The last 15 years

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HomerJ
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The last 15 years

Post by HomerJ » Sat Jan 23, 2016 10:04 pm

The money you invested in Jan 2001 - has made 5% a year - $10,000 invested is now worth $20,779
The money you invested in Jan 2002 - has made 7% a year - $10,000 invested is now worth $24,382
The money you invested in Jan 2003 - has made 9% a year - $10,000 invested is now worth $30,103
The money you invested in Jan 2004 - has made 7% a year - $10,000 invested is now worth $22,095
The money you invested in Jan 2005 - has made 7% a year - $10,000 invested is now worth $21,107
The money you invested in Jan 2006 - has made 6% a year - $10,000 invested is now worth $18,834
The money you invested in Jan 2007 - has made 6% a year - $10,000 invested is now worth $16,472
The money you invested in Jan 2008 - has made 7% a year - $10,000 invested is now worth $17,614
The money you invested in Jan 2009 - has made 15% a year - $10,000 invested is now worth 27,104
The money you invested in Jan 2010 - has made 12% a year - $10,000 invested is now worth $19,648
The money you invested in Jan 2011 - has made 10% a year - $10,000 invested is now worth $16,188
The money you invested in Jan 2012 - has made 11% a year - $10,000 invested is now worth $15,515
The money you invested in Jan 2013 - has made 9% a year - $10,000 invested is now worth $13,334
The money you invested in Jan 2014 - has made 2% a year - $10,000 invested is now worth $10,456
The money you invested in Jan 2015 - has lost 7% this year - $10,000 invested is now worth $9300

Those are some pretty good numbers. Just by investing in Total Stock Market Index fund and "staying the course" through good times and bad. And 2000-2009 was considered by many at the time to be a "lost decade". Yet it still turned out pretty good in the "long-term".

$10,000 a year for the past 15 years has turned into $282,931

amitb00
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Re: The last 15 years

Post by amitb00 » Sat Jan 23, 2016 10:18 pm

Nice. Puts things into perspective .

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Toons
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Re: The last 15 years

Post by Toons » Sat Jan 23, 2016 10:20 pm

Very Interesting Numbers to crunch,
Thanks :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

Happy2BeFree
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Re: The last 15 years

Post by Happy2BeFree » Sat Jan 23, 2016 10:51 pm

I am bookmarking this page. Thanks, HomerJ!

Erwin
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Re: The last 15 years

Post by Erwin » Sat Jan 23, 2016 11:39 pm

In general the numbers look fine, but it all has depended on the entry point. Had I invested $10k in 2001, today I do not think that I would happy. Would you? So much volatility for 5%. I have not figured out what the total bond market would have done, but I suspect not much difference and with little volatility. 50/50 allocation seems to me a good insurance policy.
Last edited by Erwin on Sat Jan 23, 2016 11:51 pm, edited 1 time in total.
Erwin

Dirghatamas
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Re: The last 15 years

Post by Dirghatamas » Sat Jan 23, 2016 11:42 pm

HomerJ could you do the exact same calculation for the Total International Stock (dividends reinvested of course). The way you presented this data is very nice (and somewhat inspirational), so would like to look at how badly or well, we (those of us who like to be globally diversified) actually did.

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DG99999
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Re: The last 15 years

Post by DG99999 » Sat Jan 23, 2016 11:50 pm

HomerJ wrote:The money you invested in Jan 2001 - has made 5% a year - $10,000 invested is now worth $20,779
The money you invested in Jan 2002 - has made 7% a year - $10,000 invested is now worth $24,382
The money you invested in Jan 2003 - has made 9% a year - $10,000 invested is now worth $30,103
The money you invested in Jan 2004 - has made 7% a year - $10,000 invested is now worth $22,095
The money you invested in Jan 2005 - has made 7% a year - $10,000 invested is now worth $21,107
The money you invested in Jan 2006 - has made 6% a year - $10,000 invested is now worth $18,834
The money you invested in Jan 2007 - has made 6% a year - $10,000 invested is now worth $16,472
The money you invested in Jan 2008 - has made 7% a year - $10,000 invested is now worth $17,614
The money you invested in Jan 2009 - has made 15% a year - $10,000 invested is now worth 27,104
The money you invested in Jan 2010 - has made 12% a year - $10,000 invested is now worth $19,648
The money you invested in Jan 2011 - has made 10% a year - $10,000 invested is now worth $16,188
The money you invested in Jan 2012 - has made 11% a year - $10,000 invested is now worth $15,515
The money you invested in Jan 2013 - has made 9% a year - $10,000 invested is now worth $13,334
The money you invested in Jan 2014 - has made 2% a year - $10,000 invested is now worth $10,456
The money you invested in Jan 2015 - has lost 7% this year - $10,000 invested is now worth $9300

Those are some pretty good numbers. Just by investing in Total Stock Market Index fund and "staying the course" through good times and bad. And 2000-2009 was considered by many at the time to be a "lost decade". Yet it still turned out pretty good in the "long-term".

$10,000 a year for the past 15 years has turned into $282,931
I greatly enjoyed this illustration, however, I did have to do my own quick check. Here are the numbers I find when using Morningstar to look at VTSAX over the dates shown (to 1/22/16). The final total with this method comes pretty close [$280,235]. Although there are some substantial differences in some of the yearly figures, both sets of numbers seem to support the excellent illustration and argument Homer has presented. Note that I estimated the annualized percentage return using whole years (ignoring the extra 3 weeks).

Jan-01......5.1%.......$21,163
Jan-02......6.4%.......$23,749
Jan-03......8.8%.......$30,043
Jan-04......7.1%.......$22,861
Jan-05......6.6%.......$20,301
Jan-06......6.7%.......$19,136
Jan-07......5.8%.......$16,550
Jan-08......5.8%.......$15,677
Jan-09.....13.9%......$24,879
Jan-10.....11.6%......$19,312
Jan-11.....10.5%......$16,470
Jan-12.....13.0%......$16,294
Jan-13.....11.9%......$14,000
Jan-14......2.4%......$10,485
Jan-15.....-6.8%.......$9,315
Last edited by DG99999 on Sun Jan 24, 2016 12:15 am, edited 1 time in total.
I am not a financial professional. My posts are only my opinion on the topic. You need to do your own due diligence and consult with a professional when addressing your financial questions.

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DG99999
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Re: The last 15 years

Post by DG99999 » Sun Jan 24, 2016 12:13 am

Dirghatamas wrote:HomerJ could you do the exact same calculation for the Total International Stock (dividends reinvested of course). The way you presented this data is very nice (and somewhat inspirational), so would like to look at how badly or well, we (those of us who like to be globally diversified) actually did.
Your question piqued my interest so I ran that calculation too. Here are the results that I got for VGTSX:

Jan-01......3.2% ......$16,127
Jan-02......5.1%......$20,197
Jan-03......6.9%......$23,785
Jan-04......4.5%......$16,948
Jan-05......3.1%......$14,026
Jan-06......2.0%......$12,136
Jan-07.....-0.5%.......$9,583
Jan-08.....-2.3%.......$8,296
Jan-09......5.8%......$14,840
Jan-10......1.4%......$10,854
Jan-11.....-0.5%......$9,768
Jan-12......3.4%.....$11,433
Jan-13.....-1.1%......$9,677
Jan-14.....-8.3%......$8,412
Jan-15....-12.2%......$8,784
Total ................$194,866
I am not a financial professional. My posts are only my opinion on the topic. You need to do your own due diligence and consult with a professional when addressing your financial questions.

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Boglenaut
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Re: The last 15 years

Post by Boglenaut » Sun Jan 24, 2016 12:23 am

Good one!

