Owning stocks long-term low risk?

[BillKidd + 139]

Sorry for ignorance on stock matters... wondering this... let's say someone owns a substantial stock portfolio. Say, $250,000. I don't know if the amount has relevance. Question is... if an economy crashes, will that portfolio eventually regain its value? In other words, in a terrible recession or even depression... let's say the $250,000 loses, say, 60% of its value. (Pick a number.) So, post-crash, its value is $100,000. Over the history of stock markets, has it been shown that it will eventually rise back and even surpass $250,000 in value? Of course, if it takes ten years, that isn't a very good investment scenario. Due to the time value of money concept, if it takes ten years to get back to the original value, you've actually lost money.

Now, taking all of that into consideration, if that portfolio is oil stocks, the risk is much higher, right? Because of the risk of a permanent devaluation of oil stocks due to competition from renewables or even decreased demand from a global economic meltdown. And we don't know what a global economic meltdown could entail because we've never been there.

I guess all of this influenced by one's worldview regarding global economies and the likelihood of a catastrophic economic collapse. For instance, some take the view that the global economies are all due to the credit 'experiment,' and the day of reckoning is nigh, and it won't be pretty.

[Kate Turlington + 44]

There's always a cycle. If you're Warren Buffett, you see 'time' in a different way. He's not afraid of time. That's why he's rich. Oil stocks aren't anywhere near a situation that could be described as a "permanent devaluation", despite renewable energy gains and EVs, etc, and even despite talk of 'peak oil' or depletion. There's still a ton of oil stuck in the ground. It's all a game of recovery and tech now. 

[Epic + 390]

Let me put this as bluntly as I can...

If you invested $250,000 at the very PEAK of the 1929 crash (right before the worst stock market crash in US history), you would now have $750 billion dollars. 

...that's billion with a B.

Today, you would now be almost 9 times more rich than Bill Gates.

So you tell me, would you consider that "regaining it's value"?  

[Dan Warnick + 6,100]

When you say "will a portfolio regain its value" it sets off alarms to me.  The reason it does is because "a portfolio" requires management and at the very least one must make sure that the companies represented in the portfolio are still going to be around next month, next year, etc.  In the extreme, you could have a portfolio of 5 companies at the beginning of a down cycle and all 5 of those companies could go out of business, leaving you with a completely worthless "portfolio".  Holding stocks for the long term only works if the stocks you hold are in solid companies that are, most significantly, still around after all the dust settles and the markets recover.

If a person is simply looking for a solid, safe investment haven for a period of uncertainty, such as the one we're in now, U.S. Treasuries are a good vehicle/tool.  If you think about it, there has been a lot in the news about this lately, but it appears to be aimed at the big institutional players.  It's not, it's just as good for the average person that has $$ like the amount you have asked about.  Rates of return are at historical highs and I have been convinced that there is no safer asset to hold, even in a a depression.  Look into the them.  The U.S. Treasury website is pretty easy and they have all kinds of information on how the average person can buy U.S. Treasuries.  They can be traded, or liquidated, at regular intervals without penalty, and they have tax advantages also.  Lots of good reasons to look into them.

Most important is to know what you hold and to monitor its performance.  You can use an investment service or advisor, but you had better watch where they are putting your money and make sure they are doing their jobs.  Investment firms are in the business of selling investment "tools" and collecting the fees for trading you into and out of as many of them as possible.  DO NOT just let them go with your money and trust them.  Look at every stock, debt, bond or whatever else they put you into.  This is also true of your retirement accounts with your company, if you lucky enough to have a company that has a retirement plan these days.  Get a detailed monthly listing of what they are putting your money into and do at least a minimum amount of research into what those things are.

[Epic + 390]

10 hours ago, Dan Warnick said:

The reason it does is because "a portfolio" requires management and at the very least one must make sure that the companies represented in the portfolio are still going to be around next month, next year, etc. 

^This isn't exactly true.  You can also just purchase a broad-market index fund.  They do not require management and they never go bankrupt.  They also provide a decent and reliable return.  However, they do take a while to make you rich.  It will probably take at least 10 years before you make your first million.  Portfolio managers can get you there faster, but make sure you go with one that only charges you for alpha and avoids leverage to do so.  Of course, I've never found one who is willing to do that...

[Dan Warnick + 6,100]

5 hours ago, Epic said:

^This isn't exactly true.  You can also just purchase a broad-market index fund.  They do not require management and they never go bankrupt.  They also provide a decent and reliable return.  However, they do take a while to make you rich.  It will probably take at least 10 years before you make your first million.  Portfolio managers can get you there faster, but make sure you go with one that only charges you for alpha and avoids leverage to do so.  Of course, I've never found one who is willing to do that...

