Author Topic: VTSMX 15 year trailing return: 4.06% ?  (Read 10424 times)

Frugancial Advisor

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VTSMX 15 year trailing return: 4.06% ?
« on: September 05, 2015, 09:50:06 AM »
I've noticed a lot of posters who heavily weight their portfolios into VTSMX. Rightfully so, it's an excellent core component for an index-investor. I myself am a strong believer in Vanguard and am thankful they have now expanded into Canada. Unfortunately, as their funds are still relatively new here, we don't have a long track record for performance. Luckily, the US funds have been around a lot longer, so I reviewed them as they will likely be very comparable.

My question however, is that when looking at the trailing returns over the past 15 years we're seeing an average of only 4.06% per year. (Source: http://performance.morningstar.com/fund/performance-return.action?t=VTSMX)

For those who are heavily invested in VTSMX, or US Equity in general, do you have any concern over the next 15 years in regards to inflation-adjusted performance? I believe many people like to reference the average 8-10% returns of US equity over the 'long term', but fail to identify a relatively long time frame such as the past 15 years?

This is not a criticism in any way; I genuinely just want to hear some feedback as I was a little surprised myself. Perhaps the last 5 years average of 14.12% is more relevant to those who are newer to the index investing world?

Thanks.

RWD

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #1 on: September 05, 2015, 10:07:53 AM »
There was a pretty big crash starting in 2000, 15 years ago. I think that makes it a poor starting point. If you start 13 years ago near the end of 2002 you end up with about a 7.8% return instead. Of course, you could cherry pick data points all day to prove whatever you want.

Tyler

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #2 on: September 05, 2015, 11:47:32 AM »
An investor buying VTSMX in 2000 actually lost money in compound inflation-adjusted terms for 13 straight years. It was a terrible time to start investing, but it also was not unprecedented.  There have been times historically where stock investors had less inflation-adjusted money than when they started even 20 years later! Stocks may do well in the long run, but defining an acceptable "long run" for yourself is an important step to identify your own risk tolerance. And no, you definitely should not assume that returns in the last 5 years are "more relevant" or are likely to continue.

Looking at single historic periods can be deceptive. However, looking at single long term averages can be just as deceptive, as they often mask some long unpleasant investing periods along the way. For studying the big picture, I recommend looking at the top "Pixel" chart here: http://portfoliocharts.com/portfolio/total-stock-market/. For reference, "total stock market" is VTSMX in this data. You can also compare lots of different lazy portfolios (and even build your own) to see how diversification changes the results.
« Last Edit: September 05, 2015, 12:09:37 PM by Tyler »

Abe

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #3 on: September 05, 2015, 12:04:01 PM »
That website is awesome! Thanks for the link! I think it shows over the long term, the fund pretty much stabilizes at 5-6% return after inflation, which is what I use for my rough calculations

ozzy

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #4 on: September 05, 2015, 12:22:15 PM »
Well said Tyler. 

And for further illustration, here's the 200 year performance of all the assets adjusted for inflation (Real Returns). 

I'm sure the chart's purpose is to illustrate that in the VERY long run, stocks are the most profitable.  But if you examine the stock graph closely, there are some very long stretches of bear markets, some lasting over 20 years.
 
So, for stock-heavy investors, returns are dependent on WHEN they starting investing (during a bull or bear market).  Whereas those who own all the assets, and rebalance annually, aren't gambling on catching a bull stock market.



Yankuba

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #5 on: September 05, 2015, 12:56:06 PM »
I share the OP's concerns. 15 year returns for the S&P500 index (including dividends) are only 3.55%. Over the past 15 years we saw the boom of IT (the Internet and automation of manufacturing), outsourcing, globalization and free trade, historically high stock buybacks, zero interest rates, the mass development of China and relative global peace. We consumed a lot of low handing fruit over the past fifteen years and yet productivity growth is slowing, wages are flat (or even declining in some areas) and labor force participation rates across the globe are falling.

