Why I am reducing mkt exposure+have been since 2015.

[steveo]

Out of everyone who tries to "educate" himself to beat the market, half will necessarily fail, because for every winning trade there is a losing counterparty.

This claim is flawed because different people risk different amounts of money. For example, I might be on the winning side of a bet in which I had invested $1,000,000, but the losing side didn't involve a single investor risking $1,000,000 but rather a million investors each risking $1. In that case, there would be a million losers but only one winner. In the result, there's no simple way to calculate the ratio of people who "beat the market".

Good point. If we can assume that the people who win tend to accumulate assets (or clients with assets) -- a not unreasonable assumption, I think -- and thus make larger and larger trades over time, then the odds against a small individual investor look even much worse than I claimed before.

I think that you are massively understating the chance of beating the market for a couple of reasons:-

1. You aren't taking into account fees. A high trading approach will involve a lot of fees. This will hammer you.
2. You aren't taking into account the fact that you can make money in 10 trades and lose it all in 1. This happens as well.
3. Winning via active trading is hard because your winners tend to be subject to capital gains tax. Your losers though tend just to be counted as losses for tax purposes. Everyone's tax rules may be different but this makes a big difference. I've traded and won but this really hurt me.

If you are a buy and hold value based investor you may not be subject to all of the points I've stated above but you probably won't be as diversified. You will also have to spend some more time on choosing what you invest in. It's not a bad approach but for a lazy investor like myself I don't see the benefit.

[faramund]

Yes - that is the definition. Buying individual stocks, even holding for long time frames is a negative sum game.

Fama and French
https://www.dimensional.com/famafrench/essays/why-active-investing-is-a-negative-sum-game.aspx

The Monevator - a pretty good description as well.
http://monevator.com/is-active-investing-a-zero-sum-game/

These are just making the argument, that the return on average of active investors, is the average return of the market, minus fees.

I have no problem with this - but it doesn't change the basic question of are their strategies that do do better than average. It just says that to find such strategies is hard - and if it has high fees - the likelihood of such a strategy working, is less.

[Cougar]

I have tried to stay out of this thread even though I started it because it's not really my responsibility to try and save anyone from losing money in 2016, that decision is up to you; but it has gotten so much attention that occasionally I will check it.

And when I see posts like this, I feel the need to step in:

Threads like this can really be dangerous.  For people looking at investing in the market, consider the following:

First--you (average you) will not beat the market.  You are not special.

Second--if you (average you) try to beat the market by timing the market, you will most likely lose to the market.

Third--if you make consistent investments in the market over the long term, you will most likely get rich.  7% annual growth with regular contributions over 20-30 years creates big numbers. 

again, I am not trying to time the mkt, my goal is capital preservation; and continuing to keep mkt exposure to 100% equities while an economy is contracting is a certain way to lose money.

current example:
"While for most of 2015, tax withholdings rose at a rate of 5% or more from a year ago, on the back of job growth and gains in wages, commissions and other incentive pay, in recent months there has been a substantial dropoff in this key indicator.

As shown in the chart below, revenue inflows to the Treasury Department steadily slowed through the fall, bringing the annual growth rate down to just below 4% by the start of 2016. That’s when growth seemingly collapsed — to just 1.8% over the past five-plus weeks, from Jan. 11 through Feb. 16."

http://www.zerohedge.com/news/2016-02-20/alarm-goes-threatening-strong-us-jobs-myth-withheld-income-taxes-are-stalling

This doesn't happen in an economy that is expanding. If it looks more and more like a storm is coming, wouldn't you look to protect yourself ? That is what is happening, it is not mkt timing; if anything it's recession timing and trying not to be all in equities when it looks like one is starting.

As far as lose to the mkt by timing it or the "7%".

Where anywhere does economic data show you that in 2016, you're going to make 7% over the more likely losing 28% in a bear mkt that many countries in the world are already in(this was posted on zerohedge in the past few days) ? Outside of more monetary intervention by the FED, there is nothing.

No, I beat the mkt last year by paying attention to the early economic signs and decreasing exposure last may and have done the same this year and I have extended the same possibility the mmm community could reduce it's loses in 2016 by the initial post.

Again, my question is if you could save money this year by reducing exposure over losing it and having to wait additional years before you could retire because you now have to wait to get back the gains you lost; would you ? That is capital preservation and if that's "scary", so be it. I think it's going to be more scary to be 100% in the mkt after April and the seasonally stock period is over.

[yoda34]

Yes - that is the definition. Buying individual stocks, even holding for long time frames is a negative sum game.

Fama and French
https://www.dimensional.com/famafrench/essays/why-active-investing-is-a-negative-sum-game.aspx

The Monevator - a pretty good description as well.
http://monevator.com/is-active-investing-a-zero-sum-game/

These are just making the argument, that the return on average of active investors, is the average return of the market, minus fees.

I have no problem with this - but it doesn't change the basic question of are their strategies that do do better than average. It just says that to find such strategies is hard - and if it has high fees - the likelihood of such a strategy working, is less.

Totally agree. It says nothing about specific strategies, only that in the universe of active investing, it is - at the whole - a negative sum game.

The question of "are there strategies that do better than average", it all comes down to are there strategies that can systemically take advantage of a common type of behavior error from other active investors. I think value investing fits that description as it attempts to take advantage of the fact that the market (i.e. other investors) can irrationally push an asset down past it's intrinsic value due to overreaction to news and information.

I'm a value investor, and I've had great success using that approach compared to the market. My point is that it is really hard to do, on the whole it averages out to be worse than passive investing, and that when I make gains that beat the market it comes at the expense of someone else's bad investing choices. If someone doesn't understand those points, then active investing really isn't for them because they truly don't understand the risks or that for a few people to do really well a lot of people have to do poorly (which means the odds are such that any one random individual is more likely to be in the poor camp than better camp).

