[senshan]

As long as this debt does not make it into life insurance and pension funds, we are fine. The trouble is that private credit is taking control of some life insurance companies and off-loads this debt to these. When these fail, it will become everyone's problem.

> Risks to financial stability may also stem from entities with particularly high exposure to private credit markets, such as insurers influenced by private equity firms and certain groups of pension funds. The assets of private‐equity‐controlled insurers have grown significantly in recent years, with these entities owning significantly more exposure to less‐liquid investments than other insurers

https://www.imf.org/-/media/files/publications/gfsr/2024/apr...

https://www.imf.org/-/media/files/publications/gfsr/2024/apr...

[skohan]

Couldn't it be a problem given the concentration of the S&P in these companies?

At this point these companies make up a huge portion of 401k's for a huge chunk of Americans. How would it affect retirees if they dropped 40-50%, likely taking the market with them?

[hualapais]

I suggest looking into “EQL”, or better yet, just replicating its index by taking a position in the 11 XL* sector funds from SPDR, allocating equal weighting to each. One will end up with one’s equities equal weighted by sector and with plenty of large cap exposure, as opposed to the pronounced mid-cap tilt found in whole market equal-weight strategies.

Personally, I drop the financial sector entirely (Thomistic prohibitions on usury) which leaves an even 10 funds which is easy to allocate mentally and in practice. For example, assuming a 60/40 allocation where one is holding the lion’s share in equities and the remainder in bonds (I substitute with a combination of gold, crypto, cash, and Swiss Franc here), one would allocate as follows:

XLC 6% XLY 6% XLP 6% XLE 6% XLV 6% XLI 6% XLB 6% XLK 6% XLU 6% XLRE 6%

(Note that XLF is consciously not taken as a position here, decide if it’s right for you. The Mortgate REITs which would make XLRE problematic are in XLF per the sector selection rules)

The remaining 40% is bonded debt if you are fine with usury, or some sort of asset negatively or neutrally correlated to equities.

[khriss]

The problem is that this strategy is only feasible in a tax-advantaged account. Otherwise the drag of taxes during rebalancing dramatically lowers the returns.

[derwiki]

BrokerageLink should let you do this with your 401k

[rocho]

Why do you consider bonds usury?

[hualapais]

Because bonds involve interest. Per Summa Theologica:

> To take usury for money lent is unjust in itself, because this is to sell what does not exist, and this evidently leads to inequality which is contrary to justice.

https://www.newadvent.org/summa/3078.htm

…Aquinas expands the analysis but it is relatively straightforward: all interest is usury.

Personally, I find it helpful to imagine two hypothetical persons representing the entire economy, one the creditor who is lending and two the borrower who is taking on the loan. In this ultra simple closed model with a fixed quantity of money, the former is in effect asking for more units of money than actually exist in the whole system. When the loan comes due the borrower owes a sum that cannot be paid in full from the circulating medium itself. Settlement then requires either default, the creditor forgiving the excess, or the transfer of real goods and property to make up the difference. Scaled up, that same pressure (the continuous generation of monetary claims that exceed the existing stock of money) is what I suspect drives a good deal of the subtle and overt strain on families and communities that people so often complain of in the West and in modern growth-oriented capital societies.

This definition of usury differs from the modern loophole-definition: that interest bearing loans are only usury when the rates cross some nebulous abusive threshold. In the above Thomistic interpretation, all interest is socially problematic and disfavored. Judaism holds to a similar prohibition on interest when loans are made between Jews. Islam likewise prohibit usury even more broadly. Despite the injunction against usury in the Middle Ages Christendom and the enduring prohibitions of usury in other faiths, there are many modern Catholics and Protestants who will favor the modern interpretation over Thomas’ understanding; I’m just not one of them.

[maroonblazer]

>in effect asking for more units of money than actually exist in the whole system.

Depends on how you define the 'whole system'. If I borrow $100 and make $110, the latter didn't appear out of nowhere. The lender, too, could have turned that $100 into $110.

Why shouldn't they be compensated for that opportunity cost?

[largbae]

If I understand right, it is allowed to invest like a partnership, where you make $110 together out of your $100 and your partner's effort. But you must be exposed to the downside of failure just like your partner.

[hualapais]

The opportunity cost point is fair enough if one is thinking in terms of two concrete individuals. The illustration I offered was meant at a more abstract level, the two persons standing in for the creditor side and the debtor side of a closed economy taken as wholes. In that framing the issue is not whether a particular borrower can put the money to productive use (clearly he can), but that the system as a whole is being asked to generate more units of the circulating medium than currently exist within it. Even when real value is created, the monetary claim still exceeds the monetary stock. Settlement then requires continuous expansion of the money supply, continuous transfer of existing assets toward creditors, or periodic default. That structural pressure is what I was trying to get at.