But this is how people see it:

he money you invested in Jan 2001 - has made 5% a year - $10,000 invested is now worth $20,779
The money you invested in Jan 2002 - has made 7% a year - $10,000 invested is now worth $24,382
The money you invested in Jan 2003 - has made 9% a year - $10,000 invested is now worth $30,103
The money you invested in Jan 2004 - has made 7% a year - $10,000 invested is now worth $22,095
The money you invested in Jan 2005 - has made 7% a year - $10,000 invested is now worth $21,107
The money you invested in Jan 2006 - has made 6% a year - $10,000 invested is now worth $18,834
The money you invested in Jan 2007 - has made 6% a year - $10,000 invested is now worth $16,472
The money you invested in Jan 2008 - has made 7% a year - $10,000 invested is now worth $17,614
The money you invested in Jan 2009 - has made 15% a year - $10,000 invested is now worth 27,104
The money you invested in Jan 2010 - has made 12% a year - $10,000 invested is now worth $19,648
The money you invested in Jan 2011 - has made 10% a year - $10,000 invested is now worth $16,188
The money you invested in Jan 2012 - has made 11% a year - $10,000 invested is now worth $15,515
The money you invested in Jan 2013 - has made 9% a year - $10,000 invested is now worth $13,334
The money you invested in Jan 2014 - has made 2% a year - $10,000 invested is now worth $10,456
The money you invested in Jan 2015 - has LOST 7% this year - $10,000 invested is now worth $9300!!!!!

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HomerJ
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Re: The last 15 years

Post by HomerJ » Sun Jan 24, 2016 12:40 am

DG99999 wrote:Note that I estimated the annualized percentage return using whole years (ignoring the extra 3 weeks).
The differences are probably because I went from Jan 23, 20xx to Jan 23, 2016, and it sounds like you went from Jan 1st to Jan 1st.

Theoretical
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Re: The last 15 years

Post by Theoretical » Sun Jan 24, 2016 12:42 am

DG99999 wrote:
Dirghatamas wrote:HomerJ could you do the exact same calculation for the Total International Stock (dividends reinvested of course). The way you presented this data is very nice (and somewhat inspirational), so would like to look at how badly or well, we (those of us who like to be globally diversified) actually did.
Your question piqued my interest so I ran that calculation too. Here are the results that I got for VGTSX:

Jan-01......3.2% ......$16,127
Jan-02......5.1%......$20,197
Jan-03......6.9%......$23,785
Jan-04......4.5%......$16,948
Jan-05......3.1%......$14,026
Jan-06......2.0%......$12,136
Jan-07.....-0.5%.......$9,583
Jan-08.....-2.3%.......$8,296
Jan-09......5.8%......$14,840
Jan-10......1.4%......$10,854
Jan-11.....-0.5%......$9,768
Jan-12......3.4%.....$11,433
Jan-13.....-1.1%......$9,677
Jan-14.....-8.3%......$8,412
Jan-15....-12.2%......$8,784
Total ................$194,866
70/30 VTSMX/VGTSX, rebalanced annually.

Jan-01......5.18% ......$21,231
Jan-02......6.68%......$24,712
Jan-03.....8.97%......$30,532
Jan-04......7.07%......$22,692
Jan-05......6.37%......$19,730
Jan-06......6.13%......$18,125
Jan-07.....4.80%.......$15,250
Jan-08.....4.35%.......$14,056
Jan-09......12.71%......$23,101
Jan-10......9.9%......$17,620
Jan-11.....8.85%......$15,282
Jan-12......12.24%.....$15,868
Jan-13.....10.75%......$13,584
Jan-14.....3.07%......$10,624
Jan-15....-1.11%......$9,889
Total ................$272,296

One more: Money invested in January 2000 (one of the worst possible times to invest this century) got a 4.00% Return and is now worth $18,744 if you went 70/30 US/International. For All US, it's 20,112 (4.46%), and All International it's $15,070 (2.6%)


But let's say you only looked at January 2000 to January 2010

Jan-01......3.39% ......$13,952 (+$1,200 higher than straight US, almost $2,800 lower than Total International)
Jan-02......5.49%......$16,171 (+1,800 higher than straight US, $5,000 lower than Total International)
Jan-03.....9.04%......$19,979 (+1,800 higher than straight US, $4,500 lower than Total International)
Jan-04......7.07%......$22,692 (+1,000 higher than straight US, $2,500 lower than Total international)
Jan-05......4.35%......$12,911 (+$700 higher than straight US, $1,400 lower than Total International)
Jan-06......3.47%......$11,860 (+$300 higher than straight US, $600 lower than Total International)
Jan-07.....-.05%.......$9,979 (-$30 lower than straight US, $160 higher than Total International)
Jan-08.....-2.75%.......$9,198 (-$300 lower than straight US, $700 higher than Total International)
Jan-09......22.95%......$15,117 (+40 higher than straight US, $80 lower than Total International)
Jan-10......15.30%......$11,530 (-$170 lower than straight US, $425 higher than total international)

$143,389 for 70/30
$137,059 for 100% US
$158,984 for 100% Total International

Using the full dates from January 2001 to December 2010 with the Portfolio Visualizer, you get this:

$145,546 for 70/30 - 5.46% IRR
$139,044 for 100 US - 4.59% IRR
$161,215 for 100 Total International - 7.4% IRR

With this range, there's a strong argument to underweight the US, if you were going back in time. Looking 5 years forward, International now looks lousy. Even in a gloomy season for investors, it's not been a total loss.
Last edited by Theoretical on Sun Jan 24, 2016 1:11 am, edited 1 time in total.

sawhorse
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Re: The last 15 years

Post by sawhorse » Sun Jan 24, 2016 12:46 am

This assumes that you could invest gradually that whole time. That wasn't the reality for many people. Think about how many people were out of work in 2009, many of whom took over a year to find work again. No 15% gain for them. Lots of people were also out of work at the beginning of the century.

It also doesn't consider those who were retired although hopefully they had more balanced portfolios.

Could someone do the same analysis with gold? I have a feeling it would blow the socks off stocks during this period. With a different time period, the reverse would be true.
Last edited by sawhorse on Sun Jan 24, 2016 12:57 am, edited 1 time in total.

Dirghatamas
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Re: The last 15 years

Post by Dirghatamas » Sun Jan 24, 2016 12:52 am

Thank you DG99999, HomerJ and Theoretical

So, yes International has done worse than US (I knew that), but the blended returns for a diversified portfolio have NOT been horrible.

One small caveat in this calculation method: how are taxes handled? I assume for total return calculation for US funds, the tools simply ignore taxes (because every one's tax situation is different).

However, for international fund, held in taxable accounts, one also gets the foreign tax credit back. If that is not handled by tools correctly, it will UNDER REPORT the actual total returns for investors (basically it assumes double taxation). Probably not a huge shift but something.

