# Why investing SS in the stock market is a horrible idea.



## OohPooPahDoo

There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries. 


This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S. 

To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.


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## Norman

OohPooPahDoo said:


> There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
> 
> 
> This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
> 
> To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.



If all of the stock market is down. I think it's reasonable to assume that the taxpayer receipts are also equally down.

What I am saying is, if there is an economic disaster, you won't be getting your retirement either way. That is why the argument that you can't invest pensions but instead the money should be spent by government is nonsense.

Of course you should invest the pensions all over the place and over the world. Not just stocks. That is likely to be the most stable and profitable way.


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## OohPooPahDoo

Norman said:


> OohPooPahDoo said:
> 
> 
> 
> There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
> 
> 
> This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
> 
> To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.
> 
> 
> 
> 
> If all of the stock market is down. I think it's reasonable to assume that the taxpayer receipts are also equally down.
> 
> What I am saying is, if there is an economic disaster, you won't be getting your retirement either way. That is why the argument that you can't invest pensions but instead the money should be spent by government is nonsense.
Click to expand...


Did Japan default on its debt? I don't recall that it did. Any Japanese person who had invested in Japanese debt instead of the stock market would have come out way ahead of everyone else. Your argument is based on the  false presumption that nations always default on their debts when their stock markets crash. Although this is certainly possible and the two have coincided in the past, it is hardly a rule.


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## Avatar4321

They idea that you cant invest your own money is ludicrous. 

But then so is the lie that SS is our own money. It's a ponzi scheme. Our money is going to people who are already collecting.


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## DiamondDave

hence why the government should have no hand in this at all... people should be able to invest on their own without forced government participation in the scam program slush fund


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## Norman

OohPooPahDoo said:


> Norman said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
> 
> 
> This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
> 
> To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.
> 
> 
> 
> 
> If all of the stock market is down. I think it's reasonable to assume that the taxpayer receipts are also equally down.
> 
> What I am saying is, if there is an economic disaster, you won't be getting your retirement either way. That is why the argument that you can't invest pensions but instead the money should be spent by government is nonsense.
> 
> Click to expand...
> 
> 
> Did Japan default on its debt? I don't recall that it did. Any Japanese person who had invested in Japanese debt instead of the stock market would have come out way ahead of everyone else. Your argument is based on the  false presumption that nations always default on their debts when their stock markets crash. Although this is certainly possible and the two have coincided in the past, it is hardly a rule.
Click to expand...


What I said has nothing to do with defaulting. It's about getting your retirement. If tax receipts or productivity of an economy permanently goes down then so does the retirement money if it's based on a pay as you go plan. Or perhaps it's just taken from other services that you otherwise would recieve, or perhaps your taxes are raised. Either way you lose it just like in the stock market case (of course, in stock market case you at least have some constant profits).

On the other hand if your money is invested all arond the world in many asset classes, that's already much safer and obviously more profitable (when there is no crisis) than "investing" it in government to spend.

Besides that government schemes of this size obviously carry tremendous political risks.


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## Skull Pilot

I'll take my chances with a balanced portfolio any day over letting the fucking miscreants in the government handle my money.


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## Toro

OohPooPahDoo said:


> There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
> 
> 
> This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
> 
> To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.



Looking over 10, 20 or 30 years for an investment fund that is supposed to last forever is simply wrong and bad economics.  The Nikkei 225 peaked in 1989.  But over the past 50 years, the Nikkei 225 has generated significantly positive returns.  

Over 50 years, a balanced portfolio of stocks and bonds has generated roughly 8% a year.  Over the same time period, a portfolio of 100% government bonds has generated about 4%.  $100 million invested at 4% per year will be worth $460 million in 50 years.  $100 million invested at 8% per year will be worth $4.6 billion.

This is a no-brainer.  That's why other countries such as Canada and Norway invest their equivalent of SS in stocks.

If you think that the stock market won't beat the government bond market over 100 years or more, then there is something seriously wrong with the US, and those SS promises won't be paid anyways.


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## Norman

Skull Pilot said:


> I'll take my chances with a balanced portfolio any day over letting the fucking miscreants in the government handle my money.



But also I would have the government manage the money rather than spend it. As of right now no one is managing your money in the government - it is spent outright.

The system right now is unfortunately the worst imaginable. Especially in times of other policies which also discourage people from saving anything. The problem is this disaster of the system is hard to fix as the money is already spent. If you attempt to fix it people will lose retirement. It's a disaster.


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## Norman

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
> 
> 
> This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
> 
> To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.
> 
> 
> 
> 
> Looking over 10, 20 or 30 years for an investment fund that is supposed to last forever is simply wrong and bad economics.  The Nikkei 225 peaked in 1989.  But over the past 50 years, the Nikkei 225 has generated significantly positive returns.
> 
> Over 50 years, a balanced portfolio of stocks and bonds has generated roughly 8% a year.  Over the same time period, a portfolio of 100% government bonds has generated about 4%.  $100 million invested at 4% per year will be worth $460 million in 50 years.  $100 million invested at 8% per year will be worth $4.6 billion.
> 
> This is a no-brainer.  That's why other countries such as Canada and Norway invest their equivalent of SS in stocks.
> 
> If you think that the stock market won't beat the government bond market over 100 years or more, then there is something seriously wrong with the US, and those SS promises won't be paid anyways.
Click to expand...


I don't think that you can call it investing to bonds when the government does it. It's SPENDING, no one is investing anything. It's misleading to even look at the treasury rates because ultimately, YOU as taxpayer pay for the interest on those bonds anyway. Thus you don't gain anything even if the interest is paid in double.

But IF we would look at the situation as such, you would basically have to say that the US government bond is and will be the BEST investment in the world to say this system is favorable. Since the current system forces your retirement money to be invested in those bonds and nothing else can be considered.

I think freely investing professionals would beat a static investment by a bureucrat every time.


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## peach174

Interest rate for U.S. Treasury Bonds
1 year =  average. 037 % 
30 years = average 3.64%

Stock Market Interest rate
1 year = average 8.49 to 12%
over all average over the years 14.8%

Even when you lose in the market, the interest is always higher the Treasury Bonds.
If I was a young person I would want my SS in the market which always makes more interest than the treasury bonds.


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## OohPooPahDoo

Avatar4321 said:


> They idea that you cant invest your own money is ludicrous.



The idea that history can't repeat itself is even more ludicrous. 




> But then so is the lie that SS is our own money. It's a ponzi scheme. Our money is going to people who are already collecting.



Ponzi schemes by definition require fraud. Social Security is a law that anyone can read.


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## OohPooPahDoo

DiamondDave said:


> hence why the government should have no hand in this at all... people should be able to invest on their own without forced government participation in the scam program slush fund



And when the stock market crashes we can all go hungry together?


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## OohPooPahDoo

Norman said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Norman said:
> 
> 
> 
> If all of the stock market is down. I think it's reasonable to assume that the taxpayer receipts are also equally down.
> 
> What I am saying is, if there is an economic disaster, you won't be getting your retirement either way. That is why the argument that you can't invest pensions but instead the money should be spent by government is nonsense.
> 
> 
> 
> 
> Did Japan default on its debt? I don't recall that it did. Any Japanese person who had invested in Japanese debt instead of the stock market would have come out way ahead of everyone else. Your argument is based on the  false presumption that nations always default on their debts when their stock markets crash. Although this is certainly possible and the two have coincided in the past, it is hardly a rule.
> 
> Click to expand...
> 
> 
> What I said has nothing to do with defaulting. It's about getting your retirement. If tax receipts or productivity of an economy permanently goes down then so does the retirement money if it's based on a pay as you go plan. Or perhaps it's just taken from other services that you otherwise would recieve, or perhaps your taxes are raised. Either way you lose it just like in the stock market case (of course, in stock market case you at least have some constant profits).
Click to expand...


Governments borrow more in bad economies to make up for lost revenues. Treasuries outperformed the stock market on average throughout much of the depression - and as already pointed out, the Japanese government has continued to pay its debt obligations. Social Security is hardly bullet proof but that fact should not induce us to expose our retirements to even greater risk.




> On the other hand if your money is invested all arond the world in many asset classes, that's already much safer and obviously more profitable (when there is no crisis) than "investing" it in government to spend.



When there is no crisis? You're just going to ignore the potential of an economic crisis?

In the 1930's the world was in a depression. If you had invested worldwide you might well have fared far _worse_ than in the U.S. 

I submit that

a) history can repeat itself and 

b) the future will always contain more extremes than history


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## OohPooPahDoo

Skull Pilot said:


> I'll take my chances with a balanced portfolio any day over letting the fucking miscreants in the government handle my money.



The expected return of a balanced portfolio is the same as the expected return of U.S. Treasuries.

If you're going to buy the buy and hold balanced porfolio line you should at least hedge your risk with put options.


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## Sallow

OohPooPahDoo said:


> There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
> 
> 
> This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
> 
> To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.



It's not a "myth".

Stocks generally perform well over the long term. But if you invest, you need to be fully aware that the market is not a bank. Investors need to pay close attention to their investments and the economic climate.


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## OohPooPahDoo

Sallow said:


> It's not a "myth".
> 
> Stocks generally perform well over the long term.



And you base that assertion on what exactly? Generally when? The past? Or the future?



> But if you invest, you need to be fully aware that the market is not a bank. Investors need to pay close attention to their investments and the economic climate.



Because if investors just pay close enough attention they can all avoid losing money?


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## Mad Scientist

Sallow said:


> Stocks generally perform well over the long term. But if you invest, you need to be fully aware that the market is not a bank. *Investors need to pay close attention to their investments and the economic climate.*


Unless you're a Too Big To Fail Bank then you get a Taxpayer Funded Bailout. See how that works?

OP doesn't know how SS came into being in the first place.


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## peach174

OohPooPahDoo said:


> DiamondDave said:
> 
> 
> 
> hence why the government should have no hand in this at all... people should be able to invest on their own without forced government participation in the scam program slush fund
> 
> 
> 
> 
> And when the stock market crashes we can all go hungry together?
Click to expand...


It has crashed big 3 times, 1929,1987 and 2000.
But it is still around.
You never lose all of your money in stocks.

According to a 2009 Urban Institute report, those hit hardest by the 2008 financial crisis were seniors with investment-based savings or retirement plans. Millions of people saw the value of their investments drop dramatically in 2008, but those that stayed in the market saw many of their investments recover in 2009 and 2010. Those who bought shares in healthy companies during the recession made a considerable amount of money. However, many seniors had their savings in mutual funds, stocks and property and, unlike younger people, seniors were living off these savings and many could not wait for the market to recover to sell their houses or withdraw money from accounts for monthly or yearly expenses. As a result, many senior citizens lost 30 percent or 40 percent of their life savings, or even more.
Even when it goes down you still have more in the long run in 30 years than with the government who sets how much you get each month.

You would still have more than what the government sets up.
Most would get around or close to 1 million in 30 years in stocks at retirement.

SS average monthly payment is around 1,000.00 each month. That's 12,000.00 a year ( this amount will go down by quite a bit for the young in the future, in order to keep it going). They will maybe get only 6000.00 or 700.00 a month.
If you live for about 30 years after retirement you would get about 360,000.00 from the government at 1,000.00 a month.

In the market you would get 3 times or more that amount, even with stock crashes, because the market always makes a come back.

If you get close to 1 million at retirement, the yearly amount would be about 27,777.00 to 28,000.00 a year, rather than 12,000.00 a year.
You would be able to pay for unexpected emergencies rather than having to wait for the 1st of each month.

You would be able to give that money to your spouse or children if you died early.
It should also not be taxed.


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## FA_Q2

OohPooPahDoo said:


> There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
> 
> 
> This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
> 
> To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.



First off, SS has already defaulted.  The taxes that go into SS were doubled and the payout was unchanged.  The future of SS is almost guaranteed to default as well when those promised benefits are changed (aka. Retirement age increased or benefits decreased).  Of course, the government will not call this a default because it will not literally default on the debt it owes to itself.  Instead, it just stiffs the people that really own that debt and does not pay them what was guaranteed.

The reality is that you cannot find a 40 year period where stable investments led to a worse return for investments.  That makes SS invested rather than spent FAR superior, end of story.  The only way that you are capable of skewing this reality is by cherry picking specific instances in specific markets.  That is not a strong argument.  If you want to keep SS as a program, the best way of going about it would be to allow control over that money in a limited fashion where you could choose to invest in a limited number of ways.


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## Skull Pilot

OohPooPahDoo said:


> Skull Pilot said:
> 
> 
> 
> I'll take my chances with a balanced portfolio any day over letting the fucking miscreants in the government handle my money.
> 
> 
> 
> 
> The expected return of a balanced portfolio is the same as the expected return of U.S. Treasuries.
> 
> If you're going to buy the buy and hold balanced porfolio line you should at least hedge your risk with put options.
Click to expand...


 30 year US treasuries average less than 4 % 10 year T bills average a little over 2% a balanced portfolio of stocks and bonds will beat that.


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## OohPooPahDoo

peach174 said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> DiamondDave said:
> 
> 
> 
> hence why the government should have no hand in this at all... people should be able to invest on their own without forced government participation in the scam program slush fund
> 
> 
> 
> 
> And when the stock market crashes we can all go hungry together?
> 
> Click to expand...
> 
> 
> It has crashed big 3 times, 1929,1987 and 2000.
Click to expand...


Your sample only includes about 100 years  - less than two lifetimes - of a single nation's stock market and you happen to have picked a stock market that has performed extremely well compared to others in place and time. *You're straight up ignoring the sample points that would show the historical performance of the U.S. market is an outlier. *For instance - like I said, anyone invested in the Japanese stock market 25 years ago is not half recovered yet.



> But it is still around.
> You never lose all of your money in stocks.


My contention isn't that it will go away, but that assuming it will post at least X gains over the next 30 years because it has done so in the past is wrong.




> According to a 2009 Urban Institute report, those hit hardest by the 2008 financial crisis were seniors with investment-based savings or retirement plans. Millions of people saw the value of their investments drop dramatically in 2008, but those that stayed in the market saw many of their investments recover in 2009 and 2010. Those who bought shares in healthy companies during the recession made a considerable amount of money. However, many seniors had their savings in mutual funds, stocks and property and, unlike younger people, seniors were living off these savings and many could not wait for the market to recover to sell their houses or withdraw money from accounts for monthly or yearly expenses. As a result, many senior citizens lost 30 percent or 40 percent of their life savings, or even more.



Yes. One of the curious effects of a recession is that many people lose their jobs and _can't stay in the market_. They have to cash in part or all of their retirement accounts early. This further drives down equity prices.

I'm very glad you brought this point up because it helps me make my point. We can look at, say, the period 1928-1958, and say that since the total return (dividends included) was 10 X over that period, the market return ~8% and all was good in the end. But we ignore the fact that real investors are selling their portfolios all throughout 1929-33 because they have to eat. So they have bought in 1928 on the high side and out of necessity sold at a lower price in late 29 and the early 30's. Throughout much of the 30's stocks would have been a good deal - but no one had any money to actually buy them (that's WHY they are a good deal).
 Let's look at a more practical case - 

you invest $144 in the market in 1928. 
The market crashes, you lose your job, and in 1932 you have to sell the investment for $51 and you spend the money on necessities. Then for the next several years you are poor and can't afford to make an investment. The war comes, you get drafted, you get paid, and in 1943 you  invest $51 in the stock market. By 1958 that investment is worth $600. 600/144 isn't that much over 30 years.

This is why the average person saving for retirement NEVER does as good as the stock market over 30 year periods. People have more to save for retirement when the economy is booming and stocks are expensive and less to save when the economy is in recession and stocks are cheap - the real average person investing for retirement will never do as well as the indexes. 



> Even when it goes down you still have more in the long run in 30 years than with the government who sets how much you get each month.


IN THE PAST you would. Your claiming to predict the future. I'm fine with that - but your basis for doing so is very shaky. You are essentially claiming that because the U.S. stock market has performed so well in the past over long periods - it will continue to do so in the future. You ignore all other stock markets. 





> In the market you would get 3 times or more that amount, even with stock crashes, because the market always makes a come back.



You mean in the market you "would *have*". We can't retire based on the market returns of the past.


Your attitude, unfortunately, is very common. You honestly believe you can divine the future of the stock market based on the past returns of a 100 year period in the U.S. alone. The fact this believe is commonly held is all the more reason it would be a piss poor idea to put SS funds into the stock market.


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## OohPooPahDoo

Skull Pilot said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Skull Pilot said:
> 
> 
> 
> I'll take my chances with a balanced portfolio any day over letting the fucking miscreants in the government handle my money.
> 
> 
> 
> 
> The expected return of a balanced portfolio is the same as the expected return of U.S. Treasuries.
> 
> If you're going to buy the buy and hold balanced porfolio line you should at least hedge your risk with put options.
> 
> Click to expand...
> 
> 
> 30 year US treasuries average less than 4 % 10 year T bills average a little over 2% a balanced portfolio of stocks and bonds will beat that.
Click to expand...


You say it "will" beat that based on what?


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## Toro

Economic growth.


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## OohPooPahDoo

FA_Q2 said:


> The reality is that you cannot find a 40 year period where stable investments led to a worse return for investments.



In the past - yes - I agree. It would be great if I could take my income that I earn now and invest it in the stock market in 1933 and then the next day sell it in the 1973 market. Wouldn't that be awesome? Barring time travel though, that will not be possible. 



> The only way that you are capable of skewing this reality is by cherry picking specific instances in specific markets.  That is not a strong argument.  If you want to keep SS as a program, the best way of going about it would be to allow control over that money in a limited fashion where you could choose to invest in a limited number of ways.



And your argument is based on what data exactly? The U.S. stock market for the past 100 years? That's not cherry picking?* Are you even aware that the U.S. stock market for the past 100 years is a statistical outlier?*


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## Toro

OohPooPahDoo said:


> FA_Q2 said:
> 
> 
> 
> The reality is that you cannot find a 40 year period where stable investments led to a worse return for investments.
> 
> 
> 
> 
> In the past - yes - I agree. It would be great if I could take my income that I earn now and invest it in the stock market in 1933 and then the next day sell it in the 1973 market. Wouldn't that be awesome? Barring time travel though, that will not be possible.
> 
> 
> 
> 
> The only way that you are capable of skewing this reality is by cherry picking specific instances in specific markets.  That is not a strong argument.  If you want to keep SS as a program, the best way of going about it would be to allow control over that money in a limited fashion where you could choose to invest in a limited number of ways.
> 
> Click to expand...
> 
> 
> And your argument is based on what data exactly? The U.S. stock market for the past 100 years? That's not cherry picking?* Are you even aware that the U.S. stock market for the past 100 years is a statistical outlier?*
Click to expand...


What do you mean?

Equity returns have been similar across most Western nations.


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## Toro

BTW, since 1969, the price index of the Nikkei 225 has been 4.25%. I don't have dividends reinvested, but 2%-3% is a fair assumption. So Japanese stocks have returned 6%-7% over long periods of time. 

I don't have data prior to 1970.


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## Skull Pilot

OohPooPahDoo said:


> Skull Pilot said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> The expected return of a balanced portfolio is the same as the expected return of U.S. Treasuries.
> 
> If you're going to buy the buy and hold balanced porfolio line you should at least hedge your risk with put options.
> 
> 
> 
> 
> 30 year US treasuries average less than 4 % 10 year T bills average a little over 2% a balanced portfolio of stocks and bonds will beat that.
> 
> Click to expand...
> 
> 
> You say it "will" beat that based on what?
Click to expand...


Experience and history.


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## Mad Scientist

Toro said:


> Economic growth.


Revised Downward *again!* (At least for the USA)
Goldman Joins JPM In Cutting Q2 GDP To 1% Stall Speed; A "Funny Chart" Becomes Funnier | Zero Hedge

I love the comments: Noless:"Yes, this is a chart of nominal growth. Real "growth" (including inflation) would be _*negative*_."

Special Request for Toro: Could you start a thread and explain to everyone what "Front Running" is?


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## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> FA_Q2 said:
> 
> 
> 
> The reality is that you cannot find a 40 year period where stable investments led to a worse return for investments.
> 
> 
> 
> 
> In the past - yes - I agree. It would be great if I could take my income that I earn now and invest it in the stock market in 1933 and then the next day sell it in the 1973 market. Wouldn't that be awesome? Barring time travel though, that will not be possible.
> 
> 
> 
> 
> The only way that you are capable of skewing this reality is by cherry picking specific instances in specific markets.  That is not a strong argument.  If you want to keep SS as a program, the best way of going about it would be to allow control over that money in a limited fashion where you could choose to invest in a limited number of ways.
> 
> Click to expand...
> 
> 
> And your argument is based on what data exactly? The U.S. stock market for the past 100 years? That's not cherry picking?* Are you even aware that the U.S. stock market for the past 100 years is a statistical outlier?*
> 
> Click to expand...
> 
> 
> What do you mean?
> 
> Equity returns have been similar across most Western nations.
Click to expand...

The U.S. has actually been an exceptional case-
The Stock Market: A Look Back

Many stock exchanges in Europe suffered extreme real price depression in the 40's

Why would you pick only western nations?


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## OohPooPahDoo

Toro said:


> BTW, since 1969, the price index of the Nikkei 225 has been 4.25%. I don't have dividends reinvested, but 2%-3% is a fair assumption. So Japanese stocks have returned 6%-7% over long periods of time.
> 
> I don't have data prior to 1970.



The average retirement dollar isn't invested over 44 years. Most people's _first_ retirement dollars will be - but if you retire at 65 that means only the money you've earned before age 21 can possibly be invested for 44 years.


----------



## OohPooPahDoo

Skull Pilot said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Skull Pilot said:
> 
> 
> 
> 30 year US treasuries average less than 4 % 10 year T bills average a little over 2% a balanced portfolio of stocks and bonds will beat that.
> 
> 
> 
> 
> You say it "will" beat that based on what?
> 
> Click to expand...
> 
> 
> Experience and history.
Click to expand...


I think you have the past confused with the future.

Have you ever read the disclaimer on an investment prospectus?

"Past Performance is No Guarantee of Future Results"

For what reason do you think this doesn't apply to the U.S. Stock market?


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> BTW, since 1969, the price index of the Nikkei 225 has been 4.25%. I don't have dividends reinvested, but 2%-3% is a fair assumption. So Japanese stocks have returned 6%-7% over long periods of time.
> 
> I don't have data prior to 1970.
> 
> 
> 
> 
> The average retirement dollar isn't invested over 44 years. Most people's _first_ retirement dollars will be - but if you retire at 65 that means only the money you've earned before age 21 can possibly be invested for 44 years.
Click to expand...


A defined contribution plan can last forever if funded properly.  It won't matter how long any one individual has worked.  

You're worried about potential disaster scenarios that are small probabilities.  You can cite hyperinflation or war for being very fearful as a reason for investing solely in government liabilities, but you can also be very fearful and horde canned goods, guns and gold and live in the woods too.  And you aren't going to get your SS in full anyways if we have either.

There is tremendous opportunity cost for being highly fearful.  Again, using long-term averages, over 50 years, a standard 60/40 allocation between stocks and bonds has generated returns 10x higher than 100% in government bonds.  

Over long periods of time, returns on capital should approximate the growth rate in the economy.  Capital includes debt and equity.  Because debt is safer, it returns a lower return and equity a higher return.  If productivity growth is 2%, population growth 1% and inflation 3%, then the nominal return on capital will be 6%.  Returns to capital are the risk-free rate + credit risk + the equity risk premium.  The risk-free rate has been roughly 3-4% over long periods of time, credit risk 2% and the equity risk premium 3%-4%.  If the economy collapses, then that risk-free rate isn't going to be 3%-4%.  It is going to be negative.  You aren't going to get your SS anyways.


----------



## Toro

OohPooPahDoo said:


> Skull Pilot said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> You say it "will" beat that based on what?
> 
> 
> 
> 
> Experience and history.
> 
> Click to expand...
> 
> 
> I think you have the past confused with the future.
> 
> Have you ever read the disclaimer on an investment prospectus?
> 
> "Past Performance is No Guarantee of Future Results"
> 
> For what reason do you think this doesn't apply to the U.S. Stock market?
Click to expand...


Stocks are a call option on a rising economy.  Rising asset prices are a function of rising wealth.  Rising wealth is tied to a rising economy.  A rising economy is tied to rising productivity and living standards.  

Why do you think America is not going to have rising productivity and living standards in the future?


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> In the past - yes - I agree. It would be great if I could take my income that I earn now and invest it in the stock market in 1933 and then the next day sell it in the 1973 market. Wouldn't that be awesome? Barring time travel though, that will not be possible.
> 
> 
> 
> And your argument is based on what data exactly? The U.S. stock market for the past 100 years? That's not cherry picking?* Are you even aware that the U.S. stock market for the past 100 years is a statistical outlier?*
> 
> 
> 
> 
> What do you mean?
> 
> Equity returns have been similar across most Western nations.
> 
> Click to expand...
> 
> The U.S. has actually been an exceptional case-
> The Stock Market: A Look Back
> 
> Many stock exchanges in Europe suffered extreme real price depression in the 40's
> 
> Why would you pick only western nations?
Click to expand...


Because we are a Western nation.  Why would you pick nations that have little in common with us?

If you think that one day America is going to be like India or the Congo, then you have a point.  I don't that will be the case.  I don't think most Americans think that will be the case either.


----------



## Darkwind

If SS is so wonderful, and it is allegedly so safe, why does the President have to borrow money to pay us the dividend of our investment?


