# who was buying the decline ?



## lonewolf :) (Sep 13, 2016)

The public usually becomes more bullish as prices rise & more bearish as prices fall. The COT shows that in the S&P E mini futures the public percent of open interest increased from the summer to the Sept 21 high then OI has increased further during the decline. This is the opposite of what the public usually does & suggests further decline ahead


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## dubmac (Jan 9, 2011)

lonewolf :) said:


> The public usually becomes more bullish as prices rise & more bearish as prices fall. The COT shows that in the E mini futures the public percent of open interest increased from the summer to the Sept 21 high then OI has increased further during the decline. This is the opposite of what the public usually does & suggests further decline ahead


not sure exactly what the question is here lonewolf. I did some buying in late Oct October and in November. Also bought WCP on the 23rd when it hit 4. other than that -nothing. I have some cash ready to buy more, but I am following sentiment here - most think that the TSX has more bear than bull so I am waiting for more drop.


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## Pluto (Sep 12, 2013)

Not me. not yet. going to wait a bit for the W in the chart and then assess again. There is still quite a bit of optimism, often, and strangely tied to leading economic indicators which look good. But economic indicators have never predicted the market, especially since the market is one of those indicators. It isn't logical to use the indicators to predict themselves. Besides, the economic fundamentals always look good when the market tops out. Optimisim is also tied to claims about earnings looking good next year. But they almost always say that. Sol, I'm going to wait for the second bottom and see how things look then.


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## james4beach (Nov 15, 2012)

lonewolf :) said:


> The public usually becomes more bullish as prices rise & more bearish as prices fall. The COT shows that in the S&P E mini futures the public percent of open interest increased from the summer to the Sept 21 high then OI has increased further during the decline. This is the opposite of what the public usually does & suggests further decline ahead


lonewolf, I get the feeling that most investors aren't too concerned about this selloff. Look at the volume on big ETFs like SPY and QQQ. Volume throughout the selloff has been relatively average. SPY for example is only trading 200 to 250 million shares a day on some of the worst down-days so far.

That's relatively low volume. Even in August 2008, which was *before* the sharpest declines, SPY volume was often at 300 million on down-days. Once September hit, down days on SPY had more like 400 million shares volume. Into the meat of the bear market, volume was routinely over 500 million shares daily. Really dramatic, panic days exceeded 700 million shares.

And yet, today we're getting orderly declines (not panic) with barely 250 million volume on SPY. Personally I don't think there's panic, and not much fear about the stock market. I think retail investors are still generally optimistic about stocks and still have no fear. There hasn't been any panic during this recent decline.

I was pretty actively trading the market in 2007 & 2008 and have been watching the current market with great interest. I don't see the kinds of signs of panic that were visible during the last bear market. No disorderly trading, no crazy gaps down, crazy high volume or high VIX.


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## sags (May 15, 2010)

There was a fund manager on CNBC who has many very high net worth clients.

She was discussing the usual "buy the dip" as a long term strategy, like many other fund managers do when stock values are declining, and was pressed by one of the anchors that maybe it was possible that stocks could continue to decline in value.

Revealing some irritation and frustration, she blurted out that "people just don't get it". She said many of her clients had earned a lot of money in their stock portfolios, sold everything and harvested the profits. They were sitting on huge piles of cash.

Now she was calling them and advising them to buy their stocks back while they are "on sale". She said none of them are interested. 

They are all waiting for the bottom to form and show some upside momentum. I took notice of the exchange because you would rarely hear a fund manager admit their clients are staying out of the markets. 

What I gather from that exchange is that high net worth individuals cash out their profits, sit in cash on the sidelines and wait for a solid turnaround. They don't care about missing a couple % increase. They want to keep their profits as safe as possible.

Just saying........maybe the volatility in the markets is partly due to mostly small investors who operate in a perpetual panic mode. Buy...sell....sell....buy.

The wealthy are sitting on the side watching and waiting.


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## MarcoE (May 3, 2018)

I bought a little on Monday when the prices were pretty low. If it declines further, I'll buy more.

I don't know why people celebrate when stock prices rise and cry when they drop. Declining markets should only upset you if you plan to sell your stocks sometime soon. If you're a buyer, you should celebrate when the stock market declines, and you should cry when prices go up.


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## lonewolf :) (Sep 13, 2016)

james4beach said:


> lonewolf, I get the feeling that most investors aren't too concerned about this selloff. Look at the volume on big ETFs like SPY and QQQ. Volume throughout the selloff has been relatively average. SPY for example is only trading 200 to 250 million shares a day on some of the worst down-days so far.
> 
> That's relatively low volume. Even in August 2008, which was *before* the sharpest declines, SPY volume was often at 300 million on down-days. Once September hit, down days on SPY had more like 400 million shares volume. Into the meat of the bear market, volume was routinely over 500 million shares daily. Really dramatic, panic days exceeded 700 million shares.
> 
> ...


 Sometime before the end of 2022 the big money will be made on the downside though only a handful of people will make a fortune. Everyone is looking to make money on the upside when the real big money will be made on the downside. Was listening to Arch Crawford earlier in Dec & he was up between 9 & 10 fold on his put position. In 08 Arch turned 2500 into half a million with put options.


