Investing Returns on the S&P500
github.com
github.com
1. GDP growth is not as high as it used to be anywhere in developed world: http://www.oecd.org/std/productivity-stats/oecd-compendium-o...
2. USA is superpower at the peak. Plenty of other stock market economies hasn't been so successful. E.g. Argentina used to be one of the richest country in the world. Investing in history is easy, e.g. you can also say about Apple stock that it will always recover based on past data, but plenty of other companies hasn't.
3. Most of the 100 years we have inflation: http://inflationdata.com/Inflation/Inflation_Rate/Long_Term_...
Right now interests rate are close to zero, which is rare. Long term trends may change if we continue to operate in those climate.
Edit: Inflation was factored in the graphs. Sorry I was wrong about that.
Point #3 is wrong.
PS: Now if this is for 401k accounts or something that's another story.
Granted, IRA/401k etc exist and in years with 0-3% it's not that big a deal, but over 20 years it's often a significant cost.
Only if you never withdraw them.
http://avondaleam.com/sp-500-dividend-vs-10-year-treasury-yi...
I'm not sure why you are being downvoted, as the dividend component of the S&P 500 is a substantial component of the total return.
If your choices are go on a 'cruse' today, or invest your money wait 15 years and then pay for a cruse waiting seems pointless. If you wait 15 years and can't pay for a cruse your clearly worse off. If you wait 15 years and can pay for a cruse and have money left over then that's an advantage to investing.
Sure, you can consider several investment strategy's. But, you can't see the future when your deciding what to do today. So, you can't say ahead of time what the best strategy is.
And if you'd just put the money in a mattress you're down 10%, far more than the loss of paying taxes on 10%.
E.g. Dow Jones: http://www.macrotrends.net/1319/dow-jones-100-year-historica...
Also from other nations.
Also, just as some risky "foreign" markets did awesome a hundred years ago-- that's what the US was to the investing world in 1900, and it did great-- some will do great over the next 100 years. Some will have wipe outs as Russia, Germany and Argentina did. The future is hard to know.
Really though, owning some vanguard funds is a good idea. I'd just hold on to a little real estate as well.
Of course, "buy and hold" would have been very wrong in that era (two of your superpowers would permanently tank), as it might be in this one.
Yes. China and India (and Pakistan and Brazil and...) are disasters in progress. Yet there are encouraging signs.
I choose to hope that Nigeria and others will improve their lots as they climb the economic ladder. Their people certainly deserve it.
Seriously now, this is like asking: What methods do you propose for building a perpetuum mobile? This Universe does not allow for the future to be predicted, like it doesn't allow for the laws of TD to be broken. All the predictions of growth/decline you read/hear from people are just educated guesses, nothing else. Some of them might get lucky with their predictions, some of them might not, but let's not foul ourselves into thinking that we can predict the future only because we can make nice-looking charts about what happened in the past
You're saying we can't understand the world through science?
Physical laws like the laws of thermodynamics are methods for predicting the future that we obtain by inferring them from what we've observed in the past.
You can argue that particular domains (like the global economy) are nearly impossible to predict with much accuracy because we are unable to observe many of the driving variables and the underlying causal structure is too complicated for us to comprehend the laws of the system's behavior. But to say that, in general, the universe does not allow forecasting the future seems really weird.
We're having a hard enough time as it is understanding the physical, inanimate world, when it comes to applying "science" to human endeavors the results are much less certain, approaching crystal-ball-reasoning. People did try in the past to do just that, i.e. to make scientific "sense" about what happened in the past with us, humans, with the hidden aim of trying to predict what will happen in the future. Karl Popper had a really good book explaining why that was a terrible idea (https://en.wikipedia.org/wiki/The_Poverty_of_Historicism):
> The book is a treatise on scientific method in the social sciences.[2] Popper defines historicism as: “an approach to the social sciences which assumes that historical prediction is their principal aim…”.[3] “The belief… that it is the task of the social sciences to lay bare the law of evolution of society in order to foretell its future… might be described as the central Historicist doctrine.”.[4]
> Popper’s criticisms of the poverty of the idea of historical prediction can broadly be split into three areas: fundamental problems with the idea itself, common inconsistencies in the arguments of historicists, and the negative practical effects of implementing Historicist ideas.
> iii) Individual human action or reaction can never be predicted with certainty, therefore neither can the future: “the human factor is the ultimately uncertain and wayward element in social life and in all social institutions. Indeed this is the element which ultimately cannot be completely controlled by institutions (as Spinoza first saw); for every attempt at controlling it completely must lead to tyranny; which means, to the omnipotence of the human factor – the whims of a few men, or even one.”.
And, to put it more generally, we do know that the Sun will probably die in the next 4-5 billion years, that is science based on induction, i.e. we saw that other stars similar to the Sun have lived that long in the past and so we expect the Sun to have the same lifespan. But this is not prediction nor forecasting the future, is really a very good guess. Science itself is a really nice and educated guess. The problem is that we're much better at guessing what will happen to the Sun, let's say, compared to what will happen to the stock exchange in the next 10 years or to who the president of Rwanda will be in 15 to 20 years.
David Hume has put down in writing the issue with induction better than a guy like me could ever do. From here (https://en.wikipedia.org/wiki/Problem_of_induction#David_Hum...):
> Only through previous observation can it be predicted, inductively, what will actually happen with the balls. In general, it is not necessary that causal relation in the future resemble causal relations in the past, as it is always conceivable otherwise
That remains to be seen
> Argentina used to be richest country in the world.
That is not true. In the early 20th century they were top 10, but never surpassed Britain or the US in GDP per capita.