[Cycling Stache]

Again, my question is if you could save money this year by reducing exposure over losing it and having to wait additional years before you could retire because you now have to wait to get back the gains you lost; would you ? That is capital preservation and if that's "scary", so be it. I think it's going to be more scary to be 100% in the mkt after April and the seasonally stock period is over.

Cougar, the objections you've gotten have been regarding the belief that you can foresee the market--and especially, if you get out, when you get back in.

That said, if preserving capital is your goal, then yes, you're probably absolutely right to get out now.  Doing so creates two issues though.  First, when do you get back in?  Second, if you don't, how do you get the growth you need in the long term?

The 25x rule and all the other MMM metrics presume being in the market and getting market growth over the long term.  Pulling out means you need a lot more money.

You (and many, many people) are worried about the volatility right now.  And the overall market seems messed up where people celebrate bad news because it might convince the Fed to hold off raising interest rates, which is a crazy dynamic.  But on the other hand, we've already had a 20% drop (before the 6% gain the last week).  A 30% drop is a pretty big deal and doesn't happen all that much.  I expect it, but when?  I don't know.  And I don't know how quickly it will bounce back.  A 50% drop?  That's what we got in 2008-2009, and it's happened like twice.  That's why it was such a crazy big deal. 

So, your bear market is 15% away from here, and catastrophe is 35% away, which is a lot, but not absurd.  That's your downside.  But the odds of getting it right on getting back in are very low.  How do I know?  Because you're almost certainly not special (don't worry--neither am I).  And not special people lose when they time the market. 

There's a reason that asset allocations become more conservative as people get closer to retirement.  Capital preservation becomes more important, and short-term volatility is a bigger problem.  But that's not where most people are here when it comes to investing in the market.  And especially for early retirement, you need the growth in your portfolio because your time horizon for needing money is 30-50 years. 

I'm blessed and have done very well, but I'm also very attuned to what I don't know.  And I know that I don't know which way the market is going, when, and when it's coming back.  And unless you or the other timers are special, you don't know either.  Calling it going down doesn't mean anything unless you bank the profit on the way back up.

The reason this thread has gotten such a response is because much more money gets lost following timing prescriptions--both because of poor timing, and because of fear of investing at all.  Your point wasn't off for purposes of people focused on capital preservation, but at the point where you "called" the market, you triggered a huge response.

And to those responses regarding value investing taking advantage of irrational behavior of investors that push the price down below its worth, that's absolutely correct.  Which is why value investors make money over the long term.  But when you talk about timing the market on that basis--well, that requires trying to predict irrational behavior, which is even more difficult than trying to value an asset better than everyone else.  Like the market, value investors make money over the very long term because eventually (usually) the asset gets to its correct price.  But with the irrationality, that can take a long time (which is fine).

P.S.  I do have a market timing thought for the long term.  I wonder what the impact is going to be when the boomers start to shift from stocks to preserve capital as they get closer to the end (that sounds morbid).  That seems like a lot of money that's going to come out of the market not in reaction to any particular economic metric, but just to be "safe."  I'll be curious to see if that creates downward pressure on the market in the next 10-15 years, but I don't know.

[faramund]

I'm a buy-and-hold value investor who's moderately beaten the markets average growth over 15 years - so I believe its possible to beat the market.

However, people who post things on this forum - saying fire, fire its all going down!, are the opposite of what I think, which is goody, goody, goody the market's getting cheap!

But I also hold off buying sometimes, but its not after a crash - its before a crash if the market's frothy. I haven't done this though since 2005-2007.

So if people come on here now and post, the markets overvalued I'm selling out. My main thought is.. what, but you had your money in the market 4 months ago, when markets were higher, and you thought that was fine.

The big error that most investors do, is they buy high - when the mass opinion is positive, and sell low - when the market is negative, and of course they find justifications to do this at both times.

The only, I'm selling the market post I'm likely to pay attention to, is something along the lines of: Hey everyone I sold out 6 months ago, and I'm still waiting for a good time to buy back in. Anything else, seems like its more coming from panic, than anything else.

[Interest Compound]

I'm a buy-and-hold value investor who's moderately beaten the markets average growth over 15 years - so I believe its possible to beat the market.

How do you calculate your returns?

[faramund]

I'm a buy-and-hold value investor who's moderately beaten the markets average growth over 15 years - so I believe its possible to beat the market.

How do you calculate your returns?

I have a multi-page spreadsheet, in one, I record how much in each year I purchased of each company I hold, in another I record how much in dividends I receive each year for each company, I also record their current market price as well as their market price at the end of each year.

From this for each share, I can work out the average year when I bought each company (weighted by the amount of money I spend), for each year. So then, given the final value of a company + the dividends the company has given me, I can work out the average growth rate of the company, or alternatively of my entire portfolio (mainly by keeping totals of all the columns of each sub-spreadsheet).

I have almost 50 shares, and two of them are actually index funds (an entire market, and a high dividend weighted index). So using the same approach, I can work out their average growth rate - which is one way I can do comparisons. Although, I only bought the index funds in 2014 - so I can only do this comparison over the last few years.

I can also work out the average growth of a share/or the portfolio in a year, so then chaining them all together, say something like 100*1.05*0.95*1.20*.... I can work out how $100 would have grown over 15 years, and can then work out the average growth rate over 15 years.

In case you're wondering how I work out average growth rates, say I worked out that $100, 15 years ago, grew into say $300 today, the formula in excel is 100*power(300/100,1/15)-100.

As an example, for a company, say I bought in year 1 $100 of the company, year 2 $200, and year 3 $300, that means on average I bought the company in (1*100+2*200+3*300)/6= 1400/6 = 2.33, say its now worth $800 and its paid $50 in dividends, so then excel would work out
100*power(850/600,1/(current year-2.33))-100.

