Author Topic: What if stocks go nowhere for 10 years?  (Read 24144 times)

God or Mammon?

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What if stocks go nowhere for 10 years?
« on: April 17, 2014, 05:16:02 AM »
http://hussmanfunds.com/wmc/wmc140407c.png

The graph shows that long term forward returns are highly predictable (which is also the work that earned Robert Shiller the Nobel Prize) even if the exact timing is difficult.

Thoughts?

chasesfish

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Re: What if stocks go nowhere for 10 years?
« Reply #1 on: April 17, 2014, 05:27:38 AM »
I'll be happily collecting a 3% dividend that grows every year from the companies I choose to invest in

God or Mammon?

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Re: What if stocks go nowhere for 10 years?
« Reply #2 on: April 17, 2014, 05:34:17 AM »
I'll be happily collecting a 3% dividend that grows every year from the companies I choose to invest in
Good point about the dividends.

I guess I was wondering what the effects of a flat stock market for 10 years would be for those working towards FI (I'm not there yet).

And 3% is fine if inflation stays low, but that seems like a hard bet to make given what's going on in the world with global monetary policy.  Also I'm not entirely sure, but what happened to dividend payments during the last market correction - did they still increase or stay the same?

dcheesi

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Re: What if stocks go nowhere for 10 years?
« Reply #3 on: April 17, 2014, 05:48:48 AM »
This was basically my experience with my 401k for the first ten years. I started contributing in the late nineties, which as you can see was a pretty pitiful run. It certainly made it hard to get motivated about Investing and retirement.

Weedy Acres

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Re: What if stocks go nowhere for 10 years?
« Reply #4 on: April 17, 2014, 06:07:29 AM »
It means that when the market eventually pulls out of its slump, you'll have a ton of shares bought cheaply for the past ten years.  So it positions you well for a bull market.

God or Mammon?

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Re: What if stocks go nowhere for 10 years?
« Reply #5 on: April 17, 2014, 06:13:42 AM »
It means that when the market eventually pulls out of its slump, you'll have a ton of shares bought cheaply for the past ten years.  So it positions you well for a bull market.
Agree with that logic but 10 years is a very long time to be getting 0% returns, and what if it ends up going sideways (or even down) for a much longer period, like 15 years?

I calculate 10 years of 0% returns would delay my ER date by at least 7 years, and potentially more depending on the actual path of market returns.

ZiziPB

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Re: What if stocks go nowhere for 10 years?
« Reply #6 on: April 17, 2014, 06:26:21 AM »
Why worry about something you can't control?  Keep on saving and investing and things will work out one way or the other. 

NewStachian

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Re: What if stocks go nowhere for 10 years?
« Reply #7 on: April 17, 2014, 06:39:18 AM »
From the reading I've done about the Shiller P/E it seems like his ratio, historically, has given a >50% chance of predicting where $1 invested today would be 10 years later.

One thing to keep in mind is it's the instantaneous money invested. How often does the blue line on your graph go below 0 and stay there? Sure, the dollars you put in while it's there might follow that trend ~60% of the time, but as soon as it goes above that minimum, your next $1 will be "locked" in at that rate. That's all if you choose to put that much faith in the model.

A few months back I fooled around with a formula that took the Shiller P/E's delta from 25 and throttled my monthly investing amount by a maximum of 10%. So, if the Shiller P/E dips below 25, have a linear function that adds slightly more to your monthly allotment, and when it goes above, invest a slightly lower amount. I ultimately decided not to use it (mainly because I started writing a cloud implementation of a genetic algorithm to time the market... For fun, of course, I don't think it would ever be successful)

Bottom line: I see no reason to stop dollar cost averaging every month, despite this OMFG graph that appears to look like the future is locked in.

Roland of Gilead

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Re: What if stocks go nowhere for 10 years?
« Reply #8 on: April 17, 2014, 06:43:58 AM »
Has there been a time period where inflation beat stocks for a whole decade?  Let me check on that but I would guess if inflation goes very high then stocks will eventually follow but maybe they lag a bit.

God or Mammon?

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Re: What if stocks go nowhere for 10 years?
« Reply #9 on: April 17, 2014, 06:48:40 AM »
From the reading I've done about the Shiller P/E it seems like his ratio, historically, has given a >50% chance of predicting where $1 invested today would be 10 years later.

One thing to keep in mind is it's the instantaneous money invested. How often does the blue line on your graph go below 0 and stay there? Sure, the dollars you put in while it's there might follow that trend ~60% of the time, but as soon as it goes above that minimum, your next $1 will be "locked" in at that rate. That's all if you choose to put that much faith in the model.

A few months back I fooled around with a formula that took the Shiller P/E's delta from 25 and throttled my monthly investing amount by a maximum of 10%. So, if the Shiller P/E dips below 25, have a linear function that adds slightly more to your monthly allotment, and when it goes above, invest a slightly lower amount. I ultimately decided not to use it (mainly because I started writing a cloud implementation of a genetic algorithm to time the market... For fun, of course, I don't think it would ever be successful)

Bottom line: I see no reason to stop dollar cost averaging every month, despite this OMFG graph that appears to look like the future is locked in.
I guess for me the question is more about whether stocks make sense as a primary investment vehicle to accumulate wealth in order to FIRE.  I am seriously considering other asset classes to focus on for growing the critical mass of assets one needs to achieve ER.

