Has the market lost its mind?

[nereo]

Nereo, I'm not sure how you're calculating your returns, but if I use cfiresim to look at the return someone earns on average over 30 years if they're annually saving, I get the following values for a 100% stocks portfolio:

Min   0.91%
25th   5.66%
Med   7.03%
75th   8.80%
99th   10.92%
...

Seattle - you seem to be doing something a bit different from what Andysandp and I are discussing (or at least what I am discussing).
I'm talking about the annualized real returns on a given 30 year period.
For data I've been using Robert Schiller's data for SP500 and for inflation (mostly out of convenience) the CPI.  Dividends are reinvested.

This is going to be different than if you are saving annually.  There's so many different inputs you could use with cFIREsim that you'll have to walk me through which you used in order for us to have a productive conversation.

From my calculations, the stretch that ends in 1920 (i.e. 1890-1920) returned -1.44% before dividends, and +3.47 with dividends reinvested.
If I misunderstood and you're looking at Jan 1891 until December 1920 the results are pretty similar: -1.67% without div, +3.3% with dividends.

In effect this is basically "real return on $1 after 30 years".

I'd love to understand what your inputs were and how you are arriving at such low values.  REgardless, both of our data indicates that this is NOT the worst period in history.  Of course we could both be making large mistakes somehow...

[DavidAnnArbor]

Seriously, if you get nervous with things are going up, what will you do when things drop?  I'm not trying to be mean, I'm trying to get you to think about what your actions are likely to be when things go down.  Will you panic and sell?  I hope not, because that will get you the worst outcome possible.

No I haven't panicked and sold, thanks for asking.

[Tyson]

Seriously, if you get nervous with things are going up, what will you do when things drop?  I'm not trying to be mean, I'm trying to get you to think about what your actions are likely to be when things go down.  Will you panic and sell?  I hope not, because that will get you the worst outcome possible.

No I haven't panicked and sold, thanks for asking.

Sorry, I wasn't clear and rambled a bit there!  I was curious why you were nervous.  Why are you?

[DavidAnnArbor]

Seriously, if you get nervous with things are going up, what will you do when things drop?  I'm not trying to be mean, I'm trying to get you to think about what your actions are likely to be when things go down.  Will you panic and sell?  I hope not, because that will get you the worst outcome possible.

No I haven't panicked and sold, thanks for asking.

Sorry, I wasn't clear and rambled a bit there!  I was curious why you were nervous.  Why are you?

Because I'm an emotional person. Which is why for me the best thing is to be in touch with my emotions, rather than pretend I don't have any.  Then I'm able to use logic to help me guide my decisions rather than fear.

[Tyson]

Smart!  Seriously, that's a great answer. 

My follow up question - if the markets do go down in the near future, what will you do?

Side note:  I'm sorry, I know I'm kind of picking on you at random here, it's not really specific to you.  I see this with a lot of people here on this forum and it's so different than my view, I just want to understand it a bit more. 

[DavidAnnArbor]

Just like in 2009 I stayed the course. In January 2009 I had a conversation with a client, and said to her, capitalism isn't going away, it's the system that so far seems to be working the best, so therefore stock investing still makes the most sense. I continued to add money to the market. I had no idea what was going to happen then. I wasn't clear whether we were in for a long bear market like a 1975-1983 situation or not, although macroeconomic conditions were very different then.

[Tyson]

Nice.  So you've been through the ups and downs already.  Are you FIRE, too?  Or still accumulating?

[DavidAnnArbor]

Nice.  So you've been through the ups and downs already.  Are you FIRE, too?  Or still accumulating?

I'm both FI, trying to shed work as I head toward retirement whatever that means, and am still accumulating.

The health insurance issue is still a big uncertainty in my mind. I'm hoping my part time job with public schools will eventually enable me to have health insurance covered by the time I reach 60 years old.

[andysandp]

Nereo, I'm not sure how you're calculating your returns, but if I use cfiresim to look at the return someone earns on average over 30 years if they're annually saving, I get the following values for a 100% stocks portfolio:

Min   0.91%
25th   5.66%
Med   7.03%
75th   8.80%
99th   10.92%
...

Seattle - you seem to be doing something a bit different from what Andysandp and I are discussing (or at least what I am discussing).
I'm talking about the annualized real returns on a given 30 year period.
For data I've been using Robert Schiller's data for SP500 and for inflation (mostly out of convenience) the CPI.  Dividends are reinvested.

This is going to be different than if you are saving annually.  There's so many different inputs you could use with cFIREsim that you'll have to walk me through which you used in order for us to have a productive conversation.

From my calculations, the stretch that ends in 1920 (i.e. 1890-1920) returned -1.44% before dividends, and +3.47 with dividends reinvested.
If I misunderstood and you're looking at Jan 1891 until December 1920 the results are pretty similar: -1.67% without div, +3.3% with dividends.

In effect this is basically "real return on $1 after 30 years".

I'd love to understand what your inputs were and how you are arriving at such low values.  REgardless, both of our data indicates that this is NOT the worst period in history.  Of course we could both be making large mistakes somehow...

Thanks for all the info Curio and SeattleCPA!

I guess I shouldn't have used the term "worst in history."  I was using data starting from 1926. 

Why did the Trinity study use data only starting from 1926?  Shouldn't they revise their 4% Rule and use data from 1890?  If we use data from 1890, the lowest returns are scary..

From 2000-2017, the Real Returns was only 2.768%.

If for the next 13 years, we still get less then 7% Real Returns, we will have the lowest 30 year return in MODERN history (post 1926).

