Author Topic: Sky high S&P 500 PE Ratio (Read 3162 times)

Aardvark · « **on:** March 11, 2021, 01:20:30 PM »

I know that a big part of Mustachianism is to not worry about things like PE ratios, but is this not a bit crazy?
https://www.longtermtrends.net/sp500-price-earnings-shiller-pe-ratio/

And if you agree that it's crazy... Is it not crazy to just do nothing about it?

So... I suppose my question is: is anybody changing their investment strategy because of this?

Sanitary Stache · « **Reply #1 on:** March 11, 2021, 01:25:56 PM »

I don't know about PE ratios.

I invest in a total stock market index fund and expect it to experience continuous incremental increase in value marked by drastic downswings in value and I don't care when either event is happening.

reeshau · « **Reply #2 on:** March 11, 2021, 02:00:37 PM »

Remember that it is the P/E ratio. So, it goes up when prices go up, but it also goes up when earnings go down. And having closed a year when, say Norwegian Cruise Lines lost $15.75 a share, that is going to look bad. And this year, while "recovering," won't look good on the basis of annual earnings, either. And Case Shiller will live with that for 10 years.

And that's part of the point: to get a PE over a full business cycle. Should a pandemic year be declared an outlier, and either struck from consideration, or turned into a footnote for every interpretation? Or is it a realised potential, and it could easily happen again? If it did happen again, would we recover slower, faster, or about the same?

Or maybe it's perfectly valid, since the general assumption is that business cycles should last 5 years, and we just finished the longest bull run ever. So a recession That's "twice as bad" just evens things out?

Until you have thought your way through those questions, I don't think you can conclude anything on the Case Shiller PE.

bwall · « **Reply #3 on:** March 11, 2021, 02:08:33 PM »

Quote from: reeshau on March 11, 2021, 02:00:37 PM

Remember that it is the P/E ratio. So, it goes up when prices go up, but it also goes up when earnings go down. And having closed a year when, say Norwegian Cruise Lines lost $15.75 a share, that is going to look bad. And this year, while "recovering," won't look good on the basis of annual earnings, either. And Case Shiller will live with that for 10 years.

And that's part of the point: to get a PE over a full business cycle. Should a pandemic year be declared an outlier, and either struck from consideration, or turned into a footnote for every interpretation? Or is it a realised potential, and it could easily happen again? If it did happen again, would we recover slower, faster, or about the same?

Or maybe it's perfectly valid, since the general assumption is that business cycles should last 5 years, and we just finished the longest bull run ever. So a recession That's "twice as bad" just evens things out?

Until you have thought your way through those questions, I don't think you can conclude anything on the Case Shiller PE.

Valid points.

I remember a couple of years ago the headlines were '10 year CASE at all time historic highs!' or some such hand-wringing nonsense. They always neglected to mention that the financial crisis of 2008/09 were still in the mix, totally distorting the 10 year PE.

So, I pay about as much attention to Case Shiller as I do a televangelist or an astrologer.

the_gastropod · « **Reply #4 on:** March 11, 2021, 02:18:56 PM »

Another critique that I think is pretty relevant is that the Earnings aspect of the P/E ratio is an inconsistently measured number that changes when accounting laws change. GAAP earnings today are defined significantly differently from GAAP earnings of the 1990s.

This is a pretty good (and more thorough) explanation as to why this is a problem and why things aren't necessarily as bad as they seem at first glance http://www.philosophicaleconomics.com/2013/12/shiller/

vand · « **Reply #5 on:** March 12, 2021, 06:20:28 AM »

Has been discussed many times.
Yes the S&P is expensive.

However I don't particularly think having fixed bands of "cheap/fair/expensive/bubble" is particularly helpful. What is considered cheap or expensive changes
over time and moreover it changes in response to ongoing current prices. So I like to think valuation bands should change themselves and weight the most recent price more heavily, similar to a +/- range around the long term moving average.

RWD · « **Reply #6 on:** March 12, 2021, 08:27:01 AM »

maizefolk · « **Reply #7 on:** March 12, 2021, 08:41:14 AM »

Quote from: Aardvark on March 11, 2021, 01:20:30 PM

So... I suppose my question is: is anybody changing their investment strategy because of this?

Lets say you decide the stock market is expensive. How would you actually change your investment strategy?