I suspect the deeper difficulty is the “bond” in bonds themselves, the ongoing compulsion that interest introduces. Once interest is attached the debtor is under continuous obligation to produce additional claims simply to keep the accounts from breaking. Traditional writers on the Christian and Islamic sides generally preferred arrangements that avoided this continuous pressure. A pure discount (as with discounted Treasury bills and similar instruments) prices the time element once, up front: the creditor advances a smaller sum and later receives the larger face amount. The cost is paid at the beginning rather than levied as a recurring claim that must be met out of future circulation. In that sense the time value is acknowledged without the mechanism that forces the system to keep generating more monetary units than presently exist.

[edit:] Clarified the discount language.

[mattclarkdotnet]

But, there is no fixed quantity of money in modern finance. It's created every someone or some business takes out a loan from a bank, and every time the government spends money. It's destroyed when the loans are repaid or taxes are paid.

[sharts]

Infinite money is worthless. modern finance is bunk and infinite currency chasing finite energy is all there is.

[jbs789]

The borrower is buying time. I’m glad I can buy something that I value now, rather than wait. That is useful to me, and I’m happy to pay for it

[geye1234]

Greetings, fellow Thomist. You are correct that usury is any amount of interest, and attempts to pretend otherwise are sophistical, but I suggest you may want to look again at corporate bonds and other non-recourse loans -- that is, loan where collateral is limited to specified asset(s). Look at Zippy Catholic's writing on the subject -- he was a finance dude, and a very rich self-made man. A non-recourse loan is more like taking an ownership share in something, and then renting it back. It's unfortunate that we use the same words (loan, interest, debt) for both full-recourse and non-recourse contracts, because they're entirely different things.

I agree that charging interest on a full-recourse loan is a wicked and disgusting thing to do to one's fellow man, and I'd say it's in the same genus as slavery. Usury is to fraud what robbery is to larceny. It's also interesting that the markets where usury is most prevalent (housing, college fees) are the ones that have seen the most insane price increases.

[lazide]

Sounds like a religious aversion to all lending?

Usury usually means ruinously high interest rates, not all lending.

Unless you’re Muslim, generally.

[michaelt]

In many historical societies, religious prohibitions on usury meant the charging of interest of any kind.

Jump in a time machine to 1515 and ask Martin Luther, or to 1260 and ask Thomas Aquinas, they'd tell you it's sinful.

And in the present age, a fair number of Islamic folk consider interest against their religion's rules. So there's a Halal finance industry where, for example, you can get a "murabahah contract" where the bank buys a house, then sells the house to you at a higher price, while allowing you to pay them in monthly instalments.

[LadyCailin]

I love when religions have rule lawyers like this. It readily discredits the religion. As if their all powerful god can be fooled by fancy paperwork or legal loopholes.

[bacchusracine]

They’re not trying to fool God, they’re trying to fool you into going along with it. They don’t care what God thinks and may not even believe in Him at all, but unless they can convince you of the loophole they’re stuck with the rules themselves.

[marcus_holmes]

The bit that isn't rules-lawyered away is that the risk is shared. For the deal to be compliant with the religious law, the lender must accept the same risk as the borrower, equally.

So I guess in this case if the house burns down and the insurance only pays 50% of the agreed value then the lender only receives 50% of their agreed repayment.

[harry8]

Do you love it when people use religion to create rules like this as though people can be fooled into thinking they /know/ the mind of god?

[Exoristos]

Older than any of those:

"Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest" (Deut 23.20 JPS Tanakh).

[nickpeterson]

the letter but not the spirit, like Amish workers using batteries

[inigyou]

It's concretely different. If the house becomes worthless, the "borrower" can walk away from the contract, owe nothing, and the bank keeps the house. The bank had better consider the value of the house, not just the ability of the "borrowed" to pay, when issuing this contract.

[tyleo]

It’s an interesting thought. The growth is so extreme that if the S&P 500 fell 50% today it would reach levels last seen in 2022. Given that the timespan is so short, I’m honestly not sure it would be as bad for 401ks as people expect unless all of your investment was concentrated in the last 4 years.

I suppose it’s worse if your calculation is, “I’ll retire when my 401k hits $X absolute value,” but I think most people just retire at a certain age instead with risk spread across decades.

[Imustaskforhelp]

During the dot-com crisis. Nasdaq fell around 78% from its peak and S&P by around 49% so it isn't unprecedented (ironically has both aspects of being both tech and are within the same time-era)

It created an actual recession albeit thankfully short one for the case of dotcom (sadly not for 2007) and a really recessionary environment which causes unemployment and just straight up fear and panic.

I do understand what you are talking about and overall in long term, perhaps things flatten out but atleast speaking financially so, its better to be on a smooth sailing road rather than insane ups and downs with retirement money if preferable.

> I think most people just retire at a certain age instead with risk spread across decades.

The issue in my opinion is with people near that certain age you mention and who retire in the time during boom just before bust. They would then get the 50% hit on their savings instantly with an recession/inflation/unemployment environment which in my opinion might be genuinely devastating.

