Are long-term market returns reliable?

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CULater
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Are long-term market returns reliable?

Post by CULater » Sat Sep 16, 2017 8:42 pm

[note: I edited the subject title and my original post to be a little less provocative, which I didn't intend to be]

Most of us, including me, feel that it's important to maintain a steady course based on the assumption that if you stay in the market for a long enough period and endure the short run downdrafts, you can expect to receive pretty respectable returns when the dust has settled.

That has typically been the case for U.S. investors historically, but I found an article that indicates that the long run returns of U.S. stocks are not very reliable, even for us dollar-cost averagers who religiously keep investing year-after-year, as shown in the following graph from this source:

https://evergreensmallbusiness.com/long ... t-returns/

Image

The data are based on an allocation of 75% stocks / 25% bonds that is rebalanced. As you can see, while the spread between best case and worst case returns lessens with time, and the median long-term returns look decent, there is considerable variability in terminal returns even at 30 years. And there have been 30-year periods in which you would have earned zero, nada, zilch. It's far from a guaranteed deal that you won't end up on the short end of the stick even if you keep the faith.

My takeaway is that In the end, you need to be lucky as well as virtuous -- in the sense that you hitched a long ride with Mr. Market during a fortuitous period of time. Patience is a necessary -- but not a sufficient condition. Let's check back in 20-30 years and see if we got lucky.
If we didn't, we can at least celebrate the virtues of patience while we share a can of dog food. :sharebeer
Last edited by CULater on Sun Sep 17, 2017 2:13 pm, edited 1 time in total.
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in_reality
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Re: The myth about long-run stock returns

Post by in_reality » Sat Sep 16, 2017 8:55 pm

I disagree with the methodology and analysis.

In fact, the value at 30 years includes money that has only been invested 1 year, 3 yrs, 5 yrs etc.
the article wrote:I’m calculating the future value of an annuity, $10,000 a year for up to 30 years. I’m not calculating the future value of an initial one-time deposit. This change from a one-time deposit to an annuity fattens the tail by nearly 70%
Sequence of return risk is certainly real and has been discussed many times here.
And there have been 30-year periods in which you would have earned zero, nada, zilch. It's far from a guaranteed deal that you won't end up on the short end of the stick even if you keep the faith.
Well, you have kept up with inflation.

Anyway, I don't believe that chart makes the case that stocks might return zero thirty years later.

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Re: The myth about long-run stock returns

Post by Nate79 » Sat Sep 16, 2017 8:59 pm

Is average annual return a meaningful metric?

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TheTimeLord
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Re: The myth about long-run stock returns

Post by TheTimeLord » Sat Sep 16, 2017 9:03 pm

Here is his article from the week before. Seems like author has an ax to grind.

Bogleheads Investment Philosophy Flaws: Problems with a Popular Approach
by Steve September 4, 2017
https://evergreensmallbusiness.com/bogl ... phy-flaws/
This week’s blog post discusses five flaws I see in the Bogleheads investment philosophy.

Two are pretty significant, I think.

The other three flaws? Well, the other flaws are me picking nits.
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Re: The myth about long-run stock returns

Post by TheTimeLord » Sat Sep 16, 2017 9:05 pm

CULater wrote:
Sat Sep 16, 2017 8:42 pm
I'm compelled to pick a nit about the "myth" that may serve some folks as the basis for "buy and hold" and "stay the course"; which is that if you stay in the market for a long enough period and endure the short run downdrafts, you can expect to receive pretty respectable returns when the dust has settled.

But you know the old saying: "It's not what you believe that gets you in trouble as much as what you believe that ain't true." Actually, the long run returns of U.S. stocks are not very reliable, even for us dollar-cost averagers who religiously keep investing year-after-year, as shown in the following graph from this source:

https://evergreensmallbusiness.com/long ... t-returns/

Image

As you can see, while the spread between best case and worst case returns lessens with time, and the median long-term returns look decent, there is considerable variability in terminal returns even at 30 years. And there have been 30-year periods in which you would have earned zero, nada, zilch. It's far from a guaranteed deal that you won't end up on the short end of the stick even if you keep the faith.