Going forward many economists believe the USA will be mired in 2% to 3% GDP growth with low inflation  - thus it will be hard for stocks to meet historical returns. Much of the world (with the exception of Africa, India and the Middle East) is fully developed and China is slowing down - so we're not going to see tremendous growth in those areas. The world is aging and earth's population will peak somewhere in the 2000s. Personally, I'm budgeting for 6% equity growth in my lifetime but wouldn't be surprised if it was 5%.

This paper by Robert Gordon explains why many are bearish about future economic growth, despite the amazing developments coming out of Silicon Valley. The bottom line is that past industrial revolutions that brought us refrigeration, antibiotics, electricity, air travel, radio/television, indoor plumbing, etc. were far more ECONOMICALLY advantageous than Google, Amazon, Netflix, Facebook and Apple. 

http://www.cepr.org/sites/default/files/policy_insights/PolicyInsight63.pdf



Frugancial Advisor

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #6 on: September 05, 2015, 01:22:33 PM »
Thank you for answering the question, Yankuba. And that is a very interesting read by Robert Gordon.

I think this thread got derailed quickly, perhaps unintentionally. We all understand interpretation of historical data and there's no denying the extreme variation of returns dependent on when an individual invests. My point was in referencing the 15 year trailing return as of today, which I believe is completely reasonable, and then asking how you feel about the next 15 years in regards to inflation-adjusted performance.

Tyler, you're right about my reference to 5 year returns - I apologize for the wording. What I meant by 'relevant' was that perhaps the newer generation of index-investors are more aware of the short term performance of VTSMX which has been phenomenal as opposed to the longer term - as they haven't been invested for 15 years. Also, thank you for the link - very interesting!

fa

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #7 on: September 05, 2015, 03:51:34 PM »
OP's post illustrates the sequence risk of investment returns.  If you invested in the stock market in the year 2000, you started out with a pretty severe bear market.  I am sure if you were in 2010 and looked back 10 years, the numbers would look worse.

Your observation underscores the need to diversify, especially in investment vehicles with a low correlation coefficient with the stock market.

Frugancial Advisor

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #8 on: September 05, 2015, 04:26:12 PM »
FA, you bring up an excellent point. Diversification is unfortunately recognized as simply a way to reduce risk in a portfolio, but it offers much more. For those with adequate risk tolerance, diversification can lead to re-balancing which is essentially a proponent of market-timing to capitalize on current market conditions. It can also provide a portfolio with negatively correlated asset classes, which reinforces the purchase of 'discounted' holdings'. In the longer-term, this undoubtedly leads to increased risk-adjusted performance.

It would be interesting to see the 15 year 'trailing return' of VTSMX when you include dollar-cost-averaging & portfolio re-balancing with a negatively correlated asset class. Obviously this would be next to impossible, but I still believe it solidifies the fact that investors have an ability to improve long-term returns through their own actions.

I think any educated investor agrees that market-timing is a losers game, but neglect to realize that every purchase or sale is essentially during a specific time in the market and therefore perpetuating the review of so-called 'market-timing'.

forummm

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #9 on: September 05, 2015, 07:10:23 PM »
Keep in mind that 2000 had the highest CAPE in history at that point, of 47 (it's around 19 now). Historical average CAPE is about 15. So that means stocks were EXTREMELY overvalued--and we knew it at the time. So if you were at all paying attention you knew that medium-term (10 year) future returns were likely to be lower than average. CAPE is very predictive of future equity returns.

That said, there are various people who have done some kind of modeling to see what would have happened if they retired in 2000 on a 4% WR. The idea is to ask if even with this extremely overvalued market, would a 4% WR work. Here's one simulation using a balanced global portfolio.

http://forum.mrmoneymustache.com/journals/pyro-amberfocus-is-catching-fire!/msg761174/#msg761174

forummm

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #10 on: September 05, 2015, 07:14:16 PM »
Keep in mind that 2000 had the highest CAPE in history at that point, of 47 (it's around 19 now). Historical average CAPE is about 15. So that means stocks were EXTREMELY overvalued--and we knew it at the time. So if you were at all paying attention you knew that medium-term (10 year) future returns were likely to be lower than average. CAPE is very predictive of future equity returns.