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Maynard F. Speer
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Re: The last 15 years

Post by Maynard F. Speer » Sun Jan 24, 2016 1:03 am

This is a very rough calculation (I'm sure someone can do it better – I've simply used total return and not calculated dividends separately) if the market corrects by about 50% (which some suggest it needs to):

The money you invested in Jan 2001 - has made 1% a year - $10,000 invested is now worth $10,789
The money you invested in Jan 2002 - has made 1.8% a year - $10,000 invested is now worth $12,892
The money you invested in Jan 2003 - has made 3.3% a year - $10,000 invested is now worth $15,329
The money you invested in Jan 2004 - has made 1% a year - $10,000 invested is now worth $11,260
The money you invested in Jan 2005 - has made 0.5% a year - $10,000 invested is now worth $10,524
The money you invested in Jan 2006 - has LOST 1.1% a year - $10,000 invested is now worth $8,954
The money you invested in Jan 2007 - has LOST 1.9% a year - $10,000 invested is now worth $8,447
The money you invested in Jan 2008 - has LOST 1.9% a year - $10,000 invested is now worth $8,590
The money you invested in Jan 2009 - has made 4% a year - $10,000 invested is now worth $13,300
The money you invested in Jan 2010 - has LOST 0.3% a year - $10,000 invested is now worth $9,869
The money you invested in Jan 2011 - has LOST 4.3% a year - $10,000 invested is now worth $8,052
The money you invested in Jan 2012 - has LOST 7% a year - $10,000 invested is now worth $7,590
The money you invested in Jan 2013 - has LOST 14% a year - $10,000 invested is now worth $6,475

Again, ballpark at best, and very crudely calculated, but if markets continue to mean revert towards average valuations, buying into these expensive post-2000 markets hasn't exactly been the best game in town
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

Theoretical
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Re: The last 15 years

Post by Theoretical » Sun Jan 24, 2016 1:20 am

sawhorse wrote:This assumes that you could invest gradually that whole time. That wasn't the reality for many people. Think about how many people were out of work in 2009, many of whom took over a year to find work again. No 15% gain for them. Lots of people were also out of work at the beginning of the century.

It also doesn't consider those who were retired although hopefully they had more balanced portfolios.

Could someone do the same analysis with gold? I have a feeling it would blow the socks off stocks during this period. With a different time period, the reverse would be true.
Gold
$264,883 (6.38 IRR)

Total Bond
$219,983 (4.1 IRR)

The real winners were (so far)

Long Treasuries
$267,320 (6.49 IRR)

REIT
$368,541 (10.29 IRR)

Midcap Value (Somewhat affected/correlated by REITs
$364,003 (10.14 IRR)
Last edited by Theoretical on Sun Jan 24, 2016 1:26 am, edited 1 time in total.

sawhorse
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Re: The last 15 years

Post by sawhorse » Sun Jan 24, 2016 1:22 am

Theoretical wrote:
sawhorse wrote:This assumes that you could invest gradually that whole time. That wasn't the reality for many people. Think about how many people were out of work in 2009, many of whom took over a year to find work again. No 15% gain for them. Lots of people were also out of work at the beginning of the century.

It also doesn't consider those who were retired although hopefully they had more balanced portfolios.

Could someone do the same analysis with gold? I have a feeling it would blow the socks off stocks during this period. With a different time period, the reverse would be true.
Gold
$264,883 (6.38 IRR)

Total Bond
$219,983 (4.1 IRR)
Thanks. It looks like I was wrong. I thought gold knocked the socks off stocks because their returns were so good for the early years. Then they fell a lot.

I got $278,198.231 for January 1, 2001 through January 23, 2016. So pretty close to stocks.

It's another example of different asset classes over/under performing at different times. Best to have a diversified portfolio!
Last edited by sawhorse on Sun Jan 24, 2016 1:35 am, edited 1 time in total.

ogrehead
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Re: The last 15 years

Post by ogrehead » Sun Jan 24, 2016 1:29 am

Maynard F. Speer wrote:This is a very rough calculation (I'm sure someone can do it better – I've simply used total return and not calculated dividends separately) if the market corrects by about 50% (which some suggest it needs to):

The money you invested in Jan 2001 - has made 1% a year - $10,000 invested is now worth $10,789
The money you invested in Jan 2002 - has made 1.8% a year - $10,000 invested is now worth $12,892
The money you invested in Jan 2003 - has made 3.3% a year - $10,000 invested is now worth $15,329
The money you invested in Jan 2004 - has made 1% a year - $10,000 invested is now worth $11,260
The money you invested in Jan 2005 - has made 0.5% a year - $10,000 invested is now worth $10,524
The money you invested in Jan 2006 - has LOST 1.1% a year - $10,000 invested is now worth $8,954
The money you invested in Jan 2007 - has LOST 1.9% a year - $10,000 invested is now worth $8,447
The money you invested in Jan 2008 - has LOST 1.9% a year - $10,000 invested is now worth $8,590
The money you invested in Jan 2009 - has made 4% a year - $10,000 invested is now worth $13,300
The money you invested in Jan 2010 - has LOST 0.3% a year - $10,000 invested is now worth $9,869
The money you invested in Jan 2011 - has LOST 4.3% a year - $10,000 invested is now worth $8,052
The money you invested in Jan 2012 - has LOST 7% a year - $10,000 invested is now worth $7,590
The money you invested in Jan 2013 - has LOST 14% a year - $10,000 invested is now worth $6,475

Again, ballpark at best, and very crudely calculated, but if markets continue to mean revert towards average valuations, buying into these expensive post-2000 markets hasn't exactly been the best game in town
It's easier to understand why you constantly trash stock returns when your numbers come from a completely different planet from everyone else. I wouldn't invest in stocks if I were wearing your glasses either.

Edit: Hypothetically cutting returns in half is a cute game. Because we can expect the stock market to just implode and cut in half without issuing further dividends, earnings improving, etc. before "average" valuations return to what they were, what, 50-60 years ago?
Last edited by ogrehead on Sun Jan 24, 2016 1:50 am, edited 1 time in total.

Theoretical
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Re: The last 15 years

Post by Theoretical » Sun Jan 24, 2016 1:34 am

Maynard F. Speer wrote:This is a very rough calculation (I'm sure someone can do it better – I've simply used total return and not calculated dividends separately) if the market corrects by about 50% (which some suggest it needs to):

The money you invested in Jan 2001 - has made 1% a year - $10,000 invested is now worth $10,789
The money you invested in Jan 2002 - has made 1.8% a year - $10,000 invested is now worth $12,892
The money you invested in Jan 2003 - has made 3.3% a year - $10,000 invested is now worth $15,329
The money you invested in Jan 2004 - has made 1% a year - $10,000 invested is now worth $11,260
The money you invested in Jan 2005 - has made 0.5% a year - $10,000 invested is now worth $10,524
The money you invested in Jan 2006 - has LOST 1.1% a year - $10,000 invested is now worth $8,954
The money you invested in Jan 2007 - has LOST 1.9% a year - $10,000 invested is now worth $8,447
The money you invested in Jan 2008 - has LOST 1.9% a year - $10,000 invested is now worth $8,590
The money you invested in Jan 2009 - has made 4% a year - $10,000 invested is now worth $13,300
The money you invested in Jan 2010 - has LOST 0.3% a year - $10,000 invested is now worth $9,869
The money you invested in Jan 2011 - has LOST 4.3% a year - $10,000 invested is now worth $8,052
The money you invested in Jan 2012 - has LOST 7% a year - $10,000 invested is now worth $7,590
The money you invested in Jan 2013 - has LOST 14% a year - $10,000 invested is now worth $6,475

Again, ballpark at best, and very crudely calculated, but if markets continue to mean revert towards average valuations, buying into these expensive post-2000 markets hasn't exactly been the best game in town
There's no question that a long and drawn out correction on that scale would wreck these returns. In fact, it'd quite possibly bring "back" the equity premium with a vengeance, because a lot of people would give up on the markets altogether at that point, potentially similarly to how many of the Depression era would never ever trust stocks.

