Author Topic: The stock market ALWAYS goes up  (Read 3879 times)

ILikeDividends

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Re: The stock market ALWAYS goes up
« Reply #50 on: January 07, 2019, 08:29:22 PM »
There are other cases where markets have been flat for 20 years.   From 60-63, future 20 year returns were generally below 2%.  1960 to 1982 it was below 2%, that's a 22 year stretch.  Even from that peak in 2000 until today I think it's only up 2.5% over inflation.   It happens.
Is that from a price-only analysis?  Or is that with dividends reinvested?  This isn't a trick question.  I don't actually know the answer.  I'm just curious about whether dividends are factored into your analysis, and whether they are reinvested or spent.

nereo

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Re: The stock market ALWAYS goes up
« Reply #51 on: January 07, 2019, 08:41:25 PM »

No, it was worse than that.  At year 12, it was still down once you account for inflation.  Bonds beat equities in that period.

There are other cases where markets have been flat for 20 years.   From 60-63, future 20 year returns were generally below 2%.  1960 to 1982 it was below 2%, that's a 22 year stretch.  Even from that peak in 2000 until today I think it's only up 2.5% over inflation.   It happens.

Huh?  Starting in 2007?  12 years later is ...now.  August '00 to present is ~18 years, and as noted it's still up even cherry-picking those dates.

No one here has ever claimed that there has never been a period where bonds did not beat equities - rather they trail equities the majority of the time.

I'm not sure why you keep this up.  Unless you can bring some new analysis to the discussion it's already been thoroughly discussed and dissected.  Twenty year periods have historically always yielded positive returns.  On average (median) those returns are just shy of 8% (adjusted for inflation), with the inner quartile range of just above 4 and 9%. If anything these data seem to refute your original statements.
No one is arguing that low returns don't 'happen' after 20 years; instead people are pointing out that low-return events occur a very small percentage of the time.

You keep searching for peak to trough despite all the discussion - why?  You seem to have also arbitrarily decided that growth of 2.x% in excess of inflation is somehow 'flat' (despite this being a 60% increase in principle) - why?  Again, what is your alternative? Bonds (depending on which kind you are talking about) return on average about 2.6% after inflation and they, too, can lose money in real terms. Savings accounts have an even worse track record. Shoving it under your mattress means you'll always lose out to inflaiton (which has averaged about -3%/year, but has exceeded -10% at times).


Is that from a price-only analysis?  Or is that with dividends reinvested?  This isn't a trick question.  I don't actually know the answer.  I'm just curious about whether dividends are factored into your analysis, and whether they are reinvested or spent.
It appears what frugal_c is doing is selecting various market peaks and calculating the various returns with dividends reinvested and inflation (CPI) factored.
The underlying assumption is that someone could lump-sum all their money at that peak and then never reinvest another cent before pulling it out years later at another inopportune time.

It kind of brings to mind the story of Bob, the worst market timer in history
(an entertaining fable about long-term investing)
« Last Edit: January 07, 2019, 08:45:38 PM by nereo »

frugal_c

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Re: The stock market ALWAYS goes up
« Reply #52 on: January 08, 2019, 11:53:35 AM »
ILikeDividends, all my numbers including dividends reinvested and account for inflation.  I am using the calculator at this site https://dqydj.com/sp-500-return-calculator/.


nereo,

The inheritance I was referring to was invested October 2000.    12 years later it was down 2% after inflation.

I just keep this up because it seems relevant to the thread.  I want people to be aware of the risks with equities.  I don't want people to panic when things are rough and I think it's less likely if they are aware of the risks ahead of time.

I guess I pick peak to trough because I like to attack my arguments.  Plan for bad things to happen, then hopefully you exceed those expectations?    However, if you look at the numbers starting 1959-62, those 20 year periods are all below 2%.  And it's not just picking a trough, pretty much any ending period from 74-82 will have really poor results.

The 2% just comes from my calculations. That's roughly the point I find where the math starts to change.  Definitely a bit subjective of course.   Our saving rate is probably only 30%, very low by MMM standards but that is what we can do.   For us, we really rely on the market returns to get us to retirement.

