I'm curious if this is demonstrably an optimal strategy for individual investment too... I haven't had much success getting any clear data about whether active management demonstrably produces better results.
Re: picking stocks yourself, the answer is also pretty cut and dry. There’s strong evidence no individual trader can expect to beat the market. Active managers can only beat the market gross of fees because they employ large teams of people to do a lot of work to gain a small edge (stuff like predicting retail sales numbers from satellite images of store parking lots).
This is my attempt at summarizing a whole field of research in a few sentences. There are many more nuisances. I highly recommend listening to the Rational Reminder podcast if you’re curious about this sort of thing. They interview a lot of academics.
some people prefer the chance to win the lottery rather than get a steady income stream.
Also, some fraction of Buffet's success comes from deals that the rest of us don't have access to.
If you always win after lose and lose after win, then it would go like this:
1. $1000
2. $1100
3. $990
4. $1089
And so on... After 100 turns you would have only around 600 - 700.
But it's a zero sum right. Where does the 300 - 400 go? It goes exponentially to select few who by random chance have more wins than losses.
In fact the longer it goes on, the higher odds of there being outlier with a lot - you might expect that everyone would converge around $1000, but that is not the case.
I did an example run with 10 000 investors, each doing 1000 trades, each trade they bet 10% of their portfolio, with 50% odds of winning.
First investor had 562 wins and 438 losses, with $1,666,061.
Median investor had only $7 left with 500 wins and 500 losses.
Top 10th percentile investor had $364 with 520 wins and 480 losses.
So interestingly even an investor that had 40 wins more than losses, lost 2/3 of portfolio.
Buffett buys “cheap, safe, high-quality stocks” with leveraged “financed partly using insurance float with a low financing rate” [1]. TL; DR He’s doing private equity with discipline.
[1] https://www.aqr.com/Insights/Research/Journal-Article/Buffet...
1. Buffett has been underperforming the S&P 500 for about twenty years now:
* https://www.linkedin.com/pulse/warren-buffett-has-underperfo...
* https://news.ycombinator.com/item?id=37827101
For most people who are saving for retirement between the ages of (say) 30 to 65, that's most of their investing lifetime, and such underperform could radically effect the life they can live once they start working. Do you want risk your proverbial Golden Years simply because you chose not to take the market average returns?
2. While Buffett is a better-than-average investor (and certainly better than me), the main reason why we know him is because he's so rich, but as Morgan Housel notes, the vast majority of that wealth has come from compounding:
> As I write this Warren Buffett’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for Social Security, in his mid-60s. Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real key to his success is that he’s been a phenomenal investor for three quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him. Consider a little thought experiment. Buffett began serious investing when he was 10 years old. By the time he was 30 he had a net worth of $1 million, or $9.3 million adjusted for inflation.[16] What if he was a more normal person, spending his teens and 20s exploring the world and finding his passion, and by age 30 his net worth was, say, $25,000? And let’s say he still went on to earn the extraordinary annual investment returns he’s been able to generate (22% annually), but quit investing and retired at age 60 to play golf and spend time with his grandkids. What would a rough estimate of his net worth be today? Not $84.5 billion. $11.9 million. 99.9% less than his actual net worth. Effectively all of Warren Buffett’s financial success can be tied to the financial base he built in his pubescent years and the longevity he maintained in his geriatric years. His skill is investing, but his secret is time. That’s how compounding works. Think of this another way. Buffett is the richest investor of all time. But he’s not actually the greatest—at least not when measured by average annual returns.
* https://www.goodreads.com/quotes/10551666-more-than-2-000-bo...
Volatility adjusted returns (or Sharpe ratio) for instance, will tell you how much returns you have per unit of risk you take. This is important because getting 10% average annual returns with 10% annual volatility is worst than getting 5% returns with 1% annual volatility. You can only compare investments at equal amount of risk.
An other factor to take into account is diversification. If you have an alternative investment to compare to your base, and it's average returns is lower than your base, but it is un correlated, then you actually get an increased volatility adjusted average returns by investing in both.
That's just two dimensions to take into account, there are many others, but overall:
- Don't compare investments based on annualized returns alone, it really doesn't make any sense.
- Don't compare investments one against an other, instead look at the addivity of one on top of another.
