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

[deltex1]

There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.


This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.

To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.

I take it you didn't buy SIRI a few years back...

 

[Boss]

There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.


This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.

To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.

Okay, I have a little project for you. Most adults will work an average of 40 years, so let's take the entire history of the US Stock Market, and I want you to show me ANY 40 year time span in which the market was lower at the end than the beginning. It's not a myth, it's called a "FACT." The market will always recover over long time spans, it always has.

Now, what doesn't really matter one bit, is how Japanese markets performed. We're not going to invest money in the Japanese markets. Other countries are not the US, other stock markets are not the US stock market, so why the hell do they matter here?

Now.... Currently, we have a system, by which, an individual pays into all their adult life. If they are fortunate enough to live to be 65, they can retire and get a specific allotment of Social Security each month they remain alive. If they die before 65, they get not a penny of the money they contributed. Their family gets $212.00, maybe a little more if they have children under 18. However, the privatization plan would put their contribution in a personal account. An account that they own as an asset, that the government can't steal, that can't be used to fund the latest government boondoggle. If you paid in $250k over your life, that is what will be there when you retire, along with the interest earned. It's YOUR money, it's in YOUR account, it can be used as you please, and whenever you die, it can be left to your family.

Even IF the stock market tanks, and NOTHING is gained over time, which is something that has NEVER happened in our history, but even IF it did... you are still better off with an account bearing your name, even if it only has the money you paid in without ANY interest. At least you have SOMETHING... as it currently stands, you have NOTHING! You get what the government decides to send you each month, until you die, and that's ALL you get. What about the money you paid in? What about the interest on the money you paid in? Nope... you don't get any of that, nor does your family.

So if an average Joe, works his whole life and contributes to SS, and he dies the day after retirement, how well did his "retirement account" perform? His widow gets the $212 check... but what about the untold thousands he paid in? OooooH.... it's being used to bail out the Japanese?

 

[Norman]

There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.


This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.

To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.

I take it you didn't buy SIRI a few years back...

Even IF his story made any sense, he is STILL wrong. Let's just pretend that the facts I pointed out in the posts above doesn't exist, and stick with his story.

So, in his mind it's ok to compare the US stock market to japanese stock market, but not US bond market to Greek bond market?

In his mind it's not ok to look at the past performance of stock markets, but it's apparently ok to look at past performance of bond market to determinate the future returns? I guess it's actually ok to conjure the future profits of bond market out of air...

Talk about biased. I wonder if he practices what he preaches and has invested 100% of his investment capital to the government bonds. Actually I hope he has, maybe a lesson could be learned here.

 

[FA_Q2]

There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.


This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.

To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.

Okay, I have a little project for you. Most adults will work an average of 40 years, so let's take the entire history of the US Stock Market, and I want you to show me ANY 40 year time span in which the market was lower at the end than the beginning. It's not a myth, it's called a "FACT." The market will always recover over long time spans, it always has.

Now, what doesn't really matter one bit, is how Japanese markets performed. We're not going to invest money in the Japanese markets. Other countries are not the US, other stock markets are not the US stock market, so why the hell do they matter here?

Now.... Currently, we have a system, by which, an individual pays into all their adult life. If they are fortunate enough to live to be 65, they can retire and get a specific allotment of Social Security each month they remain alive. If they die before 65, they get not a penny of the money they contributed. Their family gets $212.00, maybe a little more if they have children under 18. However, the privatization plan would put their contribution in a personal account. An account that they own as an asset, that the government can't steal, that can't be used to fund the latest government boondoggle. If you paid in $250k over your life, that is what will be there when you retire, along with the interest earned. It's YOUR money, it's in YOUR account, it can be used as you please, and whenever you die, it can be left to your family.

Even IF the stock market tanks, and NOTHING is gained over time, which is something that has NEVER happened in our history, but even IF it did... you are still better off with an account bearing your name, even if it only has the money you paid in without ANY interest. At least you have SOMETHING... as it currently stands, you have NOTHING! You get what the government decides to send you each month, until you die, and that's ALL you get. What about the money you paid in? What about the interest on the money you paid in? Nope... you don't get any of that, nor does your family.