Well, actually I'd work out
100*power(850/600,1/(0.5+current year-2.33))-100
because I assume I bought the share in the middle of the year.

There's quite a few other subtleties to account for dividend reinvestments, and the few times I've sold shares (mainly when a company of mine is taken over) -  but the above is the general gist of what I do. Clear as mud??   

[Interest Compound]

I'm a buy-and-hold value investor who's moderately beaten the markets average growth over 15 years - so I believe its possible to beat the market.

How do you calculate your returns?

I have a multi-page spreadsheet, in one, I record how much in each year I purchased of each company I hold, in another I record how much in dividends I receive each year for each company, I also record their current market price as well as their market price at the end of each year.

From this for each share, I can work out the average year when I bought each company (weighted by the amount of money I spend), for each year. So then, given the final value of a company + the dividends the company has given me, I can work out the average growth rate of the company, or alternatively of my entire portfolio (mainly by keeping totals of all the columns of each sub-spreadsheet).

I have almost 50 shares, and two of them are actually index funds (an entire market, and a high dividend weighted index). So using the same approach, I can work out their average growth rate - which is one way I can do comparisons. Although, I only bought the index funds in 2014 - so I can only do this comparison over the last few years.

I can also work out the average growth of a share/or the portfolio in a year, so then chaining them all together, say something like 100*1.05*0.95*1.20*.... I can work out how $100 would have grown over 15 years, and can then work out the average growth rate over 15 years.

In case you're wondering how I work out average growth rates, say I worked out that $100, 15 years ago, grew into say $300 today, the formula in excel is 100*power(300/100,1/15)-100.

As an example, for a company, say I bought in year 1 $100 of the company, year 2 $200, and year 3 $300, that means on average I bought the company in (1*100+2*200+3*300)/6= 1400/6 = 2.33, say its now worth $800 and its paid $50 in dividends, so then excel would work out
100*power(850/600,1/(current year-2.33))-100.

Well, actually I'd work out
100*power(850/600,1/(0.5+current year-2.33))-100
because I assume I bought the share in the middle of the year.

There's quite a few other subtleties to account for dividend reinvestments, and the few times I've sold shares (mainly when a company of mine is taken over) -  but the above is the general gist of what I do. Clear as mud??   

Wow! Thanks for the detailed response! I'm used to hearing "BAM!" when I ask that question :-P

So it sounds like it's a money-weighted calculation, how are you comparing this to the index? Are you also recording what price the index was trading at that day, and calculating how much money you'd have if each individual purchase was made in the index instead?

(Therefore comparing your money-weighted return to the money-weighted return you would've received in the index)

Or do you have a separate calculation where you're also calculating the time-weighted return of your portfolio, so you can compare it to the published time-weighted return of the index from Morningstar/Vanguard...etc?

[faramund]

Wow! Thanks for the detailed response! I'm used to hearing "BAM!" when I ask that question :-P

So it sounds like it's a money-weighted calculation, how are you comparing this to the index?

I also keep track of what the ASX-all ord is at the end of each year (well actually I've found stats for it back to about 1860). So starting in 2000, I know how much it gained, and in 2001, and in 2002...

So I multiply them all together and use that formula I gave above. So, since 2000, the ASX has grown at an average of 3.5% a year, add in dividends, call that 7.5%. Do the same for me, and I'm ... dumpty daaahhh... 14.9.

I think the difference isn't really that big, I did much better in the first few years, when I had some lucky opportunities with some capital raisings for the small number of shares I had.

So more recently, my Vanguard index, lost 4.7% in 2014, lost 4.5 in 2015 and has lost 4.4 this year. (which is calculated, for say 2014, how much were my shares worth at the end of 2013+all dividends up to and including 2013+how much more of the share I bought in 2014. Compared to what were my shares worth at the end of 2014+all dividends up to and including 2014).

Doing the same for my shares it was 11.9 in 2014, 7.1 in 2014 and I'm down 3.6 this year. Actually, looking at that, maybe I can say I'm still outperforming by 7% or so a year - but that seems a bit crazy.

Are you also recording what price the index was trading at that day, and calculating how much money you'd have if each individual purchase was made in the index instead?

(Therefore comparing your money-weighted return to the money-weighted return you would've received in the index)
Or do you have a separate calculation where you're also calculating the time-weighted return of your portfolio, so you can compare it to the published time-weighted return of the index from Morningstar/Vanguard...etc?

No, I use the simplification that I assume I buy all shares in the middle of each year. Which isn't too bad - I tend to work out how much shares I can buy each year, divide it by 26, and spend that each fortnight.

But as I use the same approach for my shares, and the vanguard index I use, I assume I can't be too far off.

Although, based on whether randomly I bought at a higher or lower price, than average, that might skew it a bit - but that should average out over companies, and years.

[yoda34]

I'm a buy-and-hold value investor who's moderately beaten the markets average growth over 15 years - so I believe its possible to beat the market.

How do you calculate your returns?

I have a multi-page spreadsheet, in one, I record how much in each year I purchased of each company I hold, in another I record how much in dividends I receive each year for each company, I also record their current market price as well as their market price at the end of each year.

From this for each share, I can work out the average year when I bought each company (weighted by the amount of money I spend), for each year. So then, given the final value of a company + the dividends the company has given me, I can work out the average growth rate of the company, or alternatively of my entire portfolio (mainly by keeping totals of all the columns of each sub-spreadsheet).

I have almost 50 shares, and two of them are actually index funds (an entire market, and a high dividend weighted index). So using the same approach, I can work out their average growth rate - which is one way I can do comparisons. Although, I only bought the index funds in 2014 - so I can only do this comparison over the last few years.