Bonds: Real yields on many bonds are negative. Either they'll go up and your existing bonds will lose value. Or they'll go negative and any new bonds you buy will be charging you money to hold them.

Cash: No one is paying any sort of meaningful interest on cash sitting in the bank (or sitting under your mattress). And more "serious people" (e.g. reporters for places like NPR) are talking about the risk of significant inflation over the next several years.

Real Estate: If you think the stock market is expensive, have you looked at real estate prices lately?

Collectables: One of the finance podcasts I listen to is constantly running adds for a company that lets you buy "shares" in companies created just to hold individual pieces of artwork. Seems pretty bubbly to me.

Commodities: The expected real return of holding commodities is very nearly zero. And trying to hold commodities through ETF like investments creates all sorts of other problems. Take a look at what happened to USO.

TL;DR: Even if you're convinced the stock market is expensive and risky, where would you put your money instead that isn't expensive and risky?

vand · « **Reply #8 on:** March 12, 2021, 09:18:07 AM »

Quote from: maizefolk on March 12, 2021, 08:41:14 AM

Quote from: Aardvark on March 11, 2021, 01:20:30 PM
So... I suppose my question is: is anybody changing their investment strategy because of this?

Lets say you decide the stock market is expensive. How would you actually change your investment strategy?

Bonds: Real yields on many bonds are negative. Either they'll go up and your existing bonds will lose value. Or they'll go negative and any new bonds you buy will be charging you money to hold them.

Cash: No one is paying any sort of meaningful interest on cash sitting in the bank (or sitting under your mattress). And more "serious people" (e.g. reporters for places like NPR) are talking about the risk of significant inflation over the next several years.

Real Estate: If you think the stock market is expensive, have you looked at real estate prices lately?

Collectables: One of the finance podcasts I listen to is constantly running adds for a company that lets you buy "shares" in companies created just to hold individual pieces of artwork. Seems pretty bubbly to me.

Commodities: The expected real return of holding commodities is very nearly zero. And trying to hold commodities through ETF like investments creates all sorts of other problems. Take a look at what happened to USO.

TL;DR: Even if you're convinced the stock market is expensive and risky, where would you put your money instead that isn't expensive and risky?

TINA?

You could just.. pick less expensive stock markets. That would be anywhere outside of the US.

Also, at the rate the Bond market is selling off, fixed income is going to be paying serious future cashflows by the summer... maybe.

DadJokes · « **Reply #9 on:** March 12, 2021, 10:07:43 AM »

Quote from: vand on March 12, 2021, 09:18:07 AM

Quote from: maizefolk on March 12, 2021, 08:41:14 AM
Quote from: Aardvark on March 11, 2021, 01:20:30 PM
So... I suppose my question is: is anybody changing their investment strategy because of this?

Lets say you decide the stock market is expensive. How would you actually change your investment strategy?

Bonds: Real yields on many bonds are negative. Either they'll go up and your existing bonds will lose value. Or they'll go negative and any new bonds you buy will be charging you money to hold them.

Cash: No one is paying any sort of meaningful interest on cash sitting in the bank (or sitting under your mattress). And more "serious people" (e.g. reporters for places like NPR) are talking about the risk of significant inflation over the next several years.

Real Estate: If you think the stock market is expensive, have you looked at real estate prices lately?

Collectables: One of the finance podcasts I listen to is constantly running adds for a company that lets you buy "shares" in companies created just to hold individual pieces of artwork. Seems pretty bubbly to me.

Commodities: The expected real return of holding commodities is very nearly zero. And trying to hold commodities through ETF like investments creates all sorts of other problems. Take a look at what happened to USO.

TL;DR: Even if you're convinced the stock market is expensive and risky, where would you put your money instead that isn't expensive and risky?

TINA?

You could just.. pick less expensive stock markets. That would be anywhere outside of the US.

Also, at the rate the Bond market is selling off, fixed income is going to be paying serious future cashflows by the summer... maybe.

I won't hold my breath on that one.

ChpBstrd · « **Reply #10 on:** March 12, 2021, 12:11:24 PM »

I definitely disagree with all the people who say There Is No Alternative and so therefore we all must pile naked into very expensive stocks. People lost fortunes to over-valuation in 2000-2002 when the Nasdaq fell 78%, despite being filled with high-growth companies. Then we all said we should have known better than to pay six-figure PE ratios for technology and telecom companies just because they had compelling stories. Here we are again with Tesla, Zoom, the reopening trade, and cryptocurrencies.

