Reader Larry wants to know what advice I can give to his dad, sitting on the sidelines since 2009, waiting for the DOW to hit 6,000 which never happened.
Image from Why sitting on the sidelines in life — and investing — can be a big mistake.
Sitting on the sidelines in life is indeed a mistake.
But ask those who chased real estate in 2007 or dotcom companies in 2000 about investment mistakes.
Better yet ask Japanese Nikkei investors still hoping to get back to even after three decades. Contrary to near-universal disbelief, that can happen here.
How long is your time horizon?
Larry writes:
Hi Mish,
Please do a story on how older people like my dad 68 can re-enter the stock market to balance out his portfolio at the next 40% bottom. He has had a war chest of $5 million to put in equities in 2009. He picked 6000 on the Dow as a starting point which proved greedy. At 6700 it got close but he thought it would be a dead cat bounce. He did not understand how QE would cause zero interest rates and allow companies to refi their debt and show more profits.
So far he has been willing to be patient and not chase yield. He is surprised how long the low-interest rate environment has lasted. He did not think he would have another opportunity but now he thinks he might. He also has money set aside to buy more real estate but the low caps and retail and office weakness have kept that in his pocket too. He missed the apartment rent increase play.
What would you have told people like him to do in 2009 and what would you tell them to do when the market gets whittled down slowly vs 1929, 2000, 2009? I Hate to see him do the wrong thing at his age.
Probably a lot of your readers are like him conservative to a fault.
Happiness = Wealth
For starters, it seems like your dad has $5 million. How bad can that be?
Maybe your dad could now be sitting on $25 million.
Had he thrown $100,000 at Bitcoin at the right time he might have a billion dollars. Ignoring Bitcoin, would he be any happier with $25 million than $5 million?
I know what I would have advised in 2009 because I know what I did. I bought when the S&P hit 666. My mistake was hedging after a double and getting out almost totally near $1500 except for some gold and miners that got clobbered. Ouch!
But the miners recovered nicely, and I am in some biotech plays that I like a lot. I am heavily in one private placement medical play that is doing exceptionally well but is still in a lockup period.
Like your dad, I have enough to live comfortably in retirement.
I have never been happier. I won’t even retire, I like what I am doing and I am having fun.
Understanding QE
I failed to understand what QE would do. Many of us did.
Many others believe they are geniuses because they accurately predicted what would happen.
In reality, the result may have been random. Things will not play out the same way the next time.
Opportunities Abound
There are always opportunities. They were giving gold miners away in late 2015 and early 2016. Pull up a chart of Newmont (NEM). In late 2015 one could have purchased NEM at $15. It tripled but fell back a bit. How bad is that?
Some junior miners are up 1000% in the same timeframe. Gold sentiment was a total washout in early 2015. No one wanted miners.
My message is to buy value when no one wants it. That’s easier said than done.
I bought a basket of miners in 2013. Opps. I unloaded some winners and losers in that basket and I believe I am marginally ahead (have not even looked at that account for a while, I don’t care). But nearly everything I added after that is way ahead, and I have some huge winners.
Get In Safely?
The only way to get in safely is to get in on total washouts and hold until you have a profit. Even then you time horizon better match.
But what constitutes a total washout? Stocks can go to zero. Enron and Global Crossing come to mind. Amazon fell to $6. It’s now over $1000.
Buy Amazon here? No thanks. But I would have said that at $250 if not before.
Back to Dad
It’s not clear that your dad needs to be doing anything. What does he want? What does he need? How long does he expect to live?
It’s not possible to fully answer your initial question not knowing the above.
My only fear would be your dad start chasing things after this massive rally. Recessions do happen. So do profit warning declines. In my estimation, it would take a 50% decline in the markets just for stocks to get back to normal valuations.
It is far easier to make up for lost opportunities than realized losses! More opportunities will come, but no one flashes a light.
Staying on the sidelines with a bit of gold and miners seems like a reasonably prudent action at this point even though I personally am overweight miners.
Final Thoughts
Some people really do not belong in this market at all. Perhaps your dad is one of them. What’s his timeline? What’s yours?
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Trends in Sentiment, Asset Bubble, Gold
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Mike “Mish” Shedlock.