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## Pluto (Sep 12, 2013)

sags said:


> Just saying........maybe the volatility in the markets is partly due to mostly small investors who operate in a perpetual panic mode. Buy...sell....sell....buy.
> 
> .


Nope. The small ones can't move the market. Its institutions doing that.


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## jargey3000 (Jan 25, 2011)

...buy high, sell low...,.that's always been my motto...
seems to work too!!


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## Bruins63 (Jan 18, 2018)

What gets me is when the economy is doing well, the pundits say market gains are not tied to the economy, there is not a relationship...when the market goes sour, the pundits say well the economy is doing well, so the market should rebound...guess I’m just generally confused...


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## Beaver101 (Nov 14, 2011)

^LOL! That "always"work. Btw, how's the "I'm all-in" mantra coming along?


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## AltaRed (Jun 8, 2009)

MarcoE said:


> I don't know why people celebrate when stock prices rise and cry when they drop. Declining markets should only upset you if you plan to sell your stocks sometime soon. If you're a buyer, you should celebrate when the stock market declines, and you should cry when prices go up.


Perhaps much of the retail wealth in the market is by boomers who are either interested in protecting their existing nest egg, or are now tapping into it, for cash flow needs in retirement. I am one of those people 12 years into retirement tapping into my holdings now and then to supplement my cash flow needs. I am not disturbed/stressed/anxious about declines in the market, because I know corrections are healthy to avoid exuberant excesses and the long term trend is up, but I'd prefer NOT to see declines very often. Y'all in accumulation mode can buy the dips.


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## james4beach (Nov 15, 2012)

MarcoE said:


> I don't know why people celebrate when stock prices rise and cry when they drop.


People don't enjoy seeing losses; it's a human instinct. Our brains don't view gaining $1000 and losing $1000 symmetrically.

One legitimate reason to feel anxious about falling stock values is that there is fundamentally no guarantee that stocks must rise (and certainly not within a short time span such as a couple decades). Stocks can indeed do poorly for periods such as 20 years meaning that within most of our time horizons, there is no assurance that stocks will perform well.

There is an intrinsic risk in stock investment. When everything is going up, investors feel assured that everything is working as intended. Their accounts are steadily rising in value, their retirements look secure, etc.

However when stocks are declining, all the risks of stock investment become visible again: stocks don't necessarily go up, and your account may potentially keep dropping in value for the next 10 years... or even 20 years. There is no guarantee of returns or even preservation of capital. Suddenly you have doubts about whether everything is working as intended, and you might be concerned about your retirement too.

I think the fear makes sense, and these are all legitimate concerns. To some extent, stock investment is a faith-based activity and a gamble.



> Declining markets should only upset you if you plan to sell your stocks sometime soon


Focusing on this part for a second. Stock declines are definitely a great concern for anyone who needs to sell stocks soon, but even if you hold stocks for a very long time (10, 20, 30 years) there is fundamentally no guarantee that you will have a high return that, for example, beats cash or bonds. Even US stocks... which have performed spectacularly well historically... have gone through periods of decades with very poor returns. And in other countries, the results have been even worse.

We live in a strong "equity culture" right now where, on the heels of 37 years of amazingly good stock returns, everyone is a believer that the stock market reliably goes up if you just wait long enough. And it may well be true that stocks steadily keep going up for the next 30 to 50 years. However, there is no assurance of this.

What's actually even more concerning is that once you dig into the numbers of long term stock performance, you find that good quality stock data only exists for the USA after 1970. So our entire belief system that "stocks always have strong returns long term" is really just based on about 40-50 years of data from a single country, which happened to be the strongest economy in the world that was rising to become a super power.

There is no good quality data from other countries that provides evidence of long term stock returns. The only other major stock market (Japan, #2 to US for a long time) actually has a zero return over 30 years. But notice that we all tend to ignore that result. For other countries like UK,FR,IT which have all had stock markets for a long time, there actually isn't good quality long term data (which adjusts for dividends and corporate actions) so we really don't know what the long term stock returns have been.

Many studies in the area actually use indices and measurements constructed with the benefit of hindsight, or are using inappropriate measures. The DJ index for example was never meant for, and is not appropriate, for measuring total returns that an investor gets. It was developed to measure a simple price change over short periods. Other measurements used by researchers are developed in hindsight and are probably not representative of the actual investor's experience. *There is a lot of pseudoscience in the field of stock investing.*

It's all very concerning, once you look into it. I'll say it again: stock investment is, to some extent, based on faith, and there is not a lot of evidence that stocks have reliably provided high returns in different countries.

But where would the investment & retirement industry be if they kept reminding everyone of these caveats? It's simpler to point to a chart of the US going up for 100 years and say: stocks will make you rich. Few people will question the validity of the chart, point out that the numbers before 1970 are questionable, or ask what happened in other countries.


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## james4beach (Nov 15, 2012)

And let me point out that for 18 years now, the TSX (looking at XIU) has under-performed bonds & fixed income if you look back to 2000-12-28. Here's a picture if you don't believe me, with total returns: http://schrts.co/BcZGu9

Maybe the next 20 years will be better?

