Why investing SS in the stock market is a horrible idea.

[Skull Pilot]

I'll take my chances with a balanced portfolio any day over letting the fucking miscreants in the government handle my money.

The expected return of a balanced portfolio is the same as the expected return of U.S. Treasuries.

If you're going to buy the buy and hold balanced porfolio line you should at least hedge your risk with put options.

30 year US treasuries average less than 4 % 10 year T bills average a little over 2% a balanced portfolio of stocks and bonds will beat that.

 

[OohPooPahDoo]

hence why the government should have no hand in this at all... people should be able to invest on their own without forced government participation in the scam program slush fund

And when the stock market crashes we can all go hungry together?

It has crashed big 3 times, 1929,1987 and 2000.

Your sample only includes about 100 years - less than two lifetimes - of a single nation's stock market and you happen to have picked a stock market that has performed extremely well compared to others in place and time. You're straight up ignoring the sample points that would show the historical performance of the U.S. market is an outlier. For instance - like I said, anyone invested in the Japanese stock market 25 years ago is not half recovered yet.

But it is still around.
You never lose all of your money in stocks.

My contention isn't that it will go away, but that assuming it will post at least X gains over the next 30 years because it has done so in the past is wrong.

According to a 2009 Urban Institute report, those hit hardest by the 2008 financial crisis were seniors with investment-based savings or retirement plans. Millions of people saw the value of their investments drop dramatically in 2008, but those that stayed in the market saw many of their investments recover in 2009 and 2010. Those who bought shares in healthy companies during the recession made a considerable amount of money. However, many seniors had their savings in mutual funds, stocks and property and, unlike younger people, seniors were living off these savings and many could not wait for the market to recover to sell their houses or withdraw money from accounts for monthly or yearly expenses. As a result, many senior citizens lost 30 percent or 40 percent of their life savings, or even more.

Yes. One of the curious effects of a recession is that many people lose their jobs and can't stay in the market. They have to cash in part or all of their retirement accounts early. This further drives down equity prices.

I'm very glad you brought this point up because it helps me make my point. We can look at, say, the period 1928-1958, and say that since the total return (dividends included) was 10 X over that period, the market return ~8% and all was good in the end. But we ignore the fact that real investors are selling their portfolios all throughout 1929-33 because they have to eat. So they have bought in 1928 on the high side and out of necessity sold at a lower price in late 29 and the early 30's. Throughout much of the 30's stocks would have been a good deal - but no one had any money to actually buy them (that's WHY they are a good deal).
Let's look at a more practical case -

you invest $144 in the market in 1928.
The market crashes, you lose your job, and in 1932 you have to sell the investment for $51 and you spend the money on necessities. Then for the next several years you are poor and can't afford to make an investment. The war comes, you get drafted, you get paid, and in 1943 you invest $51 in the stock market. By 1958 that investment is worth $600. 600/144 isn't that much over 30 years.

This is why the average person saving for retirement NEVER does as good as the stock market over 30 year periods. People have more to save for retirement when the economy is booming and stocks are expensive and less to save when the economy is in recession and stocks are cheap - the real average person investing for retirement will never do as well as the indexes.

Even when it goes down you still have more in the long run in 30 years than with the government who sets how much you get each month.

IN THE PAST you would. Your claiming to predict the future. I'm fine with that - but your basis for doing so is very shaky. You are essentially claiming that because the U.S. stock market has performed so well in the past over long periods - it will continue to do so in the future. You ignore all other stock markets.

In the market you would get 3 times or more that amount, even with stock crashes, because the market always makes a come back.

You mean in the market you "would have". We can't retire based on the market returns of the past.


Your attitude, unfortunately, is very common. You honestly believe you can divine the future of the stock market based on the past returns of a 100 year period in the U.S. alone. The fact this believe is commonly held is all the more reason it would be a piss poor idea to put SS funds into the stock market.

 

[OohPooPahDoo]

I'll take my chances with a balanced portfolio any day over letting the fucking miscreants in the government handle my money.

The expected return of a balanced portfolio is the same as the expected return of U.S. Treasuries.

If you're going to buy the buy and hold balanced porfolio line you should at least hedge your risk with put options.

30 year US treasuries average less than 4 % 10 year T bills average a little over 2% a balanced portfolio of stocks and bonds will beat that.

You say it "will" beat that based on what?

 

[Toro]

Economic growth.

 

[OohPooPahDoo]

The reality is that you cannot find a 40 year period where stable investments led to a worse return for investments.