That said, there are various people who have done some kind of modeling to see what would have happened if they retired in 2000 on a 4% WR. The idea is to ask if even with this extremely overvalued market, would a 4% WR work. Here's one simulation using a balanced global portfolio.

http://forum.mrmoneymustache.com/journals/pyro-amberfocus-is-catching-fire!/msg761174/#msg761174

And here's my reply to the analysis linked above:
http://forum.mrmoneymustache.com/journals/pyro-amberfocus-is-catching-fire!/msg761320/#msg761320

hiddenace

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #11 on: September 06, 2015, 10:30:41 AM »
You can always diversify with international indexes.  Until recently, emerging markets were doing very well.  Keep the equity side of your investments diverse and you can avoid a slowdown in one country/region affecting your returns too much.

On the plus side, if things indeed stay slow, you can expect inflation to remain tame and not devour your weaker returns.

Cycling Stache

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #12 on: September 06, 2015, 11:38:15 AM »
I do not understand the benefit of diversification, at least in the long-term, until you start to get reasonably close to withdrawing money.  Over the long-term, I understand the market to provide the highest return of any asset class.  I always understood diversification to be a strategy to have money in different pots so that when you wanted to withdraw money, you could pull from the pot that is doing the best.  So, it would seem to me that if I'm looking at 20 years out, putting money in bonds, etc. would be expected to provide a significantly lower return that probably would be too big a cost to justify the increased diversification when pulling out money 20 years hence.  I also guess (educated, I hope) that over the long-term, international stocks no longer add much valuable diversification given that surely all of the top 500 U.S. companies are fully extended into international markets (Apple sells iPads everywhere).

What am I missing?  It seems like if I'm building my money for 20 years out, total market index provides me the highest expected return, and I can just add bonds (or cash) the last 5 years to provide some cushion so that I have a place to pull some money if stocks are really depressed.  It seems unlikely to me that stocks would stay hugely down for more than 4-5 years from the time you need it such that it would start to have a detrimental effect on your overall portfolio.

In all fairness, I do have everything paid off, so I'm just looking at my investment portfolio.  But I see enough references to the need for asset allocation across the board (i.e., not limited to the period as you're closing in on needing it) that I'm not sure what I'm missing in the analysis.

 

forummm

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #13 on: September 06, 2015, 12:56:51 PM »
I do not understand the benefit of diversification, at least in the long-term, until you start to get reasonably close to withdrawing money.  Over the long-term, I understand the market to provide the highest return of any asset class.  I always understood diversification to be a strategy to have money in different pots so that when you wanted to withdraw money, you could pull from the pot that is doing the best.  So, it would seem to me that if I'm looking at 20 years out, putting money in bonds, etc. would be expected to provide a significantly lower return that probably would be too big a cost to justify the increased diversification when pulling out money 20 years hence.  I also guess (educated, I hope) that over the long-term, international stocks no longer add much valuable diversification given that surely all of the top 500 U.S. companies are fully extended into international markets (Apple sells iPads everywhere).

What am I missing?  It seems like if I'm building my money for 20 years out, total market index provides me the highest expected return, and I can just add bonds (or cash) the last 5 years to provide some cushion so that I have a place to pull some money if stocks are really depressed.  It seems unlikely to me that stocks would stay hugely down for more than 4-5 years from the time you need it such that it would start to have a detrimental effect on your overall portfolio.

In all fairness, I do have everything paid off, so I'm just looking at my investment portfolio.  But I see enough references to the need for asset allocation across the board (i.e., not limited to the period as you're closing in on needing it) that I'm not sure what I'm missing in the analysis.