We can laugh all we want at cash under the mattress, but it beat the S&P 500's *total return* for 20% of the past 25 years. A person putting cash under the mattress any year between 1996-2001, or 2003-2008, or from 2017-2019 would have seen an opportunity to buy into the S&P 500 at a significantly lower price between one and five years later - that's 13 out of the last 25 years, or 52% of the time that cash or bonds were a better choice in hindsight than stocks.

One would have to get the timing just right to fully exploit those statistics, but the point is stonks don't go up forever, or even consistently, so there is always a case to be made for awaiting the next dip, particularly when valuations are flashing red and particular bubbles are visible (growth stocks, real estate, and bonds all at once this time). There's also a case to be made for buying insurance in the options market to hedge against the next correction. This is what I'm about to do, starting a few months after this latest stimulus.

Blissful Biker · « **Reply #11 on:** March 12, 2021, 12:47:21 PM »

I've maintained an 80% stocks / 20% bonds asset allocation for many years. I've had the plan to adjust it to 75/25 as I approach retirement and thus sequence of returns risk, but didn't have a fixed date in mind. The current PE ratio helped me pull the trigger and make the change. It's not a radical change my any means, just a tiny bit safer.

I feel comfortable with 75/25 for the next 6-8 years and then will likely revert to 80/20 for the long run.

dreadmoose · « **Reply #12 on:** March 12, 2021, 01:11:34 PM »

Every time these threads come up (thank you RWD for the great reminders) it always sounds to me like "the stock market went up on average for so long it can't possibly go up more based on the fact that it went up." (awkward cyclical wording on purpose)

The reason we invest in broad market index funds at ratios near 80/20 is that they provide the best return sans market timing. When you think you've found some crazy measure (that everyone in the stock market already knows about in this instance) you're just using it to emotionally justifying market timing... which will negatively impact your returns over the long term.

It is not "those that market time were dumb because they didn't think about it enough, didn't have the right charts, or were not smart enough". It is "market timing is dumb because it can't be predicted in any capacity and those that got it right were 100% luck and it's not repeatable."

Way over 100,000 people smarter than me and you have tried to market time this year alone; the stats show that those that made extra money will not be able to repeat that win. They would be better off in the future if they could forget they did it and put it all back into broad market index funds.

We can word it all 100's of different ways, and point to 1000's of different charts that say whatever we want them to say... but justifying market timing will negatively affect your returns unless you accidentally hit the stock lottery. And if you don't understand that you got lucky (and how would you if you made extra money cuz you're smart!) you will just lose next time and average to lower than if you didn't play the wrong game.

/rant

maizefolk · « **Reply #13 on:** March 12, 2021, 02:30:37 PM »

Quote from: ChpBstrd on March 12, 2021, 12:11:24 PM

We can laugh all we want at cash under the mattress, but it beat the S&P 500's *total return* for 20% of the past 25 years. A person putting cash under the mattress any year between 1996-2001, or 2003-2008, or from 2017-2019 would have seen an opportunity to buy into the S&P 500 at a significantly lower price between one and five years later - that's 13 out of the last 25 years, or 52% of the time that cash or bonds were a better choice in hindsight than stocks.

One would have to get the timing just right to fully exploit those statistics, but the point is stonks don't go up forever, or even consistently, so there is always a case to be made for awaiting the next dip, particularly when valuations are flashing red and particular bubbles are visible (growth stocks, real estate, and bonds all at once this time). There's also a case to be made for buying insurance in the options market to hedge against the next correction. This is what I'm about to do, starting a few months after this latest stimulus.

I completely agree with you that if one could get the timing right, it would be possible to do much better than a buy and hold investor by buying stocks when they were going up and selling them and stashing cash before they go down.

Very simple in principle.

Successfully getting the timing right on the other hand...