In the past - yes - I agree. It would be great if I could take my income that I earn now and invest it in the stock market in 1933 and then the next day sell it in the 1973 market. Wouldn't that be awesome? Barring time travel though, that will not be possible.

The only way that you are capable of skewing this reality is by cherry picking specific instances in specific markets. That is not a strong argument. If you want to keep SS as a program, the best way of going about it would be to allow control over that money in a limited fashion where you could choose to invest in a limited number of ways.

And your argument is based on what data exactly? The U.S. stock market for the past 100 years? That's not cherry picking? Are you even aware that the U.S. stock market for the past 100 years is a statistical outlier?

 

[Toro]

The reality is that you cannot find a 40 year period where stable investments led to a worse return for investments.

In the past - yes - I agree. It would be great if I could take my income that I earn now and invest it in the stock market in 1933 and then the next day sell it in the 1973 market. Wouldn't that be awesome? Barring time travel though, that will not be possible.

The only way that you are capable of skewing this reality is by cherry picking specific instances in specific markets. That is not a strong argument. If you want to keep SS as a program, the best way of going about it would be to allow control over that money in a limited fashion where you could choose to invest in a limited number of ways.

And your argument is based on what data exactly? The U.S. stock market for the past 100 years? That's not cherry picking? Are you even aware that the U.S. stock market for the past 100 years is a statistical outlier?

What do you mean?

Equity returns have been similar across most Western nations.

 

[Toro]

BTW, since 1969, the price index of the Nikkei 225 has been 4.25%. I don't have dividends reinvested, but 2%-3% is a fair assumption. So Japanese stocks have returned 6%-7% over long periods of time.

I don't have data prior to 1970.

 

[Skull Pilot]

The expected return of a balanced portfolio is the same as the expected return of U.S. Treasuries.

If you're going to buy the buy and hold balanced porfolio line you should at least hedge your risk with put options.

30 year US treasuries average less than 4 % 10 year T bills average a little over 2% a balanced portfolio of stocks and bonds will beat that.

You say it "will" beat that based on what?

Experience and history.

 

[Mad Scientist]

Economic growth.

Revised Downward again! (At least for the USA)
Goldman Joins JPM In Cutting Q2 GDP To 1% Stall Speed; A "Funny Chart" Becomes Funnier | Zero Hedge

I love the comments: Noless:"Yes, this is a chart of nominal growth. Real "growth" (including inflation) would be negative."

Special Request for Toro: Could you start a thread and explain to everyone what "Front Running" is?

 

[OohPooPahDoo]

The reality is that you cannot find a 40 year period where stable investments led to a worse return for investments.

In the past - yes - I agree. It would be great if I could take my income that I earn now and invest it in the stock market in 1933 and then the next day sell it in the 1973 market. Wouldn't that be awesome? Barring time travel though, that will not be possible.

The only way that you are capable of skewing this reality is by cherry picking specific instances in specific markets. That is not a strong argument. If you want to keep SS as a program, the best way of going about it would be to allow control over that money in a limited fashion where you could choose to invest in a limited number of ways.

And your argument is based on what data exactly? The U.S. stock market for the past 100 years? That's not cherry picking? Are you even aware that the U.S. stock market for the past 100 years is a statistical outlier?

What do you mean?

Equity returns have been similar across most Western nations.

The U.S. has actually been an exceptional case-
The Stock Market: A Look Back

Many stock exchanges in Europe suffered extreme real price depression in the 40's

Why would you pick only western nations?

 

[OohPooPahDoo]

BTW, since 1969, the price index of the Nikkei 225 has been 4.25%. I don't have dividends reinvested, but 2%-3% is a fair assumption. So Japanese stocks have returned 6%-7% over long periods of time.

I don't have data prior to 1970.

The average retirement dollar isn't invested over 44 years. Most people's first retirement dollars will be - but if you retire at 65 that means only the money you've earned before age 21 can possibly be invested for 44 years.

 

[OohPooPahDoo]

30 year US treasuries average less than 4 % 10 year T bills average a little over 2% a balanced portfolio of stocks and bonds will beat that.

You say it "will" beat that based on what?

Experience and history.

I think you have the past confused with the future.

Have you ever read the disclaimer on an investment prospectus?

"Past Performance is No Guarantee of Future Results"

For what reason do you think this doesn't apply to the U.S. Stock market?

 

[Toro]

BTW, since 1969, the price index of the Nikkei 225 has been 4.25%. I don't have dividends reinvested, but 2%-3% is a fair assumption. So Japanese stocks have returned 6%-7% over long periods of time.

I don't have data prior to 1970.