What would a more powerful USA look like? It doesn't appear that the country is after an empire the same way the British had one 100 years ago, so raw aggression is out. I can't imagine a realistic scenario that doesn't require the implosion of other nations to embiggen America.
We haven't experienced Total War in our lifetime (thankfully), but when referencing the imperial dynasties in history as being more noticeable, it's usually because the wars they held were total.
Not saying it would happen but I think that's one scenario that would be even "more powerful".
Passenger rail; durable houses; less unemployment and more labor-force participation; a population not balkanized along political/cultural lines.
I mean, there is "always" going to be jobs for plumbers and spots for artisan made stuff... but those jobs aren't going to replace the amount of jobs that will be lost when $15 becomes more expensive than iRobot...
Not fast enough to replace the abolished ones, and most of those new jobs are knowledge work, which can't scale as there's a IQ floor that will stop most people from being able to work them. The more we shift to knowledge work, the higher unemployment will climb. You're making the mistake of thinking the past predicts the future, but today's automation is unprecedented, it will not follow the same pattern because it has different effects.
I don't know where it would come from (perhaps the same magical unicorn tooth fairy who would remove balkanization, inspire durable construction, and give us more passenger rail), but the US would look a lot stronger if it had it.
This includes politically stronger; poverty, disengagement from the labor force, and high inequality are not good for a country's political stability.
US empire is defined more by squashing incipient threats to its global hegemony than by UK-style colony management.
The US empire is doing precisely that, through a mixture of soft and hard power.
Both have imperial dynamics, but for the U.S. the important part is being the "world's policeman" as it comes with the authority to destabilize regions and install puppets where their sovereign governments may act against U.S. interests. With this more limited administrative footprint, they're free to focus on use of violence and propaganda, while taking up domestic market policies that benefit net importer businesses and thus justify maintaining the empire.
Where people say that the Pax Americana is ending it is in part because the dynamic has grown more multipolar since the end of the Cold War, with a diverse group of nations asserting their interests without being overthrown.
This has happened! In the past 30 years, no less.
"Superpower" is better.
It also influences other countries to an extent which is similar to other empires like the British did. It invades countries to keep trade going, and it's companies dominate the world much like the companies of the British empire did.
The only difference is that the US has finished expanding.
So what really constitutes an empire? Does it need an emperor? Does it need to constantly be questing to expand in lands?
All other uses of the term are metaphorical. We can talk about the McDonald's hamburger empire.
When we talk about the American Empire, we're also using the term metaphorically, because think what you will of the US, but it doesn't rule as a supreme authority over anything but a few islands. It may have friends, allies, interests, influence, bargaining power, but it has no subjects, no subjugated peoples. It may have largely founded what is now the world's economic and security order after WWII, but those are all voluntary.
The problem is that the overlap between superpower and empire makes the term empire confusing in the American case. "Powerful like an empire" and "an empire" are very different.
When we talk or think about the "American Empire", we seek similarities and ignore differences with the Roman Empire, European colonial empires, even the Athenian Empire or Soviet Empire. It makes it sound like the US can tell other countries what to do as it pleases, that the US rules over others. That's a very important mistake, even a dangerous mistake. Allies are not subjects. When a country asks the US military to leave, it leaves. See the Philippines as a good example (and further back as an example of the bad old days, when the US was briefly interested in having a real empire).
Today's US is an empire in the sense that Microsoft is an empire -- it is an empire of the willing who can leave whenever they like.
And if you can leave whenever you'd like, it's not a real empire.
War: True, the US engages in war, and the British Empire engaged in war. But so have many countries that were no empires. When the US engages in war, it leaves and tries to set up a gov't as the new authority. This has worked well (Japan, Germany, etc.) and not so well (Iraq, South Korea initially).
Companies: Imperial British companies literally captured their markets -- they had their own armies! The British East India Company for example came to rule much of the subcontinent, with their own soldiers! Subjects of British imperial rule were told what to trade. They might have done well for themselves sometimes (or been devastated at other times), but in any case the relationship was clear.
Global leadership: The US took the mantle as global leader from the British. This wasn't desired. Indeed after WWI the US refused to play leader. Some historians believe that WWII could have been avoided if the US would have fulfilled its duty as most powerful to provide leadership.
After WWII the US became serious about being a leader, by which I mean taking the initiative on issues of global coordination, both security-wise and financial. This is another reason the US is so easily confused with an empire. The UN, IMF, World Bank, NATO, Bretton Woods, these were largely American initiatives, but they were not imperial dictats.
Again, the importance in my way of thinking is that countries with relationships with the US are not subjects of the US. That is the key distinction that must never be forgotten.
A question: In your way of thinking, is the EU an empire?
Of course, the more active a fund is, the farther it gets from zero sum, but it would never be fully zero sum.
Additionally, financial services overall are far from zero sum. There is a great deal of efficiency and market lubrication created by financial services and if you exclude the high frequency traders, you leave a huge majority that is still quite beneficial to people on both sides of the transaction.
Once again, that depends on the trade, short term trades don't make their money from dividends, but from timing the market.
> Additionally, financial services overall are far from zero sum.
Beside the point, plenty of them are zero-sum-never said they were all zero-sum; that exception exist doesn't change the point that zero-sum vs non-zero-sum is a false dichotomy, the real world is both zero-sum and non-zero-sum, depending on the way the wealth is being generated. It's tiresome watching people continually repeat the incorrect mantra that wealth isn't a zero-sum game when quite often, it is.
50 years ago there was 'America', the 'Soviets' and 'Europe'. Everything else was a footnote.
What we've seen with China 'coming out of nowhere' in the last 25 years is about to happen 4x with the rest of the world.
America and Europe's share of global economy is falling fast, and it simply has to do with electricity, plumbing, democracy, knowledge and productivity gains in the rest of the world.
