Visualization of stock market performance over time, adjusted for inflation
nytimes.com
nytimes.com
This is what it looks after shifting all the colors one step towards green:
In any case I would love to see (or make myself) the comparison with other vehicles.
Say use all my money to buy a long term bond today. If inflation would rise tomorrow, you correctly point out that bond yields of tomorrow's bonds will rise. However, mine is fixed. This means I'm hit, firstly, by the inflation, and secondly, by the fact that the price of the bond will fall. (The price will fall because competing bonds will have better yields tomorrow).
Correct me if I'm wrong.
http://www.bloomberg.com/news/2010-10-25/treasury-draws-nega...
PS: Also, historically taxes on investment income have been taxed far higher than 15% depending on how accurate the model this could have significantly altered their assessment.
He has various other versions including "Tax-Exempt Real" on his website:
http://www.crestmontresearch.com/content/Matrix%20Options.ht...
But the look is quite different from the Times version, interesting to see how the Times made it conform to their look.
I like the viz. Although one more level is needed to convey a realistic retirement investment spanning 30 years, and a subsequent 20 year withdraw period. No single square matters that much, instead you have some funky isoline which crosses many squares.
One example is that the first few years give no clue as to your long-run outcome. In fact, the first year may as well have been a coin flip. This shows what rubbish articles with a 1-year timeframe like this are: http://www.moneyweek.com/investment-advice/share-tips-moneyw...
color return occurs chances
red <0% 8 11.3%
pink 0-3% 18 25.4%
beige 3-7% 31 43.7%
light green 7-10% 14 19.7%
dark green >10% 0 0.0%
Here is the 20 year growth multiple at various returns.
return multiple
-0.02 0.67
-0.01 0.82
0 1.00
0.01 1.22
0.02 1.49
0.03 1.81
0.04 2.19
0.05 2.65
0.06 3.21
0.07 3.87
0.08 4.66
0.09 5.60
0.1 6.73
0.11 8.06
Optimistic conclusion:
If you hold a diversified portfolio of large domestic stocks for 20 years, you will likely double (and maybe even quadruple) your spending power.
The chances of ending up with less than your original spending power: 11.3%.
The chances of quadrupling your original spending power (exceeding 7% per year): 19.7%.
The chances of achieving 6.73 times your original spending power (the elusive 10% per year): It hasn't occurred yet.
Does this graph debunk the index fund strategy, or am I missing something?
Think of it this way-- buying a stock is a way of saying "the market is wrong, I think $COMPANY is worth more than the price at which it is trading". Unless you have information which the market does not (the next Apple product will be a flop, etc) this becomes, by definition, a speculative position.
Index investing is a way of opting out of the highs and lows of stock picking and still take part in the general growth in a market/sector/<whatever the index cover>.
The story merely points out that for some timespans, the growth of the US markets was crap and that (unsurprisingly when you think about it for a second) returns have varied substantially over the past 50 years even for long time-spans.
TLDR; if you think the US economy will keep growing and don't think you're smarter than marketɫ, index investing is probably still a really good way to go.
ɫ hot tip: you're not
Thus, stocks with great long-term returns but poor short-term returns will not be correctly priced by the market - even if it's obvious from well-known information.
An example is when a stock is hit by publicized litigation, that will drain some cash, but not impact their core business. Not only does it look bad, but it will negatively impact their hard numbers... in the short-term.
Compared to single stocks, index funds can be more expensive but they offer some more reliability as the diversification is higher (at least for small investors)
however it is not correct conclusion that you cannot find companies in that market that are not better performers than others - obviously there are companies in S&P500 or any other index that perform better than others for any given period of time. But if you focus on particular set of companies (tech for example) your risk increases since your diversification decreases.
Given your own example, obviously AAPL outperformed market for the past decade. Whether someone could have predicted that is a different question though.
I remember seeing a 'rolling S&P500 results' page somewhere but can't remember exactly where, [0] is what a quick search comes with.
