Author Topic: The dreaded "lost decade" of stock performance  (Read 2493 times)

mistymoney

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The dreaded "lost decade" of stock performance
« on: June 09, 2024, 09:37:40 AM »
So I was googling around trying to find what the causative factors have been for previous lost decades, and how those line up with current stock market. I didn't find anything as yet.

But I did find this thought paper on lost decades and trying to predict them, and thought I would share here:
https://www.brandeis.edu/global/about/centers/rosenberg/repec/wpapers/Global_Finance_Brief_LeBaron.pdf

if any fancied reading it.

With planning to FIRE relatively soon, I've been trying to shore up my situation to withstand SORR in the first 5 years which I think is relatively easier to do in comparison with contemplating a lost decade in the stock market.

I would like to open discussion here to any of the following:

What were the causitive factors of previous lost decades?
What could a retiree have done to mitigate/survive those?
Are lost decades predictable? And where do we stand on that now - if so? The article was written in 2012, but I'm not seeing anything that is actually predictive in the article outside of the higher expected return results in a higher probabilty of not acheiving that over a decade. So not really very magical.


Financial.Velociraptor

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Re: The dreaded "lost decade" of stock performance
« Reply #1 on: June 09, 2024, 09:43:04 AM »
What could a retiree have done to mitigate/survive those?

I "True Mustachian" TM would access a copy of this book via their public library - https://www.amazon.com/Little-Book-Sideways-Markets-Nowhere/dp/0470932937

Pomegranate12

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Re: The dreaded "lost decade" of stock performance
« Reply #2 on: June 09, 2024, 05:28:36 PM »
So I was googling around trying to find what the causative factors have been for previous lost decades, and how those line up with current stock market. I didn't find anything as yet.

But I did find this thought paper on lost decades and trying to predict them, and thought I would share here:
https://www.brandeis.edu/global/about/centers/rosenberg/repec/wpapers/Global_Finance_Brief_LeBaron.pdf

if any fancied reading it.

With planning to FIRE relatively soon, I've been trying to shore up my situation to withstand SORR in the first 5 years which I think is relatively easier to do in comparison with contemplating a lost decade in the stock market.

I would like to open discussion here to any of the following:

What were the causitive factors of previous lost decades?
What could a retiree have done to mitigate/survive those?
Are lost decades predictable? And where do we stand on that now - if so? The article was written in 2012, but I'm not seeing anything that is actually predictive in the article outside of the higher expected return results in a higher probabilty of not acheiving that over a decade. So not really very magical.

The lost decade is a real problem that we will face but it may be more than a decade, hopefully not as bad as japans lost 4 decades, look at the Japanese market returns I think it peaked in 1990 and it barely just recovered a year or two ago so that was 4 decades. Their market run up looked very similar to ours.  I am concerned

Heckler

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Re: The dreaded "lost decade" of stock performance
« Reply #3 on: June 09, 2024, 06:55:06 PM »
Top is in?

This is why I’m globally & asset class diversified.

PS: https://www.callan.com/periodic-table/

twinstudy

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Re: The dreaded "lost decade" of stock performance
« Reply #4 on: June 10, 2024, 12:38:06 AM »
If you are young then recessions and times of bad performance are good - means you buy in cheaper.

If you are old and retired you should have enough slack built into the numbers to withstand it. Personally I won't retire till my dividends and rent alone cover living expenses, so the actual valuation of the asset is immaterial.

maizefolk

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Re: The dreaded "lost decade" of stock performance
« Reply #5 on: June 10, 2024, 05:19:34 AM »
The lost decade is a real problem that we will face but it may be more than a decade, hopefully not as bad as japans lost 4 decades, look at the Japanese market returns I think it peaked in 1990 and it barely just recovered a year or two ago so that was 4 decades. Their market run up looked very similar to ours. I am concerned

Japan saw their stock market increase in value 7x in seven years.
Ours has increased 2.5x in the last ten years.

Juan Ponce de León

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Re: The dreaded "lost decade" of stock performance
« Reply #6 on: June 10, 2024, 07:08:07 AM »
Thanks to rampant money printing there is no more lost decades.  The crashes are upwards now.

TheAnonOne

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Re: The dreaded "lost decade" of stock performance
« Reply #7 on: June 10, 2024, 01:22:16 PM »
The lost decade is a real problem that we will face but it may be more than a decade, hopefully not as bad as japans lost 4 decades, look at the Japanese market returns I think it peaked in 1990 and it barely just recovered a year or two ago so that was 4 decades. Their market run up looked very similar to ours. I am concerned

Japan saw their stock market increase in value 7x in seven years.
Ours has increased 2.5x in the last ten years.

Additionally, the US is the center of the world as far as finance goes. We have deep capital markets, and a culture of investment. Japan and the USA cannot be compared nor can the extent of their bubble be compared. Completely different.

SilentC

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Re: The dreaded "lost decade" of stock performance
« Reply #8 on: June 10, 2024, 06:52:38 PM »
If you are young then recessions and times of bad performance are good - means you buy in cheaper.

If you are old and retired you should have enough slack built into the numbers to withstand it. Personally I won't retire till my dividends and rent alone cover living expenses, so the actual valuation of the asset is immaterial.

Mostly agree.  What’s the point in retiring if you are going to be anxious every time the market draws down 30% or there are three or four years of poor returns in a row. 

The second part of the equation is not thinking everything will be fine just investing in S&P 500.  There is a lot written on that on the forum so no need to beat that to death.  Meb Faber recently had a good 10 minute podcast you would find interesting, “the bear market in diversification” https://youtu.be/5ZW8kMEeMVs?si=hcM3rDmWmbNPUfIJ

vand

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Re: The dreaded "lost decade" of stock performance
« Reply #9 on: June 11, 2024, 03:19:24 AM »
With interest rates where they are, going the annuity route is an perfectly viable - even attractive, at current rates - option if you want absolute security of income rather than being conservatitve to the point of lowering your SWR to the point of "lost decade" worst-outcome scenarios.

2Birds1Stone

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Re: The dreaded "lost decade" of stock performance
« Reply #10 on: June 11, 2024, 06:15:07 AM »
With interest rates where they are, going the annuity route is an perfectly viable - even attractive, at current rates - option if you want absolute security of income rather than being conservatitve to the point of lowering your SWR to the point of "lost decade" worst-outcome scenarios.

Indeed, ERN just dropped the most recent installment of the SWR series on this topic last month.

https://earlyretirementnow.com/2024/05/16/safety-first-swr-series-part-61/

vand

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Re: The dreaded "lost decade" of stock performance
« Reply #11 on: June 11, 2024, 07:11:04 AM »
With interest rates where they are, going the annuity route is an perfectly viable - even attractive, at current rates - option if you want absolute security of income rather than being conservatitve to the point of lowering your SWR to the point of "lost decade" worst-outcome scenarios.

