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What follows is largely a reaction to analysts predicting a recession and giving advice on how to adjust your investing strategy. The TL;DR here is: don’t, they get it wrong more than they get it right.
Among PF enthusiasts, there’s a saying that goes something like this: analysts have predicted 20 of the last three recessions.
Here’s a chart for the S and P 500 long term after inflation. As you’ll notice, long downward trends are quite rare, and the general trend is upward. In general, you can expect 6.5-7% long term after taking out inflation (~10% before inflation) if you buy and hold a broad stock market index fund. It seems almost every year someone calls for a recession, and this year is no exception. People were calling for recessions staring in 2015 or so, and look how that turned out.
Finance pundits and blogs like saying outlandish things like “recession will happen this year, liquidate stocks and buy X, Y, and Z,” and if you’re lucky, they’ll throw some fancy charts up to make you think they know what they’re talking about. But just know that all of this is for attention, they make money through ads or airtime, and some will try to sell you a book or something. The worst ones do a pump and dump scheme where they’ll invest in security X, hype it up, and then sell when there’s a bump in prices and average investors are left holding the bag.
Everyone seems to think they have some system for beating the market, but few professional fund managers manage to beat the index they benchmark their fund with, and even fewer can do it consistently:
Across all domestic actively managed equity funds, 88.4% underperformed their respective benchmark over the last 15 years, according to an analysis of the S&P SPIVA report.
…
More than 80% of large-cap funds underperformed the S&P 500 over the last five years. In 2019, 79.98% of large-cap funds underperformed compared to the S&P 500, which was just a hair better than the five-year average.
So if you buy a large cap index fund, you’ll do better than 80% of professional fund managers over 5 years, and you’ll outperform nearly 90% of them over 15 years. So don’t listen to their nonsense about changing allocation during a recession (or even whether there will be a recession) because you’re statistically better off ignoring it.
To really drive it home, let’s look at the linked article about Betty, the world’s most unlucky investor, who invested only at the worst possible times (just before every major recession) since the 1980s:
Even though she picked the worst six moments since the 1980s in which to invest, she made an average profit over the next five years of 20% and an average profit over 10 years of 100%. She doubled her money. Despite her disastrous, terrible timing, she was in the black after five years on four occasions out of six, and in the black after 10 years 10 times out of 10.
Today, even though her total cash costs from those six investments totaled just $3,500, her portfolio is worth $17,500. That’s more than five times her investment. And that’s even factoring in losses this year, which have seen the global stock market — and Betty’s portfolio — fall 22%.
Just think of how much better she could’ve done if she had invested consistently, which means she would’ve bought at the lows and middles instead of just the highs.
If you instead listen to the pundits, you’re likely to buy high (you’ll miss the bottom, I guarantee it) and sell low (you’ll sell early or late). Do what has worked well historically and buy and hold a diversified portfolio.
I don’t know if a recession is coming, but I do know it’ll change nothing about my investing strategy, other than perhaps how much I can invest. If you’re nervous about the economy, make sure your emergency fund is funded and stay the course with your investing strategy, whatever your desired asset allocation is.
Precisely. They’ve conquered their rivals, so collapse happens when the system in place no longer functions. That could be kicked off via natural disaster, or it could be collapse through corruption or whatever. As a quick example, it’s a lot easier to move a tribe when disaster happens than an empire.
My point is, they can’t trade their way out of problems. That’s the difference with our current global economy. If one region runs into issues (e.g. Europe lost fossil fuel supply), they can change trading partners to get what they need.
I’m pretty sure it’ll hasten it.
Let’s do a thought experiment. Let’s say a country has tons of trees and makes its living primarily off selling lumber. They’re not going to cut down all of their trees because they won’t have anything else to sell, so they’ll want to use their resources sustainably. Let’s say another country has trees as just one of their many resources (e.g. they’re an empire), it’s a lot easier to prioritize short-term needs when you aren’t directly hurt in the short term by resource depletion.
Can you be more specific? How do you think it should function and in what way is it failing at that? Also, what is your evidence?
The way I see it, the market is a way to crowd-source investment into companies, and more investment dollars should go to companies that show more opportunity for growth. A faster moving company needs more capital than a stable company, but it also presents more risk, so a higher price makes a lot of sense. If things go according to plan, it’ll settle at that higher market cap, but if things don’t, the stock price will come crashing down. To me, that’s working as intended. Companies like Tesla get higher valuations, which means they have more capital available (i.e. if they sell company stock to raise cash), and the higher it goes, the more risky it is to new investors.
And yeah, I think Tesla’s valuation is ridiculous, but I don’t think that’s indicative of an issue with the market, it’s just that investors believe Tesla’s direction will lead them to stabilize at that valuation. They have strong battery production, in-demand vehicles, and they have established themselves as the name brand in their market. With the world moving toward renewables and specifically battery storage, Tesla is in a great place to capitalize on that demand. That said, they are still a minor player in the automotive space, so that presents more risk and thus a higher price relative to their book value.