That already breaks the promise we were told, that stocks must outperform over such long periods. Most people will respond and say that the TSX is a poor/broken index. But in fact the TSX is still one of the best performing stock markets in the world and many countries have done even worse than it.

Others will respond and say this is cherry-picking the dates. Sure, I'm aligning it to the worst start time possible, but many people do start at the worst times possible. Apparently buying & holding for 18 years does not assure a good experience in stocks.


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## MarcoE (May 3, 2018)

Broadly, I see two main reasons to invest in stocks:

1) You buy a stock at price $X today, and you hope to sell it for $X+Y in the future, then profit from capital gains of Y. 

2) You buy a stock because it pays you cash dividends. You don't EVER plan to sell the stock (unless you have to). You buy it for the income stream it provides.

I know it's more complicated than this, but for simplicity's sake, I'm dividing things broadly into these two reasons.

If you're a type 1 investor, drops in equity markets are indeed "scary." Especially if you plan to sell your stocks within a few years. Even if you don't plan to sell them for another 30-40 years.

If you're primarily a type 2 investor, dips are less frightening so long as your portfolio is still generating an income stream.

Suppose I have $100,000 in a portfolio that generates $3,500 dividends a year. If I'm primarily a type 1 investor, I hope to someday sell it for, say, $200,000, and I get very concerned if I see it drop to, say, $50,000 one day. If I'm a type 2 investor, I focus less on its market value, and I mostly look at the $3,500 I'm earning every year. A steady stream of income.

It's true that during hard times, companies might cut back dividend payments. But the declines in unit prices also allow me (if I have cash on the side, or cash coming in from paychecks, or am rebalancing) to buy more units for cheap, and increase my monthly income.

I see type 1 as being somewhat speculative. I buy something for a certain price, and I just hope that someday, somebody will pay me more for it. That's its only value. It's like buying a baseball card for $10 and hoping that someday I can sell it to somebody for $20. There are no guarantees this will happen. I'm speculating that it will. Meanwhile, I see type 2 as being a different sort of investing -- a way to create more income streams. Cold hard cash, delivered like clockwork.

I assume that we all do both. But psychologically, I think many of us focus on either reason 1 or reason 2. What we focus on also changes based on many factors -- our age, our need for fixed income, whether we're retired or in the accumulation phase, our personality, and so on.

I find that when I think in a "type 1" mindset, stock market crashes seem terrifying. If I think like a "type 2," stock market crashes present opportunities to buy more income streams at cheaper prices.

Does this make sense? Or am I missing something? I'm always looking to learn more, and it could be I'm wrong or misunderstanding something.


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## MarcoE (May 3, 2018)

james4beach said:


> People don't enjoy seeing losses; it's a human instinct. Our brains don't view gaining $1000 and losing $1000 symmetrically.
> It's all very concerning, once you look into it. I'll say it again: stock investment is, to some extent, based on faith, and there is not a lot of evidence that stocks have reliably provided high returns in different countries.


This is very true. I've read many books that talk about how investing in the S&P, for example, historically produced ~10% a year. And I've always felt that there wasn't a huge sample size for this -- just a few decades, really. I don't remember ever reading a book that talks about how little data we actually have, as you just described in your (excellent) post. One reason I feel more confident about gold is that we have FAR more data -- thousands of years of history to look at, as opposed to just a century in one country.


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## james4beach (Nov 15, 2012)

Good point about dividends... they're a perfectly good way to extract $ out of a corporation. However this tends to be more useful for very wealthy people (well into millions $ capital) because it takes quite a bit of equity value to generate significant dividends. With 10M, you could imagine simply splitting it into XIC and ZSP, which would pay something like 200K per year perpetually. However for many of us with less-than-millions, dividends can't provide enough cashflow so we have to care about price levels, to some extent.

MarcoE: the one potential issue I see in your description of type 2 is that there is no such thing as a stock you can buy for dividends and never have to sell. Companies change over the years. GE was once a 'dividend aristocrat' with one of the longest histories of paying reliable dividends. Now it's a piece of trash that pays very little dividends. Similar things happened with Citigroup over the years, also with Bombardier. _Therefore_, all stocks must be seen as things that you potentially might sell at some point. You can never ignore the price completely, _so you will always be partially subject to type 1_ whether you want to or not.

Even for dividend or income based approaches, in practice you have a more complex problem of "portfolio management" because you have to maintain a portfolio of dividend stocks for the long term. You will have to sell some of them, sometimes. If you hold something like CDZ, they (iShares) are doing this management and buying & selling securities.

This is why it's just about impossible to separate dividends from total return. I don't think it's possible to be a pure type 2 investor. At some point, your previously-excellent GE starts deteriorating and the dividend falls apart. The price plummets, and you have to sell it. Now you're wrapped up in the type 1 game.

Regarding gold: I do hold quite a bit of gold (20%) but it has its own problems. I do actually think stocks are a superior investment to gold over the long term, and I'm not entirely sure if gold will retain real value over time. That being said, I am happy about diversifying (20% gold, 30% stocks) due to the uncertainty in each of these things individually.


