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Thu Dec 2, 2021, 04:26 PM

Word to the wise: the crash is coming, get out of the stock market now ⚠ 👀 😱

Last edited Mon Jan 3, 2022, 07:53 PM - Edit history (1)

I've been hearing "the crash is coming" ever since 2014 or so, and "that's why I stay out of the Wall Street Casino" ... "The House has the edge" and so on.

So, I decided to see what would have happened if some unfortunate soul had ignored the advice of the coming crash and went to the "Wall Street Casino" and had invested in an S&P 500 index fund at the worst possible time, October 9, 2007, at the very peak of the Housing Bubble market just before the worst crash since the Great Depression (The Housing Bubble crash resulted in a 57% decline from peak to trough).

Le's see how the unfortunate soul did:

From 10/9/07 to yesterday's 12/1/21 close:

S&P 500: went from 1,565 to 4,513 for a 7.77% annualized return just on the price appreciation (i.e. throwing away the dividends)

VFINX adjusted for dividends: from 110.07 -> 417.52 for a 9.88% annualized return (note the near-quadrupling in just 14 years)

VFINX is the Vanguard S&P 500 Index Fund -- the results above are the real-world results of what Six Pack Joe or Jane would have gotten -- they are after fund expenses. It's not "theoretical" at all, it's what someone would have gotten had they invested in 10/9/07 and sold on 12/1/21.

I pick the S&P 500 because it is about 80-85% of the U.S. total market and the benchmark of the U.S. market that is most commonly used by professionals (the Dow is better known but is far less representative of the U.S. equities as a whole). And the one that Warren Buffett has recommended to anyone who simply wants to have an equity stake and that doesn't want to do research on individual stocks or sectors.

As for the "House" having the edge, no doubt -- I feel the same way when I look at the alternatives, e.g. for CD's or bonds to buy -- like 1.0% on a 4 year CD, 2.2% or so current yields on intermediate-term bond funds. Or a money market account of savings account paying 0.10%. But that's just me I guess.

As for where I got the numbers, it's from Yahoo Finance Historic Data:

VFINX: https://finance.yahoo.com/quote/VFINX/history?p=VFINX

For VFINX, the "Close" column is just the price, i.e. it doesn't include dividends.

Whereas the "Adjusted Close" column is adjusted by reinvested dividends and other distributions.

S&P 500: https://finance.yahoo.com/quote/%5EGSPC/history?p=%5EGSPC

As for the S&P 500 index, it's just the index value. Close and Adjusted Close are the same, i.e. there isn't a version of the S&P 500 index that includes dividends.

Anyway, what matters is the total return that includes dividend reinvestment: 9.88%/year. And remember that's someone investing at the worst time -- the peak before the Housing Bubble crash.

Yeah but it's just a few percent more, I'd rather sleep at night etc. etc.

Well that's understandable, but if you need some of your retirement savings to live on after you retire -- what matters is whether you'll run out of your retirement savings money before you die, and countless simulations show that the likelihood of that occurring is far higher with an all fixed income portfolio than with one with a mix of equities and fixed income.

Over time, a 9.88% annualized return, if maintained, doubles one's investment every 7.4 years, quadruples in 15.8 years, 8-folds in 22.2 years etc. The magic of compounding.

Whereas if one is lucky to get and maintain a 3.00% total return in bond investments, that takes 23.4 years to double, 46.8 years to quadruple, 70.2 years to reach 8-fold, etc.

BTW, the VFINX returns would have been much higher if the person had invested at the very best time -- the bottom of the crash, on 3/9/09 when the S&P 500 bottomed out at 677. VFINX's adjusted close on that date was 49.25. So from that point to 12/1/21 close, VFINX with dividends reinvested would have gone from 49.25 to 417.52 in 12.73 years, that's an 8.47-fold increase -- that's an annualized return of 18.28%

(An 18.28% annual return results in a doubling in 4.1 years, a quadrupling in 8.2 years, an 8-folding in 12.3 years etc.)

