Author Topic: DOW broke 17,000  (Read 95435 times)

Offline Prodigy

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Re: DOW broke 17,000
« Reply #60 on: October 15, 2014, 01:29:43 PM »
So, question is. Is it going to stabilize soon or should i put my old 401k into a cash/bond safe option

First, of course nobody can tell you the answer to that with any certainty.

But that being said, it has been mostly a lot of heavy downs lately, but there will be some big ups as well.  This is a very, very volatile time in the market, and it might last like this for months or years to come with big drops and big rises.

Put yourself in a Permanent Portfolio type of setup, and you don't have to worry about timing the market (which even most professionals who do this for a living can't get right more than half the time).

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Re: DOW broke 17,000
« Reply #61 on: October 15, 2014, 01:42:37 PM »
Do like Warren Buffet - without incurring penalties, move into "safer" options.  After the plunge go on a buying spree.

Think the quote is "be greedy when others are fearful, and fearful when others are greedy"

Yep that is correct. During the financial crisis I bought GE when it was well under $10.00 per share. I held onto it for two years, collected nice dividends and a nice capital gain when I sold at $22. I also bought Ford at $1.00 and sold at $7.00, wish I would've held onto that one for about 6 months longer when it went to $18.00+

Offline FreeLancer

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Re: DOW broke 17,000
« Reply #62 on: October 15, 2014, 02:52:58 PM »
Put yourself in a Permanent Portfolio type of setup, and you don't have to worry about timing the market (which even most professionals who do this for a living can't get right more than half the time).

Yep. Set up a plan, stick with it, watch the financial talking heads for amusement, not for insight or advice.

endurance

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Re: DOW broke 17,000
« Reply #63 on: October 15, 2014, 03:23:04 PM »
So, question is. Is it going to stabilize soon or should i put my old 401k into a cash/bond safe option
Personally, I think the bond market is in a more precarious position than the stock market. With interest rates being held this low, the only way is up and when interest rates to up, your portfolio value goes down. With interest rates on 10 years at 2%, if they go up to the historical average of 8% you'd lose close to half you investment.

Just be aware there are so many things that could send this bond market into a tailspin, not the least of which is the European debt issues, the Argentina bond fiasco, and the muni bond nightmare in the US waiting to pop. Odds are they'll all play into each other once something pops. At that point the only safe haven will be cash.

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Re: DOW broke 17,000
« Reply #64 on: October 15, 2014, 07:23:07 PM »
So, question is. Is it going to stabilize soon or should i put my old 401k into a cash/bond safe option

Keep in mind that when you move 'old' money in a 401K while it's down, you receive a permanent loss on those shares. 

Offline Prodigy

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Re: DOW broke 17,000
« Reply #65 on: October 16, 2014, 09:39:58 AM »
Personally, I think the bond market is in a more precarious position than the stock market. With interest rates being held this low, the only way is up and when interest rates to up, your portfolio value goes down. With interest rates on 10 years at 2%, if they go up to the historical average of 8% you'd lose close to half you investment.

Just be aware there are so many things that could send this bond market into a tailspin, not the least of which is the European debt issues, the Argentina bond fiasco, and the muni bond nightmare in the US waiting to pop. Odds are they'll all play into each other once something pops. At that point the only safe haven will be cash.

This is one area that I really wish I knew more about - can you explain?  I have some funds in GSTGX, which is short term government bonds.  From 1988 to now, it's never moved by more than 2-3 percentage points in a year.  What sort of bond investment can go down by half/50%??


Offline Smurf Hunter

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Re: DOW broke 17,000
« Reply #66 on: October 16, 2014, 10:01:55 AM »
This is one area that I really wish I knew more about - can you explain?  I have some funds in GSTGX, which is short term government bonds.  From 1988 to now, it's never moved by more than 2-3 percentage points in a year.  What sort of bond investment can go down by half/50%??