Absolutely. But we haven’t had a collapse with the entire planet In it’s current state. Unlikely it would be similar to previous collapses.
Potentially but if one thing blows up it impacts all others. 2008 crisis impacted all other nations. COVID encircled the globe. If and when the USA blows up it will pull down all other stock markets. They are worldwide so a contagion is going to impact others. Or so the theory goes.
You are thinking logically. Interestly the pitcairns watched as generations cut down all the trees. They actually removed their only way to escape the island. Similar to Easter island.
I’m not in charge of the trees. A giant conglomerate is and they want all the wealth and profit and couldn’t care less what happens after 50 years. That is our current predicament as humanity. Those who actually want change don’t have the power or capacity to stop Amazon from destroying the Amazon.
I’ll look up some information on that. It’s behaving irrational and not following a normal projectory. It keeps going up regardless of what is thrown at it. It’s no longer in sync with the banking sector or any sector. As long as pensions and systems keep putting money in it keeps going up. Valuation has no link to real actual outcomes. Debt and money are created out of thin air using valuations that are in any way linked to reality. It literally can’t stop going up because trillions of wealth is relying upon it that has no real backing in reality.
Easy example is evergrande. It relies on a similar system to current stock markets. It uses it’s “equity” valuation and future valuation of its product, homes. It then gets loans values on this and has to keep building houses to build more houses. If it stops building it can’t afford to pay for the previous house.
If house prices stop going up it can no longer service it’s debt and can’t get out of it’s debt. Sane as stock market. It’s fake. Numbers are moved shares move but they aren’t actually real. If for some reason shares were recalled the whole system would collapse as nothing is actually backed up with physical real shares. Sane as banking sector. Banks only require to have 10% cash on hand. Why a bank run is so terrifying.
USA dent is in the trillions and it can’t pay it back. Things need to keep running as it keeps the system going. If it stops for any reason then everything falters and breaks.
Basically my point was that what worked in the last isn’t necessarily going to work in the future. Markets were much simpler and a lot less interconnected. My belief is that the next humanity civilization disaster will be financial.
This is related to the tragedy of the commons. Basically what’s happening is that farmers are intentionally setting the forest on fire so they can have more grazing land. This article explains it a bit better and suggests private property rights are the solution. I disagree with that conclusion, but the argumentation is interesting.
I think the solution instead is to solicit donations from other countries to help fund protection and prosecution efforts.
It keeps going up because value keeps being created. Life is getting better for the average person every year, and that’s because our economy keeps growing. We’re getting more useful work done per person than ever before, so there’s even more money available to invest in R&D.
I wouldn’t put a Chinese real estate firm on the same level as Western companies, the business environment in China is way different.
So what is it, are shares fake or real?
Shares represent ownership stake in a corporation, so recalling shares makes no sense whatsoever. That’s like state or federal governments recalling private property, that’s just not how the contracts work.
If you want to control a corporation, you just need to buy a majority stake. Elon Musk did that with Twitter, and you could do that too if you had enough money. Shares absolutely do represent real ownership.
Correction, it chooses not to pay it back. Borrowing money has been cheap, so fiscal policy was to borrow like crazy. Now that rates are high, the budget is getting squeezed.
However, the US absolutely could pay it back if there was political will to do so. All we’d need to do is stop running a deficit and the debt would eventually go away, but that means cutting spending (Democrats don’t want that) and raising taxes (Republicans don’t want that), so it’s a bit of a political quagmire. If push comes to shove, perhaps the US will get a Milei that’s serious about eliminating the deficit.
I think it’ll be a mixture of climate change and war. There are so many areas that just need a spark, and climate change is like a massive torch.
At the end of the day though, it’ll be reflected as a financial issue, but I the root cause won’t be financial mismanagement, but mutual destruction because we couldn’t work together to avert disaster.
Then again, I’m also pretty bullish on humanity, so I think we’ll find a way through it, we’ll just do it at the 11th hour like we usually do.
When have we ever done it before??
Here are two that come to mind:
There are a lot more incidents during the Cold War that could’ve led to a very dangerous direct confrontation with the USSR.
Fair enough. But that isn’t a civilization collapse. That’s a mutual destruction of two “super” powers. Lots of countries would be completely unaffected but most would get done level of contagion
Nuclear war would certainly cause a collapse for more than the countries directly involved. Likewise, all major superpowers embracing totalitarianism (remember, the UK was also flirting with fascism, and could’ve gone that way if the US went first) of some variety would also lead to broader collapse.
Those were prevented because someone decided to prioritize the greater good.
If it was nuclear sure. But if it wasn’t. Then maybe not.
Not sure about greater good. Are we less good than 50 years ago. Who decides good and bad. Am ever shifting population changes things.