I worked in the US for 15 years (my whole adult life), up until the beginning of 2015 when I returned to Australia at that time, I pulled out of the market as I was afraid it was a bubble and I could not afford to lose my house deposit. Wow I wish I had bought while I was in the US as Sydney is insane at this time! Now that US will not be raising interest rates for some time, I sit there wondering is this going to be the new normal.?? I know it is a bubble but the Australian government is doing everything it can to backstop the bubble with population pumping, so as my kids get older and I need a proper home it is hard to put it into perspective as if the bubble does not pop for another 10 years it probably wont matter much.. I am just amazed that these things can continue to go on for so long.
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I am like Larry’s dad. I got out of the market before it crashed then back in in March, at the bottom. However, with a 30% gain, I exited that summer. I own a pretty decent business and have socked away about $5 million and still collect a six figure paycheck. Thing is, I can’t outlive my money unless I do something stupid like jump in the market at these levels and lose my shirt. If inflation picks up, my cash will earn more. If there is a recession, my cash will buy more. I am too old to take big risks and I won’t do so at the age of 70. Having 50% more money would not change my life materially, the only thing that would would be winning the lottery. So, I’ll just sit on the cash and some low-risk dividend-paying stocks.
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Tell your dad to start having fun by giving to the charities of his choice. A woman I know gave a big building at Stanford University 8 days before she died. Look at all the fun she could have had by giving it early enough to be invited to lots of nice parties by nice people.
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What a horrible ad for a horrible institution. Give it to over paid uni admins who will just pad their own pensions, or waste it on football stadiums.
If your dad isn’t having enough fun, tell him to brainstorm hobbies or travel more. At least tourism creates jobs for low income people.
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$1M short each facebook, amazon, netflix, apple, and google.
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Shorting Apple sounds like a really bad idea. That’s a real business. The others . . .
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Larry – can you let us know when your Dad does get into the market? I think that will mark the top.
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US Pension plans supposedly run by professionals averaged .6% returns last year. The Canadian TSX was at 15188 in April 2015. It ended at 15211 today. Between fund and advisor fees that’s about a negative 2.5% return per year…
I would advise Larry’s dad to sit in fed insured CDs and take his inflationary and tax hit and sleep at night. Maybe things will crash maybe they won’t but can anyone truly predict a continuing bull run at the valuations of today? Can anyone see western governments allowing interest rates to significantly rise with the debt levels and vote buying of modern democracy?
Even if the market drops significantly what is the point of jumping in then, when he should be enjoying his hard work, not trying to catch falling knives?
The problem with market drops is the market drops because everyone is too scared to stay/jump in, and by the time that changes the dip is mostly over because a whole lot of people know a lot more about what is happening than the retail investor. The only thing harder to pick than the top , is the bottom.
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Let dear old dad live his own life, Larry. If he’s sitting on $5M he’s done just fine. After the next crash you may be asking for his advice.
Investing in stocks when retired @ 68 is risky business.
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Larry, imagine life is a football game. Your dad is up 4 touchdowns with time running out. He has WON, Larry. Provided he doesn’t fumble 4 times (i.e. doing something stupid).
So he should not be throwing passes downfield (stocks). He should be running out the clock (CDs).
Personally, I don’t have anywhere near $5 million and am living comfortably on the income. Which means I can live to 100 and never touch a dime of the principal.
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Like others here, I picked the Great Recession bottom in the stock market almost to the day. The reason was that: that day every bit of news I read & advice I heard was negative, so I figured that’s a sure sign of a bottom, and it was. Then I too got out way too soon. Every day now I read articles saying the market is about to crash, and the arguments seem solid, but I’m staying in until all the bears give it up. No use reading Jim Rickards, he always says the crash will be next month.
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It’s such a drag, missing out on money for nothing. For many it’s the only thing worth living for. For myself, I have “missed” many opportunities to get rich quick. I don’t feel bad about it one damn bit.
My joy comes from knowing that these gambling bastards will not have use of a dime of my wealth to gamble the future of our world with….and fool yourself NOT, for that is EXACTLY what they are doing. They are gambling with other people’s money, harvesting great profits or hosing everyone with their losses.
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Yes, the joy and well wishes just emanates like rays of sunshine from your every post. A prose that overwhelms and warms the readers soul as if being swarmed by a litter of Golden Retriever puppy kisses.
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What do other investors and the markets hate right now?
Uranium
Coal
Oil pipelines
The pound
Retail – brick and mortar
Turkish equities and currency
The peso
Feel free to add your own
Are these investment opportunities? Who knows?
