In Investing, It’s When You Start and When You Finish (2011) | Hacker News Reader

In Investing, It’s When You Start and When You Finish (2011)

nytimes.com

181 pointsTomte149 comments

To reiterate my comment another time this was posted in a comment thread:

I feel this graphic, while informative and delightful, is insidious in its choice of scale and its lack of comparisons.

On scale, it colors +3% to +7% real returns as "neutral". This makes it seem like the stock market is sometimes good sometimes bad but overall it may as well be just okay. I feel that 0% nominal returns, or even 0% real returns, is more honest as a neutral anchor, and even with the latter it would need some comparisons against other asset classes to paint an accurate picture.

On comparisons, it does a disservice to its readers by not adding a tab showing bond yields and a tab showing cash/treasury yields (which would be dark red across the board except light red around 1930).

These slights in the graphic unfairly make the stock market look unfavorable and makes the suboptimal strategy of keeping your money out of the market seem much more favorable than it is.

Adding a specific example, the "worst 20 years" is 1961 to 1981 with a BIG RED -2.0% a year, as if someone loses money and in retrospect would have been better stowing cash away under one's mattress. According to the BLS[1], US inflation was 5.7% over that period, so the mattress strategy yields at best -5.7% in real returns, not at all better than investing in the S&P.

[1] - http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=1&year1=1961&ye...: $1 in 1961 was $3.04 in 1981, 3.04^(1/20) = 1.057

These returns are before taxes. There is no inflation discount on taxes so your real after tax returns can be negative with a 1% nominal ROI.

Further people don't really invest all their money in year X, and then take it all out in year Y. Cost dollar averaging helps returns and needing to take money out to live off of in down years hurts returns.

Finally the baseline is not the mattress strategy, it's spending all your money now and investing nothing.

I'm pretty sure I replied to you last time ;) One important aspect of looking at returns is comparing different strategies, but another one is in realistic planning. There's a lot of literature and marketing out there touting, in my view, grossly unrealistic numbers like 7-8% annualized compound returns as a reasonable expectation for sticking your money in an index fun on the S&P. Considering the huge differences in the effect of small changes to the annualized returns, it's important people have a realistic idea of the volatility in that expected number when they allocate the amount of money they save for the kind of retirement they want.

This graphic is awesome primarily because it shows that it is not correct to assume that volatility in the equity markets is averaged out completely during a timespan that is comparable to the average savings portion of a career.

edit: oops, meant to reply to GP

Thank you for the reply again :). I saw your comment previously and I think you make a great point. As much as I criticize the chart for being unfairly pessimistic about equity returns, there is far too much literature suggesting you can get 7-8% real returns by parking your money in X, especially in the <20 year time frame for stocks. In comparison this chart is a good factual dose.

My concern is, that while this comparison is useful for people further along in their research trying to understand the volatility of the stock market, this chart has a number of misleading (IMO) traits that can dangerously/unfairly steer people who are newer to managing their own money away from index funds altogether.

I would hope that people see this chart, my comment, yours, and FabHK's excellent comparison to bond yields. But if you have limited attention and are getting started, I would hate for the original link to be the only thing you see.

Speaking for experience with family and friends, too many good people scared by charts like this bought gold in 2011 or trusted mutual fund managers to buy into funds with 4% front-end loads and 2% AUM fees.

It's funny because I agree with all those statements and add "people will listen to Jeff Siegel and just jam their money into index funds and close their eyes until its time to retire". So they lose coming and going (but lose less relying on index funds than buying gold funds).

Personally I think actively managing your money is the better solution, but the active desire not to manage money from so many people (even otherwise active and engaged people like the HN crowd) has led me to being in favor of a stronger govt-backed pension system rather than tax-deferred accounts that hurt our tax base and are a windfall for trustees.

> Personally I think actively managing your money is the better solution...

To what degree do you believe people should actively manage their money? Are you advocating that people should be more active in choosing their distribution of assets across risk:reward categories, or are you advocating for more active trading?

I think the short answer to your question is "both". You need a portfolio with diversified product risk and diversified strategies. You don't need to be a quant to make a basic stab at this with the typical retail portfolio size, there are tons of tools for free on the internet to do this kind of thing. Most people who know enough to not be in managed funds still have no idea how to have anything but basically a 100% long equity market portfolio (I'm intentionally grouping together mostly meaningless 'diversification' between highly correlated segments like midcap/largecap/nasdaq/dow) except to make it long bonds. So I think there's basic product and strategy knowhow to organizing and maintaining a portfolio.

The reason I said both is because of the 'maintaining' part. Without some level of activity, its effectively impossible to be engaged with the market enough to take advantage of opportunities and manage your portfolio to keep enough diversification and reduce the internal correlations in your holdings/strategies.

It might sound complicated but it can be learned and it isn't rocket science, and there is a lot of great technology to assist anyone, not just software devs. Managing your life savings is a better investment of time than many other pursuits, in my view.

Any examples of less correlated assets, and tech to assist, that you could share? How would you go about learning this stuff?

Sure, the guys at tastytrade.com put a ton of effort into educating people and providing a platform (dough.com) that provides this information. I think it has some organizational issues, but my way to start would be to start with the 'Where Do I Start' series they have.

In short, that site largely revolves around the fundamental premises of a random-walk view of prices, and using the time-decay of selling options to reduce the cost basis of holdings over time. There's a lot of treatment and research on correlation of different assets (equities, different kinds of commodities, currencies). My advice if you follow this is to start small and stay actively engaged without getting over-confident at early success. There is a lot of getting used to the mechanics and learning the products so that you can make it a manageable part of your life, time-wise. Also you need to make sure you properly understand the relevant notional values you're dealing with so you can do proper sizing.

BTW quick answer to your first question, here's a sample basket of lesser-correlated assets that the typical index funds that all boil down to being long the market. One of the cores of having a random-walk view of things is that the choice of direction (long/short) is less important than the strategy & cost basis reduction (all of these have liquid option markets):

Long S&P (/ES or SPY) Long Gold (/GC or GLD) Short Bonds (/ZB or TLT) Short WTI Oil (/CL or USO) Long Euro/USD (/6E or FXE)

Thanks! I'm not sure how shorting bonds/oil is like being long the market? I've always been under the impression that going long had an upward bias, and buying options had a downward bias (but maybe selling them gives some upward bias), so that playing with options was a bit like playing at a casino, where the odds are biased in the favor of the house.