Indeed, ERN just dropped the most recent installment of the SWR series on this topic last month.

https://earlyretirementnow.com/2024/05/16/safety-first-swr-series-part-61/

Nice.

Annuities have become an interesting option right now given the rates that are available.
Best buy tables currently suggest single policies offer 5.9% flat and 4% with an annual 3% COLA adjustment for a 55yo - arguably a much better option than "I'll only use a 3% SWR because I'm ultra conservative". Furthermore, I like the idea that people will find it easier to spend the income rather overcoming the mindset of "taking it out of the portfolio to spend".

Furthermore, it can be seen a risk-mitigation option, which you would be very greatful for if there is a good old-fashioned deflationary recession/crash where stocks get cut in half while interest rates go to zero. I know we're not supposed to try to predict markets and recessions, but hedging at least some of your living costs against the next existential crisis makes a lot of sense to me.
« Last Edit: June 11, 2024, 07:14:46 AM by vand »

ixtap

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Re: The dreaded "lost decade" of stock performance
« Reply #12 on: June 11, 2024, 08:13:38 AM »
The lost decade is a real problem that we will face but it may be more than a decade, hopefully not as bad as japans lost 4 decades, look at the Japanese market returns I think it peaked in 1990 and it barely just recovered a year or two ago so that was 4 decades. Their market run up looked very similar to ours. I am concerned

Japan saw their stock market increase in value 7x in seven years.
Ours has increased 2.5x in the last ten years.

Additionally, the US is the center of the world as far as finance goes. We have deep capital markets, and a culture of investment. Japan and the USA cannot be compared nor can the extent of their bubble be compared. Completely different.

Moreover, the US has natural resources that Japan is rather poor in. Their principal natural resource is fish and they constantly have to negotiate with their neighbors on that one.

maizefolk

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Re: The dreaded "lost decade" of stock performance
« Reply #13 on: June 11, 2024, 10:25:39 AM »
Annuities have become an interesting option right now given the rates that are available.
Best buy tables currently suggest single policies offer 5.9% flat and 4% with an annual 3% COLA adjustment for a 55yo - arguably a much better option than "I'll only use a 3% SWR because I'm ultra conservative". Furthermore, I like the idea that people will find it easier to spend the income rather overcoming the mindset of "taking it out of the portfolio to spend".

Furthermore, it can be seen a risk-mitigation option, which you would be very greatful for if there is a good old-fashioned deflationary recession/crash where stocks get cut in half while interest rates go to zero. I know we're not supposed to try to predict markets and recessions, but hedging at least some of your living costs against the next existential crisis makes a lot of sense to me.

A big part of why the 4% and 3% withdrawal rates are so low is that the portfolio needs to be robust to depressions and periods of high inflation.

Between 1968 and 1982, consumer prices in the USA increase 195% while an annuity with a 3% COLA would be a hypothetical retiree's income only increased 60%. In real terms a 55 retiree's spending power would have been cut in half sixteen years into retirement if they'd invested in such an annuity.

bacchi

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Re: The dreaded "lost decade" of stock performance
« Reply #14 on: June 11, 2024, 11:12:31 AM »
Annuities have become an interesting option right now given the rates that are available.
Best buy tables currently suggest single policies offer 5.9% flat and 4% with an annual 3% COLA adjustment for a 55yo - arguably a much better option than "I'll only use a 3% SWR because I'm ultra conservative". Furthermore, I like the idea that people will find it easier to spend the income rather overcoming the mindset of "taking it out of the portfolio to spend".

Furthermore, it can be seen a risk-mitigation option, which you would be very greatful for if there is a good old-fashioned deflationary recession/crash where stocks get cut in half while interest rates go to zero. I know we're not supposed to try to predict markets and recessions, but hedging at least some of your living costs against the next existential crisis makes a lot of sense to me.

A big part of why the 4% and 3% withdrawal rates are so low is that the portfolio needs to be robust to depressions and periods of high inflation.

Between 1968 and 1982, consumer prices in the USA increase 195% while an annuity with a 3% COLA would be a hypothetical retiree's income only increased 60%. In real terms a 55 retiree's spending power would have been cut in half sixteen years into retirement if they'd invested in such an annuity.

An alterative is setting up a TIPS ladder (at 4.5%) and leaving the rest in the market. The TIPS cover annual expenses and the rest ($130k of $1M) covers expected unexpected expenses.

2Birds1Stone

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Re: The dreaded "lost decade" of stock performance
« Reply #15 on: June 11, 2024, 11:24:27 AM »
If you read the "conclusion" in the ERN post I linked, he states that even in this interest rate environment you're better off just using a slightly lower starting WR% and letting things ride. But as Vand pointed out, you don't have to go "all in" on either strategy and hedge your bets....

Some people just can't handle the stress of the ups and downs of the market.

There's no free lunch though.....

ChpBstrd

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Re: The dreaded "lost decade" of stock performance
« Reply #16 on: June 11, 2024, 04:29:21 PM »
Something I think about that makes me tempted to take the deal of bonds or annuities is this:

When a Sequence of Returns Risk event occurs, you can usually win by adding risk, but you will usually lose by trying to remove risk.

In other words, when the SHTF, usually the worst thing you can do is to trade your risky stocks for cash/bonds. The best thing you can do is usually to trade your cash/bonds for risky stocks. This is a case for hanging out in a relatively safe AA on a routine basis, and waiting to buy a future dip.

One might implement by adding something like this to their Investment Policy Statement:
"I will maintain a 50% equity, 50% fixed income + cash asset allocation, unless the S&P500 closes 20% down from its high, at which point I will change my allocation to 85% equity, 15% fixed income + cash."

ERN and other financial analysts do not usually build models around such algorithms. Guess it gets complicated quickly. ERN comes close with his observation that the safe withdraw rate is higher when CAPE is lower, and his observation that the SWR is much higher after stocks are in a bear market.
Quote
...the lesson here is that the 4% Rule fails only if we’re at or very close to the equity market peak. After we’ve already fallen by 20+% we can be a lot more generous with our safe withdrawal rates. Historically, you can use withdrawal rates well in excess of 4% if the stock market is down as much as today!{March 2020}