India is coming on a little slowly, but surely.
Pakistan is 180 Million people. Nigeria almost that - and they have oil.
Africa is a billion people.
There are a lot of Asians outside of China, India and Japan.
As they start to become connected to the global economy, relative power shift will happen.
I don't see the emergence of any new 'superpower' and America will likely remain the only 'superpower' in the classical sense, but it won't be as powerful as it is today - relatively speaking.
If you look at the growth of Japan after WW2 - a period of fast growth, then slowing down as it approaches parity with the west - this is what the underdeveloped world will look like, but a little slower.
Also - a very important point - a lot of real growth is not measured in the GDP.
For example, the value that is created by governments is measured simply in 'government spending'. But $1 of gov. spending hopefully creates more value than $1!
For example, if the US Gov spent $50B and created this amazing national public transport system that everyone used, and cost next to nothing - the 'economic surplus' would be massive, but the GDP would directly be down. Why? Because the only thing that would count towards the GDP would be the $50B spent by the gov, not the $Trillion in value derived from it. Obviously, there would be indirect business benefits ... point being - the GDP is not necessarily the best way to measure things for many obvious reasons.
Maybe. But the trend towards privatising military force could end up accelerating USA's slide down in terms of military power. If we are indeed moving back to the "normal" (historically speaking) "neo medieval" world were military force is generally mercenary and not national standing armies - coupled with the commodization of advanced military technology - the world could radically change quite quickly.
Maybe the USA won't be able to pay its contractors - and China and/or Russia can? Maybe China will restructure the PLA as the world's biggest military contractor?
I don't really think you are wrong - but it can be tricky to predict the future. Perhaps especially the sudden stumbles we seem to make every so often as a species back into new dark ages and decent into chaos.
+ This is a very marginal thing.
" If we are indeed moving back to the "normal" (historically speaking) "neo medieval" world were military force is generally mercenary and not national standing armies"
+ This is not happening. Don't worry about it.
Listen - war is too expensive. It is only economically advantageous when the parties are not interconnected.
Some American businesses can economically from a war in Iraq by getting big contracts ... but a war with any real nation would cause massive upheaval in markets.
The moment Brexit happened - it was a big shock to markets - and that was a small thing.
90% of people and businesses 'lose' in a big war, so it's very, very unlikely that China, Russia, USA get involved directly in a war - it's just too costly for everyone. USA is China's #1 customer.
The only 'rising military power' that will make a difference is China.
Everyone else - won't matter.
It's also very, very expensive to challenge the Americans in any way, even regionally, so the only actors that will do it are non-state entities, i.e. insurgents like Al Qeda etc..
The 'big shift' over the next 50 years is that 4 billion people who are not even on the radar today are going from $2 a day, to $50 a day in terms of GDP.
Don't forget that "the end of war" as proclaimed after world war one - because a new world war would be too costly, and too horrible for anyone to contemplate. Of course no one will start a war they think they will lose. You start wars you are "certain" you will win. And then they escalate. And escalate.
> The 'big shift' over the next 50 years is that 4 billion people who are not even on the radar today are going from $2 a day, to $50 a day in terms of GDP.
I absolutely agree that this is going to be the biggest change. With accompanying logistics, new (political and economical) battles over water rights and so on. If there's a new "private" war, I'm guessing it will start with a large contractor being hired by some regime to "calm down" "unreasonable unrest" over stealing natural resources and handing them over to corporations, like for example privatizing water (or as one can see in Niger, privatizing oil).
I certainly hope we won't see a third world war, but I'm also afraid of people that seem to think that large scale war is "unlikely". Nothing in history suggests that it is.
[ed: And "insurgents" are likely to always be proxy wars. The US created the modern resistance in Afghanistan to fight Sovjet power, and then end up fighting that same insurgency, now supported by Saudis, which are allies on paper.]
The fact that it remains to be seen is kind of the point. It is possible that it is at peak, and if it is true, then it is likely that historical data is not very useful in understanding market returns.
It assumes that the future will look like the past, even though there are some plausible reasons to think that it won't.
Some of those reasons would push you harder in the direction of investing in stocks (e.g. increasing automation, globalization) and some would push you in the opposite (e.g. declining gdp growth, rising inequality, political instability).
Anyway the point is much like some agriculture analogies you plop down a steel mill next to a metal shop specializing in tuyere construction and repair, and they both thrive. Take away either, and the other eventually disappears. Going back in history there is no spontaneous generation of either blast furnaces or tuyere metalworking shops separately. They always and only develop, grow, and survive together, simultaneously.
Now lets talk about another pair of technologies that can only thrive in the presence of each other... the capitalist stock market, and early industrialization. Unlike the tuyere example, for both of these, without the other, they can exist, barely, but only a thousandth the size in the long run if required to operate alone. You can kinda industrialize without a stock market, communist style, but it doesn't work nearly as well.
The USA is in a post industrial era. Therefore soon we'll be in a post stock market era. Stock trading will still exist, just maybe a thousandth the size, volume, and importance.
Even today the decline is evident. I'd estimate a century ago "everyone" in my family and maybe in the country worked for a stock market financed industrial company, or indirectly in that all their revenue came from stock market financed industrial companies. The value of the DJIA directly influenced if the railroad expanded and therefore promoted my g-grandfather. Today? Half the population does not work (young, old, sick, unemployable, etc), my wife works for the .gov so the market means nothing to her, my sister and I work at (different) megacorporations that are so large the market cannot handle them anymore (like our employers influence the market, not the market influences our employers LOL). Many of my friends work for non-profits or privately owned/financed firms. My dad's last day at his career position in a stock market financed company was in the early 80s, and it was mostly contracting at privately owned companies for the next 20 years. I've only worked at two companies financed by the stock market and I've never had a career and probably never will. I could do pretty well without the market.
