Markets - Minor Correction? (Edit: Question Answered)

DairyQueen

womble_87 said:

AlanP_2 said:

womble_87 said:

I lost £800 off my pension but it is only relatively small and a couple of years old. I assume those who have been in it years lost a lot more depending on how close to retirement they are.

Until you sell up and cash in you haven't lost anything. What you have is a lower valuation of an asset you own. 

Do you view a reported fall in house prices as a "loss"?

Yes, because if I sold a house I would get the money. If the value falls I would get less money. So I class it as a loss. Forgetting fees etc.

My pension is now worth less, if I were to retire today I would get less than I would have done a few weeks ago. How can one not see it as a loss, even if technically I haven't lost anything. 

The clue is in the highlighted text. An asset's value is only realised when you dispose of it. In the interim your gain/loss is zero. Some assets only depreciate (cars, consumer electronics). Others have historically appreciated by more than inflation but only over long periods (property, shares). Shares yo-yo in value every minute of each day so you need to research 'volatility' and 'risk tolerance'. It's part of the territory with any market investment.

We are in our early 60s and approaching retirement. We are therefore at a lifetime max of accumulated assets.  I just checked our pension portfolio and it's down 13.8% over one month.That's a drop of around £80,000. It was 75% equities just before the correction began. 

If the market crashes proper then I would expect to see a drop of up to 50% of the equity value. That translates to over £230,000 on our portfolio. I will not be losing any sleep as the portfolio is positioned so that no equity disposal is planned for at least 5 years and, if required, such disposal can be delayed indefinitely as we have other guaranteed income.

The key point to take away: whether £800 or £230,000 is immaterial. The important issue is whether you may need to dispose of an asset before you expect to realise a gain.

Typical investment cycle for equities is 10 years. If you are a new investor then continue to regularly add to your investment and you should be rewarded by compounding and cost averaging over the long term. 

AlanP_2

womble_87 said:

AlanP_2 said:

womble_87 said:

I lost £800 off my pension but it is only relatively small and a couple of years old. I assume those who have been in it years lost a lot more depending on how close to retirement they are.

Until you sell up and cash in you haven't lost anything. What you have is a lower valuation of an asset you own. 

Do you view a reported fall in house prices as a "loss"?

Yes, because if I sold a house I would get the money. If the value falls I would get less money. So I class it as a loss. Forgetting fees etc.

My pension is now worth less, if I were to retire today I would get less than I would have done a few weeks ago. How can one not see it as a loss, even if technically I haven't lost anything. 

So using that logic I have lost about £20k on my house compared to its peak estimated valuation despite the fact that if I sold it I would make something like £250k compared to the price we purchased it for.

So which one would be correct as they can't both be right? 

womble_87

AlanP_2 said:

womble_87 said:

AlanP_2 said:

womble_87 said:

I lost £800 off my pension but it is only relatively small and a couple of years old. I assume those who have been in it years lost a lot more depending on how close to retirement they are.

Until you sell up and cash in you haven't lost anything. What you have is a lower valuation of an asset you own. 

Do you view a reported fall in house prices as a "loss"?

Yes, because if I sold a house I would get the money. If the value falls I would get less money. So I class it as a loss. Forgetting fees etc.

My pension is now worth less, if I were to retire today I would get less than I would have done a few weeks ago. How can one not see it as a loss, even if technically I haven't lost anything. 

So using that logic I have lost about £20k on my house compared to its peak estimated valuation despite the fact that if I sold it I would make something like £250k compared to the price we purchased it for.

So which one would be correct as they can't both be right? 

If you decided to sell now, then you have "lost" 20k because you could have received more had you sold when it was valued. You would be 20k worse off.

That being said, if you paid less than 250k then you have made a profit, albeit a smaller profit than you could have had when it was valued. 

womble_87

MarkCarnage said:

How can one not see it as a loss, even if technically I haven't lost anything. 

Answering your own question. Make it a loss if you want, sell the holdings and crystallise it. Or do what most long term investors do, sit it out, perhaps reallocate at the margin.

This thread has been quite a revelation in terms of the true attitude to risk displayed by quite a number of people, who may fall into the category of Warren Buffet's naked bathers.

It's also quite revealing to see some of the comments around investing as if it were day trading. Sometimes from the same people as those in the category above. 

Various studies have revealed that there is an asymmetry in terms of utility between 'losses' and 'gains' for many, perhaps most investors (I use 'losses' and 'gains' advisedly, as shorthand). Typically, aversion to declines is such that these people 'value' one negative unit about the same as two to three positive units, therefore there is quite a skew towards 'loss' aversion. Usually after the event of course....

I do not invest in stocks apart from via my pension. I know I will not touch my pension for about another 40 years but I was just making a comment that the value of it has fallen over the past few weeks. I see it as a "loss" but it depends on the person.

coastline

m_c_s said:

A further 20% reduction is needed in markets to get back to historical average earnings based on P\E (S&P 500). One could consider that if there is a major impact on global economic activity then a further 30 or 40% drop is not inconceivable to go below the historical average P\E. The US stimulus will have to be enormous to reduce any further major drops but like most economic measures the full benefits will not be seen for another 12 to 24 months.
The UK interest rate drop will take time to filter through and the infrastructure spending will take years to start to generate growth. 
Europe will be interesting. Italy is still a large economy and will likely take a big economic hit. What about France and Germany? 
Still much is unknown and we will have to wait for 3 to 6 months to know some of the true impacts.

