Almost No One Makes Money From The Stock Market Alone - Seeking Alpha

Phew! I thought it was just me.
But according to an associate who retreated from the mutual fund sales
industry - NO ONE MAKES REAL MONEY OFF OF THE STOCK MARKETS. Sorry, excuse the caps. And
very, very few investors who reside in the middle classes will retire due to the money generated from their
investment portfolio or their investment philosophy. As Gordon Pape, a leading personal finance writer
recently quipped on one of those business news shows 'if you want to retire one day, my advice would be
to get a job with the government'. Suppose you could marry a government worker as well. Ha.
And to clarify, no one makes real money off of the equity or bond markets, except those who produce or sell
a financial product or provide financial advice.
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Cranky
Long-term horizon
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Almost No One Makes Money From The Stock
Market Alone
Oct. 25, 2012 6:19 AM ET | by: Cranky 321 comments | Includes: GLD, TLT
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next
72 hours. (More...)

Almost No One Makes Money From The Stock Market Alone [SPDR Gol... http://seekingalpha.com/article/949001-almost-no-one-makes-money-from...
1 of 11 1/28/2014 11:42 AM
And on those who sell advice, I would guess that most Financial Advisors earn their fees when they provide a
financial plan, and help their clients avoid bonehead moves such as buying high and selling low, and also
stopping clients from taking undue risk. Charging 1% or more on all of their clients' portfolio totals - well that
can add up to real money.
So why no returns for the little guy, and girl?
The stock market is mostly long periods of losing money against inflation, punctuated by two rabid bull
markets that saw equities reach giddy levels of extreme overvaluation. OK, cover the eyes of any squeamish
investors who might be nearby and check out this chart.
(click to enlarge)
Truly scary, but hey it's almost Halloween, so why not. This graphic description of events, courtesy of
thechartstore.com, is eye opening. You can see regular and extended periods where US equity markets
delivered no real returns for periods lasting 20 to 25 years. That's a regular event; being flat in real dollar
terms for 20 to 25 years, save for market timing plus dividends (dividends are not included in the above chart)
and their reinvestment. That last equity black hole lasted 24 years.
Investors who've made real money off of the equity markets were fortunate by birth. No not by being born
into a rich family (though that will help and is certainly recommended). I'm soooo jealous of those who were
able to invest in equities during the 80's and 90's. The proverbial monkey throwing darts could have made a
bundle. Even I could have picked a few winners back in the day. But not sure if I would have beaten Bubbles
the Chimp.
For the rest of us chumps, it's an uphill battle. Factor in inflation, and we will rewrite history if we can
generate real returns more than 3-4% from 2000-2020 or 2000-2025, or whenever this secular bear is slayed.
And making retirement-inducing returns above inflation? As Aerosmith would sing 'Dream On'. What's more,
the chart does not take into account taxes for those who are investing outside of a registered account. Our
current nasty secular bear market began in 2000. For 12 years (an eternity for the average investor), many
equity investors have made nothing or next to nothing, even as we sit near the highs of the last 12 years. To
compound the issue, many investors got cold feet in 2008 and sold low. Investors are really good at buying
high and selling low. See my first article for some chilling returns from those invested in the Magellan Fund
2 of 11 1/28/2014 11:42 AM
during one of their great runs.
As we can see from the real return chart, using the SP500 broad index SPY, it usually takes 20-30 years to
break even from the previous market peak. Equity investors may have to watch their portfolios slump and
sometimes take a royal shellacking for another decade or more. Equity investors have had a tough time for
the last 12 years. Even with the current surge in equity prices, investors are down from the peak, and have
taken a hit (a real whack upside the head) from inflation. If the Portfolios were trucks, they'd be making that
loud beeping sound to warn pedestrians that they're backing up. And if we look at the average time frame of
the last three bear markets, we are likely just about halfway through. That's not a guarantee. But it's a risk all
investors should address.
And it's likely why an all-stock portfolio or one that is very heavily weighted to equities continues to have its
back against the wall. You can look the other way and just count your dividends. But certainly it hurts when
equity investors sneak a peek at their portfolios' total value and returns. And more important than fear and
squashed pride, an all-stock portfolio can delay or disable retirement plans. Total return is important. To hold
non-correlated or less-correlated asset classes can provide opportunity. It can get you across the finish line.
It's always a good idea to have something that's working in your portfolio. It's possible that if we stay in a bear
market for another 12-15 years, investors could be much better off in a portfolio that holds bonds and gold
AND equities. Of course, investors who've had a nice mix of equities and gold and bonds over the last 12
years have seen some decent returns.
Which brings us to another point. No one retires because of his or her investment skills or perseverance.
People retire or semi-retire when they accumulate wealth by living beneath their means and having money
left over after every pay cheque. After that it is about slowly growing your portfolio and investment income.
If you can beat inflation by three or four points - good for you. So think about that real number. Your
investment portfolio is only growing by 3-4% a year, if you're doing most things right. The most worthwhile
investment advice one could give is 'save more'. Invest more. Be frugal. Do a budget. Don't buy those two $4
lattes every day. Think like a Scot. It takes a lot of money invested to fund a comfortable middle class
retirement.
I will write that the long-term average stock market returns that are commonly stated are useless to most
investors. Most of us get serious about investing and saving for retirement over a period of 15-20 years, even
a shorter time period for many. Your peak investment years could take place entirely within an equity bear
market.
Save and invest 20-30% of your income. Protect yourself against stock market collapses and portfolio
volatility with bonds and gold and exposure to other currencies.
Check out the incredible phenomenon known as the Permanent Portfolio. The basic premise is to hold asset
classes that protect against or prosper during periods of inflation, deflation, recession and robust economic
growth. It holds, in equal amounts - 25% Equities, 25% Cash, 25% Long Treasuries, 25% Gold.
It is available in a fund with the symbol PRPFX. View the long-term chart and you can see that the
Permanent Portfolio has delivered nearly 150% over the last ten years. Over the last 5 years, it is up 38%.
And incredibly the Permanent Portfolio has seen only two very small down years in the last 40.
It is also available in ETF form - symbol PERM - a recent addition to the ETF world. Investors can also build
their own Permanent Portfolio with equal amounts of SPY, GLD, TLT, SHY. Short-term Treasuries are often
used as the cash component in PP construction - SHY in this example.
There is also a website dedicated to all things Permanent Portfolio, and its creator Harry Browne. Visit
crawlingroad.com. Here's a chart from crawlingroad that says it all.
3 of 11 1/28/2014 11:42 AM
(click to enlarge)
The Permanent Portfolio clearly demonstrates how an investor (by holding and rebalancing multiple asset
classes) can experience decent returns in any environment, all while greatly reducing stomach-churning
volatility.
It almost makes real money.
Cranky aka thecrankywriter and the scaredy cat investor.
Additional disclosure: Please note that Dale Roberts aka crankyguy, the crankywriter, the scaredy cat
investor is not a licenced investor advisor, and the above opinions should only be factored in to an investor's
overall opinion forming process. Consult a licenced investment advisor before making any investment
decisions. Please. Through ETFs I may hold positions in companies within SPY.
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Almost No One Makes Money From The Stock Market Alone by Cranky
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Comments (321)
All (321) Author's Picks (2)
Register or Login to rate comments
pkvanwinkle@yahoo.com
, contributor
Comments (27)