Here's another metric:

The VFINX S&P 500 index fund has had an average annualized return of 11.62% since its August 31, 1976 inception to 11/30/21, per

(see: "Life of Fund" )

During that time (8/31/76 - 11/30/21), it went up 144 fold. Yes, that's what a 11.62% return over 45.248 years compounds to.

A 7% return in bonds during that same period would have resulted in a 21.4 fold increase.

A 4.62 percentage point annual return difference is the difference between having $144,000 and have $21,400 on a $1,000 investment over 45.248 years.

A VERY LATE EDITED TO ADD, 1/3/22 - bucolic_frolic made the very good point that the stock market is undoubtedly being buoyed up by years of $trillions of bond-buying by the Federal Reserve to reduce interest rates. So the 9.88% annualized rate of return between the housing bubble peak and December 1 value is higher than if the Fed wasn't pumping in all that stimulus.

So, I figured what if the market is, say, 50% overvalued? i.e. instead of a "3" value, it should be a "2" value? I figured the rate of return after the market adjusted back to the "2" would be a still very nice 6.84%/year annualized average return. (I used the Vanguard Total U.S. Stock Market Index fund VTSMX rather than the S&P 500 fund for this calculation, but would be very similar for the S&P 500 fund ). And again this is for someone investing at the very very worst time -- the peak before the housing bubble crash.

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Response to progree (Original post)

Thu Dec 2, 2021, 04:41 PM

1. I retired in 2009 at about the bottom of the market. Today

my IRA has tripled and that is after I have taken out
my RMDs the last 3 years. My investments are fairly conservative about 50% equities and 50% fixed income.
I think I bonds are real bargain now paying 7.12% and exempt from state and local tax. The catch you can only invest $10000 a year and you have to hold them at least 1 year.

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Response to doc03 (Reply #1)

Thu Dec 2, 2021, 04:56 PM

2. I-bonds bummer it's limited to $10,000. Even so, its a quick pickup of a lot of $hundreds

in interest. (That 7.12% rate is only good for 6 months, unfortunately, for Ibonds bought between Nov 1 and May 31 as I understand it, for anyone reading this, and the result of some unusual circumstances as I barely understand it ).

Here's a history of the rates --

Just picking the past 6 years (12 semi-annual rate periods), in chronological order from oldest to latest:

0.26%, 2.76%, 1.96%, 2.58%, 2.52%, 2.83%, 1.90%, 2.22%, 1.06%, 1.68%, 3.54%, 7.12%

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Response to progree (Reply #2)

Thu Dec 2, 2021, 05:19 PM

3. Yes I purchased one at the 3.54% percent rate in June then as of Nov 1 to May31 22 it

pays 7.12%. I took the money out of my bank MM that paid next to nothing and you have to pay federal, state
and local tax on it. If you have $10000 that you can hold it is a good place to park it. Banks and MM funds haven't
paid anything for years.

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Response to progree (Original post)

Thu Dec 2, 2021, 07:29 PM

4. It may, or may not be, good timing to invest at all time highs

While many an all time high is made in an uptrending market, there are investment books that take the long term perspective and advise caution. Individual stocks can outpace every type of investment if the growth is strong. But it is also the case that indexes are average. There were all time highs that preceded market tops - 1929, 1968, 1987, 2000, 2008, and the recession of 1973-75. These were significant market top events. Investing at a true market peak, is, as economist John Hussman often writes, an event that can take a decade, or two, to again attain the levels of that market top. Which means being underwater. Buying the dip is a frequent strategy, and one that works, but at small discounts to market peaks it can spell vulnerability. Market averages did not recover their previous highs following those market peaks for many years ... such as 1941, 1981, 1993, 2008.

Paying an inflated price is no way to buy a car, a house, or investments - if the intent is to make money. Timing is as important as the price paid.

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Response to bucolic_frolic (Reply #4)

Thu Dec 2, 2021, 07:58 PM

5. I'm not suggesting people buy at the peak -- I hope nobody is getting that out of what

I wrote. I was using the example I got as the worst case example of somebody picking the most unfortunate time to invest in recent decades, and where they end up now.

Yes, it can take decades sometimes to recover from some crashes

It took 25 years for the Dow to regain the peak before the 1929 crash,

It took 16 years for the Dow to get back to its 1966 high.