So I guess the intrigue with such a "rush into danger" algorithm is the following:
  • Bear markets are the only times when we can be statistically confident the stock market will go up, and that there's a lower than average likelihood of a cheaper buying opportunity being right around the corner. When everyone is panicking, we can be confident in future price gains.
  • Instead of working our asses off to save 30x our annual spending so that we can safely retire at the top, why not just wait for the SWR to come down to where we are, and switch AAs to something more risky after stocks have already fallen? ERN's research suggests it is possible to safely retire on about 23x if you can buy in during a bear market.
  • Bear markets occur on average every 6 years and last about a year. A significant number of the last 25 years had lower stock prices in the future!
  • At >2%, real yields on 10y treasuries are the highest they've been since the deflation of December 2008. A bond-heavy portfolio can cover a greater percentage of your expenses now than in the past 16 years. Thus, with a high bond allocation, a retiree can avoid selling as many shares of stock during the next bear market, and be armed with enough net worth to buy the dip.
  • The S&P500 CAPE ratio is now 35. This is greater than the 1929 bubble and was only ever exceeded by the 1998-2001 dot com bubble and 2021. There has never been a time when the CAPE was this high and a bear market wasn't on the way within 1-3 years.
  • A retiree allocated to, say, 2-year treasuries yielding 4.84% today could cover all their expenses except for inflation for the next two years with just 20.6x of their spending invested (4.84% temporary WR). Out on the risk curve a little, AA corporates yield 5.4% today. So unlike in past situations, it is plausible to retire on 100% fixed income today with a low WR. Since you only need stocks for long-run returns and to outpace inflation, why not use the next bear market as an opportunity to reallocate, instead of worrying about the next bear market?

vand

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Re: The dreaded "lost decade" of stock performance
« Reply #17 on: June 12, 2024, 03:38:00 AM »
Annuities have become an interesting option right now given the rates that are available.
Best buy tables currently suggest single policies offer 5.9% flat and 4% with an annual 3% COLA adjustment for a 55yo - arguably a much better option than "I'll only use a 3% SWR because I'm ultra conservative". Furthermore, I like the idea that people will find it easier to spend the income rather overcoming the mindset of "taking it out of the portfolio to spend".

Furthermore, it can be seen a risk-mitigation option, which you would be very greatful for if there is a good old-fashioned deflationary recession/crash where stocks get cut in half while interest rates go to zero. I know we're not supposed to try to predict markets and recessions, but hedging at least some of your living costs against the next existential crisis makes a lot of sense to me.

A big part of why the 4% and 3% withdrawal rates are so low is that the portfolio needs to be robust to depressions and periods of high inflation.

Between 1968 and 1982, consumer prices in the USA increase 195% while an annuity with a 3% COLA would be a hypothetical retiree's income only increased 60%. In real terms a 55 retiree's spending power would have been cut in half sixteen years into retirement if they'd invested in such an annuity.

Aye, that is true. Not sure if its the same in the US but for us the commonly available options are to escalate a 3%, 5%, or RPI.. and if you can link to RPI but then the best annuity rate drops to about 3.4% - no free lunches (although the RPI calculation tends produce a higher number than CPI).

However, the best deals on annuities are to be found by sticking to a vanilla flat payout non-escalating payout with no guarantees... the more linkage and guarantees you want to add, the more specialised the product and fatter the profit margins for the insurer.

Annuities also become relatively more attractive as you get older in overcoming longevity risk.. (https://earlyretirementnow.com/2019/08/29/you-are-a-pension-fund-of-one-swr-series-part-32/) - there is a lot more sense in a 70 or 75yo taking out an annuity to protect against living to 100 while still being able to enjoy planning to an average of 85.

You can also get enhanced annuities if you have a preexisting condition - that's something that the general market doesn't recognise and you'd have to factor into your own calculations, sadly, if you are sticking with drawdown, which I imagine could be quite a depressing thought. Hey, if you got diabetes, might as well get paid for it.

Not claiming they're a magic bullet, but rates available today make them worth considering.

mistymoney

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Re: The dreaded "lost decade" of stock performance
« Reply #18 on: June 12, 2024, 09:51:43 AM »
What could a retiree have done to mitigate/survive those?

I "True Mustachian" TM would access a copy of this book via their public library - https://www.amazon.com/Little-Book-Sideways-Markets-Nowhere/dp/0470932937

I appreciate this recommendation, but it may be too active investing for me. However I will dig a little deeper.

One question is though - sideways markets at some point take off (or drop too!) so I'm unsure how this strategy may weather at that junction point where the market starts to move.

mistymoney

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Re: The dreaded "lost decade" of stock performance
« Reply #19 on: June 12, 2024, 09:54:01 AM »



hmmm...seems like the bigger they are (drop) the harder they fall (length of decline). Or vice versa I suppose!

mistymoney

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Re: The dreaded "lost decade" of stock performance
« Reply #20 on: June 12, 2024, 10:05:10 AM »
Annuities have become an interesting option right now given the rates that are available.
Best buy tables currently suggest single policies offer 5.9% flat and 4% with an annual 3% COLA adjustment for a 55yo - arguably a much better option than "I'll only use a 3% SWR because I'm ultra conservative". Furthermore, I like the idea that people will find it easier to spend the income rather overcoming the mindset of "taking it out of the portfolio to spend".

Furthermore, it can be seen a risk-mitigation option, which you would be very greatful for if there is a good old-fashioned deflationary recession/crash where stocks get cut in half while interest rates go to zero. I know we're not supposed to try to predict markets and recessions, but hedging at least some of your living costs against the next existential crisis makes a lot of sense to me.

A big part of why the 4% and 3% withdrawal rates are so low is that the portfolio needs to be robust to depressions and periods of high inflation.

Between 1968 and 1982, consumer prices in the USA increase 195% while an annuity with a 3% COLA would be a hypothetical retiree's income only increased 60%. In real terms a 55 retiree's spending power would have been cut in half sixteen years into retirement if they'd invested in such an annuity.

Aye, that is true. Not sure if its the same in the US but for us the commonly available options are to escalate a 3%, 5%, or RPI.. and if you can link to RPI but then the best annuity rate drops to about 3.4% - no free lunches (although the RPI calculation tends produce a higher number than CPI).

However, the best deals on annuities are to be found by sticking to a vanilla flat payout non-escalating payout with no guarantees... the more linkage and guarantees you want to add, the more specialised the product and fatter the profit margins for the insurer.

Annuities also become relatively more attractive as you get older in overcoming longevity risk.. (https://earlyretirementnow.com/2019/08/29/you-are-a-pension-fund-of-one-swr-series-part-32/) - there is a lot more sense in a 70 or 75yo taking out an annuity to protect against living to 100 while still being able to enjoy planning to an average of 85.

You can also get enhanced annuities if you have a preexisting condition - that's something that the general market doesn't recognise and you'd have to factor into your own calculations, sadly, if you are sticking with drawdown, which I imagine could be quite a depressing thought. Hey, if you got diabetes, might as well get paid for it.

Not claiming they're a magic bullet, but rates available today make them worth considering.

One way or another, the house always wins. At least on average. So the greater likelihood is that you'd do better yourself - if you can stomach it!


vand

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Re: The dreaded "lost decade" of stock performance
« Reply #21 on: June 12, 2024, 01:25:56 PM »
Annuities have become an interesting option right now given the rates that are available.
Best buy tables currently suggest single policies offer 5.9% flat and 4% with an annual 3% COLA adjustment for a 55yo - arguably a much better option than "I'll only use a 3% SWR because I'm ultra conservative". Furthermore, I like the idea that people will find it easier to spend the income rather overcoming the mindset of "taking it out of the portfolio to spend".