Todays heavy falls in the US put this correction into near bear market territory of 20%. Who knows what will happen to company earnings although it appears they will be affected. ? As of last week the forward P/E ratio in the US was around 16.5 and now will be lower. This isn't that demanding considering where base and bond rates are today.
https://pbs.twimg.com/media/ESmXey3XQAAnnNv?format=png&name=900x900
https://www.multpl.com/s-p-500-pe-ratio
Years ago there was a great deal of emphasis placed on P/E ratios but what I've learnt is its hard to put a value on them. Basically I'd say P/E 10 cheap for the market and 30 dear. That's a fair old bit in the middle to play with. I've seen the likes of Tesco at 10 for years then recently there was a period in the 20's. It's getting difficult to use them.
 

Thrugelmir

coastline said:

m_c_s said:

A further 20% reduction is needed in markets to get back to historical average earnings based on P\E (S&P 500). One could consider that if there is a major impact on global economic activity then a further 30 or 40% drop is not inconceivable to go below the historical average P\E. The US stimulus will have to be enormous to reduce any further major drops but like most economic measures the full benefits will not be seen for another 12 to 24 months.
The UK interest rate drop will take time to filter through and the infrastructure spending will take years to start to generate growth. 
Europe will be interesting. Italy is still a large economy and will likely take a big economic hit. What about France and Germany? 
Still much is unknown and we will have to wait for 3 to 6 months to know some of the true impacts.

Todays heavy falls in the US put this correction into near bear market territory of 20%. Who knows what will happen to company earnings although it appears they will be affected. ? As of last week the forward P/E ratio in the US was around 16.5 and now will be lower. This isn't that demanding considering where base and bond rates are today.
https://pbs.twimg.com/media/ESmXey3XQAAnnNv?format=png&name=900x900
https://www.multpl.com/s-p-500-pe-ratio
Years ago there was a great deal of emphasis placed on P/E ratios but what I've learnt is its hard to put a value on them. Basically I'd say P/E 10 cheap for the market and 30 dear. That's a fair old bit in the middle to play with. I've seen the likes of Tesco at 10 for years then recently there was a period in the 20's. It's getting difficult to use them.
 

Average p/e's are somewhat misleading. Given the ratings on certain US stocks and their influence on the markets. US corporate profitability was flat in the year to September 2019. Be interesting to see the next quarters data when it's released. 

DairyQueen

womble_87 said:

I do not invest in stocks apart from via my pension. I know I will not touch my pension for about another 40 years but I was just making a comment that the value of it has fallen over the past few weeks. I see it as a "loss" but it depends on the person.

You and everyone else. This drop is nothing unusual.

Get used to it. You can expect to see many such drops over the next decades. On occasion that drop will be spectacular (think 50%). Unless capitalism is replaced by a new world order, the markets will recover and your pension along with it. You can expect to see average returns of approx 5%p.a. above inflation over the course of some decades.

OTOH...

Those who shun equities will see the real value of their assets fall over the long term. This is especially true of cash. Unlike other asset types, cash is guaranteed to lose value in real terms courtesy of inflation. 

To reiterate... you haven't made a loss, nor will you unless you sell before the markets recover. Keep adding new money regularly and buying more equities now prices have corrected. Stay diversified. This will help increase the real value of your investments over the decades. After a few major shifts you too will shrug at the antics of the markets (and of those who are trying to time them - the kind of mistake that many new investors make).

Thrugelmir

DairyQueen said:

womble_87 said:

I do not invest in stocks apart from via my pension. I know I will not touch my pension for about another 40 years but I was just making a comment that the value of it has fallen over the past few weeks. I see it as a "loss" but it depends on the person.

Those who shun equities will see the real value of their assets fall over the long term. This is especially true of cash. Unlike other asset types, cash is guaranteed to lose value in real terms courtesy of inflation. 

In 4 out of 10 decade long periods (up to 2011 if I recall correctly). The S&P 500 underperformed US inflation rates. That was with income reinvested. 
Long term growth rates hide a multitude of differing returns. 

Username999

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chucknorris

womble_87 said:

I lost £800 off my pension but it is only relatively small and a couple of years old. I assume those who have been in it years lost a lot more depending on how close to retirement they are.

My investments have fallen quite a bit, but I don't see it as a loss, it is just a temporary fallen value, in all likelihood the markets will eventually recover. I actually see this as a good opportunity, I have invested a fair bit at lower values, and I am in the process of switching my etf's to similar ones (and also some portfolio re-balancing) to lock in some 'paper losses'  (which I can use to offset against CGT when I later sell investment property, so that will be a 28% gain in the near future). Corrections are wonderful for making money (later on).

In the 2008 correction our property portfolio fell by about £1m, and we took the opportunity to buy another house, after the recovery our property portfolio increased by about £2m (from the bottom). I also manged to acquire about £100k of paper losses from my equity investments, which I have already used to partially offset a previous CGT bill.

When the market does recover, I will re-balance my portfolio again, and switch to some bonds, so I have ammunition for the next correction, although by then I may well consider myself a bit old (with a shorter horizon) to have as much in equities.