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JoMoney
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Re: The last 15 years

Post by JoMoney » Sun Jan 24, 2016 2:16 am

Just thought I'd point out that you can get a lot of series like this for various stop and end points using data in the "DFA "Matrix Book"
The most recent one seems to come out in Spring each year
https://www.ifa.com/book-library/?q=DFA%20Matrix%20Book#
It has data for the U.S. CRSP Total Stock, S&P500, MSCI EAFE, EM, Bond Indices, etc...
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"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Maynard F. Speer
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Re: The last 15 years

Post by Maynard F. Speer » Sun Jan 24, 2016 4:05 am

ogrehead wrote:
Maynard F. Speer wrote:This is a very rough calculation (I'm sure someone can do it better – I've simply used total return and not calculated dividends separately) if the market corrects by about 50% (which some suggest it needs to):

The money you invested in Jan 2001 - has made 1% a year - $10,000 invested is now worth $10,789
The money you invested in Jan 2002 - has made 1.8% a year - $10,000 invested is now worth $12,892
The money you invested in Jan 2003 - has made 3.3% a year - $10,000 invested is now worth $15,329
The money you invested in Jan 2004 - has made 1% a year - $10,000 invested is now worth $11,260
The money you invested in Jan 2005 - has made 0.5% a year - $10,000 invested is now worth $10,524
The money you invested in Jan 2006 - has LOST 1.1% a year - $10,000 invested is now worth $8,954
The money you invested in Jan 2007 - has LOST 1.9% a year - $10,000 invested is now worth $8,447
The money you invested in Jan 2008 - has LOST 1.9% a year - $10,000 invested is now worth $8,590
The money you invested in Jan 2009 - has made 4% a year - $10,000 invested is now worth $13,300
The money you invested in Jan 2010 - has LOST 0.3% a year - $10,000 invested is now worth $9,869
The money you invested in Jan 2011 - has LOST 4.3% a year - $10,000 invested is now worth $8,052
The money you invested in Jan 2012 - has LOST 7% a year - $10,000 invested is now worth $7,590
The money you invested in Jan 2013 - has LOST 14% a year - $10,000 invested is now worth $6,475

Again, ballpark at best, and very crudely calculated, but if markets continue to mean revert towards average valuations, buying into these expensive post-2000 markets hasn't exactly been the best game in town
It's easier to understand why you constantly trash stock returns when your numbers come from a completely different planet from everyone else. I wouldn't invest in stocks if I were wearing your glasses either.

Edit: Hypothetically cutting returns in half is a cute game. Because we can expect the stock market to just implode and cut in half without issuing further dividends, earnings improving, etc. before "average" valuations return to what they were, what, 50-60 years ago?
So why would I want to see what these figures like if I chopped the market in half?

Well, it helps to understand what's happened to markets so far this century .. What have the effects of years and years of stimulus on the economy been, and what have the effects on financial markets been?

Here's what valuations have done - and this is simply a measure of how much people are paying to own stocks

Image

Why do people care how much we pay to own stocks? .. Because over the long-term, whatever pressures drive stock prices into high valuations, or cause them to crash down, tend to normalise - and we drift back towards this long-term 'fair value' range

In a sense it's like measuring the performance of an Olympic sprinter while he/she's using performance enhancing drugs ... If you keep using the PEDs, you risk being caught, and facing a long and hefty ban; if you stop using them, you can expect performance to suffer ... If we keep using QE to prop up markets, we could be in big trouble when the next recession comes along - if we stop: expect prices to drift back towards more normal ranges
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Re: The last 15 years

Post by Maynard F. Speer » Sun Jan 24, 2016 4:12 am

Theoretical wrote:
Maynard F. Speer wrote:This is a very rough calculation (I'm sure someone can do it better – I've simply used total return and not calculated dividends separately) if the market corrects by about 50% (which some suggest it needs to):

The money you invested in Jan 2001 - has made 1% a year - $10,000 invested is now worth $10,789
The money you invested in Jan 2002 - has made 1.8% a year - $10,000 invested is now worth $12,892
The money you invested in Jan 2003 - has made 3.3% a year - $10,000 invested is now worth $15,329
The money you invested in Jan 2004 - has made 1% a year - $10,000 invested is now worth $11,260
The money you invested in Jan 2005 - has made 0.5% a year - $10,000 invested is now worth $10,524
The money you invested in Jan 2006 - has LOST 1.1% a year - $10,000 invested is now worth $8,954
The money you invested in Jan 2007 - has LOST 1.9% a year - $10,000 invested is now worth $8,447
The money you invested in Jan 2008 - has LOST 1.9% a year - $10,000 invested is now worth $8,590
The money you invested in Jan 2009 - has made 4% a year - $10,000 invested is now worth $13,300
The money you invested in Jan 2010 - has LOST 0.3% a year - $10,000 invested is now worth $9,869
The money you invested in Jan 2011 - has LOST 4.3% a year - $10,000 invested is now worth $8,052
The money you invested in Jan 2012 - has LOST 7% a year - $10,000 invested is now worth $7,590
The money you invested in Jan 2013 - has LOST 14% a year - $10,000 invested is now worth $6,475

Again, ballpark at best, and very crudely calculated, but if markets continue to mean revert towards average valuations, buying into these expensive post-2000 markets hasn't exactly been the best game in town
There's no question that a long and drawn out correction on that scale would wreck these returns. In fact, it'd quite possibly bring "back" the equity premium with a vengeance, because a lot of people would give up on the markets altogether at that point, potentially similarly to how many of the Depression era would never ever trust stocks.
Unless you're a few years from retirement, I think a hefty (>50%) and swift draw-down would be the best thing that could happen to financial markets at the moment

Funnily enough, it seems we're still not too keen to own stocks .. Investors have continued to pull money out of the stock market since 2008 .. Much of what's happened in markets has been down to corporate buybacks
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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Re: The last 15 years

Post by longinvest » Sun Jan 24, 2016 8:07 am

sawhorse wrote:This assumes that you could invest gradually that whole time. That wasn't the reality for many people. Think about how many people were out of work in 2009, many of whom took over a year to find work again. No 15% gain for them. Lots of people were also out of work at the beginning of the century.

It also doesn't consider those who were retired although hopefully they had more balanced portfolios.

Could someone do the same analysis with gold? I have a feeling it would blow the socks off stocks during this period. With a different time period, the reverse would be true.
Sawhorse,

Thank you for the very astute observation. Many small investors have more money to invest when the economy and markets are doing well, and less when it is doing badly. This all goes back to William Sharpe's definition of risk as doing badly in bad times.

The best protection one can get against "doing badly in bad times" risk is to diversify his portfolio by including bonds (at least 25% of portfolio, at most 75% of portfolio), and to diversify the stock allocation internationally (at least 25% of stocks, at most 75% of stocks).

Why 25% to 75%? There's no deep theory behind these ratios. They are simply the ranges within which the allocation will have a noticeable impact on returns.

The returns of a diversified portfolio will always be lower than returns of the star portfolio of the year, decade, or century. But, the portfolio will consistently deliver average returns year after year after year, protecting the investor from catastrophic losses just at the worst of times.

For retirees, it is important to remain flexible; in other words, to lower their withdrawals when markets are doing badly. Using a diversified portfolio, they won't have to lower their withdrawals as much as with a portfolio concentrated into the losing asset.
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Re: The last 15 years

Post by matjen » Sun Jan 24, 2016 8:30 am

JoMoney wrote:Just thought I'd point out that you can get a lot of series like this for various stop and end points using data in the "DFA "Matrix Book"
The most recent one seems to come out in Spring each year
https://www.ifa.com/book-library/?q=DFA%20Matrix%20Book#
It has data for the U.S. CRSP Total Stock, S&P500, MSCI EAFE, EM, Bond Indices, etc...
Image
Thank you for this reminder and refresher JoMoney. Every year someone (likely Robert T.) posts a link to the DFA Matrix Book and I download it and look at it for 5 minutes and then forget about it. Same with the Dimson and Marsh International stuff. Great resources if one takes a bit of time with them.
Last edited by matjen on Sun Jan 24, 2016 9:34 am, edited 1 time in total.
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Re: The last 15 years

Post by Jpg » Sun Jan 24, 2016 9:17 am

I agree always have at least 25% bonds, but never more than 75%- that is what Ben Graham ( Warren Buffett's mentor) believed for investors of any age. I believe that when in doubt, most people can't go wrong with 50/50. You participate when markets go up, and you do not get crushed when markets tank. An added bonus is that you can sleep well every night for the rest of your life. Good luck to all- stay safe, and reduce risk in an appropriate way that works for you.