In the end, you need to be lucky as well as virtuous -- in the sense that you hitched a long ride with Mr. Market during a fortuitous period of time. Patience is a necessary -- but not a sufficient condition. Let's check back in 20-30 years and see if we got lucky.
If we didn't, we can at least celebrate the virtues of patience while we share a can of dog food. :sharebeer
I always use a 75/25 AA when projecting stock returns :oops: :oops: :oops: :oops: :oops: :oops: :oops: :oops: :oops:
Let me quickly explain how I got the numbers plotted in the line chart. (If you don’t care about the math or numbers are not your friend, skip ahead to the next section.)

The data comes out of the cFIREsim online calculator, which uses a data set that starts in 1872.

The asset allocation equals 75 percent stocks and 25 percent bonds. So not 100% stocks but rather a more typical stocks and bonds blend.

The scenarios I modeled say some investor saves $10,000 annually for a given number of years: 5 years, 10 years, 15 years and so on at five year increments right up to 30 years.

I used the cFIREsim default .18% expense ratio and default annual rebalancing.

Finally, I calculated the average annual return using Microsoft Excel’s RATE function using as the function inputs that $10,000 annual savings amount, the number of years of saving, and then the cFIREsim-calculated future value for the average, best case and worst case scenarios.

And now back to the message from the chart…
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Re: The myth about long-run stock returns

Post by avalpert » Sat Sep 16, 2017 9:20 pm

Yeah, while I don't disagree that stocks are risky in the long term, this is a very weak and misleading 'analysis' and presentation of said analysis.

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Re: The myth about long-run stock returns

Post by CULater » Sat Sep 16, 2017 9:29 pm

avalpert wrote:
Sat Sep 16, 2017 9:20 pm
Yeah, while I don't disagree that stocks are risky in the long term, this is a very weak and misleading 'analysis' and presentation of said analysis.
How come? You are being weak and misleading...
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Re: The myth about long-run stock returns

Post by TheTimeLord » Sat Sep 16, 2017 9:39 pm

CULater wrote:
Sat Sep 16, 2017 9:29 pm
avalpert wrote:
Sat Sep 16, 2017 9:20 pm
Yeah, while I don't disagree that stocks are risky in the long term, this is a very weak and misleading 'analysis' and presentation of said analysis.
How come? You are being weak and misleading...
Why is 6% a year bad, which is doubling in value every 12 years? Best I tell this is more a demonstration of reversion to the mean over time instead of a comment on long term stock returns. Looking at the graph want to guess where the lines end up in 40 or 50 years?
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Re: The myth about long-run stock returns

Post by avalpert » Sat Sep 16, 2017 9:50 pm

CULater wrote:
Sat Sep 16, 2017 9:29 pm
avalpert wrote:
Sat Sep 16, 2017 9:20 pm
Yeah, while I don't disagree that stocks are risky in the long term, this is a very weak and misleading 'analysis' and presentation of said analysis.
How come? You are being weak and misleading...
Well for the reasons already stated, but if you need me to restate them. He uses a stock/bond mix, so it isn't about measuring stock returns at all. He isn't looking at 30-year stock performance at all since he is using ongoing contributions and the entire premise that it is this 'myth' of guaranteed average performance that is the basis for Boglehead philosophy is incorrect. How about this, why doesn't he show the average 30-year performance of small businesses historically and compare the performance?

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Re: The myth about long-run stock returns

Post by metalworking » Sat Sep 16, 2017 10:25 pm

I guess I am just confused as to the point of the article. Maybe i am missing something but it is not a shock to me that there are no guarantees. Nothing is certain. The author also doesn't suggest what he can do to remedy this uncertainty.

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Re: The myth about long-run stock returns

Post by Slacker » Sat Sep 16, 2017 10:40 pm

Here is a remedy:

Monitor your investments.
If the amounts are not what you need to be FI/retired, work "one more year".
After you achieve the required amount (to be FI / Retired), the accumulation phase considerations are no longer paramount.