Keep in mind the 0% in the graph is nominal return - inflation over 10 years makes the real return negative anywhere from 20-50% over the time period.

That is a tremendous amount of wealth destruction to risk based on the hope that 'what happened in the past occurs again' - the US (and I am assuming most Americans portfolio is based in US markets) is a very different place now vs even 10 years ago.

God or Mammon?

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Re: What if stocks go nowhere for 10 years?
« Reply #10 on: April 17, 2014, 06:57:29 AM »
Has there been a time period where inflation beat stocks for a whole decade?  Let me check on that but I would guess if inflation goes very high then stocks will eventually follow but maybe they lag a bit.
http://www.ritholtz.com/blog/wp-content/uploads/2011/03/3-4-11-Secular-Cycles-1.gif

The chart above shows inflation adjusted S&P composite to have had 2 periods of 20+ and almost even 30 years of no return.

NewStachian

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Re: What if stocks go nowhere for 10 years?
« Reply #11 on: April 17, 2014, 07:01:44 AM »
That chart would be accurate if you dumped every dollar you had into the market at that one time and did nothing else. Who does that? The dollar cost averaging effect would work to your benefit when it is on the decline when it finally comes back up.

God or Mammon?

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Re: What if stocks go nowhere for 10 years?
« Reply #12 on: April 17, 2014, 07:02:59 AM »
That chart would be accurate if you dumped every dollar you had into the market at that one time and did nothing else. Who does that? The dollar cost averaging effect would work to your benefit when it is on the decline when it finally comes back up.
For many people who are somewhat close to their ER date (as well as anyone who is already retired), the amount already invested in the market dwarfs the incremental amount to be invested by dollar cost averaging over time.

Roland of Gilead

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Re: What if stocks go nowhere for 10 years?
« Reply #13 on: April 17, 2014, 07:09:05 AM »
Has there been a time period where inflation beat stocks for a whole decade?  Let me check on that but I would guess if inflation goes very high then stocks will eventually follow but maybe they lag a bit.
http://www.ritholtz.com/blog/wp-content/uploads/2011/03/3-4-11-Secular-Cycles-1.gif

The chart above shows inflation adjusted S&P composite to have had 2 periods of 20+ and almost even 30 years of no return.

Wow, based on that chart we should see S&P 2400 or so before the next big decline...time to go margin!

God or Mammon?

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Re: What if stocks go nowhere for 10 years?
« Reply #14 on: April 17, 2014, 07:13:23 AM »
Has there been a time period where inflation beat stocks for a whole decade?  Let me check on that but I would guess if inflation goes very high then stocks will eventually follow but maybe they lag a bit.
http://www.ritholtz.com/blog/wp-content/uploads/2011/03/3-4-11-Secular-Cycles-1.gif

The chart above shows inflation adjusted S&P composite to have had 2 periods of 20+ and almost even 30 years of no return.

Wow, based on that chart we should see S&P 2400 or so before the next big decline...time to go margin!
Re margin debt, market is already there:
http://www.advisorperspectives.com/dshort/updates/NYSE-Margin-Debt-and-the-SPX.php

nereo

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Re: What if stocks go nowhere for 10 years?
« Reply #15 on: April 17, 2014, 08:35:07 AM »
Has there been a time period where inflation beat stocks for a whole decade?  Let me check on that but I would guess if inflation goes very high then stocks will eventually follow but maybe they lag a bit.
http://www.ritholtz.com/blog/wp-content/uploads/2011/03/3-4-11-Secular-Cycles-1.gif

The chart above shows inflation adjusted S&P composite to have had 2 periods of 20+ and almost even 30 years of no return.
Chart doesn't include dividends reinvested, and compares how long it took to recover from a peak.  It would be irrelevant for any investor using DCA and reinvesting their dividends.
To correct that chart - the first period I cannot verify (lack of good dividend data).  The second (beginning in Oct 1929) would have yielded 4.75% annually CPI adjusted, and the third (beginning in Dec 1968) yielded 4.2%

Of course, average gains would have been MUCH higher if a person did anything other than dump all their money in at the absolute peak (i.e. DCA).

Roland of Gilead

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Re: What if stocks go nowhere for 10 years?
« Reply #16 on: April 17, 2014, 08:41:56 AM »
Of course, average gains would have been MUCH higher if a person did anything other than dump all their money in at the absolute peak (i.e. DCA).

Yes and being 100% stocks is quite foolish.  At even 20% cash you would have scored some killer deals during those falls which would have increased your return significantly.

Notice there are no long periods where there is not an opportunity to rebalance from cash into stocks.  There is no period for example where the market is perfectly flat and inflation ravages you.