Doesn't this depend on how long you're planning on investing for, and what your criteria for selling your investments are?
If you're planning on investing for at least 10 years, and you're willing to give yourself a 2-3 year window for selling your investments once they reach a threshhold you decide on ahead of time, isn't the 10%/10% investment better?
(e.g. if retirement is 20 years away, you might consider putting your funds in that sort of investment for 10 years, with a view to moving them to something less volatile in the 5 years after that, as soon as they cross a 10% annualised return threshhold during that window.)
If you consider that "you don't know any better" and returns are normally distributed (i.e. you don't have some secret sauce nobody else knows about), then there is no dimension in which the 10/10 is better.
You can convince yourself intuitively by imagining how you would maximize each strategy. The amount of money you have is a factor of the risk you take, because if you want to do something risky you will not be able to borrow much, whereas if you want to do something safe you can easily borrow.
That is, you objective is to maximize your expected return, under the constraint of not breaking your risk limit.
Suppose you have a 10% annualized volatility risk tolerance. That's your budget.
If you invest it all in a 10% average return / 10% annual vol strategy, that's it.
Now if I propose you a 5% average return / 1% volatility strategy, you just have to go to the bank and borrow 10x your capital. You will have the same risk exposure (in dollar), but 5x the expected returns.
I don't know much about finance. I guess that at that point (you borrowed 10 times your net worth). This is no longer your investment, it's your lender's investment. They will adjust interest rate to match the riskiness of whatever you are doing, leaving you with net zero.
Borrowing money is not free.
Of course it is, though not exactly by "borrowing money" in a "mortgage" sense. Margin trading is a way to take leverage, derivatives is another. The former is simpler but costly, the latter is cheaper and allows you much more than 10x leverage, though it requires some high school mathematical thinking.
"just" is doing a lot of heavy lifting in that sentence.
It's clearly better in the expected return dimension. This strategy has 10% expected return, while the other strategy has 5%.
>- Don't compare investments one against an other, instead look at the addivity of one on top of another.
I don’t think either of these matter to 90% of investors whose goal is to build up a nest egg for retirement which means not spending for decades in the future.
Sharpe ratios and all those “risk” adjusted calculations all involve assumptions that may or may not be true.
Comparisons of just annualized returns over long periods of time seems fine for broad market index funds, especially if you are assuming the federal US government will provide a backstop.
On the contrary, these risk adjusted measures assume nothing more than a normally distributed random variable.
If you just look at annualized returns, then go ahead and invest in CDOs ETFs.
More seriously, the S&P for instance has around 20% annualized vol, which IMHO is way above what you would want for a retirement fund. I would target something closer to 10%.
> Comparisons of just annualized returns over long periods of time seems fine for broad market index funds
Do you have any sort of reasoning or is it just a gut feeling?
The financial sector isn't yet so unrelated to reality that the price of securities is random.
At best, using a normal distribution is something that undergrads use as a tool to learn about the stock market and make some simplifying assumptions for pedagogical purposes, but it most certainly is not something that actual professionals or researchers in the field genuinely believe.
My point is that, for all intent and purposes, you should assume normal distribution of returns.
If you don't, you're obviously on either end of the spectrum: not knowing the subject at all, or nitpicking expertise on the internet.
The subject of the matter here is convincing someone that risk adjusted measures should be considered when comparing portfolios. This is the basic underlying modelisation that 99.99% of the finance world makes, "compare sharpes", "compare volatility adjusted returns".
I'm stating 1+1=2 and you're arguing it doesn't hold in Z/2.
> At best, using a normal distribution is something that undergrads use as a tool to learn about the stock market and make some simplifying assumptions for pedagogical purposes
Implicit normality assumptions are everywhere. I encourage you to think hardly about your model and question whether anything you do would work on non normal distributions, you will most likely find that you have millions of these assumptions in your linear combinations, sample renormalization, regressions, sharpe weighters and optimizations.
Now of course you could refine that with students, lognormals, and whatever, but this is more _refinement_ than anything.
To be pedantic, stock returns, not prices.
As for the quotes, I encourage you to strongly think about the meaning of the work of Sharpe, Black & Scholes and Markowitz applied to non normal distributions (both Nobel prizes, we understand each other).
In particular, try to articulate the relevancy of sharpe ratios between two non normally distributed portfolios.