As you can see in graph [1] there was quite a dip for everyone investing for a period of 20 years between 1974 and somewhere around 1994. That is a 30 year period of a total of 80 years measured with bad returns.
[0]: http://allfinancialmatters.com/2007/06/12/sp-500-rolling-per... [1]: http://allfinancialmatters.com/Graphics/S&P50020-YearTot...
It does seem somewhat difficult to end up on a green square though--there aren't that many of them and there are even fewer long runs.
Does this comment adds redundant noise to the conversation? Really? If you have a good reason to disagree with the subject matter (indices seem less attractive that purported) please share it with us in the comments, I know I'd be genuinely interested.
I would have voted it down before seeing your comment. But apparently this particular misconception is more common than I thought, so perhaps debunking it is actually useful.
and why would that be "the goodness" of index fund strategy? who told you that?
"the goodness" of index funds is that they're low cost and diversified (sometimes) - so more of the returns stay in your pockets, not get handed over to fund managers. return of the over-all stock market has little to do with it!
Not only should a retirement portfolio be exposed to a much wider range of risk factors than simply large-cap U.S. growth/blend stocks (bonds, TIPS, international stocks, REITs, small-cap value, etc.), but holding only a single asset class eliminates the possibility for an investor to rebalance their portfolio to maintain an appropriate asset allocation that is in line with their ability, willingess, and need to take risk (not to mention the fact that rebalancing, by definition, requires an investor to sell investments that have increased in price and purchase those that have decreased in price).
In my opinion, a more interesting chart is The Callan Periodic Table of Investment Returns: http://www.callan.com/research/download/?file=periodic/free/...
Quite simply it demonstrates that the performance of different asset classes relative to each other can change drastically from one year to the next. It would actually be a much better chart if it included more asset classes, but at the very least it shows that returns are unpredictable in the near-term and that diversification doesn't simply mean holding a bunch of stocks (especially when they are all large-cap U.S. growth/blend like the S&P 500).
I think a lot of people would say, "if you gave me 50 years, and a five year window in which to divest, you should definitely go all stock". I don't think that would be absurdly controversial. Looking at this data though, given the risk, it actually isn't a slam dunk.
Now this isn't to say that one shouldn't diversify among equities, but I suspect you'd see similar charts for random selection diversified among mutual funds/indices.
What happens specifically to the S&P 500 would not be the primary concern for an investor whose portfolio consists of a wide variety of asset classes and who follows a glide path approach by reducing their allocation to stocks (and increasing their allocation to bonds) over time. Thus an investor using this approach would not be 100% invested in the S&P 500 at the beginning or the end horizon (or at any point in between) of their investment.
I guess my point is that even just adjusting this data to include a 60%/40% equity/bond portfolio, rebalanced annually would be a heck of a lot more useful for retirement planning.
That'll invert your screen colors, and "might" make it readable. Press the same key combo to de-invert.
This is difficult, so people average it out and choose something like the S&P 500. As this is a decent investment strategy, it's what the article shows.
1) from the visual it seems to me that the starting year is the most relevant. If you start in a good year, it will mostly turn out right, regardless whenever your end (exceptions aside, for which see point 2). If you start in a bad year it will mostly work out badly unless you really have some time to spare or manage to run into a very rare occasion (e.g. starting in 1947 and ending in the mid 1950's). But that's just from the visual, which can be very misleading, so the raw data points would be interesting to do some statistic exercises. If that holds true though, it could be a good guideline - assess the current returns of a particular fund and do not invest [in it] if the current returns are not high enough. While this would make you, by definition, miss out on any really spectacular returns, it could reduce risk enormously without sacrificing much in terms of returns.
2) if you happen to have invested in a fund that took a nose-dive, hang on to it and don't sell for a long while, as in the long run you're apparently very likely to end up at the 20-year median (guess it's called a median for a reason ;-) which is not too bad. At the very least your loss is going to be minimized with time.
1) in reality you're constantly investing. nobody invests a lump-sum one time and hopes they chose a good moment to enter the market. the chart gives you some idea of your long-term chances.
