are willing to stand by your statement "Expect the Dow to continue to plunge, maybe as low as 3-5,000" and you are going to give investment advice, are you willing to back it up with cash?




Somehow I kind of doubt it.

[smoogatz]

18. That's my best guess based on what I've been reading,

but I wouldn't bet the farm on any specific scenario in this market; that way lies bankruptcy. When/if the market does what I think it's likely to do, I'll probably look for some good values in individual stocks. I'm happy sitting on the sidelines 'til then. Buy on margin? No thanks, compadre--but be my guest, if you're a gambling fool.

[DeschutesRiver]

30. Just wanted to say this is what I think also, and

I am not making any moves at the moment.

While my dh and I made a bet on the drop, and mine was down to 6200, I believe it is realistic that we could see something between 3000 and 5000 as easily.

[swag]

37. It could very well happen in the short term.

As Robert Shiller said, the P/E ratio of the S&P 500 (currently around 12 for trailing-smoothed 10-year earnings) has fallen to 6 in past crashes. The market always overshoots on both booms and busts. If it goes as low as you say, even better bargains for long-term investors, assuming the world will last.

My regular monthly contributions are going into stocks, as are my div reinvestments, until my strategic allocation gets back to its target.

[DeschutesRiver]

43. How far out is retirement for you (if this is your retirement account!)? nt

[swag]

47. 20 - 25 years (at the top end of the range, I hope).

[DeschutesRiver]

51. We are 10-15 years out from retirement

if we were 20-25 years away from it, I might be more willing to buy on dips now, because if I was wrong, I'd have more time to make up my mistakes! As it is, we are too close for me to be comfortable with buying right now, esp. when I think we are headed lower. I suck at timing these things, so am trying to err on the side of caution.

Dh is inclined to be doing as you are, buy on the dips, but due to past experiences, I've prevailed upon him to just sit this out. If I am wrong and it doesn't go lower, there is no harm for us having not bought into any "opportunities", because we'll still have enough to live on. Just won't make any "wow" gains over the next so many years. Being this close to retirement requires an adjustment in thinking from growth to preservation, which has been a wierd and hard switch for us to make, after spending all these years since our 20s trying to grow our investments.

I did suggest he could ebay some unwanted items around here, and use anything he makes to invest in the market right now:)

[CoffeeCat]

38. This is what I've been hearing quite a bit...

Exactly, as you said---that the market will rally, but it will be VERY short lived. Then,
the bottom drops out.

Just like this guy said (a VERY interesting listen)
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=385x212795

Our 401k is still in the stock market. My husband and I are still deciding what to do. He wants to stay
in and ride it out. We've got 2 decades before we'd cash out. I want to ride the rally up a bit,
then put the 401k into a money market until the dow hits about 3,000-4,000. Then, put it back in. My
husband is listening to me, but I think he's in denial about that reality happening.

And really...I have no proof! I'm basically using my intuition and my minor in economics at this point--which
really isn't saying much!

It's interesting that so much of this is playing out in the stock market--when the real crisis is in the
credit markets. In my opinion, the impending fallout will be catastrophic---and what is happening
to our 401ks will be the least of our worries. I'm concerned about the flow of money just completely stopping
as credit continues to freeze. In addition, we're about to move into an economy where people drastically
cut down on using credit cards, retail cards and money from home-equity loans. That's a drastic downward shift
in aggregate demand which will fuel skyrocketing unemployment and massive business failures.

This is the scenario--that could (as you stated) potentially bankrupt many Dow companies...but it's hard to predict how
deep the crisis will be. I consider the Dow at 3,000-4,000 to be a best-case scenario.

Just thinking out loud--and very open to being enlightened about where I'm missing something, etc.

[smoogatz]

39. Yep--Bushco (and the nitwit Bluedogs) have crippled the consumer economy

by allowing predatory lenders to bankrupt the middle class. That's a good thing for the long term: unsustainable consumption is bad for the planet, and it'll likely force us to innovate and build a new economy based on production of, say, green energy technology--a good thing all around. But let's say it takes ten years to make the transition: that's going to be a tough ten years.

In your situation, I'd base my thinking on how much of that 401k I felt I could afford to lose, short-term, and whether shifting it out of stocks would have any benefit once you paid the fees, taxes, etc. If that cost is minimal, then I don't think you'd lose much by sitting on the sidelines until the markets really bottom out. Be careful about money markets, though--they're not insured and a lot of them are pretty unstable at the moment. Your 20-year horizon puts you in pretty good shape long-term, I'm guessing, assuming you have some cash to move in with when/if the Dow/S&P hit that magic 6-8 PE ratio. People who can position themselves to buy at historic market lows tend to do very well over the long term (most people buy when the market's hot and sell when it starts to go down: oops). You risk getting wiped out if your 401k is poorly managed, but you'd be risking that anyway.

On the other hand, it's entirely possible that I'm wrong, and this is actually the bottom. Considering who's in charge, though, I don't have a lot of confidence that that's the case.

[TexasObserver]

14. that's really a bogus example, very unrealistic

Anyone who could afford to put $1000 into the stock market AFTER it collapsed, and let it and its dividends ride for 25 years was not really experiencing the Depression as most did.

This old meme that "the stock market always comes back, and always makes money over the long haul" is fool's gold sold to the unwary. If you invest in a company that goes belly up, you lose your entire investment. And if you looked at the markets from 1929-1942, you'd see that they did terribly.

It is true that the market will always return, but that's like saying the lake is still there after I go fishing. True, but the fish I caught and am eating are dead and gone. The fact that the lake is still there, still full of other fish, doesn't help those who died and were eaten.