If there's little confidence in private equities, OR a lack of confidence in foreign currencies, that boosts demand for US bonds.  Basically when everything else sucks, US gov debt looks attractive.

So whatever the root cause, if we get into a situation where US bonds are high in demand, the rates will go down. 
e.g. if you think you'll lose 1-5% holding onto stocks, only earning 0.1% is a welcomed alternative.


Offline bigbear

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Re: DOW broke 17,000
« Reply #67 on: October 16, 2014, 12:46:42 PM »
This is one area that I really wish I knew more about - can you explain?  I have some funds in GSTGX, which is short term government bonds.  From 1988 to now, it's never moved by more than 2-3 percentage points in a year.  What sort of bond investment can go down by half/50%??

Historically, short-term gov't bonds as among the most stable types of bonds.  And holding bonds within a mutual fund sort of masks the movement a bit because that fund's prospectus/purpose limits itself to certain timeframes (which is a factor in the yield).  So it's easier to picture outside of a mutual fund and think of it at an individual bond level. 

But any sort of bond investment can go down by half (or more), even gov't bonds.  However, if you hold the bond to maturity, you'll always get the 2-3%.  The price movement comes if you want to sell the bond.  Like what if interest rates went up and you want to get that higher rate?  And conversely, if rates went down, wouldn't you want to keep what's now a higher yielding bond?  Is that anything that would make you want to sell?

So here's an (overly simplified) scenario:
Today I put $1k in a bond with a 2 year APY of 2%, I expect to have a return of $40.40 ($20 for year 1 and 20.40 for year 2).  So the future value (if I hold to maturity) is $1040.40.  In general bonds are fixed contracts, so the interest rate doesn't change with the market rates.

Tomorrow, say the bond rates go down to 1%.  But you just got your bonus and are interested in buying the warm and fuzzy security you get with a bond.  In my limited market you have two options: buying a newly issued 2 year bond with a 1% APY OR you may interested in my bond with a 2% APY.  Which ones more attractive to you?  With the 1% bond you would expect to have $20.20 in interest ($1020.20 total value).  But you would still expect $1040.40 from my bond.  Obviously my 2% bond has more value than a 1% bond.

But why would I want to sell?  The only market-driven reason (outside of personal reasons like needed cash to pay for a hospital visit) for me to sell is if I can get back more money than what I would expect out of my investment.  There's a few variables that play into the 'fair market value' of my bond, including time to maturity, market risks, bond risks, alternative investments...  But basically, it'll cost you more than $1,000 to pry that higher yielding bond out of my hands.  Maybe more than $1,020.40 because I would break even by selling my bond and buying the newly issued bond ($1,020.40 from selling bond - $1,000 buying new bond + $1,020.00 expected return of the new bond = $1,040.40).

Hence the value going up, when interest rates drop.  I kept it simple and didn't really include the 'time value of money' and adjusting for payouts of interest during that 2 year span...

The opposite is true.  If the market rate goes up to 3%, then I'm going to have to drop my selling price to entice the market to buy my lower yielding bond.  No one will buy it otherwise.

Offline Prodigy

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Re: DOW broke 17,000
« Reply #68 on: October 16, 2014, 01:24:47 PM »
Fantastic explanations, and I was pretty sure that's how it worked.  That is why this statement:

With interest rates on 10 years at 2%, if they go up to the historical average of 8% you'd lose close to half you investment.

which I've heard before, doesn't make sense to me.  Even if, with bigbears example, let's say I have a portfolio of $10,000 in the GSTGX bond fund, and every month I buy $100 worth to add to the fund.  My fund isn't going to drop in value by half if interest rates jump way up.  Isn't it better to say my future returns would drop in half?  So instead of $10,000 + 2% ($200), I would only get $100 the next year (or maybe even have the value go down by a percentage or two).