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Re: What if stocks go nowhere for 10 years?
« Reply #17 on: April 17, 2014, 08:44:36 AM »
Has there been a time period where inflation beat stocks for a whole decade?  Let me check on that but I would guess if inflation goes very high then stocks will eventually follow but maybe they lag a bit.
http://www.ritholtz.com/blog/wp-content/uploads/2011/03/3-4-11-Secular-Cycles-1.gif

The chart above shows inflation adjusted S&P composite to have had 2 periods of 20+ and almost even 30 years of no return.
Chart doesn't include dividends reinvested, and compares how long it took to recover from a peak.  It would be irrelevant for any investor using DCA and reinvesting their dividends.
To correct that chart - the first period I cannot verify (lack of good dividend data).  The second (beginning in Oct 1929) would have yielded 4.75% annually CPI adjusted, and the third (beginning in Dec 1968) yielded 4.2%

Of course, average gains would have been MUCH higher if a person did anything other than dump all their money in at the absolute peak (i.e. DCA).

DCA is not an answer to what happens to the lump sum that is already invested, and mainly only applies for people who have a very long time horizon for which they will keep adding to their accounts - i.e. the future cashflows to be invested are >>>> than current account balances

Re dividends, if you are long stocks now in the above mentioned accounts, seems to me the < 2% dividend yield of the market overall doesn't even keep up with inflation

nereo

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Re: What if stocks go nowhere for 10 years?
« Reply #18 on: April 17, 2014, 08:48:17 AM »
Yes and being 100% stocks is quite foolish.  At even 20% cash you would have scored some killer deals during those falls which would have increased your return significantly.

Notice there are no long periods where there is not an opportunity to rebalance from cash into stocks.  There is no period for example where the market is perfectly flat and inflation ravages you.
Eee...  I'd say holding 20% cash is quite foolish.  Bonds, sure, but cash no.  That's just a bunch of little green employees sitting around loosing value instead of earning you money. In 98 out of the last 100 years you'd have lost money on that cash.  Dollar Cost Averaging and rebalancing would serve someone much better.

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Re: What if stocks go nowhere for 10 years?
« Reply #19 on: April 17, 2014, 08:52:46 AM »
Yes and being 100% stocks is quite foolish.  At even 20% cash you would have scored some killer deals during those falls which would have increased your return significantly.

Notice there are no long periods where there is not an opportunity to rebalance from cash into stocks.  There is no period for example where the market is perfectly flat and inflation ravages you.
Eee...  I'd say holding 20% cash is quite foolish.  Bonds, sure, but cash no.  That's just a bunch of little green employees sitting around loosing value instead of earning you money. In 98 out of the last 100 years you'd have lost money on that cash.  Dollar Cost Averaging and rebalancing would serve someone much better.

Cash being worthless is only a more recent phenomenon (thanks to the Fed), as I believe historically cash (t-bills) have kept up with inflation so no purchasing power is lost.

It is also a very cheap put option as it allows you to buy on the dip.

Roland of Gilead

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Re: What if stocks go nowhere for 10 years?
« Reply #20 on: April 17, 2014, 08:59:10 AM »
Eee...  I'd say holding 20% cash is quite foolish.  Bonds, sure, but cash no.  That's just a bunch of little green employees sitting around loosing value instead of earning you money. In 98 out of the last 100 years you'd have lost money on that cash.  Dollar Cost Averaging and rebalancing would serve someone much better.

When I say cash I mostly mean CD's and I-bonds via a ladder.  Both of these vehicles mostly keep up with inflation and allow you fairly immediate access to the money in the case of a 20% drop in the stock market.

nereo

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Re: What if stocks go nowhere for 10 years?
« Reply #21 on: April 17, 2014, 09:03:17 AM »
Eee...  I'd say holding 20% cash is quite foolish.  Bonds, sure, but cash no.  That's just a bunch of little green employees sitting around loosing value instead of earning you money. In 98 out of the last 100 years you'd have lost money on that cash.  Dollar Cost Averaging and rebalancing would serve someone much better.

When I say cash I mostly mean CD's and I-bonds via a ladder.  Both of these vehicles mostly keep up with inflation and allow you fairly immediate access to the money in the case of a 20% drop in the stock market.

Ok - then I agree with you.  I've known others that suggest keeping cash in a savings account earning 0.1% just "waiting for a good time to invest."

Roland of Gilead

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Re: What if stocks go nowhere for 10 years?
« Reply #22 on: April 17, 2014, 09:07:19 AM »

Ok - then I agree with you.  I've known others that suggest keeping cash in a savings account earning 0.1% just "waiting for a good time to invest."

I do keep about $20,000 in pure cash (not even a money market) but that is for trading purposes otherwise I have to wait 3 days for settlement.  There isn't a great way to earn anything on $20K if you are cycling through it several times a week.

GuitarStv

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Re: What if stocks go nowhere for 10 years?
« Reply #23 on: April 17, 2014, 09:16:44 AM »
You mean like in Japan . . . where they've gone nowhere for what, 15 years?