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Re: The last 15 years

Post by White Coat Investor » Sun Jan 24, 2016 9:24 am

Best post of the last month. Good job.
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Re: The last 15 years

Post by Jpg » Sun Jan 24, 2016 9:28 am

Homer J : Thanks for the analysis. Could you please do a 50/50 analysis with Vanguard total stock/ total bond ? Thank you !

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Re: The last 15 years

Post by obgyn65 » Sun Jan 24, 2016 9:49 am

In the last 15 years we have also witnessed massive interventions from governments around the world to help financial markets and the national economies. I don't dispute the OP's numbers, but would stress that the underlying assumptions over time have changed dramatically.
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Re: The last 15 years

Post by ogrehead » Sun Jan 24, 2016 11:19 am

Maynard F. Speer wrote:Well, it helps to understand what's happened to markets so far this century .. What have the effects of years and years of stimulus on the economy been, and what have the effects on financial markets been?
Has it been decades and decades of stimulus? I think you ideology is showing.
Here's what valuations have done - and this is simply a measure of how much people are paying to own stocks
The bears have been waving this chart around since Ronald Reagan was president while the rest of us have been making money. I'm not shocked that you posted this here again, as if it proves anything. CAPE is lagging. S&P PE is now down to 20. The ratio has two components, price and earnings. The ratio can move down in the future not only due to price dropping, but due to earnings rising. Why don't you ever post this chart?
Image
There have been 2 times in the past century where the market declined by 50%, neither of which persisted. I think you can spot them in the chart above as when earnings very briefly fell on the floor.

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Re: The last 15 years

Post by Rx 4 investing » Sun Jan 24, 2016 12:43 pm

This type of look- back is more useful for the 20 and 30 something year olds in the forum who have long time horizons. This group of buy-and- hold investors should “stay the course” , and steadily DCA into their 401-ks or other retirement savings vehicles.

But what about the sub-group who is 5-10 years out from retirement ? This is where it can be mis-leading. I submit the “pre-retiree” sub-group needs much more certainty in order to mitigate “sequence of return” risk. For the 55 or older group, it may be prudent to do an early “bucketing” exercise for retirement funds, taking into account the current stock market valuation level. .

A basic financial planning concept: If buy-and-hold investor with no particular view about market conditions or future returns, and who wants to have a fairly predictable amount of money at some future date, should hold a portfolio with a duration that is roughly equal to the investment horizon.

All of us have been taught stocks are a “long-term” investment. But how long is long? The price-to-dividend ratio (P/D) is a good approximation for the “duration” of the S & P 500. Currently, that is : $1,907 / $43.39 = 44 years. (as of 1-22-16).

Since the overall duration of the Vanguard Total Bond Market Index is about is about 6 years, and cash has a duration of zero (0) , the canonical 60% stocks /30% bonds/ 10% cash allocation implicitly assumes an investment horizon of roughly :

[(0.6 x 44) + (0.3 x 6) + (0.1 x 0) ] = 28.2 years.


At present, for a buy-and-hold investor who wants a degree of certainty in their financial planning, that portfolio allocation might be suitable for someone 38 years or younger (retirement target age 66.5 minus 28.2 years portfolio = 38 years old). Worth noting…

--Continuous D-C-A contributions help to shorten the duration of stocks, and alleviates the current high valuation concern for those with a long time horizon.

--And as will be evident from the examples below, doing a calculation of stock market’s “duration” will allow an older investor the opportunity to periodically increase stock allocation when valuation falls.

For a 55- year old who plans (hopes) to work to age 66.5, they now have only 11.5 years to retirement. Here’s some examples of how to incorporate the stock market's current duration into the “bucketing” approach...

Retirement bucket #1: 1-2 years of living expenses:
The funds targeted for this bucket have a time horizon of 11.5 years ..

11.5 time horizon / 44 years duration for stocks = 26% stocks

--The funds in this bucket are your "safe money". It covers near-term living expenses that you need outside of pension and social security. This is mostly cash and short-term C.D.s. When carving out the funds needed in this bucket, at the present market valuation level, just 26% stocks with the balance in cash and bonds (74% ), would provide the best assurance for a predictable amount here.

Retirement bucket #2: 5-7 years time horizon.
The funds in this bucket are now approx.. 18.5 years away for the 55-year old.

18.5 years / 44 years duration for stocks = 42% stocks

-- Funds in this bucket include mostly high-quality short-term bonds, high-quality intermediate bonds (58%). Or, use a 'moderate allocation' balanced fund like Vanguard’s Life Strategy Conservative Growth Fund (40%-S / 60%-B).

Retirement bucket #3: 8 years or more time horizon
. The balance not needed in buckets #1 & 2 goes in here. The funds in this bucket may be needed by a 55- year old as soon as 19.5 years, but perhaps as far out as 29.5 years. (29.5 years would place a 55- year old in the 85 year old range).

On the low end of the bucket #3 range: 19.5 years / 44 years duration for stocks = 44% stocks in this bucket .

On the far end of the range: 29.5 years / 44 years duration for stocks = 67% stocks.

Some time ago, William Bernstein wrote the following about the implications of the stock market’s “ duration” to investors of various age groups :

“ For the truly long-term investor, the results of a prolonged bear or bull market may very well prove of little consequence, or even produce surprisingly paradoxical results. But in reality, equanimity to market declines depends on time horizon. If you’re retired and living off savings, you will neither have enough time to get over the duration hump nor be able to make the contributions to shorten it. If you’re (younger) and still adding to a decent-sized nest egg, then you will likely have plenty of time. And if you’re a twenty-something just beginning to save, then get down on your knees and pray for (a) crash…”

http://www.efficientfrontier.com/ef/999/duration.htm

FWIW…. I’m 58 years old, and have a target retirement age of 66.5 when I plan to start taking SS. When I’ve done my own (three) “bucketing” exercise, I’ve backed into an overall 30% stock allocation at the present time. This allocation is respectful of the current valuation level of the
S & P 500. Should valuation come down , I plan to gradually increase my stock allocation in each of the buckets.

Good luck in the year ahead to investors in all age groups !
“Everyone is a disciplined, long-term investor until the market goes down.” – Steve Forbes

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Re: The last 15 years

Post by lomarica01 » Sun Jan 24, 2016 1:04 pm

Great post, I actually just did this for my 401k account going back to my first year of investing 28 years ago just about 2 months ago. When you do this it is very apparent the power of compounding in the early years. I wish I had this list 25 years ago, but that might have included the time period in the 60's when the market went sideways for years. Not sure the exact dates or how that would have affected any investment decisions.

I will show the list I made of yearly returns when my son starts investing in a few years.

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Re: The last 15 years

Post by Rodc » Sun Jan 24, 2016 1:06 pm

All of us have been taught stocks are a “long-term” investment. But how long is long? The price-to-dividend ratio (P/D) is a good approximation for the “duration” of the S & P 500. Currently, that is : $1,907 / $43.39 = 44 years. (as of 1-22-16).

Since the overall duration of the Vanguard Total Bond Market Index is about is about 6 years, and cash has a duration of zero (0) , the canonical 60% stocks /30% bonds/ 10% cash allocation implicitly assumes an investment horizon of roughly :

[(0.6 x 44) + (0.3 x 6) + (0.1 x 0) ] = 28.2 years.