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Re: DOW broke 17,000
« Reply #69 on: October 16, 2014, 01:55:50 PM »
Fantastic explanations, and I was pretty sure that's how it worked.  That is why this statement:

which I've heard before, doesn't make sense to me.  Even if, with bigbears example, let's say I have a portfolio of $10,000 in the GSTGX bond fund, and every month I buy $100 worth to add to the fund.  My fund isn't going to drop in value by half if interest rates jump way up.  Isn't it better to say my future returns would drop in half?  So instead of $10,000 + 2% ($200), I would only get $100 the next year (or maybe even have the value go down by a percentage or two).

When intrest rates go up the value of the bond on the Market goes down. So you have a face value bond at $1,000 with a rate of 2% then rates jump up. If you were to sell that bond on the open market you would have to sell it at a discount in order to intice a new buyer to purchase your bond, lets say at $600. The buyer gets an automatic gain of $400 if they hold through to maturity plus 2% based off $1000 face value of the bond. So they would be getting a ROI of 3.33% instead of 2%. So your bond value would go off of what the market would be willing to buy it at and not the value at which you bought it at. BTW with rates so low there is not much room for capital gains on new issues. The bond market has been primed to blow for some time but it keeps hanging on and in my opinion it will not blow until it game over.

Hope that helps Prodigy.  ;D

Offline bigbear

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Re: DOW broke 17,000
« Reply #70 on: October 17, 2014, 11:10:04 AM »
Fantastic explanations, and I was pretty sure that's how it worked.  That is why this statement:

which I've heard before, doesn't make sense to me.  Even if, with bigbears example, let's say I have a portfolio of $10,000 in the GSTGX bond fund, and every month I buy $100 worth to add to the fund.  My fund isn't going to drop in value by half if interest rates jump way up.  Isn't it better to say my future returns would drop in half?  So instead of $10,000 + 2% ($200), I would only get $100 the next year (or maybe even have the value go down by a percentage or two).

In your scenario, you're holding a short-term gov't bond mutual fund.  It would have very little movement as the short-term lending rate has historically remained stable.  And when it does change, it's typically by small amounts.  Yahoo Finance performance page will prove the point though. 
http://finance.yahoo.com/q/pm?s=GSTGX+Performance

The best year the fund had was in 2001 at 8.75% (a year in which lending rates plummeted).  Yet at no point in time during the year were interest rates over 8% in 2001.  The worst year was in 2013 at 0.33% (a rates crept up).  Yet at no point in time during that year were interest rates on bonds that low. 

So why wouldn't the funds NAV return be the same as the bond rates?  It's due to the buying and selling that the fund manager did (and the changing present values of the bond).

Offline Prodigy

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Re: DOW broke 17,000
« Reply #71 on: October 17, 2014, 01:07:51 PM »
Thanks guys, I appreciate the explanations.

Doesn't it make a lot more sense for longer-term investors to just buy the actual bonds themselves, instead of a fund, and go through short, medium, and long term gov. bonds in a regular rotation?  I don't understand why you would sell something at a 40% instant loss just to hop on board the new improved bond yields.

The DOW "breaking 17,000" and then falling by 500 points in a day makes sense to me.  Bonds rising or falling at large rates just doesn't.

Offline CharlesH

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Re: DOW broke 17,000
« Reply #72 on: October 17, 2014, 06:08:29 PM »
Doesn't it make a lot more sense for longer-term investors to just buy the actual bonds themselves, instead of a fund, and go through short, medium, and long term gov. bonds in a regular rotation?  I don't understand why you would sell something at a 40% instant loss just to hop on board the new improved bond yields.
 
I think so, especially in the case of bonds.  Since the funds are constantly selling and buying, you have very little control over yield in a bond mutual fund.  By owning the bonds themselves you exercise a lot more control on the yield in your portfolio.  I don't find this critical with stocks, and actually prefer owning an index fund for stocks for the diversity.
 