2) "* if you happen to have invested in a fund that took a nose-dive, hang on to it and don't sell for a long while*"
unless it goes bankrupt in which case you definitely want to sell. This is one reason why strategists advocate diversification and investing in index funds: you're sheltered from the (possibly poor) performance of any single company/stock.
http://en.wikipedia.org/wiki/Boskin_Commission
An intuitive way to see this: CPI-adjusted wages have not increased much since the 1970's. Yet in terms of goods and services, we have vastly more than we had in the 70's - I doubt you can name a single good we consume less of than in the 70's (besides perhaps telephone land lines and typewriters). If CPI properly measured inflation, that would not be the case.
If the S&P 500 is compared against something more stable than paper money like gold, similar things emerge:
http://steadfastfinances.com/blog/wp-content/uploads/2010/07/Historical-SP-500-to-Price-of-Gold-Ratio-1900-to-2010-credits-Zero-Hedge.jpg
I suspect a reversing of one or the other axis might help: putting the shortest, most-recent holding periods top-right, for example, so those periods overlapping living memory are most prominent.
It's very hard to stay ahead of inflation with securities whose value can be fudged by cheap money. In fact, pension funds can't even make +inflation guarantees, only best efforts through low-risk investments. And even if they did, they would be lying.
while I agree that this would make a very interesting chart, do you have a reference for that?
I mean it's clear that during the last 10 years, nothing has touched metals, but if you were in gold for the 10 years before that, things wouldn't have gone quite as well.
It gave me this thought..
2010 "Gold Always Goes Up" 2004 "House Prices Always Go Up" 1999 "The US stock market always goes up"
http://mjperry.blogspot.com/2010/09/chart-of-day-inflation-a...
Also, gold is tax-disadvantaged.
However, my understanding is that this is fairly easy to get around, either buy going for a ETF like GLD, buying stock in a company that owns gold 'in the ground'
For those who are enamored with gold and want to invest conservatively, I would look at something like the Permanent Portfolio (http://crawlingroad.com/blog/2008/12/22/permanent-portfolio-...) Not how I would invest personally, but the PP isn't an unreasonable approach.
Seriously, buy the effing dip.
Great eye-opening graph.
@MarkMc very good point
True, dat. Printing money doesn't make us richer.
This says nothing of the long term effects of seniorage, just that printing money does, currently, make us richer.
Assuming that printing dollars results in a net transfer of wealth from foreigners ("them") to citizens ("us"), sure. But the "us" I was referring to was "people who hold or use U.S. Dollars" (or dollar-denominated assets).
Printing money is wealth transfer, straight up, in pretty much the same manner that an individual counterfeiter transfers wealth to himself.
Aside from the wealth itself, there is a tremendous opportunity cost, since capital is moved from productive to outright destructive and criminal sectors of the economy.
The primary vehicle of these transfers is monetary expansion. All else being equal, a sound currency would bring orders of magnitude improvement in the real economy and dramatically increase standards of living for the bottom 90% of the population far beyond what can be achieved through programs like the ones you mention. Of course, there would be a deflationary collapse first, but this would be the best thing that could possibly happen for the vast majority of us.
http://www.washingtonpost.com/wp-srv/politics/interactives/b...
Social security and medicare combined are 35% of the Federal budget. Income security is another 10%. National defense is 19%. Interest payments (essentially a transfer of wealth from taxpayers to T-bill holders, i.e. poor Americans to rich foreigners) are another 9%.
It's also not true, in strict monetary terms, that the vehicle of these transfers is monetary expansion. Total federal spending is about $3T. The total expansion in the monetary base since 2008, even with the massive explosion due to quantitative easing, is only $1.2T. Tax receipts still form the bulk of the budget.
I hate government waste as much as anyone, but get your facts straight before arguing.