(supposing that they had their investments in stocks, I wouldn't consider that any retiree would have all their money in stocks but there have been some other comments which show a sizable amount, @kipchak's comment shows 50% stock for retirement. so a 50% shock on top of that could lead to a wipe out of 25% of your retirement fund which is honestly still pretty crazy.)

[Karrot_Kream]

This kind of metric is always used to shock and awe in pop media when talking about the GFC, but it's not how actual investment works. In practice most investments are DCAed.

No person puts all of their retirement savings into QQQ or SPY at the peak and sell it off at the trough. Instead folks drip their savings into their weighted portfolio and withdraw money from their weighted portfolio as expenses accrue. Now obviously the GFC was a huge deal, but this sort of facile understanding of stock markets always leads to big misunderstandings. There's a reason Monte Carlo analyses of these events are used to model these scenarios.

(Though I imagine there were many people who tried to re-balance their portfolio into a less equity-heavy model abruptly during the GFC and based on equities performance at the time, it was probably the right move as long as taxes were taken into account.)

[toomuchtodo]

> (supposing that they had their investments in stocks, I wouldn't consider that any retiree would have all their money in stocks but there have been some other comments which show a sizable amount, @kipchak's comment shows 50% stock for retirement. so a 50% shock on top of that could lead to a wipe out of 25% of your retirement fund which is honestly still pretty crazy.)

What do you think the cost would be for protective puts per $1M of equity exposure of a portfolio on a monthly basis? "Bubble Insurance" if you will. Going 100% bonds is simply intolerable for the time window for most retirees, but an equity wipeout of this magnitude is equally intolerable.

[otherjason]

They are probably not going to be implemented using long put positions, but a product with a similar return profile to what you're looking for is a buffered ETF. Basically, over a defined period, you agree to a maximum possible downside in exchange for a capped upside. They are available in ETF form from a number of providers.

For example, you could have an S&P 500 fund that, over the next year, will have a maximum of 0% capital losses (it can't go down), you will only get the first, say, 5% of gains that the equity index makes. So if stocks go up 20% the next year, your return is capped at 5%, but if they crash 50%, you don't absorb any capital losses. In practice, the return cap is going to be just a bit above the corresponding Treasury bill for the same duration.

These can be constructed in various different ways and institutionally I'm sure there are more bespoke ways that are more efficient from a fees/returns and tax perspective, but one way to do this on your own without going the ETF route is:

- Pick an amount you'd like to invest. - Buy a Treasury bill for some duration. Treasury bills are discounted at the time of purchase and return the target amount when the bill matures. For instance, if you buy a $100k 1-year Treasury bill, it might cost $96.5k today. - Now you have $3.5k in your pocket and a guarantee that you'll get $100k in a year when the bill matures. Use that $3.5k now to purchase call options or vertical spreads on the S&P 500 index to capture the upside that you can. Your return is limited by the structure of that options trade and what its maximum payoff is.

If you're willing to accept more than 0% downside, then you can achieve a higher potential upside cap as well.

[toomuchtodo]

This is exactly what I was looking for, thank you for taking the time to reply!

[Imustaskforhelp]

> What do you think the cost would be for protective puts per $1M of equity exposure of a portfolio on a monthly basis? "Bubble Insurance" if you will. Going 100% bonds is simply intolerable for the time window for most retirees, but an equity wipeout of this magnitude is equally intolerable.

Investment companies have to remain profitable or at-worst neutral as such they would generally charge a decent bit of money for this type of setup. (If they end up having too big of losses then perhaps it could be similar to the the 2007 Banking/Investment companies crisis.)

Generally speaking I am not a financial advisor but you can take a look at international index funds/ETF's in general which have less exposure to AI in general.

and you can follow the age rule created by Mr Bogle where you have (age)% in bonds and (100-age)% in stocks, so at 70 you have 70% bonds, 30% stocks.

So again taking the example of dot com bubble, International Index funds fell from my understanding 30-40% and suppose that you had 30% stocks and 70% bonds.

So that would only have a 30% times 30 % which is 9% which perhaps might be more managable as compared to the previous 25%. There might be some other strategies as well which can help in diversification

Hope this helps!

[mhh__]

The cost of insurance is carry e.g. when you buy an option you are paying for the convexity with time decay. It is quite expensive.

It is worth saying however that part of tail hedging is that the payoff is worth a lot more when everything else has tanked, so e.g. even if you (say) get 10% on your puts when the wider portfolio is still down 40% (made up numbers), you can deploy that capital at probably quite a high expected return.

[matwood]

Even someone close to retirement doesn't need to go 100% bonds. It's not like someone needs all their retirement money on day 1. The part that remains in equities will continue generating dividends that will get reinvested, and recover over time.

[ligne]

100% of anything is a bad idea if you're going to have to draw on them any time soon. Bonds are less volatile than equity, but they're still subject to drops in value.