I can also work out the average growth of a share/or the portfolio in a year, so then chaining them all together, say something like 100*1.05*0.95*1.20*.... I can work out how $100 would have grown over 15 years, and can then work out the average growth rate over 15 years.

In case you're wondering how I work out average growth rates, say I worked out that $100, 15 years ago, grew into say $300 today, the formula in excel is 100*power(300/100,1/15)-100.

As an example, for a company, say I bought in year 1 $100 of the company, year 2 $200, and year 3 $300, that means on average I bought the company in (1*100+2*200+3*300)/6= 1400/6 = 2.33, say its now worth $800 and its paid $50 in dividends, so then excel would work out
100*power(850/600,1/(current year-2.33))-100.

Well, actually I'd work out
100*power(850/600,1/(0.5+current year-2.33))-100
because I assume I bought the share in the middle of the year.

There's quite a few other subtleties to account for dividend reinvestments, and the few times I've sold shares (mainly when a company of mine is taken over) -  but the above is the general gist of what I do. Clear as mud??   

Wow! Thanks for the detailed response! I'm used to hearing "BAM!" when I ask that question :-P

So it sounds like it's a money-weighted calculation, how are you comparing this to the index? Are you also recording what price the index was trading at that day, and calculating how much money you'd have if each individual purchase was made in the index instead?

(Therefore comparing your money-weighted return to the money-weighted return you would've received in the index)

Or do you have a separate calculation where you're also calculating the time-weighted return of your portfolio, so you can compare it to the published time-weighted return of the index from Morningstar/Vanguard...etc?

I believe if he's properly calculated his return over the holding period (i'm assuming from his description that the holding period is a year) then it sounds to me like he is describing time-weighted returns which would be directly comparable to the published index

http://www.investopedia.com/exam-guide/cfa-level-1/quantitative-methods/discounted-cash-flow-time-weighted-return.asp

Unless I've missed something here?...

[faramund]

I'm a buy-and-hold value investor who's moderately beaten the markets average growth over 15 years - so I believe its possible to beat the market.

How do you calculate your returns?

I have a multi-page spreadsheet, in one, I record how much in each year I purchased of each company I hold, in another I record how much in dividends I receive each year for each company, I also record their current market price as well as their market price at the end of each year.

From this for each share, I can work out the average year when I bought each company (weighted by the amount of money I spend), for each year. So then, given the final value of a company + the dividends the company has given me, I can work out the average growth rate of the company, or alternatively of my entire portfolio (mainly by keeping totals of all the columns of each sub-spreadsheet).

I have almost 50 shares, and two of them are actually index funds (an entire market, and a high dividend weighted index). So using the same approach, I can work out their average growth rate - which is one way I can do comparisons. Although, I only bought the index funds in 2014 - so I can only do this comparison over the last few years.

I can also work out the average growth of a share/or the portfolio in a year, so then chaining them all together, say something like 100*1.05*0.95*1.20*.... I can work out how $100 would have grown over 15 years, and can then work out the average growth rate over 15 years.

In case you're wondering how I work out average growth rates, say I worked out that $100, 15 years ago, grew into say $300 today, the formula in excel is 100*power(300/100,1/15)-100.

As an example, for a company, say I bought in year 1 $100 of the company, year 2 $200, and year 3 $300, that means on average I bought the company in (1*100+2*200+3*300)/6= 1400/6 = 2.33, say its now worth $800 and its paid $50 in dividends, so then excel would work out
100*power(850/600,1/(current year-2.33))-100.

Well, actually I'd work out
100*power(850/600,1/(0.5+current year-2.33))-100
because I assume I bought the share in the middle of the year.

There's quite a few other subtleties to account for dividend reinvestments, and the few times I've sold shares (mainly when a company of mine is taken over) -  but the above is the general gist of what I do. Clear as mud??   

Wow! Thanks for the detailed response! I'm used to hearing "BAM!" when I ask that question :-P

So it sounds like it's a money-weighted calculation, how are you comparing this to the index? Are you also recording what price the index was trading at that day, and calculating how much money you'd have if each individual purchase was made in the index instead?

(Therefore comparing your money-weighted return to the money-weighted return you would've received in the index)

Or do you have a separate calculation where you're also calculating the time-weighted return of your portfolio, so you can compare it to the published time-weighted return of the index from Morningstar/Vanguard...etc?

I believe if he's properly calculated his return over the holding period (i'm assuming from his description that the holding period is a year) then it sounds to me like he is describing time-weighted returns which would be directly comparable to the published index

http://www.investopedia.com/exam-guide/cfa-level-1/quantitative-methods/discounted-cash-flow-time-weighted-return.asp

Unless I've missed something here?...

Thanks for thinking I'm doing it properly... I can work out an annual growth rate, but I can also work out the annual growth rate over the time I've held a share. So the current year in the formula below is what can give
multi-year average growth.
100*power(850/600,1/(0.5+current year-2.33))-100

i.e. if the current year is 9 (i.e. 8 years after my first purchase), that formula would really be asking. In year 1.83 (2.33-0.5), if I bought $600 worth of shares, and now in year 9 its worth $850 (including dividends) - what is the average growth rate over those 7.17 years?

When I talked about
(which is calculated, for say 2014, how much were my shares worth at the end of 2013+all dividends up to and including 2013+how much more of the share I bought in 2014. Compared to what were my shares worth at the end of 2014+all dividends up to and including 2014)

that's just working out a year's growth.

[Interest Compound]

I'm a buy-and-hold value investor who's moderately beaten the markets average growth over 15 years - so I believe its possible to beat the market.

How do you calculate your returns?

I have a multi-page spreadsheet, in one, I record how much in each year I purchased of each company I hold, in another I record how much in dividends I receive each year for each company, I also record their current market price as well as their market price at the end of each year.