 
You should be diversifying within your asset classes (i.e. buying diversified index funds instead of just buying a handful of stocks). Diversifying limits your downside risk. Diversifying across nations smooths things out too (sometimes intl outperforms US, and vice versa).

Tyler

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #14 on: September 06, 2015, 02:39:42 PM »
I do not understand the benefit of diversification, at least in the long-term, until you start to get reasonably close to withdrawing money.  Over the long-term, I understand the market to provide the highest return of any asset class. 

Asset allocation with regular rebalancing is much more sophisticated than the sum of the individual average returns.  Stocks may have the best returns in the very long run, but they do not always over the short and mid term.  Holding other assets that do well when stocks do not can not only reduce volatility but sometimes also boost returns.  The IVY portfolio is one example of a diverse asset allocation with only 40% stocks that has slightly outperformed the total stock market since 1972 with a much smoother ride along the way.

frugal_c

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #15 on: September 07, 2015, 04:09:54 PM »
I am glad that you brought this up as I share similar concerns.  There are too many people on this board who just blindly assume that they will get their 5 or 6% over inflation without considering what is required.  Too much shooting down this type of discussion as being anti-mustachian.  From my research I think you should consign yourself to getting the dividend yield of whatever index you're investing in + 1-2% over inflation.   So given that the S&P 500 has a dividend yield of around 2%, you are looking at 3-4% over inflation over longer periods (20-30 years).   In shorter 10 or 15 year time periods it could certainly be a lot worse.  I certainly wouldn't count out another draw-down.

Most of the periods where these higher returns of 6-7% over inflation were achieved occurred with a much cheaper starting point.   In 82 for instance the PE on the S&P500 was around 7 or 8.   During the next 18 years the stock market exploded upwards but the PE also went up to 30.   If you take out the PE expansion and adjust for inflation, earnings per share only increase 60 or 70% total during this massive "bull market".   So going forward, with a PE of 20 you cannot realistically expect PE inflation and what you are left with is this 1-2% earnings growth+dividend.  Even the 2% number has variety, I think you need to get to 20+ year horizons before it starts to get consistent at that level.  However, if you look at the long-term this does seem to be a frequently occurring number.

The other thing to be aware of with the higher market return numbers is that part of the gain is the result of dividends being reinvested in bear markets at cheap prices.  That is certainly a legitimate effect but to get those returns in the future it means we will have to go through a major market pullback.  Over the LONG term we should get back to today's PE levels at some point but you should be prepared psychologically for such an event.

I think the best bet is to find high quality dividend paying stocks.   At least if asset prices go down you can just focus on the amount of dividends you are pulling in, which hopefully will at least keep up with inflation.
« Last Edit: September 07, 2015, 04:12:11 PM by frugal_canuck »

fa

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #16 on: September 07, 2015, 04:27:29 PM »
Obviously this would be next to impossible, but I still believe it solidifies the fact that investors have an ability to improve long-term returns through their own actions.

I think any educated investor agrees that market-timing is a losers game, but neglect to realize that every purchase or sale is essentially during a specific time in the market and therefore perpetuating the review of so-called 'market-timing'.

That is a good point!  Market timing is a loser's game as we all know.  But what to do with a market where equities are clearly overvalued by historic standards?  Is that market timing or common sense by refusing to buy an overvalued asset?  You can still DCA into the market.  Obviously, a market being overvalued does not mean it will decline.  You just need the greater fool theory:  as long as there is a greater fool willing to buy your overvalued asset, the market will go up in spite of rhyme or reason.  We have seen this time and time again.  Many of these greater fool gains greatly add to your investment performance.

On another note, taxable accounts can be heavily impacted by taxes.  I once locked in a $100,000 capital gain in a taxable account.  I felt good about it until the tax bill came.  In hindsight that sale was not a good decision.  I lost a lot of equity in capital gains taxes.

forummm

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #17 on: September 07, 2015, 04:58:42 PM »
I am glad that you brought this up as I share similar concerns.  There are too many people on this board who just blindly assume that they will get their 5 or 6% over inflation without considering what is required.  Too much shooting down this type of discussion as being anti-mustachian.  From my research I think you should consign yourself to getting the dividend yield of whatever index you're investing in + 1-2% over inflation.   So given that the S&P 500 has a dividend yield of around 2%, you are looking at 3-4% over inflation over longer periods (20-30 years).   In shorter 10 or 15 year time periods it could certainly be a lot worse.  I certainly wouldn't count out another draw-down.