[barchar]

It would cost an extreme amount. The only reason to do something like that would be to defer capital gains into retirement while protecting your position.

You can use a collar for this at somewhat reasonable cost. Not sure how rolling that would compare to just using it to defer until you can cheaply sell and buy some fixed income ladder. Probably badly.

Also, there’s no capital gains to defer if you use a retirement account, which will be a better place for fixed income anyway.

[Marsymars]

> What do you think the cost would be for protective puts per $1M of equity exposure of a portfolio on a monthly basis? "Bubble Insurance" if you will.

I expect that would not be a cost-effective way of attaining the risk profile you'd be looking for.

I expect there won't be a more cost-effective way of managing your portfolio risk than by simply adjusting your split of broadly-diversified equities vs bonds.

[intrasight]

My homeowners insurance isn't "cost-effective" either but I still do it. I think the reason that investors don't is because they are greedy or irrational or both.

That was the message that I got from a financial podcast I listened to a couple weeks ago anyway.

[TacticalCoder]

Take SPY at a strike of $738, per lot of 100 that's $73 800. Take 14 lots, give or take, to make a cool million.

SPY260821P00738000 (OCC symbol: PUT on SPY expiring the 21th of August 2026 at a strike of $738) is $12.20 as I type this, so $1220 per lot. So $16 800 to protect for a month. So $200 K per year.

A solid 20% yearly, unless my math is way off.

Now of course you can buy, instead of a PUT, a PUT debit spread, or you can buy further from the strike, or you can finance or partially finance your PUT or PUT debit spread with a CALL you'd sell (turning it into a covered strangle) etc. That's not the point of this exercise though. And anyway I doubt many retirees have the know-how to do that.

In any case it's well known that the costs to hedge are extremely high.

In 1929 those who had 10% gold for example "only" lost 25% overall: gold has value since thousands of years. My dumb thinking is that if gold has value since thousands of years, there's an extremely high probability that it'll keep value for the few decades I've got left at most.

[FabHK]

A more sensible strategy is probably to protect only against large down moves, so get OTM puts, and then longer maturities (like 1/2 year or so), then rotate them every quarter.

ATM options cost approximately 0.4 S sigma T^0.5 (do a Taylor expansion of the "N"s in the Black Scholes formula), so indeed, for current index vols of about 16% we are talking 0.4 * 16% * (1/12)^0.5 = 1.85% for a 1 month option, and 12 of them indeed cost 22% of your portfolio. Not a good idea.

However, if you hold the options only half the way to expiry, you lose only 1/4 of the time value. And if you buy OTM, you have convexity coming your way on the way down.

Lastly, index vols were very low (until yesterday, ha), as so many firms entered the dispersion trade: they wanted to go long dispersion (some firms do well with AI, some lose out), so short correlation, therefore long single stock vol and short index vol. Which means you could buy index vol (ie protection) quite cheap.

[MattGrommes]

One of the big issues with this is sequence of returns risk. If you retire and rely on your portfolio but the market dives for a year or two right after you leave the workforce, your total portfolio value is screwed because you were selling at a low point.

[Terr_]

Tangentially: I think a lot of people forget/underestimate the degree to which the industries behind their job are ones that they need to diversify away-from.

In other words, a programmer should invest a bit more away from software than average, a realtor should invest a bit more away from properties than average, a coal-miner should invest a bit more away from energy and mining, etc.

If you have your job, you can weather a stock-downturn, and if investments are solid, you can weather a period of unemployment by liquidating some, but if both hit trouble simultaneously then that's much much worse.

[mancerayder]

That makes sense, and it probably should be said more. It's probably just because we invest in what we know. If you're a real estate broker, you have an interest in properties, you think about it all the time, so you'll buy your own properties, or invest perhaps in builder stocks. If you're in tech, well, I don't need to say it because that's most of us. If you work in the energy sector, I imagine you know a thing or two about transport and esoterica of speculative miners or drillers, etc.

[Terr_]

> It's probably just because we invest in what we know.

I'm mostly thinking of folks that will passively invest in a big broad index fund, and then assume they've reached the end in terms of balancing industry/sector risk.

[parpfish]

it's also why you shouldn't hold equity in your own company any longer than necessary (e.g., an apple employee shouldn't tie up the majority of their networth in apple stock).

[Terr_]

My go-to example is always Enron, and the impact on employees whose retirement funds were in their own too-awesome-to-fail employer.

Oh, sure, it's way worse because of the fraud-angle, but even if it had just been a more honest kind of mania, the arrangement was reckless and bad.

[rwmj]

Which is why you keep 3-5 years of spending money in cash (or a bond ladder if you want to be fancy).

[duzer65657]

most don't even have 3-5 years "spending money" (whatever that is) in total savings; if you're keeping that in cash you're getting 2-3% annually while the market has doubled.

[LargeWu]

Last week I was at the bank in my hometown, a small rural community. The teller took a phone call, and I overheard her say "You have $1.53 in your checking account, and $150 in savings".