Furthermore, it can be seen a risk-mitigation option, which you would be very greatful for if there is a good old-fashioned deflationary recession/crash where stocks get cut in half while interest rates go to zero. I know we're not supposed to try to predict markets and recessions, but hedging at least some of your living costs against the next existential crisis makes a lot of sense to me.

A big part of why the 4% and 3% withdrawal rates are so low is that the portfolio needs to be robust to depressions and periods of high inflation.

Between 1968 and 1982, consumer prices in the USA increase 195% while an annuity with a 3% COLA would be a hypothetical retiree's income only increased 60%. In real terms a 55 retiree's spending power would have been cut in half sixteen years into retirement if they'd invested in such an annuity.

Aye, that is true. Not sure if its the same in the US but for us the commonly available options are to escalate a 3%, 5%, or RPI.. and if you can link to RPI but then the best annuity rate drops to about 3.4% - no free lunches (although the RPI calculation tends produce a higher number than CPI).

However, the best deals on annuities are to be found by sticking to a vanilla flat payout non-escalating payout with no guarantees... the more linkage and guarantees you want to add, the more specialised the product and fatter the profit margins for the insurer.

Annuities also become relatively more attractive as you get older in overcoming longevity risk.. (https://earlyretirementnow.com/2019/08/29/you-are-a-pension-fund-of-one-swr-series-part-32/) - there is a lot more sense in a 70 or 75yo taking out an annuity to protect against living to 100 while still being able to enjoy planning to an average of 85.

You can also get enhanced annuities if you have a preexisting condition - that's something that the general market doesn't recognise and you'd have to factor into your own calculations, sadly, if you are sticking with drawdown, which I imagine could be quite a depressing thought. Hey, if you got diabetes, might as well get paid for it.

Not claiming they're a magic bullet, but rates available today make them worth considering.

One way or another, the house always wins. At least on average. So the greater likelihood is that you'd do better yourself - if you can stomach it!

Or die trying?

roomtempmayo

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Re: The dreaded "lost decade" of stock performance
« Reply #22 on: June 12, 2024, 02:29:54 PM »
So I was googling around trying to find what the causative factors have been for previous lost decades, and how those line up with current stock market. I didn't find anything as yet.

But I did find this thought paper on lost decades and trying to predict them, and thought I would share here:
https://www.brandeis.edu/global/about/centers/rosenberg/repec/wpapers/Global_Finance_Brief_LeBaron.pdf

if any fancied reading it.

With planning to FIRE relatively soon, I've been trying to shore up my situation to withstand SORR in the first 5 years which I think is relatively easier to do in comparison with contemplating a lost decade in the stock market.

I would like to open discussion here to any of the following:

What were the causitive factors of previous lost decades?
What could a retiree have done to mitigate/survive those?
Are lost decades predictable? And where do we stand on that now - if so? The article was written in 2012, but I'm not seeing anything that is actually predictive in the article outside of the higher expected return results in a higher probabilty of not acheiving that over a decade. So not really very magical.

In the post-war era United States, for the inflation adjusted S&P we're talking about 1968-1991, and 2000-2014.

Each period was a cluster of bad things that happened.  68-91 included Vietnam and really high inflation.  00-14 included the dot com bust, 9/11, the War on Terror, and the housing bust in quick succession.  Maybe someone can find some underlying financial fundamentals they had in common, but we'd be talking about an n of 2, so it wouldn't mean that much.

We could easily imagine such a cluster happening right now (AI is a bust for productivity, inflation is sticky, trade conflicts escalate leading to deglobalization, war with any number of adversaries), but we'd just be speculating about the confluence of speculative events.

What is to be done? This is probably a place where it's useful to remember that the market is not the economy.  The economy was still making money during lost decades.  For example, if you bought $1000 of 3M (random value stock) on 01/01/2000 and held it until 01/01/2014 while reinvesting dividends, you'd have $4069 at the end of it, averaging 10.54% over our most recent lost decade (plus).  As long as you didn't sell everything at the worst possible time (i.e. 2009) you'd be fine.

mistymoney

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Re: The dreaded "lost decade" of stock performance
« Reply #23 on: June 12, 2024, 02:38:26 PM »
So I was googling around trying to find what the causative factors have been for previous lost decades, and how those line up with current stock market. I didn't find anything as yet.

But I did find this thought paper on lost decades and trying to predict them, and thought I would share here:
https://www.brandeis.edu/global/about/centers/rosenberg/repec/wpapers/Global_Finance_Brief_LeBaron.pdf

if any fancied reading it.

With planning to FIRE relatively soon, I've been trying to shore up my situation to withstand SORR in the first 5 years which I think is relatively easier to do in comparison with contemplating a lost decade in the stock market.

I would like to open discussion here to any of the following:

What were the causitive factors of previous lost decades?
What could a retiree have done to mitigate/survive those?
Are lost decades predictable? And where do we stand on that now - if so? The article was written in 2012, but I'm not seeing anything that is actually predictive in the article outside of the higher expected return results in a higher probabilty of not acheiving that over a decade. So not really very magical.

In the post-war era United States, for the inflation adjusted S&P we're talking about 1968-1991, and 2000-2014.

Each period was a cluster of bad things that happened.  68-91 included Vietnam and really high inflation.  00-14 included the dot com bust, 9/11, the War on Terror, and the housing bust in quick succession.  Maybe someone can find some underlying financial fundamentals they had in common, but we'd be talking about an n of 2, so it wouldn't mean that much.

We could easily imagine such a cluster happening right now (AI is a bust for productivity, inflation is sticky, trade conflicts escalate leading to deglobalization, war with any number of adversaries), but we'd just be speculating about the confluence of speculative events.

What is to be done? This is probably a place where it's useful to remember that the market is not the economy.  The economy was still making money during lost decades.  For example, if you bought $1000 of 3M (random value stock) on 01/01/2000 and held it until 01/01/2014 while reinvesting dividends, you'd have $4069 at the end of it, averaging 10.54% over our most recent lost decade (plus).  As long as you didn't sell everything at the worst possible time (i.e. 2009) you'd be fine.

did you mean 68-81?

1981-91 was good.

roomtempmayo

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Re: The dreaded "lost decade" of stock performance
« Reply #24 on: June 12, 2024, 02:54:04 PM »


did you mean 68-81?

1981-91 was good.

Nope.  If you adjust the S&P for inflation, you'll see that the peak of late-68 wasn't equaled at any point until 91.  87 got close, but didn't quite make it. 


mistymoney

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Re: The dreaded "lost decade" of stock performance
« Reply #25 on: June 12, 2024, 04:02:33 PM »
@roomtempmayo

I used this site:
https://www.officialdata.org/us/stocks/s-p-500/1968?amount=1000&endYear=1991

Quote
Stock market returns between 1968 and 1991
If you invested $1000 in the S&P 500 at the beginning of 1968, you would have about $11,248.75 at the end of 1991, assuming you reinvested all dividends. This is a return on investment of 1,024.87%, or 10.61% per year.

