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Updated over 9 years ago, 03/18/2015
How should a Real Estate Professional invest in the Stock Market?
I understand that any stock market discussion would be frowned upon within the Bigger pockets community as many may perceive the equities market as a loser's game. Since my early 20s, I've always been fascinated by understanding cycles in the equity market and demographics changes in the real estate market.
Below you will see the 110 years of 18 years of secular bull and bear markets. You can also see the 40 year Dollar chart where the dollar rises between 6-7 years and drops 9-10 years every cycle. The commodity cycle peaks every 30 years in 1920, 1950, 1980, 2010. With Gold peaking in the spring of 2011 aligns perfectly with the U.S. dollar bottoming around the same time at an index of 72, starting is 6-7 year bear market rally which aligns with the 2018, the end of the 18 year secular bear market. We are currently 14 years into the secular bear market.
1930 - 1948 - Secular Bear
1948 - 1964 - Secular Bull
1964 - 1982 - Secular Bear
1982 - 2000 - Secular Bull
2000 - 2018 - Secular Bear
2018 - 2036 - Secular Bull
DOW 1900 - 1920
DOW 1920 - 1940
DOW 1940 - 1960
DOW 1960 - 1980
DOW 1980 - 2000
DOW 2000 - 2014
40 year Dollar Chart.
Your advocating that analyzing 18 year market cycles is predictive of anything? Some of these arbitrary cycles show weak pretty correlation and this is largely the tail wagging the dog.
From 2000 - 2002, we had a correction followed by a 5 years rally into 2007. 2007-2009 we have another correction followed by a 5 years rally into 2014. As we stand today, I believe that we may one last major correction before entering the next 18 year secular bull market cycle from 2018 - 2036. As far as how deep the correction is, some analysts say 30%, some say that the correction will take out the March 2009 lows.
The last 18 year secular bull market started in 1982. Had you invested $250k in a Vanguard Index 500 fund (which mirrors the S&P 500) in 1982 and closed your eyes for 18 years, your equity portfolio is now worth $3.4 million. As a real estate professional who does not have time to analyze stocks, I believe that indexing is the best way to go. If you take a long term span of 15 years, the index 500 beats out 67% of all managed funds that charges a high expense ratio 1-2% where as the index 500 expense ratio is 0.18%. If you take into account all the funds that may consolidated or closed down due to poor performance the index 500 beats out 85% of all managed funds.
I believe that 2018 - 2036 will look similar to the performance 1982 - 2000.
Here is the law of forecasting (specially any financial market): Past performance is no indication of future performance. I have a degree in Economics and studied econometrics and have over 20 years of creating predictive models. Here is the issue with any predictive model: its accuracy is directly correlated to the amount of historical data and how far out in the future you are trying to predict. So if you have 100 historical data points that show some correlation, then the accuracy of your predictive model will increase with the shorter time frame you are trying to forecast. If those 100 data points cover 100 years, your model will be more accurate predicting the next single year than trying to predict the next 2-5 years.
So I don't recommend trying to use an predictive model to try to forecast the next cycle (years), but I would rather use a predictive model to forecast the next short-term movement of the current cycle. When I traded stocks and options, my data points we days and minutes and I was trying to predict movement in the 15-30 minutes or the next day or two. I would never try to predict movement over a month. There are too many non-financial variables that affect financial markets that you can't account for in a year plus predictive model. You have to remember that financial markets are influenced my news and human behavior more than anything. Stock prices are reflective of what people believe is the future value of a company, not the past or present value.
Rather than timing the market, I would suggest that you be an passive long term investor if you don't need the money for more than 10 years from now and invest in an ETF that mimics the SP 500 (SPY) and use dollar-cost averaging to build up stock assets to at least $100K. Once you reach that point, use covered calls and straddles (options) to "rent" out your stock and earn an average of 1% - 2% per month in returns above and beyond the value of the underling stock.
Hope this provides some insight. Just my two cents based on my 20 years experience in the field of forecasting and money management (I was also a semi-professional Black Jack gambler).
God Bless You.
Oh I remember where I heard this particular stock market cycle theory before, I just had to google "17.6 year stock cycle" looks like it has a lot of shelf life with many different prognosticators. Anyway what Michael said is true, you can back fit data to show about anything.
4 more years of vitality in the stock before entering into the new 18 year bull cycle in 2018. 
Commodity Cycles run every 30 years. Gold was priced at $35 an ounce in 1971 and rose to $850/ounce in 1980. The most recent cycle started in 2001 at $252/ounce and rose to $1921 in April of 2011. The next commodity bull cycle will start in the year 2031, while the stock market bull market cycle will come to end in 2036.
Uhm, just do dollar cost averaging in broad based index funds and forget market cycles. I got caught up in the dot.com cycle 14 years ago and learned a valuable lesson. I have done exceptionally well with a 65/35 stock to bond ratio of broad based index funds, Sure, I missed out on some gains with that ratio, but I also didn't loose sleep in 2008 when the bottom fell out like a sinkhole either.