God or Mammon?

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Re: What if stocks go nowhere for 10 years?
« Reply #24 on: April 17, 2014, 09:19:37 AM »
You mean like in Japan . . . where they've gone nowhere for what, 15 years?

Japan is closer to 30 years!


Roland of Gilead

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Re: What if stocks go nowhere for 10 years?
« Reply #25 on: April 17, 2014, 09:29:58 AM »
You mean like in Japan . . . where they've gone nowhere for what, 15 years?

Eh, the 20 year chart of Toyota looks ok to me.   (And before you say that is not diversity, I may point out that having all of your assets in one small country's market would not be diversified either!)

GuitarStv

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Re: What if stocks go nowhere for 10 years?
« Reply #26 on: April 17, 2014, 09:38:07 AM »
You mean like in Japan . . . where they've gone nowhere for what, 15 years?

Eh, the 20 year chart of Toyota looks ok to me.   (And before you say that is not diversity, I may point out that having all of your assets in one small country's market would not be diversified either!)

I was thinking more of the Nikkei than picking and choosing a couple individual stocks.

Japan is the third largest economy in the world by GDP . . .

Roland of Gilead

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Re: What if stocks go nowhere for 10 years?
« Reply #27 on: April 17, 2014, 10:06:08 AM »
I was thinking more of the Nikkei than picking and choosing a couple individual stocks.

Japan is the third largest economy in the world by GDP . . .

Yes I thought about correcting that after I typed it but I left it in place because Japan IS a relatively small country in land mass, military and resources.

If a Japanese investor had been diversified in the total world market, instead of being in a couple of individual stocks OR in just the Nikkei then they have done just fine in the past 20 years.

sirdoug007

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Re: What if stocks go nowhere for 10 years?
« Reply #28 on: April 17, 2014, 10:26:29 AM »
It has happened before and will probably happen again.

Here is a log-scale chart of the inflation adjusted S&P500 with (orange) and without reinvested dividends (blue).



I remember a bunch of articles in 2010 or so about how the market had made no gains in the last 10 years.

As someone said above, you can't control this and the alternatives are not much, if any, better so work on what you can control (savings) and realize that no calculator can tell you when your portfolio will hit "the number."

dragoncar

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Re: What if stocks go nowhere for 10 years?
« Reply #29 on: April 17, 2014, 12:22:26 PM »
Has there been a time period where inflation beat stocks for a whole decade?  Let me check on that but I would guess if inflation goes very high then stocks will eventually follow but maybe they lag a bit.
http://www.ritholtz.com/blog/wp-content/uploads/2011/03/3-4-11-Secular-Cycles-1.gif

The chart above shows inflation adjusted S&P composite to have had 2 periods of 20+ and almost even 30 years of no return.
Chart doesn't include dividends reinvested, and compares how long it took to recover from a peak.  It would be irrelevant for any investor using DCA and reinvesting their dividends.
To correct that chart - the first period I cannot verify (lack of good dividend data).  The second (beginning in Oct 1929) would have yielded 4.75% annually CPI adjusted, and the third (beginning in Dec 1968) yielded 4.2%

Of course, average gains would have been MUCH higher if a person did anything other than dump all their money in at the absolute peak (i.e. DCA).

DCA is not an answer to what happens to the lump sum that is already invested, and mainly only applies for people who have a very long time horizon for which they will keep adding to their accounts - i.e. the future cashflows to be invested are >>>> than current account balances

Re dividends, if you are long stocks now in the above mentioned accounts, seems to me the < 2% dividend yield of the market overall doesn't even keep up with inflation

^I'm really starting to like you.... you save me a lot of typing!  Anyone retiring soon is effectively putting a lump sum into the market (at whatever their AA is).  I agree, these slumps have happened before and will probably happen again.  If your retirement timing gets messed up, we have the fallback to supplement our low income/low expenses with a small additional income (hopefully).  If we can't even find work to meet our expenses, then I'm not sure we would have fared much better if we hadn't retired (and were instead fired because of how bad the economy is).

nereo

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Re: What if stocks go nowhere for 10 years?
« Reply #30 on: April 17, 2014, 12:47:01 PM »
DCA is not an answer to what happens to the lump sum that is already invested, and mainly only applies for people who have a very long time horizon for which they will keep adding to their accounts - i.e. the future cashflows to be invested are >>>> than current account balances

Re dividends, if you are long stocks now in the above mentioned accounts, seems to me the < 2% dividend yield of the market overall doesn't even keep up with inflation
I believe you are looking at it strangely.  I know of almost no one who's put all their money for retirement into the market at one single point.  Virtually everyone saves for several years (or decades).  This is by definition DCA.  Ergo, you cannot take a market peak and look 20 years down the road and say "well, their money didn't increase in value".  It did increase, on average, compared to the amount they put in.
Also, the chart you posted (which was very slanted) highlighted three periods, each >20 years, where the SP did not make any gains without dividends invested.  20 years to me is a long time frame.  In truth, no 20 year period in the last 130 years has seen a negative real market return for the SP500 with dividends reinvested. Ever.  Could it  happen? Sure.  But it hasn't yet - that's my basic point regarding that graph.