The average retirement dollar isn't invested over 44 years. Most people's first retirement dollars will be - but if you retire at 65 that means only the money you've earned before age 21 can possibly be invested for 44 years.

A defined contribution plan can last forever if funded properly. It won't matter how long any one individual has worked.

You're worried about potential disaster scenarios that are small probabilities. You can cite hyperinflation or war for being very fearful as a reason for investing solely in government liabilities, but you can also be very fearful and horde canned goods, guns and gold and live in the woods too. And you aren't going to get your SS in full anyways if we have either.

There is tremendous opportunity cost for being highly fearful. Again, using long-term averages, over 50 years, a standard 60/40 allocation between stocks and bonds has generated returns 10x higher than 100% in government bonds.

Over long periods of time, returns on capital should approximate the growth rate in the economy. Capital includes debt and equity. Because debt is safer, it returns a lower return and equity a higher return. If productivity growth is 2%, population growth 1% and inflation 3%, then the nominal return on capital will be 6%. Returns to capital are the risk-free rate + credit risk + the equity risk premium. The risk-free rate has been roughly 3-4% over long periods of time, credit risk 2% and the equity risk premium 3%-4%. If the economy collapses, then that risk-free rate isn't going to be 3%-4%. It is going to be negative. You aren't going to get your SS anyways.

 

[Toro]

You say it "will" beat that based on what?

Experience and history.

I think you have the past confused with the future.

Have you ever read the disclaimer on an investment prospectus?

"Past Performance is No Guarantee of Future Results"

For what reason do you think this doesn't apply to the U.S. Stock market?

Stocks are a call option on a rising economy. Rising asset prices are a function of rising wealth. Rising wealth is tied to a rising economy. A rising economy is tied to rising productivity and living standards.

Why do you think America is not going to have rising productivity and living standards in the future?

 

[Toro]

In the past - yes - I agree. It would be great if I could take my income that I earn now and invest it in the stock market in 1933 and then the next day sell it in the 1973 market. Wouldn't that be awesome? Barring time travel though, that will not be possible.



And your argument is based on what data exactly? The U.S. stock market for the past 100 years? That's not cherry picking? Are you even aware that the U.S. stock market for the past 100 years is a statistical outlier?

What do you mean?

Equity returns have been similar across most Western nations.

The U.S. has actually been an exceptional case-
The Stock Market: A Look Back

Many stock exchanges in Europe suffered extreme real price depression in the 40's

Why would you pick only western nations?

Because we are a Western nation. Why would you pick nations that have little in common with us?

If you think that one day America is going to be like India or the Congo, then you have a point. I don't that will be the case. I don't think most Americans think that will be the case either.

 

[Darkwind]

If SS is so wonderful, and it is allegedly so safe, why does the President have to borrow money to pay us the dividend of our investment?

 

[Skull Pilot]

You say it "will" beat that based on what?

Experience and history.

I think you have the past confused with the future.

Have you ever read the disclaimer on an investment prospectus?

"Past Performance is No Guarantee of Future Results"

For what reason do you think this doesn't apply to the U.S. Stock market?

That you're either too scared or too stupid to invest is your problem not mine.

If I had had control over the 15% of my lifetime earnings to date stolen from me to fund the SS slush fund instead of the morons in the fucking government I'd already be retired.

 

[peach174]

And when the stock market crashes we can all go hungry together?

It has crashed big 3 times, 1929,1987 and 2000.

Your sample only includes about 100 years - less than two lifetimes - of a single nation's stock market and you happen to have picked a stock market that has performed extremely well compared to others in place and time. You're straight up ignoring the sample points that would show the historical performance of the U.S. market is an outlier. For instance - like I said, anyone invested in the Japanese stock market 25 years ago is not half recovered yet.


My contention isn't that it will go away, but that assuming it will post at least X gains over the next 30 years because it has done so in the past is wrong.




Yes. One of the curious effects of a recession is that many people lose their jobs and can't stay in the market. They have to cash in part or all of their retirement accounts early. This further drives down equity prices.

I'm very glad you brought this point up because it helps me make my point. We can look at, say, the period 1928-1958, and say that since the total return (dividends included) was 10 X over that period, the market return ~8% and all was good in the end. But we ignore the fact that real investors are selling their portfolios all throughout 1929-33 because they have to eat. So they have bought in 1928 on the high side and out of necessity sold at a lower price in late 29 and the early 30's. Throughout much of the 30's stocks would have been a good deal - but no one had any money to actually buy them (that's WHY they are a good deal).
Let's look at a more practical case -

you invest $144 in the market in 1928.
The market crashes, you lose your job, and in 1932 you have to sell the investment for $51 and you spend the money on necessities. Then for the next several years you are poor and can't afford to make an investment. The war comes, you get drafted, you get paid, and in 1943 you invest $51 in the stock market. By 1958 that investment is worth $600. 600/144 isn't that much over 30 years.