That is not true at all of my family - they were all farmers until my parent's generation. To pull out some real statistics: in 1870, over 50% of Americans were farmers. A century ago it looks like about 30%.
once they are a money spigot they don't need the capital market.
when they are money burning they are too risky for what we consider acceptable for a stock listing (though biotech seems to be an exception for some odd reason)
there are no 'safe' way to deploy capital that returns 6%
The percentage of investors who lost their shirt in the Industrial Revolution dwarfs those who lost their shirt in the dot-com boom. It's just that everybody who went broke investing in a refinery or mining scheme that was just snake oil dropped out of the history books, and we only hear about the people who got fabulous wealthy.
not just HFT, buy algo shops like PDT and Renaissance Technologies being more and more frequent players
I hate this terminology. If the US has, in fact, "finished" developing, then the future of the S&P will be bleak. I don't think that's the case at all, though. I think development has just started and we'll see fantastic advances in bio-informatics, solar power, 3D printing and a number of other fields in the upcoming decades.
When I was a teenager, I pirated music. I seriously hope my children pirate gourmet cheeses and burritos as teenagers. I download apps that organize my notes. May they download the bio-app that lets them dunk from the free throw line.
If the US had a similar political climate the east coast would already have high speed rail from New York to Miami.
http://4.bp.blogspot.com/_LKZQT6pv_oU/TBqKqQaCcaI/AAAAAAAAA6...
http://www.mckinsey.com/industries/infrastructure/our-insigh...
I'm not seeing the end is nigh unemployment rate. But it will definitely get worse...
With the dropping off potential buyers you reduce the possibility for increased profit.
Sure you can just increase the margin ( and I think that is what we will see more ave more I future) but that growth is also limited.
New markets will emerge and make profits. But economics as a whole will shrink.
Most of S&P are global corporations. They're considered American simply by virtue of having headquarters in the US.
And that's despite disagreeing with Gordon fairly strongly in a number of other areas.
Vaclav Smil and Manfred Weissenbacher both have excellent books describing the impacts of technolgy, and especially energy, on history. I strongly suspect that's the most significant component.
Gordon's book is part of a larger series much of which addresses the question of why concerning the Industrial Revolution and the absolutely unprecedented growth of the past 250 years or so, much of that occurring only in the 20th century. It's hardly the only treatment of that phenomenon, but I do agree with Gordon, and others, that it's perhaps the most pressing question, still unanswered, of economics.
[1]: https://www.amazon.com/Fooled-Randomness-Hidden-Markets-Ince...
Give them a bunch of historical data
- find me the longest period that we would be flat/negative
- find the best time to invest
- find the optimal portfolio off stocks to hold over a given period.
I think I've said this before but I see too many people who think that they need to have a huge public repository of code to show off in an interview.
If you want to be a programmer at a hedge fund just having some very shallow analysis like the above would get a programmer to the top of the resume pile.
Now if you want to be a quant the bar is obviously much higher:)
The latter was the take home an old company used to give quants as a test. If you can answer the questions on teh practicum then you probably have enough math skills to start as a quant.
https://drive.google.com/folderview?id=0B1iikX5PwNx4d2dKQ3FT...
Not sure what technique they wanted you to use, but it was easy to work back from the desired outcome, keeping track of the current IOU balance and the bet that would leave you in the desired position. I assume the early questions illuminate the general way of doing this.
==== SPOILER ====
Create a 4 * 4 matrix BET_m,n and a 5 * 5 matrix IOU_m,n, where m and n are the number of wins for each team respectively, and each matrix encodes how much is bet and owed after that many wins.
Our initial constraints give IOU_0,0 = 0, as nothing is owed until a team wins a game. IOU_4,* = 100 and IOU_* ,4 = -100.
It's hard to see what BET_0,0 should be starting from the start, so instead lets work backwards.
If a team has 3 wins, and wins again, then the bet plus current IOU must equal 100 if it's my team winning, -100 if the other.
IOU_3,3 + BET_3,3 = IOU_4,3 = 100
IOU_3,3 - BET_3,3 = IOU_3,4 = -100
Thus BET_3,3 = 100 and IOU_3,3 = 0
Our matrices now look like
BET = [. . . .
. . . .
. . . .
. . . 100]
IOU = [0 . . . -100
. . . . -100
. . . . -100
. . . 0 -100
100 100 100 100 . ]
IOU_3,2 - BET_3,2 = 0
So BET_3,2 = 50 and IOU_3,2 = 50
By symmetry BET_2,3 = 50 and IOU_2,3 = -50
Working along the m=3 and n=3 edges we get
BET = [. . . 12.5
. . . 25
. . . 50
12.5 25 50 100 ]
IOU = [0 . . -87.5 -100
. . . -75 -100
. . . -50 -100
87.5 75 50 0 -100
100 100 100 100 . ]
IOU_m,n + BET_m,n = IOU_m+1,n
IOU_m,n - BET_m,n = IOU_m,n+1
Filling in through the middle
BET = [31.25 31.25 25 12.5
31.25 37.5 37.5 25
25 37.5 50 50
12.5 25 50 100 ]
IOU = [0 -31.25 -62.5 -87.5 -100
31.25 0 -37.5 -75 -100
62.5 37.5 0 -50 -100
87.5 75 50 0 -100
100 100 100 100 . ]The English translation of Arbeit macht frei? Really?
http://www.nytimes.com/interactive/2011/01/02/business/20110...