The stock market is a casino, and if you don't know what you're doing, you shouldn't be playing.

[swag]

20. Have it your way, even though your way depends on a profound misreading of the example.

[struggle4progress]

28. To profit in this manner, one must not only (1) not be wiped out by the crash but (2) have

enough money to invest across the market (to realize average market returns) and (3) have the luxury of waiting a quarter century as well as being able to (4) liquidate when the US economy is pre-eminent in the world, because all other industrialized nations are rebuilding from a global war or similar crisis

[swag]

33. It's possible to invest across the entire market in a low-cost index mutual fund.

Minimums are not very high. Many 401k plans have no minimums for investing in such funds. For IRAs, I know of fund shops where the initial investment in a broad-market fund is $500 with $100 additional investments thereafter.

As far as being wiped out by the crash, if investors don't freak out and sell out now very few will be "wiped out" by the crash.

A lot of people have the luxury of waiting for 10, 20, 30 years. And people who don't have that luxury should have had very little money in the stock market in the first place.

Your fourth point is really foggy to me. I'm not sure what you're saying. Did I say that one should be invested entirely in US stocks? I'm certainly not saying any such thing.

[struggle4progress]

45. The period 1929-1945 ends with nine years in which the entire industrialized world, except

for the US, was recovering from the wreckage of WWII: during the post-war years (which extended into the 1960s, since the ruin of Europe had been quite extensive), the US benefited from its exceptional economic position, which must color any interpretation of long-term stock value growth over any period 1ending in (say) 1954, a production boom period

I have no idea how to determine whether we will see a cataclysm analogous to the Great Depression. One of my points (and others have made it previously in this thread) is simply that the 1929 crash and its aftermath wiped out a number of investors: it is certainly true that not everyone was wiped out, and some were able to continue investing, but many were not -- and relative to much of the country, those who were able to continue investing were in an exceptional position

I certainly agree that it is probably to everyone's advantage if the market does not crash dreadfully. What you overlook, I think, is that much of the "money" involved exists only as debts in books: such debts might be meaningful in an economy with real brick-and-mortar projects; such debt is less meaningful if it is backed only by other debts-in-books in a "service economy" relying on production and resources from overseas; in a resource crisis, wealth may simply evaporate, if represented by debts not backed by brick-and-mortar. Unfortunately, market values seem to be determined in recent years by speculative investment, rather than old-school price-to-earnings considerations. A speculative market keeps stock prices above return values: this is great for anyone who can ride the bubble; but in the speculative context, "confidence" merely means hoping the offshore resource and production base will sustain speculative prices for a while longer

Some sweeping reforms are clearly needed

[TexasObserver]

32. My way comes from actually understanding how the markets have performed the past 80 years.

[swag]

36. You have my admiration. You must be very wealthy if you have such understanding.

[Fumesucker]

42. Wealth is not something worthy of admiration.. n/t

[swag]

49. I didn't say that it was.

[endthewar]

15. The US dollar will soon be worthless

The debt is skyrocketing out of control and Bush has been fudging the numbers from the Federal Reserve.

[swag]

21. Funny that it has climbed so much in recent weeks.

[girl gone mad]

26. It's not funny,

it represents the erosion of vast amounts of wealth.

Nothing funny about deflation, particularly when we as a nation are staring down the barrel of $11 Trillion in debt.

[swag]

27. Okay, you want the dollar to climb or fall? Which is it?

[depakid]

41. You never know with some folks

Currenice valuations have to do with relative economic measures- not absolute ones, which is a very basic point that some people have a hard time grasping, even when the data is right before their eyes.

[unblock]

16. true, but if you waited until 1932 or 1933, you would have been many times better off

it's usually best to sit these times out if possible, and wait for signs of an upturn before jumping back in.

buy-and-hold is not a bad strategy, especially to handle minor bumps in the road. but this is no minor bump.

[swag]

22. Good luck with knowing when to get back in to stocks.

[eridani]

19. What if you expect to be dead in 25 years?

Sitting tight is a good strategy only if you are young enough.

[swag]

23. This has been established.

[Zhade]

29. The reason no one has called you on: you wish to profit off others' misery.

Good luck sleeping at night.

[swag]

34. You're funny.

People are panicking and selling their stocks at the bottom that they bought at the top, I'm suggesting that's probably not a good idea, and you accuse me of wanting to profit off the misery of others.

I'll sleep just fine, thanks.

[tuckessee]

31. Past experiences may not be a reliable indicator this time around.

We may be entering unchartered territory. The social, political & economic factors at work today are not necessarily the same as the past.

Who knows what will really happen down the road? Anyone's honest guess is as good as anyone else's.

That's why putting money in the stock market is a gamble.

[swag]

35. They said "it's different this time" at the top of the dot.com boom.

History is littered with financial booms and busts. Everyone always says "it's different this time."

You're right - we may not recover. But if we don't recover, we'll have more to worry about than our 401k balances.

My point is that buying low (with a higher dividend yield) and selling high is preferable to buying high and selling low.

[DailyGrind51]

40. I heard Siegel at an investors' conference 8 years ago, during the dotcom bust,

held on to my mutual funds and annuities, and watched them recover, eventually. Others I knew who "cut and ran" from their original plan had no way of recovering or even getting back in, because they sold at a loss, giving them less cash to work with.

Thank you, Jeremy Siegel!:yourock:

[raccoon]

44. Yeah, but in 25 years, I'll be 84. If I'm still around. nt

[swag]

48. I doubt I'll be around when I'm 84, but best to you getting there.

[wtmusic]

46. No it's different this time. No, really.

*searches frantically for cash to buy in*

:thumbsup:

[swag]

50. So true: a new paradigm!