The random road to portfolio returns over your lifetime

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Browser
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The random road to portfolio returns over your lifetime

Post by Browser » Sun Sep 13, 2015 9:38 am

Investors typically have 20 years or so when they are putting most of their hard-earned shekels into their retirement portfolios. Each of us gets to experience just one 20-year period of investment returns, and as this chart from fool.com illustrates there has been quite a range of possible 20-year roads to Dublin for U.S. stocks. For example, the folks whose travels began in 1910 and in 1950 did pretty well by the end of their journey and would have succeeded without trying. The folks who sailed in 1920 or 1930, not so much. Just goes to show you that in the end, it's luck that makes the greatest difference in the size of your egg and you can't do anything about that.

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http://www.fool.com/investing/general/2 ... estor.aspx
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Wagnerjb
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Re: The random road to portfolio returns over your lifetime

Post by Wagnerjb » Sun Sep 13, 2015 10:02 am

Browser wrote:Investors typically have 20 years or so when they are putting most of their hard-earned shekels into their retirement portfolios.
That seems like an awful short period to me. This forum is about teaching people to have good financial discipline, and showing people saving money beginning at age 35 and stopping at 55 is a horrible example to provide. How about showing the difference is returns for 40 year periods, beginning at age 25 and ending at age 65? Also....I bet the returns look less scattered with the longer period.

There is nothing an investor can do to improve the sequence of returns he/she lives through. However, by having the discipline to start saving early, the investor reduces the magnitude of the differences in cumulative returns.

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k66
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Re: The random road to portfolio returns over your lifetime

Post by k66 » Sun Sep 13, 2015 10:29 am

The point of the Fool article wasn't to highlight a period of time when investors would be investing but rather when managers would be managing.

The graph is intended to illustrate how much luck plays in fictitious manager' careers as they manage their fictitious funds during their most productive years (age 35-55). One supposes that any manger could, in any market timeframe, come to the same result if only skill were at play (not that I necessarily buy that) and so any differences seen in various timeframe sis thus the interference of luck.
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Re: The random road to portfolio returns over your lifetime

Post by saltycaper » Sun Sep 13, 2015 10:42 am

Picking 20 years doesn't sound all that unreasonable. Not everyone graduates from college at age 22 and heads into a well paying career where they can sock money away for 40 years. Many people take longer to graduate, then they might have student loans to pay off, and maybe they get married and buy a house. At the other end of their career, maybe health problems prevent them from working until they are 65 or they face age discrimination as they get older. I don't think the average person is likely to be able to invest consistently with new earned income for 40 years. Maybe 25-30, but even that's stretching it for many. Not that it's not a good goal to have, but I don't think that was the point of the article.
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Re: The random road to portfolio returns over your lifetime

Post by fatlever » Sun Sep 13, 2015 11:02 am

Wagnerjb wrote:
Browser wrote:Investors typically have 20 years or so when they are putting most of their hard-earned shekels into their retirement portfolios.
How about showing the difference is returns for 40 year periods, beginning at age 25 and ending at age 65? Also....I bet the returns look less scattered with the longer period.
I think it's arrogant to assume that just because high income bogleheads have a 40 year accumulating period everyone has the same. I think it's much more reasonable to assume that most people have a 20 year high accumulating period.

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Blue
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Re: The random road to portfolio returns over your lifetime

Post by Blue » Sun Sep 13, 2015 11:34 am

As I read the article, the graph does not include periodic contributions throughout the the 20 year period?

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Re: The random road to portfolio returns over your lifetime

Post by Clive » Sun Sep 13, 2015 12:01 pm

Using Robert Shiller's data for yearly S&P total real returns since 1871 and assuming 20 years of accumulating equal yearly real amounts being invested in stocks, the choice of periods had a wide range of outcomes as per the fool articles chart.

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What is apparent is that you time shift such periods by 20 years then there was a degree of inverse correlation i.e. trough's tended to align to peaks and peaks to troughs. i.e. if you endured a bad 20 years of accumulating (saving) stocks, then the next 20 years tended to be relatively good for stocks; If you had a good 20 years of accumulating stocks then the next 20 years tended to be relatively poor for stocks.

This is the same chart but with the 20 year displaced red bars also added (that trail off in more recent years as the last 19 cases are incomplete 20 year periods spanning from 19 years down to just 1 year)
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If the 'average' person accumulates stocks for 20 years, draws-down/spends stocks for 20 years then the broader 40 year period will tend to see lower volatility in overall outcomes.