If one is a random variable, so is the other. It's a simple change of variables. What's your point?
> As for the quotes, I encourage you to strongly think about the meaning of the work of Sharpe, Black & Scholes and Markowitz applied to non normal distributions (both Nobel prizes, we understand each other).
Could you quote the part where they say that actual, real-world stock prices (or returns, whatever) are random?
Not sure I follow your reasoning. Prices are positive only, and non stationary. That is very much not the same for returns. Usually prices are log normal, leading to normal (log) returns.
> Could you quote the part where they say that actual, real-world stock prices (or returns, whatever) are random?
It is not said, but rather implied. Take the Sharpe ratio for instance, it is a measure that:
1) is used to compare different assets / portfolio returns
2) rely on the 2nd moment of the returns.
The standard deviation is less relevant the further away from the normal distribution you go, so since this is a comparison metric, it can only be reasonably applied to compare normally distributed returns.
If you believe the returns are not generally normal, then you reject the use of the Sharpe ratio as a relevant measure of comparison.
I don't have a B&S reference at hand, and I did not read it since 15 years, but I'm pretty sure it assumes lognormals prices as well.
Perhaps we should take it back to the beginning. What do you believe "random variable" means...?
> It is not said, but rather implied.
I see.
The market is incredibly efficient at pricing many things incorrectly and Markowtiz then BSM was no exception.
That is exactly what I am referring to. For example, from Wikipedia:
https://en.wikipedia.org/wiki/Sharpe_ratio
>However, financial assets are often not normally distributed, so that standard deviation does not capture all aspects of risk. Ponzi schemes, for example, will have a high empirical Sharpe ratio until they fail. Similarly, a fund that sells low-strike put options will have a high empirical Sharpe ratio until one of those puts is exercised, creating a large loss. In both cases, the empirical standard deviation before failure gives no real indication of the size of the risk being run.
>Do you have any sort of reasoning or is it just a gut feeling?
The reasoning is that their volatility is negligible over the long term due to political forces. Of course, it is also an assumption that could be wrong, but the mechanisms for government policy (democracy, aging demographics, and voter participation trends) seem to favor reducing purchasing power of currency rather than letting broad market equity prices stall or slide down.
Volatility not being a full measure of risk obviously does not imply that volatility should be ignored.
The former statement about returns not being normally distributed is a, trivially verifiable, factual mistake. Daily stock returns are normally distributed with a slight positive kurtosis. This remains true on any period over the last 30 years.
I am bot arguing either that the Sharpe is an all encompassing measure, some strategies have a returns distribution that is not well explained by Sharpe. I don't think it matters in this argument though.
But look at something like systemic risk: it’s not necessarily normally distributed. The S&P returns skew left. I’m sure there are other risk metrics that break this assumption as well.
I don’t know that I agree. If the market as a whole doesn’t have normally distributed risk, it implies even the simplest strategy of buying SPY and holding will also not have normally distributed risk.
Imagine really thinking that the nature of a discussion forum can somehow influence the distribution of stock prices, as if stock prices examine comments on the Internet to determine their behavior.
Attacking the comment with sarcasm isn't in the spirit of HN even if you think that is a dumb idea.
Well I do and as someone who has seen his other posts on this subject as well, he has a tendency to try to dismiss differing points of views on the basis that he has 20 years of experience and knows better than everyone else but can't be bothered to explain it.
Someone who has experience and wants to flaunt that experience should do so by coming up with good arguments, pointing people to good resources, and making a good effort to inform rather than pulling rank as a way to dismiss the conversation under the guise of sophistication and pretention.
I too have decades of experience working at a quant firm, and guess what... many people who post on HN have subject matter expertise and frankly I don't think many of us would agree with the idea that the stock market is normally distributed, or that you need a great deal of mathematical machinery and sophistication in order to demonstrate that fact.
Math models reality, reality does not model math. Whether or not stock prices or portfolios, even the portfolios of those on Hacker News, follow a normal distribution has nothing to do with the nature of the discussion of those portfolios.
Also, policing people's tone is also against the spirit of HN as well, but here we are. If you want to police how I speak, flag my comment and/or downvote it.