----------



## Skull Pilot

OohPooPahDoo said:


> Skull Pilot said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> You say it "will" beat that based on what?
> 
> 
> 
> 
> Experience and history.
> 
> Click to expand...
> 
> 
> I think you have the past confused with the future.
> 
> Have you ever read the disclaimer on an investment prospectus?
> 
> "Past Performance is No Guarantee of Future Results"
> 
> For what reason do you think this doesn't apply to the U.S. Stock market?
Click to expand...


That you're either too scared or too stupid to invest is your problem not mine.

If I had had control over the 15% of my lifetime earnings to date stolen from me to fund the SS slush fund instead of the morons in the fucking government I'd already be retired.


----------



## peach174

OohPooPahDoo said:


> peach174 said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> And when the stock market crashes we can all go hungry together?
> 
> 
> 
> 
> It has crashed big 3 times, 1929,1987 and 2000.
> 
> Click to expand...
> 
> 
> Your sample only includes about 100 years  - less than two lifetimes - of a single nation's stock market and you happen to have picked a stock market that has performed extremely well compared to others in place and time. *You're straight up ignoring the sample points that would show the historical performance of the U.S. market is an outlier. *For instance - like I said, anyone invested in the Japanese stock market 25 years ago is not half recovered yet.
> 
> 
> My contention isn't that it will go away, but that assuming it will post at least X gains over the next 30 years because it has done so in the past is wrong.
> 
> 
> 
> 
> Yes. One of the curious effects of a recession is that many people lose their jobs and _can't stay in the market_. They have to cash in part or all of their retirement accounts early. This further drives down equity prices.
> 
> I'm very glad you brought this point up because it helps me make my point. We can look at, say, the period 1928-1958, and say that since the total return (dividends included) was 10 X over that period, the market return ~8% and all was good in the end. But we ignore the fact that real investors are selling their portfolios all throughout 1929-33 because they have to eat. So they have bought in 1928 on the high side and out of necessity sold at a lower price in late 29 and the early 30's. Throughout much of the 30's stocks would have been a good deal - but no one had any money to actually buy them (that's WHY they are a good deal).
> Let's look at a more practical case -
> 
> you invest $144 in the market in 1928.
> The market crashes, you lose your job, and in 1932 you have to sell the investment for $51 and you spend the money on necessities. Then for the next several years you are poor and can't afford to make an investment. The war comes, you get drafted, you get paid, and in 1943 you  invest $51 in the stock market. By 1958 that investment is worth $600. 600/144 isn't that much over 30 years.
> 
> This is why the average person saving for retirement NEVER does as good as the stock market over 30 year periods. People have more to save for retirement when the economy is booming and stocks are expensive and less to save when the economy is in recession and stocks are cheap - the real average person investing for retirement will never do as well as the indexes.
> 
> 
> 
> 
> Even when it goes down you still have more in the long run in 30 years than with the government who sets how much you get each month.
> 
> Click to expand...
> 
> IN THE PAST you would. Your claiming to predict the future. I'm fine with that - but your basis for doing so is very shaky. You are essentially claiming that because the U.S. stock market has performed so well in the past over long periods - it will continue to do so in the future. You ignore all other stock markets.
> 
> 
> 
> 
> 
> 
> In the market you would get 3 times or more that amount, even with stock crashes, because the market always makes a come back.
> 
> Click to expand...
> 
> 
> You mean in the market you "would *have*". We can't retire based on the market returns of the past.
> 
> 
> Your attitude, unfortunately, is very common. You honestly believe you can divine the future of the stock market based on the past returns of a 100 year period in the U.S. alone. The fact this believe is commonly held is all the more reason it would be a piss poor idea to put SS funds into the stock market.
Click to expand...



It is still better than the Politicians who rob the SS funds and replace it with IOU's and that money will never be replaced. And them setting the amount that we get every month.


----------



## Norman

OohPooPahDoo said:


> Norman said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> Did Japan default on its debt? I don't recall that it did. Any Japanese person who had invested in Japanese debt instead of the stock market would have come out way ahead of everyone else. Your argument is based on the  false presumption that nations always default on their debts when their stock markets crash. Although this is certainly possible and the two have coincided in the past, it is hardly a rule.
> 
> 
> 
> 
> What I said has nothing to do with defaulting. It's about getting your retirement. If tax receipts or productivity of an economy permanently goes down then so does the retirement money if it's based on a pay as you go plan. Or perhaps it's just taken from other services that you otherwise would recieve, or perhaps your taxes are raised. Either way you lose it just like in the stock market case (of course, in stock market case you at least have some constant profits).
> 
> Click to expand...
> 
> 
> Governments borrow more in bad economies to make up for lost revenues. Treasuries outperformed the stock market on average throughout much of the depression - and as already pointed out, the Japanese government has continued to pay its debt obligations. Social Security is hardly bullet proof but that fact should not induce us to expose our retirements to even greater risk.
> 
> 
> 
> 
> 
> On the other hand if your money is invested all arond the world in many asset classes, that's already much safer and obviously more profitable (when there is no crisis) than "investing" it in government to spend.
> 
> Click to expand...
> 
> 
> When there is no crisis? You're just going to ignore the potential of an economic crisis?
> 
> In the 1930's the world was in a depression. If you had invested worldwide you might well have fared far _worse_ than in the U.S.
> 
> I submit that
> 
> a) history can repeat itself and
> 
> b) the future will always contain more extremes than history
Click to expand...


When government starts to borrow to get your retirement paid, you have already lost! That money could have been burrowed had you been investing in the stock market and provide you with retirement in any case! People just don't understand opportunity cost.

Of course like I already stated, government tax recepits also suffer from recessions. Depressions are bad thing for retirement no matter what kind of scheme you are using. BUT if you are investing all around the world, that sort of risk is greatly diversified, meaning it's much less significant.


In addition, it seems like you haven't undestood that YOU are the payer of the interest on a government bond. Thus there really is NO interest! The real interest on a government bonds come from the fact that government builds roads and such to help the economy... Except very high percentage of the investment is completely silly and never generates any profits. Unlike with stocks, corporations by law are only interested in making returns to the stock holder.



Finally, no one here is suggesting outlawing government bonds as an investment. If you think they are so great of an investment go for them. Let other people choose how they want to.


----------



## Norman

Also I would like to point out that now this thread has shifted from retirement to "Why US bonds are the best investment in the world?".

I wonder why pretty much no brokerage dealer recommends you to be in 100% bonds, in fact I think it's a bubble right now and would not recommend owning those to anyone.

But this guy is basically arguing that US bonds are the best investment NO MATTER WHAT. It's the best investment at all times. That's what you have to believe if you think there should be no alternative to US bonds as an investment.

Of course, he still hasn't dealt with the fact that when looking at this sort of scheme in an aggregate, you in fact pay the interest on the US bonds. I would understand say, Swedish government bonds as other nations tax payers have to pay for the interest on those.


Anyway I challenge the OP to open a brokerage that only sells government bonds. If your theory is correct, you should get pretty rich.  I wonder how no other professional investor has thought of this strategy before. But of course, bureucrats are always smarter than professional investors.


----------



## deltex1

OohPooPahDoo said:


> There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
> 
> 
> This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
> 
> To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.



I take it you didn't buy SIRI a few years back...


----------



## Boss

OohPooPahDoo said:


> There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
> 
> 
> This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
> 
> To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.



Okay, I have a little project for you. Most adults will work an average of 40 years, so let's take the entire history of the US Stock Market, and I want you to show me ANY 40 year time span in which the market was lower at the end than the beginning. It's not a myth, it's called a "FACT." The market will always recover over long time spans, it always has. 

Now, what doesn't really matter one bit, is how Japanese markets performed. We're not going to invest money in the Japanese markets. Other countries are not the US, other stock markets are not the US stock market, so why the hell do they matter here? 

Now.... Currently, we have a system, by which, an individual pays into all their adult life. If they are fortunate enough to live to be 65, they can retire and get a specific allotment of Social Security each month they remain alive. If they die before 65, they get not a penny of the money they contributed. Their family gets $212.00, maybe a little more if they have children under 18. However, the privatization plan would put their contribution in a personal account. An account that they own as an asset, that the government can't steal, that can't be used to fund the latest government boondoggle. If you paid in $250k over your life, that is what will be there when you retire, along with the interest earned. It's YOUR money, it's in YOUR account, it can be used as you please, and whenever you die, it can be left to your family. 

Even IF the stock market tanks, and NOTHING is gained over time, which is something that has NEVER happened in our history, but even IF it did... you are still better off with an account bearing your name, even if it only has the money you paid in without ANY interest. At least you have SOMETHING... as it currently stands, you have NOTHING! You get what the government decides to send you each month, until you die, and that's ALL you get. What about the money you paid in? What about the interest on the money you paid in? Nope... you don't get any of that, nor does your family. 

So if an average Joe, works his whole life and contributes to SS, and he dies the day after retirement, how well did his "retirement account" perform? His widow gets the $212 check... but what about the untold thousands he paid in? OooooH.... it's being used to bail out the Japanese?


----------



## Norman

deltex1 said:


> OohPooPahDoo said:
> 
> 
> 
> There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
> 
> 
> This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
> 
> To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.
> 
> 
> 
> 
> I take it you didn't buy SIRI a few years back...
Click to expand...



Even IF his story made any sense, he is STILL wrong. Let's just pretend that the facts I pointed out in the posts above doesn't exist, and stick with his story.

So, in his mind it's ok to compare the US stock market to japanese stock market, but not US bond market to Greek bond market?

In his mind it's not ok to look at the past performance of stock markets, but it's apparently ok to look at past performance of bond market to determinate the future returns? I guess it's actually ok to conjure the future profits of bond market out of air...

Talk about biased. I wonder if he practices what he preaches and has invested 100% of his investment capital to the government bonds. Actually I hope he has, maybe a lesson could be learned here.


----------



## FA_Q2

Boss said:


> OohPooPahDoo said:
> 
> 
> 
> There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
> 
> 
> This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
> 
> To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.
> 
> 
> 
> 
> Okay, I have a little project for you. Most adults will work an average of 40 years, so let's take the entire history of the US Stock Market, and I want you to show me ANY 40 year time span in which the market was lower at the end than the beginning. It's not a myth, it's called a "FACT." The market will always recover over long time spans, it always has.
> 
> Now, what doesn't really matter one bit, is how Japanese markets performed. We're not going to invest money in the Japanese markets. Other countries are not the US, other stock markets are not the US stock market, so why the hell do they matter here?
> 
> Now.... Currently, we have a system, by which, an individual pays into all their adult life. If they are fortunate enough to live to be 65, they can retire and get a specific allotment of Social Security each month they remain alive. If they die before 65, they get not a penny of the money they contributed. Their family gets $212.00, maybe a little more if they have children under 18. However, the privatization plan would put their contribution in a personal account. An account that they own as an asset, that the government can't steal, that can't be used to fund the latest government boondoggle. If you paid in $250k over your life, that is what will be there when you retire, along with the interest earned. It's YOUR money, it's in YOUR account, it can be used as you please, and whenever you die, it can be left to your family.
> 
> Even IF the stock market tanks, and NOTHING is gained over time, which is something that has NEVER happened in our history, but even IF it did... you are still better off with an account bearing your name, even if it only has the money you paid in without ANY interest. At least you have SOMETHING... as it currently stands, you have NOTHING! You get what the government decides to send you each month, until you die, and that's ALL you get. What about the money you paid in? What about the interest on the money you paid in? Nope... you don't get any of that, nor does your family.
> 
> So if an average Joe, works his whole life and contributes to SS, and he dies the day after retirement, how well did his "retirement account" perform? His widow gets the $212 check... but what about the untold thousands he paid in? OooooH.... it's being used to bail out the Japanese?
Click to expand...

EXACTLY.  The side benefit of such a system is that poor families can actually have the ability to create real generational wealth, something that they have never been able to accomplish.  On top of that, it opens them up the savings and investment.  It is known that people have a hard time breaking into a new system to them until they do so for the first time.  Once that is done, they have some familiarity that helps them continue to use the product.

Instead of the current SS which actually KEEPS people in poverty, right at the edge, we could have a program that actually allwed people to get OUT of poverty instead.


----------



## Boss

Norman said:


> Even IF his story made any sense, he is STILL wrong. Let's just pretend that the facts I pointed out in the posts above doesn't exist, and stick with his story.
> 
> So, in his mind it's ok to compare the US stock market to japanese stock market, but not US bond market to Greek bond market?
> 
> In his mind it's not ok to look at the past performance of stock markets, but it's apparently ok to look at past performance of bond market to determinate the future returns? I guess it's actually ok to conjure the future profits of bond market out of air...
> 
> Talk about biased. I wonder if he practices what he preaches and has invested 100% of his investment capital to the government bonds. Actually I hope he has, maybe a lesson could be learned here.



It's even worse, if you can imagine. He is actually arguing that investment in a stock market, because of volatility, is worse than pouring your money down a bankrupt rathole, where you will never see it again. He is arguing that actually having an account in a bank with your name on it, containing the assets you contributed over your lifetime... is WORSE than just forking over 30% of your pay your entire working life, in return for the promise of a monthly check, which you may or may not get, depending on when you retire.

An IRA is an asset you own. It belongs to you. It can be used to secure a loan, or can be handed down to your children and spouse. If you die before you retire, the money is still there, in the account, where it can benefit your family in the event of your death. This moron would rather have the guaranteed $212 check, to help cover your funeral expenses, in return for your lifelong contribution. Even an investment in the Japanese stock market would be BETTER!


----------



## OohPooPahDoo

Toro said:


> There is tremendous opportunity cost for being highly fearful.  Again, using long-term averages, over 50 years, a standard 60/40 allocation between stocks and bonds has generated returns 10x higher than 100% in government bonds.



Sure, if you select what is close to if not the best stock market ever in the history of man, you would get those numbers. Its called _selection bias_. Look it up. You continue to base you analysis of future return prospects on a sample that is biased in favor of survivors while insisting that rare events simply be discounted as not even relevant to the analysis. Even the stock indexes themselves are biased in favor of survivors. 





> If productivity growth is 2%, population growth 1% and inflation 3%, then the nominal return on capital will be 6%


. 

What happens when population growth is -5%?


----------



## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Skull Pilot said:
> 
> 
> 
> Experience and history.
> 
> 
> 
> 
> I think you have the past confused with the future.
> 
> Have you ever read the disclaimer on an investment prospectus?
> 
> "Past Performance is No Guarantee of Future Results"
> 
> For what reason do you think this doesn't apply to the U.S. Stock market?
> 
> Click to expand...
> 
> 
> Stocks are a call option on a rising economy.
Click to expand...

Yeah, a call option with a strike price of zero.



> Rising asset prices are a function of rising wealth.  Rising wealth is tied to a rising economy.  A rising economy is tied to rising productivity and living standards.
> 
> Why do you think America is not going to have rising productivity and living standards in the future?



I've no particular reason to think it will or won't except that for America to continue to have an economy that is growing indefinitely without end would be exceptional and highly unlikely indeed.


----------



## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Toro said:
> 
> 
> 
> What do you mean?
> 
> Equity returns have been similar across most Western nations.
> 
> 
> 
> The U.S. has actually been an exceptional case-
> The Stock Market: A Look Back
> 
> Many stock exchanges in Europe suffered extreme real price depression in the 40's
> 
> Why would you pick only western nations?
> 
> Click to expand...
> 
> 
> Because we are a Western nation.  Why would you pick nations that have little in common with us?
Click to expand...


Why would I not only pick the winners for my sample? Is that what you're asking?


----------



## OohPooPahDoo

Skull Pilot said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Skull Pilot said:
> 
> 
> 
> Experience and history.
> 
> 
> 
> 
> I think you have the past confused with the future.
> 
> Have you ever read the disclaimer on an investment prospectus?
> 
> "Past Performance is No Guarantee of Future Results"
> 
> For what reason do you think this doesn't apply to the U.S. Stock market?
> 
> Click to expand...
> 
> 
> That you're either too scared or too stupid to invest is your problem not mine.
> 
> If I had had control over the 15% of my lifetime earnings to date stolen from me to fund the SS slush fund instead of the morons in the fucking government I'd already be retired.
Click to expand...



Have you ever read the disclaimer on an investment prospectus?

"Past Performance is No Guarantee of Future Results"

For what reason do you think this doesn't apply to the U.S. Stock market?


----------



## OohPooPahDoo

peach174 said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> peach174 said:
> 
> 
> 
> It has crashed big 3 times, 1929,1987 and 2000.
> 
> 
> 
> 
> Your sample only includes about 100 years  - less than two lifetimes - of a single nation's stock market and you happen to have picked a stock market that has performed extremely well compared to others in place and time. *You're straight up ignoring the sample points that would show the historical performance of the U.S. market is an outlier. *For instance - like I said, anyone invested in the Japanese stock market 25 years ago is not half recovered yet.
> 
> 
> My contention isn't that it will go away, but that assuming it will post at least X gains over the next 30 years because it has done so in the past is wrong.
> 
> 
> 
> 
> Yes. One of the curious effects of a recession is that many people lose their jobs and _can't stay in the market_. They have to cash in part or all of their retirement accounts early. This further drives down equity prices.
> 
> I'm very glad you brought this point up because it helps me make my point. We can look at, say, the period 1928-1958, and say that since the total return (dividends included) was 10 X over that period, the market return ~8% and all was good in the end. But we ignore the fact that real investors are selling their portfolios all throughout 1929-33 because they have to eat. So they have bought in 1928 on the high side and out of necessity sold at a lower price in late 29 and the early 30's. Throughout much of the 30's stocks would have been a good deal - but no one had any money to actually buy them (that's WHY they are a good deal).
> Let's look at a more practical case -
> 
> you invest $144 in the market in 1928.
> The market crashes, you lose your job, and in 1932 you have to sell the investment for $51 and you spend the money on necessities. Then for the next several years you are poor and can't afford to make an investment. The war comes, you get drafted, you get paid, and in 1943 you  invest $51 in the stock market. By 1958 that investment is worth $600. 600/144 isn't that much over 30 years.
> 
> This is why the average person saving for retirement NEVER does as good as the stock market over 30 year periods. People have more to save for retirement when the economy is booming and stocks are expensive and less to save when the economy is in recession and stocks are cheap - the real average person investing for retirement will never do as well as the indexes.
> 
> 
> IN THE PAST you would. Your claiming to predict the future. I'm fine with that - but your basis for doing so is very shaky. You are essentially claiming that because the U.S. stock market has performed so well in the past over long periods - it will continue to do so in the future. You ignore all other stock markets.
> 
> 
> 
> 
> 
> 
> In the market you would get 3 times or more that amount, even with stock crashes, because the market always makes a come back.
> 
> Click to expand...
> 
> 
> You mean in the market you "would *have*". We can't retire based on the market returns of the past.
> 
> 
> Your attitude, unfortunately, is very common. You honestly believe you can divine the future of the stock market based on the past returns of a 100 year period in the U.S. alone. The fact this believe is commonly held is all the more reason it would be a piss poor idea to put SS funds into the stock market.
> 
> Click to expand...
> 
> 
> 
> It is still better than the Politicians who rob the SS funds and replace it with IOU's and that money will never be replaced. And them setting the amount that we get every month.
Click to expand...


If you think the U.S. Government is going to default on its debt, investing in the U.S. Stock market is an even dumber idea.


----------



## OohPooPahDoo

Norman said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Norman said:
> 
> 
> 
> What I said has nothing to do with defaulting. It's about getting your retirement. If tax receipts or productivity of an economy permanently goes down then so does the retirement money if it's based on a pay as you go plan. Or perhaps it's just taken from other services that you otherwise would recieve, or perhaps your taxes are raised. Either way you lose it just like in the stock market case (of course, in stock market case you at least have some constant profits).
> 
> 
> 
> 
> Governments borrow more in bad economies to make up for lost revenues. Treasuries outperformed the stock market on average throughout much of the depression - and as already pointed out, the Japanese government has continued to pay its debt obligations. Social Security is hardly bullet proof but that fact should not induce us to expose our retirements to even greater risk.
> 
> 
> 
> 
> 
> On the other hand if your money is invested all arond the world in many asset classes, that's already much safer and obviously more profitable (when there is no crisis) than "investing" it in government to spend.
> 
> Click to expand...
> 
> 
> When there is no crisis? You're just going to ignore the potential of an economic crisis?
> 
> In the 1930's the world was in a depression. If you had invested worldwide you might well have fared far _worse_ than in the U.S.
> 
> I submit that
> 
> a) history can repeat itself and
> 
> b) the future will always contain more extremes than history
> 
> Click to expand...
> 
> 
> When government starts to borrow to get your retirement paid, you have already lost!
Click to expand...


SS benefits are paid from SS revenues. 



> That money could have been burrowed had you been investing in the stock market and provide you with retirement in any case! People just don't understand opportunity cost.



My brother the energy trader likes to use the term constantly. 




> Of course like I already stated, government tax recepits also suffer from recessions.


Like I already said there isn't a 1:1 correlation. 




> In addition, it seems like you haven't undestood that YOU are the payer of the interest on a government bond. Thus there really is NO interest!



People who are retired and living off of the interest of treasuries receive more interest than they pay back in taxes.



> Finally, no one here is suggesting outlawing government bonds as an investment. If you think they are so great of an investment go for them. Let other people choose how they want to.



I wasn't suggesting anyone be forced to buy government bonds, I was only using them as a comparison point w/ stocks. Social Security is an annuity plan.


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> The U.S. has actually been an exceptional case-
> The Stock Market: A Look Back
> 
> Many stock exchanges in Europe suffered extreme real price depression in the 40's
> 
> Why would you pick only western nations?
> 
> 
> 
> 
> Because we are a Western nation.  Why would you pick nations that have little in common with us?
> 
> Click to expand...
> 
> 
> Why would I not only pick the winners for my sample? Is that what you're asking?
Click to expand...


What in American culture, society, people, politics, history, and institutions make you believe that we should be compared to Zimbabwe or Argentina?

America has more in common with itself than with those nations.


----------



## OohPooPahDoo

deltex1 said:


> OohPooPahDoo said:
> 
> 
> 
> There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
> 
> 
> This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
> 
> To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.
> 
> 
> 
> 
> I take it you didn't buy SIRI a few years back...
Click to expand...


What great hindsight you have.


----------



## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Toro said:
> 
> 
> 
> Because we are a Western nation.  Why would you pick nations that have little in common with us?
> 
> 
> 
> 
> Why would I not only pick the winners for my sample? Is that what you're asking?
> 
> Click to expand...
> 
> 
> What in American culture, society, people, politics, history, and institutions make you believe that we should be compared to Zimbabwe or Argentina?
> 
> America has more in common with itself than with those nations.
Click to expand...


I'm not comparing Americans to anything. I'm talking about stock markets. Are you suggesting the laws of nature are different in other places?


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> I think you have the past confused with the future.
> 
> Have you ever read the disclaimer on an investment prospectus?
> 
> "Past Performance is No Guarantee of Future Results"
> 
> For what reason do you think this doesn't apply to the U.S. Stock market?
> 
> 
> 
> 
> Stocks are a call option on a rising economy.
> 
> Click to expand...
> 
> Yeah, a call option with a strike price of zero.
> 
> 
> 
> 
> Rising asset prices are a function of rising wealth.  Rising wealth is tied to a rising economy.  A rising economy is tied to rising productivity and living standards.
> 
> Why do you think America is not going to have rising productivity and living standards in the future?
> 
> Click to expand...
> 
> 
> I've no particular reason to think it will or won't except that for America to continue to have an economy that is growing indefinitely without end would be exceptional and highly unlikely indeed.
Click to expand...


Why?

Again, if America stops growing, or there is a catastrophe, why do you think government liabilities are safe?


----------



## OohPooPahDoo

Norman said:


> I wonder why pretty much no brokerage dealer recommends you to be in 100% bonds, in fact I think it's a bubble right now and would not recommend owning those to anyone.



LOL! The brokerage dealers have never failed to call the stock market correctly.



> But this guy is basically arguing that US bonds are the best investment NO MATTER WHAT.


No, that's not what I'm arguing. You've completely missed the boat on that one.


> It's the best investment at all times. That's what you have to believe if you think there should be no alternative to US bonds as an investment.


OK. But I don't think that.





> Of course, he still hasn't dealt with the fact that when looking at this sort of scheme in an aggregate, you in fact pay the interest on the US bonds. I would understand say, Swedish government bonds as other nations tax payers have to pay for the interest on those.


 LOL! That's the most absurd notion I've ever heard. Actually when you buy bonds you lower interest rates.



> Anyway I challenge the OP to open a brokerage that only sells government bonds.


Why would anyone want to do that?


> If your theory is correct, you should get pretty rich.


What theory is that?



> I wonder how no other professional investor has thought of this strategy before.



You're the first!


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> Why would I not only pick the winners for my sample? Is that what you're asking?
> 
> 
> 
> 
> What in American culture, society, people, politics, history, and institutions make you believe that we should be compared to Zimbabwe or Argentina?
> 
> America has more in common with itself than with those nations.
> 
> Click to expand...
> 
> 
> I'm not comparing Americans to anything. I'm talking about stock markets. Are you suggesting the laws of nature are different in other places?
Click to expand...


When you ask why should we only look at the winners, you imply that we should look at the losers. Yes, if you think we are going to collapse into chaos, then stocks aren't a good option. But neither is government debt. 

Over long periods of time, asset prices grow with the economy. That may not be true for any decade, or even two or three, but it is over long periods.


----------



## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Toro said:
> 
> 
> 
> Stocks are a call option on a rising economy.
> 
> 
> 
> Yeah, a call option with a strike price of zero.
> 
> 
> 
> 
> Rising asset prices are a function of rising wealth.  Rising wealth is tied to a rising economy.  A rising economy is tied to rising productivity and living standards.
> 
> Why do you think America is not going to have rising productivity and living standards in the future?
> 
> Click to expand...
> 
> 
> I've no particular reason to think it will or won't except that for America to continue to have an economy that is growing indefinitely without end would be exceptional and highly unlikely indeed.
> 
> Click to expand...
> 
> 
> Why?
> 
> Again, if America stops growing, or there is a catastrophe, why do you think government liabilities are safe?
Click to expand...