This lump-sum investment beats inflation during this period for an inflation-adjusted return of about 187.41% cumulatively, or 4.50% per year.

maizefolk

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Re: The dreaded "lost decade" of stock performance
« Reply #26 on: June 12, 2024, 07:34:25 PM »
roomtempmayo, does the site you are using include the impact of reinvesting dividends? That's the most common reason I see for people underestimating the total return of stock market investments in historical data.

reeshau

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Re: The dreaded "lost decade" of stock performance
« Reply #27 on: June 13, 2024, 06:26:40 AM »
@roomtempmayo

I used this site:
https://www.officialdata.org/us/stocks/s-p-500/1968?amount=1000&endYear=1991

Quote
Stock market returns between 1968 and 1991
If you invested $1000 in the S&P 500 at the beginning of 1968, you would have about $11,248.75 at the end of 1991, assuming you reinvested all dividends. This is a return on investment of 1,024.87%, or 10.61% per year.

This lump-sum investment beats inflation during this period for an inflation-adjusted return of about 187.41% cumulatively, or 4.50% per year.

This era is actually what defined the 4% rule; what Bill Bengen called safemax.  Starting in the 80's you were more than fine, in no small part due to the 90's.

ChpBstrd

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Re: The dreaded "lost decade" of stock performance
« Reply #28 on: June 13, 2024, 07:55:18 AM »
The 1970s and early 80s caused a failure of the 4% rule mostly because high inflation escalated the hypothetical spending rate.

Today's housing woes make me wonder how retirees in the U.S. did if they entered the 1970s as homeowners with a fixed rate mortgage. If maybe a quarter of one's spending was fixed, did inflation really ravage their portfolios?

This is obviously a relevant question now because we live in a world where lots of people have mortgages at sub-5% rates on houses purchased before the post-pandemic run-up in prices, and others are renting or buying after both prices and rates increased dramatically.

CPI minus shelter is only 2.1% right now, as opposed to 3.3% for regular CPI. Arguably, for a homeowner like myself with a 3.25% mortgage rate on a $91k balance, the 2.1% inflation rate is the more comparable benchmark. So at the moment I'm enjoying a 36% discount on my inflation-related spending escalation.

Another factor that might have been relevant in the 70's was whether a person owned a large gas guzzling car like most people, or if one endured the ridicule and scorn of owning a compact car. This is another trend that exists today, with so many large SUVs and v8 powered "trucks" on the road. Mustachians tend to embrace vehicles with half the ownership costs others pay (e.g. Corolla, Civic, Prius, Volt) if not bicycles. We will be less sensitive to transportation and energy inflation than the family with an F150.

I know ERN has debunked the idea of "cutting back," but his simulations were (a) cutting back after significant portfolio damage had occurred, and (b) assuming constant spending adjustments with inflation at the same level as the average person's exposure. Some of us, however, will avoid drawing down our portfolios to cover rapidly escalating energy, transportation, and housing expenses, and we will suffer a personal rate of inflation far below the headline rate because we engineered less price sensitivity into our lifestyles. 

I wonder what the 1968 SWR would have been if we assumed a lifestyle that was only exposed to maybe 70% of inflation?

roomtempmayo

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Re: The dreaded "lost decade" of stock performance
« Reply #29 on: June 13, 2024, 08:09:22 AM »
roomtempmayo, does the site you are using include the impact of reinvesting dividends? That's the most common reason I see for people underestimating the total return of stock market investments in historical data.

No, it's not a chart of investment, just the total value of the S&P.

Perhaps the more concerning factor today is that the major indexes are tilted toward growth and away from dividend-paying value stocks, so reinvesting dividends from an index fund wouldn't have the same impact today that it would have in the 80s.

roomtempmayo

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Re: The dreaded "lost decade" of stock performance
« Reply #30 on: June 13, 2024, 08:15:52 AM »
I wonder what the 1968 SWR would have been if we assumed a lifestyle that was only exposed to maybe 70% of inflation?

The Back to the Land Movement of the 70s is often held up as a hippie caricature, but it was also a movement of thrift: unplug from the petro economy, grow your own food, chop your own wood, and basically don't be as reliant on cash.

bacchi

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Re: The dreaded "lost decade" of stock performance
« Reply #31 on: June 13, 2024, 08:25:43 AM »
I wonder what the 1968 SWR would have been if we assumed a lifestyle that was only exposed to maybe 70% of inflation?

Great point.

https://alfred.stlouisfed.org/series?seid=CPIHOSSL

Inflation started increasing in 1968 (from 2.8% to 4.3%) and was tamed around 1983. (https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1913-)

There's a housing increase from 31.6 to 101 in the 1968 to 1983 span. That's a 7.5% annual gain, right? Taking 1/3 of that is 2.5%*, which is a huge portion of the average annual inflation rate of 4.2% during that 15 years. It's lumpy, though, so it's not that simple.

In 1974 there was an 11.1% inflation rate and Jan74 to Jan75 housing went from 43.3 to 49, which is over 13%. Inflation would've been 6.8% if you had a fixed rate mortgage. ??



* Did housing count as ~33% of CPI during the 70s?

reeshau

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Re: The dreaded "lost decade" of stock performance
« Reply #32 on: June 13, 2024, 08:29:47 AM »
The 1970s and early 80s caused a failure of the 4% rule mostly because high inflation escalated the hypothetical spending rate.

Not a failure.  Defined it.  In good times, it could be the 8% rule.  Yes, this time was worse for portfolios than the 1929 crash + Great Depression.  But it did not fail, because Bengen's point was to find a withdrawal rate that would not fail the worst of times.  That's why he named it SAFEMAX.

mistymoney

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Re: The dreaded "lost decade" of stock performance
« Reply #33 on: June 13, 2024, 10:52:02 AM »
The 1970s and early 80s caused a failure of the 4% rule mostly because high inflation escalated the hypothetical spending rate.

Not a failure.  Defined it.  In good times, it could be the 8% rule.  Yes, this time was worse for portfolios than the 1929 crash + Great Depression.  But it did not fail, because Bengen's point was to find a withdrawal rate that would not fail the worst of times.  That's why he named it SAFEMAX.

your graph notes a 50/50 AA. so that might be the key piece.

vand

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Re: The dreaded "lost decade" of stock performance
« Reply #34 on: June 13, 2024, 11:02:58 AM »
I wonder what the 1968 SWR would have been if we assumed a lifestyle that was only exposed to maybe 70% of inflation?