James, I think the best strategy is to buy stocks in companies you wouldn't mind owning 100% of. The stock market will do what it wants and hindsight will always be 20/20. If the value of a company meets or exceeds your investment criteria, a cheaper price the next day should be much more enticing; it's the intrinsic value that's most important.
Mark my post Bryan Neal,
Had you invested $250,000 Vanguard Index 500 in 1982 and held that fund for 18 years, your investment would have grown to $3.4M in the year 2000.
Originally posted by @Bryan N.:
Uhm, just do dollar cost averaging in broad based index funds and forget market cycles. I got caught up in the dot.com cycle 14 years ago and learned a valuable lesson. I have done exceptionally well with a 65/35 stock to bond ratio of broad based index funds, Sure, I missed out on some gains with that ratio, but I also didn't loose sleep in 2008 when the bottom fell out like a sinkhole either.
Is there a question here? As an equity trader I can tell you your returns in real estate will be much greater than sitting on something over 10 years. I would follow @Michael Evans advice as he is 100% correct in his explanation on predictive models and options.
Sure, there are correlations on the market. However, if you see one and act on it, your timing will not be perfect. Are you going to be comfortable with the drawdown in the meantime?
Oh, and on a side note. I would recommend looking at the S&P500 as it is more in tune with what is really happening than the Dow is nowadays.
@Jason Eyerly
I am not an equity trader, but I like to invest long term (10-18 years) into new cyclical cycles. As you can see from my posts, I believe that the bear market cycle that started in 2000 will end sometime in 2017-2018 and new 18 year bull market will begin. As a real estate professional, I believe that indexing, like the Vanguard Index 500 is the way to go where the expense ratio is 0.18% compared to managed funds which can range from 1.0 - 2%.
Here is a quote from Warren Buffett:
A low-cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth.
- Warran Buffet, Chairman, Berkshire Hathaway, Inc.
Originally posted by @Jason Eyerly:
Is there a question here? As an equity trader I can tell you your returns in real estate will be much greater than sitting on something over 10 years. I would follow @Michael Evans advice as he is 100% correct in his explanation on predictive models and options.
Sure, there are correlations on the market. However, if you see one and act on it, your timing will not be perfect. Are you going to be comfortable with the drawdown in the meantime?
At the end of the day the current Debt and defiacit are not sustainable, I don't see an 18 year run in stocks. I am a little more pessimistic then that and while I still invest I am looking for solid cash flowing, recession resistant companies.
I would focus on developing an investment model with a shorter time frame (less than a year). You can invest in low volatile stocks with high dividends and use a covered call options strategy to make above average returns. Just a suggestion from a former options trader.
God Bless You!
Michael,
I have no idea and nor do I really care how the markets will perform in the short term and I wouldn't recommend anyone here to jump into the stock market at these all time high levels. My theory and research tells me that we will have at least one more good entry point in the next 4 years before the next 18 year Bull Market Cycle begins. As everyone can see that the stock market has been a roller coaster since year 2000 until now.
Most real estate professionals do not have the time and desire to research companies and individual stocks. I believe the Vanguard Index 500 is a good investment solution for the real estate professional who wants to invest some of their capital in the equities market with a 20 year horizon.
Real estate professionals should focus majority of their energy and time into their strength which is real estate investing, not researching companies and stocks to buy. When you index the S&P500, history has shown that you will beat out 80% of the actively managed funds. Why would anyone want to give their money to a financial advisor or a fund manager who themselves cannot beat the S&P500?
Here is why I like the Vanguard Index 500:
From Warren Buffet:
"My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I've laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife's benefit. (I have to use cash for individual bequests, because all of my Berkshire Hathaway shares will be fully distributed to certain philanthropic organizations over the 10 years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions, or individuals -- who employ high-fee managers."
Why are you just focusing on large cap stocks? Over the long run mid and small cap stocks should have higher returns than large cap. And I agree that you can use historical data to make it say what you want. It certainly isn't an exact science and I wouldn't necessarily follow a rule stating secular bull and bear markets last 18 years. Every market cycle can be different
Why are spending so much time talking about stock investing on a real estate investor website? I am an investor that invests in different asset classes (real estate, stock market, historical currencies, businesses, etc.), so I am extremely well versed in the stock market, money management and risk management. But I only discuss real estate on this website. If you want good input on your long-term stock market investing strategies, maybe you should go to a website that focuses on that and has experts who can give you advice.
I don't agree at all with your forecasting models, because you are relying on past performance of the stock market cycles, rather than the predictive variables that directly correlate to the performance of the stock market. And as I said before, there are no reliable stock market timing forecast models. If there were, we would all subscribe to that investor newsletter.
Good luck and God Bless You!
Today's FOMC meeting. Rates remain the same.
"I do not believe that Yellen will raise rates at the FOMC meeting next Wednesday. She will likely buy more time just like Mario Draghi announced 2 years ago that he will do everything in his power to support a strong euro. "Patience" and more "Patience" is the key word. We are in midst of a currency war."