Did I ever say they would be? If we use _your_ favorite metric, however - the PAST - we would see the U.S. has continued to pay its debts through good times and bad.


I just think any investment strategy that assumes stocks will always out-perform bonds in the long run is fundamentally flawed as it is based on a selective sampling of past data. You might think of any number of investment strategies to deal with this - 50/50 bonds and stocks from around the world, or maybe take some of your funds and put them into something with intrinsic worth like forest or farm land, or perhaps make delta neutral investments that seek to capitalize from movements in the market, or buy commodities. Whatever you do - blindly assuming stocks will always outperform treasuries over ~30 year periods is just fool and social security policy should not be based on it.


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> There is tremendous opportunity cost for being highly fearful.  Again, using long-term averages, over 50 years, a standard 60/40 allocation between stocks and bonds has generated returns 10x higher than 100% in government bonds.
> 
> 
> 
> 
> Sure, if you select what is close to if not the best stock market ever in the history of man, you would get those numbers. Its called _selection bias_. Look it up. You continue to base you analysis of future return prospects on a sample that is biased in favor of survivors while insisting that rare events simply be discounted as not even relevant to the analysis. Even the stock indexes themselves are biased in favor of survivors.
> 
> 
> 
> 
> 
> 
> If productivity growth is 2%, population growth 1% and inflation 3%, then the nominal return on capital will be 6%
> 
> Click to expand...
> 
> .
> 
> What happens when population growth is -5%?
Click to expand...


If we have population growth of -5%, then you won't be getting SS either. 

We can think of all sorts of apocalyptic scenarios. I've heard them all. Yet America endures. 

Your comment about survivorship bias implies America won't survive. I think it will. You can go into the woods with canned food, guns and gold and wait for the end of America with all the crazy right wingers. I'm going to stay here and participate in the continued growth in America.


----------



## OohPooPahDoo

Toro said:


> Over long periods of time, asset prices grow with the economy. That may not be true for any decade, or even two or three, but it is over long periods.



And over how many "long periods" is this observation based on?

100 years / 30 years = 3.33333

Barely more than 3.

That's a statistical sample size not even worthy of mention. I think you know that.


----------



## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Toro said:
> 
> 
> 
> There is tremendous opportunity cost for being highly fearful.  Again, using long-term averages, over 50 years, a standard 60/40 allocation between stocks and bonds has generated returns 10x higher than 100% in government bonds.
> 
> 
> 
> 
> Sure, if you select what is close to if not the best stock market ever in the history of man, you would get those numbers. Its called _selection bias_. Look it up. You continue to base you analysis of future return prospects on a sample that is biased in favor of survivors while insisting that rare events simply be discounted as not even relevant to the analysis. Even the stock indexes themselves are biased in favor of survivors.
> 
> 
> 
> 
> 
> 
> If productivity growth is 2%, population growth 1% and inflation 3%, then the nominal return on capital will be 6%
> 
> Click to expand...
> 
> .
> 
> What happens when population growth is -5%?
> 
> Click to expand...
> 
> 
> If we have population growth of -5%, then you won't be getting SS either.
Click to expand...


You think a lot of your ability to divine the future. 





> We can think of all sorts of apocalyptic scenarios. I've heard them all. Yet America endures.



-5% population growth is an "apocalyptic scenario" ? I suppose it is if your retirement planning is based on the presumption the population will continue to grow!




> Your comment about survivorship bias implies America won't survive.



Actually it in no way implies that one bit.


----------



## Quantum Windbag

OohPooPahDoo said:


> There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
> 
> 
> This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
> 
> To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.



The Tosho suffered for years under Keynesian stimulus plans that weighed down the economy. As long as we can keep the idiots that think Keynes supported massive deficits and and government spending from controlling everything here we should be fine.


----------



## Boss

> the U.S. has continued to pay its debts through good times and bad.



Yeah? Well how the hell did we get $13 trillion in the hole??? By paying off our debts??? 

You're such a goddamn genius, I am sure you can explain this to me. It looks to me like, we've been amassing more and more debt, instead of paying it off.


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> Yeah, a call option with a strike price of zero.
> 
> 
> 
> I've no particular reason to think it will or won't except that for America to continue to have an economy that is growing indefinitely without end would be exceptional and highly unlikely indeed.
> 
> 
> 
> 
> Why?
> 
> Again, if America stops growing, or there is a catastrophe, why do you think government liabilities are safe?
> 
> Click to expand...
> 
> 
> Did I ever say they would be? If we use _your_ favorite metric, however - the PAST - we would see the U.S. has continued to pay its debts through good times and bad.
> 
> 
> I just think any investment strategy that assumes stocks will always out-perform bonds in the long run is fundamentally flawed as it is based on a selective sampling of past data. You might think of any number of investment strategies to deal with this - 50/50 bonds and stocks from around the world, or maybe take some of your funds and put them into something with intrinsic worth like forest or farm land, or perhaps make delta neutral investments that seek to capitalize from movements in the market, or buy commodities. Whatever you do - blindly assuming stocks will always outperform treasuries over ~30 year periods is just fool and social security policy should not be based on it.
Click to expand...


There is an economic logic to why equities will do better than government debt or any debt over the long run. It's because in the distribution of returns to capital, bonds get paid first and are thus less risky. Because equity is last to get paid, it's returns are higher to compensate for the risk. Higher risk means higher returns. Lower risk means lower returns. This is a basic tenet of economics and finance. If wealth is growing over long periods of time, stocks will always do better than debt.  Equity should do better than real estate and commodities. Over long periods of time, real estate grows at about the rate of the economy, give or take a bit. Commodities are priced over marginal costs, which is influenced by production technologies and substitution effects. 

Nobody is saying that SS should be 100% in equities. But it shouldn't be 100% government debt either. I know of no other pension plan in this country that does that. And many countries are now running their SS as real pension plans, with allocations across many asset classes.


----------



## CrusaderFrank

OohPooPahDoo said:


> There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
> 
> 
> This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
> 
> To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.



Two words: Warren Buffett

Also, we're not in Japan.


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> Over long periods of time, asset prices grow with the economy. That may not be true for any decade, or even two or three, but it is over long periods.
> 
> 
> 
> 
> And over how many "long periods" is this observation based on?
> 
> 100 years / 30 years = 3.33333
> 
> Barely more than 3.
> 
> That's a statistical sample size not even worthy of mention. I think you know that.
Click to expand...


In the history of the world, virtually all of the economic growth has occurred on the past 200+ years. So if you want statistical samples, starting in the year 1900, there are 62 discreet 50-year samples. This is statistically significant. In all cases, US stocks have outperformed government debt.


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> Sure, if you select what is close to if not the best stock market ever in the history of man, you would get those numbers. Its called _selection bias_. Look it up. You continue to base you analysis of future return prospects on a sample that is biased in favor of survivors while insisting that rare events simply be discounted as not even relevant to the analysis. Even the stock indexes themselves are biased in favor of survivors.
> 
> 
> 
> .
> 
> What happens when population growth is -5%?
> 
> 
> 
> 
> If we have population growth of -5%, then you won't be getting SS either.
> 
> Click to expand...
> 
> 
> You think a lot of your ability to divine the future.
> 
> 
> 
> 
> 
> 
> We can think of all sorts of apocalyptic scenarios. I've heard them all. Yet America endures.
> 
> Click to expand...
> 
> 
> -5% population growth is an "apocalyptic scenario" ? I suppose it is if your retirement planning is based on the presumption the population will continue to grow!
> 
> 
> 
> 
> 
> Your comment about survivorship bias implies America won't survive.
> 
> Click to expand...
> 
> 
> Actually it in no way implies that one bit.
Click to expand...


Well, what do you mean by "survivorship bias" then?  I've always known it to mean it excludes data that doesn't survive. 

As for population growth, again, if the population is shrinking by 5%, you ain't getting your SS, or far less of it, because there are less people paying for more recipients. It's finished.


----------



## CrusaderFrank

Bonds? today?

Better off putting your money in a garbage pal in Grand Central Station, far more likely you'll get a return


----------



## boedicca

The government investing SS funds in the stock market is a bad idea because the government will make political, not financially sound, choices (the moral hazard of other people's money).

Individual controlling privatized SS-retirement accounts and making their own investment choices based on their income, wealth, objectives, and risk tolerance is a great idea.  

It's too bad the Feds have already spent all of the money and that the lockbox is just filled with IOUs to be paid off by future taxpayers.


----------



## boedicca

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Toro said:
> 
> 
> 
> If we have population growth of -5%, then you won't be getting SS either.
> 
> 
> 
> 
> You think a lot of your ability to divine the future.
> 
> -5% population growth is an "apocalyptic scenario" ? I suppose it is if your retirement planning is based on the presumption the population will continue to grow!
> 
> 
> 
> 
> 
> Your comment about survivorship bias implies America won't survive.
> 
> Click to expand...
> 
> 
> Actually it in no way implies that one bit.
> 
> Click to expand...
> 
> 
> Well, what do you mean by "survivorship bias" then?  I've always known it to mean it excludes data that doesn't survive.
> 
> As for population growth, again, if the population is shrinking by 5%, you ain't getting your SS, or far less of it, because there are less people paying for more recipients. It's finished.
Click to expand...



The Ponzi scheme is cratering.  We currently have less than 3 taxpayers per SS recipient.   When SS started, it was over 40 to 1.     Between having to pay for half of someone else's retirement and ObamaCare, and then their student loans, many young people will never be able to afford a family and a home.  

We have eaten our seed corn as a society, and the future harvests have disappeared.


----------



## Boss

Toro said:


> There is an economic logic to why equities will do better than government debt or any debt over the long run. It's because in the distribution of returns to capital, bonds get paid first and are thus less risky. Because equity is last to get paid, it's returns are higher to compensate for the risk. Higher risk means higher returns. Lower risk means lower returns. This is a basic tenet of economics and finance. If wealth is growing over long periods of time, stocks will always do better than debt.  Equity should do better than real estate and commodities. Over long periods of time, real estate grows at about the rate of the economy, give or take a bit. Commodities are priced over marginal costs, which is influenced by production technologies and substitution effects.
> 
> Nobody is saying that SS should be 100% in equities. But it shouldn't be 100% government debt either. I know of no other pension plan in this country that does that. And many countries are now running their SS as real pension plans, with allocations across many asset classes.



The major problem we are having in this debate, is the fact that we are allowing apples compared to oranges, as if they are the same. We don't currently have an investment-based social security system. You do not invest in Social Security, you pay a SSI tax, what amounts to a premium for insurance. Insurance that, when it does finally pay off, is paid in monthly installments, only until you die. You have no "investment" in this system, it is purely a government distributed program, relying on the benevolence of Congress. By the way, Congress has already borrowed and spent all the money in the system, and if you are under 50, there will probably not be a benefit for your contributions at all, by the time you retire. So you would have been much better off investing in the Japanese stock market, and losing half your money, or stuffing your money in a mattress.


----------



## Toro

Boss said:


> Toro said:
> 
> 
> 
> There is an economic logic to why equities will do better than government debt or any debt over the long run. It's because in the distribution of returns to capital, bonds get paid first and are thus less risky. Because equity is last to get paid, it's returns are higher to compensate for the risk. Higher risk means higher returns. Lower risk means lower returns. This is a basic tenet of economics and finance. If wealth is growing over long periods of time, stocks will always do better than debt.  Equity should do better than real estate and commodities. Over long periods of time, real estate grows at about the rate of the economy, give or take a bit. Commodities are priced over marginal costs, which is influenced by production technologies and substitution effects.
> 
> Nobody is saying that SS should be 100% in equities. But it shouldn't be 100% government debt either. I know of no other pension plan in this country that does that. And many countries are now running their SS as real pension plans, with allocations across many asset classes.
> 
> 
> 
> 
> The major problem we are having in this debate, is the fact that we are allowing apples compared to oranges, as if they are the same. We don't currently have an investment-based social security system. You do not invest in Social Security, you pay a SSI tax, what amounts to a premium for insurance. Insurance that, when it does finally pay off, is paid in monthly installments, only until you die. You have no "investment" in this system, it is purely a government distributed program, relying on the benevolence of Congress. By the way, Congress has already borrowed and spent all the money in the system, and if you are under 50, there will probably not be a benefit for your contributions at all, by the time you retire. So you would have been much better off investing in the Japanese stock market, and losing half your money, or stuffing your money in a mattress.
Click to expand...


Yeah, I get that criticism.  I've been around pensions for most of my career, and I've looked at SS.  Even though it is a pay-as-you-go system, it mimics a government bond fund.  IOW, if rather than acting as a pass-through, it actually bought government bonds, the economics would be the same as the way the SS trusts are debited and credited now.

Every pension fund in America owns government bonds.  SS should also.  It just shouldn't be invested 100% in government bonds.


----------



## OohPooPahDoo

Boss said:


> the U.S. has continued to pay its debts through good times and bad.
> 
> 
> 
> 
> Yeah? Well how the hell did we get $13 trillion in the hole??? By paying off our debts???
Click to expand...


By spending exceeding revenue. Duh. What are you, a fucking idiot?



> You're such a goddamn genius, I am sure you can explain this to me. It looks to me like, we've been amassing more and more debt, instead of paying it off.


Wow - no - clearly - you're the genius.


----------



## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Toro said:
> 
> 
> 
> Why?
> 
> Again, if America stops growing, or there is a catastrophe, why do you think government liabilities are safe?
> 
> 
> 
> 
> Did I ever say they would be? If we use _your_ favorite metric, however - the PAST - we would see the U.S. has continued to pay its debts through good times and bad.
> 
> 
> I just think any investment strategy that assumes stocks will always out-perform bonds in the long run is fundamentally flawed as it is based on a selective sampling of past data. You might think of any number of investment strategies to deal with this - 50/50 bonds and stocks from around the world, or maybe take some of your funds and put them into something with intrinsic worth like forest or farm land, or perhaps make delta neutral investments that seek to capitalize from movements in the market, or buy commodities. Whatever you do - blindly assuming stocks will always outperform treasuries over ~30 year periods is just fool and social security policy should not be based on it.
> 
> Click to expand...
> 
> 
> There is an economic logic to why equities will do better than government debt or any debt over the long run. It's because in the distribution of returns to capital, bonds get paid first and are thus less risky.
Click to expand...

_
You have to assume risk averse investing._ ~7% returns over treasuries over 30 year periods assumes extremely risk averse investing.

Take a look at what S&P 500 futures are for June 2014 delivery. I guarantee you they are not even close to 8% higher than the S&P 500 is now. They will in fact be about 2% LOWER than the S&P 500 is now. This is because the market doesn't actually think the S&P 500 will be 8% higher 11 months from now - it actually thinks that the total return will be the same as a U.S. Treasury over the same period. 



> Higher risk means higher returns. Lower risk means lower returns.


_*Yet your entire premise is based on the idea that a 30+ year investment in the stock market is actually low risk.
*_



> This is a basic tenet of economics and finance.


ONLY IF THE AVERAGE INVESTOR IS RISK AVERSE.
_*
Yet, actually entire areas of finance assume risk neutral investors.*_ Options pricing, for instance, is entirely based on the assumption of the risk neutral investor.



> If wealth is growing over long periods of time, stocks will always do better than debt.


You're making a prediction of the future based on a very tiny sample.


> Nobody is saying that SS should be 100% in equities.But it shouldn't be 100% government debt either.



Its not really "in" government debt. Its not like you get an account that accrues debt obligations and if those obligations do well you get more money and if they do less well you get less. Social security is an annuity. Its paid for by social security tax revenues +/- general revenues depending on whether the trust fund is being added to or drawn down.


----------



## OohPooPahDoo

CrusaderFrank said:


> OohPooPahDoo said:
> 
> 
> 
> There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
> 
> 
> This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
> 
> To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.
> 
> 
> 
> 
> Two words: Warren Buffett
Click to expand...


Congratulations, your survivor bias is so high, you've chosen perhaps the most successful investor of our day as your _only_ sample point.



> Also, we're not in Japan.


Are the laws of nature different in Japan?


----------



## Boss

OohPooPahDoo said:


> Boss said:
> 
> 
> 
> 
> 
> 
> the U.S. has continued to pay its debts through good times and bad.
> 
> 
> 
> 
> Yeah? Well how the hell did we get $13 trillion in the hole??? By paying off our debts???
> 
> Click to expand...
> 
> 
> By spending exceeding revenue. Duh. What are you, a fucking idiot?
> 
> 
> 
> 
> You're such a goddamn genius, I am sure you can explain this to me. It looks to me like, we've been amassing more and more debt, instead of paying it off.
> 
> Click to expand...
> 
> Wow - no - clearly - you're the genius.
Click to expand...


So we've obviously NOT been paying our debts, if we are spending more than our revenue. We are ACCUMULATING debt, not paying our debt. If you charge $5,000 on your charge card, and pay the minimum $140 monthly payment, you are not paying your debts. That's called FLOATING your debt. When you continue to spend $5,000 and pay $140, you will gain MORE debt, you are NOT paying the debt off.


----------



## OohPooPahDoo

Toro said:


> So if you want statistical samples, starting in the year 1900, there are 62 discreet 50-year samples.



LOL! That's hilarious, Sorry, but if you have 2 samples you don't get a 3rd by taking half of the first and tacking it on to half of the 2nd! 

There are 2.065 50 year samples over a 113 year period.  DUH


----------



## OohPooPahDoo

Boss said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Boss said:
> 
> 
> 
> Yeah? Well how the hell did we get $13 trillion in the hole??? By paying off our debts???
> 
> 
> 
> 
> By spending exceeding revenue. Duh. What are you, a fucking idiot?
> 
> 
> 
> 
> You're such a goddamn genius, I am sure you can explain this to me. It looks to me like, we've been amassing more and more debt, instead of paying it off.
> 
> Click to expand...
> 
> Wow - no - clearly - you're the genius.
> 
> Click to expand...
> 
> 
> So we've obviously NOT been paying our debts, if we are spending more than our revenue. We are ACCUMULATING debt, not paying our debt. If you charge $5,000 on your charge card, and pay the minimum $140 monthly payment, you are not paying your debts. That's called FLOATING your debt. When you continue to spend $5,000 and pay $140, you will gain MORE debt, you are NOT paying the debt off.
Click to expand...


Awesome. You're so smart. You're missing the entire point of this thread.


----------



## OohPooPahDoo

Toro said:


> Well, what do you mean by "survivorship bias" then?



Just look at the S&P 500. Is it a sample of the general stock market over time? No. It doesn't follow the losers to the ground - it drops them from the index! 



> As for population growth, again, if the population is shrinking by 5%, you ain't getting your SS, or far less of it, because there are less people paying for more recipients. It's finished.



So its your assertion that its mathematically impossible for the working members of a population to provide the goods and services that the too old to work members of that population needs if the population is decreasing? You are certainly certain of an awful lot!


----------



## Boss

Toro said:


> Yeah, I get that criticism.  I've been around pensions for most of my career, and I've looked at SS.  Even though it is a pay-as-you-go system, it mimics a government bond fund.  IOW, if rather than acting as a pass-through, it actually bought government bonds, the economics would be the same as the way the SS trusts are debited and credited now.
> 
> Every pension fund in America owns government bonds.  SS should also.  It just shouldn't be invested 100% in government bonds.



STILL... Even THAT would be better than what we're currently doing. Which is, pouring our money down a rathole, so cronies like Harry Reid and Nancy Pelosi, and even John McCain can "appropriate" it for their latest boondoggle. At least, we would have SOMETHING there, when it came time to retire.


----------



## CrusaderFrank

OohPooPahDoo said:


> CrusaderFrank said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
> 
> 
> This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
> 
> To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.
> 
> 
> 
> 
> Two words: Warren Buffett
> 
> Click to expand...
> 
> 
> Congratulations, your survivor bias is so high, you've chosen perhaps the most successful investor of our day as your _only_ sample point.
> 
> 
> 
> 
> Also, we're not in Japan.
> 
> Click to expand...
> 
> Are the laws of nature different in Japan?
Click to expand...


My survivor bias? It's just common sense that you can do better with equities than with bonds and I'd say between Berkshire Hathaway or bonds, I'd put it all on Berkshire


----------



## Toro

OohPooPahDoo said:


> _You have to assume risk averse investing._ ~7% returns over treasuries over 30 year periods assumes extremely risk averse investing.



I don't know what returns over Treasuries will be.  I do know that historically, equities have beaten Treasuries by a wide margin over long periods of times.  

The only way this doesn't occur in the future is if there are

1.  Extreme economic and political dislocations
2.  Extreme equity market valuations

I am willing to bet that America isn't going to fall apart politically or economically.  And equities aren't at extreme valuations.  In fact, the valuation extremes are in bonds.  Whenever the spread between bonds and stocks have been this narrow, the outperformance over subsequent periods for stocks has been high.

You will respond by saying "How do you know the past will be like the future?"  The argument can be made to you.  How do you know the government will meet all of it's SS obligations?  How do you know the government won't go broke and choose not to pay out all they've promised?  Just because they have in the past does not mean they will in the future.  You don't know.  



> Take a look at what S&P 500 futures are for June 2014 delivery. I guarantee you they are not even close to 8% higher than the S&P 500 is now. They will in fact be about 2% LOWER than the S&P 500 is now. This is because the market doesn't actually think the S&P 500 will be 8% higher 11 months from now - it actually thinks that the total return will be the same as a U.S. Treasury over the same period.



I don't know what the market will do one year from now.  That's not the point of this discussion.  You don't invest a pension plan based on next year's return.  A pension is invested looking out over multiple decades.  If the economy continues to grow at a 2%-3% real rate, equities will outperform bonds.  If they don't, that would mean that an ever increasing share of the return on capital would accrue to bondholders, which seems unlikely given that bonds are fixed rate instruments.  Mathematically, this doesn't work.



> _*Yet your entire premise is based on the idea that a 30+ year investment in the stock market is actually low risk.
> *_



That is totally wrong.  You've got it backwards.  Stocks are more risky than bonds and should be compensated as such.  That is basic economics.  



> ONLY IF THE AVERAGE INVESTOR IS RISK AVERSE.
> _*
> Yet, actually entire areas of finance assume risk neutral investors.*_ Options pricing, for instance, is entirely based on the assumption of the risk neutral investor.



What do you mean?  In Black Scholes, the higher the expected volatility, the more valuable the option.  How is this consistent with your claim that investors are risk neutral?



> You're making a prediction of the future based on a very tiny sample.



It's no different than what you are doing.  You are making assumptions about financial market behavior just as I am.  The difference is that my argument is based on economic theory, observable data and history.  Given that economic theory dictates and history has confirmed that equities outperform bonds over long periods of time, the onus is on you to prove otherwise.  Thus far, your arguments have been "we've been lucky" and "past performance is no guarantee of future returns."  But other than that, you have not yet given a coherent argument why government bonds should outperform stocks.



> Its not really "in" government debt. Its not like you get an account that accrues debt obligations and if those obligations do well you get more money and if they do less well you get less. Social security is an annuity. Its paid for by social security tax revenues +/- general revenues depending on whether the trust fund is being added to or drawn down.



The value of the trusts is based upon how much each individual contributes and the rate at which the pool compounds.  That rate is a function of the government bond market.  The trusts publish what this rate is every year.  Liabilities are credited to the participants of the pool less payments out. You have a social security number which tracks your contributions into the pool.  SS payments are calculated based on actuarial assumptions and your contributions into the pool.  The solvency of the pools are a function of the contributions and the rates at which they compound. Annuities you buy from an insurance company are the same, except the insurance company invests in tradeable bonds, unlike the trusts, which debit and credit the accounts as if they were buying government bonds.  In fact, the SS trusts act like a government bond fund.


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> Well, what do you mean by "survivorship bias" then?
> 
> 
> 
> 
> Just look at the S&P 500. Is it a sample of the general stock market over time? No. It doesn't follow the losers to the ground - it drops them from the index!
Click to expand...


I understand that.  So what did you mean by this?



OohPooPahDoo said:


> Your comment about survivorship bias implies America won't survive.
> 
> 
> 
> 
> Actually it in no way implies that one bit.
Click to expand...


What do you mean by "survivorship bias" as it applies to the US stock market then?  I'm assuming you mean the US economy, because even though the index drops individual stocks, it replaces them with ones that are growing, which is representative of the innovation occurring in the economy.  The only way survivorship bias can be applied to the entire US stock market is if there is something cataclysmically wrong with US economy that wipes out the entire stock market.  

Unless you want to clarify.



> So its your assertion that its mathematically impossible for the working members of a population to provide the goods and services that the too old to work members of that population needs if the population is decreasing? You are certainly certain of an awful lot!



Not unless the working population is willing to continuously work more for less.  Given that the CBO estimates the trusts will be able to pay out 75% of its promised amounts by 2040, and given the resistance by ordinary Americans to pay out more in taxes, it seems very unlikely that a declining American working population would be willing to shell out even more.


----------



## Sallow

OohPooPahDoo said:


> Sallow said:
> 
> 
> 
> It's not a "myth".
> 
> Stocks generally perform well over the long term.
> 
> 
> 
> 
> And you base that assertion on what exactly? Generally when? The past? Or the future?
> 
> 
> 
> 
> But if you invest, you need to be fully aware that the market is not a bank. Investors need to pay close attention to their investments and the economic climate.
> 
> Click to expand...
> 
> 
> Because if investors just pay close enough attention they can all avoid losing money?
Click to expand...