Presumably this is their total net worth. I think this is way more common than people on this type of forum realize. Most will work until they literally can't anymore, then scrape by on social security until they die. I think it's important to keep that perspective.

[MattGrommes]

When you're headed into retirement, one possibility is to shift to saving more in cash-like options instead of a 401k (or whatever). It's should just be part of your retirement plan to account for possibilities like this.

[bell-cot]

Look back at the grandparent comment. If someone doesn't have 3-5 years in total savings, then they had better not try to retire.

[rwmj]

Sure, but we're not talking about people who have no savings. FIRE people have huge investment portfolios while being frugal with their spending, and understand the risk of keeping 5-10% of their total net worth in cash equivalents (not dissimilar to having insurance).

[hdgvhicv]

People return with less than 4 years expenses in retirement funds

Surely you need about 20 years?

[staticman2]

3 to 5 years of cash or a bond ladder won't help in a 1970s stagflation scenario.

[inigyou]

At the extreme end of this, realise that absolutely nothing is safe.

[Panzer04]

3-5x is way too much if you're still working.

1x is plenty IMO.

[bandrami]

Which is why lifecycle funds move you into bonds gradually as you approach retirement age

[zer00eyz]

Inherited IRA's, if you aren't the spouse, have some pretty strict draw down rules.

As the boomers die off - if they have these accounts - their kids are quickly going to be forced to liquidate them over the course of 10 years. With some of them having to sell a chunk annually.

[riffraff]

NVidia makes up 7.5% of the SP500. If it lost 50%, it would be a 3% loss for the index. The concentration is bad, but it would not cause a drop of 50% retirement funds by itself. If you take an all world index, it's even less.

Still, if NVidia lost 50% of their market share, we would probably see a big collapse of the stock market.

EDIT: to note, the top ten companies in SP500 make up an unprecedented concentration but they're not "mostly AI".

[rockskon]

It is unlikely that a 50% drop in NVidia wouldn't be paired with a significant drop in the valuation of every other company heavily invested in AI.

[burningChrome]

Unless they too were somehow tied into Nvidia.

This is what caused the 08' crash. Everything was all tied together so as one massive bank failed it sent a cascading ripple effect through the entire industry which became a sort of black hole that took down many seemingly stable, profitable banks with it.

I can easily see the same happening with AI.

[riffraff]

Of course, but the top ten that make up >30% of the market don't just sell AI. If all of those lost 50% it would be a 15% drop in the index, painful but not jumping-off-building bad

[rockskon]

What of most of the rest of the US economy thats keeps trying to shoehorn AI into their workflows and, more importantly, whose stock prices are buoyed by the prospect of theoretical AI-related productivity gains?

[hnfong]

> EDIT: to note, the top ten companies in SP500 make up an unprecedented concentration but they're not "mostly AI".

They're mostly either AI proper, or hardware manufacturers benefitting from AI boom, or provide cloud services to AI companies...

[matwood]

An AI collapse would represent a generational buying opportunity for companies like Meta, Google, and MS. It would be bumpy for a bit while things unwind, but eventually all this FCF they have been dumping into AI would start dropping to the bottom line instead. It's like when Meta stopped dumping money in Reality Labs, but on a much larger scale.

[throwaway85825]

For it to be a buying opportunity would require the mega corps to continue growing post bubble pop. This is questionable given how large they already are.

[oblio]

And a lot of their apparent growth post 2022 is AI, but most likely at subsidized, unsustainable prices. So demand that isn't real.

Plus apparently at least for Google, but from other news sources I've seen, at least Amazon and Oracle have basically mortgaged their future in other business units to fund AI, so it's likely many of these other business units will underperform (or already are).

So lots of new debt, unverifiable growth that could be shady, coupled with a slow down of their other businesses could be a really bad combo.

[mhh__]

A risk in this situation is that in names that are dominated by passive flows there is a pro-cyclical effect where because the name is valued in terms of the overall index but is also part of said index that you end up with a positive feedback loop - which will eventually be arrested by speculators.

[kipchak]

Regarding unprecedented concentration, wasn't the nifty fifty era comparable for the top 10, about 40%?

[riffraff]

I frankly don't know, the "unprecedented" is something I read in articles but haven't actually investigated.

[kipchak]

Looking at for example 1965, the top 10 of the S&P500 were, rounded, ATT 9%, GM 7%, Exxon (4%) IBM (4%) DuPont (3%) Texaco (3%) Sears (3%) GE 2%, Kodak 2%, Gulf 1%, for a total of 38%.

This is pretty close to current concentration, but the current top 10% is basically all technology except for Eli Lily at 1.5%, so in that sense it's arguably unprecedented.

There's a good chart here on page 5 of top 10 weights over time, and on 6 of how the 1965 top 10 fared to 2025.

https://corporate.vanguard.com/content/dam/corp/research/pdf...

[conartist6]

Idunno man. Am I the only one that remembers the day the first DeepSeek model came out?