I'm not saying shorting bonds/oil is like being long the market. I just picked a set of underlying assets that are much less correlated than e.g. S&P & Nasdaq. The directional choice (long/short) is really a choice of the investor. Correlations between products are not stable over time, so picking one vs the other is similar to a price bet (i.e. normally distributed). The main point is that the underlying assets are not highly correlated, and that they have liquid derivatives markets that can be used to reduce cost basis.

You may or may not make money on your directional choices, but the core strategy is to be short option premium to make your expected value positive, and to have low internal correlation amongst your assets to reduce volatility in your portfolio.

I'm not 100% sure I understand what you're trying to say re: upward bias/downward bias. However, buying options do have a negative expected value so I agree about that. Selling options is the strategy, and conceptually is similar to selling insurance. Limited profitability, positive expected value. Just like an insurance company, you keep your risk diversified to reduce volatility and keep positions small enough to prevent busting out during drawdowns.

I'm not suggesting buying options (except as part of a spread)

Ah ok, I see what you mean. Yeah, I meant expected value with the bias parts.

Thanks for the explanations!

Sounds good in principle but how well does advice like this scale? Similar problem to Waze - side streets are great when you're the only one taking them, but once everyone does your advantage is gone. It's hard to expect a large population of amateur investors with no edge to outperform the market. In the general case, what's the marginal return on time and effort spent actively managing your money vs dumping it in a vanguard 50 and learning a different hobby?

That's possible, but it isn't currently the case. At a minimum, having a long vanguard 500 position has a roughly 50% + positive drift - fees chance of success. Part of the long vanguard 500 price bakes in the unlimited theoretical upside that comes along with it. Selling option contracts against that long position to give up that upside beyond a certain price reduces your cost basis and pushes your position's success rate over 50%. Repeated over many events creates a net positive expected value.

Even if there was no edge in the market, as in your premise, it's still the case that the upside of a long S&P 500 equity position is unlimited, and the upside of a long S&P 500 equity position with an option sold against it is limited, therefore would be priced to have a superior chance of success relatively speaking. More market participants would improve the price accuracy of risk, it wouldn't reduce the price of risk to zero.

As for whether its worth it, I think the aggregate effect is significant and, of course, is subject to the benefits of compounded returns, so it doesn't take much to severely outperform your other prospects in the long term. It's up to each of us to decide if its worth learning.

edit: typo

it sounds like you're basically advocating something like an s&p 500 buy-write index investment instead of just an s&p index investment, right? basically selling covered calls on your index investment.

I agree with your premise, and make a pleasant bit of side-income selling covered calls on individual stocks that I own, but it seems like the buy-write indices don't actually fare well, or at least $BXM doesn't. Way worse than I would have expected actually...any idea why?

If the strategy worked, that would mean that calls were overpriced. Why would that be? Why wouldn't their price reflect their value?

Since indexes by themselves have such low overhead costs, more complex strategies have difficulty generating superior returns.

that's a good point -- i suspect the s&p 500 receives so much attention in comparison to any particular individual stock that there is very probably little change to fish out of its couch cushions

(replying to durkie)

I don't know about every buy-write index investments, but BXM specifically is done with essentially ATM (technically the very first strike OTM I believe) calls against the long position, then held to expiration and cash settled. In a long bull market like the present day, this approach will always underperform the market while having reduced volatility. It should overperform the market in down or sideways markets. Also, volatility induces drag so in a compounded return, all else being equal, lower volatility will yield higher returns.

Diversifying amongst uncorrelated products is an important missing feature to this strategy for the purposes of reducing volatility. If only considering writing covered calls/puts, I'd personally prefer to reduce volatility through diversification, and sell further OTM options to reduce basis so I keep more of the directional risk in each individual position and have lower transactional costs.

Also, BMX holds contracts to expiration rather than benefit from cyclicality in price and implied volatility by closing/rolling options early when they move in your favor or scaling into positions during volatility expansions.

The average person likely doesn't have the time, energy or interest to go beyond the absolute basics of investing which is why simplified advice such as that on Bogleheads is popular.

For those wanting to go a step beyond but still lacking time to go deep, where would you recommend starting education wise? Any links or a syllabus with links would be super useful.

True. Bond yields would be super useful. In 1961, 10yr US treasury yields were 3.84%, and in 1971 they were 6.24%, so you'd have made some 5% nominally by rolling (I don't have 20yr yields at hand), or -0.7% in real terms, beating equity handily.

So, for that period, treasuries > shares > cash.

HOWEVER, I think the chart is not so useful (or intended) as a decision aid for asset allocation (equity/debt/...), but quite good to disabuse people of that notion that "over the long term, you can't lose with equities", or the idea that you can pretty much rely on a 6% real return on your savings.

For some charts that _are_ useful aids to choosing an asset allocation, check out this guy's site:

https://portfoliocharts.com/

Very cool site, thanks!

You're missing that there are other investment options.

My college expenses were largely paid for with US Savings Bonds which paid between 4-9%. I cashed in the last one, which ceased paying 9% interest in 2011. My ING Direct 5%, 10-year CD matured last year.

The problem is is with this weird never-land world where we're printing money with no inflation, it's difficult to make money anywhere. My son's 529 plan is in a basket of volatile stock and bond funds. I'll probably make a similar return to my dad's savings bond portfolio, but at substantially higher risk.

> My son's 529 plan is in a basket of volatile stock and bond funds.

Depending on the age of your son, you may really want to consider investing in more stable assets. 20 years is a typically considered a minimum time-horizon for being heavily-weighted in stocks due to their volatility. If your son is older than 5, preservation of the earnings you've already made should start to become a significantly higher priority than high returns.

I absolutely will. He just turned 4. Thanks for the tip!

That's true iff the 529 plan money is "required" for college. If you take instead the view that the 529 plan is just one type of asset that your child has, that you are optimizing for lifetime returns, and that attending vs not attending college is not changed by the 529 returns, then you could take the view that the 529 funds are just as subject to optimal asset allocation as any IRA or brokerage investments the child might have.