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Re: The myth about long-run stock returns

Post by arcticpineapplecorp. » Sat Sep 16, 2017 10:48 pm

First off, the median looks ok to me (what does that show 7% or 8% per year compounding. That'll get the job done). That being said, I believe the point is not to focus on the blue or orange line, but rather the dreaded grey line. So...

What about those who invest for MORE than 30 years? You know, those of us who started investing in our 20s and plan to retire in our 60s (that's 40 years right there not counting money in stocks THROUGH retirement).

But wait, what about retirement? We don't go to 0% stocks in retirement do we? No, even the target date retirement funds are around 40% stocks in one's 60s, 30% in one's 70s and beyond (if you pick a TD date that somewhat matches a normal retirement age). So if that's the case, you'd have somewhere between 30% and 80% (or more) for 60, 70 or 80 years (depending on how early one starts retirement).

https://personal.vanguard.com/us/funds/ ... undId=0308
https://investor.vanguard.com/mutual-fu ... retirement

So can you show us another chart that covers more than 30 year periods of time? Because I'm more concerned with longer buy and hold time periods. Thanks.
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Re: The myth about long-run stock returns

Post by rbaldini » Sat Sep 16, 2017 11:03 pm

Two thoughts.

1. Folks have suggested this is misleading, so I've checked the numbers myself. See S&P 500 numbers here from 1928: http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html

Of all the contiguous 30-year periods shown here, the smallest total return is a factor of 9.98. That is, the worst 30-year outcome observed since 1928 was that $1,000 turned into $9,980. That's an annualized return of 7.9%. Why the difference? I can think of two reasons. First, I'm only looking at long term returns, whereas the original article considered total return from investing a fixed amount every year (which means a lot of the money invested would actually *not* be long-term!). Second, this is 100% stock; the article is 25% bonds. In other words, I differ from the original numbers because I actually address the title of this post: long-run stock returns.

(Note: you still shouldn't take 7.9% as a 30-year guarantee!)

(In case you're wondering, the best return was a factor of 46.23. I.e. $1,000 -> $46,230. Cheers to anyone who invested a lump sum in 1970 and pulled out just before the dot com bubble collapsed!)

2. Suppose the analysis were actually convincing (IMO it isn't). So what? Unless there's a *better* strategy available, it's not very actionable information.

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Re: The myth about long-run stock returns

Post by visualguy » Sun Sep 17, 2017 12:23 am

rbaldini wrote:
Sat Sep 16, 2017 11:03 pm
2. Suppose the analysis were actually convincing (IMO it isn't). So what? Unless there's a *better* strategy available, it's not very actionable information.
There are other possible investments... One common example is owning rental properties. Many in my family and my wife's family do that with the bulk of their money, and this has consistently worked very well for them (although it is more work).

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Re: The myth about long-run stock returns

Post by Sandtrap » Sun Sep 17, 2017 12:28 am

Thank you for posting an interesting topic for rich and varied input by all.
Can you please add more factual and graphic data if you have it.
Thanks again.
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Re: The myth about long-run stock returns

Post by Sandtrap » Sun Sep 17, 2017 12:33 am

visualguy wrote:
Sun Sep 17, 2017 12:23 am
rbaldini wrote:
Sat Sep 16, 2017 11:03 pm
2. Suppose the analysis were actually convincing (IMO it isn't). So what? Unless there's a *better* strategy available, it's not very actionable information.
There are other possible investments... One common example is owning rental properties. Many in my family and my wife's family do that with the bulk of their money, and this has consistently worked very well for them (although it is more work).
+1 on rental properties (as a full time business endeavor. IE: +100, +300, etc, rental units)
Definitely more work and potentially hands-on business commitment that many would not have a taste for, especially after a certain number of holdings.
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Re: The myth about long-run stock returns

Post by 2015 » Sun Sep 17, 2017 12:37 pm

metalworking wrote:
Sat Sep 16, 2017 10:25 pm
I guess I am just confused as to the point of the article. Maybe i am missing something but it is not a shock to me that there are no guarantees. Nothing is certain. The author also doesn't suggest what he can do to remedy this uncertainty.
Yup. Whenever an author places the word "myth" in his click-bait I expect it to be followed with "hints", "tips", and "guides", or at a least some kind of sales pitch.