Should I be focused on numbers from modern history or numbers from 1890?

[SnackDog]

The S&P 500 started in 1926 (as a composite of 90 stocks).  The Dow Jones (30) goes back to 1896.

[Mighty-Dollar]

Am I the only one that feels like we're rocketing deeper and deeper into bubble territory?

For every doom and gloomer there's an optimist. I've heard analysts making the case for DOW 30,000. Never forget Greenspan's irrational exuberance speech on December 5, 1996. Stocks continued to go up another 75% over the next nearly 4 years time. Market timing will fail you over time.

[SeattleCPA]

Nereo, I'm not sure how you're calculating your returns, but if I use cfiresim to look at the return someone earns on average over 30 years if they're annually saving, I get the following values for a 100% stocks portfolio:

Min   0.91%
25th   5.66%
Med   7.03%
75th   8.80%
99th   10.92%
...

Seattle - you seem to be doing something a bit different from what Andysandp and I are discussing (or at least what I am discussing).
I'm talking about the annualized real returns on a given 30 year period.
For data I've been using Robert Schiller's data for SP500 and for inflation (mostly out of convenience) the CPI.  Dividends are reinvested.

This is going to be different than if you are saving annually.  There's so many different inputs you could use with cFIREsim that you'll have to walk me through which you used in order for us to have a productive conversation.

From my calculations, the stretch that ends in 1920 (i.e. 1890-1920) returned -1.44% before dividends, and +3.47 with dividends reinvested.
If I misunderstood and you're looking at Jan 1891 until December 1920 the results are pretty similar: -1.67% without div, +3.3% with dividends.

In effect this is basically "real return on $1 after 30 years".

I'd love to understand what your inputs were and how you are arriving at such low values.  REgardless, both of our data indicates that this is NOT the worst period in history.  Of course we could both be making large mistakes somehow...

Nereo, I think the difference is this: You are calculating the average annual return earned if someone invests a lump sum for 30 years.

I am calculating the future value of a thirty year stream of payments... then solving for the annual IRR (using Excel's RATE function)

Here, BTW, are the cfiresim values I get for a lump sum... they more closely match your numbers:

Min   2.47%
Median   6.33%
Max   9.67%

And I bet we could reconcile the differences... E.g., one thing that you probably didn't include but which cfiresim does include is an .18 expense ratio.

BTW, we are both making the same basic point to Andysandp... but I am concerned (just in general) that people underestimate the variability in outcomes.

[SeattleCPA]

From 2000-2017, the Real Returns was only 2.768%.

If for the next 13 years, we still get less then 7% Real Returns, we will have the lowest 30 year return in MODERN history (post 1926).

Should I be focused on numbers from modern history or numbers from 1890?

Some additional comments:
1. If I use your 2.768% for 13 years and then use the median real return of the last 150 years (which is around 6%), I calculate your average annual return over thirty years as roughly 4.6% which is far, far from the worst in recent history. That's actually a thirty year average very much in line with what people were experiencing if they retired between 1974 and 1990... BTW I didn't double-check your 2.768% figure...
2. As I keep saying in my posts to this thread, I think the way one most usefully calculates the future values and annual returns is to look at a thirty year stream of payments or whatever... if you're accumulating over thirty years, for example, one chunk of your money is in market and compounding for 30 years, another chunk for 29 years, another chunk for 28 years and so on. You don't want to look at average annual return for just one of these chunks. You want to average them out.

BTW, here are the 35 year average returns I calculated for 1974 to 1990 my blog post about why people need a retirement plan b:

1974   4.34%
1975   4.88%
1976   4.83%
1977   3.93%
1978   3.85%
1979   3.69%
1980   3.65%
1981   2.62%
1982   3.30%
1983   3.51%
1984   3.35%
1985   3.98%
1986   4.73%
1987   4.24%
1988   4.43%
1989   4.82%
1990   4.42%

[Cwadda]

My recommendation: sock your money into the market and don't even check it each day. You'll drive yourself crazy. There have been dozens of threads on market timing over the years. They have a lot of more in-depth information.

[dougules]

I suspect that since a lot of people have switched from active investing (stock picking) to passive investing (buying index funds and just leaving the money where it is) that might be making a difference with the stability of the markets. There has been nowhere near the volatility in the markets from Trump's actions that I expected there would be. A lot of investors have taken up MMM's strategy and they aren't pushing and pulling money as much as they used to.

Or could it be the ~$11 trillion (yes, that's with a t) that central banks have pumped into assets since 2006. That would have some effect on asset prices.

http://www.businessinsider.com/1-trillion-in-central-bank-asset-buying-2017-4

Yes, this is probably it.  I'd like interest rates to get back to normal. 

Am I the only one that feels like we're rocketing deeper and deeper into bubble territory?

For every doom and gloomer there's an optimist. I've heard analysts making the case for DOW 30,000. Never forget Greenspan's irrational exuberance speech on December 5, 1996. Stocks continued to go up another 75% over the next nearly 4 years time. Market timing will fail you over time.

I'm still sticking to my plan.  Honestly I feel like things have been a bit inflated for a few years now, so yes I'm making zero predictions on what is actually going to happen.  And I'm curious what the case is for DOW 30,000.  I am looking for the optimist side of why current prices make sense. 

My recommendation: sock your money into the market and don't even check it each day. You'll drive yourself crazy. There have been dozens of threads on market timing over the years. They have a lot of more in-depth information.

I'm not changing what I'm doing.  I'm just crossing my fingers that the market will go back down a bit.  Whether it actually will or not, I have no idea.  This is more about the present than the future.