Author Topic: Unreliability of long run stock market returns  (Read 16218 times)

boarder42

  • Walrus Stache
  • *******
  • Posts: 7849
Re: Unreliability of long run stock market returns
« Reply #100 on: September 26, 2017, 06:27:18 AM »
The ''average returns'' we talk about here, is it considering dividends ?
It's including reinvestment of all dividends (also known as total return).

This is a good resource:
https://dqydj.com/sp-500-return-calculator/

My investing career spans 1998 to now.  S&P500 annualized total return adjusted for inflation = 4% (three bull markets, two bears).

Someone investing in the last eight years has seen 12% (one bull market).

yes but just b/c thats what most of the younger group has seen doesnt mean thats what we estimate as our average ROR

AdrianC

  • Pencil Stache
  • ****
  • Posts: 962
  • Location: Cincinnati
Re: Unreliability of long run stock market returns
« Reply #101 on: September 26, 2017, 07:48:34 AM »
The ''average returns'' we talk about here, is it considering dividends ?
It's including reinvestment of all dividends (also known as total return).

This is a good resource:
https://dqydj.com/sp-500-return-calculator/

My investing career spans 1998 to now.  S&P500 annualized total return adjusted for inflation = 4% (three bull markets, two bears).

Someone investing in the last eight years has seen 12% (one bull market).
The years 1998 to present are a good demonstration of how dollar cost averaging can increase the reliability of returns. I thought 4% looked low so I checked portfolio visualizer and sure enough, investing monthly into the S&P500 increased rate of return from 6.76% to 8.26% compared to a lump sum on January 1998 (but of course dollar cost averaging also ended in less money than if you had made a lump sum of the same size, which is why, given a choice, lump sum is preferable.)

Just to clarify in case anyone is confused, I'm quoting real returns, Radagast is quoting nominal.

August 1998- August 2017
Annualized S&P 500 Return (Dividends Reinvested)
Not adjusted for inflation: 6.374%
Adjusted for inflation (real return): 4.137%


AdrianC

  • Pencil Stache
  • ****
  • Posts: 962
  • Location: Cincinnati
Re: Unreliability of long run stock market returns
« Reply #102 on: September 26, 2017, 07:52:30 AM »
yes but just b/c thats what most of the younger group has seen doesnt mean thats what we estimate as our average ROR

Sure. And what we estimate doesn't matter anyway. As we say around our dinner table: "You get what you get, and you don't get upset".

boarder42

  • Walrus Stache
  • *******
  • Posts: 7849
Re: Unreliability of long run stock market returns
« Reply #103 on: September 26, 2017, 01:14:13 PM »
yes but just b/c thats what most of the younger group has seen doesnt mean thats what we estimate as our average ROR

Sure. And what we estimate doesn't matter anyway. As we say around our dinner table: "You get what you get, and you don't get upset".

correct its mostly futile.  as indicated many times here and in MMM posts the returns during accumulation arent really as big a deal as the amount of money you're contributing to your future.

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1334
  • Age: 59
  • Location: Redmond, WA
    • Evergreen Small Business
Re: Unreliability of long run stock market returns
« Reply #104 on: September 26, 2017, 02:05:56 PM »
... as indicated many times here and in MMM posts the returns during accumulation arent really as big a deal as the amount of money you're contributing to your future.

If what you mean by this is the gap between the worst and best case lines in the chart below at, say, the 10 year or 15 year marker isn't that bad, I guess I can sort of see that... But to me, that gap still looks pretty significant.



Here's another chart that shows the range of returns using the same data:



P.S. These come from the blog post I did the week after the blog post cited near the start of this thread: myth of the long run stock market return chart.


boarder42

  • Walrus Stache
  • *******
  • Posts: 7849
Re: Unreliability of long run stock market returns
« Reply #105 on: September 27, 2017, 07:42:53 AM »
... as indicated many times here and in MMM posts the returns during accumulation arent really as big a deal as the amount of money you're contributing to your future.

If what you mean by this is the gap between the worst and best case lines in the chart below at, say, the 10 year or 15 year marker isn't that bad, I guess I can sort of see that... But to me, that gap still looks pretty significant.



Here's another chart that shows the range of returns using the same data:



P.S. These come from the blog post I did the week after the blog post cited near the start of this thread: myth of the long run stock market return chart.

DrF ran a sim on the first page that showed exactly what the year range was.  I mean looking at a chart is pretty and all but whats the real time difference thats all that really matters.  and its at most 5 years from worst vs best... so planning for a 2 year range is all thats needed for the most part.  and even then as stated knowing this is great but there is no way to effect what happens over your accumulation window.  so just dump in the money and decrease your spending and retire when you get to your number and you're comfortable with the current status of your investments to support you. 

this also assumes investing the same amount annually.  Most investments accellerate throughout life esp. around here in 7 years my salary has gone up 120% so this would need to take into account non linear investment on an annual basis i'd be interested to see how a 20% increase in investment YoY affected the best and worse outcomes

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1334
  • Age: 59
  • Location: Redmond, WA
    • Evergreen Small Business
Re: Unreliability of long run stock market returns
« Reply #106 on: September 27, 2017, 02:05:26 PM »
... its at most 5 years from worst vs best... so planning for a 2 year range is all thats needed for the most part.  and even then as stated knowing this is great but there is no way to effect what happens over your accumulation window.  so just dump in the money and decrease your spending and retire when you get to your number and you're comfortable with the current status of your investments to support you.

I agree. And I think this is really sort of akin to discussing whether the glass is 80% full or 20% empty.
 
this also assumes investing the same amount annually.  Most investments accellerate throughout life esp. around here in 7 years my salary has gone up 120% so this would need to take into account non linear investment on an annual basis i'd be interested to see how a 20% increase in investment YoY affected the best and worse outcomes

You could pretty easily modify the stock market monte carlo simulation worksheet I provided here to do that. Well, except for estimating the inflation rate. But if you worked in nominal dollars which maybe works okay for a shorter forecast, that might be okay.