Also, if you're looking at dividends as being unimportant because "overall [they don't] keep up with inflation" i believe you misunderstand the power that they can have. The power of dividends isn't that they are on average just above inflation, but that they are gains on top of increases in share price. Better yet, they are their own kind of DCA because they are issued every quarter, whether the market is up or down.
here's a simple example.  Over the past 40 years, the SP has returned on average 3.38% without dividends, but 6.48% with.  An investment would increase 3.7x over that time period with dividends, but a whopping 12.4x with dividends.  In other words, dividends accounted for 70% of all returns.

Roland of Gilead

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Re: What if stocks go nowhere for 10 years?
« Reply #31 on: April 17, 2014, 12:58:45 PM »
What he is saying is that at the point you declare "I quit!" and retire, no longer bringing in earned income, it is like you have taken all of your money on that day and placed it in the market (and possibly in bonds).  There will not be any new money outside of what you make on interest and dividends so there is no way to DCA.

I guess you could sell every single investment on the day you retire, put all the cash in a big CD ladder and then try to DCA back into your desired asset allocation over the next decade.   This would be considered a pretty poor move.

nereo

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Re: What if stocks go nowhere for 10 years?
« Reply #32 on: April 17, 2014, 01:23:20 PM »
What he is saying is that at the point you declare "I quit!" and retire, no longer bringing in earned income, it is like you have taken all of your money on that day and placed it in the market (and possibly in bonds).  There will not be any new money outside of what you make on interest and dividends so there is no way to DCA.
Ok - I can see what the poster meant then, but I think it's fundamentally different to say "my investments haven't gone up at all in 20 years!" then to say "my portolio hasn't reached the same peak it hit 20 years ago."  In the end your return is the amount you put in divided by the time it was there and adjusted for inflation.

However, you bring up a valid point, which is what do you do when look at your portfolio, declare it's time to say "i quit", and then the market drops or goes sideways for years.  And that is a legitimate concern.  It gets back to what a SWR should be, the "4% rule", and ultimately 'how much is enough to say 'i quit!'?"
FireCALC and other simulators include these decades when stocks did poorly. The majority of the time, the portfolio still survives.  I'm sure it's scary as hell to declare retirement one year and then watch the market (and your portfolio) nosedive 30% the following year.  But there are ways to adapt.  Having a bond ladder is one.  Having a 3.5% or even 3% SWR generally results in near-100% success rates in these historical models.  And being adaptable by being able to reduce your spending or bring in some extra money when necessary is perhaps the most powerful method of ensuring your AA lasts.

Roland of Gilead

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Re: What if stocks go nowhere for 10 years?
« Reply #33 on: April 17, 2014, 01:31:04 PM »
  Having a 3.5% or even 3% SWR generally results in near-100% success rates in these historical models.  And being adaptable by being able to reduce your spending or bring in some extra money when necessary is perhaps the most powerful method of ensuring your AA lasts.

Yes, I plan to try and make do on 3% or 3.5% and also I know that we can always cut our budget 50% and still eat, sleep dry and have healthcare (which is near free now with ACA and subsidies).

You don't have to eat cat food and work as a Wal-Mart greeter at age 75 if the market tanked when you were 60 if you cut back on the steak, 800 channels of TV, and Europe vacations quick enough to reduce your SWR during the crisis.  If you look at those charts, none of the huge downward spikes lasts longer than a couple of years.  If you cut back to a SWR of 2% during the bad times you can probably survive almost anything.

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Re: What if stocks go nowhere for 10 years?
« Reply #34 on: April 17, 2014, 01:38:24 PM »
DCA is not an answer to what happens to the lump sum that is already invested, and mainly only applies for people who have a very long time horizon for which they will keep adding to their accounts - i.e. the future cashflows to be invested are >>>> than current account balances

Re dividends, if you are long stocks now in the above mentioned accounts, seems to me the < 2% dividend yield of the market overall doesn't even keep up with inflation
I believe you are looking at it strangely.  I know of almost no one who's put all their money for retirement into the market at one single point.  Virtually everyone saves for several years (or decades).  This is by definition DCA.  Ergo, you cannot take a market peak and look 20 years down the road and say "well, their money didn't increase in value".  It did increase, on average, compared to the amount they put in.
Also, the chart you posted (which was very slanted) highlighted three periods, each >20 years, where the SP did not make any gains without dividends invested.  20 years to me is a long time frame.  In truth, no 20 year period in the last 130 years has seen a negative real market return for the SP500 with dividends reinvested. Ever.  Could it  happen? Sure.  But it hasn't yet - that's my basic point regarding that graph.