Let me give one example.  If we are going for the traditional $1M retirement nest egg with a $40k spend, let's say we are saving $20k per year.  This is not the same as my numbers but kind of ballpark close enough.  Let's say we have a $500k stache (just making up some numbers).  With a 7% return (long term average) we are retired in 7 years.   With 4% it's 10 years.  With 2% it's 14.5 years.   With 1% it's 18 years.  It really starts to change things with those lower returns.

Why does it matter?  What would I do different even if that is a possibility?  Honestly, I would live life a bit different.  It means I have to be more aggressive with career and increasing income / cutting expenses becomes even more critical.   You can kind of just ride out 7 years, but if it's 15, that's too long.   At that point it might be worth starting a business even.   It might also be worth diversifying into real estate.

I think at the end of the day, my relative would have been happier if they had realized it was a real possibility there nest egg would still be worth the same 12 years later.   The 80's and 90's were just so crazy we just were irrational in our expectations.  With 10% or high returns for so long, a bad market felt like one with 5-6% returns.  That is on them but I just want everyone else to have their eyes wide open when they are investing that this is a possibility.   Yes, it did turn out ok in the end.
« Last Edit: January 08, 2019, 11:59:17 AM by frugal_c »

Mesmoiselle

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Re: The stock market ALWAYS goes up
« Reply #53 on: January 08, 2019, 11:57:31 AM »
dangerous? pfft. We're not talking about starvation here. We're talking about highly motivated intelligent people having to work for a living again temporarily. the most this would do is hurt your pride.

this is a weird thread.  I apparently lost 10k in 2018. I can do nothing but sigh and tack on another half year of work to make up the difference, but I haven't stopped believing the Simple Math of Early Retirement.
« Last Edit: January 08, 2019, 11:59:42 AM by Mesmoiselle »

nereo

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Re: The stock market ALWAYS goes up
« Reply #54 on: January 08, 2019, 12:56:38 PM »

let me give one example.  If we are going for the traditional $1M retirement nest egg with a $40k spend, let's say we are saving $20k per year.  This is not the same as my numbers but kind of ballpark close enough.  Let's say we have a $500k stache (just making up some numbers).  With a 7% return (long term average) we are retired in 7 years.   With 4% it's 10 years.  With 2% it's 14.5 years.   With 1% it's 18 years.  It really starts to change things with those lower returns.


But here is the key point you seem to be missing.  The above example is not what you are calculating by seeking out peak-to-trough moments.
Go back and see what your returns would have been had you actually followed your example and saved $20k/year instead of dumping a lump sum and investing nothing more.  In all those cases you wind up with a lot more money and much better returns.

As an example, that 2000 scenario you keep bringing up would be essentially flat (actually slightly negative) had it truly been a lump-sum, one-time deal.  Money saved 'under a mattress' would have lost over 35% of its purchasing power in the same time frame. But follow the scenario you outlined (investing $20k/year) and you wind up with annualized 4.8% gains.  Not too bad for a 12 year period which included two major recessions (including the biggest in our lifetime).

Either way, your arguments seem very precarious.  If the future is no worse than the worst of the past, if you lump-sum invest and hold for 20 years you aren't going to lose money even after inflation, and the overwhelming odds are that you will see real returns in the 4-9% range.  If you are like virtually every investor on the planet that makes periodic investments as their earned income allows, the likelihood of these abysmal decade+ periods you keep cherry picking is essentially zero. This 18 year, 1% return scenario has never happened with consistent periodic contributions. As maizeman pointed out earlier, by DCAing (by necessity) you are reducing the variance but the average (median) remains largely unchanged.

Either way this amounts to probabilities.  There is a very small (and approaching zero) chance that your returns will be low as your holding period increases. If you keep buying whenever you can the odds of having flat or nearly-flat returns go down further.  Even under these rare, near-zero real-return situations your investments do better than most alternatives.

ChpBstrd

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Re: The stock market ALWAYS goes up
« Reply #55 on: January 08, 2019, 01:12:22 PM »
The OP contained 2 very valid questions and this post has strayed far from them. The questions were:

... the whole system that we're basing our statement on are not that old. Sure, the stock market always goes up, but only in the last, what, 150 years? It is a baby as far as data is concerned.
...
What about major game changers ... ?