At present, for a buy-and-hold investor who wants a degree of certainty in their financial planning, that portfolio allocation might be suitable for someone 38 years or younger (retirement target age 66.5 minus 28.2 years portfolio = 38 years old). Worth noting…
Can you comment on why P/D is a good approximation of duration?

Let's just go with that for now.

I would note that for most of us we invest little by little, so the average time in the market for any given investment dollar averaged from say age 25 to 65 will be less than 20 years at retirement. Dollar 1 will be invested for 40 years, but the last dollar might be invested about 1 month, for an average of about 20 years. But due to inflation, and hopefully career growth, we put in more dollars over times so in fact we have more at that 1 month horizon than at the 40 year horizon. For many this is a significant shift so perhaps something more like 15 years on average. Which would imply on average a very low allocation to stocks.

This would imply, given the above, that all investors should be shifting from nearly all stocks at age 25 (40 years vs 44 so a pretty good match) to about 40% stocks, 30% bonds and 30% cash at age 45, and to about 0% stocks, 85% bonds and 15% cash at age 60.

That would seem to be rather conservative.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: The last 15 years

Post by Rx 4 investing » Sun Jan 24, 2016 1:26 pm

Rodc asked: "Can you comment on why P/D is a good approximation of duration ?"
John Hussman offered this more detailed explanation a few years back in his "geek's note" :

" Consider the dividend discount model P = D/(k-g). Differentiate with respect to k to get dP/dk = -D/(k-g)^2. Divide through by price, which is D/(k-g), and then substitute P/D for 1/(k-g). Notice that this result is independent of g. For stocks that don't pay a predictable stream of dividends, you have to calculate duration explicitly from the stream of expected free cash flows, but for blue-chip indices, the price/dividend ratio is an excellent proxy for modified duration."

I think the notion of the stock market's approximate "duration" is best explained in the older piece by Bernstein I posted above. Using "duration" and time horizon might also be useful to some investors with a newly found windfall when deciding how to allocate a "lump sum" into the market.
“Everyone is a disciplined, long-term investor until the market goes down.” – Steve Forbes

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Re: The last 15 years

Post by longinvest » Sun Jan 24, 2016 2:50 pm

Rx 4 investing wrote: I think the notion of the stock market's approximate "duration" is best explained in the older piece by Bernstein I posted above. Using "duration" and time horizon might also be useful to some investors with a newly found windfall when deciding how to allocate a "lump sum" into the market.
Duration is the weighted average time it takes to receive one's promised money.

The day I will see precise payment dates and amounts written on my stock certificates, I might start to believe some of that, but not before. :wink:
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Re: The last 15 years

Post by DG99999 » Sun Jan 24, 2016 6:00 pm

HomerJ wrote:
DG99999 wrote:Note that I estimated the annualized percentage return using whole years (ignoring the extra 3 weeks).
The differences are probably because I went from Jan 23, 20xx to Jan 23, 2016, and it sounds like you went from Jan 1st to Jan 1st.
Got it - yes I ran the numbers starting January 1 for each year.
I am not a financial professional. My posts are only my opinion on the topic. You need to do your own due diligence and consult with a professional when addressing your financial questions.

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Re: The last 15 years

Post by Rx 4 investing » Sun Jan 24, 2016 6:17 pm

longinvest commented: "The day I will see precise payment dates and amounts written on my stock certificates, I might start to believe some of that, but not before."
I agree in principle. The only guaranteed investments are US treasury bonds.

The current macro-economic backdrop has raised my level of risk aversion. Stocks need to fall a lot farther for me to get interested in increasing my current low allocation.

When times get tough, about all stock investors should hope for is dividend income , but even that is suspect at best. There is always a risk that dividends can be suspended or cut. As noted in the Bernstein article:
"...during the Great Depression the real dividend stream of the Dow decreased by only 25%."
Only 25% ? I don't know a lot of retirees who like seeing a source of their income cut 25%. During the '08-'09 market downturn, didn't a few blue-chip US companies temporarily suspended their dividends?
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Re: The last 15 years

Post by Maynard F. Speer » Sun Jan 24, 2016 9:29 pm

ogrehead wrote:
Maynard F. Speer wrote:Well, it helps to understand what's happened to markets so far this century .. What have the effects of years and years of stimulus on the economy been, and what have the effects on financial markets been?
Has it been decades and decades of stimulus? I think you ideology is showing.
Here's what valuations have done - and this is simply a measure of how much people are paying to own stocks
The bears have been waving this chart around since Ronald Reagan was president while the rest of us have been making money
I'm not sure where you got decades and decades, but rates have been falling since 1980 .. Having hit bottom, the question is whether we go into negative or whether this particular tailwind is exhausted

Bears have been making better money .. Since 1995 - long/short equity is beating long-only; long-term bonds are beating equities; I think total bonds are ahead of equities over 16 years; these 5-7% nominal returns have poorly compensated risk and volatility (private equity has returned closer to 20%)

You can convince yourself buying and overweighting expensive equities has been a great move - and say silly things about CAPE failing - but valuations have tracked 10-year returns over this period, and equities have been about the poorest risk-adjusted returns going
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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Re: The last 15 years

Post by lack_ey » Sun Jan 24, 2016 10:07 pm

Maynard F. Speer wrote:Bears have been making better money .. Since 1995 - long/short equity is beating long-only; long-term bonds are beating equities; I think total bonds are ahead of equities over 16 years; these 5-7% nominal returns have poorly compensated risk and volatility (private equity has returned closer to 20%)
You mean in the UK or US or what?

This is a quick look at US mutual fund data:
Image

US stock did well over the time, but even if you look at world stock that's well ahead of the long/short category average. And that's the way it should be, unless they have huge CAPM alpha to overcome the lower beta exposure.

Maybe the long/short equity hedge funds did better. Actually, I'm pretty sure they did, at least in the earlier parts. Recently, checking the HRFX it doesn't look so good.

Or maybe you meant risk-adjusted return?

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Re: The last 15 years

Post by zaboomafoozarg » Sun Jan 24, 2016 10:12 pm

I'm just trying to build up a passive side income of $20/$30k per year, plus a pension and some alternative/real assets, just in case equity/bond investments don't work out.

I would hope that investing 50% of my income from the age of 27 would be enough to retire by 60 at the latest, but returns might be really bad this century.

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Re: The last 15 years

Post by HomerJ » Sun Jan 24, 2016 10:45 pm

Rx 4 investing wrote:As noted in the Bernstein article:
"...during the Great Depression the real dividend stream of the Dow decreased by only 25%."
Only 25% ? I don't know a lot of retirees who like seeing a source of their income cut 25%.
Just FYI.. there was a ton of deflation during the Great Depression, so those retirees didn't really see their spending power drop 25%. But yes, you're right. Dividends are not guaranteed.
During the '08-'09 market downturn, didn't a few blue-chip US companies temporarily suspended their dividends?
Yes, GE is a prime example.
Last edited by HomerJ on Sun Jan 24, 2016 10:53 pm, edited 1 time in total.

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Re: The last 15 years

Post by HomerJ » Sun Jan 24, 2016 10:51 pm

Maynard F. Speer wrote:say silly things about CAPE failing - but valuations have tracked 10-year returns over this period
Valuations have NOT tracked 10-year returns over the past 23 years (CAPE has been above 20 since 1992).

We've gotten far better returns than the CAPE 10-year predicted returns for when CAPE is above 20.

Now, maybe you're right, and we're due for a monster correction to get us back to the historical "average" (of an arbitrary made-up statistic).

Or maybe the CAPE model is incorrect. When you have a model and 100 data points, and 23 of the last data points don't follow that model, maybe, just maybe, the model is wrong.

But, again you could be right... I will admit I don't know. Will you admit you don't really know with 100% certainty either?