But as Mish said, everyone hated gold miners about two years ago and they are going great now.
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This person is probably to worried about loosing to get fully invested in the stock market.
He will emotionally buy on top when everybody agrees it can only go up and the emotionally sell at the next cycle bottom when everybody agrees that stocks are going to zero.
He should buy a balanced low-cost fund with something like 40% stocks-index and 60% high grade bonds.
He will then be guaranteed to not loose everything and probably make a little more than he is doing now over time.
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“Please do a story on how older people like my dad 68 can re-enter the stock market to balance out his portfolio at the next 40% bottom.”
“and what would you tell them to do when the market gets whittled down slowly vs 1929, 2000, 2009?”
When/If we get there, come back and ask again. When someone starts like that, why waste time explaining?
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Larry should enjoy his retirement with 5 M in the bank. In a nice comfortable house in a nice area of the country. Go travel around, see the world a bit as long as you physically able to do so (that ability may be gone tomorrow). And tell your son he won’t see a penny of that 5M unless he manages to get at least 1M by himself before dad dies.
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tell dad to take $50,000 (1%) of his portfolio and buy $5,000 in each of 10 companies. Choose companies based on whatever criteria he wishes.
do this once a month for 10 months, until he has 10% of his portfolio ($500;000) in equity long.
then ; if he can still sleep at night ; continue the once a month buy schedule.
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I would exchange companies with low cost index fund, because whichever criteria he chooses he will do worse than the market as a novice.
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We may be here for a very long time with these ultra-low rates.
The stock market cannot stay this high if rate hikes get put in, Almost all of US residential RE mortgages are backed by the GSAs, so that also puts huge downward pressure on rates. Sit out for long stretches of time and it becomes futile to chase these market returns.
You can walk away if you’re at the $5,000,000 level of net worth. No way I’d wait out these irrational conditions at age 68. Go out and live it up as best you can. The common sense that was prevalent when you built your wealth is not coming back in our lifetimes. The idiocracy is too well entrenched.
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Thank you Mish for writing that article… good stuff!
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Deus ex machina dept
a half million Harvey destroyed cars will need to be replaced tossing a lifeline to overstuffed new car pipelines and rental companies and off lease vehicles.
Of course insurers will jerk them around, “this can be repaired” but you may have to wait a while…
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And how, pray tell, are these people whose cars need replacing going to pay for them?
If they are homeowners, the vast majority of them DO NOT have flood insurance and they are now totally screwed financially.
If they are renters, they can take comfort in the fact that only their worldly possessions have been ruined by the flood.
Do you really think ANY of these people are in a position to go out and buy a NEW car?
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Securitize it. :.)
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Insurance companies don’t buy you a new car. They pay you the depreciated value. Many people will be unemployed for a while as businesses clean up and restart.
New cars will be bought by people who could already afford them before the storm.
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Tell your dad to go to Vegas and play blackjack. Better odds.
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Happiness is Wealth. Absolutely, totally. Couldn’t agree more.
Happiness + Health is a lottery win.
Perhaps your Dad needs a distraction as he sounds likes he already won the lottery compared to the vast majority.
Move to a poorer area? Surprising how $5M can seem nothing in some areas and in others the wealth of Kings. It’s all relative.
A Millionaire in the company of Billionaires will always feel the need to increase their wealth and therefore risk what they have grafted for.
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dca the divs
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“Had he thrown $100,000 at Bitcoin at the right time he might have a billion dollars.”
As illusory as “wealth” in a big equities portfolio and potentially gone with no recourse via a few keystrokes from the dark web or by the creation of additional competitive cryptocurrencies upon which there is no constraining limit.
Considering the massive debt bubble worldwide and interest rates which therefore must be held at ridiculously low levels to avoid ruinous debt service payments by governments, there will no longer be any truly safe means of earning what used to be possible to earn on a 5% interest rate on life savings. Everyone must be a speculator vulnerable to be wiped out in the next crash or gradual downturn to hell, one which this time will be a real doozy.
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And the people in a position to actually change things (don’t make me laugh about your power of the vote – the swamp is clearly in charge no matter how you vote) don’t mind at all:
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& therein lies the lack of real growth.
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With the same to continue into perpetuity until there is a MASSIVE extinguishing of debt reset via bankruptcies of the sort which simply hasn’t been allowed by central banks for 30 years.
