Equities are just far too risky

H

Hawkwing

Guest
Consider the following short term risks:

India/Pakistan Nuclear War

Markets fall 30%

Middle East War

Markets fall 20%

Islamic revolution in Saudi Arabia (much overdue)

Markets fall 20%

Terrorist attack on US on a par with September 11th

Markets fall 15%

George Bush assassinated

Markets fall 15%

Unexpected rise in Interest Rates

Markets fall 5%

Unexpected fall in Interest rates

Markets fall 5%

Against these catastophes we can set the possible upside windfalls:

Sadam Hussein dies or is overthrown

Markets rise 5%

USA win World Cup

Markets rise 2%

Seems to me that investing in equities represents a huge short term gamble in the hope of long term returns.:rolleyes
 
Who knows?

Hi Hawkwing

You could well be right (and if I was asked to guess the expected return on an equity portfolio over the next few months, I would be inclined to expect this to be negative) but you might also be wrong.

The difficulty with trying to time the equity markets is that, unless you possess a crystal ball, you could easily miss out on a major rise by being out of the market or suffer a major fall by being in.

The key issue is that equities should not be undertaken as a short term investment unless you fancy a gamble.

Regards
Homer
 
Re: Who knows?

Hi Hawkwing

Consider the following actual events

Two World Wars

The rise of communism

Revolution in Russia

Revolution in China

Worldwide famines and diseases

Nuclear accidents in America and Russia

Constant war footing in the Middle East

The assassination of various American Presidents and other World leaders

Inflation

Stagflation

The collapse of Britain's industries

Recessions and recoveries

Strong dollars

Weak dollars

Currency collapses in various countries

Rise of Islamic fundamentalism

Rise of Christian fundamentalism

Various financial scandals

These various unpredictable events have caused only short blips in the onward march of equities.

There is a big short-term risk in the market. There is also a smaller long-term risk in the market. But these are all outweighed by the risk of not being in the market.


Brendan
 
Equities thru' thick and thin

Good reply, <!--EZCODE ITALIC START--> Boss<!--EZCODE ITALIC END-->
 
Eh...what Boss?

I'm still trying to consider Stagflation. :jem

Is it something involving a male deer and a bicycle pump?
 
The onward march of equities

Hold on a second, Brendan

Two points:

Aren't you the leading proponent of 'past performance is no guide to future returns' principle? But past performance is the core of your argument in favour of equities.

I remember reading an article some time back which put forward the theory that our historical measurement of equity performance suffers from survivor bias. If you were investing £1000 in equities in 1900, you would have put some in the US (but not 50%), some in the UK, some in Germany, some in Russia, and probably some in South America and Austria-Hungary. Your UK and US investments would have done well, but you would have completely lost your German and Russian money, almost all your South American money, and almost all of your Austrian investment. However, when we look at historical equity performance, we only look at UK and US figures.

d
 
Survivor Bias

The UK & US returns also suffer from survivor bias. Just think of Enron. But that’s why index tracking is very effective. You are always invested in the surviving companies. Those that go bankrupt automatically fall out of the index with new growth companies replacing them.
 
Re: Survivor Bias

Hi d53

The past performance <!--EZCODE ITALIC START--> of investment managers<!--EZCODE ITALIC END--> is no guide to future performance. This does not mean that the past performance of a football team, a plumber or an artist is not a guide to their future performance.

I don't think that survivorship bias has a huge impact on the long term stockmarket performance. Yes, the Russian market disappeared and that was a big impact for anyone who was 100% invested in Russia. (Depositors and property holders lost all their wealth as well).

My understanding from reading Siegel is that the German markets took a battering during the World Wars, but evenually recovered. I am not familiar at all with the South American markets, but certainly their depositors and bond holders were all wiped out. I can't see why the holders of shares would have been wiped out - apart from Cuba perhaps.

Brendan
 
Survivorship Bias - Stocks

I also wouldn't read too much into Bearish's claim about survivorship bias in stock indices. Certainly the Enrons of the world may ultimately be deleted from the market indices, but <!--EZCODE BOLD START--> at their actual price at the time of the deletion<!--EZCODE BOLD END--> - which will usually reflect most of the loss to shareholders. It's not simply eliminated from the historical records. Whereas, if a mutual fund closes, it no longer has a track record, and it will therefore be expunged from the historical data.
 
Re: Survivorship Bias - Stocks

Hi Dynamo

Do you have any view on the omission of Imperial Russia from the data? What significant stockmarkets were completely wiped out, never to recover?

Brendan
 
Equities

Hi Brendan,

Nothing to add on that, I'm afraid, other than perhaps a general impression that cross-border investment wouldn't have been very large at that stage, ie that the investors who lost out on Russia would mainly have been Russians.
 
Equities

Dynamo/Brendan

Dynamo - cross border investment was not as common 102 years ago as it is now, but it did exist: UK investors had significant stakes in South America, and French investors had exposure to Russia. But there is still a survivor bias, whether or not there was cross border investment.