It would be helpful if it compared against the same visualization for other straightforward market investments, like bonds, or savings accounts / CDs. Those asset classes would be red (or pink for long-term bonds, perhaps) across the board. Stocks look great in comparison.
But picking a slightly more reasonable color scale would help.
Not sure if I'm reading it wrong, but the key shows <=0% as red, 0-3% as pink, 3-7% as biege.
IMO it would make more sense to show 0-3% real return — strictly above inflation — as beige and 3-7% real return as a shade of green.
You can see that there are quite a few vertical slices where you will always result in a positive return. It's just a matter of how long you are willing to hold your money, and for what kind of return. That's why I'm attracted to index funds for investing.
How do people feel about investing in the SP500 right now? I'm not too bullish considering the current peak and the US political future.
The difference is that this one factors in "taxes and fees".
In this chart, it says 1979-1999 is +8.2% per year.
Using the OP's data source, 1979-1999 would be 12.464% (using https://dqydj.com/sp-500-return-calculator/ which uses the same Schiller data set).
That's 4.2% per year obliterated by "taxes and fees". That seems excessive for "taxes and fees", given that it's buy-and-hold.
I don't know what to make of this discrepancy but I find it aggravating. Either Schiller's data has some strange assumptions built into it, or the OP's analysis draws improperly bullish conclusions from it, or the NYT chart is unreasonably bearish.
Either way, I still strongly believe people should not be generally expecting their investments to quadruple in 20 years. There's a whole investment industry that is based off of bad assumptions, and it's keeping people from investing in actually producing value for themselves and others.
What do you mean?
Leaving out compounding interest could massively affect the returns shown in the chart.
But somehow the regular guy is supposed to navigate his way through this jungle of conflicting, confusing or meaningless numbers. And considering the long time frames most people don't have much opportunity for leaning from mistakes and doing better. Once you realize that your strategy doesn't work you have already wasted many, many years and lots of money.
And for the lazy, this is a good resource: https://www.bogleheads.org/wiki/Lazy_portfolios
*(Actually, looks like it depends on your source: 48%[1] or 52%[2], so let's say "about half of people")
1: http://money.cnn.com/2015/04/10/investing/investing-52-perce...
2: http://www.gallup.com/poll/190883/half-americans-own-stocks-...
It astounds me that so many people think they can be great investors. It would be like me trying to build an ark with no experience in carpentry or ship-building. Really it just strikes me as a legal and socially acceptable way to gamble. Please recognize that this is a zero-sum game, and the other person taking your trade is likely a professional who spends their entire work week doing deep analysis.
Minor quibble. That is not accurate.
You see teenagers buying hotdogs with a credit card. Visa and Mastercard go public, you buy shares, it goes up, up, up.
There's no zero sum here and people can spot special values without deep analysis.
(Brexit nonwithstanding)
...actually that is a hole in my argument.
Okay: if you can find a cultural trend that you earnestly believe thatFinance people are out of touch with, then it makes sense to do arbitrage there.
There are, however, externalities that make it less costly for Visa to sell lower than the theoretical max. Happy investors are easier to manage, market momentum is strong, etc.
(But even if trading is zero-sum in a strict monetary sense, different risk preferences, desire to liquidate positions in order to buy something you value more, etc. mean that it's not zero-sum in a utility sense.)
Right now we are quite high in the cycle - 9 years from the last crisis, end of QE, slowing growth - so at least in my view, it's an asymmetric bet to wait and see. But what do I know.
Vanguard says you're wrong.
https://pressroom.vanguard.com/nonindexed/7.23.2012_Dollar-c...
Some point out some greater risk in ETFs because they can lend their securities : http://www.etf.com/etf-education-center/21031-understanding-...
http://www.ft.com/cms/s/0/3e0cc962-ec0c-11e4-b428-00144feab7...
As for it only "technically" being a mutual fund: consider that VFIAX predates VOO by 10 years. How does that square with VFIAX only "technically" being a mutual fund, when presumably it was a real, honest mutual fund in the years 2000-2010 (before VOO was introduced)
Thanks for the overview. I'd heard about the constant trading difference before (I've tended not to think about it, since I'm a buy-and-hold-for-years type). Do you have a sense of how much cost winds up being associated with broker commissions and/or the buy-ask spread? I hadn't been aware of the simpler capital gains situation (thus far, I've just blindly copied down whatever's summarized on the year-end tax statement they provide onto my IRS forms).
*: The exceptions tend to be new-ish funds which are less liquid and have purchase costs on the mutual fund side. I haven't seen more than one or two of these recently.
[1]: http://www.ft.com/cms/s/0/3e0cc962-ec0c-11e4-b428-00144feab7...
Understand the market, understand the product and technology well, and you can do significantly better than any wall street analyst. Don't rush into it, but do your research. Look at the numbers and the growth potential.
Is looking at the company numbers enough, or do you have to look at companies in detail?
Is domain knowledge enough, or do you need to look at corporate culture, people and business plans?
How fast do you need to be, in term of reacting to events?
My professional life now revolves around mining. I'm confident to know who to invest in and who not to.
My personal life centers around various hobbies - I'm confident I could choose a few companies in those spaces to invest in. Unfortunately, most of those are well performing private companies.
what happen?
This is very dangerous advice because it just ain't true. Under efficient markets, you can do equally well as "any wall street analyst"
2. Why would you assume you can't do better than an analyst, in your area of expertise? Someone who understands tech well will be able to make better tech investments, than, let's say, investments in mining. That seems pretty obvious to me. That doesn't means you'll always get it right, but it does increase chances significantly.
2. Honestly, the analysts got it wrong in their own area of expertise often enough that I don't think it makes sense to pretend they're oracles in comparison to anyone else.