Fair enough.  I was obviously referring only to stocks of individual companies.  What you add about the index funds is interesting and informative.  How does this work with regards to ETFs?  Do the same things apply or how are they different?

[Epic + 390]

1 hour ago, Dan Warnick said:

 Fair enough.  I was obviously referring only to stocks of individual companies.  What you add about the index funds is interesting and informative.  How does this work with regards to ETFs?  Do the same things apply or how are they different?

They are very similar.  ETFs tend to be targeted, ie: the Saudi-only ETF that uses the ticker "KSA".  There are some targeted mutual funds, but index funds tend to only cover the broadest market of stocks, such as the S&P 500.  On the other hand, there are broakmarket ETFs that hold the exact same securities as index funds (and I mean the exact same), such as the S&P 500 ETF that uses the ticker "SPY". 

There are two main differences between the index fund that tracks the S&P 500 and an ETF that tracks the same thing.  The first has to do with taxes.  The ETFs pay their own capital-gains taxes, and they pay those out of your return, and so your return ends up lower.  Since no one knows how much capital gains taxes the ETF will have each quarter, this results in returns which tend to fluctuate a lot more than those received by index funds.  Since index funds pass those capital gains taxes on to you, their returns tend to be a bit higher, but then you end up taking the tax hit, too, so it's basically a wash (unless you can write off the tax hit, which is really hard to anticipate, because you never know for sure when you are going to take that hit).  Note, also, that I am talking about the capital gains taxes received from buying/selling the underlying securities, not the capital gains taxes received from buying/selling the ETF/index fund. 

The second difference is that ETFs can be bought/sold during trading hours, so you can get your money faster, whereas index funds wait until the market closes before the buy/sell orders are processed.  For example, let's say you read an article on this forum and it makes you want to buy Valero stock; if you have ETFs, you can immediately sell the ETFs and then use those funds to immediately buy Valero.  With index funds, you have to put in the sell order, but you won't get access to your funds until after hours.  Sometimes waiting one day can make a big difference.   

Ultimately, though, the goal is to have enough money that you can create your own well-diversified portfolio so that you don't need to use either ETFs or index funds, and that way you don't have to pay their needless expense ratios.  Being able to buy 500 different stocks in the correct ratios, however, does require a substantial amounts of free cash lying around...which is why so many people prefer using the ETFs or index funds despite having to pay their expense ratios.  

[jaycee + 348]

On 10/19/2018 at 3:36 PM, BillKidd said:

Sorry for ignorance on stock matters... wondering this... let's say someone owns a substantial stock portfolio. Say, $250,000. I don't know if the amount has relevance. Question is... if an economy crashes, will that portfolio eventually regain its value? In other words, in a terrible recession or even depression... let's say the $250,000 loses, say, 60% of its value. (Pick a number.) So, post-crash, its value is $100,000. Over the history of stock markets, has it been shown that it will eventually rise back and even surpass $250,000 in value? Of course, if it takes ten years, that isn't a very good investment scenario. Due to the time value of money concept, if it takes ten years to get back to the original value, you've actually lost money.

Now, taking all of that into consideration, if that portfolio is oil stocks, the risk is much higher, right? Because of the risk of a permanent devaluation of oil stocks due to competition from renewables or even decreased demand from a global economic meltdown. And we don't know what a global economic meltdown could entail because we've never been there.

I guess all of this influenced by one's worldview regarding global economies and the likelihood of a catastrophic economic collapse. For instance, some take the view that the global economies are all due to the credit 'experiment,' and the day of reckoning is nigh, and it won't be pretty.

I have been running a diverse mainly defensive, as in dividend paying large companies, for about 15 years. I have started diversifying into more speculative stocks in the last few years. I went through the 2008 meltdown and my portfolio has recovered but only because I reinvested dividends and spare cash into shares at low prices. My bank shares have never recovered to anything like their previous price however by averaging down I made a profit. I also bought a lot of distressed bank debt, preference shares and bonds, and made a killing on them. So yes a well balanced and managed portfolio will recover but just leaving it and hoping for the best won’t work very well as some shares will never recover so the others will have to do spectacularly to cover the losses. I am well up now because of my buying during the bad years in various areas. 

[Dan Warnick + 6,100]

18 hours ago, Epic said:

Ultimately, though, the goal is to have enough money that you can create your own well-diversified portfolio so that you don't need to use either ETFs or index funds, and that way you don't have to pay their needless expense ratios.  Being able to buy 500 different stocks in the correct ratios, however, does require a substantial amounts of free cash lying around...which is why so many people prefer using the ETFs or index funds despite having to pay their expense ratios.  

Your answer gave me far more detail than I expected, although that is exactly what I wanted.  The bit about being able to trade during vs after business hours was indeed interesting, as were the other points you brought up.  Thank you.  Good info.