First off..I agree with your OP.

It's a bad idea to invest SSI money into the stock market.

That said..return over the long term..is generally pretty good.

But that comes with a caveat given the wide swings.

Which makes it foolhardy to put SSI cash in.


----------



## Toro

CrusaderFrank said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> CrusaderFrank said:
> 
> 
> 
> Two words: Warren Buffett
> 
> 
> 
> 
> Congratulations, your survivor bias is so high, you've chosen perhaps the most successful investor of our day as your _only_ sample point.
> 
> 
> 
> 
> Also, we're not in Japan.
> 
> Click to expand...
> 
> Are the laws of nature different in Japan?
> 
> Click to expand...
> 
> 
> My survivor bias? It's just common sense that you can do better with equities than with bonds and I'd say between Berkshire Hathaway or bonds, I'd put it all on Berkshire
Click to expand...


There is an economic reason for it.

If the cost of capital is 6%, it will be divided across all parts of the capital stack.  Envision three parts of capital, a senior loan, a mezzanine piece and equity.  The senior loan will be priced below the blended cost of capital, the equity piece above, and the mezz somewhere in between.   

The only way that this does not happen is if there is tremendous mispricing in the financial markets such that when traded, the senior loans trade at a deep discount and the equity at a steep premium.  And the only way that this can persist is if financial markets are random for a very long time.  Such mispricings can, and have, occurred over several years.  But eventually, the mispricings adjust and markets become rational again.  To assume that stocks will underperform bonds in a growing economy over many decades is to assume that financial markets remain irrational and mispriced for generations.  That doesn't happen.  Economic theory would say it won't and history has borne it out.

The funny thing about OPPD is that he doesn't appear to understand what has been happening in the bond markets.  BB-rated high yield debt was trading below 5%, all-time lows.  Kingdom of the Netherlands bonds were yielding 495-year lows last winter.  The bubble has been in bonds as investors chase yields at any price.  Now is a terrible time to be invested in bonds.


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> So if you want statistical samples, starting in the year 1900, there are 62 discreet 50-year samples.
> 
> 
> 
> 
> LOL! That's hilarious, Sorry, but if you have 2 samples you don't get a 3rd by taking half of the first and tacking it on to half of the 2nd!
> 
> There are 2.065 50 year samples over a 113 year period.  DUH
Click to expand...


"Stocks have outperformed bonds over any 50-year period" means every 50-year period.  It doesn't mean only 1900 to 1949 and 1950 to 2000.  It means every single 50-year period from 1900 to 2012.

You'll have to take up your argument with academics in finance.  Tell me how you make out.  I'd be interested.

Email this guy, tell him that he's wrong and get back to us.


----------



## OohPooPahDoo

CrusaderFrank said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> CrusaderFrank said:
> 
> 
> 
> Two words: Warren Buffett
> 
> 
> 
> 
> Congratulations, your survivor bias is so high, you've chosen perhaps the most successful investor of our day as your _only_ sample point.
> 
> 
> 
> 
> Also, we're not in Japan.
> 
> Click to expand...
> 
> Are the laws of nature different in Japan?
> 
> Click to expand...
> 
> 
> My survivor bias? It's just common sense that you can do better with equities than with bonds
Click to expand...


In other words you can't explain why.



> and I'd say between Berkshire Hathaway or bonds, I'd put it all on Berkshire



What amazing hindsight you have!


----------



## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> I don't know what returns over Treasuries will be.  I do know that historically, equities have beaten Treasuries by a wide margin over long periods of times.
> 
> 
> 
> We're not talking about history. We're talking about the future.
> 
> 
> 
> 
> 
> 
> The only way this doesn't occur in the future is if there are
> 
> 1.  Extreme economic and political dislocations
> 2.  Extreme equity market valuations
> 
> Click to expand...
> 
> 
> Great analysis. We'll just exclude any potential future we don't like. That's not selection bias at all.
> 
> 
> 
> 
> And equities aren't at extreme valuations.
> 
> Click to expand...
> 
> 
> Equities have never ever in the history of the stock market ever been at "extreme valuations" in the present. Its only in hindsight that the valuations appear extreme. Why do you not get this?
> 
> 
> 
> 
> 
> 
> In fact, the valuation extremes are in bonds.  Whenever the spread between bonds and stocks have been this narrow, the outperformance over subsequent periods for stocks has been high.
> 
> Click to expand...
> 
> 
> If you pick 1000 different investing strategies and apply them to the 100 year sample you have provided you're bound to find several that beat the average. if you pick 1000000 different strategies to try you'll find 1000 times more.
> 
> 
> 
> 
> How do you know the government will meet all of it's SS obligations?
> 
> Click to expand...
> 
> I don't. Nor is anything I've said predicated on an assumption that it will.
> 
> You have severely misunderstood me to be someone like you. Unlike you - I cannot predict the future. I'm not saying bonds will out-perform stocks. In fact,  I'm not saying anything about the future - except that _you_ can't predict it and I'd prefer Social Security to not be based around an assumption that you can.
> 
> 
> 
> 
> What do you mean?  In Black Scholes, the higher the expected volatility, the more valuable the option.  How is this consistent with your claim that investors are risk neutral?
> 
> Click to expand...
> 
> 
> Black Scholes assumes the risk neutral investor.
> 
> 
> 
> You are making assumptions about financial market behavior just as I am.
> 
> Click to expand...
> 
> I'm not. I'm making zero assumptions.
> 
> 
> 
> 
> The difference is that my argument is based on economic theory, observable data and history.
> 
> Click to expand...
> 
> 
> Your argument is based on a slice of history that happens to reinforce your argument.
> 
> If a beef cow were to predict its future based on its past it would have nothing but a rosy outlook. Free grass and feed as far as the eye can see. Until slaughter day.
> 
> 
> 
> 
> Given that economic theory dictates and history has confirmed that equities outperform bonds over long periods of time
> 
> Click to expand...
> 
> ,
> 
> Actually economic theory cannot adequately explain why equities outperform stocks.  Look up "equity premium"
Click to expand...


----------



## OohPooPahDoo

Toro said:


> "Stocks have outperformed bonds over any 50-year period" means every 50-year period.  It doesn't mean only 1900 to 1949 and 1950 to 2000.  It means every single 50-year period from 1900 to 2012.




Actually - if we get rid of the requirement that each 50 year sample not include points from any other 50 year sample - there are an INFINITE number of 50 year periods between 1900 and 2012. Why do you arbitrarily decide that each sample must be staggered one year apart from the other? Why not two years? Why not 1/2 year?


_*In fact - for any sample size over 50 years - we can pick an infinite number of 50 year samples if we eliminate the requirement that each sample not include parts of other samples.
*_ 
*
So congratulations. You and the finance academia you laud so much have been able to magically produce an INFINITE number of 50 year samples with only 100 years of data!!!!!!!!!
*


Do you realize that if you ask 1,000,000 people to predict which way the stock market will move each month, that after 20 months, on average about one of them will have been correct with every prediction even if they were all picking at random? Would you give your money to that guy to invest? I mean why not, right? He's been correct 20 times in a row in predicting the monthly stock market move? What are the odds of that? He MUST be good, right? SURVIVORSHIP BIAS - learn about it.


----------



## boedicca

It's kinda sad...but very funny to see OPPD make a total idiot of himself.

Toro's cat knows (or would know if he had one) more about economics than does OPPD.   He's lost the debate with Toro before it even started.


----------



## Boss

OohPooPahDoo said:


> Boss said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> By spending exceeding revenue. Duh. What are you, a fucking idiot?
> 
> 
> Wow - no - clearly - you're the genius.
> 
> 
> 
> 
> So we've obviously NOT been paying our debts, if we are spending more than our revenue. We are ACCUMULATING debt, not paying our debt. If you charge $5,000 on your charge card, and pay the minimum $140 monthly payment, you are not paying your debts. That's called FLOATING your debt. When you continue to spend $5,000 and pay $140, you will gain MORE debt, you are NOT paying the debt off.
> 
> Click to expand...
> 
> 
> Awesome. You're so smart. You're missing the entire point of this thread.
Click to expand...


The point of the thread is sheer ignorance. It argues, it's a bad idea to keep our money and invest in a stock market, as opposed to giving our money to Nancy and Harry to fritter away. I fundamentally disagree, even if we can only keep our money and bury it in a can, we're better off than giving it to out of control Federal government, to blow and squander. Even if we lost our ass and only retained half of our investment, we're better off than not having the money to pay retirees.


----------



## Toro

OohPooPahDoo said:


> We're not talking about history. We're talking about the future.



The future isn't random.  You seem to think it is.



> Great analysis. We'll just exclude any potential future we don't like. That's not selection bias at all.



What other events besides extreme political or economic dislocations or extreme valuations would you include?



> Equities have never ever in the history of the stock market ever been at "extreme valuations" in the present. Its only in hindsight that the valuations appear extreme. Why do you not get this?



Perhaps it wasn't to the theoreticians and non-practitioners, and to those who don't understand financial market history, but it was easy to see for the professionals who ran money during the tech bubble.  At least for those who are still around.



> If you pick 1000 different investing strategies and apply them to the 100 year sample you have provided you're bound to find several that beat the average. if you pick 1000000 different strategies to try you'll find 1000 times more.



What averages are you talking about? It's not about averages.  The stock market is the average.  Stocks should outperform other asset classes such as government bonds over time because stocks are riskier.



> I don't. Nor is anything I've said predicated on an assumption that it will.



You are saying that we shouldn't invest SS in stocks.  That makes the assumption that government bonds are a better bet.



> You have severely misunderstood me to be someone like you. Unlike you - I cannot predict the future. I'm not saying bonds will out-perform stocks. In fact,  I'm not saying anything about the future - except that _you_ can't predict it and I'd prefer Social Security to not be based around an assumption that you can.



You are making an assumption that government bonds are a better bet than stocks.  You are predicting that the government will continue to pay the obligations in the future.  



> Black Scholes assumes the risk neutral investor.



Explain why volatility is part of the formula then?

Here are all the assumptions in Black-Scholes.



> The Black&#8211;Scholes model of the market for a particular stock makes the following explicit assumptions:
> 
> There is no arbitrage opportunity (i.e., there is no way to make a riskless profit).
> It is possible to borrow and lend cash at a known constant risk-free interest rate.
> It is possible to buy and sell any amount, even fractional, of stock (this includes short selling).
> The above transactions do not incur any fees or costs (i.e., frictionless market).
> The stock price follows a geometric Brownian motion with constant drift and volatility.
> The underlying security does not pay a dividend.



Black?Scholes - Wikipedia, the free encyclopedia

Where does it say that an investor is "risk neutral?"



> Your argument is based on a slice of history that happens to reinforce your argument.



My argument is based upon economic theory that has been _confirmed_ by history.  



> If a beef cow were to predict its future based on its past it would have nothing but a rosy outlook. Free grass and feed as far as the eye can see. Until slaughter day.



You are saying that America is the cow.  One day it will be slaughtered.  I disagree.  If it is the cow, SS is finished anyways.



> Actually economic theory cannot adequately explain why equities outperform stocks.  Look up "equity premium"



Actually, it does.  The equity risk premium states that equities should earn a higher return because equities have greater risk.  This is what CAPM is built upon, which derives from modern portfolio theory, which won the Nobel Prize in economics.

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1990

You should call the Riksbank and tell them they're wrong.


----------



## Toro

OohPooPahDoo said:


> Actually - if we get rid of the requirement that each 50 year sample not include points from any other 50 year sample - there are an INFINITE number of 50 year periods between 1900 and 2012.[/SIZE] Why do you arbitrarily decide that each sample must be staggered one year apart from the other? Why not two years? Why not 1/2 year?



Fine.  There are infinite number of 50 year-periods.  That further confirms my point.  Pick any date, any day, any time, any second, any millisecond, and prove I'm wrong.



> Do you realize that if you ask 1,000,000 people to predict which way the stock market will move each month, that after 20 months, on average about one of them will have been correct with every prediction even if they were all picking at random? Would you give your money to that guy to invest? I mean why not, right? He's been correct 20 times in a row in predicting the monthly stock market move? What are the odds of that? He MUST be good, right? SURVIVORSHIP BIAS - learn about it.



That's not survivorship bias.  Survivorship bias is excluding data from the sample that is no longer around.  



> Survivorship bias is the logical error of concentrating on the people or things that "survived" some process and inadvertently overlooking those that didn't because of their lack of visibility.



Survivorship bias - Wikipedia, the free encyclopedia

What you are referring to is randomness and a statistical outcome where one cannot differentiate between skill and luck.

If we apply this to your argument, then the success of the United States has been random, i.e. lucky.  That's what I was referring to earlier.  For your argument to apply, for US stocks to not outperform bonds over very long periods of time, it would require the US to no longer be "lucky."

Or, you can believe there is a fundamental reason why the United States has seen remarkable growth over the past 200 years due to its culture, its laws, its people, its remarkable adaptiveness, and its institutions, which has caused the economy to grow and stocks to be such great investments.


----------



## auditor0007

Avatar4321 said:


> They idea that you cant invest your own money is ludicrous.
> 
> But then so is the lie that SS is our own money. It's a ponzi scheme. Our money is going to people who are already collecting.



It's always been that way and there is nothing wrong with it being that way.  It's a pay as you go plan, not an investment plan.  Again, there is absolutely nothing wrong with that.  What is wrong is taking surpluses from the fund to use for other things and then saying it is owed back to the program.  That is just robbing Peter to pay Paul and should never have been permitted in the first place.


----------



## Boss

auditor0007 said:


> Avatar4321 said:
> 
> 
> 
> They idea that you cant invest your own money is ludicrous.
> 
> But then so is the lie that SS is our own money. It's a ponzi scheme. Our money is going to people who are already collecting.
> 
> 
> 
> 
> It's always been that way and there is nothing wrong with it being that way.  It's a pay as you go plan, not an investment plan.  Again, there is absolutely nothing wrong with that.  What is wrong is taking surpluses from the fund to use for other things and then saying it is owed back to the program.  That is just robbing Peter to pay Paul and should never have been permitted in the first place.
Click to expand...


Sorry, it HASN'T always been that way. And there is something VERY wrong with it being that way, especially with the knowledge that those who are currently paying, aren't going to receive any benefit. That's a ponzi scheme. The program started out being a trust fund, and the working baby boomers were socking away billions, so the grubby little hands of Congress figured it wouldn't cause any harm to "borrow" a little for this or that, and once that started happening, the practice snowballed, and now all the money is spent. The baby boomers, who worked and contributed their whole life, have nothing. There is not another baby boomer generation to follow them, the boom in babies stopped with the next generation. So who is going to pay the retirement pensions for these 70 million baby boomers? Do you not understand why it's totally stupid to have a 'pay as you go' system?


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## FA_Q2

auditor0007 said:


> Avatar4321 said:
> 
> 
> 
> They idea that you cant invest your own money is ludicrous.
> 
> But then so is the lie that SS is our own money. It's a ponzi scheme. Our money is going to people who are already collecting.
> 
> 
> 
> 
> It's always been that way and there is nothing wrong with it being that way.  It's a pay as you go plan, not an investment plan.  Again, there is absolutely nothing wrong with that.  What is wrong is taking surpluses from the fund to use for other things and then saying it is owed back to the program.  That is just robbing Peter to pay Paul and should never have been permitted in the first place.
Click to expand...


A pay as you go system requires that the economy AND the population is in perpetual growth, a sheer impossibility.  At some point, the population will NOT grow as fast as required and behold, that time is now.

You realize that this is the SAME problem with a Ponzi scheme, right?  That scheme works wonders AS LONG AS YOU ARE GETTING MORE PEOPLE GOING IN THAN GOING OUT.  Strangely, that is exactly what the SS program requires as well.  There MUST be more people entering the system than leaving at all times to keep it working.  That, quite frankly, is insane.


----------



## Norman

auditor0007 said:


> Avatar4321 said:
> 
> 
> 
> They idea that you cant invest your own money is ludicrous.
> 
> But then so is the lie that SS is our own money. It's a ponzi scheme. Our money is going to people who are already collecting.
> 
> 
> 
> 
> It's always been that way and there is nothing wrong with it being that way.  It's a pay as you go plan, not an investment plan.  Again, there is absolutely nothing wrong with that.  *What is wrong is taking surpluses from the fund to use for other things and then saying it is owed back to the program.  That is just robbing Peter to pay Paul and should never have been permitted in the first place.*
Click to expand...


But that is what pay as you go plan is by definition. There is no real fund. If you want to pay (interest) to the fund you need to tax it from the people - exactly the same if there wasn't any fund at all. Thus saying that something was robbed is kind of wrong.

Also pay as you go plan doesn't necessarily require an ever growing economy and population. The plan hurts people whether the economy grows or not. It just less noticable if there are more people and greater economy to pay for it. The interest is STILL effectevely lost though, it's just easier to pay for it if the population has grown.


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## FA_Q2

Norman said:


> auditor0007 said:
> 
> 
> 
> 
> 
> Avatar4321 said:
> 
> 
> 
> They idea that you cant invest your own money is ludicrous.
> 
> But then so is the lie that SS is our own money. It's a ponzi scheme. Our money is going to people who are already collecting.
> 
> 
> 
> 
> It's always been that way and there is nothing wrong with it being that way.  It's a pay as you go plan, not an investment plan.  Again, there is absolutely nothing wrong with that.  *What is wrong is taking surpluses from the fund to use for other things and then saying it is owed back to the program.  That is just robbing Peter to pay Paul and should never have been permitted in the first place.*
> 
> Click to expand...
> 
> 
> But that is what pay as you go plan is by definition. There is no real fund. If you want to pay (interest) to the fund you need to tax it from the people - exactly the same if there wasn't any fund at all. Thus saying that something was robbed is kind of wrong.
> 
> Also pay as you go plan doesn't necessarily require an ever growing economy and population. The plan hurts people whether the economy grows or not. It just less noticable if there are more people and greater economy to pay for it. The interest is STILL effectevely lost though, it's just easier to pay for it if the population has grown.
Click to expand...


Thats incorrect.  With a decreasing working population, there is NOT enough money coming in to cover the expenses going out.  That is a cold hard fact and no way around that.  This is why a growing population is REQUIRED.  Obviously, you are going to draw more in a yare than you are going to pay as such you require more than a single worker paying into the system than drawing from that system.  The close that number gets to a 1:1 ratio, the worse the problem gets, hence you need more going into the system than you have exiting it in order for it to be sustainable. 

We had seen this coming; that is why the SS taxes were DOUBLED.  Of course, we spent that too so there really was zero gain in that debacle.


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## Boss

I'm sorry, but I am still not seeing the "disadvantage" to a system where individuals are responsible for their OWN retirements, through a system of contribution to a personal retirement account with their name on it, as opposed the the current arrangement. Especially if such a plan were voluntary or partial. What's the problem, what's your beef? Your democrat congressman doesn't want this, because it takes away his little slush fund. But why are YOU opposed? ...Because it's something conservatives are FOR?


----------



## Norman

FA_Q2 said:


> Norman said:
> 
> 
> 
> 
> 
> auditor0007 said:
> 
> 
> 
> It's always been that way and there is nothing wrong with it being that way.  It's a pay as you go plan, not an investment plan.  Again, there is absolutely nothing wrong with that.  *What is wrong is taking surpluses from the fund to use for other things and then saying it is owed back to the program.  That is just robbing Peter to pay Paul and should never have been permitted in the first place.*
> 
> 
> 
> 
> But that is what pay as you go plan is by definition. There is no real fund. If you want to pay (interest) to the fund you need to tax it from the people - exactly the same if there wasn't any fund at all. Thus saying that something was robbed is kind of wrong.
> 
> Also pay as you go plan doesn't necessarily require an ever growing economy and population. The plan hurts people whether the economy grows or not. It just less noticable if there are more people and greater economy to pay for it. The interest is STILL effectevely lost though, it's just easier to pay for it if the population has grown.
> 
> Click to expand...
> 
> 
> That&#8217;s incorrect.  With a decreasing working population, there is NOT enough money coming in to cover the expenses going out.  That is a cold hard fact and no way around that.  This is why a growing population is REQUIRED.  Obviously, you are going to draw more in a yare than you are going to pay as such you require more than a single worker paying into the system than drawing from that system.  The close that number gets to a 1:1 ratio, the worse the problem gets, hence you need more going into the system than you have exiting it in order for it to be sustainable.
> 
> We had seen this coming; that is why the SS taxes were DOUBLED.  Of course, we spent that too so there really was zero gain in that debacle.
Click to expand...


What I meant is that if you have, for example a population of 100.000 who earn 100K a year and a other population of 50.000 who earn 10K a year, obviously it's easier to pay 10 million in retirement benefits for the first population.

The loss of 10 million is just as real either way though. And in a case where the population doesn't grow you would massively have to increase taxes. But in BOTH CASES you have lost 10 million. The "failure" is there either way, it's just easier to pay for it with increasing population and improving economy. Just like it is for anything. That 10 million could have been used to do other things if not for the SS. The benefits of growing economy and population are partially lost.



Now, if the population invested into stocks and equities overseas, the interest would actually be real and not just taxed back from the population. There would be no 10 million hole, there would be perhaps 1 million gained in interest instead, no one would have to be taxed. And it would not matter if the population shrank like a shark. That would be a real invstment plan.


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## CrusaderFrank

The Social Security "trust fund" isn't even invested in real treasury bonds! They're buying Bernie Madoff bonds-- that is bonds that can't be sold to the general public but only sold back to the issuer. Its a purchase money note

Sent from my DROID RAZR using Tapatalk 2


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## OohPooPahDoo

Boss said:


> It argues, it's a bad idea to keep our money and invest in a stock market


No it doesn't. It argues that _social security_ funds being invested in the stock market is a bad idea. Outside of that I'd encourage you to buy as much stock as you can - it will make my portfolio more valuable.


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## blastoff

Boss said:


> I'm sorry, but I am still not seeing the "disadvantage" to a system where individuals are responsible for their OWN retirements, through a system of contribution to a personal retirement account with their name on it, as opposed the the current arrangement. Especially if such a plan were voluntary or partial. What's the problem, what's your beef? Your democrat congressman doesn't want this, because it takes away his little slush fund. But why are YOU opposed? ...Because it's something conservatives are FOR?



BINGO!!!

And OWN being the key word.  All of such programs I've ever heard discussed gave the individual the CHOICE to either stay in the traditional SS program or opt in on any variety of market plans similar to various 401K programs.   

Not something for a lot of people IMO, but many of us would jump at it in a heartbeat.


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## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> We're not talking about history. We're talking about the future.
> 
> 
> 
> 
> The future isn't random.  You seem to think it is.
Click to expand...


Of course it isn't random - you can predict it, right?




> What other events besides extreme political or economic dislocations or extreme valuations would you include?



You ARE excluding those events. You are saying because they would be so detrimental, they should not be included in the analysis. This kind of attitude is part of what lead to the recent housing induced economic crisis. For instance, the sellers of default swaps believed that if it ever got to the point where all those swaps became worth a ton of money to the buyers, the entire economy would be in shambles anyway and nothing would matter. 



> Perhaps it wasn't to the theoreticians and non-practitioners, and to those who don't understand financial market history, but it was easy to see for the professionals who ran money during the tech bubble.  At least for those who are still around.



At least for those who are still around? LOL! Classic survivor bias. You've selected the sample that correctly predicted the tech bubble and abandoned the sample of professionals who failed to predict it, lost their jobs, and became shoe salesmen or dentists - and declared that the pros got it right!




> Stocks should outperform other asset classes such as government bonds over time because stocks are riskier.



Actually according to you - over time - stocks are not risky. That would seem to be your entire point. That if I invest over ~30 years, my returns may be lower than someone else who invested in another ~30 years, but I am virtually guaranteed to at least have preserved my capital and make a little bit above Treasuries. If that is indeed what you are saying - that's a LOW risk investment. You can't have it both ways - arguing that stocks pay more over the long haul because they are riskier and at the same time maintaining they're actually not very risky. Which is it?




> Here are all the assumptions in Black-Scholes.
> 
> 
> 
> Black?Scholes - Wikipedia, the free encyclopedia
> 
> Where does it say that an investor is "risk neutral?"


Do you understand what Black Scholes computes? It is the_ mean expected value_ of a European call or put option at expiration (in the future), discounted by the risk free rate to the present day. What is mean expected value? I will explain it

take two options. 

Option A) has a 90% chance of expiring $11.11 in the money and a 10% chance of expiring worthless. 

Option B) has a 10% chance of expiring $100 in the money and a 90% chance of expiring worthless. 

By risk neutral pricing, option A) is worth 0.9X$11.11 + 0.1*$0.00= $10 and option B) is worth 0.9*$0.00 + 0.1*$100 = $10. They are worth the same! Although the risk profiles are very different, the market will price these options near one another. 

Search for the term "neutral" in the wiki article. You can also use the web. There is plenty of literature on risk neutral pricing (its also referred to as arbitrage free pricing).

The Black Scholes equation itself is derivable from the risk free assumption. http://www.soarcorp.com/research/BS_risk_neutral_martingale.pdf



> Actually economic theory cannot adequately explain why equities outperform stocks.  Look up "equity premium"
> 
> 
> 
> 
> Actually, it does.
Click to expand...


Not according to the economists.
Equity premium puzzle - Wikipedia, the free encyclopedia



> The equity risk premium states that equities should earn a higher return because equities have greater risk.  This is what CAPM is built upon, which derives from modern portfolio theory, which won the Nobel Prize in economics.