First, spending on social security, medicare, income security, and domestic programs is of a qualitatively different nature than military spending, bailouts, and the interest payments you mention in that it is inserted directly into the real economy instead of being diverted and for the most part removed for good. Yes, some small portion of the military budget really is for 'National Defense' and so would come closer to domestic spending, and perhaps some portion of the bailout funds wind up in the economy instead of banks in Zurich or Dubai, but the bulk of it is simply absconded. So you must strongly weight the impacts of these different types of expenditures in relation to each other to gauge their true comparative impacts, which you haven't addressed.
Second, the monetary base is only a small part of the picture since this only includes physical currency and highly liquid assets. $1.2T is an enormous expansion that constitutes a doubling of the base, but much more important are M3 and MZM since these include credit, which contributes exponentially more to inflation and wealth transfer due to fractional reserve banking, which is only possible on anything remotely close to this scale in a fiat system. This graph illustrates my point quite well, and it only shows up to M2, presumably since the Fed stopped reporting the even more damning statistics: http://en.wikipedia.org/wiki/File:Components_of_US_Money_sup.... So again you have ignored or confused critical factors.
The last point you left unaddressed is opportunity cost, which is really the core of my argument. In a sound economy with sufficient resources available, the capital stock (wealth) increases on an exponential scale, not linearly, because the more capital that exists, the more that can be invested in creating even more capital. Therefore, interfering with this process of accumulation through wealth transfers and the instability caused by monetary manipulations has deceptively gargantuan opportunity costs. All the resources that are funneled into bombs and guns are employed in actively destroying capital when they would otherwise be accelerating its accumulation. Likewise for resources funneled into estates, yachts, and private jets for finance industry billionaires that SHOULD have gone into producing capital goods for the real economy. If you truly consider the full consequences of these policies and the functional relationships involved, the implications are almost unbelievably staggering.
1. GDP growth requires printing money, or else it will create a deflationary environment, which is dangerous because it creates an incentive to delay business purchasing.
2. Low levels of inflation create a more efficient way for the economy to adjust the mix of labor skill demand. Research shows that it is difficult to nominally lower a worker's pay year over year, but giving no raise in an inflationary environment allows a company to do just that. This is important to lower the rewards for resources the economy has a lesser need for, such as when bar codes reduced the need for grocery store staff.
3. And finally, printing money can help an economy recover from an aggregate demand gap (i.e., a supply-demand disequilibrium that doesn't automatically recover). This can happen in period of high unemployment, where wages need to fall to create more demand for labor, but a fall in wages reduces personal income, further reducing aggregate demand, further reducing the demand for labor. Printing money reduces the cost of money and gives an incentive for companies to invest more, which reduces the aggregate demand gap.
Either that, or counterfeiters also create wealth.
I specifically state that it does, in certain situations, create wealth. There is a tremendous amount of economic research to support this.
Of course, I agree with you that printing money does not always create wealth. Far from it. There are many cases in which it does not create wealth. Highly inflationary economies are a good example of this.
But if you re-read the three situations I describe, you will see that they do indeed describe places that the printing of money will create wealth that would not have existed otherwise without the printing of money, and which are above and beyond the mere reallocation of wealth.
Perhaps to better understand why your point is not true is to understand your claim from a different perspective: that the money supply should always stay exactly constant, year after year.
Even a cursory understanding of my first point (that economic growth in and of itself requires a corresponding increase in the money supply) shows this to not be true. Imagine the economy grows and the money supply stays constant. The value of products available per dollar now increases annually. This is deflation.
Now you are implicitly claiming that deflation is a good thing.
To read more on deflation, see:
Yes, deflationary collapses that are preceded by artificially induced inflationary booms cause massive pain. This is why we shouldn't have artificially induced inflationary booms. They massively misdirect resources and create a necessity for a massive restructuring, which is painful and destabilizing, but necessary and inevitable to return to economic viability. You are confusing the heroin with the withdrawal, the alcohol with the hangover, the sickness with the cure.
Printing money may enable the creation of wealth (by reallocating existing wealth) but is not, itself, wealth creation.