The problem with buying individual bonds is the price.  To build a ladder of bonds with varying maturities like you describe could easily cost in the tens of thousands of dollars.  What I have heard people doing is initially buying 1, 3, 5, and 10 year bonds then rolling them into 10 year bonds each time a batch matures.  You could easily do this with longer terms as well.  But again, it ain't cheap...

endurance

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Re: DOW broke 17,000
« Reply #73 on: October 21, 2014, 03:48:50 PM »
Sorry, I totally forgot about this thread, but I'll try to explain my concerns.

Here's something to consider:


Vanguard Long-Term Bond

and


20 year Treasury rate

So when the fund started, it was sold at $10/share.  As interest rates rose, the price dropped.  When the interest rates went down, the price rose.  It's not a one to one ratio because 20 year is your longer-term bond, so the interest rates are higher, but the volatility is also higher.  In the meantime, the 1 year, 2 year, 5 year 7 year and 10 year are acting differently, but follow similar trends.

In January 1999 the fund was valued at $11.40/share.  In December 1999 the fund was valued at $9.77/share.  That's a 15% loss while the 20 year Treasury rate went from 5.3% to 6.9%.  Now 20 year Treasuries are at 2.68%.  It's not hard to imagine a loss in confidence in the bond market brought about by municipalities like Detroit, Chicago, Providence, and Cincinnati going into bankruptcy and defaulting.  Nor is it hard to imagine countries like Greece, Spain, Argentina, and Ireland defaulting on their debt.  That loss of confidence spreads and becomes a contagion since countries like Germany and Great Britain hold Spanish and Greek debt.  It impacts the banking sector and their solvency since they're also invested in the bonds.  As they shuffle their money around, interest rates rise and with that, there goes your value in your bond portfolio.

And if that long decent in interest rates doesn't make you uncomfortable, you're a hopeless optimist. ;)

If you really want an injection of optimism, try this podcast. (Note: vapid sarcasm in that statement)


Offline Prodigy

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Re: DOW broke 17,000
« Reply #74 on: October 22, 2014, 09:59:22 AM »
Sorry, I totally forgot about this thread, but I'll try to explain my concerns.

Here's something to consider:
...

Good call.  I guess when I went into bonds it was mostly short term, so I never saw any of these issues.  Makes sense with longer term bonds.

I really should diversify my bonds into more intermediate and longer term ones, but sounds like now is an awful time to start.

endurance

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Re: DOW broke 17,000
« Reply #75 on: October 22, 2014, 11:49:12 AM »
Good call.  I guess when I went into bonds it was mostly short term, so I never saw any of these issues.  Makes sense with longer term bonds.

I really should diversify my bonds into more intermediate and longer term ones, but sounds like now is an awful time to start.
When interest rates get back up to 6% or higher, then you can start to slowly move into the longer term bonds.  My mom scored back in the 1980s when she bought some 10 and 30 year T-bills with 8-9% rates.  As rates came down in the 1990s she did really well.  Unfortunately, she also lusted for those high returns and as things matured, she went into some South American bonds that really beat her up badly, too, because they defaulted or used hyperinflation to eliminate their debts.  The lesson I've taken away is diversity; in nation, region, type, duration, and vehicle.  That means gold, silver, land, stocks, growth mutual funds, value mutual funds, equity income funds, short term bond funds, CDs, traditional bank savings, IRA, Roth IRA, medium term bonds, international bond....  The hope is something will be up when you need money and you won't have to sell something else at a loss.

Max

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Re: DOW broke 17,000
« Reply #76 on: October 22, 2014, 02:19:33 PM »
When interest rates get back up to 6% or higher,

When rates go back up that high it will be game over. At that level we'll won't be able to service the debt.

endurance

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Re: DOW broke 17,000
« Reply #77 on: October 22, 2014, 02:27:48 PM »
When rates go back up that high it will be game over. At that level we'll won't be able to service the debt.
We can always service the debt.  It's called printing.  We're not Greece who is tied to a currency they can't inflate. 

The solution isn't always pretty, but never doubt the ability of bankers to keep the giant wheel turning.