From this for each share, I can work out the average year when I bought each company (weighted by the amount of money I spend), for each year. So then, given the final value of a company + the dividends the company has given me, I can work out the average growth rate of the company, or alternatively of my entire portfolio (mainly by keeping totals of all the columns of each sub-spreadsheet).

I have almost 50 shares, and two of them are actually index funds (an entire market, and a high dividend weighted index). So using the same approach, I can work out their average growth rate - which is one way I can do comparisons. Although, I only bought the index funds in 2014 - so I can only do this comparison over the last few years.

I can also work out the average growth of a share/or the portfolio in a year, so then chaining them all together, say something like 100*1.05*0.95*1.20*.... I can work out how $100 would have grown over 15 years, and can then work out the average growth rate over 15 years.

In case you're wondering how I work out average growth rates, say I worked out that $100, 15 years ago, grew into say $300 today, the formula in excel is 100*power(300/100,1/15)-100.

As an example, for a company, say I bought in year 1 $100 of the company, year 2 $200, and year 3 $300, that means on average I bought the company in (1*100+2*200+3*300)/6= 1400/6 = 2.33, say its now worth $800 and its paid $50 in dividends, so then excel would work out
100*power(850/600,1/(current year-2.33))-100.

Well, actually I'd work out
100*power(850/600,1/(0.5+current year-2.33))-100
because I assume I bought the share in the middle of the year.

There's quite a few other subtleties to account for dividend reinvestments, and the few times I've sold shares (mainly when a company of mine is taken over) -  but the above is the general gist of what I do. Clear as mud??   

Wow! Thanks for the detailed response! I'm used to hearing "BAM!" when I ask that question :-P

So it sounds like it's a money-weighted calculation, how are you comparing this to the index? Are you also recording what price the index was trading at that day, and calculating how much money you'd have if each individual purchase was made in the index instead?

(Therefore comparing your money-weighted return to the money-weighted return you would've received in the index)

Or do you have a separate calculation where you're also calculating the time-weighted return of your portfolio, so you can compare it to the published time-weighted return of the index from Morningstar/Vanguard...etc?

I believe if he's properly calculated his return over the holding period (i'm assuming from his description that the holding period is a year) then it sounds to me like he is describing time-weighted returns which would be directly comparable to the published index

http://www.investopedia.com/exam-guide/cfa-level-1/quantitative-methods/discounted-cash-flow-time-weighted-return.asp

Unless I've missed something here?...

Thanks for thinking I'm doing it properly... I can work out an annual growth rate, but I can also work out the annual growth rate over the time I've held a share. So the current year in the formula below is what can give
multi-year average growth.
100*power(850/600,1/(0.5+current year-2.33))-100

i.e. if the current year is 9 (i.e. 8 years after my first purchase), that formula would really be asking. In year 1.83 (2.33-0.5), if I bought $600 worth of shares, and now in year 9 its worth $850 (including dividends) - what is the average growth rate over those 7.17 years?

When I talked about
(which is calculated, for say 2014, how much were my shares worth at the end of 2013+all dividends up to and including 2013+how much more of the share I bought in 2014. Compared to what were my shares worth at the end of 2014+all dividends up to and including 2014)

that's just working out a year's growth.

Agreed, great job! Looks like you're in the 10% group. Keep it up!

[faramund]

Well, just to recap, how I think I've done it.. buy and hold.. never sell... buy stocks with low PE's, high ROEs, high dividends, high dividend growth. If market PEs ever get really high, lots of companies are doing initial offerings, read the Economist magazine, and if they have articles about bubbles - stop buying and pay off loans instead - until the crash, after the crash, buy as much as you can.

[MustacheAndaHalf]

If you search for "asset weighted returns" you might uncover how well the average investor performs.  Often the good years encourage buyers, who then discover reversion to the mean, and exit the fund with far less gains than the annual performance suggests.  When you look at asset weighted returns, the average investor does even worse than using the less accurate assumption that all investors get the annual return of all funds in which they invest.

[AdrianC]

That's great! Is that a money-weighted return, or a time-weighted return? My understanding is that Quicken isn't a good tool for this, as it doesn't provide returns in a way that can be compared to an index.

You are absolutely right. I didn't think it through. My returns are money-weighted so direct comparison to the index is not valid. I messed around with it some but it's way complicated to try to answer the question: what would my returns have been if I had invested in the index and not in the stocks and funds that I did. I'd like an answer, though. I'll see if I can figure a way. I do have all the data.

EDIT: I see faramund described his method.

[Metric Mouse]

Well, just to recap, how I think I've done it.. buy and hold.. never sell... buy stocks with low PE's, high ROEs, high dividends, high dividend growth. If market PEs ever get really high, lots of companies are doing initial offerings, read the Economist magazine, and if they have articles about bubbles - stop buying and pay off loans instead - until the crash, after the crash, buy as much as you can.

Well put, actionable advice. I hope it continues to work out for you.

[Cycling Stache]

That market has increased 7% in the last 2 weeks.  That's close to a 200% annual return.

I did not see a single thread in investor alley predicting that.  But I bet there are a few people now thinking about putting some money back in the market based on the increase.

This is why market timing is tough.  The instincts are so often wrong.  If you think you've got the timing nailed down, ask yourself how you missed (or gave up on) a 200% annual return.  And what's going to happen tomorrow?

I don't know.  But I take increasing comfort in knowing that I don't, and investing accordingly.

[Dicey]

That market has increased 7% in the last 2 weeks.  That's close to a 200% annual return.

Gah! I didn't shovel money in fast enough! However, it's still down-ish, so at least I didn't miss the sale completely!

[sol]

That market has increased 7% in the last 2 weeks.  That's close to a 200% annual return.

I did not see a single thread in investor alley predicting that.  But I bet there are a few people now thinking about putting some money back in the market based on the increase.

I made this same observation back on page 4 of this thread.  Notice no one here has taken me up on my offer of fame and fortune for correctly calling the bottom.