RWD · « **Reply #14 on:** March 12, 2021, 04:20:33 PM »

Quote from: ChpBstrd on March 12, 2021, 12:11:24 PM

We can laugh all we want at cash under the mattress, but it beat the S&P 500's *total return* for 20% of the past 25 years. A person putting cash under the mattress any year between 1996-2001, or 2003-2008, or from 2017-2019 would have seen an opportunity to buy into the S&P 500 at a significantly lower price between one and five years later - that's 13 out of the last 25 years, or 52% of the time that cash or bonds were a better choice in hindsight than stocks.

Not sure losing 80% of the time to S&P 500 is high praise for cash. I'm also a little skeptical of your claims here, are you including dividends for the specific years for those time ranges? 1996 and 1997 were worst case roughly flat after including dividends. There's also rebalancing to be considered. If it takes several years before the bubble bursts you'll have rebalanced out some of the gains (assuming you aren't 100% US stocks).

MustacheAndaHalf · « **Reply #15 on:** March 13, 2021, 07:21:22 AM »

Quote from: dreadmoose on March 12, 2021, 01:11:34 PM

It is not "those that market time were dumb because they didn't think about it enough, didn't have the right charts, or were not smart enough". It is "market timing is dumb because it can't be predicted in any capacity and those that got it right were 100% luck and it's not repeatable."
...
/rant

Warren Buffet beat the market for decades, and academics later studied his investing style carefully and developed new factors to explain his success. I wouldn't call Warren Buffet "100% luck" and "not repeatable". There's a number of famous investors who beat the market for decades.

Quote from: ChpBstrd on March 12, 2021, 12:11:24 PM

We can laugh all we want at cash under the mattress, but it beat the S&P 500's *total return* for 20% of the past 25 years. A person putting cash under the mattress any year between 1996-2001, or 2003-2008, or from 2017-2019 would have seen an opportunity to buy into the S&P 500 at a significantly lower price between one and five years later - that's 13 out of the last 25 years, or 52% of the time that cash or bonds were a better choice in hindsight than stocks.

Whenever the stock market has a down year, cash wins. But I only count five individual years in the last 25 where that happened: 2000, 2001, 2002, 2008, 2018.

According to Portfolio Visualizer, from 1996-2001 stocks gained +93% while cash gained +34%. By itself, stock performance in 1997 just about tied cash's performance for the entire 5 years. Over the whole 25 years (1996-2005), stocks gained +891% while cash gained +70%, so that seems like a counter-example for investing in cash.

FR2000EE · « **Reply #16 on:** March 13, 2021, 04:52:46 PM »

I am also worried about the high PE ratio. It's hard to balance with the market can do crazy things longer than I can stay solvent, (think tesla shorts). I have been selling some of the positions that have done really well that I picked up last March/April. So, I am about 40% cash as the moment and I am still very nervous about the whole market. While being in all the time is probably the best strategy, It doesn't seem possible for me, no matter how much I read about it. So, I just my best to buy value and reasonable growth. I haven't been the best investor, but have earned enough to have more in lifetime financial assets than I have earned from my job earnings. Sometimes the buy and hold crowd tries to push everyone into their strategy on this site. But, I bet if you look at it, most of them have made changes along the way also. If you need to take less risk and wait for another opportunity, it's your money, do what you think is best.

reeshau · « **Reply #17 on:** March 13, 2021, 05:43:13 PM »

Quote from: FR2000EE on March 13, 2021, 04:52:46 PM

If you need to take less risk and wait for another opportunity, it's your money, do what you think is best.

This is very true. It's one thing to maximize your returns. It's another thing if you are popping antacids and checking market prices daily. You only need how much you need. You might have things you would do with more, but those wants are less important than the needs. Likewise, you may risk some market move by sitting on some cash now, But if that helps you sweat out your job situation until we reach Covid herd immunity, well that's useful too, but not calculated in any return.

vand · « **Reply #18 on:** March 14, 2021, 01:24:28 AM »

This is a good listen which goes through the S&P sectors to conclude that even allowing for changes in composition and the heavier weighting to tech and healthcare, the S&P trades well above intrinsic value.