Also, if you're looking at dividends as being unimportant because "overall [they don't] keep up with inflation" i believe you misunderstand the power that they can have. The power of dividends isn't that they are on average just above inflation, but that they are gains on top of increases in share price. Better yet, they are their own kind of DCA because they are issued every quarter, whether the market is up or down.
here's a simple example.  Over the past 40 years, the SP has returned on average 3.38% without dividends, but 6.48% with.  An investment would increase 3.7x over that time period with dividends, but a whopping 12.4x with dividends.  In other words, dividends accounted for 70% of all returns.

For 99% of people the portfolio they have can be turned into cash with a few clicks of a button with no market impact (liquidity and transaction costs are not really an issue).  Excluding tax considerations (which wouldn't matter in most retirement accounts anyway), theoretically the portfolio you have is a conscious decision each day, whether you bought it all today or over decades of DCA accumulation.  So I disagree with you in that each day you choose to keep your portfolio allocation in stocks it is like you are putting a lump sum in at that time (again ignoring taxes), because you can liquidate it with little consequence - at least that is always how I have thought of it.

I started the post with the question "What if stocks go nowhere for 10 years?", and my own personal situation is that I have a lot of exposure to equities in my portfolio but I am rethinking if I should change the asset allocation as well as where the incremental dollar of investment should go.  The conclusion I am coming to for myself is that it would significantly delay ER and would probably make me rethink what a SWR would be (i.e. 4% is too high for me personally).

dragoncar

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Re: What if stocks go nowhere for 10 years?
« Reply #35 on: April 17, 2014, 01:44:56 PM »
DCA is not an answer to what happens to the lump sum that is already invested, and mainly only applies for people who have a very long time horizon for which they will keep adding to their accounts - i.e. the future cashflows to be invested are >>>> than current account balances

Re dividends, if you are long stocks now in the above mentioned accounts, seems to me the < 2% dividend yield of the market overall doesn't even keep up with inflation
I believe you are looking at it strangely.  I know of almost no one who's put all their money for retirement into the market at one single point.  Virtually everyone saves for several years (or decades).  This is by definition DCA.  Ergo, you cannot take a market peak and look 20 years down the road and say "well, their money didn't increase in value".  It did increase, on average, compared to the amount they put in.
Also, the chart you posted (which was very slanted) highlighted three periods, each >20 years, where the SP did not make any gains without dividends invested.  20 years to me is a long time frame.  In truth, no 20 year period in the last 130 years has seen a negative real market return for the SP500 with dividends reinvested. Ever.  Could it  happen? Sure.  But it hasn't yet - that's my basic point regarding that graph.

Also, if you're looking at dividends as being unimportant because "overall [they don't] keep up with inflation" i believe you misunderstand the power that they can have. The power of dividends isn't that they are on average just above inflation, but that they are gains on top of increases in share price. Better yet, they are their own kind of DCA because they are issued every quarter, whether the market is up or down.
here's a simple example.  Over the past 40 years, the SP has returned on average 3.38% without dividends, but 6.48% with.  An investment would increase 3.7x over that time period with dividends, but a whopping 12.4x with dividends.  In other words, dividends accounted for 70% of all returns.

For 99% of people the portfolio they have can be turned into cash with a few clicks of a button with no market impact (liquidity and transaction costs are not really an issue).  Excluding tax considerations (which wouldn't matter in most retirement accounts anyway), theoretically the portfolio you have is a conscious decision each day, whether you bought it all today or over decades of DCA accumulation.  So I disagree with you in that each day you choose to keep your portfolio allocation in stocks it is like you are putting a lump sum in at that time (again ignoring taxes), because you can liquidate it with little consequence - at least that is always how I have thought of it.

I started the post with the question "What if stocks go nowhere for 10 years?", and my own personal situation is that I have a lot of exposure to equities in my portfolio but I am rethinking if I should change the asset allocation as well as where the incremental dollar of investment should go.  The conclusion I am coming to for myself is that it would significantly delay ER and would probably make me rethink what a SWR would be (i.e. 4% is too high for me personally).

Yeah, I guess the answer is:  It could break the 4% SWR (the 5% of failed cases, or whatever).

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Re: What if stocks go nowhere for 10 years?
« Reply #36 on: April 17, 2014, 02:01:09 PM »
Quote
I started the post with the question "What if stocks go nowhere for 10 years?", and my own personal situation is that I have a lot of exposure to equities in my portfolio but I am rethinking if I should change the asset allocation as well as where the incremental dollar of investment should go.  The conclusion I am coming to for myself is that it would significantly delay ER and would probably make me rethink what a SWR would be (i.e. 4% is too high for me personally).
Fair enough.  Everyone certainly has to decide for themselves what they are comfortable with.  I would just add that there's a cost involved with building a portfolio so large that you only need (for example) a 2.5% SWR.  That cost is years of extra work and saving.  To each their own.
My own strategy (still a ways off) is to have a 3 year pile of bonds I can draw off of when the markets really take a dive.  in virtually every historical case the market had recovered or mostly recovered after 4 years (again, including dividends). having that stash, plus staying flexible with spending gives me comfort in my planning.  in truth this would make my total portfolio SWR 3.8%.  That's just where my level of comfort is.  YMMV.