CAPM doesn't explain WHY the equity premium exists - it only provides a method for pricing securities in a market where the equity premium DOES exist.[/I]  You have to plug in your "expected rate of return" from the market to get the formula to work. If you take a look at it, Capital Asset Pricing Model (CAPM) Definition | Investopedia, you'll see that if the market return = the risk free rate return, the second term on the RHS becomes zero and the LHS becomes equal to the risk free rate. CAPM assumes there is an equity premium - it doesn't explain why there is one.


----------



## OohPooPahDoo

CrusaderFrank said:


> The Social Security "trust fund" isn't even invested in real treasury bonds! They're buying Bernie Madoff bonds-- that is bonds that can't be sold to the general public but only sold back to the issuer. Its a purchase money note



LOL. Does that mean savings bonds aren't real treasury bonds, either?

Its my understanding the Treasury IOU's are actually sellable _at all_. The Trust fund simply holds them, collects the coupon payments, and then the principal at the end, using the proceeds to either reinvest in treasury IOUs or pay beneficiaries as needed. I could be wrong though, I haven't verified this.


The Trust fund is merely an accounting trick and there is no secret to this. Social security is a paygo program and always has been and even with the trust fund it is. It keeps the government from having to adjust the SS tax rate as often as it would have to otherwise. The trust fund allows for excess SS taxes to effectively go to the general fund in years when SS collects excess (when the Trust fund is built up), and it allows for a shortage of funds to automatically be provided by the general fund in years when SS collects a shortage of taxes. This insulates the process from the politics and prevents the politicians from having to debate every couple of years whether to raise or lower SS taxes. Unfortunately I think it has insulated them from it _too much_.


----------



## Norman

The investment theory you presented doesn't matter in this case at all. Even if you agree with it you even according to that theory are better off with more choices, have you not heard of diversification? Do I really have to explain this for the billionth time?

Government bonds do not pay any interest if all tax payers own them, since those same tax payers have to pay for the interest! The interest is just a monetary illusion and it doesn't tell about the real interest at all. There can be a real interest in this kind of case if government say, builds roads with the money. The tax payer can then use the said road which helps his productivity.

Problem is, vast amounts of government spending doesn't go into investment but spending. It's like buying stake for yourself and expecting that to pay for your retirement. But yes, initially you still get that stake, and that is my friends what every politician loves to serve.

Now if you had Norway's government's bonds then that would actually be an legitimate investment. It does not matter how they spend the money, you will be getting your money + interest either way.

Pay as you go = wellfare = not an investment plan. It's plain and simple. It does not matter a single bit if the interest on the government bond is 10%, 15% or 100% a year. You are the payer of that interest unless it's a foreign bond.


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## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> Actually - if we get rid of the requirement that each 50 year sample not include points from any other 50 year sample - there are an INFINITE number of 50 year periods between 1900 and 2012.[/SIZE] Why do you arbitrarily decide that each sample must be staggered one year apart from the other? Why not two years? Why not 1/2 year?
> 
> 
> 
> 
> Fine.  There are infinite number of 50 year-periods.  That further confirms my point.  Pick any date, any day, any time, any second, any millisecond, and prove I'm wrong.
Click to expand...


Your statistical method is fatally flawed. 



> That's not survivorship bias.  Survivorship bias is excluding data from the sample that is no longer around.



LOL! What do you think happens to Wall Street managers who are bad at predicting the stock market? They may go on to build rockets or drive cabs but they won't be around Wall St. for long.




> If we apply this to your argument, then the success of the United States has been random, i.e. lucky.




Luck isn't the entire story, but the success or failure of any nation certainly has a huge luck component to it. They might be speaking Spanish in Great Britain right now if it weren't for a fortuitous storm that destroyed the Spanish Armada. We might be speaking German in the U.S. right now if the Germans had come up with the A-Bomb before us (scientific and technological progress at times is almost exclusively luck related) 




> That's what I was referring to earlier.  For your argument to apply, for US stocks to not outperform bonds over very long periods of time, it would require the US to no longer be "lucky."



Here you seem to be using the term "lucky" is the sense of divine luck, while in the preceding paragraph you use it in the sense of random luck. There is no divine luck.



> Or, you can believe there is a fundamental reason why the United States has seen remarkable growth over the past 200 years due to its culture, its laws, its people, its remarkable adaptiveness, and its institutions, which has caused the economy to grow and stocks to be such great investments.


Many of those things were required - _along with random luck_ - for us to progress as a nation. This really has nothing to do with the stock market though.


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## OohPooPahDoo

Norman said:


> Government bonds do not pay any interest if all tax payers own them, since those same tax payers have to pay for the interest!



Government bond owners receive interest. U.S. taxpayers pay the interest. If you want more interest than you pay in taxes - buy bonds.


----------



## Norman

OohPooPahDoo said:


> Norman said:
> 
> 
> 
> Government bonds do not pay any interest if all tax payers own them, since those same tax payers have to pay for the interest!
> 
> 
> 
> 
> Government bond owners receive interest. U.S. taxpayers pay the interest. If you want more interest than you pay in taxes - buy bonds.
Click to expand...


So somehow the bond is able to generate interest without anyone paying that said interest? 

I agree that's true if an INDIVIDUAL buys a government bond, yes then it's an asset, and mostly OTHER tax payers pay for the interest. However, if all the tax payers are forced into government bonds, it's misleading to say there is any interest. It's like writing an IOU to yourself and calling that an asset. That is what happens with social security.


It is tax and spend. Problem is you are pretending that social security is some sort of investment plan that makes great returns. There are by and large no returns in reality, it's just wellfare.


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## OohPooPahDoo

Norman said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Norman said:
> 
> 
> 
> Government bonds do not pay any interest if all tax payers own them, since those same tax payers have to pay for the interest!
> 
> 
> 
> 
> Government bond owners receive interest. U.S. taxpayers pay the interest. If you want more interest than you pay in taxes - buy bonds.
> 
> Click to expand...
> 
> 
> So somehow the bond is able to generate interest without anyone paying that said interest?
Click to expand...


Is that what I said? No, its not. What I said was: "If you want more interest than you pay in taxes - buy bonds." Do you need me to explain the meaning of that English sentence to you?



> I agree that's true if an INDIVIDUAL buys a government bond, yes then it's an asset, and mostly OTHER tax payers pay for the interest. However, if all the tax payers are forced into government bonds, it's misleading to say there is any interest. It's like writing an IOU to yourself and calling that an asset. That is what happens with social security.



Social Security is pay as you go. Have you been paying attention?



> Problem is you are pretending that social security is some sort of investment plan that makes great returns.


I'm not. Social Security is an insurance product, not an investment product - and it should remain that way. You could buy the almost same thing in the private market by packaging a disability insurance plan with a life annuity.


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## whitehall

Every pension system in the entire Country is heavily invested in the DOW. It's not a myth that the stock market will recover no matter what administration tries to kill it.


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## Toro

OohPooPahDoo said:


> Norman said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> Government bond owners receive interest. U.S. taxpayers pay the interest. If you want more interest than you pay in taxes - buy bonds.
> 
> 
> 
> 
> So somehow the bond is able to generate interest without anyone paying that said interest?
> 
> Click to expand...
> 
> 
> Is that what I said? No, its not. What I said was: "If you want more interest than you pay in taxes - buy bonds." Do you need me to explain the meaning of that English sentence to you?
> 
> 
> 
> 
> I agree that's true if an INDIVIDUAL buys a government bond, yes then it's an asset, and mostly OTHER tax payers pay for the interest. However, if all the tax payers are forced into government bonds, it's misleading to say there is any interest. It's like writing an IOU to yourself and calling that an asset. That is what happens with social security.
> 
> Click to expand...
> 
> 
> Social Security is pay as you go. Have you been paying attention?
> 
> 
> 
> 
> Problem is you are pretending that social security is some sort of investment plan that makes great returns.
> 
> Click to expand...
> 
> I'm not. Social Security is an insurance product, not an investment product - and it should remain that way. You could buy the almost same thing in the private market by packaging a disability insurance plan with a life annuity.
Click to expand...


Annuities are paid out of pools of capital that invest in other assets besides government bonds. 

Insurance companies invest capital in the stock market.


----------



## flacaltenn

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
> 
> 
> This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
> 
> To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.
> 
> 
> 
> 
> Looking over 10, 20 or 30 years for an investment fund that is supposed to last forever is simply wrong and bad economics.  The Nikkei 225 peaked in 1989.  But over the past 50 years, the Nikkei 225 has generated significantly positive returns.
> 
> Over 50 years, a balanced portfolio of stocks and bonds has generated roughly 8% a year.  Over the same time period, a portfolio of 100% government bonds has generated about 4%.  $100 million invested at 4% per year will be worth $460 million in 50 years.  $100 million invested at 8% per year will be worth $4.6 billion.
> 
> This is a no-brainer.  That's why other countries such as Canada and Norway invest their equivalent of SS in stocks.
> 
> If you think that the stock market won't beat the government bond market over 100 years or more, then there is something seriously wrong with the US, and those SS promises won't be paid anyways.
Click to expand...


Nothing wrong with your analysis.. However -- let's look at how we got here and what SHOULD have been done.. 

It's OK to run a SS Surplus if --- you don't blow the money on other crap and put in an IOU.

Instead of an IOU -- if the FEDS had simply used the surplus during history to buy EXISTING US TREASURIES on the market (taken them out of circulation) --- then our national debt would be several $Trill less today --- leaving us in a better state to finance deficits today.. 

We were told 25 yrs ago -- we'd have to address the deficit if wanted to avoid the ultimate SS crisis.. 

Don't like the idea of the politics involved in buying securities. UNLESS the govt is restricted to buying mutual funds or indexes..


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## flacaltenn

The only portion of SS ever "invested" was the fractional SURPLUSES while they existed. 

*Almost ALL of the money funding and dispersed for SS benefits WAS NEVER invested in anything*.. 
Any one who believes anything else is a mental midget and a tool... 

And it's only the myth of the Trust Fund accounting that PRETENDS the stolen and squandered surpluses was ever invested...


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## whitehall

WTF is the left trying to say? Invest in government? How did Social Security work out? Buy stuff and hoard it away? Buy metals and wish for bad times when precious metal becomes more valuable? The bi-polar left rails about corporate wealth and at the same time praises the president when the stock market spikes.


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## Boss

OohPooPahDoo said:


> Boss said:
> 
> 
> 
> It argues, it's a bad idea to keep our money and invest in a stock market
> 
> 
> 
> No it doesn't. It argues that _social security_ funds being invested in the stock market is a bad idea. Outside of that I'd encourage you to buy as much stock as you can - it will make my portfolio more valuable.
Click to expand...



Hey dimwit, where do you think social security funds come from? It's OUR money! I'm happy that you realize and understand, if I invest MY money, it helps you. Now, if I could actually GET my money so I can invest it, everything will be just fine! 

The problem is, you're a brainwashed little tool for the left, who doesn't want to relinquish power and control of MY money. It helps to fund too many of your idiotic knee-jerk whims.


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## Two Thumbs

OohPooPahDoo said:


> There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
> 
> 
> This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
> 
> To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.



just be honest for a change

OohPoo;  I'm against it b/c it's a republican idea, but I had to come up with some other reason so I didn't sound like the bigot I am.

It would be a refreshing change.


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## Londoner

Avatar4321 said:


> They idea that you cant invest your own money is ludicrous.
> 
> But then so is the lie that SS is our own money. It's a ponzi scheme. Our money is going to people who are already collecting.



SS allows the rich to steal from the poor. 

Let me explain to you how the American Government works. Let's go back to Reagan.

First you lower taxes on the wealthy. Then you raise taxes on wage earners, telling them the money will be held in trust for Social Security. Then you raid the trust in order to hand out subsidies to corporations and pay for things like Star Wars. Then, 50 years later, you tell the poor that they will have to take a haircut on benefits.

But it gets better. It's important that the poor don't realize how bad you are fucking them. So you set-up radio and TV stations that bitch 24/7 about welfare payouts to the lazy, but you never mention who government really serves. Instead, you use your considerable media assets to redirect the understandable rage of the poor away from the concentrated wealth that owns government.


----------



## Norman

OohPooPahDoo said:


> Norman said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> Government bond owners receive interest. U.S. taxpayers pay the interest. If you want more interest than you pay in taxes - buy bonds.
> 
> 
> 
> 
> So somehow the bond is able to generate interest without anyone paying that said interest?
> 
> Click to expand...
> 
> 
> Is that what I said? No, its not. What I said was: "If you want more interest than you pay in taxes - buy bonds." Do you need me to explain the meaning of that English sentence to you?
> 
> 
> 
> 
> I agree that's true if an INDIVIDUAL buys a government bond, yes then it's an asset, and mostly OTHER tax payers pay for the interest. However, if all the tax payers are forced into government bonds, it's misleading to say there is any interest. It's like writing an IOU to yourself and calling that an asset. That is what happens with social security.
> 
> Click to expand...
> 
> 
> Social Security is pay as you go. Have you been paying attention?
> 
> 
> 
> 
> Problem is you are pretending that social security is some sort of investment plan that makes great returns.
> 
> Click to expand...
> 
> I'm not. Social Security is an insurance product, not an investment product - and it should remain that way. You could buy the almost same thing in the private market by packaging a disability insurance plan with a life annuity.
Click to expand...


Okay, I may have understood you wrong and you referred to an individual buying bond. However that is not what this topic is about. To me it sounds like you are trying to say SS is better than stocks because the returns are better. If not, could you clarify what this topic is even about? For the record, I don't think many people are saying SS should be invested into stocks only.

And no you coud not buy something like the SS on the markets. That kind of plan would be shut down as a ponzi scheme. Insurance companies are required to invest their surpluses and have plenty of excess funds. Something from the markets is always going to be fully funded plan. Ponzi schemes are illegal.


----------



## Toro

OohPooPahDoo said:


> Of course it isn't random - you can predict it, right?



You had a link that mentioned the book, Triumph of the Optimists.  In it, it details the history of stock market returns of 16 countries, which basically represent the Western economies.  Since 1900, every single nation has seen equity returns greater than bond returns.  That includes Germany, which experienced hyperinflation, a Great Depression, and destruction of the country not once, but twice.  It also includes most of the other European countries that were ravaged by war twice which killed tens of millions of people as well as the Great Depression.  The United States includes the Great Depression.  Schiller goes back to the Civil War, and confirms the same thing, so include that.  Most of the economic growth of the world has occurred since 1800, and until recently, most of it occurred in the West.  This demonstrates incredible resiliency and dynamic adaptiveness of Western societies and its political and socioeconomic structures.  To assume that the future won't be like the past is to assume that there will be some cataclysmic or earth-shattering change in Western societies, one worse than two world wars, hyperinflation, a depression, etc.  

Can it happen?  Maybe.  A declining population is certainly a threat.  But the onus is on those to articulate why the future will not be like the  past.  It's not good enough to say it's random (because it's not) or we might be one day be Zimbabwe or Bangladesh (your "survivorship bias" argument).  For those of us who think the future will be like the past, we assume that the culture, laws, institutions, and remarkable adaptability and productivity of our society will not change.  You must tell us why these will change.



> You ARE excluding those events. You are saying because they would be so detrimental, they should not be included in the analysis. This kind of attitude is part of what lead to the recent housing induced economic crisis. For instance, the sellers of default swaps believed that if it ever got to the point where all those swaps became worth a ton of money to the buyers, the entire economy would be in shambles anyway and nothing would matter.



What I'm saying is that what has ruined economies in the past are calamitous political or economic events, and what has caused significant underperformance by equities is dramatic overvaluation.  

Even calamitous economic events of Western societies of the past have not been enough to derail tremendous economic growth over time.  Equities are the growth component of the capital structure within the economy.  As the economy grows, more and more profits will accrue to equities relative to fixed income.

If there are all these other events that can disrupt our society that would cause stocks to underperform bonds over long periods of time, what are they?



> At least for those who are still around? LOL! Classic survivor bias. You've selected the sample that correctly predicted the tech bubble and abandoned the sample of professionals who failed to predict it, lost their jobs, and became shoe salesmen or dentists - and declared that the pros got it right!



Which has nothing to do with your assertion that stocks are only grossly overvalued in retrospect.  Those who believe that stocks are only overvalued in retrospect are the guys who lost their jobs.  



> Actually according to you - over time - stocks are not risky. That would seem to be your entire point. That if I invest over ~30 years, my returns may be lower than someone else who invested in another ~30 years, but I am virtually guaranteed to at least have preserved my capital and make a little bit above Treasuries. If that is indeed what you are saying - that's a LOW risk investment. You can't have it both ways - arguing that stocks pay more over the long haul because they are riskier and at the same time maintaining they're actually not very risky. Which is it?



Completely and totally wrong.  I have said it before and I will say it again - stock returns are higher because they are _more_ risky.  They are more risky because they are more volatile and they have the last claim on assets in the capital stack.  What I am saying is that because SS is an institution that should last forever - and if it's not, then it won't pay out what it has promised regardless - it should absorb that risk and accrue higher returns over time.  

(You may not realize this, but you are making the same argument that diehard free market economists at right-wing think tanks like the American Enterprise Institute were making before the tech bubble collapsed.)  

The longer the duration of the institution, the more risk it should take.  The shorter the duration, the less risk it should take.  If SS is expected to wind down in 5 years, it should be invested almost entirely in bonds.  If SS is expected to be around in 150 years, it should have a high risk component.  Every pension actuary knows this.



> Search for the term "neutral" in the wiki article. You can also use the web. There is plenty of literature on risk neutral pricing (its also referred to as arbitrage free pricing).



I said way back that a basic tenet of economic theory is that there is a trade-off between risk and reward.  Every student in finance 101 is taught this.  Risk neutrality does not change this. Risk neutrality does not mean that investors don't want to take any risk, nor that they don't want to be compensated for taking risk. It says that prices must be adjusted for risk preferences.  "Risk aversion" does not mean people don't want to take on any risk.  It means that they over-estimate risk, and need to be paid more to take it on.  It means people will take a lower return for a more certain outcome than a higher return with a less certain outcome, even if the expected probabilities are the same.  



OohPooPahDoo said:


> Actually economic theory cannot adequately explain why equities outperform stocks.  Look up "equity premium"





Toro said:


> Actually, it does.  The equity risk premium states that equities should earn a higher return because equities have greater risk.  This is what CAPM is built upon, which derives from modern portfolio theory, which won the Nobel Prize in economics.
> 
> The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1990





OohPooPahDoo said:


> Not according to the economists.
> Equity premium puzzle - Wikipedia, the free encyclopedia



Actually, yes according to your link.



> The equity premium puzzle is a term coined in 1985 by Rajnish Mehra and Edward C. Prescott in their seminal work of the same name, and refers to a lack of consensus among economists on why demand for government bonds - which return much less than stocks - is as high as it is, and even why the demand exists at all. The intuitive notion that stocks are much riskier than bonds is not a sufficient explanation as _the magnitude_ of the disparity between the two returns (the equity risk premium) is so great that it implies an implausibly high level of investor risk aversion that is fundamentally incompatible with other branches of economics, particularly macroeconomics and financial economics. ...
> 
> The most basic explanation is that there is no puzzle to explain: that there is no equity premium. ...
> 
> Note however that most mainstream economists agree that the evidence shows substantial statistical power.



Economists believe that the equity risk premium is explained by risk, if not the magnitude.  One explanation is that using volatility as the sole measure of risk is insufficient to measure all risk.  Risk aversion mentioned above may explain this discrepancy.



> CAPM doesn't explain WHY the equity premium exists - it only provides a method for pricing securities in a market where the equity premium DOES exist.[/I]  You have to plug in your "expected rate of return" from the market to get the formula to work. If you take a look at it, Capital Asset Pricing Model (CAPM) Definition | Investopedia, you'll see that if the market return = the risk free rate return, the second term on the RHS becomes zero and the LHS becomes equal to the risk free rate. CAPM assumes there is an equity premium - it doesn't explain why there is one.



CAPM is a formula which derives from modern portfolio theory.  I included it to demonstrate that theory shows higher risk leads to higher return.

Modern portfolio theory states that there is a trade-off between risk and return.  In MPT, the higher the risk, the higher return.  



> Modern portfolio theory (MPT) is a theory of finance that attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return



Modern portfolio theory - Wikipedia, the free encyclopedia

EDIT - To clarify, economic theory states that an investor must be compensated to take on more risk.  Ergo, higher risk, higher return.  Higher risk unto itself is why returns are higher for riskier assets.


----------



## Boss

Great post, Toro! Well said!


----------



## FA_Q2

Londoner said:


> Avatar4321 said:
> 
> 
> 
> They idea that you cant invest your own money is ludicrous.
> 
> But then so is the lie that SS is our own money. It's a ponzi scheme. Our money is going to people who are already collecting.
> 
> 
> 
> 
> SS allows the rich to steal from the poor.
> 
> Let me explain to you how the American Government works. Let's go back to Reagan.
> 
> First you lower taxes on the wealthy. Then you raise taxes on wage earners, telling them the money will be held in trust for Social Security. Then you raid the trust in order to hand out subsidies to corporations and pay for things like Star Wars. Then, 50 years later, you tell the poor that they will have to take a haircut on benefits.
> 
> But it gets better. It's important that the poor don't realize how bad you are fucking them. So you set-up radio and TV stations that bitch 24/7 about welfare payouts to the lazy, but you never mention who government really serves. Instead, you use your considerable media assets to redirect the understandable rage of the poor away from the concentrated wealth that owns government.
Click to expand...


Mostly true minus the rhetoric and hate but that really is the point as to why SS would be so much better invested rather than squandered.  It would give the poor REAL assets.  There would be no haircut and such assets can be passed on.

You do realize that you just made a good case for PRIVATIZING SS, right?


----------



## FA_Q2

Norman said:


> FA_Q2 said:
> 
> 
> 
> 
> 
> Norman said:
> 
> 
> 
> But that is what pay as you go plan is by definition. There is no real fund. If you want to pay (interest) to the fund you need to tax it from the people - exactly the same if there wasn't any fund at all. Thus saying that something was robbed is kind of wrong.
> 
> Also pay as you go plan doesn't necessarily require an ever growing economy and population. The plan hurts people whether the economy grows or not. It just less noticable if there are more people and greater economy to pay for it. The interest is STILL effectevely lost though, it's just easier to pay for it if the population has grown.
> 
> 
> 
> 
> Thats incorrect.  With a decreasing working population, there is NOT enough money coming in to cover the expenses going out.  That is a cold hard fact and no way around that.  This is why a growing population is REQUIRED.  Obviously, you are going to draw more in a yare than you are going to pay as such you require more than a single worker paying into the system than drawing from that system.  The close that number gets to a 1:1 ratio, the worse the problem gets, hence you need more going into the system than you have exiting it in order for it to be sustainable.
> 
> We had seen this coming; that is why the SS taxes were DOUBLED.  Of course, we spent that too so there really was zero gain in that debacle.
> 
> Click to expand...
> 
> 
> What I meant is that if you have, for example a population of 100.000 who earn 100K a year and a other population of 50.000 who earn 10K a year, obviously it's easier to pay 10 million in retirement benefits for the first population.
> 
> The loss of 10 million is just as real either way though. And in a case where the population doesn't grow you would massively have to increase taxes. But in BOTH CASES you have lost 10 million. The "failure" is there either way, it's just easier to pay for it with increasing population and improving economy. Just like it is for anything. That 10 million could have been used to do other things if not for the SS. The benefits of growing economy and population are partially lost.
> 
> 
> 
> Now, if the population invested into stocks and equities overseas, the interest would actually be real and not just taxed back from the population. There would be no 10 million hole, there would be perhaps 1 million gained in interest instead, no one would have to be taxed. And it would not matter if the population shrank like a shark. That would be a real invstment plan.
Click to expand...


That makes some sense.  My point was though that if you have a decreasing pool of people to draw from it becomes untenable to pay them at some point.  Sure, the loss is the same no matter what but the real impact grows to the point where it can no longer be floated.

As you said, if we went to an investment instead, that would not mean anything.  Should the population decrease, so what.  Those assets would be real and would not dry up simply because others were not paying into the system.  Of course the real benefit is in the fact that you get back what you put in, even if you die young.


----------



## Norman

FA_Q2 said:


> Norman said:
> 
> 
> 
> 
> 
> FA_Q2 said:
> 
> 
> 
> That&#8217;s incorrect.  With a decreasing working population, there is NOT enough money coming in to cover the expenses going out.  That is a cold hard fact and no way around that.  This is why a growing population is REQUIRED.  Obviously, you are going to draw more in a yare than you are going to pay as such you require more than a single worker paying into the system than drawing from that system.  The close that number gets to a 1:1 ratio, the worse the problem gets, hence you need more going into the system than you have exiting it in order for it to be sustainable.
> 
> We had seen this coming; that is why the SS taxes were DOUBLED.  Of course, we spent that too so there really was zero gain in that debacle.
> 
> 
> 
> 
> What I meant is that if you have, for example a population of 100.000 who earn 100K a year and a other population of 50.000 who earn 10K a year, obviously it's easier to pay 10 million in retirement benefits for the first population.
> 
> The loss of 10 million is just as real either way though. And in a case where the population doesn't grow you would massively have to increase taxes. But in BOTH CASES you have lost 10 million. The "failure" is there either way, it's just easier to pay for it with increasing population and improving economy. Just like it is for anything. That 10 million could have been used to do other things if not for the SS. The benefits of growing economy and population are partially lost.
> 
> 
> 
> Now, if the population invested into stocks and equities overseas, the interest would actually be real and not just taxed back from the population. There would be no 10 million hole, there would be perhaps 1 million gained in interest instead, no one would have to be taxed. And it would not matter if the population shrank like a shark. That would be a real invstment plan.
> 
> Click to expand...
> 
> 
> That makes some sense.  My point was though that if you have a decreasing pool of people to draw from it becomes untenable to pay them at some point.  Sure, the loss is the same no matter what but the real impact grows to the point where it can no longer be floated.
> 
> As you said, if we went to an investment instead, that would not mean anything.  Should the population decrease, so what.  Those assets would be real and would not dry up simply because others were not paying into the system.  Of course the real benefit is in the fact that you get back what you put in, even if you die young.
Click to expand...