You can look two stocks like Exxon and Shell, the one that trades on the US has bounced back far quicker than the one that doesn't. Doesn't make any sense to me, its not as if Exxon's management is pulling up trees.

https://mebfaber.com/2018/09/24/bonus-episode-rick-friedman-anna-chetoukhina-faang-schmaang/

MustacheAndaHalf · « **Reply #19 on:** March 14, 2021, 03:39:00 AM »

Quote from: FR2000EE on March 13, 2021, 04:52:46 PM

I am also worried about the high PE ratio. It's hard to balance with the market can do crazy things longer than I can stay solvent, (think tesla shorts). I have been selling some of the positions that have done really well that I picked up last March/April. So, I am about 40% cash as the moment and I am still very nervous about the whole market. While being in all the time is probably the best strategy, It doesn't seem possible for me, no matter how much I read about it.

Are you attributing recent losses to P/E ratios? Because that could be more about inflation fears - in which case, cash isn't good defense.

It may help to look at historical stock performance, and see for yourself how often a crash is followed by a recovery.

If it's purely about P/E ratio, you could invest in international value ETFs. International tends to have lower P/E values, and value focuses on avoiding high P/E values. That risks missing any tech rally, but likely beats holding cash.

FR2000EE · « **Reply #20 on:** March 14, 2021, 05:10:17 PM »

Agree in general that cash isn't a good investment in inflationary times. I suppose, it is a downside risk protection and hedge against a short term pull back, where I could re-deploy the cash. International does have a lower PE ratio and I have been considering that as well. I kind of miss the days when international was less correlated to the US market, it doesn't seem to be as much diversification as it provided decades ago. I appreciate the comments and options for me to consider. Another strategy I am considering is buying S&P puts, when I get nervous about valuation, such that I don't create a taxable event by selling then rebuying later, hopefully lower.

PDXTabs · « **Reply #21 on:** March 15, 2021, 09:51:32 AM »

Quote from: Aardvark on March 11, 2021, 01:20:30 PM

So... I suppose my question is: is anybody changing their investment strategy because of this?

Nope. If you invested in the SP500 in March 2002 at the very top and just left your money in then right now you'd have something like 6.5% CAGR real (after inflation) with dividends reinvested:
https://dqydj.com/sp-500-return-calculator/

dougules · « **Reply #22 on:** March 15, 2021, 10:37:26 AM »

Quote from: MustacheAndaHalf on March 13, 2021, 07:21:22 AM

Quote from: dreadmoose on March 12, 2021, 01:11:34 PM
It is not "those that market time were dumb because they didn't think about it enough, didn't have the right charts, or were not smart enough". It is "market timing is dumb because it can't be predicted in any capacity and those that got it right were 100% luck and it's not repeatable."
...
/rant
Warren Buffet beat the market for decades, and academics later studied his investing style carefully and developed new factors to explain his success. I wouldn't call Warren Buffet "100% luck" and "not repeatable". There's a number of famous investors who beat the market for decades.

True, but they did it with a whole lot of homework as well as skill and talent. If you're willing to make pouring over the books of companies into your all-consuming passion, you might be able to do it too. That just sounds like another job to me, though.

dreadmoose · « **Reply #23 on:** March 15, 2021, 11:18:29 AM »

Quote from: dougules on March 15, 2021, 10:37:26 AM

Quote from: MustacheAndaHalf on March 13, 2021, 07:21:22 AM
Quote from: dreadmoose on March 12, 2021, 01:11:34 PM
It is not "those that market time were dumb because they didn't think about it enough, didn't have the right charts, or were not smart enough". It is "market timing is dumb because it can't be predicted in any capacity and those that got it right were 100% luck and it's not repeatable."
...
/rant
Warren Buffet beat the market for decades, and academics later studied his investing style carefully and developed new factors to explain his success. I wouldn't call Warren Buffet "100% luck" and "not repeatable". There's a number of famous investors who beat the market for decades.

True, but they did it with a whole lot of homework as well as skill and talent. If you're willing to make pouring over the books of companies into your all-consuming passion, you might be able to do it too. That just sounds like another job to me, though.

Add to this Warren Buffet's own advice, and how he's going to leave money to his wife: “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)"

And where he puts his money on the worlds smartest hedge funds vs standard index funds: The $1,000,000 Bet

The fact that you know his name and he's a larger-than-life celebrity for accomplishing what he did, while saying we can't and shouldn't try to replicate it kind of solidifies my point.

This thread isn't even about if you can make extra money in the stock market (I believe you can't consistently). It's about if the high P/E ratio means we should action anything based on that (we categorically should not).