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Re: What if stocks go nowhere for 10 years?
« Reply #37 on: April 17, 2014, 02:35:27 PM »
Having a big stinky pile of cash in CDs will let you ride out some pretty harsh bumps.  Just this year penfed was selling 5 year CDs paying 3%.

If you had $400,000 in CDs paying 3% and $1,000,000 in the stock market earning 2% dividends, you could take out $32,000 a year without even touching the principal.  You would pay zero tax too!

There are quite a few mustachians who could live quite well on $32,000 a year.

dragoncar

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Re: What if stocks go nowhere for 10 years?
« Reply #38 on: April 17, 2014, 02:59:23 PM »
Quote
I started the post with the question "What if stocks go nowhere for 10 years?", and my own personal situation is that I have a lot of exposure to equities in my portfolio but I am rethinking if I should change the asset allocation as well as where the incremental dollar of investment should go.  The conclusion I am coming to for myself is that it would significantly delay ER and would probably make me rethink what a SWR would be (i.e. 4% is too high for me personally).
Fair enough.  Everyone certainly has to decide for themselves what they are comfortable with.  I would just add that there's a cost involved with building a portfolio so large that you only need (for example) a 2.5% SWR.  That cost is years of extra work and saving.  To each their own.
My own strategy (still a ways off) is to have a 3 year pile of bonds I can draw off of when the markets really take a dive.  in virtually every historical case the market had recovered or mostly recovered after 4 years (again, including dividends). having that stash, plus staying flexible with spending gives me comfort in my planning.  in truth this would make my total portfolio SWR 3.8%.  That's just where my level of comfort is.  YMMV.

Interesting... So you have 25x expenses saved in a boglehead type portfolio, plus three years cash?  By my calc, that's a 3.57% WR with 13% cash AA.  I kinda like this approach even though I don't know if it beats investing all 28x expenses in the bogleheads portfolio in fire calc

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Re: What if stocks go nowhere for 10 years?
« Reply #39 on: April 17, 2014, 04:43:13 PM »
I imagine there will be outsized returns starting in year 11.  Mean reversion and all that.

I haven't seen much about the "lost generation" of the 2000's lately.  If you've been piling money into the market throughout the 2008-09 crash, you're sitting pretty today. 


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Re: What if stocks go nowhere for 10 years?
« Reply #40 on: April 17, 2014, 04:48:12 PM »
My approach has been heavy on equities, but only through dividend-paying index funds.  Vanguard's High Dividend Yield Index has been doing me some good so far.    I have a long horizon of 15-20 years, so I can sit back a little and let DCA in the low years provide nice returns much later. 

If I was closer to my FI and staring at those charts, I would be considering some alternatives to equities or bonds to shore up the portfolio like peer-to-peer lending, REIT's, and rental property.


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Re: What if stocks go nowhere for 10 years?
« Reply #41 on: April 17, 2014, 05:07:23 PM »
It is a risk... for example Japan went consistently downward for like 20 years and they were the world's 2nd largest economy at the time (IIRC). Main answer imo is to diversify and to have contingency plans. For example, if we retire aggressively we'll probably realize that there might be a 10% chance or whatever that we would have to sell the house and downsize.

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Re: What if stocks go nowhere for 10 years?
« Reply #42 on: April 17, 2014, 06:16:53 PM »
Having a big stinky pile of cash in CDs will let you ride out some pretty harsh bumps.  Just this year penfed was selling 5 year CDs paying 3%.

If you had $400,000 in CDs paying 3% and $1,000,000 in the stock market earning 2% dividends, you could take out $32,000 a year without even touching the principal.  You would pay zero tax too!

There are quite a few mustachians who could live quite well on $32,000 a year.
That certainly would let you ride out some pretty harsh bumps.  And you'd have a huge cushion with a 2.28% SWR.  FireCALC has that scenrio succeeding 100% of the time (in fact every scenerio grew over a 30 year time frame, some increased almost 8x in value), with no SS or pensions or anything.
Then again, that's over $600k more than what i'm shooting for.

nereo

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Re: What if stocks go nowhere for 10 years?
« Reply #43 on: April 17, 2014, 06:24:11 PM »
Interesting... So you have 25x expenses saved in a boglehead type portfolio, plus three years cash?  By my calc, that's a 3.57% WR with 13% cash AA.  I kinda like this approach even though I don't know if it beats investing all 28x expenses in the bogleheads portfolio in fire calc
your calculations are correct.  I made a typo.  This is the plan I've written down, but it'll a fair while longer to get there.  Lately I've been trying to run scenarios as high as 20% bonds AA, allowing for some rebalancing, but I've always been more afraid of missing a rally than holding equities during a tumble.  Since it would be my "wealth preservation" stage instead of my "wealth generation" stage my main goal in these scenarios is to not eat into the principle of my equities during down markets.

chasesfish

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Re: What if stocks go nowhere for 10 years?
« Reply #44 on: April 18, 2014, 04:52:38 AM »
Has there been a time period where inflation beat stocks for a whole decade?  Let me check on that but I would guess if inflation goes very high then stocks will eventually follow but maybe they lag a bit.
http://www.ritholtz.com/blog/wp-content/uploads/2011/03/3-4-11-Secular-Cycles-1.gif

The chart above shows inflation adjusted S&P composite to have had 2 periods of 20+ and almost even 30 years of no return.