Yeah, some people like the fact that you can get the money back even if you die young. Some however don't and would rather enjoy the security in the case that you live very long.

Bad news is, the government gives you no choice and you are forced into a form of defined benefit plan. This is really unnecessary even IF you use pay as you go system. But it's what it is.

In free markets both plans are provided. You can choose whether you want defined contribution plan or defined benefit plan.

I would rather have a private system where the government provided a very small retirement just enough to live by and the rest would be up to you (or perhaps you would be forced to invest some of your earnings). But the problem is, it's very hard to go from pay as you go to any other scheme as where is the money come from to pay the existing retirees?

Even the swedish system is much better, in it the retirement benefits basically scale according to the economy. Although, it's difficult to point out to a system that is worse than the SS so no surprise there. In most countries at least some amount of the money was intially invested, not so in USA. Every penny was spent on star wars and other... for sure profit generating ventures. And then people were left with an impression that they actually paid into some fund, which just makes it that much worse. Even today  many people seem to believe that there is some sort of fund. I guess they don't' know what "Pay as you go" means.

The irony is, to my knowledge SS was originally created partly because the fact that it was feared a lot of people would not save money and thus would be a burden on the society when they retire.... So the government decided to then spend everybody's retirement money and now every single retiree is a burden to the tax payer. 



EDIT: And yes I completely understand where you are coming from, in my previous post I just wanted to explain the losses are there whether the economy grows or not. It's in fact impossible to run a ponzi scheme indefinitely without the investor base growing, that is correct. And in that sense payasyougo scheme must straight out crash if any real interest is promised in a static economy. For example the first generations retirement payment is 1000, with 20% interest. Now the second generation must pay 1200 to pay the retirees benefits with interest... the third generation must again pay 20% more and so on. At some point the whole GDP is going to be retirement payments.


----------



## FA_Q2

Norman said:


> Yeah, some people like the fact that you can get the money back even if you die young. Some however don't and would rather enjoy the security in the case that you live very long.
> 
> Bad news is, the government gives you no choice and you are forced into a form of defined benefit plan. This is really unnecessary even IF you use pay as you go system. But it's what it is.
> 
> In free markets both plans are provided. You can choose whether you want defined contribution plan or defined benefit plan.


I see no reason that the government could not offer the same dual system either.  If these people really want SS as it stands, then they could pay into some sort of insurance plan as well then.  My beef, and it seems yours as well, is the government has forced us all into an asinine system that has essentially zero benefits over a balanced retirement plan.  That is what happens in our government though.


Norman said:


> I would rather have a private system where the government provided a very small retirement just enough to live by and the rest would be up to you (or perhaps you would be forced to invest some of your earnings). But the problem is, it's very hard to go from pay as you go to any other scheme as where is the money come from to pay the existing retirees?


VERY true.  That is one of the fundamental problems that we are running into  swapping over is going to be VERY expensive.  Of course, the longer we wait, the worse that swap gets.  Not a good reason to continue on.

Anything this large and on this type of monetary scale needs to be phased in over a long period of time.


Norman said:


> Even the swedish system is much better, in it the retirement benefits basically scale according to the economy. Although, it's difficult to point out to a system that is worse than the SS so no surprise there. In most countries at least some amount of the money was intially invested, not so in USA. Every penny was spent on star wars and other... for sure profit generating ventures. And then people were left with an impression that they actually paid into some fund, which just makes it that much worse. Even today  many people seem to believe that there is some sort of fund. I guess they don't' know what "Pay as you go" means.


The government itself perpetuated this asinine concept in talking constantly about the SS trust fund that supposedly is 2 trillion strong.  In that same breath, the left demands that SS does not add one red cent onto the deficit.  Never mind that they are using interest paid by the general fund right now to cover their expenses.

The really sad part of this, to me, is that the original program was, for all intents and purposes, a sham.   Average life expectancy in 1935, when SS started, was 61 years old.  Essentially, many people did not even live long enough to get SS in the first place even though they paid into it.  SS attempt to deny this BUT even using their figures that remove mortality rates below 21 for the adult average lifespan and you still end up with just over half (57%) of people that lived long enough to even collect social security.  The rest, of course, gained nothing.  


Norman said:


> The irony is, to my knowledge SS was originally created partly because the fact that it was feared a lot of people would not save money and thus would be a burden on the society when they retire.... So the government decided to then spend everybody's retirement money and now every single retiree is a burden to the tax payer.


LOL.  Good point and spot on.


----------



## Boss

> The irony is, to my knowledge SS was originally created partly because the fact that it was feared a lot of people would not save money and thus would be a burden on the society when they retire....



It wasn't feared, it was a very real problem. Old people were quite literally starving in the streets, homeless and destitute. Of course, this was in the midst of the Great Depression, where people lost any 'savings' they might have socked away. The initial idea was noble, and it's still a well-intentioned idea. The problem has been, keeping Congressional hands off the money. In 1969, legislation that was passed under LBJ came into effect, which gave us a "unified budget" ...combining the SS trust fund and other general revenues. This accounting gimmick made it appear we had a surplus, so Congress immediately began to think of ways to spend it. That wasn't hard to do, and by 1996, the trust fund was essentially full of IOUs. The only reason the SS became so big, was the Baby Boomer generation, which dwarfed previous working generations. Now that they are retiring, the money is gone. We don't have enough workers to pay their retirements, and the trust fund is full of IOUs. 

Now we can argue all day long about who's fault that is, or who voted for what and when, it doesn't help solve the problem or address the future. I think there are several things we need to do, in order to revamp the system, and ensure that future generations have a security system that works under any circumstance. This means partial privatization. That word seems to frighten liberals for some reason, they envision bumbling dolts who wouldn't invest wisely, becoming a burden on society. But it's a really simple concept to transition to, and can be done without the risk of this happening. 

First of all, people who have attained a certain amount of wealth in their lifetime, enough to securely care for themselves in old age, should be able to opt out entirely. They would only contribute to SS until they've reached that level, and they wouldn't receive benefits. A "basic" contribution could be made to a general SS trust fund, which would pay a small benefit upon retirement, much like what we currently have. However, there would be the optional IRA-type investment, which we make mandatory by law, just as SSI is now mandatory by law. You have to contribute to your own account, if you work. So it's like a forced savings account, but it is your asset and your property when you reach retirement. If you don't make it to retirement, your spouse and children can collect the amount you paid in, through a monthly disbursement, for as long as they live or until the funds are depleted, at which time, they would revert to the old 'basic' system. You would never be able to withdraw the money in a lump sum, although a provision could be made to withdraw larger amounts in hardship cases or special circumstances. If this had been the original setup, current retirees would have bank accounts with $800k at least, plenty of money to live the rest of their lives comfortably, and still leave their families something. As it stands, we're approaching a time when retirees will have nothing, because the government is broke and can't pay the monthly benefits.


----------



## LogikAndReazon

Social Security in a guranteed , menial return, fixed, civil servant managed account is perfect for handicapped folks like this poster........


----------



## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Norman said:
> 
> 
> 
> So somehow the bond is able to generate interest without anyone paying that said interest?
> 
> 
> 
> 
> Is that what I said? No, its not. What I said was: "If you want more interest than you pay in taxes - buy bonds." Do you need me to explain the meaning of that English sentence to you?
> 
> 
> 
> Social Security is pay as you go. Have you been paying attention?
> 
> 
> 
> 
> Problem is you are pretending that social security is some sort of investment plan that makes great returns.
> 
> Click to expand...
> 
> I'm not. Social Security is an insurance product, not an investment product - and it should remain that way. You could buy the almost same thing in the private market by packaging a disability insurance plan with a life annuity.
> 
> Click to expand...
> 
> 
> Annuities are paid out of pools of capital that invest in other assets besides government bonds.
> 
> Insurance companies invest capital in the stock market.
Click to expand...




Annuities are guaranteed by the insurance company regardless of the performance of any assets they have purchased with the funds.


----------



## OohPooPahDoo

Boss said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Boss said:
> 
> 
> 
> It argues, it's a bad idea to keep our money and invest in a stock market
> 
> 
> 
> No it doesn't. It argues that _social security_ funds being invested in the stock market is a bad idea. Outside of that I'd encourage you to buy as much stock as you can - it will make my portfolio more valuable.
> 
> Click to expand...
> 
> 
> 
> Hey dimwit, where do you think social security funds come from? It's OUR money! I'm happy that you realize and understand, if I invest MY money, it helps you. Now, if I could actually GET my money so I can invest it, everything will be just fine!
> 
> The problem is, you're a brainwashed little tool for the left, who doesn't want to relinquish power and control of MY money. It helps to fund too many of your idiotic knee-jerk whims.
Click to expand...



The Social Security taxes you have paid have been spent on retirement benefits for the currently retired. I suppose you feel that we should just screw over old people and let you keep your money.


----------



## OohPooPahDoo

Toro said:


> I said way back that a basic tenet of economic theory is that there is a trade-off between risk and reward.  Every student in finance 101 is taught this.  Risk neutrality does not change this. Risk neutrality does not mean that investors don't want to take any risk, nor that they don't want to be compensated for taking risk. It says that prices must be adjusted for risk preferences.



No, it doesn't mean that. Risk neutral investors do not adjust price with risk. That's the very definition of risk neutral.


> "Risk aversion" does not mean people don't want to take on any risk.  It means that they over-estimate risk, and need to be paid more to take it on.  It means people will take a lower return for a more certain outcome than a higher return with a less certain outcome, even if the expected probabilities are the same.



Yes, that is true. Unfortunately any attempt to price options contracts with an assumption of risk averse investing fails miserably. 








> Modern portfolio theory states that there is a trade-off between risk and return.  In MPT, the higher the risk, the higher return.







> Modern portfolio theory (MPT) is a theory of finance that attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return



Those two statements aren't the same thing. In one you say that higher return means higher risk, and in the other you say there is a way you can get around the higher risk while keeping the high return.



> EDIT - To clarify, economic theory states that an investor must be compensated to take on more risk.



WHAT economic theory? Are you aware there are multitudes of economic theories all describing the same things and often failing miserably? On the other hand, the black scholes pricing model has proven exceptionally accurate for a finance theory, and it presumes - in fact requires - risk neutrality.

If it is indeed true that over 30 year periods the market will always beat treasuries, there would be young arbitragers lining up to leverage as much capital as possible to buy as much of the stock market as humanly possible - guaranteeing themselves  pay out in 30 years. If you're so certain you're right, why not borrow on the stocks you have now and leverage your account as much as you can? Why not buy call options on stocks and indexes instead of the underlying?


----------



## Boss

OohPooPahDoo said:


> Boss said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> No it doesn't. It argues that _social security_ funds being invested in the stock market is a bad idea. Outside of that I'd encourage you to buy as much stock as you can - it will make my portfolio more valuable.
> 
> 
> 
> 
> 
> Hey dimwit, where do you think social security funds come from? It's OUR money! I'm happy that you realize and understand, if I invest MY money, it helps you. Now, if I could actually GET my money so I can invest it, everything will be just fine!
> 
> The problem is, you're a brainwashed little tool for the left, who doesn't want to relinquish power and control of MY money. It helps to fund too many of your idiotic knee-jerk whims.
> 
> Click to expand...
> 
> 
> The Social Security taxes you have paid have been spent on retirement benefits for the currently retired. I suppose you feel that we should just screw over old people and let you keep your money.
Click to expand...


No, I think you should pay them back their money, that you borrowed and spent, on your frivolous little social entitlement programs and whatnot, by cutting those programs, and let me keep my money so this doesn't happen again in the future.


----------



## OohPooPahDoo

Boss said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Boss said:
> 
> 
> 
> Hey dimwit, where do you think social security funds come from? It's OUR money! I'm happy that you realize and understand, if I invest MY money, it helps you. Now, if I could actually GET my money so I can invest it, everything will be just fine!
> 
> The problem is, you're a brainwashed little tool for the left, who doesn't want to relinquish power and control of MY money. It helps to fund too many of your idiotic knee-jerk whims.
> 
> 
> 
> 
> The Social Security taxes you have paid have been spent on retirement benefits for the currently retired. I suppose you feel that we should just screw over old people and let you keep your money.
> 
> Click to expand...
> 
> 
> No, I think you should pay them back their money, that you borrowed and spent, on your frivolous little social entitlement programs and whatnot, by cutting those programs, and let me keep my money so this doesn't happen again in the future.
Click to expand...


I didn't borrow any money from retirees.

You're the on complaining that they get their benefits paid, not me.


----------



## Toro

Economic theory says that higher risk should be compensated with higher rewards. A rational investor needs to be compensated for taking on more risk. This assumption is what the entire theory of modern finance is based upon. If you think that is wrong, then you better alert every single university in the world because that's what they are teaching their students. 

But do not mistake that I'm saying every single individual should always be invested in the stock market. It depends on each individual's risk preference. And it depends on valuation and time frames. At times over the past 15 years, I've been short. Right now, I'm about 75% invested in my personal account, mostly highly concentrated in one industry that I think is dirt cheap. I have been as much as 220% long, which I was in gold in 2009.  I tried to short Tnotes last year and buy high dividend paying stocks but my brokers had no inventory to lend. So I just bought the stocks in smaller size. 

If someone offered me a 30-year swap of the S&P 500 against 30-year Treasury bond, I'd do that right now.


----------



## OohPooPahDoo

Toro said:


> Economic theory says that higher risk should be compensated with higher rewards. A rational investor needs to be compensated for taking on more risk. This assumption is what the entire theory of modern finance is based upon.



_
If there were risk-aversion in the options market, it would have to be balanced by risk seeking behaviour on the other side of the transaction. _ Take for instance, a binary call option with a 10 to 1 chance expiring in the money and  paying out $10. The risk-averse investor would not pay $1 for this option, he would want pay less than $1. The trouble is - he has to find someone to sell it to him - and the other side of that transaction would have to be risk seeking! If you demand to pay only $0.75 for an option with a 1 in 10 chance of having to pay you $10 - who would sell you that contract? Only someone willing to take LESS money for the same risk - a risk-seeker. But no competent derivatives dealer would sell a binary with a 10 to 1 chance at a payout for anything less than $1.00 before the bid/ask spread and commissions! So the risk-averse investor doesn't even get to play in the options market because no one will sell to or buy options from him at the price he desires. The CBOE may as well put up a sign that says "risk neutral investors only" - because any risk-averse investors will not find the price they want and any risk-seeking investors will simply be gobbled up by the arbitrageurs (some within seconds).


EDIT: Perhaps the equity premium in the stock market is possible because the risk-aversion of investors is balanced by risk-seeking on the side of companies that offer public stock. When the owners of a company decide to offer part of it to the public, they are essentially making a bet that the value of the cash raised in the offering (and what they can do with the cash) is worth more to them than the liabilities incurred by having to now give up whatever % of their profits they have to pay to the public share float. However - if they are risk-seeking, they will be willing to take less cash for the shares. Risk-seeking behavior can occur when its all-or-nothing. For instance, if you owe $1000 on your house note and if you don't pay it tomorrow you will lose your home, you might be willing to pay $200 for a 10 to 1 bet to win $1000 because the $200 won't save your home. A new company can be in an all-or-nothing position - where they have to raise lots of cash through selling shares, or they will not be able to continue growing and risk being over-run by their competitors who are better financed. So they will be willing to discount those shares.

I submit that the equity premium may be a result of risk-seeking behaviour by the sale of stock by the underlying corporations (either in the IPO or subsequent offerings)


Its worth thinking about these things and doing a little research into risk-neutrality and arbitrage free pricing before mindlessly repeating again "economic theory says...."


----------



## flacaltenn

OohPooPahDoo said:


> Boss said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> No it doesn't. It argues that _social security_ funds being invested in the stock market is a bad idea. Outside of that I'd encourage you to buy as much stock as you can - it will make my portfolio more valuable.
> 
> 
> 
> 
> 
> Hey dimwit, where do you think social security funds come from? It's OUR money! I'm happy that you realize and understand, if I invest MY money, it helps you. Now, if I could actually GET my money so I can invest it, everything will be just fine!
> 
> The problem is, you're a brainwashed little tool for the left, who doesn't want to relinquish power and control of MY money. It helps to fund too many of your idiotic knee-jerk whims.
> 
> Click to expand...
> 
> 
> 
> The Social Security taxes you have paid have been spent on retirement benefits for the currently retired. I suppose you feel that we should just screw over old people and let you keep your money.
Click to expand...


Of course -- when we WERE running $80Bill /year in surplus --- WE COULD have used that money to defer FUTURE payments, by letting some folks partially opt out.. If you're forced into a negative ROI --- doesn't matter if it's 20% or 25%.... So I would have volunteered to have future benefits cut by an amount greater than the exemption I was getting.. 

OR --- why shouldn't the "premiums" include a 2% kicker ABOVE expected payment liabilities to build up a REAL investment fund? 2% would move the SS FICA from about 12.2% to 12.5%.    Trivial amount per paycheck.. Brings in a 4 or 5 $BILL/yr to invest.. 

That's how real people invest for their future..


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> Economic theory says that higher risk should be compensated with higher rewards. A rational investor needs to be compensated for taking on more risk. This assumption is what the entire theory of modern finance is based upon.
> 
> 
> 
> 
> _
> If there were risk-aversion in the options market, it would have to be balanced by risk seeking behaviour on the other side of the transaction. _ Take for instance, a binary call option with a 10 to 1 chance expiring in the money and  paying out $10. The risk-averse investor would not pay $1 for this option, he would want pay less than $1. The trouble is - he has to find someone to sell it to him - and the other side of that transaction would have to be risk seeking! If you demand to pay only $0.75 for an option with a 1 in 10 chance of having to pay you $10 - who would sell you that contract? Only someone willing to take LESS money for the same risk - a risk-seeker. But no competent derivatives dealer would sell a binary with a 10 to 1 chance at a payout for anything less than $1.00 before the bid/ask spread and commissions! So the risk-averse investor doesn't even get to play in the options market because no one will sell to or buy options from him at the price he desires. The CBOE may as well put up a sign that says "risk neutral investors only" - because any risk-averse investors will not find the price they want and any risk-seeking investors will simply be gobbled up by the arbitrageurs (some within seconds).
Click to expand...


There are arbitrageurs who take advantage of that.  The implied volatility of options is generally higher than realized volatility.  The arbitrageurs write options and collect the premium, then hedge the underlying.

There is a great deal of empirical evidence that people consistently over-estimate downside risk.  This behavior is all over the financial markets.


----------



## Toro

OohPooPahDoo said:


> Its worth thinking about these things and doing a little research into risk-neutrality and arbitrage free pricing before mindlessly repeating again "economic theory says...."



Like I said, take it up with every university in the world that teaches finance and economics because that is what they teach.


----------



## Boss

OohPooPahDoo said:


> Boss said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> The Social Security taxes you have paid have been spent on retirement benefits for the currently retired. I suppose you feel that we should just screw over old people and let you keep your money.
> 
> 
> 
> 
> No, I think you should pay them back their money, that you borrowed and spent, on your frivolous little social entitlement programs and whatnot, by cutting those programs, and let me keep my money so this doesn't happen again in the future.
> 
> Click to expand...
> 
> 
> I didn't borrow any money from retirees.
> 
> You're the on complaining that they get their benefits paid, not me.
Click to expand...


Yes, your political representatives that you voted for and supported, were acting on your behalf at your request, to pilfer their money and spend it on entitlement. Now the money is gone, and you think it should be MY responsibility to pay it back? 

I am NOT complaining they get their benefits paid, they SHOULD have their benefits paid, they put their money it it all their lives. You spent their money, now you need to repay what you borrowed from them. In order to do this, we need to eliminate all the entitlement programs you borrowed the money to fund, the earmarks you authorized for the sake of votes to your favorite representatives, and the interest you owe on your debt to them. Then we need to abolish the system which allowed you to get your grubby little hands on OUR money, and install a system which guarantees that can never happen again.


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> I said way back that a basic tenet of economic theory is that there is a trade-off between risk and reward.  Every student in finance 101 is taught this.  Risk neutrality does not change this. Risk neutrality does not mean that investors don't want to take any risk, nor that they don't want to be compensated for taking risk. It says that prices must be adjusted for risk preferences.
> 
> 
> 
> 
> No, it doesn't mean that. Risk neutral investors do not adjust price with risk. That's the very definition of risk neutral.
Click to expand...


Yes it does.  My mistake.

Risk neutrality is used in options theory to price options.  It's an assumption to make options pricing mathematically easier.  It doesn't mean that all financial markets are risk neutral.  It assumes that the expected return on stocks is the risk-free rate.  Modern portfolio theory says otherwise.


----------



## Toro

So I decided to revisit risk neutrality.  Here is what it says in Introduction to Futures and Options Markets, Second Edition, by John C Hull, page 270.



> Note that risk-neutral valuation does not state that investors are risk neutral.  What it does state is that derivative securities such as options can be valued on the assumption that investors are risk neutral.



IOW, risk neutrality is used to price options, not to make a general statements about the behavior of financial market participants.

EDIT - Also, from page 245



> The expected return on all stocks in a risk-neutral world is the risk-free rate.



Clearly, MPT says otherwise, as demonstrated in CAPM where stocks are a function of volatility and the expected return of the market above the risk-free rate.


----------



## Norman

I think treasuries are mispriced because of FED's and other central banks' actions - who don't care about profits but politics and the like.  That means you can kind of throw investment theory in the water. And that's why treasuries can be at times a terrible investment. (Yes you can actually benefit from their actions as well in the short run).

But I really think the OP should decide whether he wants to talk about the superiority of government bonds vs. stocks in general, or social security retirement plans. Because those are different discussions.


----------



## Connery

*Moved to proper forum*


----------



## OohPooPahDoo

flacaltenn said:


> So I would have volunteered to have future benefits cut by an amount greater than the exemption I was getting..



Unless you can predict the day you will die its kinda hard to tell whether you will net or lose cash on social security



> OR --- why shouldn't the "premiums" include a 2% kicker ABOVE expected payment liabilities to build up a REAL investment fund? 2% would move the SS FICA from about 12.2% to 12.5%.    Trivial amount per paycheck.. Brings in a 4 or 5 $BILL/yr to invest..
> 
> That's how real people invest for their future..



So "real people" don't buy U.S. Treasuries? Its actually considered - almost universally - the safest dollar denominated asset. 


OK.


If you put SS tax revenues into stock all you're doing is artificially inflating stock prices. When the demographics change and there are more SS retirees drawing on that investment than workers contributing - it will cause stock prices to artificially decline. Either way its not going to affect the total amount of economic resources available in the future. The economy will need to produce most of the goods and services that retirees need to live close to  the time they actually need those goods and services - there's nothing that can be done to avoid that.


----------



## OohPooPahDoo

Norman said:


> I think treasuries are mispriced because of FED's and other central banks' actions - who don't care about profits but politics and the like.  That means you can kind of throw investment theory in the water. And that's why treasuries can be at times a terrible investment. (Yes you can actually benefit from their actions as well in the short run).
> 
> But I really think the OP should decide whether he wants to talk about the superiority of government bonds vs. stocks in general, or social security retirement plans. Because those are different discussions.



Are you suggesting that instead of stocks being under priced - treasuries are over-priced?


I've sometimes wondered if that's really the case. Treasuries are subject to more artificial buying and selling pressure than stocks, so it stands to reason they could be mis-priced.


----------



## CrusaderFrank

Just to revisit, the SS "Trust Fund" "Invests" in a special issuance of "Bonds" that can only be sold back to the US Government.

With me so far?

These are "Assets" that only have value if the Government can borrow from someplace else to redeem them

Still there?

Do you see the problem here?


----------



## OohPooPahDoo

Toro said:


> There are arbitrageurs who take advantage of that.



Your thinking is backwards. If there is a bet with 10 to 1 odds and I'm demanding to pay only $0.90 for a $10 potential payout - an arbitrageur can't take advantage of that. No one can except the risk seeking.




> The implied volatility of options is generally higher than realized volatility.


Under the assumption that the realized path the stock price takes is a log-normal  distribution, that is generally (though not always), true, yes - but real stock prices don't exactly follow the log-normal distribution. The real distribution has slightly fatter tales, and if you compute the volatility of a stock based on its option prices and the assumption of a log-normal distribution - those fatter tails show up as the volatility smile.

In other words, the distribution assumed for the real price is not the same as the distribution the option chain is implying, meaning any comparisons of volatility between the two won't be exactly apples and apples.



> The arbitrageurs write options and collect the premium, then hedge the underlying.



Yes, but they won't be able to make money writing options if you are only willing to to pay less than the expected payout of of the option (risk-averse).


----------



## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> Its worth thinking about these things and doing a little research into risk-neutrality and arbitrage free pricing before mindlessly repeating again "economic theory says...."
> 
> 
> 
> 
> Like I said, take it up with every university in the world that teaches finance and economics because that is what they teach.
Click to expand...


What is it that they teach exactly?


----------



## OohPooPahDoo

Boss said:


> Yes, your political representatives that you voted for and supported, were acting on your behalf at your request, to pilfer their money and spend it on entitlement. Now the money is gone, and you think it should be MY responsibility to pay it back?



You don't even know what you're talking about. What are you, 12 years old?


----------



## OohPooPahDoo

Toro said:


> Risk neutrality is used in options theory to price options.  It's an assumption to make options pricing mathematically easier.