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Re: The myth about long-run stock returns

Post by rgs92 » Sun Sep 17, 2017 12:51 pm

Isn't this chart at odds with the Trinity Study/standard Monte Carlo analysis/Firecalc findings?

If there was a substantial proportion of stock market returns being very low over many 30+ year periods, wouldn't this show up in Firecalc success/failure probability conclusions?

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Re: The myth about long-run stock returns

Post by selters » Sun Sep 17, 2017 1:10 pm

So when did the worst 30 year period end? And are these real or nominal returns?

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Re: The myth about long-run stock returns

Post by arcticpineapplecorp. » Sun Sep 17, 2017 1:20 pm

Hey wait a second...those aren't stock returns...they're stock AND bond returns:
The asset allocation equals 75 percent stocks and 25 percent bonds. So not 100% stocks but rather a more typical stocks and bonds blend.
The scenarios I modeled say some investor saves $10,000 annually for a given number of years: 5 years, 10 years, 15 years and so on at five year increments right up to 30 years.

I used the cFIREsim default .18% expense ratio and default annual rebalancing.

Finally, I calculated the average annual return using Microsoft Excel’s RATE function using as the function inputs that $10,000 annual savings amount, the number of years of saving, and then the cFIREsim-calculated future value for the average, best case and worst case scenarios. source: https://evergreensmallbusiness.com/long ... t-returns/
and then...is this how he gets his percentage for the 25% in bonds?:
Second, I’m calculating the future value of an annuity, $10,000 a year for up to 30 years. I’m not calculating the future value of an initial one-time deposit. This change from a one-time deposit to an annuity fattens the tail by nearly 70%. You do want, however, to calculate returns using an annuity since you save for retirement by making regular contributions and not a one-time deposit. source: https://evergreensmallbusiness.com/long ... t-returns/
Finally, as Harry Sit (The Finance Buff) listed in the comments section:
Harry Sit
September 12, 2017 at 9:51 pm

Measuring the variability by the annualized return is problematic by itself. The correct measure is the variability in the end wealth. John Norstad wrote this back in 2000.

http://www.norstad.org/finance/risk-and-time.html

The bar chart near the end shows how the range increases over time
. source: https://evergreensmallbusiness.com/long ... t-returns/
Cheers!
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Re: The myth about long-run stock returns

Post by willthrill81 » Sun Sep 17, 2017 1:51 pm

I'm guessing the OP has never read Siegel's "Stocks for the Long Run," where the author demonstrates that over periods 17 years and longer, stocks have always had a higher real return than the bond market. There have only been two 30 year periods where long-term bonds beat stocks, but few investors are buying 30 year bonds and holding them to term, with good reason.

Siegel also demonstrated that over long-term periods in the 200 year historic record, stock returns have been a remarkably stable 7% real, give or take less than 1%.
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Re: The myth about long-run stock returns

Post by dbr » Sun Sep 17, 2017 2:06 pm

rgs92 wrote:
Sun Sep 17, 2017 12:51 pm
Isn't this chart at odds with the Trinity Study/standard Monte Carlo analysis/Firecalc findings?

If there was a substantial proportion of stock market returns being very low over many 30+ year periods, wouldn't this show up in Firecalc success/failure probability conclusions?
Failures in FireCalc have more to do with sequence of returns than overall average return. The difference turns up depending on whether or not there are withdrawals. I took a quick look and the worst years with no withdrawals are very different from the worst years with significant withdrawals in an all stock portfolio. You can look at that data from FireCalc. The worst accumulation of wealth in 30 yearsfrom $1M and no withdrawals was an ending value of about $4M and the best was about $40M. The worst years were the late 19th and early 20th century, and the best years were a hodge podge of early 40's and mid 70's. If you put in a 5% withdrawal rate then the worst portfolio outcome was -$13M and the best was about $18M. The worst years were the mid 60's and early 70's and the best were a hodge podge of early 40's, early 80's, and some others. I think there is very little correlation between the two.