It wasn't like, "Nvidia took a hit and everyone else was fine". It was more like, "One or two companies were fine, and ALL others took a hit"

[bdangubic]

how are they not “mostly AI”?

[riffraff]

Amazon, Microsoft, Meta, Alphabet sell a lot more things than AI. They were huge before and would still be huge after.

Do you think iphones and windows™ will stop selling once the ai bubble pops?

[krashidov]

"This tree only makes up 0.0001% of the forest. If it is lit on fire, the forest will be fine"

[6510]

I have this cheap B movie in my head with a primitive people living on an island. They compete in hunting, fishing, building boats, houses, cutting trees, growing crops etc they use sea shells as currency. Someone finds a spot with countless sea shells, 95% of the population spends their days digging up more and more. Almost everyone is insanely rich, everyone except from the dumb people still hunting, fishing, building boats, houses, cutting trees, growing crops etc

[MikeNotThePope]

I don’t think concentration risk is itself overly concerning. The nature of a market cap weighted index means it will always be heavy on whatever is currently trending. You’ll certainly be hurting if your plan is to retire at the top of the market with just enough, as the inevitable downturn will hammer your portfolio down into not enough. So invest until you have enough to handle volatility or a lost decade with a dip and slow recovery.

[minimaltom]

Even if theres a massive drawdown it will recover in the medium term (and in the short term is a great buying opportunity).

For the people who are close/early to retirement and can't do that, well, they need to manage sequence of returns risk.

Edit: I think some ppl might interpret this as me being bullish on the SP500. I'm not, I'm bullish on everything evens out and returns to the mean.

[fsckboy]

>How would it affect retirees if they dropped 40-50%, likely taking the market with them?

a drop of 40-50% in the S&P 500!? That didn't even happen in the market crash of 1929. It would lead to unemployment and breadlines for the majority of the population, and retirees would get in line like everybody else. Making income from your savings requires a productive economy; bonds are not the answer because bonds also stop getting paid, and even govt bonds would be erased by inflation.

it's just not a scenario that should be on your radar, the chance is tiny, and the result would be completely non-linear. if you tried to hedge yourself against that, not only would you fail (it's simply out of your control, like an earthquake or tornado), you also wouldn't make any income in good times, and most times are good and it's sensible to plan for that retirement.

[kbcool]

The S&P 500 has dropped over 40% multiple times including 1929. It did it in the 70s, 2000 and 2008/9.

The COVID crash nearly hit those levels also

[epolanski]

There is no data showing that high concentration is bad in an index.

No correlation with future returns.

On the other hand the world is leveraged to insane levels not seen since world wars or global recessions.

At the same time yields are low while inflation is high.

There is definitely a high level of risk in the financial markets.

A risk nobody, especially politicians, want to look at, because it would unavoidably lead to some major pains, so procrastinating until it's unavoidable seems the way to go.

[senshan]

For those who stick to a meaningful asset allocation (e.g. 60/40, 80/20, etc), this does not pose significant problem -- they would not be buying much stock in the last 3 years. Instead, they would be buying mostly fixed-income. Probably mostly in 401k/IRA accounts.

[mint5]

But if their debt goes bad, isn’t that debt the very bonds that make up the other part of those asset allocations?

[senshan]

Typical total bond market fund like BND is ~70% in USG -- pretty solid:

https://investor.vanguard.com/investment-products/etfs/profi...

[swarnie]

I'm not familiar with 401k rules but presumably they get a choice of markets and products?

If one is over concentrated its easily avoided.

[skohan]

The problem some have pointed out is that these companies are such a huge portion of the market right now.

The sound advice for the past decades has been, just invest in a low-cost ETF tracking the S&P instead of picking stocks to minimize risk and invest in the market broadly.

So a huge number of people have done that, believing they're diversified, while tech makes up 40% of the index.

Yes you could sell your S&P and find things to invest in least likely to be impacted by a potential bubble, but your average 9-5'er with automated contributions to their 401k is probably not sophisticated enough to do that.

And that's assuming only these companies would be affected if there was a massive draw-down in tech/AI related stocks. We haven't really seen a situation like this before, so it's not easy to predict what effects there might be in the broader economy.

[wonnage]

It’s probably not even a good idea to try and defend against the bubble by switching up your stock allocation. After all the whole reason passive investing works is that active investment rarely beats the market and if you’ve just been in SPY the whole time it’s unlike you have any edge to gain by switching to an active strategy every time fear creeps up

[izacus]

All of that is only true if the market is sufficiently diversified and not manipulated for profit extraction.

Right now it's not clear that is true.

[wonnage]

It’s one thing to predict a crash, it’s another to actually make money off of it. If you’ve watched The Big Short even those who predicted the housing crisis correctly nearly lost their shirt before and after it happened because timing the crash is the hard part. There is a whole body of research showing that passive strategies outperform active after crashes

[anthonypasq]

no one that needs to rely on their investments for their actual retirement still has them in equities. theres a reason target date funds automatically adjust asset allocation as it nears its target date. you should be in majority bonds and cds well before your actual retirement date.