Though my kids are 5 and 7, I plan to invest on their behalf in 529, UTMA, and other accounts with their anticipated lifespan as the controlling factor, not which moment I expect to need the funds (because it is overwhelmingly likely that there will be other funds available if needed).

That's not a bad idea...for someone with substantial assets.

Also, it does not seem to be an accident that they have chosen the range 3% to 7%. The historic average excess return of stocks vs. government bonds is 6.5%. If their range was 2% to 6%, the graphic might look very different.

It's interesting to note that at the beginning of the best periods to invest (the big green regions on the graph, like 1942-1960s or 1980s-2000), the stock market was often not just low in terms of broad valuation. It was just "empty". It had typically gone through many years of very little participation, little activity and low liquidity.

E.g. in 1980 the (Belgian) stock market was pretty much comatose. The typical stock owners were wealthy families, often holding their family fortune as a large stake in a single company. To most non-financial people in 1980, owning public common stock would have been something from a bygone era. They didn't consider it an option.

Rather, people in 1980 were standing in line to buy gold coins. People then feared that Volcker's dramatic rate hikes would cause severe problems. When the stock market sprang to life in early and mid 80s, back offices were often not able to keep pace and doing transactions could be cumbersome.

Compare this with 2016, where central bankers are walking on egg shells to hike rates with as little as 0.25%. Stocks and bonds are more expensive than ever. Yet almost everybody I know has a trading account. Regular people can trade advanced derivatives with minimal hassle. Every time I visit a bank, I see desks and booths filled with people getting talked into investing their savings into various kinds of "high" yielding constructions. Because "TINA".

Feels to me like the worst time to invest. 36 years of buy-the-dip reinforcement learning. But then again I've felt like this for years.

TINA??

TINA -- "There is no alternative". Many people in 2016 are being talked into stocks and bonds on the conviction that central bankers give them no other choice.

Or on its corollary, that central bankers are committed (and are capable) to keep the prices of stocks and bonds elevated to fight global deflation.

Well? What's a wiser choice? I know nothing about investing and only started making $ a few months ago so I'm curious what the alternatives are. Just put it in ETF's, rebalance yearly, and wait 20 years?

Keep your $ and wait. They won't go up but they won't go down. And when everything else goes down, you invest. (Of course this strategy is good only if everything is overvalued and goes down to fairly valued eventually.)

how do you know the bottom of "down"? this is essentially timing the market. good if you are nostradamus i guess. not trying to be a dick here but am looking for average joe plumber advice here.

A wise professor once told me "once the last stalwart hold out has bought into the market the end is near". Once you're to the point where everyone is seemingly in the market and people that shouldn't be are in, too, you're probably in for a swing downward. The Feds aversion to raising rates is really telling.

You don't have to wait until the bottom, but it's obviously better to buy assets when they are "cheap" rather than "expensive".

Valuation and long-term future returns seem indeed related historically https://www.oppenheimerfunds.com/private-client-groups/artic...

For a more detailed treatment: https://personal.vanguard.com/pdf/s338.pdf

Of course this kind of arguments are not bullet-proof, see for example: http://www.philosophicaleconomics.com/2014/06/critique/

And one could have missed the last years of bull market applying these arguments already in 2013 (it doesn't mean that the conclusion was wrong with the 2023 horizon, though).

Anyway, ignoring valuation completely doesn't seem the right thing to do and people try to forecast returns to make asset allocation decisions: https://www.researchaffiliates.com/en_us/asset-allocation.ht...

I wouldn't call that market timing.

Hold on, let me just grab my stopwatch and time the market.

You're right. TINA.

What if "they won't go down" is untrue? Asking because my $ are GBP..

1 GBP = 1 GBP as far as I can tell... Prices of many other assets in GBP are going up, that's true. It's the movement of the other assets that is going against you.

There are always inflation adjusted treasury bonds. There are also non stock based investment options, though harder to do.

The inflation-adjusted yield on those bonds is currently near 0%, and actually negative for short durations.

Isn't that the point? Risk=0 and all.

> Isn't that the point? Risk=0 and all.

Well, the short-term real returns are negative, and the long-term real returns will also be negative if the Fed ever raises interest rates in the next few decades. There is also good evidence that the official inflation rate is being artificially suppressed by the government, which means real returns are significantly lower across the board.

So if you're holding this up as a decent alternative to buying equities, I think it falls pretty flat.

I think there is no good evidence that the official inflation rate is being artificially suppressed by "the government".

Krugman: "As it happened, there was a very easy answer to the inflation truthers: quite aside from the absurdity of claiming a conspiracy at the BLS, we had independent estimates such as the Billion Prices Index that closely matched official data."

http://krugman.blogs.nytimes.com/2016/10/17/distrust-of-data...

Have you read this page? http://www.shadowstats.com/article/no-438-public-comment-on-...

Have you read this page? https://azizonomics.com/2013/06/01/the-trouble-with-shadowst...

Nope, thanks for the link.

Well it looks to me like 1980 is a mirror of 201x.

Low valuations vs super high valuations. Brash and hawkish central bankers vs anxious and dovish central bankers. 20% vs negative yields. Nobody even considering financial investments vs E-trade babies. Bruce Springsteen vs 20-something hedgies. Lowered debt (because of 60s and 70s inflation) vs record debt. Fear of inflation vs pining for inflation.

Why not follow the analogy? In 1980 people were lining up for gold when they should have been buying stocks and paper. Why not put 5% of your savings in gold? Like coins or GLD or something.

I haven't the faintest idea what your comment means and by the time I understand all this finance shit to even put together a comment like you did, I'll have given up all my hobbies and free time along with my job.

Fuck I hate finance so much. Googling for like a year and I still haven't the faintest clue what to actually do with my money.

Just going to keep it all in cash and call it a fucking day.

I just asssume they're no better than listening to "Mad Money" once they throw terms like doves and bulls around. I'd suggest you read actual books on personal finance and investment. For market stuff, 1929 the great crash by Galbraith would probably work as a crash course. Sorry for the pun.

Edit- by "no better" I mean if I can get 80-100% of your content from a common source then I'm better sticking with the common source.

> I'd suggest you read actual books on personal finance and investment.

Oh boy have I ever. And not a word was retained. Total gibberish. No idea how I can code but not understand finance.