1) You are describing the "fat tails" problem in statistics, popularized by Nassim Taleb in "The Black Swan". In a nutshell, the problem is that we do not know the actual frequency of rare events based on a sample. This is because events with, say, a 1% chance of occurring are not likely to be picked up in a sample of, say, 15 observations, such as the number of non-overlapping 10 year histories of stock market performance, or the 5 observations of non-overlapping 30 year market performances. There could be many such events with 1% frequencies. Also, in the real world, outside of careful laboratory controls, millions of things happen every day for which there is no historical precedent. According to Taleb, traditional bell curve thinking probably doesn't even apply to big complex outcomes such as national collapses, terrorist attacks, or stock market returns.

2) Major game changers are fairly common if one looks beyond the history of US markets. Consider that in 1900, Argentina was a world-leading economy and the US and Mexico had similar GNP per capita and living standards. Imagine being a Turk invested in the Turkish stock market when Recep Erdogan overthrew the establishment there. Think about being invested in Venezuela, Zimbabwe, Hungary, Greece, etc. In my hindsight, the key factors that differentiated the US from the basket cases were (a) a stable and slow-moving political system, and (b) at least somewhat competent leadership. If those two assumptions ever fall into question, I see no special luck that would prevent the US from having the experiences we're used to only reading about, like hyperinflation, equities collapses, or 50% unemployment. The exceptions to my assumptions are post-1990 Japan and possibly post-2016 Britain, both places with stable governance and moderately competent leadership which have made disasterous policy decisions. The other examples might have been predictable for someone with the right perspective, i.e. Venezuelans who got out with their assets when Hugo Chavez came to power or anyone who shorted bitcoin last year.

The question is to what extent to diversify? My portfolio is about 90% stocks (index funds) based on the rationale that these assets have the highest risk-adjusted expected return and that shifting into bonds, commodities, real estate, P2P lending, notes, crypto, cash, art, etc. would probably - but not certainly - involve a reduction in overall portfolio returns.

Because we cannot empirically estimate the probability of fat tail events that would make any given hedge a good investment, Taleb would say we are flying blind with asset allocation. His own AA as a fund manager was something like 90% treasuries / 10% speculations like call options on the S&P 500 - an upside-only portfolio that reflects an expectation that the market is underpricing risk.

I did something similar, establishing protective puts on about half my portfolio last summer. It was a good decision, based on erosion of my 2 assumptions about the US market.

Radagast

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Re: The stock market ALWAYS goes up
« Reply #56 on: January 08, 2019, 01:27:34 PM »
The inheritance I was referring to was invested October 2000.    12 years later it was down 2% after inflation.
Here are three three fund portfolios that, after an October 2000 investment, realized positive real returns by summer 2009. The surprising thing was that even 50% Total US Stock Market, 33% Total International, 17% Intermediate Term Treasury was positive in real terms by August. The S&P500 is good for discussing theory, but not as good for using 100% of in practice.

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=2000&firstMonth=10&endYear=2009&lastMonth=5&calendarAligned=true&endDate=01%2F07%2F2019&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&benchmark=VFINX&symbol1=VTSMX&allocation1_1=34&allocation1_2=45&allocation1_3=50&symbol2=VGTSX&allocation2_1=33&allocation2_2=30&allocation2_3=33&symbol3=VFITX&allocation3_1=33&allocation3_2=25&allocation3_3=17

RWD

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Re: The stock market ALWAYS goes up
« Reply #57 on: January 08, 2019, 01:39:37 PM »

let me give one example.  If we are going for the traditional $1M retirement nest egg with a $40k spend, let's say we are saving $20k per year.  This is not the same as my numbers but kind of ballpark close enough.  Let's say we have a $500k stache (just making up some numbers).  With a 7% return (long term average) we are retired in 7 years.   With 4% it's 10 years.  With 2% it's 14.5 years.   With 1% it's 18 years.  It really starts to change things with those lower returns.