As always, write down an Investment Policy Statement and follow it. If you get scared with your ratios of Stocks to Bonds then adjust them to your actual risk tolerance. Do not market-time based on charts and panic you've read online or seen in the news. That is a nearly guaranteed way you lose your money over time... though if you don't look that close at the end you won't notice.

MustacheAndaHalf · « **Reply #24 on:** March 15, 2021, 11:38:10 AM »

Quote from: dreadmoose on March 15, 2021, 11:18:29 AM

Quote from: MustacheAndaHalf on March 13, 2021, 07:21:22 AM
Quote from: dreadmoose on March 12, 2021, 01:11:34 PM
It is not "those that market time were dumb because they didn't think about it enough, didn't have the right charts, or were not smart enough". It is "market timing is dumb because it can't be predicted in any capacity and those that got it right were 100% luck and it's not repeatable."
...
/rant
Warren Buffet beat the market for decades, and academics later studied his investing style carefully and developed new factors to explain his success. I wouldn't call Warren Buffet "100% luck" and "not repeatable". There's a number of famous investors who beat the market for decades.
Add to this Warren Buffet's own advice, and how he's going to leave money to his wife: “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)"
...
The fact that you know his name and he's a larger-than-life celebrity for accomplishing what he did, while saying we can't and shouldn't try to replicate it kind of solidifies my point.

I quoted you saying "market timing" is "100% luck", not what you're saying now.

Quote from: dreadmoose on March 12, 2021, 01:11:34 PM

It is "market timing is dumb because it can't be predicted in any capacity and those that got it right were 100% luck and it's not repeatable."

So I'm picking on that sentence, by showing that Buffet is a notable exception. There's also George Soros, whose Quantum Fund beat the market by a wide margin for decades. There's Peter Lynch, who averaged 29% over his 13 years running Fidelity Magellan Fund ...
https://en.wikipedia.org/wiki/Peter_Lynch#Fidelity_Magellan_Fund

dreadmoose · « **Reply #25 on:** March 15, 2021, 12:00:01 PM »

I understand what you're saying MustacheAndaHalf, there are some people that have done what I'm saying is impossible and I didn't leave any room to be slightly wrong so my point is defeated.

The nuance I might not have portrayed is that it's possible for any singular individual to hit the lottery (market time) multiple times in a row, but that the stats are so stacked against that outcome that it's the exact opposite of a prudent plan. It is a mathematical improbability to the point I exaggerate it (ever so slightly) to an impossibility.

Using significant figures it is 100% luck; that doesn't delete the chance it may actually only be 99.99999% luck.

Picking singular (or triplicate) examples of someone that beats the overwhelming majority, and even then only sometimes doesn't prove any point. We (the collective we) are better off investing in low-cost index funds over long time periods without attempting to market time. This is ignoring using basic P/E ratios to choose market timing points, which is even sillier than just believing you can consistently beat the average against all odds.

On the more strawman side... how is the Fidelity Magellan Fund doing now? "The fund has underperformed the S&P 500 significantly over the last 20 years, down 11% while the S&P is up more than 134%."

They guessed right for 13 years... then started falling behind to the point you'd be better off having bought the S&P 500 throughout the whole time.... kind of showing that even legendary survivorship bias examples are not a sure bet, so what would have been... and how do we use that today https://www.cnbc.com/2020/10/02/fidelity-magellan-mutual-fund-moves-to-etf-format-what-may-be-next.html

MustacheAndaHalf · « **Reply #26 on:** March 16, 2021, 07:10:23 AM »

And you did use the "/rant" tag, which I didn't really respect by nitpicking.

More generally, in some years indexing actually does worse than average. Passive investing seems to have the most trouble in crash years, like the following SPIVA per by year data shows:
https://www.spglobal.com/spdji/en/spiva/article/spiva-us/
They compared all U.S. mutual funds against the S&P 1500 (a broad market index):
2020, 57.1% underperformed (43% beat) passive indexing
2008, 64.9% underperformed (35% beat) passive indexing
2003, 48.0% underperformed (52% beat) passive indexing

I cherry picked 3 crashes (2003, 2008, 2020) out of their 20 years of data. I wouldn't say 52% is luck - most active funds beat the index in 2003. It looked good in 2008, but 2009-2010 were bad (60% beat in 2009, half in 2010).