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## doctrine (Sep 30, 2011)

The population on this board has a "strong equity culture", perhaps. But out in the real world, especially among those 40 and younger, that is hardly the case. In fact, many people who were 15-25 during the 2008 financial crisis are STILL not investing, despite missing out on 200-300% gains over the last 10 years. Fear is a big factor. Unfortunately, they missed out on a decade of investment time. Most young people now would rather go work for a tech startup and hope to strike it rich than invest their money. That's not a new trend, but 20 years ago, you had people interested in both avenues of wealth creation.


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## james4beach (Nov 15, 2012)

doctrine said:


> The population on this board has a "strong equity culture", perhaps.


And this board has an older crowd. They've also gotten into stocks at lower prices, which is another reason they don't fear a bear market so much. If they have 1980s or 1990s cost basis, they're well in the positive. A different game.



doctrine said:


> But out in the real world, especially among those 40 and younger, that is hardly the case. In fact, many people who were 15-25 during the 2008 financial crisis are STILL not investing, despite missing out on 200-300% gains over the last 10 years. Fear is a big factor.


Well they didn't miss much. My friends mostly started investing in 2000-2001 right at the dot com peak and suffered huge losses right out of the gate. Even those who stuck with it took many years to get back to break-even, IF they even got back to break even. Most never recouped their losses because they invested in individual stocks instead of indexes. I'm very lucky that I didn't get suckered into buying stocks in 2000.

doctrine I've seen the same thing you observe with young people not investing at all in the last few years. I'm not sure they have a lot of excess savings to invest, given the chronically poor labour market, lack of job security and stability. Whatever the reason though, yes, younger people don't seem to invest in equities.


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## crgf1k (Aug 8, 2015)

A few days ago, CIBC was under $100, and I was seriously considering buying some along with BNS and POW for the dividends. A 5 year GIC was available for 3.3%. Considering a) the Shiller CAPE is still sky high b) The "Buffet Indicator" still shows the US market as significantly overvalued with a projected return of something like 0.4% per year c) CIBC and BNS are both traded in the US as well d) The chart for the S&P 500 is ugly. I decided that the extra 2.3% return (average dividend vs the GIC) wasn't worth the risk of a 10, 20, 30% decline in the prices of the stock. Now if the CAPE drops to, or below the mean value, I'll have a different view.


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## crgf1k (Aug 8, 2015)

I also have concerns that the aging baby boomer generation is getting more and more conservative, and the smaller generations that follow may not have the ability to reflate the market as quickly and powerfully as in the past, so I really need to see value in the markets before investing heavily.


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## jargey3000 (Jan 25, 2011)

"who WAS buying the decline"?
was? you mean it's over??


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## james4beach (Nov 15, 2012)

crgf1k said:


> I also have concerns that the aging baby boomer generation is getting more and more conservative, and the smaller generations that follow may not have the ability to reflate the market as quickly and powerfully as in the past, so I really need to see value in the markets before investing heavily.


I share that concern. Younger generations don't have the financial means to heavily invest. Since the boomers are net sellers of stocks, it makes me wonder who's going to buy as the boomers sell. The central banks maybe? Bank of Japan has been experimenting with buying up all public shares, and the Swiss central bank also buys huge amounts of S&P 500.


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## Onagoth (May 12, 2017)

james4beach said:


> I share that concern. Younger generations don't have the financial means to heavily invest. Since the boomers are net sellers of stocks, it makes me wonder who's going to buy as the boomers sell. The central banks maybe? Bank of Japan has been experimenting with buying up all public shares, and the Swiss central bank also buys huge amounts of S&P 500.


Real Vision had an excellent video on the 'coming retirement crisis'.

I thought it was very insightful, and it did speak about this problem

They posted it for free to youtube if anyone is interested


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## lonewolf :) (Sep 13, 2016)

The panic I have seen lately is fear of missing out on the rally. put call ratio went from 1.88 to .75


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## MarcoE (May 3, 2018)

james4beach said:


> Good point about dividends... they're a perfectly good way to extract $ out of a corporation. However this tends to be more useful for very wealthy people (well into millions $ capital) because it takes quite a bit of equity value to generate significant dividends. With 10M, you could imagine simply splitting it into XIC and ZSP, which would pay something like 200K per year perpetually. However for many of us with less-than-millions, dividends can't provide enough cashflow so we have to care about price levels, to some extent.


Yes, this is true. If the portfolio is smaller, then earning about 3% dividends (for example) doesn't seem like much. If the portfolio is 7 figures, that 3% is a lot. I can see why somebody who's starting out, and/or has a smaller portfolio, can see capital appreciation as a faster route to wealth. 



james4beach said:


> MarcoE: the one potential issue I see in your description of type 2 is that there is no such thing as a stock you can buy for dividends and never have to sell. Companies change over the years. GE was once a 'dividend aristocrat' with one of the longest histories of paying reliable dividends. Now it's a piece of trash that pays very little dividends. Similar things happened with Citigroup over the years, also with Bombardier. _Therefore_, all stocks must be seen as things that you potentially might sell at some point. You can never ignore the price completely, _so you will always be partially subject to type 1_ whether you want to or not.