So if an average Joe, works his whole life and contributes to SS, and he dies the day after retirement, how well did his "retirement account" perform? His widow gets the $212 check... but what about the untold thousands he paid in? OooooH.... it's being used to bail out the Japanese?

EXACTLY. The side benefit of such a system is that poor families can actually have the ability to create real generational wealth, something that they have never been able to accomplish. On top of that, it opens them up the savings and investment. It is known that people have a hard time breaking into a new system to them until they do so for the first time. Once that is done, they have some familiarity that helps them continue to use the product.

Instead of the current SS which actually KEEPS people in poverty, right at the edge, we could have a program that actually allwed people to get OUT of poverty instead.

 

[Boss]

Even IF his story made any sense, he is STILL wrong. Let's just pretend that the facts I pointed out in the posts above doesn't exist, and stick with his story.

So, in his mind it's ok to compare the US stock market to japanese stock market, but not US bond market to Greek bond market?

In his mind it's not ok to look at the past performance of stock markets, but it's apparently ok to look at past performance of bond market to determinate the future returns? I guess it's actually ok to conjure the future profits of bond market out of air...

Talk about biased. I wonder if he practices what he preaches and has invested 100% of his investment capital to the government bonds. Actually I hope he has, maybe a lesson could be learned here.

It's even worse, if you can imagine. He is actually arguing that investment in a stock market, because of volatility, is worse than pouring your money down a bankrupt rathole, where you will never see it again. He is arguing that actually having an account in a bank with your name on it, containing the assets you contributed over your lifetime... is WORSE than just forking over 30% of your pay your entire working life, in return for the promise of a monthly check, which you may or may not get, depending on when you retire.

An IRA is an asset you own. It belongs to you. It can be used to secure a loan, or can be handed down to your children and spouse. If you die before you retire, the money is still there, in the account, where it can benefit your family in the event of your death. This moron would rather have the guaranteed $212 check, to help cover your funeral expenses, in return for your lifelong contribution. Even an investment in the Japanese stock market would be BETTER!

 

[OohPooPahDoo]

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.

Sure, if you select what is close to if not the best stock market ever in the history of man, you would get those numbers. Its called selection bias. Look it up. You continue to base you analysis of future return prospects on a sample that is biased in favor of survivors while insisting that rare events simply be discounted as not even relevant to the analysis. Even the stock indexes themselves are biased in favor of survivors.

If productivity growth is 2%, population growth 1% and inflation 3%, then the nominal return on capital will be 6%

.

What happens when population growth is -5%?

 

[OohPooPahDoo]

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.

Yeah, a call option with a strike price of zero.

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?

I've no particular reason to think it will or won't except that for America to continue to have an economy that is growing indefinitely without end would be exceptional and highly unlikely indeed.

 

[OohPooPahDoo]

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?

Why would I not only pick the winners for my sample? Is that what you're asking?

 

[OohPooPahDoo]

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.

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?

 

[OohPooPahDoo]

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.


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.

If you think the U.S. Government is going to default on its debt, investing in the U.S. Stock market is an even dumber idea.

 

[OohPooPahDoo]

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!

SS benefits are paid from SS revenues.

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.

My brother the energy trader likes to use the term constantly.

Of course like I already stated, government tax recepits also suffer from recessions.

Like I already said there isn't a 1:1 correlation.

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!

People who are retired and living off of the interest of treasuries receive more interest than they pay back in taxes.

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.

I wasn't suggesting anyone be forced to buy government bonds, I was only using them as a comparison point w/ stocks. Social Security is an annuity plan.

 

[Toro]

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?

Why would I not only pick the winners for my sample? Is that what you're asking?

What in American culture, society, people, politics, history, and institutions make you believe that we should be compared to Zimbabwe or Argentina?

America has more in common with itself than with those nations.

 

[OohPooPahDoo]

There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.


This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.

To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.

I take it you didn't buy SIRI a few years back...

What great hindsight you have.