Most of the periods where these higher returns of 6-7% over inflation were achieved occurred with a much cheaper starting point.   In 82 for instance the PE on the S&P500 was around 7 or 8.   During the next 18 years the stock market exploded upwards but the PE also went up to 30.   If you take out the PE expansion and adjust for inflation, earnings per share only increase 60 or 70% total during this massive "bull market".   So going forward, with a PE of 20 you cannot realistically expect PE inflation and what you are left with is this 1-2% earnings growth+dividend.  Even the 2% number has variety, I think you need to get to 20+ year horizons before it starts to get consistent at that level.  However, if you look at the long-term this does seem to be a frequently occurring number.

The other thing to be aware of with the higher market return numbers is that part of the gain is the result of dividends being reinvested in bear markets at cheap prices.  That is certainly a legitimate effect but to get those returns in the future it means we will have to go through a major market pullback.  Over the LONG term we should get back to today's PE levels at some point but you should be prepared psychologically for such an event.

I think the best bet is to find high quality dividend paying stocks.   At least if asset prices go down you can just focus on the amount of dividends you are pulling in, which hopefully will at least keep up with inflation.
I think the PE is going to normalize somewhat in the short to medium term as interest rates increase. It's been 17.5 on average over the last 65 years. It's only about 19.4 now. The long term (the last 140 years) returns of about 6 or 7% after inflation for the US markets are probably reasonable returns over the long run in the future as well. Companies used to pay out almost all their earnings in dividends. Now they reinvest most of them in the business or through share buybacks. So I think a dividend-based strategy or analysis is too conservative.

frugal_c

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #18 on: September 07, 2015, 09:26:32 PM »
I disagree with you that it is a given we get back to 6-7% but I do appreciate a differing opinion, so by all means have at her.

Just one example.  Over the past 50 years, 1965-2015, the S&P has returned a 5.25% CAGR once adjusted for inflation.   Earnings growth over that period amounted to slightly over 2% (again inflation adjusted) and there was a starting dividend yield of 3%.   So in this case dividend + earnings growth was roughly 5% which is very close to the actual delivered return.  The actual result will differ for a number of reasons including the pricing of the index that the dividends get reinvested at.

So with those numbers as a base, I just assume if the past 50 years gave 2% earnings growth why not the next 50 or at least why not the next 25?   I think there are headwinds over the next 10-20 years because of all the debt that has been accumulated, so it doesn't seem unreasonable that we just match the past 50 years.  That doesn't even seem worst case.  At any rate, assuming we get 2% earnings and with the S&P yielding about 2%, I come out with 4% return inflation adjusted.   I like to plan for worst case so I generally cut it back to 3% to allow more flexibility.  This is longer period too, over shorter periods, say less than 20 you could certainly have near 0 returns.
« Last Edit: September 07, 2015, 09:29:20 PM by frugal_canuck »

Aphalite

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #19 on: September 08, 2015, 08:36:17 AM »
A few things:

1) Main pet peeve - looking at historical return of $1 on XXX date. Who in the world acts like that? I'm willing to bet that every poster who has commented on this thread did not invest all of their cash holdings at XXX date and then never invested fresh capital again. Any look at trailing results doesn't paint a correct picture. If you were to invest $1000 15 years ago, September 2000, and $1000 each month until today, your results would be $279k with $180k invested, and your XIRR would be 5.6%. You got a far better result than the 4.06% that you saw. Meanwhile, your total returns of 55% cash on cash handily beat total inflation of 39%. See below link for results (first thing I could find, so no guarantee it's 100% accurate)
http://www.buyupside.com/calculators/dollarcostaveinclude.php?symbol=%5EGSPC&amountinitial=1000&amount=1000&interval=1&start_month=08&start_year=2000&end_month=08&end_year=2015&submit=Calculate+Results

If you as frugal canuck posited, invested $1000 a month starting in 1965, you would end up with $5.5m today, for an XIRR of 7.3%, far better than the 5.25% CAGR he cited. 2% over a period of 50 years is a whole lot of money when you compound for such a long time. Total returns of 917% crushed inflation of 658%.