Honestly, I don't have the time to 'get into' finance beyond reading up a couple hours a week. Just need a simple guide, my only goal is to leave my money somewhere for 20 years and not touch it while it grows so I can make $20k/year off my investments eventually. Not looking to day trade or do any of that. Been looking at Canadian Couch Potato (I'm in Canada) and Mr Money Moustache.

I don't have any lofty aspirations. I only want this apartment to be paid off for free every month, at which point I'll have the freedom to wake up every day and do whatever I want.

Check out real estate investment trusts. I think you may get your residual that way.

Will do, thanks. RE: Housing - I've always had a gut feeling that tying your money into an asset like that is a terrible idea because of the infinite number of potential money sucking risks along the way. It seems like something you'd 'get rich' off of on paper, but when you try to sell for that price you'll find nobody is buying. Don't want to end up in that position and again, that's just a gut feeling, didn't really read up on it.

REITs are traded on the market, (pretty much) just like a stock. So you don't have to worry about liquidity being too much of a problem. One example of a REIT is [1].

However, if you really just want to park money for 20 years, you probably want a target year fund like [2] which will have higher risk now (stocks, REITs, etc), and rebalance to lower risk (Bonds) as it gets closer to 2040. It's literally the definition of set it and forget it.

[1] https://personal.vanguard.com/us/funds/snapshot?FundId=0123&...

[2] https://personal.vanguard.com/us/funds/snapshot?FundId=0696&...

edit: I should add, I'm not your financial advisor, and I don't have a fiduciary duty. You should consult with a financial advisor (who has a fiduciary duty) before making any decisions about investments. However, target year funds are frequently (one of) the best decisions for many people.

REITs: -are publicly owned on the stock market -have a legal obligation to pay out 90% of their operating profit through dividends -can own/operate myriad forms of real estate assets, but I'd suggest sticking with REITs that actually own real estate and not mortgages.

That's like, just my .02 though.

I'm also in Canada and I follow the passive investing Couch Potato approach which I've converted to pseudo code here - https://news.ycombinator.com/item?id=11528787.

That said if investing doesn't interest you just use a Robo advisor like Wealth Simple (Toronto based). You will pay maybe 0.2% more in fees but your performance will be the same as the couch potato approach, and you'll never need to think about investing.

Buy VTSAX (or any other broad-based, low-fee, 100% stock mutual fund) and call it a day. Fees will eat your lunch far more than you think. Even a difference of 20 basis points (0.2% or 0.002) matters, IMO. Don't pay a fee unless you're 100% sure you're getting more than the fee in value. That's why I love Vanguard (no connection, other than satisfied customer). When you get 5 or 7 years away from needing (not just wanting) the money, then start to scale into REIT or fixed-income strategies to reduce your risk exposure. While you're more than 10 years away from needing it, I think you want to be full risk-on for stocks.

Then, come back in 20 years and upvote this. :)

Just invest in a "target 20XX" index fund if you're that unwilling to learn more, IMO.

Take 1/2 your money and dump it into a lowest cost index fund you can find. Ignore it for 40 years. Do whatever you want with the other half.

And really what to do with the other half is what most of investing is about. If you have a lot of money then many people try and beat the market, which generally means they lose it all. Others hedge for bad times, which is a good idea if your wealthy and care about downsides more than upsides.

However, if you are like most people you can invest in other things. Save for unemployment, pay off your debt, pay for education, start a company, buy a house, buy solar panels, or buy a Prius etc. Chances are there are non 'investment' options that are better than the stock market after taxes, but it really depends on you and what you want to do.

pay off your debt: none

pay for education: none

start a company: definitely not

buy a house: nope

buy solar panels: nowhere to put them

I literally have nowhere to 'put' my money except instruments. I already have all the instruments I need. Just finished selling off a good 80% of my possessions as well. I've hit my limit for 'desires'. My only goal now is to make that $20k/year off investments. So you say put half in there and sit on it, but I don't actually have anything to do with the other half.

Getting, ~20k/year for a long time takes something like 500+k with more money being safer. I am going to assume you want to do this to retire early. So, my advice is this, stick with the 50% long term investment and ignore this money. It does not exist until your 65+.

Second, dump the other half into the same basic investment, but treat this as your early retirement pool. When you can make it to 65 with this money then "retire." The other half plus social security will last your retirement, and this half is your FU money.

Edit: To be clear when 1/2 your money is ~280k @ 50 ramping up to ~500k in @40 you can very likely pull out 20k/year till 65. So 1 mill total @ 40 and 560k @ 50.

Why do this? Well your expenses will rise faster than inflation. As you age you just need more help and have more health issues. So retiring as soon as you can is risky unless you living on a small chunk of your nest egg.

PS: By retire I don't mean living on a beach someone, just no longer forced to work a job for food. Further, social security is actually a significant amount of money if your single and had a good paying job for ~25-30+ years.

Wow thank you.

Yes my goal is to hit 20k/month just to cover my basic expenses, at which point nearly 100% of my income can go towards my accounts. I'm 23 right now making $100k USD (in Canada it's around $125k). Expenses are $1500/mo, rest just sits in the bank.

I figure if I keep working until I'm 40 (my cutoff age), it'll be much loftier. I also don't plan to live past 65 for personal reasons.

When I say 'retire' I really just mean ROI covers life expenses in full, otherwise my sub <20k/year expense lifestyle will do until I die. I still plan on working, just putting all that money into savings.

With this new information, how would you adjust your plan? Also can you please clarify the @50 and @40? Do you mean 50% and 40% respectively?

Thanks.

> I also don't plan to live past 65 for personal reasons.

Can you go into this?

I may one day end my life out of exasperation at the culture I live in bearing down with demands for a certain conduct that I cannot sincerely present, but this future isn’t real to me either, just like no future is real, because I don’t currently feel compelled to commit suicide. I do, however, feel that my frustration will progress. Often it seems like what is expected of us in the industrialized world is akin to joining a traveling sideshow and lumbering around in clumsy costumes, doing a song and dance for the simple delight of some abstract, blurred-out crowd. None of my friends or anyone I know are real either. They are all becoming the same person. Isolated hand crafted social networks. No particular philosophy or ideology to bind them except the mindless packed egalitarianism that the media sold to them in a nice little bundle.