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Re: The last 15 years

Post by Maynard F. Speer » Sun Jan 24, 2016 11:49 pm

lack_ey wrote:
Maynard F. Speer wrote:Bears have been making better money .. Since 1995 - long/short equity is beating long-only; long-term bonds are beating equities; I think total bonds are ahead of equities over 16 years; these 5-7% nominal returns have poorly compensated risk and volatility (private equity has returned closer to 20%)
You mean in the UK or US or what?

This is a quick look at US mutual fund data:
Image

US stock did well over the time, but even if you look at world stock that's well ahead of the long/short category average. And that's the way it should be, unless they have huge CAPM alpha to overcome the lower beta exposure.

Maybe the long/short equity hedge funds did better. Actually, I'm pretty sure they did, at least in the earlier parts. Recently, checking the HRFX it doesn't look so good.

Or maybe you meant risk-adjusted return?
I should say long/short hedge funds .. There are lots of funds that go long and short that are absolute garbage

Image

http://www.eurekahedge.com/Indices/Inde ... Fund_Index
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Re: The last 15 years

Post by Maynard F. Speer » Sun Jan 24, 2016 11:58 pm

HomerJ wrote:
Maynard F. Speer wrote:say silly things about CAPE failing - but valuations have tracked 10-year returns over this period
Valuations have NOT tracked 10-year returns over the past 23 years (CAPE has been above 20 since 1992).

We've gotten far better returns than the CAPE 10-year predicted returns for when CAPE is above 20.

Now, maybe you're right, and we're due for a monster correction to get us back to the historical "average" (of an arbitrary made-up statistic).

Or maybe the CAPE model is incorrect. When you have a model and 100 data points, and 23 of the last data points don't follow that model, maybe, just maybe, the model is wrong.

But, again you could be right... I will admit I don't know. Will you admit you don't really know with 100% certainty either?
This is a selection of metrics (including CAPE) measured against actual subsequent 10-yr returns (looks like we're up to about 2013)

Image

Since the mid-90s we've been predicting 10-yr returns peaking at around 5-7%, and that's generally what we've had ... Markets have been buoyed by unusual stimulatory measures, and corporate buybacks, but over 10 years these trends tend to mean revert like any other - we may be a few percentage points above for 2005-2015, but that's well within normal error
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Re: The last 15 years

Post by Snowjob » Mon Jan 25, 2016 12:09 am

Maynard F. Speer wrote:
You can convince yourself buying and overweighting expensive equities has been a great move - and say silly things about CAPE failing - but valuations have tracked 10-year returns over this period, and equities have been about the poorest risk-adjusted returns going
Other than the absurd times of the 2000 dotcom bubble, I am not sure that the excessive PE (20ish) would have kept me out of stocks completely. Maybe I would have been less than enthused with buying some, but I am convinced that the fear of missing out on future returns would have kept me buying during some of these periods. I do believe that it makes sense to invest more capital when valuations are cheaper, and I admit I was completely wrong on bonds. I thought rates had bottomed out several years ago.

I'm not saying investing in equities was a great move, it was however likely the only move for the vast majority of us who want a better life in the future. We need to take a shot. I suppose you could argue the wade pfau approach with a 'safe savings rate', but then there are taking on career risk and you have significantly capped your upside and / or your current standard of living.

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Re: The last 15 years

Post by Maynard F. Speer » Mon Jan 25, 2016 12:30 am

Snowjob wrote:
Maynard F. Speer wrote:
You can convince yourself buying and overweighting expensive equities has been a great move - and say silly things about CAPE failing - but valuations have tracked 10-year returns over this period, and equities have been about the poorest risk-adjusted returns going
Other than the absurd times of the 2000 dotcom bubble, I am not sure that the excessive PE (20ish) would have kept me out of stocks completely. Maybe I would have been less than enthused with buying some, but I am convinced that the fear of missing out on future returns would have kept me buying during some of these periods. I do believe that it makes sense to invest more capital when valuations are cheaper, and I admit I was completely wrong on bonds. I thought rates had bottomed out several years ago.

I'm not saying investing in equities was a great move, it was however likely the only move for the vast majority of us who want a better life in the future. We need to take a shot. I suppose you could argue the wade pfau approach with a 'safe savings rate', but then there are taking on career risk and you have significantly capped your upside and / or your current standard of living.
Absolutely .. So far this century, the market's allocation to equities has dropped from about 50-55% to about 30-35% (which demonstrates how much share prices have been pushed up by corporate buybacks)

Which feels about right to me - and there have been some great opportunities over that time away from the broader indices .. So I don't want to come across as overly negative - but I think being overly optimistic is at least equally dangerous for long-term planning

The idea valuations have been some fool's errand is not supported by the data at all .. In fact, in such engineered markets, it's surprising how difficult it's been for returns to break free from long-term mean reverting principles
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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Re: The last 15 years

Post by HomerJ » Mon Jan 25, 2016 1:17 am

Maynard F. Speer wrote:Since the mid-90s we've been predicting 10-yr returns peaking at around 5-7%, and that's generally what we've had ...
Two things....

One, your statement above is incorrect. The data does not support your model.

Here are the ACTUAL 10-year returns for Vanguard Total Stock Market Index fund since 1992 (when CAPE went above 20)

April 1992 - April 2002 11%
April 1993 - April 2003 9%
April 1994 - April 2004 11%
April 1995 - April 2005 10%
April 1996 - April 2006 9%
April 1997 - April 2007 9%
April 1998 - April 2008 4%
April 1999 - April 2009 -2%
April 2000 - April 2010 1%
April 2001 - April 2011 4%
April 2002 - April 2012 6%
April 2003 - April 2013 9%
April 2004 - April 2014 8%
April 2005 - April 2015 9%

CAPE may indeed predict returns of 5%-7% when CAPE is above 20, but most of the 10-year returns since 1992 have been in the 9%-11% range. Your graph is way too busy. Above are the real actual world results of investing in U.S. stock market with CAPE at a "very high" level.

Second, why all the doom about valuations? You say CAPE at these high levels predicts 5%-7%? Sweet... I'd be perfectly happy with 10-year returns of 5%-7%... So even if the CAPE model turns out to be correct (which I highly doubt), I don't see any reasons to cut back on my stock market allocation.

Look, I absolutely believe that markets go through cycles. High valuations/markets are usually followed by low valuations/markets. But you never know when, and I don't believe that a silly number like 15 PE10 represents the "fair-value" of the U.S. stock market, just because it's the "average".

Just holding on through ups and downs still gets you a decent return. That 9%-10% historical average INCLUDES holding through bear markets. In the past, you didn't have to avoid the bad times. You STILL got 9%-10% long-term returns. That's good enough for me. I don't need to try jumping in and out to get better returns (especially since there's a bigger chance I'll get worse returns). Heck, I'd be happy with 5%-7% going forward.

Look, CAPE has been above 20 since 1992. That's VERY high by historical standards. Anyone following CAPE has had lower stock allocations since 1992, waiting for the "reversion to mean" to happen. How many years have to go by before you start wondering if there is a flaw in the model?

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Re: The last 15 years

Post by Theoretical » Mon Jan 25, 2016 1:30 am

HomerJ wrote:
Maynard F. Speer wrote:say silly things about CAPE failing - but valuations have tracked 10-year returns over this period
Valuations have NOT tracked 10-year returns over the past 23 years (CAPE has been above 20 since 1992).

We've gotten far better returns than the CAPE 10-year predicted returns for when CAPE is above 20.

Now, maybe you're right, and we're due for a monster correction to get us back to the historical "average" (of an arbitrary made-up statistic).

Or maybe the CAPE model is incorrect. When you have a model and 100 data points, and 23 of the last data points don't follow that model, maybe, just maybe, the model is wrong.