2) Market timing isn't always bad. If you are dancing in and out of the market, then yes, you probably had poor results. But if you bought something at a reasonable price and never sold, but timed your entries into the market with your fresh capital/cash, waiting until values were acceptable for what you paid, you probably did more than okay. I don't think there's anything wrong with timing your ENTRIES into the market. Admittedly, this advice is probably more useful/suitable to individual stock selectors than to indexers.

EDIT: One last thing - the goal of investing is to beat inflation, if you want to generate wealth, that's going to be from your job (selling your time), rental property (selling your capital), or a side business (selling your time and possibly some capital). Unless you are willing to take crazy amounts of risk (and get lucky along the way), the stock market is where you PARK your wealth, not where you create it. This is especially true for index investors. I get the feeling a lot of posters here have this idea that investing in the stock market is the prescribed way to get rich, but really, the way to get rich is to spend less than you earn. The investing portion of the equation is merely a mechanism to help you NOT LOSE PURCHASING POWER.
« Last Edit: September 08, 2015, 09:05:57 AM by Aphalite »

Bearded Man

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #20 on: September 08, 2015, 08:50:22 AM »
I think this is a great argument for diversification. Rentals, dividend stocks, REIT's (in lieu of actual physical rentals you own), a side business like a coffee stand, etc.

Psychstache

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #21 on: September 08, 2015, 09:42:18 AM »
A few things:

1) Main pet peeve - looking at historical return of $1 on XXX date. Who in the world acts like that? I'm willing to bet that every poster who has commented on this thread did not invest all of their cash holdings at XXX date and then never invested fresh capital again. Any look at trailing results doesn't paint a correct picture. If you were to invest $1000 15 years ago, September 2000, and $1000 each month until today, your results would be $279k with $180k invested, and your XIRR would be 5.6%. You got a far better result than the 4.06% that you saw. Meanwhile, your total returns of 55% cash on cash handily beat total inflation of 39%. See below link for results (first thing I could find, so no guarantee it's 100% accurate)
http://www.buyupside.com/calculators/dollarcostaveinclude.php?symbol=%5EGSPC&amountinitial=1000&amount=1000&interval=1&start_month=08&start_year=2000&end_month=08&end_year=2015&submit=Calculate+Results

If you as frugal canuck posited, invested $1000 a month starting in 1965, you would end up with $5.5m today, for an XIRR of 7.3%, far better than the 5.25% CAGR he cited. 2% over a period of 50 years is a whole lot of money when you compound for such a long time. Total returns of 917% crushed inflation of 658%.

2) Market timing isn't always bad. If you are dancing in and out of the market, then yes, you probably had poor results. But if you bought something at a reasonable price and never sold, but timed your entries into the market with your fresh capital/cash, waiting until values were acceptable for what you paid, you probably did more than okay. I don't think there's anything wrong with timing your ENTRIES into the market. Admittedly, this advice is probably more useful/suitable to individual stock selectors than to indexers.

EDIT: One last thing - the goal of investing is to beat inflation, if you want to generate wealth, that's going to be from your job (selling your time), rental property (selling your capital), or a side business (selling your time and possibly some capital). Unless you are willing to take crazy amounts of risk (and get lucky along the way), the stock market is where you PARK your wealth, not where you create it. This is especially true for index investors. I get the feeling a lot of posters here have this idea that investing in the stock market is the prescribed way to get rich, but really, the way to get rich is to spend less than you earn. The investing portion of the equation is merely a mechanism to help you NOT LOSE PURCHASING POWER.