Brendan - yes, past performance is more of an issue for managers than for sectors, but it still is an issue. The last 100 years were a unique economic experience, and the only thing we know about future investment environments is that they won't be the same. So extrapolating from past historical experience is at best chancy. Just to pick two scenarios: the last 50 years have been the most peaceful for the major economies for a long time: why should this persist? As the baby boomers in western economies approach retirement over the next 30 years, they will become net disinvestors where they are at present net investors. This may have the effect of depressing equities relative to bonds, as this is where they have traditionally invested their funds.

d
 
Equities

Hi d53,

But other aspects have changed in favour of equities, surely. For instance, corporate regulation and governance was non-existent at the time of Imperial Russian, and financial reporting was undeveloped, to say the least.

I know, I know, financial reporting and corporate governance didn't do much to protect investors in Enron, Tyco, etc, but it was presumably a good deal easier to scam investors a hundred years ago than it is now.

I'm not sure I entirely agree with you on survivorship bias, either, although I see your point. But if US and UK investors were unrepresented in the Imperial Russian equity market, then eliminating it from your analysis of how their assets performed doesn't give rise to any inaccuracy.
 
Equities

Dynamo

I agree that there may be benign factors as well. My fundamental point is simply that all these factors exist: the last 50 or 100 years is just one scenario, and we shouldn't read too much into it, and we certainly shouldn't take as a given that equities will outperform bonds to the same extent.

100 years ago, US/UK investors were not internationally diversified much, and so didn't suffer. Russian investors suffered 100%. We cannot just take the experience of the lucky ones and say that this is representative of all equity returns.

d
 
Re: Equities

Hi d53

The outperformance of equities over bonds and properties has been fairly consistent over almost all 20 year time periods across almost all economies. Sure, there is no guarantee that this outperformance will continue. In fact, the extent of the outperformance is probably unlikely. But it is reasonable to expect it to continue.

Most long term studies show a comparison of the returns on equities vs. the returns on bonds for various contries - so the return on American bonds is compared with the return on American equities.

To work out the return on an internationally diversified basket of investments, one would have had to include Russia in the equities basket. But you would have had to include Japan and Germany in the bonds basket. The survivorship bias in bonds is much more distorting.

Brendan
 
Art

All this big picture stuff has me scared.

Though I think Brendan is winning the Equities versus other Financial Investments argument it has rather illustratd that there ain't any of them safe. :eek

Is "Works of Art" the answer? They would seem to be independent of whatever economic or political system happens to be in the ascendancy at any particular time.

Maybe Gold?:jem
 
valuations

What's different this time is that stocks have been
so highly valued relative to other asset classes. This is due to the widespread belief that stocks are the only longterm investments. This has lead to a "Don't worry about the price, just buy" mentality.
Personnally, I'm amazed at the levels of complacency despite two years of falling prices. No worries just buy!

This is a secular bearmarket that is following the greatest longest bullmarket of all time. Do not expect it to be short or steep. Death by a thousand cuts, more likely,until complacency has been replaced by fear and stocks are widely seen to be the work of the devil.
 
equities

Reading this thread the 'man from Mars' could be forgiven for thinking that 'equities' were a fairly homogenous commodity.

The world of equities offers massive choice and since equity markets are not efficient (post Enron surely the EMH is also blown up)there is always opportunity for astute/patient investors.

Leaving the 5/10/20/100 years of historical evidence to one side,the main choice facing investors is to give long-term loans to governments or companies or to take a stake in the future profits/dividends of one or more companies.

If management is motivated to deliver shareholder value
and uses the capital given to them efficiently it seems philosophically (& intellectually) more appealing than the bond option.

I anticipate the riposte that the shares of the good companies are over-valued but this is the ultimate sweeping generalisation.

The good people of Ireland will shortly be faced with this proposition in the case of C&C : if the issue is reasonably priced I for one would be disposed to including it in my portfolio.

It strikes me that the return on gilts is pretty skinny and that over time there simply has to be better potential within the world of equity markets.I do accept that most of the fund managers seem to struggle to discover this but I believe the pressure of short-term performance measurement has seriously affected their behaviour.The Elan debacle revealed how many of the managers were 'index slaves'.

The growing corporate bond market offers better returns than gilts but the investor continuously under-estimates the default risk( the way punters never anticipate the horse refusing to start/ running out/ being brought down).
 
Re: C&C

<!--EZCODE QUOTE START--><blockquote>Quote:<hr> C&C : if the issue is reasonably priced I for one would be disposed to including it in my portfolio<hr></blockquote><!--EZCODE QUOTE END-->

I presume you're referring to your personal portfolio here. Aren't you concerned that you'll have to commit your money based on the <!--EZCODE BOLD START--> indicative<!--EZCODE BOLD END--> price range, so you won't actually know what price you'll be buying at?
 
Told You So

Every day you expect to hear of a new bananaskin to trip up equities. The cultists really have to be pitied for their blind faith.:rolleyes
 
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