This is really not a good article for investors to read who have not previously studied and learned a
great deal about the realities of market trends. In his conclusion, he recommends buying a "package" of
cash, gold, bonds, and some stocks; doing that now, with interest rates virtually at zero, and gold at
speculative highs, seems to me to be about as reckless a strategy as one could possibly deploy.
The stock market is at roughly 1400 right now, and even Bubbles, the chimp, would feel comfortable
investing at this level using the chart he provides to show that there appears more upside than down.
There is no question the market has "steps" where the markets highs are similar over ten, fifteen years,
(1966-1982) and (2000-present). And absolutely, if you took a lot of money and invested it in stocks at
the top, in March, 2000 you would not be very comfortable today..12 years later. The question is, if you
have money now, or if you have had money invested, what do you do now. We are not at the
bottom...indeed, notice what the market does at the end of these market steps...they soar! And our
current market, which has not gone above where it was in 2000, and 2007 is entering the 13 year of the
"step". ..I am not sure about adjusting for inflation, the 1970's and 80's where hell on investors, but if
you had piled into the S&P in 1982...when this writer was still playing with bongo boards..you would
have made a very nice return indeed.
25 Oct 2012, 07:10 AMReplyLike18
Cranky
, contributor
Comments (3183)

Authors reply Hey thanks Winkle for being up early and having a read. Certainly that was one of the
main points of the article. Those who invested in 80s and 90's were lucky by birth. That said, many of
them got scared off by the volatility. Check out the example in my first article. And 25 years ago we
had computers make a big 'ooops' that had people selling low, as well.
Investor psychology and low tolerance for volatility plays in as well.
5 of 11 1/28/2014 11:42 AM
David at Imperial Beach
, contributor
Comments (699)

If a more honest deflator is used the first chart looks even worse. See
http://bit.ly/Ptos8Q where the price of gold is used as the deflator.
byronpolo11
, contributor
Comment (1)