True. Personally, 99% of my stock exposure is via index ETFs, such as XIC, so this is done for me. You're right that the buying and selling are still being done, but it happens behind the curtain from my perspective. It's also true that indexes also include stocks that don't even pay dividends, so they're purely type 1s.

We're all a bit of type 1 and type 2. As you said, it's impossible to compeltely separate them. But where we lean affects how we see market turbulence, and how we react to it.




james4beach said:


> Regarding gold: I do hold quite a bit of gold (20%) but it has its own problems. I do actually think stocks are a superior investment to gold over the long term, and I'm not entirely sure if gold will retain real value over time. That being said, I am happy about diversifying (20% gold, 30% stocks) due to the uncertainty in each of these things individually.


I don't think anyone knows what'll happen to gold. But we have a lot more data for it. Modern stock markets have only been around for about a century, maybe a bit longer. Not a huge amount of time. Gold has been considered valuable for thousands of years, and I doubt people still stop considering it valuable anytime soon. Gold is essentially a currency. It doesn't pay any yield. It doesn't do anything. It's a currency that's been in use throughout most of human history, and will probably still be in use for a long time. But who knows? The world today is changing quickly.


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## milhouse (Nov 16, 2016)

I picked up a few shares this week for my non-registered portfolio. The goal for this side of my portfolio is to grow the dividends to a certain point. The >5% yields on these _blue chip_ companies that are growing their earnings and dividends were too tempting. The companies I bought have declined >15% from their 52 week highs while they certainly can fall further but how do you identify a bottom? While obviously I'd like to buy closer to the bottom, I don't think I need to be that precise in order to meet my dividend goals. So, I'm pretty excited about the price declines on this side of my portfolio. 

On my registered side where I'm indexing, I'm a little less excited. Sure I'm looking forward to adding another $6k to my TFSA but I'm only in accumulation mode for another 3.5 years. Most of the heavy lifting has been done in my registered accounts from purchases years ago. What I add now pales in compounding effect so in some ways, I'd rather see steady and growing prices to see a nice nest egg to pull from in a few years instead of all the yoyo'ing of the last couple of months.


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## MarcoE (May 3, 2018)

james4beach said:


> And this board has an older crowd. They've also gotten into stocks at lower prices, which is another reason they don't fear a bear market so much. If they have 1980s or 1990s cost basis, they're well in the positive. A different game.


This is purely anecdotal. But when I talk to friends my age (in their 30s), many don't invest in the stock market at all. I'm invested with about 30% of my money, which is very conservative. It seems like people older than me tend to invest more.


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## crgf1k (Aug 8, 2015)

james4beach said:


> I share that concern. Younger generations don't have the financial means to heavily invest. Since the boomers are net sellers of stocks, it makes me wonder who's going to buy as the boomers sell. The central banks maybe? Bank of Japan has been experimenting with buying up all public shares, and the Swiss central bank also buys huge amounts of S&P 500.


All of this central bank interference makes me nervous. Not to mention the US government debt, which I believe adds another layer of (currency) risk for a Canadian holding US stocks.


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## james4beach (Nov 15, 2012)

MarcoE said:


> This is purely anecdotal. But when I talk to friends my age (in their 30s), many don't invest in the stock market at all. I'm invested with about 30% of my money, which is very conservative. It seems like people older than me tend to invest more.


We're around the same age and my experience sounds similar to yours. I've also found that people older than me tend to invest more heavily in stocks. My older family members have way more in stocks than I do. (But they also have pensions and real estate).

I also know some older people who have been destroyed by the stock market, for example losing their life savings in disasters such as Nortel. When we consider that "older people invest more in stocks" we also need to consider that we're only aware of the ones who survived stock disasters. Others got ruined by the stock market, but they're not at CMF, nor are they telling friends and coworkers about their experience.

It would be interesting to know what % of all people who tried investing in the stock market actually ended up with higher returns than savings accounts over the long term. I bet the number is lower than we'd expect.

This is a big reason that I'm interested in conservative stock investment, so that I can survive the really rough periods and keep investing. I'd rather have that mild experience (and somewhat lower returns) than get wiped out.


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## MarcoE (May 3, 2018)

I'm generalizing a bit, but our parents' generation (the Baby Boomers) also tended to have: more job security, pensions, and lower cost of living relative to wages. That meant they could take more risks with their money. Many people of my generation have jumped from job to job, don't have a pension waiting for them, face higher cost of living relative to wages, struggle to own real estate, have more debt, and overall feel less secure financially. They're simply not in positions to take more risk. If I look at my own situation: I'm self-employed, have zero job security, and don't have a pension waiting for me when I retire. That doesn't mean I'm poor or struggling. It just means I have to play the game a bit differently, and I need my portfolio to offer more stability and fixed income, and can't afford to invest too much of it in risky asset classes.