Great point.

https://alfred.stlouisfed.org/series?seid=CPIHOSSL

Inflation started increasing in 1968 (from 2.8% to 4.3%) and was tamed around 1983. (https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1913-)

There's a housing increase from 31.6 to 101 in the 1968 to 1983 span. That's a 7.5% annual gain, right? Taking 1/3 of that is 2.5%*, which is a huge portion of the average annual inflation rate of 4.2% during that 15 years. It's lumpy, though, so it's not that simple.

In 1974 there was an 11.1% inflation rate and Jan74 to Jan75 housing went from 43.3 to 49, which is over 13%. Inflation would've been 6.8% if you had a fixed rate mortgage. ??



* Did housing count as ~33% of CPI during the 70s?

I think the opposite is more likely; household are probably exposed to inflation more than the headline numbers. why?  Food & Transport are highly exposed to raw materal prices.  You have to eat, and most transport isn't optional. 

reeshau

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Re: The dreaded "lost decade" of stock performance
« Reply #35 on: June 13, 2024, 11:15:17 AM »
The 1970s and early 80s caused a failure of the 4% rule mostly because high inflation escalated the hypothetical spending rate.

Not a failure.  Defined it.  In good times, it could be the 8% rule.  Yes, this time was worse for portfolios than the 1929 crash + Great Depression.  But it did not fail, because Bengen's point was to find a withdrawal rate that would not fail the worst of times.  That's why he named it SAFEMAX.

your graph notes a 50/50 AA. so that might be the key piece.

Yes, that is the only mix Bengen calculated.  The Trinity Study later expanded it.

My main point was the Bengen was not testing 4%; he was finding the highest value that worked in all historical scenarios.  So, if 4% failed, he would have reported lower.

I also think the shape of the graph shocks a lot of people.  Yes, plan for the worst.  But understand if your scenario turns out to be the 8% one, you have drastically different things to do.

Telecaster

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Re: The dreaded "lost decade" of stock performance
« Reply #36 on: June 13, 2024, 11:54:50 AM »
Perhaps the more concerning factor today is that the major indexes are tilted toward growth and away from dividend-paying value stocks, so reinvesting dividends from an index fund wouldn't have the same impact today that it would have in the 80s.

I wouldn't be too concerned about it.  Dividends have been trending downward for decades.   A number of reasons for this but a big one is share buybacks, which were prohibited until the 1980s.   

bacchi

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Re: The dreaded "lost decade" of stock performance
« Reply #37 on: June 13, 2024, 12:13:19 PM »
I wonder what the 1968 SWR would have been if we assumed a lifestyle that was only exposed to maybe 70% of inflation?

Great point.

https://alfred.stlouisfed.org/series?seid=CPIHOSSL

Inflation started increasing in 1968 (from 2.8% to 4.3%) and was tamed around 1983. (https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1913-)

There's a housing increase from 31.6 to 101 in the 1968 to 1983 span. That's a 7.5% annual gain, right? Taking 1/3 of that is 2.5%*, which is a huge portion of the average annual inflation rate of 4.2% during that 15 years. It's lumpy, though, so it's not that simple.

In 1974 there was an 11.1% inflation rate and Jan74 to Jan75 housing went from 43.3 to 49, which is over 13%. Inflation would've been 6.8% if you had a fixed rate mortgage. ??



* Did housing count as ~33% of CPI during the 70s?

I think the opposite is more likely; household are probably exposed to inflation more than the headline numbers. why?  Food & Transport are highly exposed to raw materal prices.  You have to eat, and most transport isn't optional.

I'm unclear on what you mean. What else is CPI measuring if not Consumer Price Inflation?

"The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services."

CPI has components and "shelter" is one of them. If someone is insulated from increases in shelter, such as from a fixed rate mortgage or rent controls, then that component of inflation is effectively negated for that person/family. They would still be affected by food and transport inflationary increases, of course, but why would that be higher for a fixed rate mortgage holder vs someone that's seeing their rent jump by 10%/year?

mistymoney

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Re: The dreaded "lost decade" of stock performance
« Reply #38 on: June 13, 2024, 01:35:46 PM »
Annuities have become an interesting option right now given the rates that are available.
Best buy tables currently suggest single policies offer 5.9% flat and 4% with an annual 3% COLA adjustment for a 55yo - arguably a much better option than "I'll only use a 3% SWR because I'm ultra conservative". Furthermore, I like the idea that people will find it easier to spend the income rather overcoming the mindset of "taking it out of the portfolio to spend".

Furthermore, it can be seen a risk-mitigation option, which you would be very greatful for if there is a good old-fashioned deflationary recession/crash where stocks get cut in half while interest rates go to zero. I know we're not supposed to try to predict markets and recessions, but hedging at least some of your living costs against the next existential crisis makes a lot of sense to me.

A big part of why the 4% and 3% withdrawal rates are so low is that the portfolio needs to be robust to depressions and periods of high inflation.

Between 1968 and 1982, consumer prices in the USA increase 195% while an annuity with a 3% COLA would be a hypothetical retiree's income only increased 60%. In real terms a 55 retiree's spending power would have been cut in half sixteen years into retirement if they'd invested in such an annuity.

Aye, that is true. Not sure if its the same in the US but for us the commonly available options are to escalate a 3%, 5%, or RPI.. and if you can link to RPI but then the best annuity rate drops to about 3.4% - no free lunches (although the RPI calculation tends produce a higher number than CPI).

However, the best deals on annuities are to be found by sticking to a vanilla flat payout non-escalating payout with no guarantees... the more linkage and guarantees you want to add, the more specialised the product and fatter the profit margins for the insurer.

Annuities also become relatively more attractive as you get older in overcoming longevity risk.. (https://earlyretirementnow.com/2019/08/29/you-are-a-pension-fund-of-one-swr-series-part-32/) - there is a lot more sense in a 70 or 75yo taking out an annuity to protect against living to 100 while still being able to enjoy planning to an average of 85.

You can also get enhanced annuities if you have a preexisting condition - that's something that the general market doesn't recognise and you'd have to factor into your own calculations, sadly, if you are sticking with drawdown, which I imagine could be quite a depressing thought. Hey, if you got diabetes, might as well get paid for it.

Not claiming they're a magic bullet, but rates available today make them worth considering.

One way or another, the house always wins. At least on average. So the greater likelihood is that you'd do better yourself - if you can stomach it!

Or die trying?

seems the inevitable end of fire!

mistymoney

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Re: The dreaded "lost decade" of stock performance
« Reply #39 on: June 13, 2024, 01:39:26 PM »
The 1970s and early 80s caused a failure of the 4% rule mostly because high inflation escalated the hypothetical spending rate.

Not a failure.  Defined it.  In good times, it could be the 8% rule.  Yes, this time was worse for portfolios than the 1929 crash + Great Depression.  But it did not fail, because Bengen's point was to find a withdrawal rate that would not fail the worst of times.  That's why he named it SAFEMAX.

your graph notes a 50/50 AA. so that might be the key piece.

Yes, that is the only mix Bengen calculated.  The Trinity Study later expanded it.