Market timers always cry SELL SELL SELL all the way down, but they never seem to get the BUY BUY BUY signal no matter how much the market recovers, and they certainly never call the bottom correctly.  Me?  I bought all the way down, and I'm buying all the way back up.  I bought on the market's lowest day.  I bought today.  I'm an accumulating indexer, I'm always buying.

[Paul der Krake]

I bought all the way down, and I'm buying all the way back up.  I bought on the market's lowest day.  I bought today.  I'm an accumulating indexer, I'm always buying.

What would it take for you to stop buying?

Extreme example: the next 5 years see a raging bull market with millions of new investors pouring in. It's February 2021 and the S&P500 has a P/E > 80. Are you still buying?

[GuitarStv]

I bought all the way down, and I'm buying all the way back up.  I bought on the market's lowest day.  I bought today.  I'm an accumulating indexer, I'm always buying.

What would it take for you to stop buying?

I can't speak for Sol, but for me it would be total world economic collapse.  At that point money would not have value, so trying to trade some of it for an abstract concept like stock in a company would be useless.  Other than that . . . I'll keep buying my indexes and bonds and re-balancing them a couple times a year.

[Retire-Canada]

What would it take for you to stop buying?

Extreme example: the next 5 years see a raging bull market with millions of new investors pouring in. It's February 2021 and the S&P500 has a P/E > 80. Are you still buying?

We'd all be FIRE'd drinking mai tais on a beach at the MMM Tahiti Meet Up. It would be time to sell and live off the proceeds. :)

[Jack]

I bought all the way down, and I'm buying all the way back up.  I bought on the market's lowest day.  I bought today.  I'm an accumulating indexer, I'm always buying.

What would it take for you to stop buying?

Extreme example: the next 5 years see a raging bull market with millions of new investors pouring in. It's February 2021 and the S&P500 has a P/E > 80. Are you still buying?

I'll admit, there is some point where I'd say "screw the efficient market hypothesis; y'all have clearly all gone completely insane" and quit buying. I don't know exactly what P/E ratio that would be at, but it would be fairly obvious because everyone would be comparing the situation to 1989 Japan and yelling about tulips.

[sol]

What would it take for you to stop buying?

Extreme example: the next 5 years see a raging bull market with millions of new investors pouring in. It's February 2021 and the S&P500 has a P/E > 80. Are you still buying?

Yes, I would still be buying.  I would have my expectations adjusted way down, up to and including expecting a market meltdown, but I'd be buying right through it anyway and reminding myself that my portfolio was likely to adjust down to more historically average valuations.

I can think of exceptions, I suppose.  P/E > 80 would likely mean my entire portfolio had recently quadrupled, giving me more than enough money (in overvalued stock valuations) to fulfill all of my life's desires, and if interest rates were still low for the foreseeable future then I might be tempted to call myself the winner of this game, and take all my chips and go home. 

But short of a decision like that to just abandon the global economy, I'd still be buying.  I bought through the 2007 highs.  I bought through the late 90s highs.  I expect to keep buying through every spike, and every dip, for as long as I have income to invest.  That's what indexing means.  That's how you guarantee yourself average market returns. 

[brooklynguy]

P/E > 80 would likely mean my entire portfolio had recently quadrupled, giving me more than enough money (in overvalued stock valuations) to fulfill all of my life's desires, and if interest rates were still low for the foreseeable future then I might be tempted to call myself the winner of this game, and take all my chips and go home. 

Why only if interest rates remain low?

[PathtoFIRE]

If the PE was ~80, wouldn't we be rebalancing into the other legs of our investment strategy, like bonds and foreign equities? For some it would also be into real estate, either by paying down mortgage, purchasing rentals, or REITs. So I'd still be buying, but it would probably be less US equities, and more of the others. But if everything appeared absurdly overvalued based on history, I would keep buying everything, and weigh against the assured return of paying down my mortgage.

[AdrianC]

This is why market timing is tough.  The instincts are so often wrong.  If you think you've got the timing nailed down, ask yourself how you missed (or gave up on) a 200% annual return.  And what's going to happen tomorrow?

I don't know.  But I take increasing comfort in knowing that I don't, and investing accordingly.

There are ways to do "market timing" without relying on instincts or gut feel. These methods are objective, such as valuation or trend following. Currently valuations are high (by historical standards) and the trend points down.

No one missed a "200% annual return". VTI is still down nearly 6% YTD. I wouldn't declare victory just yet.

No one knows what's going to happen tomorrow. If history is any guide we can expect to get a better entry point on something interesting some day.

[Aphalite]

Why only if interest rates remain low?

I'm guessing sol is talking about opportunity cost here

[brooklynguy]

I'm guessing sol is talking about opportunity cost here

Right, but, if anything, the opportunity cost of exiting the stock market into cash is higher when interest rates are low.

[sol]

Why only if interest rates remain low?

 *inflation

Because I have a federal pension that is not indexed for inflation until I'm 60 and it would be decimated by high inflation between now and then.  My particular early retirement plans are more inflation sensitive than most.  If the 2020s look like the 1970s then I'm not sitting quite as pretty as I appear to be.

[bacchi]

I'll admit, there is some point where I'd say "screw the efficient market hypothesis; y'all have clearly all gone completely insane" and quit buying. I don't know exactly what P/E ratio that would be at, but it would be fairly obvious because everyone would be comparing the situation to 1989 Japan and yelling about tulips.

It'd be the opposite. In the late 90s, EVERYONE thought they were a stock market genius. There were commercials about quitting and becoming a daytrader; taxi drivers and barbers were handing out stock tips.

In 2006/7, everyone was busy flipping houses and watching shows about flipping houses. People were trading up to larger houses because "a house is a great investment."