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## doctrine (Sep 30, 2011)

crgf1k said:


> A few days ago, CIBC was under $100, and I was seriously considering buying some along with BNS and POW for the dividends. A 5 year GIC was available for 3.3%. Considering a) the Shiller CAPE is still sky high b) The "Buffet Indicator" still shows the US market as significantly overvalued with a projected return of something like 0.4% per year c) CIBC and BNS are both traded in the US as well d) The chart for the S&P 500 is ugly. I decided that the extra 2.3% return (average dividend vs the GIC) wasn't worth the risk of a 10, 20, 30% decline in the prices of the stock. Now if the CAPE drops to, or below the mean value, I'll have a different view.


This is a great comparison - CIBC stock vs a 5 year CIBC GIC. They are different asset classes, with different risk profiles. But everyone should be aware of the real equity premium, and it isn't the difference between the dividend and the GIC interest rate.

GIC expected return = 3.3% a year for 5 years. $1000 turns into $1165 using simple non-compounded interest. 
CIBC expected return. More difficult but let's be conservative. Using 5% EPS growth (well below 5 year average), $12.10 EPS 2018, and a P/E of 9.5 (well below 5 year average), share price of $146 plus $5.44/share of dividends per year assuming 0% dividend growth and no reinvested dividends, gives a 11% annual return turning $1000 into $1704. 

The equity premium is 7.7%. These are very conservative numbers too. There is not much downside unless you assume doomsday scenario, and a more typical or average scenario seeing CIBC return to a P/E of 10 and EPS growth of 7.5% would be closer to 15% a year. This range, 11-15%, is very much within the long term average returns of the Canadian banks. 

I'm not saying anyone should sell their GICs to buy CIBC, I'm just saying that the equity premium rises on these pullbacks, not decreases.

Actually I remember doing this same analysis, CIBC vs 5 year GIC, around 5 years ago. Pretty happy with the results. My cost basis of CIBC shares from 2011-2013 is $76. The dividend yield was about the same then as it is now, giving me an average annual return of about 10% even after the 19% drop in the last few months. See you again in another 5 years.


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## crgf1k (Aug 8, 2015)

doctrine said:


> This is a great comparison - CIBC stock vs a 5 year CIBC GIC. They are different asset classes, with different risk profiles. But everyone should be aware of the real equity premium, and it isn't the difference between the dividend and the GIC interest rate.
> 
> GIC expected return = 3.3% a year for 5 years. $1000 turns into $1165 using simple non-compounded interest.
> CIBC expected return. More difficult but let's be conservative. Using 5% EPS growth (well below 5 year average), $12.10 EPS 2018, and a P/E of 9.5 (well below 5 year average), share price of $146 plus $5.44/share of dividends per year assuming 0% dividend growth and no reinvested dividends, gives a 11% annual return turning $1000 into $1704.
> ...


I understand that there really is some value to be had on the TSX now, particularly with great dividend payers like CIBC, that's why I was so tempted considering the price/earnings and the dividend support. But the way I look at it is, the GIC is guaranteed to pay 3.3% and the principal has about a 100% chance of not dropping. CIBC will almost certainly pay 5.3% on my investment, and the principal has about a 10-70%(?) chance of not going down, considering both moving averages of the stock, the TSX, and the S&P500 are all pointing down. I'm not arguing with you, I want to own some of these stocks too, but the US market scares me at the moment.


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## doctrine (Sep 30, 2011)

Even so, is 3.3% worth the 5 year GIC? Can't you get a 1 year GIC at like 3.1% without much difficulty? I feel like the yield curve is very flat and you are paid well to keep your money more liquid (not that a 1 year lockup is liquid, but a lot can happen in 5 years).


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## 1980z28 (Mar 4, 2010)

For buying in down markets,i am 100% equities,did buy during Nov. and Dec,will be buying in Jan 2019 as have cash for TFSA (6000)will buy BPY.UN maybe
Enjoy
Just turned 58 so need more dividends to reinvest


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## RBull (Jan 20, 2013)

doctrine said:


> This is a great comparison - CIBC stock vs a 5 year CIBC GIC. They are different asset classes, with different risk profiles. But everyone should be aware of the real equity premium, and it isn't the difference between the dividend and the GIC interest rate.
> 
> GIC expected return = 3.3% a year for 5 years. $1000 turns into $1165 using simple non-compounded interest.
> CIBC expected return. More difficult but let's be conservative. Using 5% EPS growth (well below 5 year average), $12.10 EPS 2018, and a P/E of 9.5 (well below 5 year average), share price of $146 plus $5.44/share of dividends per year assuming 0% dividend growth and no reinvested dividends, gives a 11% annual return turning $1000 into $1704.
> ...


Great analysis. Yes, it would be good to revisit this in 5 years.


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## Pluto (Sep 12, 2013)

doctrine said:


> This is a great comparison - CIBC stock vs a 5 year CIBC GIC. They are different asset classes, with different risk profiles. But everyone should be aware of the real equity premium, and it isn't the difference between the dividend and the GIC interest rate.
> 
> GIC expected return = 3.3% a year for 5 years. $1000 turns into $1165 using simple non-compounded interest.
> CIBC expected return. More difficult but let's be conservative. Using 5% EPS growth (well below 5 year average), $12.10 EPS 2018, and a P/E of 9.5 (well below 5 year average), share price of $146 plus $5.44/share of dividends per year assuming 0% dividend growth and no reinvested dividends, gives a 11% annual return turning $1000 into $1704.
> ...