Clothing. Beats. Startups. Money. Let's get fucked up bro. You thinking DORSiA tonight bro? It's all pseudo. Even the people who are 'into shit' are usually into it just deep enough where they can virtue signal others of the same depth, then jerk each other off about how fucking amazing they are for being the x% of the population into $y hobby. It doesn't matter what club. The attitude comes in all themes - classical music, startups, etc. Most of it is an illusion, I've only met maybe 2 people in my entire life who've dissolved their ego's (no I am not one of them).

We've abstracted human connection and communication to such a disgusting degree we're most likely never turning back.

And please spare me the mental health responses.

65 is a long time from now; your viewpoint on many things is likely to evolve.

I would encourage you to plan your finances as if you'll live to 90+, such that any decision to exit early will be driven by your own volition and not by financial stressors. No mental health argument here; I'm just trying to keep it practical.

With all due respect you don't know me. My viewpoint on all things is likely not to evolve. I'm at the end. There are no more 'viewpoints'. Perspective/viewpoint/ideology only go so far. Thanks for asking.

You're right, I don't and didn't mean to overstep.

Why do you think your viewpoints won't evolve?

I remember how bound to philosophy I was in high school. Every new concept was amazing and gave me strength. It's been years since I've been moved by anything I've read and I don't know why, but it's not for a lack of trying. I also don't think it's a case of "oh you're young" because there's only so much literature out there, and with the internet + basic life trivialities mostly optimized and handled, the amount of time to take in information is an order of magnitude larger than past generations.

Just way too much information way too quickly.

Have you ever thought of writing your own thoughts down in a more extended form? I think the world only benefits from a plurality of viewpoints, not just viewpoints of the common.

Why would you choose death over, say, removing yourself from the environment? Couldn't you move to another country(assuming you had the resources), or move out into the forest and live as a hermit?

Is there something more specific you could talk about with this? "with demands for a certain conduct that I cannot sincerely present". Are we talking about something like being gay in an anti-gay society, or something far deeper about the basic structure of society?

Sorry for pressing, I'm just very curious in your point of view.

>Why would you choose death over, say, removing yourself from the environment? Couldn't you move to another country(assuming you had the resources), or move out into the forest and live as a hermit?

>Is there something more specific you could talk about with this? "with demands for a certain conduct that I cannot sincerely present". Are we talking about something like being gay in an anti-gay society, or something far deeper about the basic structure of society?

If I dress my thoughts up into a book with a narrative it might be just good enough where people excuse my depravity as 'wit'. I'll wait until I publish and if it goes nowhere, then I'll end it. Until then I'll keep pretending, and it's the pretending that kills me. Most people are lost. I get overwhelmingly sad when around people because I can't help them. Too much empathy and self awareness. I honestly have no idea. Just being around people makes me sadder than if I wasn't around them. What actually makes me happy is not chilling and hanging out, but teaching someone and watching them learn and seeing the resultant joy that brings. That's why I greatly enjoy getting lost in music and playing with friends. There's people I know where I honestly don't know a single detail about eachother's lives, we just play and communicate that way.

I don't mean to impose, but your comments here and others above sound exactly like my diagnosed schizophrenic brother when he's not medicating. You might consider visiting a psychiatrist.

Can you go more in depth on that?

@50 and @40 was shorthand for 50 years old and 40 years old.

The point was the older you retire the less money you need. But, also retiring ASAP is often a poor idea as you tend to worry about cash more the less you have. If you are going to keep working then it's a purely theoretical exercise and you can quickly get far more savings than your lifestyle will ever spend.

I would also say 65 can feel rather young when you hit 65 or you might not make it. However, planning to have money indefinatly adds peace of mind even if you never spend it.

@23 just dump it all in a low cost index fund and ignore it, in 10 years you can rethink the situation. You could easily be married with kids or something. Also, get a solid understanding of the tax implications of what your doing. Some people say having X months of cash on hand is important but selling stocks is hardly the end of the world the real issue is tax deferred accounts can have withdrawal penalties.

Consider putting your money into a business you know, equity, or rental property.

The idea is that rather than holding liquid exchange media (money), you make that money work by investing it on a productive venture.

Investing in the stock market (or an index fund) is similar in many regards to starting your own business or putting the money into a partnership or investment property: you're investing financial capital (giving someone else the ability to buy stuff -- liquid exchange medium) in return for an ownership interest in the return.

On balance, investing in stocks is cheap, has little by way of management obligations, and (notable exceptions notwithstanding) tends to produce pretty good returns over time, especially as compared to holding cash. Your investment is also fairly liquid, as stocks themselves can be sold (converted to cash) at any time.

No, it's not risk-free. But it's a pretty decent risk, and in general you're in the same boat as everyone else.

Maybe this is a good book: "A Fool and His Money" by John Rothschild. Containing such gems as "Never buy the June call nor sell the October put simultaneously, unless you know what they are".

Comedy gold about the overfinancialization of everything. As early as 1988 no less!

Btw if "overfinancialization" is not a word, it should be.

Yeah I've read it all. It's way too high level to make use of.

My suggestion: if you care to understand the comment, highlight the parts you don't understand, and maybe venture a guess as to what it actually means.

Finance both is and isn't confusing. The language is obfuscatory. Many of the concepts are actually pretty straightforward. There are the occasional kinks.

"Stocks and bonds are more expensive than ever."

Which is what you would expect most of the time in a growing economy.

You're right. High valuation multiples imply high expectations about future profits. But those expectations will need to be met before you can look back and say you've done a good investment.

Growing economy?

The growth rate in the past several years in the developed world has been the lowest in any economic expansion. In the US, around 1.5% lately and is only positive because the inflation rate calculated by the government (by which it is adjusted) is significantly under-estimated.

I wasn't making a political statement.

I don't think his was a political statement either, just that your implication that it's the result of growth doesn't seem accurate.

CPI is often ( generally? ) considered to overstate inflation.

"More expensive than ever" doesn't mean that the price is higher than ever. The S&P 500 was higher in 2012 than in 2004 but it was less expensive.

Can you please expand on that? Do you mean inflated adjusted price?

P/E ratio, or, more likely, CAPE. P/E stands for "price to earnings" - it essentially tells you how much you're paying in a share of stock for each dollar in future earnings.

P/E is calculated at a point in time - current price over last reported earnings. The CAPE (Cyclically adjusted price-to-earnings) ratio is a better measure because it's calculated based on the last 10-years earnings. It's somewhat predictive of future stock market returns (10 to 17 years out), albeit with wide variation.