Your chart excludes dividends.  Dividends, when reinvested, make up roughly half the return of the S&P 500.  Your only showing half of the way a stock can provide a return to shareholders.

Total Return = Stock Price Appreciation + Dividends Paid

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Re: What if stocks go nowhere for 10 years?
« Reply #45 on: April 18, 2014, 07:50:10 AM »
Has there been a time period where inflation beat stocks for a whole decade?  Let me check on that but I would guess if inflation goes very high then stocks will eventually follow but maybe they lag a bit.
http://www.ritholtz.com/blog/wp-content/uploads/2011/03/3-4-11-Secular-Cycles-1.gif

The chart above shows inflation adjusted S&P composite to have had 2 periods of 20+ and almost even 30 years of no return.

Your chart excludes dividends.  Dividends, when reinvested, make up roughly half the return of the S&P 500.  Your only showing half of the way a stock can provide a return to shareholders.

Total Return = Stock Price Appreciation + Dividends Paid

The current dividend yield is roughly 1.75%.  What does that imply for future returns?

Roland of Gilead

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Re: What if stocks go nowhere for 10 years?
« Reply #46 on: April 18, 2014, 08:05:47 AM »

The current dividend yield is roughly 1.75%.  What does that imply for future returns?

You can create a portfolio of solid stocks with a 2.3% to 2.8% yield if you eliminate a few things from your portfolio (Facebook, Amazon, Twitter, etc.)

In the past I would not have suggested this but in today's market with everyone chasing the next bitcoin in high flying stocks there could be room for a broad diversified portfolio of Corning, Cisco, Intel, Apple, Microsoft, Exxon, BP, Ford, Toyota, P&G, Pfizer, J&J, Coke, McDonalds, SeaDrill, Caterpillar, Boeing, Wells Fargo (I could continue for about 50 more names).  All of these pay above 2% and most above 2.3%.   The volatility would be a lot lower too.

If you wanted dividends and were willing to go to the trouble.

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Re: What if stocks go nowhere for 10 years?
« Reply #47 on: April 18, 2014, 08:16:55 AM »
You can create a portfolio of solid stocks with a 2.3% to 2.8% yield if you eliminate a few things from your portfolio (Facebook, Amazon, Twitter, etc.)


Our stock portfolio of passive index funds actually spit out around 2.2% yield without having any focus whatsoever on dividends.  The main reason is a 50% allocation to international investments which just happened to pay a nice dividend.   http://rootofgood.com/dividends/

Our spending will float around 2.5-3.0% of portfolio value most years, so we are just barely spending about the dividend yield.  Sideways stocks (not counting the dividend) will leave us slightly poorer in nominal terms after a decade. In real terms, inflation will add another dent to our net worth. 

The nice thing about sideways movement over a decade is the PE multiple tends to drop and a lot of latent demand (consumer and industrial) builds up.  To quote a Katy Perry song, "after the hurricane comes a rainbow".




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Re: What if stocks go nowhere for 10 years?
« Reply #48 on: April 18, 2014, 08:31:52 AM »
I found this website (http://dripinvesting.org/Tools/Tools.asp) for what they call "dividend champions."  These are companies that have increased their dividend for 20, 25, 30+ years straight.

But it's probably too risky for me and I'll stay with index funds (dividends re-invested of course).

Roland of Gilead

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Re: What if stocks go nowhere for 10 years?
« Reply #49 on: April 18, 2014, 08:43:49 AM »
I found this website (http://dripinvesting.org/Tools/Tools.asp) for what they call "dividend champions."  These are companies that have increased their dividend for 20, 25, 30+ years straight.

But it's probably too risky for me and I'll stay with index funds (dividends re-invested of course).

It usually isn't *that* risky if you don't go for a company paying 15% dividend with a 200% payout ratio.

If you have 50 or 60 individual solid stocks in your portfolio (no penny stocks!) you probably will only see a teeny bit more volatility than owning a Vanguard fund.  Actually you might see a lower volatility.

Trading costs are what would get you.  Buying $5,000 each of 60 stocks is going to cost you several hundred dollars.  If you are living off the dividends though, you would not need to worry much about reinvesting and the trading costs associated with that, so you may only incur this cost one time.  If you use Wells Fargo and happen to be grandfathered in for 100 free trades a year as I am, you could set this portfolio up with 100 stocks for free.   A tiny extra benefit is you would pay 0% in fees each year (although the cheaper Vanguard funds only charge like 0.02% or something).

I am considering doing this when we retire.  I will have to think about it.  The decision would be easier if Vanguard charged 0.5% or higher.