[jandrewrogers]

That is an overly conservative approach that sacrifices a lot of growth for not much more safety. It also exposes you to inflation risk, which is a significant concern these days.

Most people in actual retirement I know do something like keep ~2 years of cash in short-term treasuries and everything else in equities. That gives you a lot of buffer to time-shift equity drawdown, which is the main risk with equities, while retaining almost all of the benefit of equities. Simple and relatively robust.

[anthonypasq]

i dont think you want to ever be in a position where you arent making money and your net worth could drop 50% in a year. but hey, if you want the risk go for it i guess.

[loudmax]

The employer selects a financial company to manage the 401k. When you switch jobs, you can roll the 401k from the previous employer into the new one, or into an IRA (Individual Retirement Account).

Usually the financial services company will offer several options: more aggressive/high risk, or less aggressive/lower risk. Most people will just go with whatever is the default option.

So much of the American S&P 500 is dominated by handful of companies that the risk is not that easy to avoid. If or when the AI bubble pops, it's going to take down a lot of the economy with it. You can direct your retirement savings into the lowest yield/lowest risk assets offered by the firm, but you'll forego whatever growth happens in the mean time.

Will the bubble pop next week? Next month? Next year? Who knows. Timing the market is incredibly difficult.

There's a famous quote, attributed (perhaps apocryphally) to John Maynard Keynes: "The market can remain irrational longer than you can remain solvent."

[TitaRusell]

The whole idea of a pension fund is that you don't need to time the system it is the system.

Like my country pension scheme. It went through ups and downs for a hundred years but has always come on top. All you need is a long horizon and a trillion dollars and you basically can't lose.

[magicbook]

Isn't that considered a likely case? I always assume that my sp500 holdings are worth roughly half of what they are (and base retirement and spending decisions on that number). and most financial advisors will tell you future returns of sp500 for 10 years out will barely keep pace with inflation, if that.

[anthonypasq]

retirees arent suppose to have their active retirement funds in stocks dude. Any financial advisor with a brain would not make such a ridiculous asset allocation error.

[kipchak]

Regardless of whether it's a good idea, it absolutely happens and as a result would impact retirees, both in individually managed accounts and target date funds. For example here 70+ are 45% equity.[1] TROW retirement 2020 funds are about 50% stock, for example, and only decrease to a floor of 30%.

https://workplace.vanguard.com/content/dam/inst/iig-transfor... (page 78)

[noelsusman]

Retirees relying on short term equity returns to cover expenses only have themselves to blame.

[isoprophlex]

There is ZERO chance the modern oligo-kleptocracy isn't going to socialize the losses onto the little guy

[shimman]

Yeah, hence all the talk about forcing "public" ownership. Becomes easier to justify a bailout when you create some legal fiction compelling the government to do so.

[d5lt5]

> As long as this debt does not make it into life insurance and pension funds, we are fine.

Already happened: https://finance.yahoo.com/markets/stocks/articles/michael-bu...

[baron816]

Yes of course life insurance and pension funds are going to buy this debt. This is the highest quality debt that's out there. If you don't want life insurance and pension funds to buy debt from big tech companies because you believe it's too risky, then you believe that bonds are just too risky in general.

[AnimalMuppet]

OK, wait a minute. Elsewhere in this discussion, people are saying that only a few of these AI companies are going to survive. For stocks, that can still be a reasonable investment - low odds, but still a positive expectation value - but for bonds, it's terrible. You're paying me single-digit interest when there's only a 20% chance that you live long enough to give me my principle back? Get outta here. Literally nobody should be investing in such bonds.

[FabHK]

FWIW, a firm can go bankrupt and the stocks be worth zero with the bond holders being paid 100%. In fact, that's sort of the goal and "ideal" scenario (ideal given bankruptcy, of course, which in turn is not ideal).

In the real world, recovery rates for corporate bonds are between 30% to 70% or so, depending on the seniority of the debt and the collateral.

[muellero]

If big tech bonds are a terrible deal for investors at 8%, then Google or OpenAI is getting a screaming deal by raising debt at that rate. Saying nobody should be investing in these bonds is very similar to saying that big tech should raise more debt.

[AnimalMuppet]

Yes, they should, if they can. But on the other side, life insurance companies and pension funds should not be buying it.

[muellero]

Agree with you on that. I just wanted to point out that Big Tech debt being a bad purchase for things like pension funds means its a good deal for big tech. Everyone else in the thread seems very negative on big tech debt for some reason. You can't have it both ways.

[hvb2]

> buy debt from big tech companies because you believe it's too risky, then you believe that bonds are just too risky in general

Uh, no? Ignoring the rating, I think there are plenty of other bonds to be found that are less risky.