Right now the American stock market is very expensive. Take a look at http://www.multpl.com/shiller-pe/. Many international markets are not, though: http://www.starcapital.de/research/stockmarketvaluation. Current American market valuations have most people expecting very little real (inflation-adjusted) returns from the stock market over the next 10 years.

More expensive relative to some measure of underlying value like earnings or book value. If you look at the P/E ratio (price-to-earnings) of a stock, a higher ratio means you're paying more to buy enough stock to get $1 of earnings, which in a sense means that the stock is more expensive.

"Expensive" when referring to stocks typically means some flavor of price/earnings ratio, such as http://www.multpl.com/shiller-pe/

You've been right for years. Easy money has kept things stable but starting from right now, if you invest in stocks and bonds and hold for 20 years, you should expect pretty low returns. Everything is expensive

Since 1980 and especially since 2000, people have learned that buying into a crash will be rewarded within 2-3 years because of central bank response.

They think "you can't loose with stocks long-term", which I believe is largely correct. But they have lost all historical perspective on what "long-term" has occasionally meant. And they underestimate the interim carnage in those instances (1930s, 1970s).

One rather successful man I e-know put it this way: business is the stuff you do to make money; investing is the stuff you do not to lose it.

He said that because often the part that sees the thing for what it is gets shorted when the average person sees it through the "investment" prism.

If you're interested in an alternative to the traditional suggestions, I'd suggest the derivative-trading approach you can find espoused at tastytrade.com. It's not for those who don't want to learn and engage though.

Anonymous downvotes not withstanding, I'm interested in comments from anyone informed on the subject who's critical of the approach I mentioned. I don't find much discussion on the subject in forums.

Except there are alternatives, there are plenty of alternatives, and in the year 2046 your successor is going to be writing the same post as this one cleverly pointing out how the assets to be in during the 2010s had comparatively little activity and little liquidity.

Sure there are alternatives. For the record and as a direct response to cloudjacker, my proposed alternative is called precious metals.

What's yours?

The counterpoint to precious metals, despite the "it can only go up" logic that is quite convincing, is that there were extremely prolonged periods of losses in precious metals like gold during periods of economic uncertainty way worse than today. Such as the period from 1982 till 2006 (let alone the losses sustained by holding gold from 1980). The price of precious metals simply did not react according to the logic presented today.

There are plenty of growing sectors and there will continue to be.

Of course, if you want to dollar cost average your whole salary in low growth sectors or metals for 25 years, you should still come out ahead on any uptick two dozen years from now.

> "during periods of economic uncertainty way worse than today. Such as the period from 1982 till 2006"

The bulk of the period you mention is referred to as Great Moderation by high fiving central bankers. It’s part of one of the great green areas on the chart of the original post. It was marked by disinflation, fall of the Iron Curtain, corporate adoption of computers, globalization, trade and offshoring. (And rising central banker activism and financialization.) And yes, gold went through a gruelling secular bear market during the Great Moderation.

Conversely, all big red areas on the chart saw positive action in gold.

In the 1930s-1940s large quantities of gold were being hoarded. The official price of gold itself was fixed but e.g. gold mines did great.

In 1960s gold was being hoarded again, to the extent that by 1971 they had to give up the fixed price and let it float.

Since 2000 gold has being doing great again (with corrections in 2008 and a bigger one since 2011). Interestingly enough, the latest correction seems to have reversed the exact day Yellen decided to hike rates with 0.25%.

Imagine you could reconstruct a performance chart for gold, similar to the S&P chart of the original post. I’m fairly sure it would be roughly inverse to the original S&P chart.

(In practice it’s hard to really do this, because the gold price was fixed until 1971. So before 1971 you’d need to reconstruct perhaps some kind of measure of “stress” on the price fix, or use an imperfect proxy such as gold mines.)

> "There are plenty of growing sectors and there will continue to be."

True. But in some eras an investor can make a 1000 mistakes and still expect a good outcome. In other times there’s much less room for mistakes in terms of timing and securities picking. Things are harder, like really much harder. The difference is caused by general valuation levels, the kind of profits that are being priced in, and by the amount of eyes that are looking at the same things.

That's just a different formulation of the exact same message the original chart is telling us.

The last great investment desert ended ~35 years ago. Once again, around the time when people where lining up to buy gold. Crawling out of that desert, if you thought you had found a bargain on the stock market, a real gem of mispricing, chances were good that it actually was a bargain.

In my humble opinion, we're somewhere deep inside another investment desert. This one appears to have longer lasting and more elaborate fata morgana's than before. But I expect we will witness a few serious extinction events before we can even think about crawling out.

And that's the S&P 500, based on American stock exchanges, which have probably had the best & most consistent returns over the past 100 years than stock exchanges everywhere else.

The past 100 years witnessed the rise of American domination of global business. Even if American business stays dominant, there's probably less growth from #1 -> #1 then there was during the rise to #1. And that's a big if.

In other words, the future returns of the S&P 500 is probably going to look more like the returns of a basket of international stock markets over the past 100 years than it will look like the returns of the S&P 500 over the past 100 years.

Many people believe that since the S&P 500 has never lost money over any 10 year period that it's never going to do so. It may be highly unlikely, but if you keep rolling those dice eventually you're going to come up snake eyes.

> "S&P has never lost money over any 10 year period"

Investing a dollar in 1929 meant 20 bad years. Sitting on that dollar for 3 years and investing it in 1932 meant no bad years.

If I look at some expectations and common beliefs that people hold in 2016, I can't help but wonder whether we have one of those 20 bad year periods coming up.

(By the way, part of the success of US assets is definitely related to American companies leading the way in business innovation like IT. But another part is related to the US running trade deficits and the dollar being the reserve currency, meaning large amounts of dollar liquidity flooded back into the US and mostly into its financial system.)

Where "20 bad years" meant that your investment did not keep up with inflation, or barely kept up with inflation, but it still grew in dollar terms.

In terms of bad things happening, that's fairly benign. It could be worse, and probably will be some time. I'm just not going to predict when.

It meant "barely kept up with inflation" in the end. In those few instances: after 2 or 3 decades.