I see a gradual, stepped descent into hell as more likely… with shooting wars along the way and I’m not talking about “police actions” like Afghanistan which, BTW, we will now most certainly win because 4,000 more troops and no new ideas will make all the difference… maybe within another 16 years and another 800 billion wasted.
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Prior to 2008 it wasn’t too difficult to invest with some sense of security. But market conditions and other factors had made good investments difficult. it the stock market, and to some extent, the bond market, there are only three ways to make or lose money.
The first is through stock dividends. If you had bought Royal Dutch Shell A a few months ago when it dropped to $50 a share your dividend would be close to 10%. Of course one cannot count on dividends to remain the same over the long run. But finding a decent company that will pay a two or three percent dividend isn’t that difficult and is better than the interest you get from a bank deposit.
The second way is price appreciation or growth. A good company’s stock should grow in value or price as that company grows its sales and profits. Assuming one does not have a Welch as CEO, even a middle size company can grow at two or three percent per year and see its stock appreciate in price.
The third was is through speculation. Gambling might be a better description. Fortunes have been made and lost very quickly this way and those who make the fortunes are not investment geniuses, just lucky for the moment.
Picking good dividend stocks is not too difficult, there are a good many companies who pay dividends. But the investor ages makes the difference here. If one is in his sixties, then one’s pile of investment money will grow slowly relative to one’s age. One might need 5 million dollars worth of stock to reap $50,000 in income these days. Price appreciation is usually another long term proposition. A good company may be bought out prior to seeing its stock rise more than a few percentage points. The point being is that there are no sure bets. Do your research and due diligence before making any selections. Keep an eye on the markets to see where they are headed. That is the only advice I can give that is worth a damn. Beware of those who tell you what specific stocks to buy, if you lose your investment they will not cover your loses.
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I hate dividends. I try to avoid them like the plague.
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Dividends can be a pain. Ordinary and qualified and whatever else there may be affects one’s taxes. But given that banks are not paying much in the way of interest and haven’t been for quite some time, they aren’t a bad way to invest. Bonds are another source of income but like banks, who is paying 4% on par? I was able to make some money off high yield bonds about five to seven years ago but I won’t touch them now. Hate to say it, but investing seems more to be a crap shoot these days and the dice are loaded against you.
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. ..not sure if you’re rendering praise on Welch or vilifying him (?)
Not everybody can operate their company like it’s a bank despite lacking a banking charter. It’s an acquired skill.
sarc /off.
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Let’s just say that being a real estate broker is not exactly what GE needed. For all of his “stellar” performance, the average profit for GE never exceeded 10% during his tenure.
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Happiness = Wealth ; yes indeed.
I’ve noticed that generally the more money one has the more foolishly it is spent. This applies to corporations. When management has plenty of money at hand they tend not to critically evaluate new investments as well as when the company was smaller. With the leveraging and merging trends of the past few decades I think management has had access to too much capital and therefore has been making poorer decisions. I’ve opted out of stocks for a while because of this. But I must be wrong – just look at the stock market, twice as high now compared to when I exited market.
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“But I must be wrong – just look at the stock market, twice as high now compared to when I exited market.”
It’s equity investing. The boiled frog wins in that space.
The wise frog leaped out when the pot (i.e., markets) got too hot. The foolish frog stayed in, even as things began to boil. He accumulated time IN THE MARKET and never paid attention to the timing OF THE MARKET.
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But-but -but what about all that money I left on the table. I guess I’m not likely to be cooked so I have happiness wealth instead of boiling stock market wealth.
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What makes a market? The dozens of people commenting on what this gentleman should do with his $5 million. Notice the diversity of replies, with the majority of them offering good advice to him that he should mainly just enjoy living and if he has his health his is doubly blessed.
The gentleman is 68 years old. If he is in good health and doesn’t smoke, his life expectancy now is to age 84. Every year it gets a little older. Add 10 years to that for good luck and a conservative view (my mother lived to 103). So, he’s got 26 years to go. He could, of course, spend 1/26th or $192,000 per year and leave zero. But he sounds like a man who likes to think things through. Maybe he overthinks and that’s what got him to this point. He is a risk avoider, but thought he could outsmart the market and that it would do what he wanted it to do – go to 6,000. It didn’t and he learned a lesson that the market is not an ATM machine that will give you what you want or need. Now he has FOMO (fear of missing out). FOMO is a very dangerous disease and can kill you financially.