Yep, this is a good comparison, and analysis. And when you add after tax analysis, the stock is even better in contrast to the GIC. At a 30% marginal rate, for example, you pay about 4% tax on the dividend, and 30% on the GIC. The price for the certainty of the GIC is very high.


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## like_to_retire (Oct 9, 2016)

doctrine said:


> Even so, is 3.3% worth the 5 year GIC? Can't you get a 1 year GIC at like 3.1% without much difficulty? I feel like the yield curve is very flat and you are paid well to keep your money more liquid (not that a 1 year lockup is liquid, but a lot can happen in 5 years).


As your 1 year GIC matures, the rate may be significantly lower. I would take the 5 year GIC as part of a ladder and every year pick up the latest 5 year rate. Matters not what it is.

ltr


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## AltaRed (Jun 8, 2009)

like_to_retire said:


> As your 1 year GIC matures, the rate may be significantly lower. I would take the 5 year GIC as part of a ladder and every year pick up the latest 5 year rate. Matters not what it is.
> 
> ltr


Agreed. History has shown time and again that no one can forecast interest rates. Rates for all GICs could be well into the 2% range by this time next year. 

In investments, especially upward trends, humans are more fearful of giving up potential upside than they are protecting against downside.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> And this board has an older crowd. They've also gotten into stocks at lower prices, which is another reason they don't fear a bear market so much. If they have 1980s or 1990s cost basis, they're well in the positive. A different game ... My friends mostly started investing in 2000-2001 right at the dot com peak and suffered huge losses right out of the gate. Even those who stuck with it took many years to get back to break-even, IF they even got back to break even. Most never recouped their losses because they invested in individual stocks instead of indexes. I'm very lucky that I didn't get suckered into buying stocks in 2000 ...


Interesting ... sounds like similar to my co-worker who started investing at that time, they were too focused on tech stocks. A good chunk of the stocks I got into "at lower prices" are from this period, as it is when I started too. Several, after the current drops are at +400% with a top performer being sold for +800% CG (ignoring the dividends paid).

If you want to pick outline bad investment choices, the G&M article that profile a "I know tech stocks" investor around 2001 had turned $130K into stocks worth $30K, with a third round margin call expected shortly.




james4beach said:


> ... I've seen the same thing you observe with young people not investing at all in the last few years. I'm not sure they have a lot of excess savings to invest, given the chronically poor labour market, lack of job security and stability. Whatever the reason though, yes, younger people don't seem to invest in equities.


Same thing in the "good old days". Throw in that many who lived through the depression insisted on savings deposit accounts around 2000.


Cheers


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## OptsyEagle (Nov 29, 2009)

The problem with bear markets, with respect to their differing effect, on younger people compared to older people is probably only partly due to the older person's multi experience with them and the fact that some of their stocks were bought at lower prices.

The real problem is that the younger person is probably still accumulating money and the older person is either static or withdrawing money. If a person has a lump sum invested for 5 years and they earn 10% a year for 4 years and then lose 20% in the last year, they are almost assured of ending with some positive result. If another person puts in $5,000 the 1st year, $7,000 the 2nd, $10,000 the 3rd, $20,000 the 4th and then loses 20% in the last year, you should be able to see that the positive returns on almost no money invested cannot possibly make up for the 20% loss on all his/her money invested.

That is probably why younger people find them so damaging, because they are. We older guys went through it as well, and if memory holds up, I do recall that it sucked.


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## crgf1k (Aug 8, 2015)

doctrine said:


> Even so, is 3.3% worth the 5 year GIC? Can't you get a 1 year GIC at like 3.1% without much difficulty? I feel like the yield curve is very flat and you are paid well to keep your money more liquid (not that a 1 year lockup is liquid, but a lot can happen in 5 years).


I know the premium on the five year is tiny, but it's still a premium and if rates get cut, I'll be happy I didn't mess up my ladder with shorter terms. I have money sitting in HISAs like Tangerine and EQ that I can move to my brokerage account in a few days so liquidity isn't an issue.


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## crgf1k (Aug 8, 2015)

Pluto said:


> Yep, this is a good comparison, and analysis. And when you add after tax analysis, the stock is even better in contrast to the GIC. At a 30% marginal rate, for example, you pay about 4% tax on the dividend, and 30% on the GIC. The price for the certainty of the GIC is very high.


I'm 44 and retired. My frugal lifestyle allows me to live on a small income that doesn't trigger income tax, so there's not much advantage to dividends over interest for me right now. Most people I know my age, do invest in stocks. I sold the last of my stocks in the Summer of 2017 and in January 2018. I'll invest in stocks again, but only when I see a compelling reason to.


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## Pluto (Sep 12, 2013)

crgf1k said:


> I'm 44 and retired. My frugal lifestyle allows me to live on a small income that doesn't trigger income tax, so there's not much advantage to dividends over interest for me right now. Most people I know my age, do invest in stocks. I sold the last of my stocks in the Summer of 2017 and in January 2018. I'll invest in stocks again, but only when I see a compelling reason to.