This is why the average person saving for retirement NEVER does as good as the stock market over 30 year periods. People have more to save for retirement when the economy is booming and stocks are expensive and less to save when the economy is in recession and stocks are cheap - the real average person investing for retirement will never do as well as the indexes.

Even when it goes down you still have more in the long run in 30 years than with the government who sets how much you get each month.

IN THE PAST you would. Your claiming to predict the future. I'm fine with that - but your basis for doing so is very shaky. You are essentially claiming that because the U.S. stock market has performed so well in the past over long periods - it will continue to do so in the future. You ignore all other stock markets.

In the market you would get 3 times or more that amount, even with stock crashes, because the market always makes a come back.

You mean in the market you "would have". We can't retire based on the market returns of the past.


Your attitude, unfortunately, is very common. You honestly believe you can divine the future of the stock market based on the past returns of a 100 year period in the U.S. alone. The fact this believe is commonly held is all the more reason it would be a piss poor idea to put SS funds into the stock market.

It is still better than the Politicians who rob the SS funds and replace it with IOU's and that money will never be replaced. And them setting the amount that we get every month.

 

[Norman]

Did Japan default on its debt? I don't recall that it did. Any Japanese person who had invested in Japanese debt instead of the stock market would have come out way ahead of everyone else. Your argument is based on the false presumption that nations always default on their debts when their stock markets crash. Although this is certainly possible and the two have coincided in the past, it is hardly a rule.

What I said has nothing to do with defaulting. It's about getting your retirement. If tax receipts or productivity of an economy permanently goes down then so does the retirement money if it's based on a pay as you go plan. Or perhaps it's just taken from other services that you otherwise would recieve, or perhaps your taxes are raised. Either way you lose it just like in the stock market case (of course, in stock market case you at least have some constant profits).

Governments borrow more in bad economies to make up for lost revenues. Treasuries outperformed the stock market on average throughout much of the depression - and as already pointed out, the Japanese government has continued to pay its debt obligations. Social Security is hardly bullet proof but that fact should not induce us to expose our retirements to even greater risk.

On the other hand if your money is invested all arond the world in many asset classes, that's already much safer and obviously more profitable (when there is no crisis) than "investing" it in government to spend.

When there is no crisis? You're just going to ignore the potential of an economic crisis?

In the 1930's the world was in a depression. If you had invested worldwide you might well have fared far worse than in the U.S.

I submit that

a) history can repeat itself and

b) the future will always contain more extremes than history

When government starts to borrow to get your retirement paid, you have already lost! That money could have been burrowed had you been investing in the stock market and provide you with retirement in any case! People just don't understand opportunity cost.

Of course like I already stated, government tax recepits also suffer from recessions. Depressions are bad thing for retirement no matter what kind of scheme you are using. BUT if you are investing all around the world, that sort of risk is greatly diversified, meaning it's much less significant.


In addition, it seems like you haven't undestood that YOU are the payer of the interest on a government bond. Thus there really is NO interest! The real interest on a government bonds come from the fact that government builds roads and such to help the economy... Except very high percentage of the investment is completely silly and never generates any profits. Unlike with stocks, corporations by law are only interested in making returns to the stock holder.



Finally, no one here is suggesting outlawing government bonds as an investment. If you think they are so great of an investment go for them. Let other people choose how they want to.

 

[Norman]

Also I would like to point out that now this thread has shifted from retirement to "Why US bonds are the best investment in the world?".

I wonder why pretty much no brokerage dealer recommends you to be in 100% bonds, in fact I think it's a bubble right now and would not recommend owning those to anyone.

But this guy is basically arguing that US bonds are the best investment NO MATTER WHAT. It's the best investment at all times. That's what you have to believe if you think there should be no alternative to US bonds as an investment.

Of course, he still hasn't dealt with the fact that when looking at this sort of scheme in an aggregate, you in fact pay the interest on the US bonds. I would understand say, Swedish government bonds as other nations tax payers have to pay for the interest on those.


Anyway I challenge the OP to open a brokerage that only sells government bonds. If your theory is correct, you should get pretty rich. I wonder how no other professional investor has thought of this strategy before. But of course, bureucrats are always smarter than professional investors.