But here is the key point you seem to be missing.  The above example is not what you are calculating by seeking out peak-to-trough moments.
Go back and see what your returns would have been had you actually followed your example and saved $20k/year instead of dumping a lump sum and investing nothing more.  In all those cases you wind up with a lot more money and much better returns.

Saving $20k/year from October 2000 - October 2012 results in $326k. 35.8% total increase on money invested despite the "flat" market. If you started with $500k then the final amount is $937k (26.6% total increase).
https://dqydj.com/sp-500-dividend-reinvestment-and-periodic-investment-calculator/

maizeman

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Re: The stock market ALWAYS goes up
« Reply #58 on: January 08, 2019, 05:07:03 PM »
The question is to what extent to diversify? My portfolio is about 90% stocks (index funds) based on the rationale that these assets have the highest risk-adjusted expected return and that shifting into bonds, commodities, real estate, P2P lending, notes, crypto, cash, art, etc. would probably - but not certainly - involve a reduction in overall portfolio returns.

Because we cannot empirically estimate the probability of fat tail events that would make any given hedge a good investment, Taleb would say we are flying blind with asset allocation.

This is a good point, but I think it is useful for a potential investor to classify "fat tail" events that make the stock market a bad long term into two categories: those where another asset becomes a good hedge, and those where no asset is going to be a good hedge.

While there are lots of hypothetical long term outcomes where the stock market ends up not providing a good return on investment, in most of the ones I can imagine cash, crypto, art, bonds, commodities etc also end up not being useful hedges (these can range from the very grim collapse of civilization type outcomes to the star trek there's no money in the future because we have so much material abundance it doesn't make sense to try to ration it in any way).

So the universe of bad stock-market outcomes that can be hedged against is significantly smaller than the total universe of bad stock market outcomes.

nereo

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Re: The stock market ALWAYS goes up
« Reply #59 on: January 08, 2019, 05:15:36 PM »

While there are lots of hypothetical long term outcomes where the stock market ends up not providing a good return on investment, in most of the ones I can imagine cash, crypto, art, bonds, commodities etc also end up not being useful hedges (these can range from the very grim collapse of civilization type outcomes to the star trek there's no money in the future because we have so much material abundance it doesn't make sense to try to ration it in any way).


Well you bring up something that's always bugged me - what's up with bars of pressed latinum?  Is this only when dealing with the Ferangi?  If so, how do star trek offficers and enlisted get some?  What happens if you win big on the Dabo wheel beyond blowing it on synthahol (which doesn't actually get you drunk) or booking time in a holo-suite?  Is that all its good for?

maizeman

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Re: The stock market ALWAYS goes up
« Reply #60 on: January 08, 2019, 06:10:58 PM »
These are serious and important questions, nereo.

Since the federation only ever seems to use latinum to trade with other civilizations or when individual people are in non-federation bars, my guess is that you're right, it's only for dealing with the ferangi/generic-species-of-the-week and for buying drinks that don't get you drunk.

BicycleB

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Re: The stock market ALWAYS goes up
« Reply #61 on: January 08, 2019, 06:18:43 PM »
This is a thread that takes the concept of "always" seriously!


appleshampooid

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Re: The stock market ALWAYS goes up
« Reply #62 on: January 08, 2019, 06:34:50 PM »
Well you bring up something that's always bugged me - what's up with bars of pressed latinum?  Is this only when dealing with the Ferangi?  If so, how do star trek offficers and enlisted get some?  What happens if you win big on the Dabo wheel beyond blowing it on synthahol (which doesn't actually get you drunk) or booking time in a holo-suite?  Is that all its good for?
The Federation is a money-free society, but outside the Federation many species still use money, not just the Ferengi. Gold-pressed latinum seems to be used by many species, just most notably the Ferengi given the events covered in the various TV shows.

appleshampooid

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Re: The stock market ALWAYS goes up
« Reply #63 on: January 08, 2019, 06:38:50 PM »
Oh, and the drinks you buy at Quark's with that latinum will definitely get you drunk. Just the lame Federation bars (like Ten Forward) where it's all synthehol.