Its important to only buy stocks when it is compelling for you, or stated alternately, when it makes sense to you. 
In the meantime, if you did have dividend income at your income level, you'd probably get a tax credit. If ones income is only (CDN corp) dividends, they can earn over $50,000 before paying any tax.


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## crgf1k (Aug 8, 2015)

Pluto said:


> Its important to only buy stocks when it is compelling for you, or stated alternately, when it makes sense to you.
> In the meantime, if you did have dividend income at your income level, you'd probably get a tax credit. If ones income is only (CDN corp) dividends, they can earn over $50,000 before paying any tax.


Thanks Pluto, I didn't know that.


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## Bruins63 (Jan 18, 2018)

Pluto said:


> Its important to only buy stocks when it is compelling for you, or stated alternately, when it makes sense to you.
> In the meantime, if you did have dividend income at your income level, you'd probably get a tax credit. If ones income is only (CDN corp) dividends, they can earn over $50,000 before paying any tax.


Are you saying the first $50k of divvy income is tax free if CDN divvys? What if you also have other income sources? Thanks


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## kcowan (Jul 1, 2010)

Bruins63 said:


> Are you saying the first $50k of divvy income is tax free if CDN divvys? What if you also have other income sources? Thanks


No it only works if they are the sole source of income.


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## OptsyEagle (Nov 29, 2009)

The only problem with dividend income is it's grossing up effect. With Eligible Canadian Dividends you are required to multiply them by 38% to calculate your taxable income. Later on the schedule 1 the government then gives you a dividend tax credit. All this has an effect to eliminate taxation on fairly large dividend income streams, BUT the multiplying factor of 38% also artificially increases your income when determining if you are eligible for HST credits and in Ontario, Trillium benefits and electricity bill relief.

For VERY low income individuals, who would not pay tax on the income anyway, regardless of dividend tax credits, it can be a net negative when they end up taking away some other government benefits when other income types would not. All due to this grossing up effect on ones tax return.


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## like_to_retire (Oct 9, 2016)

OptsyEagle said:


> The only problem with dividend income is it's grossing up effect. With Eligible Canadian Dividends you are required to multiply them by 38% to calculate your taxable income. Later on the schedule 1 the government then gives you a dividend tax credit. All this has an effect to eliminate taxation on fairly large dividend income streams, BUT the multiplying factor of 38% also artificially increases your income when determining if you are eligible for HST credits and in Ontario, Trillium benefits and electricity bill relief.


And for those in retirement, gross-up causes an increase in the clawback of the OAS and a higher clawback of the age credit. But even though it dumbs down the dividend tax advantage, dividends still beat the taxes on interest income.

ltr


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## Pluto (Sep 12, 2013)

Bruins63 said:


> Are you saying the first $50k of divvy income is tax free if CDN divvys? What if you also have other income sources? Thanks


Not exactly, but close. If one has say, 100,000 in employment income, and then 50,000 in dividends on top ot that, the answer is no. 

But if ones only source of income is dividends, yes. 

Try using the tax calculators such as this one to estimate tax in different scenarios. 

https://www.taxtips.ca/calculator/basic_calculator.htm

Then you can find how much dividend income vs interest income you can have before paying tax.


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## AltaRed (Jun 8, 2009)

like_to_retire said:


> And for those in retirement, gross-up causes an increase in the clawback of the OAS and a higher clawback of the age credit. But even though it dumbs down the dividend tax advantage, dividends still beat the taxes on interest income.
> 
> ltr


That is a significant issue for the middle class, but if one is already into >$100k income, one would actually be better off with funding their cash flow needs with cap gains only, e.g. use Horizon ETFs and have NO dividend income at all.


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## 1980z28 (Mar 4, 2010)

What would be a fair tax rate to pay if only investment income in retirement


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## AltaRed (Jun 8, 2009)

Taxable income is taxable income regardless of being retired or not. Income type/mix will change to some degree but there are only 2 significant differences for seniors and they are the Age credit and Pension Income credit.


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## like_to_retire (Oct 9, 2016)

AltaRed said:


> That is a significant issue for the middle class, but if one is already into >$100k income, one would actually be better off with funding their cash flow needs with cap gains only, e.g. use Horizon ETFs and have NO dividend income at all.


Yeah, I agree, if you’re in a high tax bracket, it makes sense to consider Canadian equities that pay less in dividends and deliver more of their returns in the form of price appreciation. The taxes when realized will be lower, and price appreciation in the form of capital gains allows you to "kick the can down the road". 

I have leaned my own investing in individual stocks to accommodate this reality in the last number of years. Personally I'm not interested and don't buy "products" such as ETF's, but it's easy enough to apply this principle and buy individual stocks that have low dividends such as CTC-A, MRU, SAP, CNR, DOL to take advantage of this reality. That's what I've done.

ltr


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## AltaRed (Jun 8, 2009)

For me it is a matter of balance. Invest in blue chip businesses with good balance sheets, reasonable valuations and return on capital. When I venture from these metrics much, I often find regret.


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