The S&P 500 didn't get back to its 1968 high until 1982 (14 years)

The Nikkei 225 was 38,916 12/29/89 close (it grew 6-fold during the 80's). Trough: 7,055 3/10/09 close, down 81.9%). It has made it above 30,000 recently but closed Dec 2 at 27,753. So that's way below its 12/29/89 high. After more than 31 years.

Some say the Nikkei doesn't apply to us because, you know, wink wink, they're different. Well at least since WWII they haven't elected an evil madman. Can't say the same about us.

There was a thread here about all that back in July 2020 --

I should add, all of the above are just the price. With dividends included, the recovery times would have been shorter.

I am near 70 yo and about 55% equities 45% fixed income because I don't think I have 15+ years to get back to zero, so I get it. And that "+" on "15+" is very significant. It could be 20, 25, 30, 35.... years. I don't want to risk that either. Otherwise I'd be 100% equities.

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Response to progree (Reply #5)

Thu Dec 2, 2021, 09:06 PM

6. I'm just saying the recent all time high is remarkable

The COVID bounce, due to all the liquidity added to the fuel. I cannot assume the landscape will be as robust going forward, in other words, the worst case scenario from investing in 2008 cannot be assumed to apply going forward now, we just don't know. Could be better, could be worse. I remember the 1970s, and while I was too young to understand what was going on financially, and the data made available now doesn't often go back that far, the market was struggling with lowered expectations and slower dividend growth. Those can whack the best hopes as we all know. Wage growth may mitigate that with higher spending, or make it worse with more inflation. It's a much different economy.

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Response to bucolic_frolic (Reply #6)

Thu Dec 2, 2021, 09:34 PM

7. Yes, any long period (decade or more) with an end point of now looks great

Vanguard, for example expects a 2.4%-4.3% annualized return on equities over the next decade (3.35% is the midpoint), and Schwab also has about the same forecast

Here's what Google served up on Vanguard, an October issue, there might be something later... but anyway


because of very high valuations due to the factors you mention, and so interest rates suck on the alternative investment: bonds, CDs, etc. (in large part because of Federal Reserve QE action).

And no, we don't know the future, we could be at the beginning of a period for U.S. equities that make the Nikkei's experience look like a walk in the park.

And yes, the mid-60's to early 80's period was a long and difficult time for stocks. As were the 20's and 30's.

I remember "The Death Of Equities" Business Week Aug. 13, 1979 cover page all too well.


For a longer term perspective, I Imgur'd this graph from Yahoo Finance at near the bottom of the Covid crash. I try hard to keep the longer term perspective in mind. Those were some mighty frightful crashes. The thing is, after several doublings, a 50% "crash" just gets rid of one of those doublings.


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Response to progree (Reply #7)

Thu Dec 2, 2021, 09:43 PM

8. As the trend heads south, there are pauses

They could mean reversals upward, or more downside ahead. I plan to average in here and there. I think it's easier with individual equities, but it can be done with sector etfs or mutual funds with particular emphasis. But that's me, I'm not a fan of index funds.

Hey, great discussion you sparked!

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Response to bucolic_frolic (Reply #8)

Thu Dec 2, 2021, 10:12 PM

9. Thank you. All your points are right on too

Why I chose VFINX is that I don't know anything equivalent for S&P 500 that includes dividends, not because I'm a fan of index funds.

And why I chose the S&P 500 is because it is cap-weighted average of 80-85% of the total U.S. market and is the one professionals use for benchmarking in general (almost never the Dow for good reason).

The ideal would be a total U.S. stock market index with dividends -- that would capture 100% of U.S. equities in market cap weighted (except for penny stocks and shrapnel like that). But I don't know where I can get that data that goes very far back (before about 1990) -- .

EDIT: anyway, every comparison I've done between the S&P 500 and the Wilshire 5000 Total Market Index is that they are very very close in performance.

I'm just trying to represent the U.S. equity market as a whole, and I don't know a better way.

I could always cherry-pick a stock or a sector fund that way beats the S&P 500, but it wasn't my goal to show how the best stock or fund would have performed. But rather my best shot that I know how of how the average investor in equities would have done had they bought at the most inopportune time in the recent 2 or 3 decades -- excepting the real recent stuff of the past few days.