My main point was the Bengen was not testing 4%; he was finding the highest value that worked in all historical scenarios.  So, if 4% failed, he would have reported lower.

I also think the shape of the graph shocks a lot of people.  Yes, plan for the worst.  But understand if your scenario turns out to be the 8% one, you have drastically different things to do.

Yes - if only we knew which way it was gonna go!!

ChpBstrd

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Re: The dreaded "lost decade" of stock performance
« Reply #40 on: June 13, 2024, 03:00:31 PM »
I wonder what the 1968 SWR would have been if we assumed a lifestyle that was only exposed to maybe 70% of inflation?
Great point.

https://alfred.stlouisfed.org/series?seid=CPIHOSSL

Inflation started increasing in 1968 (from 2.8% to 4.3%) and was tamed around 1983. (https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1913-)

There's a housing increase from 31.6 to 101 in the 1968 to 1983 span. That's a 7.5% annual gain, right? Taking 1/3 of that is 2.5%*, which is a huge portion of the average annual inflation rate of 4.2% during that 15 years. It's lumpy, though, so it's not that simple.

In 1974 there was an 11.1% inflation rate and Jan74 to Jan75 housing went from 43.3 to 49, which is over 13%. Inflation would've been 6.8% if you had a fixed rate mortgage. ??

* Did housing count as ~33% of CPI during the 70s?
I think the opposite is more likely; household are probably exposed to inflation more than the headline numbers. why?  Food & Transport are highly exposed to raw materal prices.  You have to eat, and most transport isn't optional.
A Mustachian household with a ~4% mortgage has a 0% inflation rate for the majority of their shelter expenses.
A Mustachian household with a car that uses very little or no gasoline is less exposed to energy prices than the average household.
A FIRE household does not have to drive a car very much, so their non-energy transportation expenses are minimal (unless they're travel-the-world nomad types). E.g. they don't need as much maintenance, don't suffer as much depreciation, don't have to finance anything because they can have an older or higher-mileage car, and may obtain lower insurance rates. Commuters OTOH must pay the costs of rapidly wearing out newer cars.

That leaves food, utilities, communications, recreation, home insurance, property tax, and various consumer products and services as the remaining inflation-exposed categories.

twinstudy

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Re: The dreaded "lost decade" of stock performance
« Reply #41 on: June 13, 2024, 05:36:09 PM »
My experience, at least in Australia, is that council rates, land tax, utilities and insurance premiums all go up at faster than the rate of inflation.

Land tax has increased 50% in the past few years - most of it due to legislative change.

vand

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Re: The dreaded "lost decade" of stock performance
« Reply #42 on: June 16, 2024, 05:11:00 AM »
I wonder what the 1968 SWR would have been if we assumed a lifestyle that was only exposed to maybe 70% of inflation?
Great point.

https://alfred.stlouisfed.org/series?seid=CPIHOSSL

Inflation started increasing in 1968 (from 2.8% to 4.3%) and was tamed around 1983. (https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1913-)

There's a housing increase from 31.6 to 101 in the 1968 to 1983 span. That's a 7.5% annual gain, right? Taking 1/3 of that is 2.5%*, which is a huge portion of the average annual inflation rate of 4.2% during that 15 years. It's lumpy, though, so it's not that simple.

In 1974 there was an 11.1% inflation rate and Jan74 to Jan75 housing went from 43.3 to 49, which is over 13%. Inflation would've been 6.8% if you had a fixed rate mortgage. ??

* Did housing count as ~33% of CPI during the 70s?
I think the opposite is more likely; household are probably exposed to inflation more than the headline numbers. why?  Food & Transport are highly exposed to raw materal prices.  You have to eat, and most transport isn't optional.
A Mustachian household with a ~4% mortgage has a 0% inflation rate for the majority of their shelter expenses.
A Mustachian household with a car that uses very little or no gasoline is less exposed to energy prices than the average household.
A FIRE household does not have to drive a car very much, so their non-energy transportation expenses are minimal (unless they're travel-the-world nomad types). E.g. they don't need as much maintenance, don't suffer as much depreciation, don't have to finance anything because they can have an older or higher-mileage car, and may obtain lower insurance rates. Commuters OTOH must pay the costs of rapidly wearing out newer cars.

That leaves food, utilities, communications, recreation, home insurance, property tax, and various consumer products and services as the remaining inflation-exposed categories.

Well any household with any fixed mortgage has a 0% inflation rate for that component of their consumption basket, so why is a retirement FIRE household any different? And yet the CPI is still what it is.

ChpBstrd

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Re: The dreaded "lost decade" of stock performance
« Reply #43 on: June 16, 2024, 06:38:29 AM »
I wonder what the 1968 SWR would have been if we assumed a lifestyle that was only exposed to maybe 70% of inflation?
Great point.

https://alfred.stlouisfed.org/series?seid=CPIHOSSL

Inflation started increasing in 1968 (from 2.8% to 4.3%) and was tamed around 1983. (https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1913-)

There's a housing increase from 31.6 to 101 in the 1968 to 1983 span. That's a 7.5% annual gain, right? Taking 1/3 of that is 2.5%*, which is a huge portion of the average annual inflation rate of 4.2% during that 15 years. It's lumpy, though, so it's not that simple.

In 1974 there was an 11.1% inflation rate and Jan74 to Jan75 housing went from 43.3 to 49, which is over 13%. Inflation would've been 6.8% if you had a fixed rate mortgage. ??

* Did housing count as ~33% of CPI during the 70s?
I think the opposite is more likely; household are probably exposed to inflation more than the headline numbers. why?  Food & Transport are highly exposed to raw materal prices.  You have to eat, and most transport isn't optional.
A Mustachian household with a ~4% mortgage has a 0% inflation rate for the majority of their shelter expenses.
A Mustachian household with a car that uses very little or no gasoline is less exposed to energy prices than the average household.
A FIRE household does not have to drive a car very much, so their non-energy transportation expenses are minimal (unless they're travel-the-world nomad types). E.g. they don't need as much maintenance, don't suffer as much depreciation, don't have to finance anything because they can have an older or higher-mileage car, and may obtain lower insurance rates. Commuters OTOH must pay the costs of rapidly wearing out newer cars.

That leaves food, utilities, communications, recreation, home insurance, property tax, and various consumer products and services as the remaining inflation-exposed categories.
Well any household with any fixed mortgage has a 0% inflation rate for that component of their consumption basket, so why is a retirement FIRE household any different? And yet the CPI is still what it is.
CPI is a description of prices, and that's a much simpler piece of math compared to what a person must pay to support a lifestyle. The reason FIRE'd people often report their post-FIRE spending is only 60-80% of what they spent while working comes down to expenses which are minimized after retirement like gasoline, car maintenance, buying professional attire, childcare, car accidents, car insurance, car depreciation, mortgage payoff, paying for services due to a lack of time to DIY them, professional dues and continuing education, etc. The more stuff you don't buy or DIY, the less exposed you are to price increases in nominal terms.