Max

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Re: DOW broke 17,000
« Reply #78 on: October 22, 2014, 02:50:09 PM »
We can always service the debt.  It's called printing.  We're not Greece who is tied to a currency they can't inflate. 

The solution isn't always pretty, but never doubt the ability of bankers to keep the giant wheel turning.

While I agree with that we won't be able to print our way out of anything when, not if, when we lose the status of the world reserve currency.

Offline Cedar

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Re: DOW broke 17,000
« Reply #79 on: October 22, 2014, 05:41:04 PM »
Up, down, up, down, up down..

Cedar

Offline Cedar

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Re: DOW broke 17,000
« Reply #80 on: November 06, 2014, 02:44:52 PM »

Offline Prodigy

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Re: DOW broke 17,000
« Reply #81 on: November 07, 2014, 09:09:45 AM »
17,554.47 new record for DOW
http://www.reuters.com/article/2014/11/06/us-markets-stocks-idUSKBN0IQ1A220141106

Cedar

The roller coaster continues.  Hold on tight folks, this is just the beginning!

Offline bigbear

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Re: DOW broke 17,000
« Reply #82 on: November 07, 2014, 11:30:26 AM »
The European central bank recently printed some euros.  I probably should start another thread about the ECB move, but it applies here as well.  The gist behind QE and other devaluation tools is to "reflate" assets because of deflation (or more accurately: falling asset prices).  What assets?  Well, stocks for one.  So with the ECB pumping some more, Japan recently doing another round of their QE, the US leaving our QE open-ended (at least hinting at being more 'dovish' than in previous comments)... a case can be made that there is more upside in the stock market.

http://www.bloombergview.com/quicktake/europes-qe-quandary 

Offline Cedar

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Re: DOW broke 17,000
« Reply #83 on: November 17, 2014, 09:01:30 AM »
17,634

Cedar

Offline Louisiana Suvivor

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Re: DOW broke 17,000
« Reply #84 on: November 17, 2014, 06:39:56 PM »
it keeps climbing......2009 anyone?

Offline Cedar

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Re: DOW broke 17,000
« Reply #85 on: November 17, 2014, 06:53:28 PM »
Closed at 17,647.75 today.

Cedar

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Re: DOW broke 17,000
« Reply #86 on: November 17, 2014, 06:56:35 PM »
it keeps climbing......2009 anyone?
2007-8 to be more precise. ;)

Offline Cedar

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Re: DOW broke 17,000
« Reply #87 on: November 17, 2014, 07:12:40 PM »

Offline Cedar

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Re: DOW broke 17,000
« Reply #88 on: November 17, 2014, 07:22:34 PM »
Silver...

Silver crashed 1 month prior to the 2008 Financial crisis and no one noticed.

October 2014, Silver Slumps to 55-Month Low
http://www.bloomberg.com/news/2014-10-30/gold-holds-near-three-week-low-as-fed-ends-easing-amid-spdr-drop.html

Silver futures for delivery in December plunged 4.9 percent to $16.42 an ounce, the biggest drop since Sept. 20. The metal touched $16.33, the lowest since March 2, 2010.

Last quarter, gold slumped 8.4 percent as the dollar jumped 6.7 percent and equities surged to an all-time high. Yesterday, at the conclusion of its two-day policy meeting, the Fed maintained its pledge to keep interest rates near zero percent for a “considerable time.”



Cedar

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Re: DOW broke 17,000
« Reply #89 on: November 17, 2014, 08:25:30 PM »
September 15, 2008 to be even more precise.
http://money.cnn.com/2008/09/15/markets/markets_newyork2/
http://www.youtube.com/watch?v=giETwqWTGXc

Cedar
Ahhh, but the trick with that date is that the market actually peaked in 2007, then fell in fits and starts until September 2008 when the bottom fell out. Thus, history doesn't repeat itself, but it often rhymes. ;)