During the intermediate years you would have spent a great many years looking at absolute carnage. Periodically getting trolled by bear market rallies.

"Barely kept up" is therefore very theoretical, because few people have the character to wait it out that long. Many who call themselves long term buy-and-hold, will quietly change their designation after 10 years of watching blood stains drying up.

That's exactly why, after such periods, markets are not just cheaply valued but almost literally "empty" and deserted.

Btw, we haven't had one of those since the 60s/70s.

And only because there was an exceptionally fast run-up in 1929. If you had bought in 1928 instead, for example, you weren't down nearly as much in 1930.

The chart from the article disagrees.

Investing in the mid- to late 20s generally, a period of overvaluation, you would have done well initially. But for people who didn't have perfect timing to cash out (aka most shmuks like me), every buy-and-hold dollar invested in that timespan would remain deeply in the red for a very long period of time.

Due to the severity of the actual 1929 crash, a brief moment of semi-good investment returns (measured over multiple timespans from a few years to decades) occurred in 1933-1935.

The larger, updated versions of that chart are available here: http://www.crestmontresearch.com/stock-matrix-options/

The real question is your investing period. I'm 48; my 90% life expectancy is around 90. So, yes, I make the assumption that I'll get around 3% after inflation, taxes, etc.

CAPE (aka price-to-ten-year-earnings, PE10[1]) helps devising a rule of thumb for timing.

Stocks don't deviate from their expected earnings for long, so when the ratio jumps over the median PE10, the market becomes expensive.

Holding cash during the period of high PE10 and investing it in stocks under low PE10 is a good idea for a person who's saving for retirement and doesn't want to become a professional investor.

[1] https://en.wikipedia.org/wiki/Cyclically_adjusted_price-to-e...

I found this Vanguard report that considered 15 popular metrics used to predict returns (and 1 control: rainfall). CAPE did indeed perform best, explaining ~43% of variance. I'm not an expert at finance or statistics, but I'm finding it an interesting read.

https://personal.vanguard.com/pdf/s338.pdf

What is the current value of CAPE/PE10? Where can I find the current value of it?

This webpage seems to have the current value: http://www.multpl.com/shiller-pe/

It's really important to remember that these are inflation adjusted returns, meaning that in most cases, if you were not invested, you would have lost even more money than this graphic indicates.

It should be noted that the chart shows s&p 500 which does not include dividends. Real returns are higher when dividends are accounted for.

Indeed. Reinvestment of dividends makes a big difference. I made similar plots here:

http://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-or-in...

Very good point.

While there are total return (i.e. with dividends re-invested) and net total return (i.e. with dividends partially re-invested, as if after tax) versions of the S&P 500, they're almost never quoted.

The German DAX is the only major index I can think of that's primarily quoted as a total return index.

Note that they do include dividends though, according to the legend. So probably using the total return or net total return index.

Indeed, I stand corrected. I missed that part. I thought the returns were too low to include dividends, but that must me the inflation adjustment tricking me.

This is how a couple of university endowment funds do investing:

 	                Harvard	Yale
  Domestic Equity	15%	14% 
  Foreign Equity	15%	14% 
  Private Equity	13%	17% 
  Fixed Income (bonds)	27%	5%
  Real Assets	        23%	25% 
  hedge funds	        12%	25%

Your Harvard column adds up to 105%.

How do you think they get good returns?

Corrections are welcome

According to http://www.frontierim.com/files/file/download/id/1220 the top 20 US Endowment funds allocate their assets like:

  Private Equity                   19%
  Domestic Equity                  13%
  Global Equity                     8%
  Emerging Equity                   8%
  Global Bonds                      9%
  Global Real Estate               10%
  Commodities/Natural Resources     8%
  Hedge Funds/Managed Futures      21%
  Cash                              4%

Endowments have very different requirements than many investors. They need the money to last forever, and they need it not to dip too precipitously during the downswings.

The problem is that you and I don't have access to the best hedge funds and the best private equity funds and even the best real estate deals. You need real money, or connections, or a long investment history with a specific VC/PE firm to get into the most lucrative opportunities.

Shouldn't this be compared to an alternative like buying bonds or holding the money in an average bank account? If inflation ate up the gains from the index value increase, wouldn't the same be true for other forms of investment?

"The Standard & Poor’s 500-stock index has posted double-digit gains for the second year in a row. But the index is still below where it was in early 1999."

Is this true when adjusted for inflation?

https://www.google.ch/search?hl=en&q=Standard%20&ei=EuQEWOaq...

Adjusted for inflation seems to be higher than in 1999 in the last two years http://www.multpl.com/inflation-adjusted-s-p-500

Right, there are two questions: "What should I invest in?" and "How much do I need to save?".

In answering the first question inflation-adjusting is useless because inflation hits all investments equally, but in answering the second you do need to adjust for inflation.

Thanks! I think I get it now. The message of the article/figure is "You probably need to save more than you think in order to retire with X USD in savings."

Investors often have expectations of real annual returns greater than 7 percent — the areas in green. But over 20 years or longer, rates that high are rare.

The 7% annual return figure may be related to something Warren Buffet said around 2013:

The economy, as measured by gross domestic product, can be expected to grow at an annual rate of about 3 percent over the long term, and inflation of 2 percent would push nominal GDP growth to 5 percent, Buffett said. Stocks will probably rise at about that rate and dividend payments will boost total returns to 6 percent to 7 percent, he said.” [1]

Note that Buffet's 6-7% estimate is for nominal annual returns. His estimate of real annual returns is 4-5%

There was a recent McKinsey study [2] also describing a likely long-term scenario of 4% real returns on US equities.