Risk-neutrality is a result of efficient markets. As I pointed out earlier - for an options trader to demand a discount for risk (risk-averse) the guy on the other side of the trade has to be willing to pay extra for risk (risk-seeking). It can't happen any other way. 




> It doesn't mean that all financial markets are risk neutral.  It assumes that the expected return on stocks is the risk-free rate.  Modern portfolio theory says otherwise.



 The "expected return" isn't something that MPT predicts - its a parameter that MPT requires.


----------



## OohPooPahDoo

Toro said:


> So I decided to revisit risk neutrality.  Here is what it says in Introduction to Futures and Options Markets, Second Edition, by John C Hull, page 270.
> 
> 
> 
> 
> Note that risk-neutral valuation does not state that investors are risk neutral.  What it does state is that derivative securities such as options can be valued on the assumption that investors are risk neutral.
> 
> 
> 
> 
> IOW, risk neutrality is used to price options, not to make a general statements about the behavior of financial market participants.
Click to expand...



It doesn't state that human investors are risk-anything. (Finance tries to avoid actual biology as much as possible) However -_ the market operates in a way that makes it appear the players are - on average - risk neutral. 
_



> The expected return on all stocks in a risk-neutral world is the risk-free rate.
> 
> 
> 
> 
> Clearly, MPT says otherwise, as demonstrated in CAPM where stocks are a function of volatility and the expected return of the market above the risk-free rate.
Click to expand...


MPT doesn't say anything about what the correct expected return of the market overall is - as I've pointed out - this is a parameter required by MPT, not a parameter that MPT computes. 



To put the absurdity of relying on past returns to predict future returns, take a look at SPY returns for the past year:

SPDR S&P 500 ETF Chart - Yahoo! Finance



If you look at it, you'll see lots of ups and down - but the clear overall trend is upward. The total increase is a little over 20%.  There is a period of decline - during the fall of 2012 - but the prices recover and the market is again at pre-decline levels by February.

So based on this evidence, we should be able to conclude that although the price of the S&P 500 goes up and down, over any period that is at least 6 months long, it will at least retain its value, and on average, it will return 20%. Although we're only looking at one year of data - we can stagger 6 month samples so that we have as many samples as we like - and we could make a nice chart that shows the odds of winning or losing X dollars over certain intervals - and using all that, we should be able to convince people, like yourself, that the S&P 500 will always retain its value over 6 month periods.


Now do you see how absurd it is to base your expected 30 year return on barely more than 3X30 years of data? That's only 50%  better than basing your expected 6 month return on a years worth of data, is it? 

In fact if you look at the stock chart from a single day of a stock that did well on that day, you might conclude - using your method of reasoning - that the stock will go up and down but always retain or beat its value over 1 hour periods.


----------



## OohPooPahDoo

CrusaderFrank said:


> Just to revisit, the SS "Trust Fund" "Invests" in a special issuance of "Bonds" that can only be sold back to the US Government.
> 
> With me so far?
> 
> These are "Assets" that only have value if the Government can borrow from someplace else to redeem them
> 
> Still there?
> 
> Do you see the problem here?




They are just as valuable as any Treasury. If the government decided to default on a trust fund IOU it would be perceived by investors in other treasury instruments as a default on all the government's obligations, and ordinary T-bills,bonds,and notes would crash as well. Its all the same credit. 

Do you have a bank account? There's a good chance a substantial portion of your deposit is investing in short term treasuries. You'd better go withdraw your money now!


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> Its worth thinking about these things and doing a little research into risk-neutrality and arbitrage free pricing before mindlessly repeating again "economic theory says...."
> 
> 
> 
> 
> Like I said, take it up with every university in the world that teaches finance and economics because that is what they teach.
> 
> Click to expand...
> 
> 
> What is it that they teach exactly?
Click to expand...


That investors are not risk neutral, that they have to be compensated for taking risks.


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> Risk neutrality is used in options theory to price options.  It's an assumption to make options pricing mathematically easier.
> 
> 
> 
> 
> Risk-neutrality is a result of efficient markets. As I pointed out earlier - for an options trader to demand a discount for risk (risk-averse) the guy on the other side of the trade has to be willing to pay extra for risk (risk-seeking). It can't happen any other way.
> 
> 
> 
> 
> 
> It doesn't mean that all financial markets are risk neutral.  It assumes that the expected return on stocks is the risk-free rate.  Modern portfolio theory says otherwise.
> 
> Click to expand...
> 
> 
> The "expected return" isn't something that MPT predicts - its a parameter that MPT requires.
Click to expand...


MPT states that investors must be compensated for risk. The higher the risk investors take, the more they must be compensated. Otherwise, there is no reason to take risk. 

Risk isn't symmetric. People will pay a higher price to avoid losses.  This can skew pricing, and may explain why the equity risk premium is too high, why people overpay for protection in options markets, why futures markets are in backwardation, why there is a term premium in bond markets, and why people buy warranties for their iPad.


----------



## Toro

OohPooPahDoo said:


> CrusaderFrank said:
> 
> 
> 
> Just to revisit, the SS "Trust Fund" "Invests" in a special issuance of "Bonds" that can only be sold back to the US Government.
> 
> With me so far?
> 
> These are "Assets" that only have value if the Government can borrow from someplace else to redeem them
> 
> Still there?
> 
> Do you see the problem here?
> 
> 
> 
> 
> 
> They are just as valuable as any Treasury. If the government decided to default on a trust fund IOU it would be perceived by investors in other treasury instruments as a default on all the government's obligations, and ordinary T-bills,bonds,and notes would crash as well. Its all the same credit.
> 
> Do you have a bank account? There's a good chance a substantial portion of your deposit is investing in short term treasuries. You'd better go withdraw your money now!
Click to expand...


I don't think the SS trust liabilities are as valuable as Treasuries.  People don't understand the SS liabilities. If the US defaulted on Treasuries, it would create shock waves throughout global markets. If the government cut SS benefits, risk assets would probably rise.

I do agree though that they are real. The trusts mimic a bond fund without the bonds.


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> So I decided to revisit risk neutrality.  Here is what it says in Introduction to Futures and Options Markets, Second Edition, by John C Hull, page 270.
> 
> 
> 
> 
> Note that risk-neutral valuation does not state that investors are risk neutral.  What it does state is that derivative securities such as options can be valued on the assumption that investors are risk neutral.
> 
> 
> 
> 
> IOW, risk neutrality is used to price options, not to make a general statements about the behavior of financial market participants.
> 
> Click to expand...
> 
> 
> 
> It doesn't state that human investors are risk-anything. (Finance tries to avoid actual biology as much as possible) However -_ the market operates in a way that makes it appear the players are - on average - risk neutral.
> _
> 
> 
> 
> 
> 
> 
> 
> The expected return on all stocks in a risk-neutral world is the risk-free rate.
> 
> Click to expand...
> 
> 
> Clearly, MPT says otherwise, as demonstrated in CAPM where stocks are a function of volatility and the expected return of the market above the risk-free rate.
> 
> Click to expand...
> 
> 
> MPT doesn't say anything about what the correct expected return of the market overall is - as I've pointed out - this is a parameter required by MPT, not a parameter that MPT computes.
> 
> 
> 
> To put the absurdity of relying on past returns to predict future returns, take a look at SPY returns for the past year:
> 
> SPDR S&P 500 ETF Chart - Yahoo! Finance
> 
> 
> 
> If you look at it, you'll see lots of ups and down - but the clear overall trend is upward. The total increase is a little over 20%.  There is a period of decline - during the fall of 2012 - but the prices recover and the market is again at pre-decline levels by February.
> 
> So based on this evidence, we should be able to conclude that although the price of the S&P 500 goes up and down, over any period that is at least 6 months long, it will at least retain its value, and on average, it will return 20%. Although we're only looking at one year of data - we can stagger 6 month samples so that we have as many samples as we like - and we could make a nice chart that shows the odds of winning or losing X dollars over certain intervals - and using all that, we should be able to convince people, like yourself, that the S&P 500 will always retain its value over 6 month periods.
> 
> 
> Now do you see how absurd it is to base your expected 30 year return on barely more than 3X30 years of data? That's only 50%  better than basing your expected 6 month return on a years worth of data, is it?
> 
> In fact if you look at the stock chart from a single day of a stock that did well on that day, you might conclude - using your method of reasoning - that the stock will go up and down but always retain or beat its value over 1 hour periods.
Click to expand...


That's like saying "How do we know Western society works?  We only have 200 years of data?"  Perhaps we should crawl through the wormhole and measure the infinite multiverses, then we will have enough statistical data to see if the foundations of Western society are real.

If financial markets operate as if they are risk neutral, then why aren't the average returns the risk-free rate?

As for the past predicting the future, I do not believe that markets are efficient all the time, but I do believe they are efficient over long periods of time. In an efficient market, higher risk assets should earn more than lower risk assets over long periods of time.  That's what theory says and that's what has happened in the past. Both theory and history tell us that those with long time frames are compensated for taking on risk. Thus, we should invest SS in the stock market like other pension funds and insurance companies, as do other national retirement schemes like in Europe and Canada.


----------



## flacaltenn

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> CrusaderFrank said:
> 
> 
> 
> Just to revisit, the SS "Trust Fund" "Invests" in a special issuance of "Bonds" that can only be sold back to the US Government.
> 
> With me so far?
> 
> These are "Assets" that only have value if the Government can borrow from someplace else to redeem them
> 
> Still there?
> 
> Do you see the problem here?
> 
> 
> 
> 
> 
> They are just as valuable as any Treasury. If the government decided to default on a trust fund IOU it would be perceived by investors in other treasury instruments as a default on all the government's obligations, and ordinary T-bills,bonds,and notes would crash as well. Its all the same credit.
> 
> Do you have a bank account? There's a good chance a substantial portion of your deposit is investing in short term treasuries. You'd better go withdraw your money now!
> 
> Click to expand...
> 
> 
> I don't think the SS trust liabilities are as valuable as Treasuries.  People don't understand the SS liabilities. If the US defaulted on Treasuries, it would create shock waves throughout global markets. If the government cut SS benefits, risk assets would probably rise.
> 
> I do agree though that they are real. The trusts mimic a bond fund without the bonds.
Click to expand...


Even the SSA annuals and the CBO state that shortfalls come out of current taxes. And they must be covered by raising revenue, issuing NEW debt, or changing the terms of the program.. It's a cynical ruse.. 

Try THAT on a bond fund (with or without the bonds).. 

And there's the prob for OopyDoos analysis of SSA trust fund being "default proof".. Default HERE --- includes changing the payouts.. Or the ROI for various classes of investors.  And THAT is more likely to happen BEFORE a classic default is considered.


----------



## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Toro said:
> 
> 
> 
> Like I said, take it up with every university in the world that teaches finance and economics because that is what they teach.
> 
> 
> 
> 
> What is it that they teach exactly?
> 
> Click to expand...
> 
> 
> That investors are not risk neutral, that they have to be compensated for taking risks.
Click to expand...


But compensated by whom?


----------



## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> CrusaderFrank said:
> 
> 
> 
> Just to revisit, the SS "Trust Fund" "Invests" in a special issuance of "Bonds" that can only be sold back to the US Government.
> 
> With me so far?
> 
> These are "Assets" that only have value if the Government can borrow from someplace else to redeem them
> 
> Still there?
> 
> Do you see the problem here?
> 
> 
> 
> 
> 
> They are just as valuable as any Treasury. If the government decided to default on a trust fund IOU it would be perceived by investors in other treasury instruments as a default on all the government's obligations, and ordinary T-bills,bonds,and notes would crash as well. Its all the same credit.
> 
> Do you have a bank account? There's a good chance a substantial portion of your deposit is investing in short term treasuries. You'd better go withdraw your money now!
> 
> Click to expand...
> 
> 
> I don't think the SS trust liabilities are as valuable as Treasuries.  People don't understand the SS liabilities. If the US defaulted on Treasuries, it would create shock waves throughout global markets. If the government cut SS benefits, risk assets would probably rise.
> 
> I do agree though that they are real. The trusts mimic a bond fund without the bonds.
Click to expand...



SS benefits are not directly tied to the trust fund securities. The government could cut benefits while still paying its obligations in the SS trust fund.


----------



## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Toro said:
> 
> 
> 
> So I decided to revisit risk neutrality.  Here is what it says in Introduction to Futures and Options Markets, Second Edition, by John C Hull, page 270.
> 
> 
> 
> IOW, risk neutrality is used to price options, not to make a general statements about the behavior of financial market participants.
> 
> 
> 
> 
> 
> It doesn't state that human investors are risk-anything. (Finance tries to avoid actual biology as much as possible) However -_ the market operates in a way that makes it appear the players are - on average - risk neutral.
> _
> 
> 
> 
> 
> Clearly, MPT says otherwise, as demonstrated in CAPM where stocks are a function of volatility and the expected return of the market above the risk-free rate.
> 
> Click to expand...
> 
> 
> MPT doesn't say anything about what the correct expected return of the market overall is - as I've pointed out - this is a parameter required by MPT, not a parameter that MPT computes.
> 
> 
> 
> To put the absurdity of relying on past returns to predict future returns, take a look at SPY returns for the past year:
> 
> SPDR S&P 500 ETF Chart - Yahoo! Finance
> 
> 
> 
> If you look at it, you'll see lots of ups and down - but the clear overall trend is upward. The total increase is a little over 20%.  There is a period of decline - during the fall of 2012 - but the prices recover and the market is again at pre-decline levels by February.
> 
> So based on this evidence, we should be able to conclude that although the price of the S&P 500 goes up and down, over any period that is at least 6 months long, it will at least retain its value, and on average, it will return 20%. Although we're only looking at one year of data - we can stagger 6 month samples so that we have as many samples as we like - and we could make a nice chart that shows the odds of winning or losing X dollars over certain intervals - and using all that, we should be able to convince people, like yourself, that the S&P 500 will always retain its value over 6 month periods.
> 
> 
> Now do you see how absurd it is to base your expected 30 year return on barely more than 3X30 years of data? That's only 50%  better than basing your expected 6 month return on a years worth of data, is it?
> 
> In fact if you look at the stock chart from a single day of a stock that did well on that day, you might conclude - using your method of reasoning - that the stock will go up and down but always retain or beat its value over 1 hour periods.
> 
> Click to expand...
> 
> 
> That's like saying "How do we know Western society works?  We only have 200 years of data?"  Perhaps we should crawl through the wormhole and measure the infinite multiverses, then we will have enough statistical data to see if the foundations of Western society are real.
> 
> If financial markets operate as if they are risk neutral, then why aren't the average returns the risk-free rate?
> 
> As for the past predicting the future, I do not believe that markets are efficient all the time, but I do believe they are efficient over long periods of time. In an efficient market, higher risk assets should earn more than lower risk assets over long periods of time.  That's what theory says and that's what has happened in the past. Both theory and history tell us that those with long time frames are compensated for taking on risk. Thus, we should invest SS in the stock market like other pension funds and insurance companies, as do other national retirement schemes like in Europe and Canada.
Click to expand...




The past 1 year of history has shown that 6 month periods the S&P 500 doesn't lose value. Do you dispute this claim?


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> What is it that they teach exactly?
> 
> 
> 
> 
> That investors are not risk neutral, that they have to be compensated for taking risks.
> 
> Click to expand...
> 
> 
> Compensated by whom?
Click to expand...


By the growth in the economy.


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> It doesn't state that human investors are risk-anything. (Finance tries to avoid actual biology as much as possible) However -_ the market operates in a way that makes it appear the players are - on average - risk neutral.
> _
> 
> 
> 
> MPT doesn't say anything about what the correct expected return of the market overall is - as I've pointed out - this is a parameter required by MPT, not a parameter that MPT computes.
> 
> 
> 
> To put the absurdity of relying on past returns to predict future returns, take a look at SPY returns for the past year:
> 
> SPDR S&P 500 ETF Chart - Yahoo! Finance
> 
> 
> 
> If you look at it, you'll see lots of ups and down - but the clear overall trend is upward. The total increase is a little over 20%.  There is a period of decline - during the fall of 2012 - but the prices recover and the market is again at pre-decline levels by February.
> 
> So based on this evidence, we should be able to conclude that although the price of the S&P 500 goes up and down, over any period that is at least 6 months long, it will at least retain its value, and on average, it will return 20%. Although we're only looking at one year of data - we can stagger 6 month samples so that we have as many samples as we like - and we could make a nice chart that shows the odds of winning or losing X dollars over certain intervals - and using all that, we should be able to convince people, like yourself, that the S&P 500 will always retain its value over 6 month periods.
> 
> 
> Now do you see how absurd it is to base your expected 30 year return on barely more than 3X30 years of data? That's only 50%  better than basing your expected 6 month return on a years worth of data, is it?
> 
> In fact if you look at the stock chart from a single day of a stock that did well on that day, you might conclude - using your method of reasoning - that the stock will go up and down but always retain or beat its value over 1 hour periods.
> 
> 
> 
> 
> That's like saying "How do we know Western society works?  We only have 200 years of data?"  Perhaps we should crawl through the wormhole and measure the infinite multiverses, then we will have enough statistical data to see if the foundations of Western society are real.
> 
> If financial markets operate as if they are risk neutral, then why aren't the average returns the risk-free rate?
> 
> As for the past predicting the future, I do not believe that markets are efficient all the time, but I do believe they are efficient over long periods of time. In an efficient market, higher risk assets should earn more than lower risk assets over long periods of time.  That's what theory says and that's what has happened in the past. Both theory and history tell us that those with long time frames are compensated for taking on risk. Thus, we should invest SS in the stock market like other pension funds and insurance companies, as do other national retirement schemes like in Europe and Canada.
> 
> Click to expand...
> 
> 
> 
> 
> The past 1 year of history has shown that 6 month periods the S&P 500 doesn't lose value. Do you dispute this claim?
Click to expand...



If financial markets operate as if they are risk neutral, then why aren't the average returns the risk-free rate?


----------



## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Toro said:
> 
> 
> 
> That investors are not risk neutral, that they have to be compensated for taking risks.
> 
> 
> 
> 
> Compensated by whom?
> 
> Click to expand...
> 
> 
> By the growth in the economy.
Click to expand...


No - by what _people_? And why would these people want to compensate the investors for taking those risks?


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> Compensated by whom?
> 
> 
> 
> 
> By the growth in the economy.
> 
> Click to expand...
> 
> 
> No - by what _people_? And why would these people want to compensate the investors for taking those risks?
Click to expand...


Everyone.  

Because by compensating them for taking the risk, they benefit also.


----------



## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Toro said:
> 
> 
> 
> That's like saying "How do we know Western society works?  We only have 200 years of data?"  Perhaps we should crawl through the wormhole and measure the infinite multiverses, then we will have enough statistical data to see if the foundations of Western society are real.
> 
> If financial markets operate as if they are risk neutral, then why aren't the average returns the risk-free rate?
> 
> As for the past predicting the future, I do not believe that markets are efficient all the time, but I do believe they are efficient over long periods of time. In an efficient market, higher risk assets should earn more than lower risk assets over long periods of time.  That's what theory says and that's what has happened in the past. Both theory and history tell us that those with long time frames are compensated for taking on risk. Thus, we should invest SS in the stock market like other pension funds and insurance companies, as do other national retirement schemes like in Europe and Canada.
> 
> 
> 
> 
> 
> 
> The past 1 year of history has shown that 6 month periods the S&P 500 doesn't lose value. Do you dispute this claim?
> 
> Click to expand...
> 
> 
> 
> If financial markets operate as if they are risk neutral, then why aren't the average returns the risk-free rate?
Click to expand...




That's the question that can't be entirely answered. 


What I can say is that calculating an expected premium based on only the past 100 years or so of U.S. returns is plain absurd. Take a look at them:

http://stockcharts.com/freecharts/historical/images/djia1900s.png

Almost all of the gains that have been long lasting happen during TWO periods of _exceptional_ economic growth - late 40's through the mid 60's, and the mid 80's through 2000. _The entire calculated return over the entire 100 year sample essentially comes from these two 15-20 year secular bull markets_. Thus to conclude that the average 30 year return in the future will be the same as the past 100 years requires not only that we presume the same frequency of these massive bull markets but that presume they happen close enough together. 

Basing expectations on what will come in any given future 30 year slices of this ~110 year graph really is just as absurd as basing expectations of what will come in any given future 30 second slice on a 2 minute graph.



So while there probably is a real premium, you are overstating it by using U.S. stock market data for the past 100 years. The premium that does exist I think has to do with the risk-seeking behavior of companies raising cash through stock sales - 

AND the fact that stocks are basically correlated to one another to some degree.

Let's put it this way - if stocks were in no way correlated to each other's movements - arbitrage becomes possible. You simply have to buy enough of them and the odds all cancel out and all you get is the average return. This would drive up their prices to the risk free return level. But stocks are correlated to each other's movements and there is only one global economy. If there were a race of space alien arbitrageurs that could invest in any planet's economy they chose - and if all the planet's economies were otherwise not connected - then the aliens would simply invest in all of the economies they can and the volatilities cancel out and with their buying they would drive up the prices (and probably price the natives out of the market who, not being able to invest in the intergalactic economy themselves, wouldn't want to take the risk anymore)

So one reason the stock market doesn't conform to risk-neutral valuation is that the market as a whole moves together (that's another thing I hate about modern investment advice - diversification is definitely good but it doesn't get you as far as you'd think. There is just ONE global economy and if you buy stock anywhere in it you're exposed to it.


----------



## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Toro said:
> 
> 
> 
> By the growth in the economy.
> 
> 
> 
> 
> No - by what _people_? And why would these people want to compensate the investors for taking those risks?
> 
> Click to expand...
> 
> 
> Everyone.
> 
> Because by compensating them for taking the risk, they benefit also.
Click to expand...


Everyone? I haven't paid any investors for taking risks. Who is the "they" here?


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> No - by what _people_? And why would these people want to compensate the investors for taking those risks?
> 
> 
> 
> 
> Everyone.
> 
> Because by compensating them for taking the risk, they benefit also.
> 
> Click to expand...
> 
> 
> Everyone? I haven't paid any investors for taking risks. Who is the "they" here?
Click to expand...


You, me and everyone else benefits by the investments people make to grow the productive capacity of the economy.  Because equity owners take the most risk, they earn the most reward.

Don't confuse that with the price of equities.  

Attached is a logarithmic graph of the real return of equities with dividends reinvested since 1871.  It comes from Robert Shiller's website.  You can download the data and recreate it.

As you can see, the real return of stocks over time has been much more constant than a price index unadjusted for inflation.


----------



## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Toro said:
> 
> 
> 
> Everyone.
> 
> Because by compensating them for taking the risk, they benefit also.
> 
> 
> 
> 
> Everyone? I haven't paid any investors for taking risks. Who is the "they" here?
> 
> Click to expand...
> 
> 
> You, me and everyone else benefits by the investments people make to grow the productive capacity of the economy.  Because equity owners take the most risk, they earn the most reward.
Click to expand...


Where does the reward come from? Who actually pays for it? That's the profit I pay above costs at the store for milk? Would that mean milk would be worth more if it comes from a company with greater risk?






> Don't confuse that with the price of equities.
> 
> Attached is a logarithmic graph of the real return of equities with dividends reinvested since 1871.  It comes from Robert Shiller's website.  You can download the data and recreate it.
> 
> As you can see, the real return of stocks over time has been much more constant than a price index unadjusted for inflation.




Did you actually get that from Shiller's website? It looks fishy to me.


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> The past 1 year of history has shown that 6 month periods the S&P 500 doesn't lose value. Do you dispute this claim?
> 
> 
> 
> 
> 
> If financial markets operate as if they are risk neutral, then why aren't the average returns the risk-free rate?
> 
> Click to expand...
> 
> 
> 
> 
> That's the question that can't be entirely answered.
> 
> 
> What I can say is that calculating an expected premium based on only the past 100 years or so of U.S. returns is plain absurd. Take a look at them:
> 
> http://stockcharts.com/freecharts/historical/images/djia1900s.png
> 
> Almost all of the gains that have been long lasting happen during TWO periods of _exceptional_ economic growth - late 40's through the mid 60's, and the mid 80's through 2000. _The entire calculated return over the entire 100 year sample essentially comes from these two 15-20 year secular bull markets_. Thus to conclude that the average 30 year return in the future will be the same as the past 100 years requires not only that we presume the same frequency of these massive bull markets but that presume they happen close enough together.
> 
> Basing expectations on what will come in any given future 30 year slices of this ~110 year graph really is just as absurd as basing expectations of what will come in any given future 30 second slice on a 2 minute graph.
> 
> 
> 
> So while there probably is a real premium, you are overstating it by using U.S. stock market data for the past 100 years. The premium that does exist I think has to do with the risk-seeking behavior of companies raising cash through stock sales -
> 
> AND the fact that stocks are basically correlated to one another to some degree.
> 
> Let's put it this way - if stocks were in no way correlated to each other's movements - arbitrage becomes possible. You simply have to buy enough of them and the odds all cancel out and all you get is the average return. This would drive up their prices to the risk free return level. But stocks are correlated to each other's movements and there is only one global economy. If there were a race of space alien arbitrageurs that could invest in any planet's economy they chose - and if all the planet's economies were otherwise not connected - then the aliens would simply invest in all of the economies they can and the volatilities cancel out and with their buying they would drive up the prices (and probably price the natives out of the market who, not being able to invest in the intergalactic economy themselves, wouldn't want to take the risk anymore)
> 
> So one reason the stock market doesn't conform to risk-neutral valuation is that the market as a whole moves together (that's another thing I hate about modern investment advice - diversification is definitely good but it doesn't get you as far as you'd think. There is just ONE global economy and if you buy stock anywhere in it you're exposed to it.
Click to expand...