 

[OohPooPahDoo]

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

Why would I not only pick the winners for my sample? Is that what you're asking?

What in American culture, society, people, politics, history, and institutions make you believe that we should be compared to Zimbabwe or Argentina?

America has more in common with itself than with those nations.

I'm not comparing Americans to anything. I'm talking about stock markets. Are you suggesting the laws of nature are different in other places?

 

[Toro]

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.

Yeah, a call option with a strike price of zero.

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?

I've no particular reason to think it will or won't except that for America to continue to have an economy that is growing indefinitely without end would be exceptional and highly unlikely indeed.

Why?

Again, if America stops growing, or there is a catastrophe, why do you think government liabilities are safe?

 

[OohPooPahDoo]

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.

LOL! The brokerage dealers have never failed to call the stock market correctly.

But this guy is basically arguing that US bonds are the best investment NO MATTER WHAT.

No, that's not what I'm arguing. You've completely missed the boat on that one.

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.

OK. But I don't think that.

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.

LOL! That's the most absurd notion I've ever heard. Actually when you buy bonds you lower interest rates.

Anyway I challenge the OP to open a brokerage that only sells government bonds.

Why would anyone want to do that?

If your theory is correct, you should get pretty rich.

What theory is that?

I wonder how no other professional investor has thought of this strategy before.

You're the first!

 

[Toro]

Why would I not only pick the winners for my sample? Is that what you're asking?

What in American culture, society, people, politics, history, and institutions make you believe that we should be compared to Zimbabwe or Argentina?

America has more in common with itself than with those nations.

I'm not comparing Americans to anything. I'm talking about stock markets. Are you suggesting the laws of nature are different in other places?

When you ask why should we only look at the winners, you imply that we should look at the losers. Yes, if you think we are going to collapse into chaos, then stocks aren't a good option. But neither is government debt.

Over long periods of time, asset prices grow with the economy. That may not be true for any decade, or even two or three, but it is over long periods.

 

[OohPooPahDoo]

Stocks are a call option on a rising economy.

Yeah, a call option with a strike price of zero.

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?

I've no particular reason to think it will or won't except that for America to continue to have an economy that is growing indefinitely without end would be exceptional and highly unlikely indeed.

Why?

Again, if America stops growing, or there is a catastrophe, why do you think government liabilities are safe?

Did I ever say they would be? If we use your favorite metric, however - the PAST - we would see the U.S. has continued to pay its debts through good times and bad.


I just think any investment strategy that assumes stocks will always out-perform bonds in the long run is fundamentally flawed as it is based on a selective sampling of past data. You might think of any number of investment strategies to deal with this - 50/50 bonds and stocks from around the world, or maybe take some of your funds and put them into something with intrinsic worth like forest or farm land, or perhaps make delta neutral investments that seek to capitalize from movements in the market, or buy commodities. Whatever you do - blindly assuming stocks will always outperform treasuries over ~30 year periods is just fool and social security policy should not be based on it.

 

[Toro]

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.

Sure, if you select what is close to if not the best stock market ever in the history of man, you would get those numbers. Its called selection bias. Look it up. You continue to base you analysis of future return prospects on a sample that is biased in favor of survivors while insisting that rare events simply be discounted as not even relevant to the analysis. Even the stock indexes themselves are biased in favor of survivors.

If productivity growth is 2%, population growth 1% and inflation 3%, then the nominal return on capital will be 6%

.

What happens when population growth is -5%?

If we have population growth of -5%, then you won't be getting SS either.

We can think of all sorts of apocalyptic scenarios. I've heard them all. Yet America endures.

Your comment about survivorship bias implies America won't survive. I think it will. You can go into the woods with canned food, guns and gold and wait for the end of America with all the crazy right wingers. I'm going to stay here and participate in the continued growth in America.

 

[OohPooPahDoo]

Over long periods of time, asset prices grow with the economy. That may not be true for any decade, or even two or three, but it is over long periods.

And over how many "long periods" is this observation based on?

100 years / 30 years = 3.33333

Barely more than 3.

That's a statistical sample size not even worthy of mention. I think you know that.