I think a great many people on this forum would disagree with your conclusion.

bacchi

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #22 on: September 08, 2015, 09:49:59 AM »
EDIT: One last thing - the goal of investing is to beat inflation, if you want to generate wealth, that's going to be from your job (selling your time), rental property (selling your capital), or a side business (selling your time and possibly some capital). Unless you are willing to take crazy amounts of risk (and get lucky along the way), the stock market is where you PARK your wealth, not where you create it. This is especially true for index investors. I get the feeling a lot of posters here have this idea that investing in the stock market is the prescribed way to get rich, but really, the way to get rich is to spend less than you earn. The investing portion of the equation is merely a mechanism to help you NOT LOSE PURCHASING POWER.

Look at the 4% WR graph. The inflation from 1985 is only 220%. Where did the extra millions come from if not from stock market generated wealth? That's with withdrawals, as well.

http://portfoliocharts.com/portfolio/total-stock-market/

Aphalite

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #23 on: September 08, 2015, 10:03:42 AM »
Look at the 4% WR graph. The inflation from 1985 is only 220%. Where did the extra millions come from if not from stock market generated wealth? That's with withdrawals, as well.

http://portfoliocharts.com/portfolio/total-stock-market/

If you have a long enough time period (30 years according to your handy chart), even a small amount of capital will eventually amount to something. But expecting your stock investments to make you rich in 10-15 years isn't possible without a great savings rate - within a 10 year time frame, it's the amount of capital you put into the market that matters, not the actual returns. Within my post, I already showed how over a 15 year time frame, your total returns from a DCA strategy is 55%, vs inflation of 39%. Also in the original post, over a 50 year span, your total returns from DCA is 917%, vs inflation of 600+%. At that point, you're literally swimming in money because of how much time you've had to compound.

The arithmetic breaks down to this, your returns are 1) your savings rate or fresh capital 2) your security selection, which governs your return rate, going with a SP500 index fund generally results in 7-8% over the long term, and 3) your time period of holding. Since we're discussing index funds here and average returns are likely to be in the 7-8% neighborhood, I'm merely asserting that you won't get rich unless you are hyperfocused on point 1) or have a lot of time to compound, which is point 3)

frugal_c

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #24 on: September 08, 2015, 07:32:11 PM »
A few things:

1) Main pet peeve - looking at historical return of $1 on XXX date. Who in the world acts like that? I'm willing to bet that every poster who has commented on this thread did not invest all of their cash holdings at XXX date and then never invested fresh capital again. Any look at trailing results doesn't paint a correct picture. If you were to invest $1000 15 years ago, September 2000, and $1000 each month until today, your results would be $279k with $180k invested, and your XIRR would be 5.6%. You got a far better result than the 4.06% that you saw. Meanwhile, your total returns of 55% cash on cash handily beat total inflation of 39%. See below link for results (first thing I could find, so no guarantee it's 100% accurate)
http://www.buyupside.com/calculators/dollarcostaveinclude.php?symbol=%5EGSPC&amountinitial=1000&amount=1000&interval=1&start_month=08&start_year=2000&end_month=08&end_year=2015&submit=Calculate+Results

Who acts like that?   Anyone who is near retirement or in retirement acts like that.  That is what this site advocates.   There is a certain point in your investing life where the amount you have saved, your stache, dwarfs future contributions.  I am pretty much at that point.   So yes, I think it is valid to think what the money I invest today will turn into in X years and based on history it is very unlikely to do 6 or 7% unless I manage to sell out at much higher PE ratios than today.   At any rate in general, this also seems to be whole point behind the question that started this thread.   
« Last Edit: September 08, 2015, 07:38:40 PM by frugal_canuck »

Aphalite

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #25 on: September 09, 2015, 06:51:41 AM »
Who acts like that?   Anyone who is near retirement or in retirement acts like that.  That is what this site advocates.   There is a certain point in your investing life where the amount you have saved, your stache, dwarfs future contributions.  I am pretty much at that point.   So yes, I think it is valid to think what the money I invest today will turn into in X years and based on history it is very unlikely to do 6 or 7% unless I manage to sell out at much higher PE ratios than today.   At any rate in general, this also seems to be whole point behind the question that started this thread.   