> decades of experience working at a quant firm
I would say the more "bayesian / sell side / derivative pricing" kind of meaning exists since the late 70s, the more "frequentist / buy side / let's hire 100 physics PhDs" meaning came prominent in the early 2000s. (as a general feeling).
> Well I do
Well then what's your stake here?
> he has a tendency to try to dismiss differing points of views on the basis that he has 20 years of experience
I surely will concede I have this tendency, now you have to keep the context in mind. You are on an internet forum focused on CS, and emerges a comment thread on personal investments. The very subject of this thread is whether it makes sense to consider risk adjusted returns or just any kind of returns for your investments.
My argument is based on the fact that risk adjusted returns should be used, and you should assume normal distribution. I am not saying this is a law of nature, but rather that this is a fine and widely used assumption for both practitioners and academics, which allows the argument and explanation to go further without entering an experts debate (like you are trying to start).
So I stand by what I said: for all intents of this discussion, assuming normal distribution should be a given. If you want to dance around it and demonstrate that a students distribution or whatnot is a better fit, go ahead. I think this is more armful than helpful here.
> try to dismiss differing points of views on the basis that he has 20 years of experience
I think this is important on the contrary. What is lost on a forum like HN is the context of people answering comments. When someone comments "I don't think risk adjusted returns are important", it makes a hell lot of a difference if it's just the opinion of a random guy, or someone with actual experience.
Now while it takes 1 sentence to wrongfully dismiss a scientific fact, it can take 100 pages of an expert to prove that it's true. Look at a proof that 1+1=2.
That is where credentials are important IMHO. Some debate tengents are not interesting in a discussion, and will only lead to an expert explanation serving no purpose other than confusing a reader, and making the expert proud of himself. In these situations, just stopping the tengent is the best reaction IMHO.
So I apologize if you take my comments as dismissing, but try to assume good intent. When someone asks why you should use risk adjusted returns to compare investments, I think the saner thing to do is to tell him to assume normal distribution, because that's the far more likely scenario, most of the research do take this overall assumption, and you can proceed to the demonstration that makes sense, which I showcased in my previous comment about 10% returns on 10% annual vol versus 5% returns on 1% annual vol.
To re take the example I posted above, when the discussion is about 1+1=2, I don't think you're doing any good contradicting that it doesn't hold on Z/2.
Assuming normal distribution of returns is a pretty standard base for comparing investments. It is a base shared by many models and metrics. Sharpes don't make a lot of sense on non normal distributions, mean variance optimization either.
Modeling (and possibly economics, especially) is rife with simplifying assumptions that break down in practice. You can find many economists who think modeling individuals as rational agents is a "fine and widely used assumption" while also finding many economists and psychologists showing where this assumption can get you into trouble. There is a big difference between "this assumption is made because it reflects reality" and "this assumption is made because it makes my life as an economic modeler not suck." The latter is still fine, but only if you're upfront about its limitations.
I don't understand that. If you just bought Apple instead of SPY 20 years ago wouldn't you be doing great?
Put another way - if you can reliably pick the next Apple before anyone else, you should go work in finance and make tons of money.
Problem is that it might take years to verify that.
> The key is that
That doesn't change the fact that there are plenty (in absolute numbers) of individual investors who consistently beat the market. Whether that's because of luck or something else is rather hard to tell.
It's actually not very hard to tell; if it was because of something other than luck, you'd expect that beating the market in the past would have some predictive value of their ability to beat the market in the future.
> average
So what? It's like saying that since an average person can't run a marathon it wouldn't make sense for any individual to even try it. How does that make sense?
> cherry picked
If we agree that 50% of all investors can't beat the market, what proportion can? 1%, 10%, 30%? Because there is a massive difference.
How do we even define that group? Is it any random person buying random stocks with pocket change? Is it above a certain portfolio size? etc.
You can beat the house at blackjack, but you can’t reliably expect to do it.
> you can’t reliably expect to do it.
Sure, I can't. But assuming that it's not entirely random chance some proportion of people certainly can.
I think you’re reading too much into the analogy, which is maybe my fault for using an analogy. The point was just that it’s not that you can’t win, just that you very likely don’t have an edge - not because it’s mathematically impossible like in blackjack with a shoe that’s continuously shuffled, but because it’s so difficult.
> Sure, I can't. But assuming that it's not entirely random chance some proportion of people certainly can.