Same with metals, recently. There were commercials asking for your gold jewelry and coworkers were cashing out the IRA to buy silver.

When it becomes common knowledge to invest in something, and it's discussed at lunch with coworkers, bad news is around the corner.

[brooklynguy]

*inflation

Because I have a federal pension that is not indexed for inflation until I'm 60 and it would be decimated by high inflation between now and then.

Ah, gotcha (though in a fantasy scenario where stocks became outrageously overvalued enough to entice you to exit the market completely, presumably your pension would become a less important component of your retirement plan and you could just stick the whole pot in inflation-protected treasuries or the like).

My particular early retirement plans are more inflation sensitive than most.

That would seem to suggest that you more than most should take precautions to guard against inflation (which is already the single greatest danger for the ordinary early retiree), but based on our previous mortgage-retention discussions, you don't seem to be especially concerned about inflation.

[sol]

you more than most should take precautions to guard against inflation (which is already the single greatest danger for the ordinary early retiree), but based on our previous mortgage-retention discussions, you don't seem to be especially concerned about inflation.

You're right on both counts, I'm not concerned and I am more susceptible to it.  But inflation has been low for years, and looks poised to stay low, so until I see signs of change I'm going to continue to assume it will stay low.  I rather like it that my biggest threat appears to be toothless at the moment. 

[brooklynguy]

You're right on both counts, I'm not concerned and I am more susceptible to it.  But inflation has been low for years, and looks poised to stay low, so until I see signs of change I'm going to continue to assume it will stay low.  I rather like it that my biggest threat appears to be toothless at the moment.

Our friendly neighborhood rebel spy might have something to say about the perils of underestimating inflation risk on the basis of the current low-inflation environment.

But in your particular case, I think on balance you may actually be better-equipped than most to deal with inflation, given that inflation-indexing will kick in relatively early in your retirement (the next two decades will hopefully be eclipsed by the remainder of your retirement) and your federal pension represents an effectively risk-free annuitized income stream.

I'll just note, more generally, that once inflation does rear its head, it will already have become too late to take certain protective measures (such as obtaining/retaining a superlow fixed interest mortgage loan, which is one of the best inflation hedges available).

[Aphalite]

I'll just note, more generally, that once inflation does rear its head, it will already have become too late to take certain protective measures (such as obtaining/retaining a superlow fixed interest mortgage loan, which is one of the best inflation hedges available).

I think you're discounting how well of an inflation hedge equities are. Companies typically will raise prices (although with a time lag) to compensate for inflation increases. Superior companies with sticky brands will raise prices in excess of inflation without blinking

[brooklynguy]

I think you're discounting how well of an inflation hedge equities are. Companies typically will raise prices (although with a time lag) to compensate for inflation increases. Superior companies with sticky brands will raise prices in excess of inflation without blinking

No, I totally agree, and my personal retirement plan is to stick with a 100% equity allocation forever (and retain my low interest mortgage) in no small part for precisely that reason.

[EngiNerd]

I'll admit, there is some point where I'd say "screw the efficient market hypothesis; y'all have clearly all gone completely insane" and quit buying. I don't know exactly what P/E ratio that would be at, but it would be fairly obvious because everyone would be comparing the situation to 1989 Japan and yelling about tulips.

It'd be the opposite. In the late 90s, EVERYONE thought they were a stock market genius. There were commercials about quitting and becoming a daytrader; taxi drivers and barbers were handing out stock tips.

In 2006/7, everyone was busy flipping houses and watching shows about flipping houses. People were trading up to larger houses because "a house is a great investment."

Same with metals, recently. There were commercials asking for your gold jewelry and coworkers were cashing out the IRA to buy silver.

When it becomes common knowledge to invest in something, and it's discussed at lunch with coworkers, bad news is around the corner.

Not all that relevant to the thread but this is what makes me somewhat queasy about all the press and attention index funds are receiving lately.  But maybe my perspective is skewed because I frequent this site and bogleheads but I feel like more and more people are understanding the easy way to money through index fund investing. 

[Interest Compound]

I'll admit, there is some point where I'd say "screw the efficient market hypothesis; y'all have clearly all gone completely insane" and quit buying. I don't know exactly what P/E ratio that would be at, but it would be fairly obvious because everyone would be comparing the situation to 1989 Japan and yelling about tulips.

It'd be the opposite. In the late 90s, EVERYONE thought they were a stock market genius. There were commercials about quitting and becoming a daytrader; taxi drivers and barbers were handing out stock tips.

In 2006/7, everyone was busy flipping houses and watching shows about flipping houses. People were trading up to larger houses because "a house is a great investment."

Same with metals, recently. There were commercials asking for your gold jewelry and coworkers were cashing out the IRA to buy silver.

When it becomes common knowledge to invest in something, and it's discussed at lunch with coworkers, bad news is around the corner.

Not all that relevant to the thread but this is what makes me somewhat queasy about all the press and attention index funds are receiving lately.  But maybe my perspective is skewed because I frequent this site and bogleheads but I feel like more and more people are understanding the easy way to money through index fund investing.

I've yet to meet a person in real life who has even heard the term "index fund". Considering the number of posters here and even at Bogleheads, who freak out at the smallest hint of volatility, I doubt anything has changed. They will freak out during the next crash with their index funds, just like the freaked out with their active funds.

[steveo]

I'll admit, there is some point where I'd say "screw the efficient market hypothesis; y'all have clearly all gone completely insane" and quit buying. I don't know exactly what P/E ratio that would be at, but it would be fairly obvious because everyone would be comparing the situation to 1989 Japan and yelling about tulips.

It'd be the opposite. In the late 90s, EVERYONE thought they were a stock market genius. There were commercials about quitting and becoming a daytrader; taxi drivers and barbers were handing out stock tips.

In 2006/7, everyone was busy flipping houses and watching shows about flipping houses. People were trading up to larger houses because "a house is a great investment."