- there is no perfect arbitrage
- volatility doesn't entirely explain risk
- people are not always rational 

Equity is compensated because it is the riskiest slice of the capital stack.  If the total return on assets is 6%, and the right hand side of the balance sheet is composed of collateralized debt and equity, the collateralized debt will earn a lower return than 6% because it has first claim on assets and the return is fixed and more certain, while the equity will earn a higher return than 6% because the return is much less certain and more volatile.  There can be no risk-free rate in the entire economy because investors - both creditors and equity owners - have to take risks to compensate them for investing.


----------



## Toro

OohPooPahDoo said:


> Where does the reward come from? Who actually pays for it? That's the profit I pay above costs at the store for milk? Would that mean milk would be worth more if it comes from a company with greater risk?



The reward comes from increasing the productive capacity of the economy.  It comes from figuring out how to bottle and sell the milk in the first place.



> Did you actually get that from Shiller's website? It looks fishy to me.



It looks fishy to you because I just made it, and my excel skills suck on a Mac.  Here is the website.

Online Data - Robert Shiller

Scale the real index price, adjust the real dividend to monthly and add it to the index, then multiply this to accumulated monthly figures over time.


----------



## FactFinder

*Why investing SS in the stock market is a horrible idea. 
*

Well, first thought is " One should not place all one's eggs in one basket." Second thought is: Do you really trust a 'pack of wolves'?


----------



## Toro

Ok, that graph looked especially fishy because it was!  This is why one shouldn't be making graphs on a Friday evening when drinking scotch!

This is the graph of Shiller's real S&P 500 with dividends reinvested.  That looks better.

Since 1871, the stock market has had three negative decades, 1910s (-17%), the 1970s (-13%) and the 2000s (-27%).  Conversely, there have been seven decades when the stock market has doubled.

Edit - And FTR, the Dow Jones Industrial Average is a poor stock market index.  It's a price index of a handful of stocks weighted by price, as opposed to the S&P 500 or Russell 3000 which are broad-market indices weighted by market capitalization.  IIRC, the Dow has lagged the S&P 500 by about 1% a year over time.  Nor does it include dividends.  A pension fund will reinvest its income back into the fund, so when calculating the return from equities, we have to include dividends reinvested.  Over time, dividends have returned about 4%.  So dividends must also be included when calculating the return from equities.


----------



## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> Where does the reward come from? Who actually pays for it? That's the profit I pay above costs at the store for milk? Would that mean milk would be worth more if it comes from a company with greater risk?
> 
> 
> 
> 
> The reward comes from increasing the productive capacity of the economy.  It comes from figuring out how to bottle and sell the milk in the first place.
Click to expand...


There has to be money that is transferred from one party to another in this process. Where is it? When I buy a bottle of milk I consider what the value of that milk is to me - I don't really care what financial risks were taken to get it to me. If milk Vendor A had to take 10X greater risks to get the same quality bottle of milk to me as Vendor B - I'm not going to pay Vendor A any more for his milk. So if the extra risk compensation money isn't coming from me - the consumer - where does it come from?


----------



## OohPooPahDoo

Toro said:


> Ok, that graph looked especially fishy because it was!  This is why one shouldn't be making graphs on a Friday evening when drinking scotch!
> 
> This is the graph of Shiller's real S&P 500 with dividends reinvested.  That looks better.
> 
> Since 1871, the stock market has had three negative decades, 1910s (-17%), the 1970s (-13%) and the 2000s (-27%).  Conversely, there have been seven decades when the stock market has doubled.
> 
> Edit - And FTR, the Dow Jones Industrial Average is a poor stock market index.  It's a price index of a handful of stocks weighted by price, as opposed to the S&P 500 or Russell 3000 which are broad-market indices weighted by market capitalization.  IIRC, the Dow has lagged the S&P 500 by about 1% a year over time.  Nor does it include dividends.  A pension fund will reinvest its income back into the fund, so when calculating the return from equities, we have to include dividends reinvested.  Over time, dividends have returned about 4%.  So dividends must also be included when calculating the return from equities.



I agree that the DOW jones is a poor index. This is the problem with doing real return analysis back as far as 1871:

1) the S&P 500 only goes back to 1957. 
2) The Dow only goes back to 1885 - and its a really shoddy index capturing only a tiny portion of the market and subject to the selection bias of those that choose its components
3) Prior to 1885 we have crap - severe selection bias comes into making retroactive indexes because the more successful and more heavily traded companies will be more likely to be found by a historian.
4) We don't have good inflation index data prior to 1913 _- its not possible to reliably compute real returns without good and meaningful inflation data._ 


I would submit that going back before 1913 on real return analysis is almost useless. *Almost all of the upward movement in total returns since 1913 has occurred in 3 big jumps - * the 20's, late 40's - early 60's  - and mid 80's through 2000. These were all periods of exceptional growth. I don't dispute that we will have periods of exceptional growth in the future - but for 30 year returns to always be as good as they have been in the past 100 years requires these periods of exceptional growth to be spaced in a way that you get a big chunk of at least one of them during that 30 year period. It would be quite exceptional if the timings of these bull markets continued to happen just in time to either give people larger than usual nest eggs to start with for retirement or to catapult their mediocre savings into more substantial savings in the years just before retirement. We are bound to hit long 50-100 year period where these bull markets do not happen (and conversely bound to have 50-100 year periods where they happen all the time) - and* the generation that misses one of these bull markets will suffer greatly in their retirements and at great expense to all, and the financial advisors who repeated the 30 year return mantra like it was infallible divine truth will be to blame.
*


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> Where does the reward come from? Who actually pays for it? That's the profit I pay above costs at the store for milk? Would that mean milk would be worth more if it comes from a company with greater risk?
> 
> 
> 
> 
> The reward comes from increasing the productive capacity of the economy.  It comes from figuring out how to bottle and sell the milk in the first place.
> 
> Click to expand...
> 
> 
> There has to be money that is transferred from one party to another in this process. Where is it? When I buy a bottle of milk I consider what the value of that milk is to me - I don't really care what financial risks were taken to get it to me. If milk Vendor A had to take 10X greater risks to get the same quality bottle of milk to me as Vendor B - I'm not going to pay Vendor A any more for his milk. So if the extra risk compensation money isn't coming from me - the consumer - where does it come from?
Click to expand...


You look at it in aggregate.  Vendor A may go out of business and Vendor B may make a fortune.  But in aggregate, there will be industry profit and a return on equity to compensate the owners of the businesses in that industry for investing in the economy.  Then there will be other industries that will be completely new and create value through investment in other ways.  The productive capacity of the economy will grow and investors in businesses will earn a return.  The profits generated by the assets will parceled out depending where investors are in the capital structure.


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> Ok, that graph looked especially fishy because it was!  This is why one shouldn't be making graphs on a Friday evening when drinking scotch!
> 
> This is the graph of Shiller's real S&P 500 with dividends reinvested.  That looks better.
> 
> Since 1871, the stock market has had three negative decades, 1910s (-17%), the 1970s (-13%) and the 2000s (-27%).  Conversely, there have been seven decades when the stock market has doubled.
> 
> Edit - And FTR, the Dow Jones Industrial Average is a poor stock market index.  It's a price index of a handful of stocks weighted by price, as opposed to the S&P 500 or Russell 3000 which are broad-market indices weighted by market capitalization.  IIRC, the Dow has lagged the S&P 500 by about 1% a year over time.  Nor does it include dividends.  A pension fund will reinvest its income back into the fund, so when calculating the return from equities, we have to include dividends reinvested.  Over time, dividends have returned about 4%.  So dividends must also be included when calculating the return from equities.
> 
> 
> 
> 
> I agree that the DOW jones is a poor index. This is the problem with doing real return analysis back as far as 1871:
> 
> 1) the S&P 500 only goes back to 1957.
> 2) The Dow only goes back to 1885 - and its a really shoddy index capturing only a tiny portion of the market and subject to the selection bias of those that choose its components
> 3) Prior to 1885 we have crap - severe selection bias comes into making retroactive indexes because the more successful and more heavily traded companies will be more likely to be found by a historian.
> 4) We don't have good inflation index data prior to 1913 _- its not possible to reliably compute real returns without good and meaningful inflation data._
> 
> 
> I would submit that going back before 1913 on real return analysis is almost useless. *Almost all of the upward movement in total returns since 1913 has occurred in 3 big jumps - * the 20's, late 40's - early 60's  - and mid 80's through 2000. These were all periods of exceptional growth. I don't dispute that we will have periods of exceptional growth in the future - but for 30 year returns to always be as good as they have been in the past 100 years requires these periods of exceptional growth to be spaced in a way that you get a big chunk of at least one of them during that 30 year period. It would be quite exceptional if the timings of these bull markets continued to happen just in time to either give people larger than usual nest eggs to start with for retirement or to catapult their mediocre savings into more substantial savings in the years just before retirement. We are bound to hit long 50-100 year period where these bull markets do not happen (and conversely bound to have 50-100 year periods where they happen all the time) - and* the generation that misses one of these bull markets will suffer greatly in their retirements and at great expense to all, and the financial advisors who repeated the 30 year return mantra like it was infallible divine truth will be to blame.
> *
Click to expand...


I don't necessarily believe that 30 year returns will always look like the same as they have in the past.  Nor would I necessarily recommend individuals always and everywhere invest in stocks with a 30 year time frame.  Mostly I would, but not always.  It depends on where assets are valued.  That's why you have a well diversified portfolio of stocks, bonds, real estate, etc.  

But I do believe, and history has borne this out, that a rising economy will lift asset prices, and rising profits will accrue to business owners in conjunction with a rising economy, thus lifting equity prices.  It would be extremely difficult for over a very long period of time for all the gains that accrue to assets to go towards debt holders, which is in effect what you are arguing if you say the economy will keep growing but equities will do poorly over long periods of time.


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## Toro

Of course, one can take this logic from equities to all other asset classes.  How do we know bonds will not lose all value in the future?  How about real estate falling by 60%?  How do we know taxpayers are going to want to continue funding SS?  How do we know the US is even going to exist 100 years from now?

If we take the "The past can't predict the future" argument to its logical extreme, we have no idea about anything in the future and thus we shouldn't even have SS.


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## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Toro said:
> 
> 
> 
> The reward comes from increasing the productive capacity of the economy.  It comes from figuring out how to bottle and sell the milk in the first place.
> 
> 
> 
> 
> There has to be money that is transferred from one party to another in this process. Where is it? When I buy a bottle of milk I consider what the value of that milk is to me - I don't really care what financial risks were taken to get it to me. If milk Vendor A had to take 10X greater risks to get the same quality bottle of milk to me as Vendor B - I'm not going to pay Vendor A any more for his milk. So if the extra risk compensation money isn't coming from me - the consumer - where does it come from?
> 
> Click to expand...
> 
> 
> You look at it in aggregate.  Vendor A may go out of business and Vendor B may make a fortune.  But in aggregate, there will be industry profit and a return on equity to compensate the owners of the businesses in that industry for investing in the economy.  Then there will be other industries that will be completely new and create value through investment in other ways.  The productive capacity of the economy will grow and investors in businesses will earn a return.  The profits generated by the assets will parceled out depending where investors are in the capital structure.
Click to expand...




Yeah, but who pays the investors their risk premium and when and why do they pay them?


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## OohPooPahDoo

Toro said:


> OohPooPahDoo said:
> 
> 
> 
> 
> 
> Toro said:
> 
> 
> 
> Ok, that graph looked especially fishy because it was!  This is why one shouldn't be making graphs on a Friday evening when drinking scotch!
> 
> This is the graph of Shiller's real S&P 500 with dividends reinvested.  That looks better.
> 
> Since 1871, the stock market has had three negative decades, 1910s (-17%), the 1970s (-13%) and the 2000s (-27%).  Conversely, there have been seven decades when the stock market has doubled.
> 
> Edit - And FTR, the Dow Jones Industrial Average is a poor stock market index.  It's a price index of a handful of stocks weighted by price, as opposed to the S&P 500 or Russell 3000 which are broad-market indices weighted by market capitalization.  IIRC, the Dow has lagged the S&P 500 by about 1% a year over time.  Nor does it include dividends.  A pension fund will reinvest its income back into the fund, so when calculating the return from equities, we have to include dividends reinvested.  Over time, dividends have returned about 4%.  So dividends must also be included when calculating the return from equities.
> 
> 
> 
> 
> I agree that the DOW jones is a poor index. This is the problem with doing real return analysis back as far as 1871:
> 
> 1) the S&P 500 only goes back to 1957.
> 2) The Dow only goes back to 1885 - and its a really shoddy index capturing only a tiny portion of the market and subject to the selection bias of those that choose its components
> 3) Prior to 1885 we have crap - severe selection bias comes into making retroactive indexes because the more successful and more heavily traded companies will be more likely to be found by a historian.
> 4) We don't have good inflation index data prior to 1913 _- its not possible to reliably compute real returns without good and meaningful inflation data._
> 
> 
> I would submit that going back before 1913 on real return analysis is almost useless. *Almost all of the upward movement in total returns since 1913 has occurred in 3 big jumps - * the 20's, late 40's - early 60's  - and mid 80's through 2000. These were all periods of exceptional growth. I don't dispute that we will have periods of exceptional growth in the future - but for 30 year returns to always be as good as they have been in the past 100 years requires these periods of exceptional growth to be spaced in a way that you get a big chunk of at least one of them during that 30 year period. It would be quite exceptional if the timings of these bull markets continued to happen just in time to either give people larger than usual nest eggs to start with for retirement or to catapult their mediocre savings into more substantial savings in the years just before retirement. We are bound to hit long 50-100 year period where these bull markets do not happen (and conversely bound to have 50-100 year periods where they happen all the time) - and* the generation that misses one of these bull markets will suffer greatly in their retirements and at great expense to all, and the financial advisors who repeated the 30 year return mantra like it was infallible divine truth will be to blame.
> *
> 
> Click to expand...
> 
> 
> I don't necessarily believe that 30 year returns will always look like the same as they have in the past.  Nor would I necessarily recommend individuals always and everywhere invest in stocks with a 30 year time frame.  Mostly I would, but not always.  It depends on where assets are valued.  That's why you have a well diversified portfolio of stocks, bonds, real estate, etc.
Click to expand...


What is "etc." ?

That's the trouble with the diversification myth. Its usually stated as "diversification means stocks, bonds, real estate, etc." and there is no explanation of the etc. First of - stocks and real estate together aren't really that diverse, as the past economic collapse should show you. In fact, if you can find any point in time when the stock market crashed and real estate values remained the same or went up - or vice versa - I'd love to read about it (not saying such a time never existed, just that it would be surprising). Second off - the phrase use to be "stocks, bonds, etc" - then real estate got popular - then it became "stocks, bonds, real estate, etc". Diversification really means "stocks, bonds, whatever is popular to invest in, etc". 

Another huge problem with the diversification myth is the idea that simply having varied assets protects you from loss while haven't non-varied assets exposes you to loss. This isn't the case. Take two portfolios:

Portfolio A)

Equal amounts of exposure to:

S&P 500
corn futures
bit coins
debt of the Mexican government
a worldwide small cap mutual fund
U.S. Treasuries


Portfolio B) 

1) long position on Microsoft
2) a put option to sell Microsoft at 90% of what I bought it for


Now which portfolio is more diverse? Clearly Portfolio A! Which is safer from loss? Clearly, Portfolio B!






> But I do believe, and history has borne this out, that a rising economy will lift asset prices, and rising profits will accrue to business owners in conjunction with a rising economy, thus lifting equity prices.



That's true but I didn't argue otherwise.



> It would be extremely difficult for over a very long period of time for all the gains that accrue to assets to go towards debt holders, which is in effect what you are arguing if you say the economy will keep growing but equities will do poorly over long periods of time.



Except you're talking about gains that haven't happened yet. They don't have to accrue to anything if they don't happen. Stock prices are based on what profits investors believe will come in the future.


Business can continue to be profitable and at the same time the market might misjudge_ how_ profitable they will be. If it turns out Company A is 10X less profitable than the investors thought it would be, Company A is still profitable but its stock will probably drop about 10 fold unless investors think it will make a big turn around.  Once the price drops, the P/E ratio becomes more sensible again and the company would appear to be "profitable" to a new investor.



I admit I'm still befuddled as to how a gain can "accrue to an asset" and actually be realized without someone having to pay money for it.  I know you don't actually believe this - but from your statements thus far it would appear that you are trying to say that businesses just accrue gains without anyone actually having to pay for them - like there's some sort of accrual gremlins that come out when everyone is asleep, dropping risk premiums into the pockets of investors.


----------



## OohPooPahDoo

Toro said:


> Of course, one can take this logic from equities to all other asset classes.  How do we know bonds will not lose all value in the future?


We don't. Nothing I've said implies otherwise and recent history certainly shows us its a possibility. Are you saying bonds are unfairly priced given the risk of default?




> How about real estate falling by 60%?


How about it? 



> How do we know taxpayers are going to want to continue funding SS?


We don't. I don't see how this means we should give a big taxpayer handout to current holders of stock.


> How do we know the US is even going to exist 100 years from now?


We don't.

I'm not sure what your argument is.  We don't know whether other things will happen in the future, thus we should proceed as if we know for a fact the stock market will return at least X over Y years all the time?



> If we take the "The past can't predict the future" argument to its logical extreme, we have no idea about anything in the future and thus we shouldn't even have SS.



No offense, but to emphasize, I would hardly consider rejecting your argument that 3 non-overlapping samples are sufficient to predict future samples to be taking anything to the extreme.


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> 
> 
> OohPooPahDoo said:
> 
> 
> 
> There has to be money that is transferred from one party to another in this process. Where is it? When I buy a bottle of milk I consider what the value of that milk is to me - I don't really care what financial risks were taken to get it to me. If milk Vendor A had to take 10X greater risks to get the same quality bottle of milk to me as Vendor B - I'm not going to pay Vendor A any more for his milk. So if the extra risk compensation money isn't coming from me - the consumer - where does it come from?
> 
> 
> 
> 
> You look at it in aggregate.  Vendor A may go out of business and Vendor B may make a fortune.  But in aggregate, there will be industry profit and a return on equity to compensate the owners of the businesses in that industry for investing in the economy.  Then there will be other industries that will be completely new and create value through investment in other ways.  The productive capacity of the economy will grow and investors in businesses will earn a return.  The profits generated by the assets will parceled out depending where investors are in the capital structure.
> 
> Click to expand...
> 
> 
> 
> 
> Yeah, but who pays the investors their risk premium and when and why do they pay them?
Click to expand...


As the economy grows, savings, i.e. the capital stock, also grows.  The gains from the growth of the capital stock accrue to the owners of the capital stock, i.e. investors, savers.  Investors are either lenders (debt holders) or owners (equity).  Is it possible for the economy to grow over long periods of time without the capital stock growing?  Possibly I suppose, but it seems highly improbable in our economy given the legal structures this society has afforded capital.  I assume that you accept the economy grows and with it, so do savings.  Thus, it appears that you are concerned with how the gains are distributed within the capital stack, and the price of the claims within the capital stack, i.e. the price of debt relative to equity.  I don't know entirely.  Neither do the academics.  But I do know that if I am a lender with a claim on the collateral of the business who receives a fixed payment from the cash flows of the business, I will receive less than the owner of the business.  I, as a lender, want the owner to make as much money as possible because the more money he makes, the more secure are my claims.  Likewise, the less sure I am of his business prospects, the higher interest rate I will charge.


----------



## Toro

OohPooPahDoo said:


> What is "etc." ?
> 
> That's the trouble with the diversification myth. Its usually stated as "diversification means stocks, bonds, real estate, etc." and there is no explanation of the etc. First of - stocks and real estate together aren't really that diverse, as the past economic collapse should show you. In fact, if you can find any point in time when the stock market crashed and real estate values remained the same or went up - or vice versa - I'd love to read about it (not saying such a time never existed, just that it would be surprising). Second off - the phrase use to be "stocks, bonds, etc" - then real estate got popular - then it became "stocks, bonds, real estate, etc". Diversification really means "stocks, bonds, whatever is popular to invest in, etc".



I said "etc." because I was being lazy.

The etc. is a variety of not only assets but also risk premia and strategies.  Assets include currencies, commodities, infrastructure, land, royalties, timber, foreign bonds, foreign stocks, and so on.  Risk premia include carry, small cap and value stocks in equities, and so on.  Strategies include divergent strategies such as managed futures.  In 2008, the S&P 500 fell 38%.  The Barclay's Agg rose 5%.  Gold rose 5%.  The Barclay Hedge CTA index rose 18%.  Many risk parity strategies were down 5% or 10% in 2008.

Diversification moves one out on the efficient frontier.  It is a free lunch in finance.



> Another huge problem with the diversification myth is the idea that simply having varied assets protects you from loss while haven't non-varied assets exposes you to loss. This isn't the case. Take two portfolios:
> 
> Portfolio A)
> 
> Equal amounts of exposure to:
> 
> S&P 500
> corn futures
> bit coins
> debt of the Mexican government
> a worldwide small cap mutual fund
> U.S. Treasuries
> 
> 
> Portfolio B)
> 
> 1) long position on Microsoft
> 2) a put option to sell Microsoft at 90% of what I bought it for
> 
> 
> Now which portfolio is more diverse? Clearly Portfolio A! Which is safer from loss? Clearly, Portfolio B!



Portfolio B is a cash replicant.  There is empirical research on this.  Buying stocks and buying puts on those stocks generates a cash return.  Actually, that's not true.  It generates a slightly lower return than cash as put buyers tend to over-estimate risk.

So I would say Portfolio A is a better portfolio because it will likely generate a higher return for a commensurate amount of risk over time.



> Business can continue to be profitable and at the same time the market might misjudge_ how_ profitable they will be. If it turns out Company A is 10X less profitable than the investors thought it would be, Company A is still profitable but its stock will probably drop about 10 fold unless investors think it will make a big turn around.  Once the price drops, the P/E ratio becomes more sensible again and the company would appear to be "profitable" to a new investor.



I agree with that.  That is why I said I don't always recommend people own stocks.  Sometimes, stocks are very expensive and shouldn't be owned.  However, over very long periods of time, 50 or 100 years, valuation levels become less important.

I've spent 20 years in capital markets.  One of the lessons I tell new people is that in the short run, valuation doesn't matter.  The only thing that matters in the short-run is sentiment.  In the short-run, and even the intermediate-run, financial markets may not be efficient.  In the long-run, however, they are.  In the long-run, the only thing that matters is valuation.




> I admit I'm still befuddled as to how a gain can "accrue to an asset" and actually be realized without someone having to pay money for it.  I know you don't actually believe this - but from your statements thus far it would appear that you are trying to say that businesses just accrue gains without anyone actually having to pay for them - like there's some sort of accrual gremlins that come out when everyone is asleep, dropping risk premiums into the pockets of investors.



I may be wrong but it appears that you are concerned about how the returns are distributed intra-asset class, i.e. between stocks and bonds, as well as the prices paid of those securities.  As I said above, I'm not entirely sure why there are risk premia, though I believe it has to do with uncertainty and cognitive biases that cannot be measured by the limited tools of statistics.  Markets are raw human emotions at times, which leads to things that cannot be explained by rational behavior, i.e. the persistence of momentum and serial correlation of prices, and thus are not explainable by economists in today's intellectual framework.


----------



## Toro

OohPooPahDoo said:


> Toro said:
> 
> 
> 
> Of course, one can take this logic from equities to all other asset classes.  How do we know bonds will not lose all value in the future?
> 
> 
> 
> We don't. Nothing I've said implies otherwise and recent history certainly shows us its a possibility. Are you saying bonds are unfairly priced given the risk of default?
> 
> 
> 
> 
> 
> How about real estate falling by 60%?
> 
> Click to expand...
> 
> How about it?
> 
> 
> We don't. I don't see how this means we should give a big taxpayer handout to current holders of stock.
> 
> 
> 
> How do we know the US is even going to exist 100 years from now?
> 
> Click to expand...
> 
> We don't.
> 
> I'm not sure what your argument is.  We don't know whether other things will happen in the future, thus we should proceed as if we know for a fact the stock market will return at least X over Y years all the time?
> 
> 
> 
> 
> If we take the "The past can't predict the future" argument to its logical extreme, we have no idea about anything in the future and thus we shouldn't even have SS.
> 
> Click to expand...
> 
> 
> No offense, but to emphasize, I would hardly consider rejecting your argument that 3 non-overlapping samples are sufficient to predict future samples to be taking anything to the extreme.
Click to expand...


Your argument appears to be that we don't know what the future will be, and we don't have enough statistically significant observations to make conclusions with confidence, therefore, we shouldn't invest SS proceeds in stocks because we have no idea that they will do well in the future.  If I'm wrong, let me know.

If I'm not, then I'd turn that argument back to you.  Currently, SS is funded by taxpayers.  If the future is unknowable, how do we know that taxpayers will continue to fund payments in the future?  Stocks have done well over at least 140 years.  We've had social security for 80 years.  It was revised 45 years ago, and the current iteration was revised 30 years ago.  If we can't base conclusions on 140 years of data, how can we base conclusions on 80/45/30 years worth of data?  If the future is unknowable for stocks, why is it more knowable for politics?  And if we conclude that because the future is unknowable, why do we have SS in the first place given that we have no confidence that payments will be made in the future?


----------



## OohPooPahDoo

Toro said:


> This is what CAPM is built upon, which derives from modern portfolio theory, which won the Nobel Prize in economics.



No it didn't. 

It won the:


> The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1990


,,, like you said. That's not the Nobel Prize. Its the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Same Alfred Nobel. Different prizes. One comes from his will. One from a bank that likes his name.


----------