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Re: Are long-term market returns reliable?

Post by rgs92 » Sun Sep 17, 2017 4:34 pm

Thanks for that fine analysis dbr!
So, if there is little correlation, isn't Firecalc the one that's most relevant for setting up a plan to use your assets for income. And therefore, regardless of the findings at top of this thread, I should simply not worry and be happy?

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Re: Are long-term market returns reliable?

Post by dbr » Sun Sep 17, 2017 4:53 pm

rgs92 wrote:
Sun Sep 17, 2017 4:34 pm
Thanks for that fine analysis dbr!
So, if there is little correlation, isn't Firecalc the one that's most relevant for setting up a plan to use your assets for income. And therefore, regardless of the findings at top of this thread, I should simply not worry and be happy?
There are two steps, the accumulation of money and the disbursement of money. The outcome you will actually experience in either is uncertain and a matter of luck. The answer to your question is no. Whether or not you should worry, I couldn't say.

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Re: Are long-term market returns reliable?

Post by CULater » Sun Sep 17, 2017 5:02 pm

A few things to keep straight:

1) the quoted article shows real (inflation-adjusted) returns. Those are lower than nominal returns.

2) the quoted article shows returns based on periodic investing (dollar-cost averaging) and not investing a single lump sum at the front end. You will have lower terminal returns if principal is trickled in year-by-year than if you had the whole wad at the beginning.

3) the quoted article shows returns based on assuming investment costs. Most of the time data fished up somewhere is "frictionless" because it does not deduct anything for investment costs. The article makes a pretty generous assumption of 0.18% for costs. Actually, if you go back to earlier historical periods the costs associated with stock investing were much, much higher which would reduce terminal returns even more.

So, when fishing around for comparative data, make sure you are comparing apples-to-apples. The most realistic data are represented in the article because it is real returns that count, and just about everybody invests periodically not with a single lump sum, and just about everybody loses some of their investment to costs.
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Re: Are long-term market returns reliable?

Post by rbaldini » Sun Sep 17, 2017 7:32 pm

CULater wrote:
Sun Sep 17, 2017 5:02 pm
So, when fishing around for comparative data, make sure you are comparing apples-to-apples. The most realistic data are represented in the article because it is real returns that count, and just about everybody invests periodically not with a single lump sum, and just about everybody loses some of their investment to costs.
Okay, fine, but IMO calling it "long-term returns" is a little sketchy. In this example, 1/3 of the 30*$10,000 invested would have been in the market for <10 years.

But whatever: let's look at periodically invested money. Using S&P 500 data again: http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html

The worst observed outcome of investing $1 every year for 30 years is to end up with $132, not accounting for inflation. That is, 4.39 times what you originally put in. I accounted for the 0.18% cost. Again I've only done stocks, no bonds.

What about inflation? That will eat up a big chunk, of course. But it will eat the same proportional chunk out of any investment. So again the question is: what's the alternative? Stocks don't guarantee that you'll be rich, but IMO saying you get "zero, nada, zilch" gives a naive reader the impression that you might as well just stash your money under a pillow. The above numbers show that's not anywhere near the truth.

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Re: Are long-term market returns reliable?

Post by CULater » Sun Sep 17, 2017 9:56 pm

rbaldini -

I think your concern is that the cited article seems to be misleading, in that you find that nominal returns are actually positive over all the 30-year investing periods even the worst ones. Point taken, but at the end of the day it is real returns, or purchasing power, that counts. If you use real return data (returns adjusted for inflation) the cited article shows that you can systematically invest in a portfolio with a 75% stock allocation for 30 years and end up with no increase in the purchasing power of the funds invested. That is better than "mattress money" which would have lost purchasing power, but it's a far cry from the real return that most people have been led to expect from their investments over a three decade period. Perhaps if you had been 100% invested in stocks for 30 years, the worst real return would have been positive - I don't know. But, even so, there aren't many people who would be comfortable doing that. I'm not sure how many would even be comfortable with 75% over 30 years. As I said before, I think the most realistic data on investment returns are (1) based on incremental investing, (2) based on real return data, and (3) account for investment costs. The cited article meets all three of these criteria.
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Re: Are long-term market returns reliable?