What should he do? One approach would be to set aside in govt money market funds at least 10 years living expenses adjusted for inflation. He has Social Security, so let’s say he needs $60,000 per year from his investment portfolio. So, he should set aside around $750,000. Make it $1,000,000. I have many clients in this man’s situation.
Then, I would select a portfolio of ETF’s, probably Vanguard’s, that invest in the entire US market, the international markets, the emerging markets, US fixed income, international fixed income, emerging markets fixed income, US and Foreign real estate, and commodities. Allocate approximately 50% to equities and 50% to fixed income/real estate/commodities. He can probably obtain good diversification and implementation at a cost of less than 20 basis points per year. This investment approach assumes nobody can predict the future, and the result of it is that he will own some of the best performing investments and some of the worst performing. And those will change places on a routine basis.
I would then take the $4,000,000 and deposit it in a brokerage account at Schwab or TD Ameritrade or wherever he feels secure. Divide the $4 million into 8 separate tranches of $500,000. In year one, invest $500,000 in the portfolio. Do this each year for the next 7 years. By the time he is age 76, he would be fully invested, re-balancing each year if necessary and if the market takes a hit or continues higher. All of this can be automated.
In 8 years, he would still have around $500,000 of his cash account and the portfolio should be producing approximately $80,000-$100,000 per year in pre-tax dividends. If the portfolio increases in value, the dividends should increase. This is his spending amount. His account would, of course, fluctuate with the markets, but by averaging in over the 8 years he has the peace of mind in knowing that he didn’t buy at the top, but that he had a plan to participate.
There is no need to select individual stocks unless he finds something he really wants to buy. No need for the hassle of owning individual real estate properties.
Just put your money to work and let it work for you. Now enjoy life.
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How stupid. At 3% he can make his $60k per year by investing 2 million in FDIC backed CDs. Invest the whole 5 million in CDs and live forever without risking the principal.
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Like you – I fail to see a need to take much risk here.
An extremely conservative portfolio of 80% Treasuries with perhaps some gold and miners should do nicely.
I am 64 and way heavier in miners but my wife has like 0% equities – very conservative individual bonds
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Maybe you can explain how someone can “live forever”? But, to your point of putting the whole amount into CD’s I fail to see how that protects your purchasing power. Without some growth investments, the $5, 000, 000 will be worth $2.2 million in 26 years at 3% inflation (which is less than the long-term average). The $60, 000 of annual pre-tax income you are forecasting would be worth $27, 178 in purchasing power by then. Equities are the only liquid investment that I am aware of that will provide annual increases in income from dividend growth.
A room in an assisted living facility ($60, 000 today, and I know this because my mother-in-law is in one) will cost around $130, 000 in 26 years. The cost increases every year. She is able to afford it because 90% of her investments are in stocks that she had held for decades. It is only due to their annual dividend increases that her income keeps up with her spending needs.
You have to think rationally about investing for the long term. Risk comes in many disguises and the risk of outliving your purchasing power is just as deadly as suffering through a few of the inevitable declines and recoveries in the equity markets.
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Cash/money markets is probably a good position for the next couple of years.
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I sat out the rally the past 8 years. I got caught up in the DotCom fallout and took a long time to reflect. During that time I generated spreadsheets and wrote software for market timing algorithms. By the time I was confident with the algorithm, the market was nearing a peak in 2015 that had a the potential of a 20% drop. The rally over the past 18 months is nearing a top due to much longer sinusoids. Once this top is in, a long-term bottom won’t occur for another 3-5 years. I gained a wealth of knowledge
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lots of good simple advice mish,
buy low sell high.
don’t invest/gamble what you can’t lose.
enjoy life and be satisfied with what you have.
find work that you love or are happy with
wealth does not buy happiness. you either choose to be grateful or you don’t.
4 months after I retired I got the diagnosis of breast and ovarian cancer…I sold out, simplified, downsized, moved to a warmer climate. it’s been 3 extra years and I go around and hand out money to the working poor.
I had no bucket list when I got the diagnosis….since I had lived my life honestly and fully.
if cancer takes me, then I don’t have to do the aging thing. it’s all how you see it….half full for me. always
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Good luck to you Beth.
Mish
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