This site also advocates wild optimism and flexibility among other things, which you shouldn't selectively ignore. Returns will only be lower than the historic 6-7% if you're pessimistic about corporate ability to continue growing earnings (most companies are now going international, which gives them further growth ability). This is the best and most innovative country in the world, don't be so pessimistic about it. People always point to the last 100 years and say it can't be duplicated because we were growing wildly, but during the past 100 years, we had, in order: a world war, a great depression spanning 10+years, another world war, runaway inflation, several oil crashes/shortages, and many stock market crashes thrown in there. If you don't think the next 100 years will be at least as good as the past 100, then you need to practice some optimism. Additionally, if you are at the point where you're starting to draw down your stache, you can draw less than 4% when the markets aren't doing well (flexibility).

frugal_c

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #26 on: September 09, 2015, 10:10:07 PM »
Look, I feel it is a bit unfair to just insist that returns are going to be some certain number.  I feel I have provided evidence why this may not be realistic at this point.  Please do not try to wrap this up around being optimistic.  I mean I could say I'm really optimistic and I think the market will do 10%.  Why are you being so pessimistic?   Seriously, I am not trying to be rude but you are not basing your argument on facts right now.

To get back to my original point the market has historically done 5% over inflation over the past 50 years.  Yes, you can get a better return but historically when it happened it was from a better starting point.  No amount of optimism will change that.   So over the past 50 years earnings have grown about 2%, that is not being pessimistic, that is me looking at the real growth in earnings over the past half-century.   So 2% growth + 2% current dividend is 4%.   Maybe, because the dividend payout is lower than historic, maybe there will be a bit higher growth and it will be more like 3% but then it is still just a 3% growth + 2% dividend = 5% inflation adjusted return.   

I don't think I am being pessimistic, just trying to figure out what will likely occur.

Retire-Canada

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #27 on: September 10, 2015, 07:38:00 AM »


I came across this trailing return calculator for the S&P500.

http://dqydj.net/investments-and-returns/



I have not validated these numbers. I don't have the skills, but I figured if they were not kosher somebody here would know.


Aphalite

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #28 on: September 10, 2015, 07:41:09 AM »
I guess I'm not understanding your point. 5% above inflation is stellar, way more than you need for a 4% withdraw rate. The opening post of this thread talked about 4% nominal returns over the past 15 years, which barely beats inflation. But if you think going forward we'll get 5% ABOVE inflation (I agree that the total market index will probably return something close to that), then what are you worried about? The 8-10% the some people reference are also nominal returns, which when reduced by the 4% average inflation over the past 50 years, results in 4-6% real return. Because we're in a near zero inflation environment currently, believing that 5% above inflation returns going forward isn't being terribly optimistic, it's based around historic patterns.

frugal_c

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Re: VTSMX 15 year trailing return: 4.06% ?
« Reply #29 on: September 13, 2015, 12:39:28 PM »
I think we are pretty much in agreement.  5% above inflation IS stellar.  I personally think it will  be between 4 & 5 % over inflation given enough time.   Even with 4% my portfolio and ER should be in great shape.  I just see people talking 6% and 7% over inflation and it starts to seem really aggressive given where we are.  Yes, those numbers have been achieved historically but if you look at the starting point it is almost always in years where the PE or dividend yield if you prefer was much cheaper than today.  I personally plan for about 4% inflation adjusted and if I get higher returns then great, I'm happy to be surprised on the upside but I don't want to plan to retire in say 10 years and then have it actually be 15.
« Last Edit: September 13, 2015, 12:43:45 PM by frugal_canuck »