Dividing the world into lucky and certain doesn't seem to be reflected in the actual data. People reading exaggerations like that might think indexing is overly easy, and abandon it when their expectations are shattered. I think it's more reasonable to say passive indexing has an edge over active and market timing approaches, but there are times like 2003-2005 that will test passive investors.

dreadmoose · « **Reply #27 on:** March 16, 2021, 10:05:41 AM »

Taking individual years out is the piece I'm fighting against here though. Showing someone that there are a few years in the past that an active strategy slightly beats out passive indexing is burying the lede.

You would have to have perfectly market-timed to jump over to active that year, then jumped back the next... which is what I keep saying is nearly impossible (why would you go there, but then jump back.. making two opposite investing decisions all within a year or two).

For passive investing to win all you have to do is extend the timelines, we aren't playing a game of who has more money at the end of the next 6 months. That's gambling, and people in crypto beat everyone. We're taking the lowest risk approach to have the most amount of money after 10 years minimum, with actual timelines for FIRE more in the 30+ year range. The numbers lean so far towards set an IPS of 80/20ish and forget that I believe the noise from the gamblers or worryers cause much more damage.

Indexing IS overly easy.

Setting expectations (10+ year timelines, and ignore fluctuations) seems much easier to me than somehow becoming the next Warren Buffet. There is no actionable strategy in "sometimes, albeit rarely, active management can squeak out wins over 1-3 year timelines". Whereas passive investing has very easy guidelines, strategy, and a set of historical data that backs it.

MustacheAndaHalf · « **Reply #28 on:** March 16, 2021, 10:43:45 AM »

With investing there's rarely a proof, but the data I quoted suggest there might be a coin flip between active and passive funds after a crash.

I claim that "buy and hold" is more important than passive vs active. Using the 10 year time frame you mention (with the note that the 2008 crash took until 2012 to recover), here's that same 2020 S&P report, page 14:
The S&P 500 returned 13.88% over the past 10 years
Large cap active funds returned 12.93% over the past 10 years
https://www.spglobal.com/spdji/en/documents/spiva/spiva-us-year-end-2020.pdf#page=14

"Winning" in this case was 14%/yr vs 13%/yr for the past 10 years. It's probably a smaller gap than most people expect, but it's only available to someone who stayed invested for the decade.

A much more significant mistake would be exiting the market (at high P/E values, per this thread), and winding up in cash - cash earned about 0.6%/year from 2011-2020 according to Portfolio Visualizer.

Personally I switched from all passive investing to mostly stock picking last March. I biased my portfolio towards stocks like Macy's, and waited for them to recover. So it's stock picking, which might be market timing, but it's more importantly buy and hold. At least, until the recovery is over, and I start arguing for passive investing again.

ChpBstrd · « **Reply #29 on:** March 16, 2021, 11:17:27 AM »

With stock-picking, value or growth tilts, tech tilts, small vs. mid vs. large caps, US vs international, hedged vs. aggressive, 60/40 vs 100% stocks, etc. we will almost certainly happen upon things that worked for the past 10 years, but it would be a fallacy to then conclude they will work for the next 10 years. This is the same fallacy as saying the highest performing sectors last year will be good bets this year. Recall the graphic below about best-performing sectors, which demonstrates the fallacy of trying to predict any particular year's best sector. We're trying something even harder when we attempt to predict the next several years' best performing individual stocks!

In 2001-2005, the best performing investors were the ones who hedged or avoided the Nasdaq entirely, and then for the next several years piling into the Nasdaq delivered great returns. There are many more examples, and a case could be made for picking the "dogs" of the stock market, which have lagged long enough to be forced to make strategic changes. We can rest assured the financial media will talk primarily about what worked best in the past year, which is horrible guidance going forward. Similarly, in some years going 3x leveraged to the market was the right move and in other years going 100% to cash was the right move. We have no clue what's next.

markbike528CBX · « **Reply #30 on:** March 16, 2021, 02:41:03 PM »

The Callan Periodic Table of Investment Returns is equally colorful and shows how investment classes bounce around from sukka to superhero and back again.

https://www.callan.com/research/2020-classic-periodic-table/
https://www.callan.com/uploads/2020/06/e085e47ea3e911f88ce21aaf5855cbb1/periodic-table-collection.pdf

I've gotten a copy most years.

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