I'm not saying it's not very hard to make money by trading. But be aware that you can't just assume efficient markets and have done with it.
I completely disagree with this statement and I've seen it (or a variation of it) many times over the years. You can have a win rate of 99%, but still lose money if the 1% losing trades/investments wipe out all your wins. The win rate isn't what people should be looking, but the profit expectancy. Other than that, I agree with what your are saying, particularly #2. I don't think the majority of people should be actively trading/investing, they don't have the time to build the expertise and will probably not invest the time in learning about their bias.
Sorry, but this is completely incorrect.
The approximate formula for success in investing or trading is "percentage right" * "average win profit" - "percentage wrong" * "average loss" = overall profit.
Many traders are correct only 20% of the time (I'm looking at you, stock options traders) but make fortunes because they understand this formula.
You can also lose a lot of money even if you are right 90% of the time because you fail to manage a big loss properly.
And there are also catastrophic losses, if you play it too risky, where you won't have enough to continue investing after a particular hard hit.
Investment houses don't start from the same place as an index fund. Their returns are penalized from the start due to the fee structure. So not only do they have to beat the market, they have to do it by a sizeable margin before the end user sees a profit advantage.
For a retail investor it is hard to justify not choosing an index fund.
It's basic expected value, magnify your wins and minimize your loss to what you know you can lose.
That is a free download of historical data that lacks failing, delisted companies of the past.
The S&P 500 constantly changes the stocks it holds. So if a stock falls out of favor, say Sears, its dropped from the index.
It's also important to Note that comparing the S&P 500 from 100 years ago to today is very naive as the methodology for what it holds has changed significantly over the years.
Comparing the returns of the S&P 500 from 1900 to now is kind of like comparing the statistics of a baseball player from 1900 and now in isolation and using that as the sole determination of which player was better.
Which makes me think: with index funds becoming more and more popular, should we see bigger and bigger crashes of stocks when they are removed from an index?
Shouldn't the index "return" thus diverge from the return of an actual index fund in practice given enough years?
You can use different indexes if you want to have smaller companies (the Russell 2000 is a good choice), but the whole point of the S&P is that it is made up of established firms. Perhaps lower reward, but also lower risk.
That's what I am taking issue with.
Memorable quote form the paper (quoted in turn from Samuelson):
> We only have one history of capitalism. Inferences based on a sample of one must never be accorded sure-thing interpretations. When a thirty-five-year-old lost 82% of his pension portfolio between 1929 and 1932, do you think it was fore-ordained in heaven that later it would come back and fructify to +400% by his retirement at sixty-five? How did 1932 Tsarist executives fare in their retirement years on the Left Bank of Paris?
That's good enough for me, I'll follow the oracle.
edit: I guess it depends on the detailed terms that they haven't disclosed, but educated guesses are fine
http://fortune.com/2016/05/11/warren-buffett-hedge-fund-bet/
Almost impossible for Warren to lose at this point.
Markets (the major players that skew the averages) are downstream of banks who use money the Fed's pay the interest on.
His gamble is that the elite would rather give the market unlimited welfare a la Japan to keep the signals of valid global demand alive.
The Fed will not allow a correction... mostly for political reasons.
If you picked a different 10 years (say, 199X-200X or 200X-201X), I suspect that Buffet wins for most values of X, but I have not checked.
He's actually betting against a portfolio of hedge funds going as far as to include fund of funds (typically a terrible bet). I assume he is only using US Equity hedge funds too?
I'd be interested to see the distribution of individual funds in his portfolio that beat the S&P vs those that didn't. In general though these numbers have huge survivor bias since numbers are self reporting and ignore dead funds.
It is also worth noting that the index went from 1400 to 900 over the course of 2008. So when he started the bet is clearly going to be relevant. You could of course repeat the experiment using every possible start date from, say, 2000 - though your portfolio of hedge funds will be hard to construct.
He is clearly winning, but it seems like an odd question to ask.
http://www.npr.org/sections/money/2016/03/04/469247400/episo...
And then it spurred the telegraph, and then the telephone, and then... :)
This cuts both ways of course: you can make money on favourable currency moves. But it's an important risk to be aware of before buying assets in a foreign currency.
If you spread your investments in many different currencies in pound terms you would have actually gained from this crisis.
Diversification also applies to currency
A US investor who bought foreign assets in 2014 and sold them today would have been hurt by the 25% USD/EUR rally in 2014-2015. The dollar rose against almost all other currencies too (besides, for example the yen).
I don't normally change the holdings or attempt active investing, but it just seemed like a very asymmetric bet - nearly 50/50 polls, very large potential downside if not diversifying outside the UK/sterling.
1) People don't get a lump sum at the beginning of their investment history
2) Ah, but you say, dollar-cost-averaging. The problem there is that people get more money to invest when times are good, and less when times are bad.
3) As a result, even when buying in responsibly, people are buying more when the market is high, and less when the market is low.
It distorts performance. Plus, betting on having average-or-better performance is a risky bet. Don't count on more than 2.5% / year lifetime.
Fast forward to age 50, when you're making 200K (this is 28 years from now, so inflation and pay raises bump you very high), you're putting in the same %, but that equates to $18K/year.
So even with dollar cost averaging, the majority of your money is invested in a small, 10 year time window when you are at peak earnings.
At age 22, you make 25k and get 0% matching, and can afford 0 to put into your still-hypothetical retirement fund.
At age 50, if you're the median person, you make 50k. And you need that money to put your kid through college.
It's also a strong reason to maintain liquidity and keep your nut (recurring expenses) low.
