Then a year after the lows it was back over 1200, and it's basically been straight up since then. Unless you timed things very accurately you were better off simply holding.
"Over the long run, that is always true. Just hold and grow, until you are within 10 years of retiring."
No, it isn't. It's quite possible to lose money with a buy-and-hold strategy if you get unlucky, particularly if you aren't diversified. It's probably the most reliable way of investing, but you can still lose money. Stocks are not guaranteed to go up over all possible 50-year intervals.
Monte carlo simulations of S&P500 investments illustrate this:
I really don't understand why you are being downvoted. I've been checking /r/investing for a while now and the general advice is to put all you have into the stock market (diversify) and HODL.
Everyone says there's no way the market can underperform on a longer run and you can't time it so don't bother. When someone brings back 2008 they downvote it to death and reply that it went back up so it will be all fine. When the market goes south just keep buying.
Indeed. But more prosaically, many of these HODL types are discounting how much they'll actually freak out at a market correction. They've never seen a 30% drop, or lived through a five-year correction (let alone an extreme situation, like Japan). Even if you have the stomach to handle the drop, things happen on a five-year horizon that people don't consider: extended unemployment (which tends to happen during recessions), children, houses, etc.
I made that comment thinking it would be a completely uncontroversial statement of fact. It's amazing to me that I'm getting downvoted, as if I've expressed an opinion of some kind.
Obviously, you were like how could these people be so stupid to give this person all this money? Didn't they read the details? ... But one of the reasons it happened, psychologically, was because people thought 8-10% with 0 risk was perfectly normal. That's why nobody asked any questions.
EDIT
And regarding my Reddit rant, also scared me that many people don't pay off their mortgage because they get a better return from the stock market, something I find quite wrong unless you're living in a hyper-inflation economy (which is not the case in the developed world)
But it's not wrong, in expectation given long term past trends. It's just leveraged investment using a vehicle for leverage that has some tax and refinancing advantages that favor the borrower, not to mention the liquidity advantages. There are very rational reasons to do this.
For any investor, there is a point in the mortgage interest rate vs risk-adjusted returns space at which investing is better. That point may differ, of course.
There are other reasons to not pay off you mortgage, especially in the US. The two most prominent being:
1. Usually a certain amount of equity in the house is protected by state law (varies from state to state). So if someone sues you and/or you go bankrupt, no one can touch your principal residence provided your equity in the home is below the state's threshold. That is assuming you stayed current on your repayments and the bank is still good with lending to you.
2. No recourse loans. If you pay off more earlier, you are just opening yourself up to further risk. I'd much rather lose a bit on super low interest rates (and maybe a little in lender's insurance, too), than lose out if the housing market crashes.
@dgacmu Cannot reply to your comment so I will here.
> For any investor, there is a point in the mortgage interest rate vs risk-adjusted returns space at which investing is better. That point may differ, of course.
I agree there always is a point, what I think is that the risk-adjusted return should be much bigger to be worth taking. The spread between the mortgage rate and the stock market return usually is not that big.
There will always be missed investing opportunities but leveraging the house you live in to squeeze an extra 1-2 percentage point at the risk of going bust doesn't look optimal to me.
Right - but what you just said was an expression of your risk/reward preference. :) But also, in the US, there's a pretty large contingent of mortgage holders who have <= 3.75% mortgages [1], which compare very nicely to the (expected / hoped for) 9.7% average return from a diversified total market fund. That's not 1-2%, that's an expected ~5%, depending on how things sit from a tax perspective.
(You don't need to account for inflation in that return calculation, since the mortgage rate is also affected by inflation.)
If you're me -- 42, great job security, relatively small mortgage relative to income, and in a high tax bracket that's unlikely to change soon -- it's a no-brainer: Take the risk and go for higher long-term expected yield. A recession just means I keep doing what I planned to do anyway - working and saving more money for retirement.
If you're 60, planning on retiring in 5 years (and so about to drop into a lower top marginal tax rate), and in an industry with uncertain job prospects ... suddenly paying off the mortgage looks more attractive from a risk minimization perspective. Or at least splitting the difference.
The "or refinanced" is important, because when rates were that low, a lot of people had a strong incentive to refinance, so the actual distribution of outstanding mortgages is biased towards the lower rates. [2]
No, it's not just about "market timing". You can do everything "right", and still lose money. Long-term buy and hold investing is not a guarantee.