It should be noted that the provided chart ends on 3/31/09 when the S&P was down around 815. Today
it is at 1400 which should significantly diminish the upside potential that Winkle writes about.
Black Gold
, contributor
Comments (444)

Plot a chart of total systemic debt vs the stock market. You'll see why the stock market has been up
since the 80s. That can't and won't continue. Exponential growth will always unsustainable. Timing is
the only thing we are debating.
Every time it crashes and tries to correct, another bubble is blown to try to keep the markets up.
Internet, housing, and now govt deficit spending/central bank intervention? The last (at least) 15 years
in the stock market have been fake. Most recently, this whole rally we have had since 2009 started
when banks were allowed to lie about assets on their balance sheets. Recently, its internet bubble 2.0
with a bunch of these companies. AMZN at, what, a 300 p/e? WDAY jumping to an 8.8B valuation on
its IPO day? $8.8B for a company that has never made a profit and actually had negative book value
before the IPO? It's insanity and it can't last.
Given the size of the bubble that has been blown this time and the fact that the market is ~9% off of its
all time nominal highs, I think I'll watch from the sidelines and only do some speculation with money I
can lose.
David Zanoni
, contributor
Comments (776)

pkvanwinkle,
You have the realistic viewpoint. The author has the mind frame that stocks are stuck in the current
consolidation period, but this will not last forever. The economy and the stock market has cycles -
unless the world ends, we will see the market soar to new highs once again.
http://seekingalpha.co...
25 Oct 2012, 03:32 PMReplyLike2
6 of 11 1/28/2014 11:42 AM
untrusting investor
, contributor
Comments (9885)

And millions of small investors are taking the same route and getting out of equities and equity mutual
funds. Volumes on US exchanges keep falling each year now. Problem is that bonds are no better than
equities and pose just as much risk. Gold, maybe .... but it's at pretty elevated levels as well now.
RLJ3033
, contributor
Comments (127)

The Permanent Portfolio (cash, gold, bonds/Treasuries, stocks) is a portfolio distribution based on
Harry Browne, who postulated that at least one of the four would be doing well under any economic
scenario, while the others would be a mixed picture, with one probably doing not well.
I used PPRX for my wife's bonus money we allocated for the boys' college in '08, worried about an
stock implosion, and it served me very well. Up 47% in four years, to be exact. The idea is to match
inflation plus a premium; this year has been the worst (6% YTD). You'll never do great but probably
never see much of a lag over inflation.
PalmDesertRat
, contributor
Comments (2055)

PPRX? Is that a ticker symbol? My queries get no response
Gratian
, contributor
Comments (2690)

Permanent Portfolio
(PRPFX)
RLJ3033
, contributor
Comments (127)

Sorry, can't type. Gratian is right--PRPFX.
James Sands
, contributor
7 of 11 1/28/2014 11:42 AM
Comments (1386)

If you invested at the top of 1999-2000 and bought again in the trough, you'd be up quite handily.
Priceline is a great example:
http://yhoo.it/U9qgXN;range=my;compare=;ind...
An initial position of $1,000 at $800 per share and one extra "random" buy anywhere between 2001 to
2007 of $1,000 at let's just say $50 and your $2,000 investment is currently $10,000.
If a portfolio can pick long-term winners, and you buy on dips and average your position, obviously
trimming and adding as appropriate, you can make a killing. The key is knowing when to cut your
losses or get more aggressive.
idkmybffjill
, contributor
Comments (1180)

The Permanent Portfolio is actually a fantastic idea for the average mom and pop investor who doesn't
want to actively manage their investments (perfectly understandable). I plan on reading his book soon.
mhg2003
, contributor
Comments (17)

The best way to invest is to invest your time in learning @ investing which most don't do. Fear and
Greed is so true. Why buy a mutual fund or ETF and hand over fees when you could easily see their
most significant holdings and invest directly? The time invested in learning id critical and never spent.
Study, study, study!!!! Be prepared to make changes when the facts change. So many people never got
out of MSFT because they where greedy and got hurt badly. Energy is what I consider the future "big
thing" until it isn't anymore. Inflation will be the next BOGEYMAN. ALWAYS BE PREPARED AND
EDUCATED!!!! If not don't invest in the market.
, contributor
Comments (27)