Note that these are returns on equities, which is considered to be the riskiest asset class in a traditional investment portfolio. A balanced portfolio of equities and bonds is expected to have a long-term annual nominal return of just 4-4.5% (corresponding to an annual real return of 2-2.5%) [3]

Pension funds and endowments typically invest in a mix of equities and bonds. These pension funds are structured by actuaries who have made outrageously optimistic assumptions about future returns, with the average US state pension plan assuming a 7.69% nominal annual return. [3] In a rare public admission, in 2008 a pension actuary for New York State declared his work to be "a step above voodoo." [4] In a more recent dose of reality, it was disclosed by Calpers that the public pension fund earned a return of 0.6% in 2015. [5]

Also, note that individual investors do not earn the "average long-term return" (which is just a theoretical number). Actual returns experienced by individual investors are more volatile and highly sensitive to the timing of when the started and finished invested. This timing is completely out of an individual's control, it is based on when a person was born and when they reach retirement age. One way to think about this problem is, what would be the cost of insuring investors against this "timing" volatility? Based on current market rates and some back of the envelope calculations, the rough answer is that it costs about 1.5 to 2% per year to buy such protection on a balanced portfolio. Once you deduct the insurance expense from the expected 2-2.5% real return, you are left with an expected 0% to 1% annual real return. To put this in perspective, a $100,000 investment compounding at 1% for 20-years would earn just $22,000 over 20 years. Meanwhile, "millennials" are apparently banking on a 10% annual return on their investments. [6]

What all this says to me, personally, is that the traditional narrative of individual "retirement," "saving" and "investment" is a delusion. There is no "safe," "slow and steady" approach for lower and middle-class people to build up for financial survival later in life. A different kind of strategy is needed, one that is based on higher risk taking. This is one reason that I think doing a startup makes a lot of sense for people who are talented - better to take a big risk, invest yourself, amp up the risk massively, and then work extremely hard and gradually "derisk" by doing all the things that good startups do. This probably has better odds of a successful "retirement" than the traditional idea of working in a corporate job and trying to climb the overcrowded corporate ladder while saving little by little in a defined contribution group pension plan.

[1] http://www.csmonitor.com/Business/The-Simple-Dollar/2013/050...

[2] https://www.bloomberg.com/news/articles/2016-04-27/be-afraid...

[3] http://www.economist.com/news/finance-and-economics/21678812...

[4] http://cityroom.blogs.nytimes.com/2008/05/16/speaker-tosses-...

[5] https://www.bloomberg.com/news/articles/2016-07-18/calpers-l...

[6] https://www.bloomberg.com/news/articles/2016-06-16/wanted-bi...

1. Agreed that people today banking on returns of 10%, or even 6%, are quite likely to be disappointed. I'd plan with a 3% real return assumption, and put in a substantial buffer, and also plan with at most 3% safe withdrawal rate (see Trinity study [1]).

2. This in turn means that you have to accumulate, say, at least $1m (in today's dollars) at retirement, to live on a modest $2500 a month.

3. This in turn means that you have to put aside basically $1100 a month for 40 years.

3b. In other words, whatever your target retirement income stream is, you'll have to set aside about half of that over your working life.

3c. Another way of looking at it is that you should put basically a quarter to a third of your income into retirement saving.

4. Disagree that startups are the best option for most people. While the average return might be high, this is skewed by a few super successful ones. I posit that the median return is rather mediocre. Thus, startup might maximise your chance to retire super early and opulently. However, to maximise your chance to reach a certain (more modest) level of retirement income, living frugally with a "normal" well paying job might be best.

5. A further problem I see with your "startup" suggestion is that it cannot work for everyone - if everyone pursued startups, there'd be no one to run the actual economy. However, if everyone reduced their consumption and ramped up their savings rate as much as I'd suggest, the economy would most likely collapse, as well. So, I dunno.

[1] https://en.wikipedia.org/wiki/Trinity_study

Disagree that startups are the best option for most people.

Right, it is definitely not a good option for "most people." What I was saying is, "startups make a lot of sense for people who are talented."

To draw an analogy, if you are a highly talented athlete, then pursuing a career in professional sports might make a lot of sense for you, even though the expected payoff in pro sports is quite low for most people. Similarly, if you are a particularly talented artist, then that career path might make a lot more financial sense than a traditional corporate job. It seems obvious when we talk about sports and arts, but I think it is less common for people to think about their corporate careers in this way.

Fair enough, and I agree with your qualification to highly talented and would add highly motivated and very lucky.

It does not seem prudent to recommend that people become singers or actors or soccer players on the basis that Madonna and George Clooney and David Beckham have reached and exceeded their retirement saving goals.

I liked this chart so much I made my own version that adds options for non-inflation adjusted and dollar-cost averaging instead of lump sum investment: https://gregstoll.com/~gregstoll/stockmarketreturns/

Does your graphic take into account dividend payments?

I'm not sure - most mutual funds include that in their returns, but I'm not sure if stock prices/indexes do.

Ah, I just saw that you gave the sources of your data. It doesn't include dividend payments.

Dave Ramsey, who is always telling everyone that average annualized returns are around 10%, will be so disappointed.

I mean Dave Ramsey is horrible, but AAR for the S&P 500 is in fact 10%, it's just that there is a large volatility to returns.

Although average real returns are much lower due to inflation, but that's another beast, though arguably more important beast.

AAR for the S&P 500 is in fact 10%

10% is a wildly high estimate of long-term nominal annual returns on US equities. Please see my comments above.

Help me understand... I am seeing this article as showing the median returns for 20-year periods around 4.1%. Are you saying you don't buy the article's conclusion, or is there an apples/oranges thing that I'm missing here?

Suppose that you make 20% returns for 8 years straight, followed by 4% returns for 12 years straight. Then your AAR is 10% ((1.2^8*1.04^12)^(1/20)-1), but your median yearly return is 4%.

The article accounts for inflation. If you don't do that and you take an average over the entire history of the S&P500 then you get returns of 9.0% annually. That's not so far off from 10%.

Not accounting for inflation is fair enough in Dave Ramsey's case since he's all about tying to get people to invest more. Since people's cash is going to be hit just as hard by inflation as stocks it isn't necessary to account for it.

I miss d3.js at nyt. I would consider a few dollars a month if digital media meant digitally interactive. same goes for you Economist. let's agree to use the power of the web for all our web publishing, not just some of it.

To be fair, this is a fairly old article (2011). D3.js only came out that year.

It might have been useful to see a comparison of active-portfolio versus buy and hold (not the chart's stated purpose). Also, to someone who doesn't invest or who doesn't think about compound interest issues, a 4% annual return builds fairly quickly, so the chart's implicit conclusion may seem more bleak than it really is.

The preview for OP link on Facebook is broken, which is unexpected from nytimes.com It's weird that it doesn't just grab the image from the article.

Article is from over 5 years ago! Open Graph had only been around for a few months.

And that's why, if you are investing in indices, it's important to continuously invest.

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