The dynamic turns up in a number of other areas. Natural resources markets: extractors are often pressed to provide more supply when prices fall because they've a large fixed cost structure, often loans, and the resource is all they have to sell. Monopolisation or cartelisation, or government-regulated stockpiles, are a common response (Standard Oil, the As-Is agreement, the TRO/Dept. of Interior quota program, Naval / Strategic oil reserve -- see also Tea Pot Dome scandal, Harbord list, OPEC). Farmers will double down in drought, see Ken Burns and Tim Egan on the Dust Bowl. Migrant or refugee labour (Dust Bowl and others).
Economic agents -- persons, groups, firms -- face both short-term essential and long-term cost structures. They can operate, for a time, below long-term costs, but only at the cost of degrading their long-term capabilities. They'll do so because if they fail to meet short-term needs, they die.
It's a tremendous market distortion. Perhaps one that drives the entire modern economy.
Except human nature is the same, economics is the same.
From my point of view, money in your 20s, 30s have 3x or 4x more value than when you are 50. You can go skydiving, scuba diving... When you are 60 your options to enjoy that money are much more limited. I think that should be factor in financial decisions that it is often overlooked
> After 20 years, you're almost guaranteed to sell high.
Not if you factor in opportunity cost. If I invest $100K and after 20 years I sell at $110K, which works out to a 0.5% APR, I wouldn't consider that selling high.
Given a normal person's time horizon, the difference between "did I start investing in 2007 or in 2009" is significant.
You have to make some really poor decisions about where you live to be spending every dollar on rent and student loans assuming you have a job that does not pay minimum wage.
Making investing a priority can be hard, but it is far from impossible at that age. Even a small amount early on will far out weigh a much larger amount invested later. It is important to communicate that instead of telling people they probably can't do it.
Experiment A: you flip a coin 1000 times. You estimate the probability that the coin flips heads, and use this to estimate the odds of flipping 10 heads in a row.
Experiment B: you flip a coin 10 times. You repeat that experiment 100 times. You use the results of that experiment to estimate the odds of flipping 100 heads in a row (by looking at how many times it occurred, and dividing by 100).
Assuming reasonable results and a fair coin, you'll conclude from experiment A that the probability of a heads flip is around 50%, and that the odds of getting 10 heads in a row are (1/2)^10.
In experiment B, ~90% of the time you'll conclude that it's impossible to flip 10 heads in a row, and ~10% of the time (in the cases where you did flip 10 heads in a row at least once) you'll overestimate the likelihood of doing it again by a factor of 10 (at 1%, instead of the true value, <0.1%).
So when you only look at annual returns, you're effectively looking at an aggregate of 365 daily returns (or 365*6.5 hourly returns).
Something to think about is the market originally existed to raise capital for massive industrial projects like transcontinental railroads and Ma Bell and steel mills and factories in general.
That's methodically been destroyed and soon will be as economically relevant as selling farm tractors is today.
True its diversified out into providing capital to set up financialization schemes, holding companies, stuff like that. But in the very long run I'm not seeing a purpose in having a stock market. That would tend to make it go away.
Take America 2016 and just turn all the dials up to 20 and call predictions for 2036. The last industrial employer closed years ago so no need to raise money for factories full of workers. The last privately funded construction project was built long ago and all construction not just sports stadiums and corporate HQs are completely government funded, no need for stock market funds if all the money comes from taxpayers. Income inequality has accelerated to the point of there no longer being a consumer economy, no need to finance consumerism like retail stores or car loans by selling stock. That also means no advertising because there's almost no value left to extract once all the blood has been squeezed from the stone, which in a country where no one can afford medical care, higher ed, or housing means they don't need to sell stock because they've crashed and no longer exist for all practical purposes. Of course this sounds all rather negative but theres plenty of good news. I'll continue to front money to my local farmers for my vegetable CSA and my occasionally "half a cow" purchase... although none of that requires stocks. Now that software has eaten the world and no computers cost more than a $5 Raspberry Pi, I can work a startup at my local makerspace with practically no money and certainly no need to raise money by selling stock, capitalist industrialism was so 19th century, I don't need to sell $25K of stock to buy a Sun SunOS minicomputer to serve DNS in a world of cloud computing and $5 raspberry pis. There's no need to invest 401K funds because everyone except the hyper wealthy is dirt poor, so no financial market demand.
Yes yes the interval from 1850 to 2000 or so was an era of needing massive investment to build industrial infrastructure. And we need great piles of cash in say 2050 to build... what? Nothing, would be my guess. So the marketplace to raise great piles of cash will go away, more or less.
The future being unevenly distributed, you should be able to find a country today thats de-industrialized (or never industrialized to begin with) and has wide enough income inequality that the population has mostly gone back to barter (probably computer / smart phone assisted agent bartering, but no currency anyway). One where most of the population works non traditional jobs, more like subsistence farmers or subsistence economy in general. How about subsistence farming in Columbia, how healthy is the fraction of the Columbian stock market that focuses on or works closely with subsistence farmers? Oh there isn't one? Oh. Well that's the future of the NYSE given recent trends.
Robinhood seems like an OK way to keep a free portfolio of ETFs approximating a Vanguard all-in-one fund.
My super-unscientific portfolio is loosely based on Vanguard's LifeStrategy Growth & Moderate Growth funds with a sliver of MGK that seemed to both boost returns and moderate declines.
A $5k portfolio would be 6 MGK (10%), 19 VTI (40%), 23 VXUS (20%), 12 BND (20%), 9 BNDX (10%).
From what I can tell, you can hold this portfolio in Robinhood for free. Shouldn't need to re-balance more than once per year or so.
https://personal.vanguard.com/us/funds/snapshot?FundIntExt=I...
https://personal.vanguard.com/us/funds/snapshot?FundIntExt=I...
Pay off your credit cards and max out your 401k/IRA first.