The more I think about this the more I realize something isn't right in his analysis. He says this equity
chart is " adjusted for inflation" which by the way is the full CPI, with all the fluctuations of oil and
other commodities. If that is so, then it says to me that for most periods, stocks KEEP UP WITH
INFLATION, which is what we want, right?
Here's the second problem.. I am not saying that one should market time, but...what would happen if, as
the market starts to rise, let's say over 20%, one slowly starts taking money out of the market. If its a
retiree, like me, I keep 3 years of annual budget needs in cash reserves, but as the market rises, I take
out more, (I pulled out an extra year at 1200, and will do it again at 1550, and again at 1700. In the past
110 years there have been only ten major bear markets (a drop over 20%), and ten bull markets. Bear
markets, 90% of the time don't last more than 2-4 years, bull markets go for 3-6 years.
8 of 11 1/28/2014 11:42 AM
So, forget inflation, let your equity portfolio ride the S&P making 9-12%per year, take no more than
5-6% out each year, (meaning right now your reserves should be 4 years times your budget, or roughly
75-80% and invest in ETFs with custody at a no fee shop like Fidelity. When markets soar, as in 2000
and 2007, you will accumulate outsized reserves, then, once the market drops more than 20% you
begin to buy back. In iras you can be more aggressive, in taxable accounts less so!
AgAuMoney
, contributor
Comments (4427)

'''what would happen if, as the market starts to rise, let's say over 20%, one slowly starts taking money
out of the market. '''
That's what you are supposed to do. It's called "rebalancing."
BTW, the S&P doesn't make 9-12% per year. It has big spurts, big drops, and sometimes just meanders
along doing a lot of nothing (see 2001-2010) and ends up right about where it started.
The key is to rebalance to take money off the top when it is high, and put money in to fill it up when it
is low. While not perfect, it's as close as you are going to get to optimizing for "buy low, sell high." It
isn't market timing if you are going by a fixed standard that doesn't sway with the fear/greed of the
moment.
, contributor
Comments (27)

I think we all know it doesn't make the same return every year. Yes, I think my point and yours are the
same, in 2008-9 the market plunged 60%... It's important to have reserves to carry you for 4 years. The
market then jumped 100%.
All we both are saying is when the market is really chugging along, take a little off every so often. By
the way, most people do exactly the opposite!
Tony Pow
, contributor
Comments (4887)

It is the herd mentally or the greed and fear. Fidelity money market fund (or similar fund) flow could be
a great contra indicator.
Lucas Krupinski
, contributor
Comments (596)

While I understand the issue of fees for larger investors, I think smaller investors (such as who this
article was targeting) can worry less about them.
9 of 11 1/28/2014 11:42 AM
PRPFX has a 0.71% expense ratio, meaning $7 per $1000 invested; someone buildig their own
"permanent portfolio" at TD Ameritrade would incur $36 in trading commissions building the most
basic version of the portfolio (unless some of the ETF's qualified for TD's free ETF program).
More over, people investing regularly through payroll deduction could get hit with that same $36
dollars in fees every time they added to their investments- less if the portfolio became unbalanced
because then they would just buy the assets that had declined.
Making biweekly investments would cost the tune of $936 per year if done with ETF's. Heck, even at
Interactive Brokers (which seems to scare away many inexperienced investors) it would amount to
$208 per year.
One would need a portfolio value of almost $132,000 for it to make sense to build their own permanent
portfolio using ETF's rather than simply buy a mutual fund and pay its fees. More actually - i'm looking
only at the fees charged by PRPFX and not the fees charged by the underlying ETF's, which are
admittedly scant compared to PRPFX's already low fees.
Most workers in this country are lucky if they have $132,000 in their portfolios or IRA's, making fund
purchases the more economical decision compared to buying the underlying assets.
Not plugging Permanent Portfolio here, just saying that the "build it yourself" strategy may not be so
sound for the average investor.
Contrarily, I'll commend PRPFX for what they have done, but can't imagine its future performance
even coming close to its past performance; a huge amount of that return came from bond returns, but
mathematically, there is only so much lower that yields can go, and with that, so goes the future total
return for bonds; likewise, gold has had a tremendous run, but QE3 or not, I can't imagine providing the
same returns as it has over the next 40 years compared to the last 40 years.
AgAuMoney
, contributor
Comments (4427)

'''PRPFX has a 0.71% expense ratio, meaning $7 per $1000 invested; someone buildig their own
"permanent portfolio" at TD Ameritrade would incur $36 in trading commissions building the most
basic version'''
That's true, but remember the fee on PRPFX is EVERY YEAR whether you add funds or not. ETF fees
are much lower for the portfolio overall, and you only pay commissions on ETFs when you buy or sell
(if you pay at all).
This means that once you get up to $10,000 or so it is much cheaper to roll your own. Just put your
additional contributions every month into the cash allocation until you hit a rebalance band. If you are
hitting a rebalance band more than about 4 times per year I'd suggest rebalancing so the cash is near the
bottom of the range (rebalance to 15% cash instead of 25%).
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