Yes, but the bar is very high.
If you're a top investing expert, you do things carefully in the right way, and you don't make mistakes, you can expect average performance. Because the market primarily consists of experts like you.
Of course, investing is a random process, and you often beat the market by being lucky. But luck doesn't last indefinitely.
There are basically two ways to beat the market consistently. One is trading based on information not available to the rest of the market. This is sometimes banned, because it makes the market less fair and less efficient. It can also be a crime. The other is finding a market that's small enough or obscure enough that it's not interesting to the professionals.
But there is no investing stat that allows you to beat the market. Life is not an RPG.
So for all intents and purposes, the takeaway for regular investors should be that they cannot expect to beat the market (but they can gamble on it if they like).
Warren Buffet buys the newspaper and has significant control of the editor. That's not the same game at all.
There's a lot of talk here about active fund management. Active ownership is playing on a completely different level.
Take 100 people randomly throwing darts at the companies on the SPY, and a fair few will do better than the SPY overall. Doesn't mean they can expect to beat the market
Is there? It would make sense if an average individual trader can't expect to beat the market. Claiming that there are no individual investors who did/can do that over a reasonably long period is both objectively false and rather absurd.
Do you believe that investment is entirely random and there is absolutely no skill involved?
Because if not, that's a nonsensical analogy. You should use a a both both luck and skill based game like poker (probably not the casino variety, though) etc.
Otherwise if you can reasonably expect to beat 50% of all "players" (of course it takes much more time to verify that in the market) then you can expect to make more than the average.
The skill involved is more just "best practices" that let you match the market: Buy-and-hold, diversify, basically, do what the index funds do and you will be roughly +0 to the market. Beyond that, it's a totally random distribution that adds between -X and +X which allows some participants to beat the market and causes some to underperform. You can't tell beforehand which participants will beat the market, even having full knowledge of their strategies and skill. If you think you can, please tell me which active funds will beat the market in the next 10 years based on their skills. I'll invest in them.
I never implied that I can. That fact doesn't prove that it's somehow fundamentally impossible to do that. The problem is that it's impossible to tell if you "strategy" is working until a significant amount of time passes and by that point the markets conditions might have changed to such an extent that you don't longer have an edge (add to that the fact that it's hardly possible to determine what part of your success was luck/skill). So there is always a huge amount of uncertainty.
Albeit if we look back by ~10-15 years it's rather obvious that it was possible to beat the market by a very significant e.g. there were clear rational reasons to believe that Nvidia would do better than its competitors like AMD or Intel and that there would be significant growth in GPU compute/ML/AI (of course accurately estimating the extent and exact timing but that wasn't necessary at all to get above market return) same applies to many companies in adjacent and unrelated sectors. Was I or the overwhelming majority of investors capable of realizing that and more importantly acting on it? Certainly not. But looking back it obviously wasn't random.
The efficient-market hypothesis is clearly false, at least in the short to medium term. That in no way means that most investors are even remotely capable of utilizing this fact.
These add up significantly. Instead of having to beat the market at all, you have to beat it by an extra half of a percent or more every year. And you have to do it year after year after year.
All the evidence shows that actively-managed funds are a weighted (against you) coin flip. Less than half will beat the market in a given year. And the results from any given year are independent of the next.
Then I suspect that even with all the supervision in place, quite some manage to also do Hollywood accounting.
Not to mention the friend of the cousin of the fund manager's niece who happened to buy x shares of y or options before, shocker, the fund invested in y.
We know these people cheat. If they were so good they wouldn't need to leech on fees.
I live in a tiny country where lots of fund are managed (only second to the US). I know the drill. Most of them by very far are about suckering people's money in, no matter what the fund is about.
Creat 16 funds, after four years show the prospectus of the one fund that performed best. Rinse and repeat.
Actively managed funds are a scam.
Also depending on where you buy it, anywhere from zero (good) to 1% entrance and exit fees.
"Scam" is not a strong enough word.
In aggregate sure. But unless we believe that it's entirely random some individual investors can still certainly expect to beat the market, they just can't verify that in advance.
I offer you a bet. We flip a perfectly fair coin. On every heads you gain 10% on top of your bet. On every tails you lose 10%.
