Author Topic: stock market returns post inflation adjustment don't look so rosy  (Read 4383 times)

bradleylsmith

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I'm a novice and also have yet to put money in the stock market, so it's easy to sway my mindset.

Just read http://observationsandnotes.blogspot.com/2011/03/stock-market-100-year-inflation-history.html

I'm feeling doubt the market is the right place to invest money into. Is this guy right in that real returns are 1.6%? Flat returns for  30+ years? Doesn't sound that appealing

TheAnonOne

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Re: stock market returns post inflation adjustment don't look so rosy
« Reply #1 on: August 22, 2015, 12:42:17 AM »
The stock market has routinely returned 7+% AFTER inflation. Not counting inflation, it is something like 11-13 percent.

frugledoc

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Re: stock market returns post inflation adjustment don't look so rosy
« Reply #2 on: August 22, 2015, 12:47:31 AM »
He didn't include dividends for some reason.

fb132

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Re: stock market returns post inflation adjustment don't look so rosy
« Reply #3 on: August 22, 2015, 06:23:40 AM »
Nobody can predict the stock market, so I wouldn't worry about it.

Note: Funny that with yesterday's drop, we have 4-5 new posts about stock market dropping, I could only imagine how many posts will talk about the crash if it ever get to the point like in '08.

bradleylsmith

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Re: stock market returns post inflation adjustment don't look so rosy
« Reply #4 on: August 22, 2015, 09:15:50 AM »
if you actually read the article I posted it's talking about from 1900 - now the AVG return being 1.6%. Yes there are times of 7+% and it's great  to invest in those times if you can predict them. However, looking at the graph and his article, it also looks like 30+ years of NO gain in the stock market, including one flat return of 70+ years.

Why is this wrong? Or is this right and we are a bit disillusioned?

bradleylsmith

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Re: stock market returns post inflation adjustment don't look so rosy
« Reply #5 on: August 22, 2015, 09:17:49 AM »
for those that don't have the time to read, here's the image:

http://4.bp.blogspot.com/-Q1a3bP-GV8Y/T1ajvk0N9oI/AAAAAAAABSg/8TheBHlMppk/s1600/Dow%2BInflation-Adjusted%2BClosing%2BPrices.jpg

the blue line being adjusted for inflation. Notice the value in 1905 being nearly the same as in 1980.

Cecil

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Re: stock market returns post inflation adjustment don't look so rosy
« Reply #6 on: August 22, 2015, 09:20:37 AM »
To reiterate, he didn't include dividends.

If you include reinvested dividends, the stock market has returned almost exactly 7% in real terms over the very long term.

I'm a red panda

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Re: stock market returns post inflation adjustment don't look so rosy
« Reply #7 on: August 22, 2015, 09:29:49 AM »
Where do you propose to invest instead. Because anywhere else it seems you lose to inflation.

I am looking into a more dividend based strategy rather than indexes though. I can't decide.

bradleylsmith

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Re: stock market returns post inflation adjustment don't look so rosy
« Reply #8 on: August 22, 2015, 09:36:53 AM »
thank you, okay I'll take a look at including dividends and see what I come up with. Not sure if the DOW is the best measure either - it's difficult to figure out this whole stock market thing.

The other big places to invest I see are in local companies (companies you buy or invest in) and real estate. I'm trying to figure out my allocation of all 3 of these and not sure what it will end up being quite yet.

Retire-Canada

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Re: stock market returns post inflation adjustment don't look so rosy
« Reply #9 on: August 22, 2015, 09:56:54 AM »
The other big places to invest I see are in local companies (companies you buy or invest in) and real estate.

Just keep in mind that investing in local companies and local real estate can put you at a lot of geographical risk compared to the wider stock market. And don't forget to include the opportunity cost of your time required to research and manage those investments - particularly if you are considering buying properties and becoming a landlord.

That's not to say you shouldn't do it. Just capture all the costs and risks so you can fully assess your options.

bradleylsmith

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Re: stock market returns post inflation adjustment don't look so rosy
« Reply #10 on: August 22, 2015, 10:14:52 AM »
yeah the easiest thing to do is to put it in the index and watch it grow - which may be a no brainer with a 401k when I have the option to get one (company doesn't offer it).

Looks like the dividends make a pretty big difference taking the avg from ~ 2% to above 6%. Thanks for helping me figure that one out he almost had me.

grantmeaname

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Re: stock market returns post inflation adjustment don't look so rosy
« Reply #11 on: August 22, 2015, 10:27:03 AM »
Not sure if the DOW is the best measure either - it's difficult to figure out this whole stock market thing.
You're right about that; the Dow is horrid in every way and nobody should pay it an ounce of attention. It's highly concentrated since it's only a couple dozen companies, it overweights a few sectors and heavily overweights large-caps, it excludes dividends, and it's weighted in the most asinine way imaginable - by price. If you had a a company with a $1B market cap and 10m shares (share price $100) and another with a $10B market cap and 1b shares (share price $10), the second one has ten times more impact on the economy and the first one has ten times the impact on a price-weighted index. A cap-weighted index would weight the second one ten times more heavily, which actually has some reasonable justification.

Everything about the DJIA sucks.

Tyler

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Re: stock market returns post inflation adjustment don't look so rosy
« Reply #12 on: August 22, 2015, 12:01:45 PM »
It's also important to note that the return you actually experience is mathematically different from the average.

Since 1900, the average inflation-adjusted return of the S&P500 (including reinvested dividends) is 8.5%.  The compound annual growth rate that you would have actually experienced if you were fully invested over that timeframe is only 6.6%.  Pretty big difference!  The difference is a result of volatility drag. Basically, the more volatile the investment, the more your actual returns will trail the average.  You can read about the math at the link.

Even looking at the more rosy averages, there have been many rolling periods where the stock market lost money (inflation adjusted) for more than a decade.  Occasionally as long as 20 years! (PDF) Recently, a 100% stock market investor starting in 2000 experienced 13 years of negative real returns before finally breaking even for good.   Stocks absolutely do work out well in the long run, but if you're not prepared to wait them out for at least 10 years without questioning your plan and switching course, you may be in for a tough emotional ride.  And remember, if you switch portfolios all the time you generally lose money.

One positive thing about diversification is that you can trade off a little of that average return but gain a much less volatile return in the process.  Shorter down periods are a lot easier to weather as an investor, and because of the effect of volatility drag, the difference in CAGRs between a "high risk high return" portfolio and a "lower risk lower return" portfolio is often less than you might think by simply looking at the average returns. 

TL;DR: Don't be freaked out about the stock market.  But also be realistic about its history.  Find a middle ground with a diverse portfolio you can truly stick with through ups and downs, and you'll most likely be a lot happier and wealthier in the long run. 

Yankuba

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Re: stock market returns post inflation adjustment don't look so rosy
« Reply #13 on: August 22, 2015, 05:54:41 PM »
With last week's debacle the past fifteen years of the S&P500 index (including dividends) averaged only 3.8 percent - and this is during a time when everyone is freaking out about robots/software taking all the jobs and corporations went nuts buying back their own stock.

http://performance.morningstar.com/fund/performance-return.action?t=VFIAX&region=usa&culture=en_US

I don't expect long term equity returns to be higher than five percent - including dividends and inflation. We live in a fully industrial world  - the gains from cutting cost and expanding overseas are gone.