So the real question is, why not?
That's not how commissions work. They are per order, not per share.
Thanks, this is the sort of answer I was looking for. I just added a brokerage account to my Vanguard 401k account, and I will use that for ETFs from now on.
Seems their game is to trick people into depositing money and then trap their money there if the person cares to leave, because that means RH can't front-run the person's trades anymore.
And this by the way is only one of their numerous issues.
No well informed person could conscionably recommend RH. In fact I wouldn't be too surprised if they get sued or even some sort of criminal charges.
What did you think Instant was and why did you want it disabled?
What's the scam?
1. How does RobinHood make money?
2. Why are the bid-ask spreads so much greater on their platform versus others?
3. Why doesn't the application show you how much buying power is coming from the Instant account's margin account versus your own cash?
4. What will the SEC think of a company that misleads novice investor-consumers into a margin account that is branded merely as instant access to funds (even though the terms you have to accept state it's a margin account) and then obscures the actual amount of margin buying power to be used in the app's UI? It's absolutely in RobinHood's business model's financial interest to keep user's money in said margin accounts. That misaligns the company's incentives with the goals of the customers.
you could easily be a financial advisor
The difficulty to be a holder is to spend less on the present to get return in a future. Human being is definitely not good on this.
What about Dollar Cost Averaging (DCA) instead of Lump Sum Investing (LSI)?
This one is going to be a little more difficult. I've included the original code and it's open-source, so if you want to play with the numbers, you can try to do this yourself. However, there are a couple points I'd like to keep in mind:
•You're working with a "cash multiplier" as the main result. You'd be trading in a unitless scale for a scale with units since you'll need to specify a base value. Perhaps the act of buying a single share of SP500 per year might help with keeping the scale nondimensional?
•There's inflation data in there, but at some point you're going to have to account for that if you're using dollars as a scale. How does one compare investing a dollar in 1902 vs. 2002?
•DCA will probably cause some scaling issues. You'll need to accurately tune your algorithm to reflect an equivalent investment under the LSI algorithm I provide.
My prediction is that DCA will "thin out" the plot and bring a lot more values closer to the average. This makes investing a bit safer, but at the cost of slower gains.
The more interesting problem is to attempt to train an investment curve based on some normalized metric for market value, which would be superior to both the lump-sum and DCA strats. What he's not showing you is that gyrations in the market have a tremendous impact on the long-run return outlook and this is extremely detrimental to the lump-sum strategy in particular. DCA is slightly better but still not perfect. You therefore want to pool cash over certain periods of time and invest more, relatively speaking, during periods when the market is trending lower. This is a tough model to construct because there are certain subjective features (how to normalize market value properly) and more complicated variables you have to account for like a negative ROI on holding cash.
All that said, I actually built a model fitting this description a while back and it works swimmingly.
What's more indicative of reality is the relatively constant vertical distribution, in a log scale, across any time range up to about 90 years, when the lack of data starts to play a significant role. So, in relative terms, uncertainty remains fairly constant over time. In absolute terms it actually increases. In a sense risk still does decrease over long time horizons, as the chance of earning over any given amount does increase with time; contrary to common belief though, the distribution of possible returns (another possible definition of risk) actually increases with time - or remains roughly constant on a log scale, as mentioned.
(You can find a great many opinions surrounding this by googling "time diversification".)
Fees can kill your returns
There are many low-fee or no-fee options
I look forward to seeing where the project will be heading next. In fact it is inspiring me to do similar analyses.
Over 30 years, that's the difference between 5.74x and 5.48x your starting capital. Noticeable, but insignificant compared to the taxes you'll pay.
This is even better :)
"Give me control of a nation's money supply, and I care not who makes its laws." --Rothschild, 1744
Of course, you won't be able to enjoy that money in prison.
1) Last 100 years has ZERO chance to be the same as the next 100 years.
2) The SP 500 adds and subtracts companies as they grow, fold and go bankrupt. So the only way this would be maybe work is if you invested in the ETF.
3) Macro-economic events are notoriously hard to predict and anticipate, and your returns are very much tied to how you time your entry point. If you invested in the beginning of 2008, you would have a 33% return, same for a 2001 entry. In the beginning of 2009, around 100%.
Or a mid 2013 entry would get you a 17% return for three years, around 5% a year.
And if you invested in mid 2014, you haven't seen ANY return, 0%.
The point is that entry points are insanely important. Getting 33% return for 15 years is horrible, especially given the opportunity costs.
This is the problem that you get when Warren Buffet fools you into "buy and hold". Yes, it has worked for him, but he is an insanely great investor. You can't replicate his returns. You can't even sniff his returns.
So what's the answer? I don't know, do what you want with your money, just don't listen to anyone who thinks they know the answer.
"2) The SP 500 adds and subtracts companies as they grow, fold and go bankrupt. So the only way this would be maybe work is if you invested in the ETF."
First of all, it's not the ETF, it's an ETF. And this isn't exactly news - this is the basic method of investing always recommended (alternatively, an index fund, which is similar).
"3) Macro-economic events are notoriously hard to predict and anticipate, and your returns are very much tied to how you time your entry point. If you invested in the beginning of 2008, you would have a 33% return, same for a 2001 entry. In the beginning of 2009, around 100%."
Well, yes, but this is kind of the point of the article. It shows what is the chance of coming out ahead out of any 20 year period in the last 100 years.
"This is the problem that you get when Warren Buffet fools you into "buy and hold". Yes, it has worked for him, but he is an insanely great investor. You can't replicate his returns. You can't even sniff his returns."
Warren Buffet doesn't "buy and hold", but he recommends it for most people exactly because it's relatively easy, and gives you very good returns.