It is fair to say that after 100 flips you may profit. If one million people play this game, someone almost certainly will. But you can expect to lose money on this game. By the end, the average person will have about 60% of their original holdings (0.9^50 * 1.1^50).
In this game it’s possible for winners to exist. It’s not even uncommon! You only have to get at least 53 out of 100 flips as heads. Unfortunately there’s also no function that lets you determine a winner in advance, and the longer you play this game the greater the expected loss.
All of the available evidence shows that publicly-available actively-managed funds are essentially playing this game. As expected, many have incredible winning streaks… right until they don’t.
Yes, Ren Tech’s Medallion Fund exists. But you can’t contribute to it; they don’t want your money. Because that requires scaling market inefficiencies and that in and of itself is an intractable problem. Novel strategies ripe for profit don’t have unlimited capacity. They rapidly exhaust alpha.
No, I simply disagree with the whole premise, at least to a limited extent.
> All of the available evidence shows that publicly-available actively-managed funds are essentially playing this game
Yeah that's true, I was mostly talking about individual investors and/or non public funds.
My only point is only that not every investor is rolling the same dice. It's just that it is effectively impossible to every verify whether you were rolling a 90-sided dice or a 100-sided one. It's rather clear that at least in the short to medium term (e.g 2-3 years) the stock is not even remotely perfectly efficient (that doesn't mean that the overwhelming majority of investors are somehow capable of utilizing that fact or that a significant proportion of those that did seemingly manage to do that weren't just lucky)
And doing that gives you the same expectations as everyone using the same dice.
The implicit assumption in that refrain is that, despite periodic dips, the U.S. stock market always goes up over time. This has been true since the Great Depression (see graph of S&P 500 since 1929)
https://www.officialdata.org/us/stocks/s-p-500/1929
The implicit assumption behind that is that the American economy always invents a way to grow. Buffet famously said, "never bet against America".
For as long as these assumptions match reality, it's likely that passive management will continue to succeed.
Even when the economy is flat, passive management works. As long as companies are economically productive, capitalism will hand over a chunk of the profits to the owners of the capital.
Of course, growth increases the size of that chunk year over year, but capitalism doesn't stop when growth stops.
Active investing is when you are looking to exceed this passive margin by timing your trades well. Active investing requires changes in productivity (such as growth).
Stock prices increase when earnings of the company grow.
In other words: when the economy grows.
You can argue that Amazon and Apple and Google and Facebook etc. will grow earnings even if the overall economy is flat or shrinks but I don't see how that would apply to passive investing i.e. investing in S&P 500 i.e. investing in 500 largest US companies.
S&P 500 is U.S. economy and they all are sensitive to overall economic situation. If people have less money, they buy less stuff. Amazon makes less money, their stock goes down. Apple sells less iPhones, their stock goes down. All other companies make less money, they spend less on advertising, Google and Facebook make less money.
I don't see a scenario where overall U.S. (or world) economy declines and S&P 500 doesn't decline.
In fact, declining economy is an argument for active investing. Even when overall economy declines, among 6000 companies listed on stock market there will be some that will be growing and if you invest in them, you'll make money.
There are other ways to make returns. Return from stock comes mainly from increasing stock prices and from dividends. But fundamentally, it comes from profits.
> Stock prices increase when earnings of the company grow.
There are many reasons stock prices increase. But whether it does or doesn't isn't really relevant.
When a company makes a profit, either:
* the profit is reinvested, the value of the company grows and the stock price grows, making a return for the passive investor
* the profit is returned as dividends, making the passive investor a return as well.
No growth needed for the individual companies either. As long as they are profitable, they make a steady return for the passive investor.
Thought experiment: imagine a company which is going to make 1 dollar of profit per year for all eternity, which it returns as dividends. For an investor with a discount rate of 95%, that company is worth 20 dollars. Say he buys the company for 20 dollars. After 10 years, that company is still worth 20 dollars, as eternity is still eternity, but the passive investor owning the company has made 10 dollars from the company.
As you can see, the passive investor made a return, despite the company only being profitable, but not growing nor shrinking.
You will make a return on your investment when your investment makes a profit, that is capitalism. Whether the profit is increasing, decreasing, flat or going in circles does not really matter, as long as it is a profit and not a loss.