I enjoy your almost daily commentary in the Economy Group's Stock Market Watch by the way.

Now a confession -- I am a fan of index funds, but that's not why I chose VFINX or the S&P 500. I am trying to broaden out however -- been trying to figure out what these people are doing:

"Closed End Funds - Open Discussion" (CEFOD) - https://www.facebook.com/groups/703483756914269

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Response to progree (Reply #9)

Thu Dec 2, 2021, 10:28 PM

10. That link says content not available, deleted, or limited to small groups

But I don't use Facebook, so that might be why.

Didn't know anyone read my commentary. Thanks. I put a lot of time into learning to read charts.

I have a watchlist, I make a few plays at a time. I have a crash list. I remember a few things I passed up or sold over the years from the 2009 lows. What was I thinking?

In a crash I reallly like covered call ETFs. There are not very many. Even fewer are index covered call writing funds. I shy from those that also carry REITS. A very few pay monthly dividends. All of them get beaten up like everything else. So I wait for the next great buying opportunity. My gurus say there's a good buying opportunity about every 18-24 months. Crashes of course less frequent, especially if from lofty heights.

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Response to bucolic_frolic (Reply #10)

Thu Dec 2, 2021, 11:00 PM

11. Another confession - I am a fan of index funds because they are for simpletons and I know

almost nothing about selecting individual stocks or sectors, covered calls or puts or naked whatever or death crosses or any of that. My affinity for index funds is for the same reason that toothless people love applesauce.

You are way ahead of me. I'm just a buy and hold investor of a few index funds and a few active mutual funds.

The only reason I've been broadening out recently is because my fixed income stuff is so awful (Vanguard and Fidelity intermediate term mostly corporate bond open mutual funds with current yields of about 2.2%), that I really feel a strong need to do something. With most of my 45% of fixed income stuff in that stuff, getting an extra percent or two would make an enormous difference.

calguy's post in https://www.democraticunderground.com/11213049#post16 opened my eyes.

But I'm not ready to dive into closed end funds until I understand them better. I'm particularly concerned about how they will perform in a long-term secular interest-rate rising environment -- something we haven't had in more than 40 years.

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Response to progree (Reply #11)

Fri Dec 3, 2021, 07:40 AM

12. My learning curve has been far too long

and I should have used index funds, or the generic funds I was in decades ago, as part of my strategy!

A good covered call fund goes up and down with the market, and of course has dividends from its holdings. It also writes calls against what it owns, or against an index, and uses that inflow to increase dividends. Some are leveraged, some not. Some have REITS, which complicate capital gain reporting I think, and some not. Some payout principal as part of monthly payments. Once I've eliminated the levered, REITS, and principal payout, it's not a large universe. But they're not mutual funds in the sense of available from the big mutual fund companies, at least as far as I know. Some of those have call writing as an option, a notice in the prospectus, but it's not a primary techique they use often. (But how would we know? They'd have to tell us, or I'd really have to scour an annual report, and it's not my expertise.) So yeah closed end funds and ETFs is a thing for a brokerage account. They yield well, and when they plunge in a market panic, the yield goes way up, on paper, and they bounce back fast for that reason. That's when I want to pounce.

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Response to bucolic_frolic (Reply #12)

Fri Dec 3, 2021, 02:51 PM

13. Thanks much for the explanation - I will look into covered call funds soon. Never heard of

them and I've been reading the AAII Journal for decades (American Association of Individual Investors). Very little on CEFs -- saw a couple articles in the last couple years, I don't recall seeing any before that. They are big on asset allocations and factors investing (e.g. small cap, value, small cap value, whatevs).

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Response to progree (Reply #13)

Fri Dec 3, 2021, 03:04 PM

14. There is an online site


CEFs in great detail right down to holdings, strategy, performance, etc. As usual, it's all about due diligence.

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Response to progree (Reply #7)

Wed Mar 23, 2022, 08:04 PM

15. Do you have any idea why Vanguard and Schwab are expecting

returns that are well under half of the historical averages?

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