An entire generation of young investors has never lived through a serious market decline, and have only been rewarded for HODL. HN skews young. There are a lot of people here who are going to find their worldview painfully challenged when the market does finally turn.
The surest sign of a market bubble in an asset is when I find myself arguing with people that yes, the price of the asset can indeed go down.
Monte carlo simulations don't model reality very well here. Years are not independent of each other.
For buy and hold to fail for something like the S&P500, companies would need to fail to make money or pay dividends for 50 years. If that's going on retirement is the least of your concerns.
Did you even read the link? The year you enter the market is the random variate.
It is a simple, uncontroversial fact that the stock market is not guaranteed to return your money over a randomly chosen N-year period. LTBH merely minimizes the chance that you'll lose money; it doesn't eliminate the chance.
It's a fact, folks. Downvoting doesn't change it, and you don't get to have opinions about it.
If you believe the stock market guarantees you safe returns, you are wrong. No matter what strategy you use, no matter what outlook you choose, you can lose money in the stock market. Don't invest what you can't afford to lose.
You say "don't invest what you can't afford to lose". If you want to eventually retire, what's the alternative?
Editing as clarification for downvoters: This was a sincere question. Since no one can afford to lose their retirement savings, but few people will generate enough income to retire without making long-term investments in the stock market, I was curious what strategy timr was actually advocating. My own approach is to invest in index funds that automatically adjust their investments to be more conservative as my retirement date nears.
If you can't afford to lose it, you should put it in a savings account, a CD or another guaranteed asset until you've accumulated sufficient wealth that you can afford to take risks.
This is investing 101. Any financial planner will tell you the same thing. Most will tell you that you shouldn't have money in the stock market if you're going to need it within the next five years. Ten years is a better number.
If your 20 you have up to 100 years worth of investing horizons to consider. Money put to retirement really is something you can lose while young. Investing in low enough to be zero yield instruments like CD's or savings accounts is terrible advice. As is treating investment savings as actual savings you can spend.
Sure, keeping ~3 years income outside of the market if your actually retired is a good idea idea. But, just because the market tanked does not mean you lost money. You have the same share of the same companies if the market goes up or down.
"If your 20 you have up to 100 years worth of investing horizons to consider. Money put to retirement really is something you can lose while young. Investing in low enough to be zero yield instruments like CD's or savings accounts is terrible advice. As is treating investment savings as actual savings you can spend."
If you need the money in five years, you should not be putting it in the stock market. If the money is truly "put to retirement" then you don't need it in five years, and you're just agreeing with me, pedantically.
The problem is that most of these HODL folks have never lived through a downturn, and will be crapping their pants when they realize that they really were secretly counting on the money being there. I've seen it happen twice now. The forums are filled with people "buying the dips" on 1% drops, but suddenly seeing a 30% short-term correction in their portfolio causes mass hysteria. The smart players have cash
on hand, and are ready to buy -- precisely because they didn't "buy the dips".
Cost dollar averaging already does a fairly good job of timing the market via retirement savings. Trying to beat that is a terrible idea, as being out of the market for a few days can easily cost you a year of growth.
He is also running an insurance company that needs cash on hand. On top of that they don't issue dividends only occasional stock buybacks which means they are going to accumulate cash by default.
> Downvoting doesn't change it, and you don't get to have opinions about it.
You wrote:
> Did you even read the link? [..]
Which is against HN netiquette:
"Please don't insinuate that someone hasn't read an article. "Did you even read the article? It mentions that" can be shortened to "The article mentions that."" [1]
I've been watching every comment on this thread wildly fluctuate for the entire day, and most have no style violations of any sort. People simply don't want to believe facts, and they're expressing their displeasure with the down arrow.
Suppose you were planning to retire in 2018, and you sold in 2008 or 2009 after the economy crashed. Bad things would happen. No one knew if or how fast the stock market would come back. Better to sell a little bit over time and move to safer investments. But there are many studies showing no one can time the market.
Agreed - perhaps I phrased it incorrectly, but I meant to say the you start moving investments out of the market 10 years prior to your retirement date, not that you sell everything in one huge move at the 10 year mark.