Only if you were fine with waiting 50-100 years. The market in 1950 was more or less at the same level in real terms as in 1906, of course dividends were way higher back in those days. If we take that into:
e.g. if you invested 200$ in S&P 500 in 1906 adjusted by inflation in 1950 you would have had ~$1570 in 1950. Which is an average annual return of ~4.7% which is not terrible but you would have made approximately the same by buying high grade corporate bonds just with way less volatility.
There are various macroeconomic models which attempt to explain the factors of growth, for example the Solow growth model. In this model technological advancement is only one of three factors. The others are the savings rate and the population growth rate.
According to this model, you may not be able to innovate your way to growth if one or both of the other factors are contrary to growth. This may sound academic but there are concrete examples in the last twenty years of countries that have not grown because of a stagnant or shrinking working age population, e.g. Japan and Italy.
This has no bearing on the passive vs active debate, as I'm fairly confident that passive investing will always be the better strategy for a retail investor regardless of the growth potential of an economy.
It's just in a country with unfavorable macroeconomic conditions, passive investing may be the way to minimize losses rather than maximize gains.
The assumption of continued growth will probably hold true for the American economy through the end of the century at least, so for everyone here investing in US equities it is academic. But we can try to decompose an economy into factors and use those to check whether we expect growth to occur at all.
Or you invest in a total world market fund for better diversification.
Diversification would have helped anyone in Japan(-only) in 1990, and anyone in the US(-only) in the 2000s. It's a very easy strategy nowadays:
* https://investor.vanguard.com/investment-products/etfs/profi...
* https://www.vanguardinvestor.co.uk/investments/vanguard-ftse...
* https://www.vanguard.ca/en/advisor/products/products-group/e...
I suspect American economy grows slower than stock market. Last 25 years its about printing debt and money supply.
for private investors buy-and-hold of highly distributed ETFs is the best way to do it. The easiest way to get started is a one ETF portfolio like e. g. Vanguard FTSE All World or SPDR MSCI ACWI IMI. They perform internal rebalancing automatically and you virtually have nothing to do. buy them and don't look at them for the next 20 years.
‘David: The way that some folks we talked to described the difference between the institutional funds and Medallion to us is that Medallion’s average hold time for their trades and positions is (call it) a day, maybe a day-and-a-half. Whereas the average hold time for the institutional funds positions is a couple of months.’
https://www.moomoo.com/news/post/5891516/the-biggest-tax-eva...
Look at total returns over the last 40 years on the most popular indices in the world. S&P 500 crushes them all. I see a lot of "Internet advice" recommending various MSCI world indices. They are all much worse than the S&P 500.
Personally I try to avoid investing in the US for political reasons, besides the wishful expectation that the empire could fall within my lifetime and hence be a not so good investment.
There is a lot of demand for S&P 500 index , but that demand isn’t exactly tied to the fundamentals of the index, and the price isn’t tied to value of the underlying companies, it’s tied to demand of people looking to save money for retirement or a place to store a nest egg. This is an opportunity for price discovery to get things wrong and eventually the market should correct that.
https://www.investopedia.com/ask/answers/08/george-soros-ban...
I live in the UK: if I buy the S&P500 over the FTSE100 (or even more so the 250, the next 250 largest companies which are typically more UK-market-oriented) I'm making a US-weighted bet. But maybe I think I'll move there, and should have that exposure. Or maybe I spend a lot of money all over the world and want a more global exposure overall.
I think at least vast majority index is right for basically everybody, but you do still need to think about which index/indices are most applicable to your situation/intentions.
(Conversely, there are smaller indexes which tend to beat the S&P500, like the NASDAQ100, but there’s a volatility cost.)
It's sort of like "does playing pro golf make sense?".
Really, you could say it about absolutely any job, it's just a bit more direct with managing money. 'If you were any good at writing software you would just sell your own SaaS', etc.
Except Warren buffet. A lot of people went with Berkshire Hathaway and did very well.
Buffett has been underperforming the S&P 500 for about twenty years now:
* https://www.linkedin.com/pulse/warren-buffett-has-underperfo...
There are only a couple that has a large history of trades, fairly even equity curves, older than two years, and small(ish) drawdowns (< 30%).
In other words, it's difficult but possible.
However, the active find will charge higher fees.