As a side dish, here's the same stock chart with Shiller's cash (real one year interest rate) 20 year accumulation of yearly equal real amounts also shown (red bars). By eye there looks to be a degree of correlation

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Yearly 50/50 stocks and cash (one year interest rate) accumulated over 20 years (rebalanced to 50/50 weightings each year)

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Re: The random road to portfolio returns over your lifetime

Post by nisiprius » Sun Sep 13, 2015 12:39 pm

My intuition is that for many retirement savers, "20-year period" is the right ballpark. The time between first and last dollar going to the retirement accounts is longer than that, but the period of large contributions is going to be focussed within a shorter period of time.

In point of fact, it ought to be possible (in theory) to get data on the average accumulation profile of retirement savers, and I don't know why nobody seems to work on this. It's silly to talk about square, hard-edged time periods with one start date and one stop date. My own experience probably wasn't wildly atypical. At the beginning, you don't contribute much--in my case, because I was a grad student, but, in any case, one often can't afford to. One can start a virtuous habit pattern, but your salary is low and your expense are high and you are not socking away a lot of money in real terms.

I didn't really start salting it away until I was in my thirties. And we can divide that period of time very roughly into two periods: pre-2000, when my wife and I paying off a mortgage and supporting two kids. (It's not just college. The last several years of high school can be very expensive; that's when they want clothing and iPods--and get "nominated" by teachers for three-week glorified-travel experiences). Meanwhile, even though my career wasn't stellar, my salary in real terms did go up steadily, as did my wife's. So, post-2000 we were looking at higher salaries, roughly stable food-clothing-and-shelter expenses, and the end of debt service on the house and college tuition. It was only post-2000 that we started to routinely max out both the 401(k) and the Roth (and the Roth limits kept going up, too).

It is a curvy "window function," not a boxcar average. A disproportionate amount of my lifetime total real-dollar contributions were made in, say, the 15 years from 1995 to 2010, but with a meaningful amount in, say the 15 years before that. Then for a while I was semiretired so 401(k) contributions stopped, but I was still making Roth contributions.

What's my time frame? From the first dollar that went into my first IRA to the last dollar that went into my Roth is about forty years. The period over which there was an actual 403(b) or 401(k) deduction on my pay stub, about twenty years. But even within those twenty years, a disproportionate amount was focussed in a period of perhaps 15 years.
Last edited by nisiprius on Sun Sep 13, 2015 1:56 pm, edited 1 time in total.
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randomizer
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Re: The random road to portfolio returns over your lifetime

Post by randomizer » Sun Sep 13, 2015 12:55 pm

Wagnerjb wrote:That seems like an awful short period to me. This forum is about teaching people to have good financial discipline, and showing people saving money beginning at age 35 and stopping at 55 is a horrible example to provide. How about showing the difference is returns for 40 year periods, beginning at age 25 and ending at age 65?
I started at 37.5 out of foolishness, ignorance, wrongheadedness and learned helplessness. So I guess that means I'm screwed...
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Lee Saage
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Re: The random road to portfolio returns over your lifetime

Post by Lee Saage » Sun Sep 13, 2015 1:30 pm

Interesting set of charts and it made me go look. I've kept pretty good records since 1993 and through the end of 2014, almost exactly half of the increase in total investments came from savings and half from total return. And the return is almost equally divided between capital gain and dividends. I have (nearly) always had a pretty conservative allocation and I expect those with a heavier tilt to equities may have seen more from capital gains.

Still, at least in my case, diligent savings seems to have been at least as important as luck.
Most of my money went to fast cars, fast living and good wine. The rest I just wasted.

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Re: The random road to portfolio returns over your lifetime

Post by Wildebeest » Sun Sep 13, 2015 1:43 pm

randomizer wrote:
Wagnerjb wrote:That seems like an awful short period to me. This forum is about teaching people to have good financial discipline, and showing people saving money beginning at age 35 and stopping at 55 is a horrible example to provide. How about showing the difference is returns for 40 year periods, beginning at age 25 and ending at age 65?
I started at 37.5 out of foolishness, ignorance, wrongheadedness and learned helplessness. So I guess that means I'm screwed...
I feel your pain.

You have a great sense of humor.

You are a star compared to all the ignorant, wrong headed fools, who do not know what they do not know.
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