Dutch government bonds just to name one? The yield wont be the same but that's probably a good indicator?

[derf_]

> When these fail, it will become everyone's problem.

Debt is senior to equity. For private credit to start taking haircuts, the equity has to have already gone to zero. At that point, this will already have been everyone's problem for some time.

[senshan]

Are you suggesting that holding private credit assets is relatively risk free?

Equity is a risky asset, so equity being wiped out should not be a surprise to anyone, but life insurance and pension funds failures is indeed a public problem.

[nickff]

There's a wide spectrum of 'private credit', and it varies from low-risk to quite high risk, depending on the debtor. In the case of "AI Companies", their debt is low-risk, but many are creating special-purpose-entities which will build and own some or all of their newer datacenters. Those datacenter companies are issuing a great deal of somewhat risky debt; with the exact level of risk depending on the off-take agreement.

[jcfrei]

That's an overgeneralization and haircuts for debtors are common - even when a positive equity value remains.

[mschuster91]

> As long as this debt does not make it into life insurance and pension funds, we are fine. The trouble is that private credit is taking control of some life insurance companies and off-loads this debt to these. When these fail, it will become everyone's problem.

Three things:

1) at least SpaceX is already in pension funds "thanks" to NASDAQ and MSCI relaxing their rules. Everyone who invests in NASDAQ or in MSCI World has SpaceX exposure, and assuming the bonanza lasts for 11 more months, so will everyone who invests into S&P 500. In addition NVIDIA, Google, Microsoft, Oracle and Amazon all have been in pretty much every investor's / pension fund depots. No matter what, everyone is going to get fucked when the party crashes, and it will make 2007 look harmless by comparison.

2) The debt of the AI companies is bad enough, but there's all the downstream credit as well, chiefly construction companies and public utilities that are undertaking absurd amounts of buildout. When the party crashes and the demand stops, there will be a lot of construction companies and possibly even a few large utility companies that will be unable to service their debt (because no datacenter means no income) or have to hike rates even more than they already are.

3) All this debt and speculation unwinding will cause an economic downturn. Most of Europe already is in or near recession territory, and the US would be in a recession if it weren't for the wash trading and circular investments artificially propping up the GDP. But unfortunately, with the exception of infamously austere Germany, everyone else has already fired all the guns during 2007ff and Covid, and all the ZIRP money never got slowly deflated out of the market, which means this time there will be no government help possible, it will be a hard crash. No way out of that one.

[aftbit]

I disagree - high leverage inherently makes systems less stable.

[senshan]

You probably meant to say that practically, high leverage tends to leak into companies of public interest. For example, when high net worth individuals start trimming their private credit holdings, which eventually end up with insurers. That is why the regulators have to watch carefully that it does not happen.

[aftbit]

No, I meant that having a lot of debt puts you in a position to be more vulnerable to any kind of negative outcome. Intuitively, this seems to hold true across the spectrum from the personal level to the government level.

If a person has a lot of debt and no savings, and they lose their job, then they will find themselves in trouble a lot faster than someone who owns their home and car and has 6 months in a savings account.

If a company has a lot of debt, they might find themselves in trouble with credit rating agencies as soon as they have a bad quarter. Or they might have cashflow issues if rates increase. Both of these can lead to an accelerating negative feedback loop.

Governments (at least those with fiscal independence) have a unique set of tools to work around this situation, but they too can struggle with high debt loads acting as a drag on future prosperity.

Debt plays a critical societal role in allowing new production in advance of revenues, but it can also be a dangerous trap.

These AI and tech companies are priced as if they are still running a capital-light, 0-marginal-cost SaaS business. That's no longer what's happening. This economic engine makes up a substantial amount of both the value and the growth in the American stock market.

If there's a loss in confidence, high leverage will make things fall faster. This could be infectious. Not just the AI and tech companies, but the whole market might suffer.

[guywithahat]

You say this as though every company doesn't take on debt, and all debt isn't a risk. I'm sure you have some much riskier debt than ChatGPT already in your portfolio, and interest rates are adjusted by relative as judged by the market. I'm sure some debt will fail, but certainly all of it won't, and while anything could cause a market crash saying "when these fail" holds a lot of incorrect assumptions.

[jgalt212]

> As long as this debt does not make it into life insurance and pension funds, we are fine.

I think for small to even large numbers you are correct, but given how yuge this debt amount is a broad-based default will probably cause a contagion. I will not predict how far and wide.

[duxup]

It impacts investment or lack of it in other places. I had some visibility to a company trying to sell and was told that if it wasn’t AI there just wasn’t much money out there.

[BrenBarn]

We are definitely not fine. The mere fact that this amount of money is flowing to these operations is already a problem.

[dzonga]

bingo - if the firms holding the debt keep holding the debt & the debt doesn't get passed to other entities - the system will be fine.

if say meta owes 720Bn, they wouldn't have trouble paying that back in 10 years.

this doesn't take away the fact that 'a.i' right now is a bubble.