Same with metals, recently. There were commercials asking for your gold jewelry and coworkers were cashing out the IRA to buy silver.

When it becomes common knowledge to invest in something, and it's discussed at lunch with coworkers, bad news is around the corner.

Not all that relevant to the thread but this is what makes me somewhat queasy about all the press and attention index funds are receiving lately.  But maybe my perspective is skewed because I frequent this site and bogleheads but I feel like more and more people are understanding the easy way to money through index fund investing.

I've yet to meet a person in real life who has even heard the term "index fund". Considering the number of posters here and even at Bogleheads, who freak out at the smallest hint of volatility, I doubt anything has changed. They will freak out during the next crash with their index funds, just like the freaked out with their active funds.

I just bought an index fund last week but I used an ETF. I called the brokerage because I needed some help with a password and he said what are you buying. I said the index and he didn't seem interested or knowledgeable about it all well. I had the impression he wanted to talk about what special stock I was buying.

I still think it's a long while until everyone just says stuff it I'll buy the index and ignore everything else. If that happens maybe it'd be a good thing anyway.

[Reido]

Just food for thought -inflation is bad for stocks because PE ratios tend to contract.

1972-1982 CAGR for a Total USA market was 8.06% vs inflation at 7.6% a very poor real return for 10 years.

  A paper was written about it but of course I can never find it when I want to!

Mostly PE consolidation. Check it at multpl.com if you wish. 

It's important to remember that the opportunity cost of owning fixed income is significantly greater with higher interest rates.

[Jack]

I'll admit, there is some point where I'd say "screw the efficient market hypothesis; y'all have clearly all gone completely insane" and quit buying. I don't know exactly what P/E ratio that would be at, but it would be fairly obvious because everyone would be comparing the situation to 1989 Japan and yelling about tulips.

It'd be the opposite. In the late 90s, EVERYONE thought they were a stock market genius. There were commercials about quitting and becoming a daytrader; taxi drivers and barbers were handing out stock tips.

In 2006/7, everyone was busy flipping houses and watching shows about flipping houses. People were trading up to larger houses because "a house is a great investment."

Same with metals, recently. There were commercials asking for your gold jewelry and coworkers were cashing out the IRA to buy silver.

When it becomes common knowledge to invest in something, and it's discussed at lunch with coworkers, bad news is around the corner.

Yes, and your point is...?

Are you trying to claim that my "get out when people start comparing to Japan" plan wouldn't have worked in the tech bubble?

You're, right, it wouldn't. If I had been investing in the late '90s I would have kept buying all the way up the bubble, all the way down the crash, and all the way up the recovery. And I would have done just fine!

(Real estate and gold are different, of course -- the first because it's illiquid and hard to get diversification, and the second because it produces no income so "investing" in it relies entirely upon speculation. The efficient market hypothesis and the topic of this thread both only apply to the stock market, so comparison to other asset classes is irrelevant.)

[Paul der Krake]

There is probably comparing the situation to Japan and yelling about tulips every single day that the market is open.

We should have a forum poll on the first of every month just to see if our collective wisdom is good at predicting crashes. It probably isn't, but that'd be fun regardless.

[Reido]

@JACK
Just keep in mind if you dollar cost averaged into the Nikkei since 1990 you would still be in terrible shape. Furthermore, there's no unwritten law that stocks HAVE to go up...  Only history of that happening.  I can give plenty of reasons why that could change for 20+ years...

[Jack]

@JACK
Just keep in mind if you dollar cost averaged into the Nikkei since 1990 you would still be in terrible shape.

Oh? How terrible? I'm having trouble finding charts going back more than 10 years, especially including dividends.

[Reido]

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=23036&start=100#p2379273

It was discussed extensively over there

[Interest Compound]

@JACK
Just keep in mind if you dollar cost averaged into the Nikkei since 1990 you would still be in terrible shape.

Did you do the math on this? This is a huge thing most people miss when looking at charts, you're only seeing how a single deposit would've done from end-to-end during that time period. A real portfolio with DCA (during the accumulation phase) doesn't look anything like that. I just worked it out up to 2013:



If you DCA'ed ¥1,000 a month into 100% Japanese stocks from 1989-2013, you'd end up with an inflation adjusted ¥360,717

Same calculation for USA stocks, in USD: $544,788
International stocks in USD: $357,746
50/50 USA/International in USD: $448,562

At that rate you'd need to work an extra 3 years compared to the market-weighted world stock market. I wouldn't consider this "terrible shape", but that's my opinion :)

[Terrestrial]

If you DCA'ed ¥1,000 a month into 100% Japanese stocks from 1989-2013, you'd end up with an inflation adjusted ¥360,717

I agree 'terrible' doesn't apply (you didn't lose money at least) but I wouldn't call it 'good' either.  Over those 24 years the DCA contributions alone make up 288k of the 360k.  25% total gain over inflation for a 24 year span is pretty bleak.

[Retire-Canada]

I agree 'terrible' doesn't apply (you didn't lose money at least) but I wouldn't call it 'good' either.  Over those 24 years the DCA contributions alone make up 288k of the 360k.  25% total gain over inflation for a 24 year span is pretty bleak.

That's why investing solely in any one market is a bad idea. There is a whole planet out there to invest in to spread the risk out.

[sol]

Over those 24 years the DCA contributions alone make up 288k of the 360k.  25% total gain over inflation for a 24 year span is pretty bleak.

That's a measly 1% gain per year, but a 1% gain is still a gain.  Most people who cite the Japan crash think being invested there meant financial ruin, but this is like the third or fourth thread on these forums detailing how even making one of the single worst mistakes in the history of stock investing STILL made money over a 25 year span, as long as you just faithfully bought the index.

In the long run, stocks just aren't that risky.