So I think your question is, even if my post-FIRE spend rate is only, let's say, 75% of my pre-FIRE spending, why wouldn't we expect that budget to increase at the same rate of CPI?

It comes down to this: If gasoline for example jumped 567% from $3/gallon to $20/gallon tomorrow, people with commutes would have little choice but to buy the same number of gallons as before the price increase. If that was 100 gallons per month, their spend rate would increase by $1700/mo, and their overall budget would increase accordingly. The retiree, on the other hand, might buy 20 gallons per month, and so their budget would increase by $340/mo. This would be a much smaller percentage of their total spending. The worker would see their budget increase at a faster percentage than the retiree.

We can extend this logic to the other categories where the retiree's spending is lower than the worker's. But CPI is considered a measurement of the whole "basket" of prices right? Yes, but different items in the basket are always changing prices at different rates than other items. If the price of food skyrocketed (e.g. due to prolonged drought, or an immigrant crackdown), while other prices stayed the same then the FIRE'ee might experience a greater increase in their spending than the worker, because food is a larger percentage of their smaller budget.

That scenario would be an outlier, hitting the one category where the retiree was unable to lock in flat prices or low consumption. It could happen, but it's much more likely that price spirals hit areas like housing, energy, manufactured products, airfare, etc. where a FIRE person can either lock in their consumption cost, apply product substitution, or hold off purchases for a few years until prices are affordable again.

For example, used car prices went sky high in 2022-2023 because of pandemic-caused supply disruptions of new cars. A household dependent upon 2 cars for commuting in opposite directions would have to pay that price last year when one of their cars died. A FIRE household, on the other hand, could have chosen to try a one-car lifestyle for a couple of years rather than pay outrageous prices for worn-out equipment. Now, a year later, used car prices are down -9.3%. That's almost $2k off of a $20k car just for being able to wait and endure some short-run minor inconvenience.

vand

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Re: The dreaded "lost decade" of stock performance
« Reply #44 on: June 17, 2024, 03:39:19 AM »
I wonder what the 1968 SWR would have been if we assumed a lifestyle that was only exposed to maybe 70% of inflation?
Great point.

https://alfred.stlouisfed.org/series?seid=CPIHOSSL

Inflation started increasing in 1968 (from 2.8% to 4.3%) and was tamed around 1983. (https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1913-)

There's a housing increase from 31.6 to 101 in the 1968 to 1983 span. That's a 7.5% annual gain, right? Taking 1/3 of that is 2.5%*, which is a huge portion of the average annual inflation rate of 4.2% during that 15 years. It's lumpy, though, so it's not that simple.

In 1974 there was an 11.1% inflation rate and Jan74 to Jan75 housing went from 43.3 to 49, which is over 13%. Inflation would've been 6.8% if you had a fixed rate mortgage. ??

* Did housing count as ~33% of CPI during the 70s?
I think the opposite is more likely; household are probably exposed to inflation more than the headline numbers. why?  Food & Transport are highly exposed to raw materal prices.  You have to eat, and most transport isn't optional.
A Mustachian household with a ~4% mortgage has a 0% inflation rate for the majority of their shelter expenses.
A Mustachian household with a car that uses very little or no gasoline is less exposed to energy prices than the average household.
A FIRE household does not have to drive a car very much, so their non-energy transportation expenses are minimal (unless they're travel-the-world nomad types). E.g. they don't need as much maintenance, don't suffer as much depreciation, don't have to finance anything because they can have an older or higher-mileage car, and may obtain lower insurance rates. Commuters OTOH must pay the costs of rapidly wearing out newer cars.

That leaves food, utilities, communications, recreation, home insurance, property tax, and various consumer products and services as the remaining inflation-exposed categories.
Well any household with any fixed mortgage has a 0% inflation rate for that component of their consumption basket, so why is a retirement FIRE household any different? And yet the CPI is still what it is.
CPI is a description of prices, and that's a much simpler piece of math compared to what a person must pay to support a lifestyle. The reason FIRE'd people often report their post-FIRE spending is only 60-80% of what they spent while working comes down to expenses which are minimized after retirement like gasoline, car maintenance, buying professional attire, childcare, car accidents, car insurance, car depreciation, mortgage payoff, paying for services due to a lack of time to DIY them, professional dues and continuing education, etc. The more stuff you don't buy or DIY, the less exposed you are to price increases in nominal terms.

So I think your question is, even if my post-FIRE spend rate is only, let's say, 75% of my pre-FIRE spending, why wouldn't we expect that budget to increase at the same rate of CPI?

It comes down to this: If gasoline for example jumped 567% from $3/gallon to $20/gallon tomorrow, people with commutes would have little choice but to buy the same number of gallons as before the price increase. If that was 100 gallons per month, their spend rate would increase by $1700/mo, and their overall budget would increase accordingly. The retiree, on the other hand, might buy 20 gallons per month, and so their budget would increase by $340/mo. This would be a much smaller percentage of their total spending. The worker would see their budget increase at a faster percentage than the retiree.

We can extend this logic to the other categories where the retiree's spending is lower than the worker's. But CPI is considered a measurement of the whole "basket" of prices right? Yes, but different items in the basket are always changing prices at different rates than other items. If the price of food skyrocketed (e.g. due to prolonged drought, or an immigrant crackdown), while other prices stayed the same then the FIRE'ee might experience a greater increase in their spending than the worker, because food is a larger percentage of their smaller budget.

That scenario would be an outlier, hitting the one category where the retiree was unable to lock in flat prices or low consumption. It could happen, but it's much more likely that price spirals hit areas like housing, energy, manufactured products, airfare, etc. where a FIRE person can either lock in their consumption cost, apply product substitution, or hold off purchases for a few years until prices are affordable again.

For example, used car prices went sky high in 2022-2023 because of pandemic-caused supply disruptions of new cars. A household dependent upon 2 cars for commuting in opposite directions would have to pay that price last year when one of their cars died. A FIRE household, on the other hand, could have chosen to try a one-car lifestyle for a couple of years rather than pay outrageous prices for worn-out equipment. Now, a year later, used car prices are down -9.3%. That's almost $2k off of a $20k car just for being able to wait and endure some short-run minor inconvenience.

Respectfully disagree - CPI also takes into account substitution effect - it makes a reasonable attempt to be more reflective of consumer spending patterns and reflective of "cost of living"... NOT just "prices".

Banner FIREes, if anything, probably have even higher personal inflation rates if their new found freedom is mostly spent tripping to Europe or other bucket list items.  And yeh, I do accept they have a lot of flexibility to be applying some god old-fashioned Mustachianism and change their consumption behaviour more than most.  But then we are back to the argument that if they are getting just as much enjoyment from these alternative choices, why weren't they just making them already.
« Last Edit: June 17, 2024, 03:46:26 AM by vand »