But, again you could be right... I will admit I don't know. Will you admit you don't really know with 100% certainty either?
Being married to an accountant, I think there's some credence in saying that the changes in accounting standards have made what is now a PE of 20 what would have been a PE of 15. It becomes especially true after Sarbanes-Oxley.

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Re: The last 15 years

Post by Maynard F. Speer » Mon Jan 25, 2016 1:36 am

HomerJ wrote:
Maynard F. Speer wrote:Since the mid-90s we've been predicting 10-yr returns peaking at around 5-7%, and that's generally what we've had ...
Two things....

One, your statement above is incorrect. The data does not support your model.

Here are the ACTUAL 10-year returns for Vanguard Total Stock Market Index fund since 1992 (when CAPE went above 20)

April 1992 - April 2002 11%
April 1993 - April 2003 9%
April 1994 - April 2004 11%
April 1995 - April 2005 10%
April 1996 - April 2006 9%
April 1997 - April 2007 9%
April 1998 - April 2008 4%
April 1999 - April 2009 -2%
April 2000 - April 2010 1%
April 2001 - April 2011 4%
April 2002 - April 2012 6%
April 2003 - April 2013 9%
April 2004 - April 2014 8%
April 2005 - April 2015 9%
These are the same returns we have here - with a little quantize error due to you measuring April to April .. But remember these are nominal returns, so we can knock between 1 and 4% off adjusting for inflation

Image

Second, why all the doom about valuations? You say CAPE at these high levels predicts 5%-7%? Sweet... I'd be perfectly happy with 10-year returns of 5%-7%... So even if the CAPE model turns out to be correct (which I highly doubt), I don't see any reasons to cut back on my stock market allocation
...
Look, CAPE has been above 20 since 1992. That's VERY high by historical standards. Anyone following CAPE has had lower stock allocations since 1992, waiting for the "reversion to mean" to happen. How many years have to go by before you start wondering if there is a flaw in the model?
The CAPE model - as with every other model - has continued to estimate 10-yr returns to within a few percentage points .. (and it gets more accurate adjusting for inflation)

20 is above average, but 40 is very high .. I think Bogle estimates nominal returns around 4-5% .. I don't mean to sound like Mr doom and gloom, but this insistence that CAPE ratios and valuations have stopped working is not supported by the data
Last edited by Maynard F. Speer on Mon Jan 25, 2016 1:37 am, edited 1 time in total.
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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Re: The last 15 years

Post by HomerJ » Mon Jan 25, 2016 1:36 am

Theoretical wrote:Being married to an accountant, I think there's some credence in saying that the changes in accounting standards have made what is now a PE of 20 what would have been a PE of 15. It becomes especially true after Sarbanes-Oxley.
Yes, this article explains it.

https://philosophicaleconomics.wordpres ... 3/shiller/

Yet many people still stick to "15 is the historical average"!

From the article:
Since 1990, however, the metric has only spent 2% of the time below its historical average–98% of the time above.

The metric’s failure to mean-revert over the last 23 years hasn’t been for a lack of reasons. The period covered three recessions, two stock market crashes, and one bonafide financial panic–the likes of which hadn’t been seen since the Great Depression.
If we’re being honest, there are only two possibilities. Either the “normal” levels of the metric have shifted significantly upwards over the last few decades, or the metric is broken.
Although I think Maynard thinks the third possibility is that markets have been artificially held up by government stimulus for the past 26 years. He may even be right.

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Re: The last 15 years

Post by HomerJ » Mon Jan 25, 2016 1:46 am

Maynard F. Speer wrote:But remember these are nominal returns, so we can knock between 1 and 4% off adjusting for inflation
Wait, CAPE is predicting 5%-7% REAL? And there are DOOM posts about this?

7% REAL is about the normal historical average for the U.S. stock market... So you're basically saying valuations don't matter.

Oh wait, your graph states that it is showing nominal returns, so inflation is NOT the reason the numbers are so far off... Your 10-year CAPE predictions have been wrong for many of the recent 10-year periods since CAPE went above 20. In fact, the stock market has returned near it's historical average for most of those 10-year periods, even though valuations have been quite high.
20 is above average, but 40 is very high ..
No, 20 is high, 25 is very high... Unless you're letting the last 23 years skew your thinking...

Here's the historical data BEFORE 1992.

Image

20 was definitely considered a danger level. Every time CAPE hit above 20, a crash occurred soon after... 25 was unthinkable... Great Depression follows 25!
I don't mean to sound like Mr doom and gloom, but this insistence CAPE ratios and valuations have stopped working is not supported by the data
Show a graph with just actual returns, and the CAPE predictions instead of 8 lines all smashed together. I just showed you data that disproved your assertion that we've gotten around 5%-7% the past 23 years, just like CAPE predicted.

How many years does the model have to be wrong before you wonder if something might be wrong with model?

(FYI - The accounting changes that lets 20 be the "normal" number for CAPE could be your saving grace - Adopt that, and the data starts fitting the model again!)

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Re: The last 15 years

Post by Rx 4 investing » Mon Jan 25, 2016 3:11 am

Here’s Shiller’s advice about how to incorporate CAPE 10 into a stock allocation :

“…the lesson there is that if you combine that with a good market diversification algorithm, the important thing is that you never get completely in or completely out of stocks. The lower CAPE is, as it gradually gets lower, you gradually move more and more in…in other words, don't dump stocks and hide in cash because the CAPE is at 24. Rather, buy less, be cautious, and expect lower returns for years to come.”

From the Business Insider article: “You're Not Listening To Robert Shiller If His CAPE Ratio Has You Scared Of Stocks”

http://www.businessinsider.com/robert-s ... pe-2013-11
Theoretical wrote: “Being married to an accountant, I think there's some credence in saying that the changes in accounting standards have made what is now a PE of 20 what would have been a PE of 15. It becomes especially true after Sarbanes-Oxley.”
OK, let’s go with that notion for a moment. The average CAPE 10 over the last 50 years is around 19.7. The current CAPE is 24.2. Shiller’s advice is not to be completely out of stocks. But he wouldn’t recommend that we have same stock allocation at CAPE 24 as we did at CAPE 19.7, nor should we be buying as much stock.

Recall too that CAPE 10 only predicts a dispersion of possible returns over the next 10 years. That return might be low as CAPE’s forecasting record suggests, but we can’t rule out that the return might be average, or even higher than expected. So given a possible dispersion of outcomes, how might an investor use the various levels of CAPE 10 to make investment allocation decisions ?

Kitces and Pfau researched the results of a valuation-based algorithm that used the level of the Shiller P/E 10 relative to the rolling median. Here’s an excerpt from their paper:

“The data shows that valuation-based asset allocation strategies increased the worst-case sustainable spending rate for retirees by 17%. In addition, necessary savings rates to meet retirement spending goals in the worst case from history fell by 20%. Valuation-based strategies have demonstrated historical success to lower savings rates and increase retirement withdrawal rates.”

The authors found potential benefits for conservative investors who periodically change stock allocations based on CAPE 10 vs. the rolling median. Periodically adjusting stock allocations aligns with the suggested use for CAPE 10 by Dr. Shiller in his quote above.

As I posted in the thread above, an alternate way to arrive at a fairly predictable amount of wealth at the end of a defined time period, is to hold a portfolio with a similar duration. Sooner or later, a portion of our retirement savings will need to be accessed and spent. Let’s narrow this example to an investor who needs to make a stock allocation decision for a bucket of money needed at the end of the upcoming 10-year period:

10 years investment horizon / 44 years "duration" of the S & P 500 = 23% stocks. (10/44 =23%) . The investor would allocate the balance (77%) into intermediate-term bonds and cash or CDs.
“Everyone is a disciplined, long-term investor until the market goes down.” – Steve Forbes

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