Post by in_reality » Sun Sep 17, 2017 10:25 pm

CULater wrote:
Sun Sep 17, 2017 9:56 pm
rbaldini -

I think your concern is that the cited article seems to be misleading, in that you find that nominal returns are actually positive over all the 30-year investing periods even the worst ones. Point taken, but at the end of the day it is real returns, or purchasing power, that counts. If you use real return data (returns adjusted for inflation) the cited article shows that you can systematically invest in a portfolio with a 75% stock allocation for 30 years and end up with no increase in the purchasing power of the funds invested. That is better than "mattress money" which would have lost purchasing power, but it's a far cry from the real return that most people have been led to expect from their investments over a three decade period. Perhaps if you had been 100% invested in stocks for 30 years, the worst real return would have been positive - I don't know. But, even so, there aren't many people who would be comfortable doing that. I'm not sure how many would even be comfortable with 75% over 30 years. As I said before, I think the most realistic data on investment returns are (1) based on incremental investing, (2) based on real return data, and (3) account for investment costs. The cited article meets all three of these criteria.
Sure there is no guarantee but what is a better alternative?

After 30 years, if you are unfortunate to be in the 0% real growth group at least you will have that nest egg. And I suspect that the valuations of your holding would be low, and the expected returns high.

Sure there are other alternatives ... real estate or private business, but they too involve their own set of risks and don't offer a guarantee either.

So what are we to do if there is no guaranteed way to success. Is a worst case of 0% real returns actually that bad? No downside with a good chance of meaningfully positive returns.

It's like college doesn't pay off for everyone. Should you tell your child not to go? For those with a better alternative perhaps not. The question is realistically are there better alternatives?

For the author of the article who is selling books on strategies for s-corporations, I think yes it's important to point out the worst possible case to traditional investing strategies.

Consider that around half of all businesses no longer exist after five years. Only one-third make it past their tenth anniversary.

Anyway, it's a bait-and-switch. Create fear about long term stock returns by showing data for things other than stocks and by using a misleading figure about how long stocks were invested. The alternative of course is to start a business (which some people really should do) and buy the books of the article's author.

And I am not sure it's fair to paint the Boglehead's as being anything other than realistic. Here's a post about a 0.5% real CAGR after 17 years of around an 80-20 portfolio. The end point is the start of the current bull. How nice to have 17 years of savings invested from that point till now.
viewtopic.php?t=25829

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Re: Are long-term market returns reliable?

Post by JBTX » Sun Sep 17, 2017 11:22 pm

The article makes some interesting points, and does have some merit, but it seems like he is mostly trying to create buzz by attacking a philosophy that he by his own admission says he mostly agrees with.

His valid points (as stated, or by extension):

1. I do think the variability of longer term returns is underplayed. It is always pretty much assumed over a 30 year time frame using some sort of stocks/bond balance you will get a respectable real return. It is a bit discouraging to think that zero percent real is in the realm of possibilities over 30 years. Obviously that is a worst case scenario (at least in terms of US history, Japan obviously has worse than that)

2. A comparison of 30 year performance of 100% stocks is interesting, but mostly irrelevant, because of our risk aversion that would not make it optimal to be in 100% stocks before we retire.

3. I have to believe if we have 20 years of zero real returns, rightly or wrongly, the appeal of the boglehead strategy will decrease a lot. We have had a 35 year party of interest rates going from the teens down to practically zero percent.

4. With CAPE at historic highs, long term subpar returns are more likely than usual.

Where he misses:

1. Zero percent real, even as a worst case scenario, is still positive nominal return. I would guess a greater percentage of bond scenarios come out with negative real return. If you purchased a 30 year treasury right now and held it to maturity you probably won't get much better than zero percent real.

2. The zero is a worst case scenario. The vast majority of other outcomes are decently positive rates of returns. One should be prepared for the worst case, but shouldn't base an investment policy as if it were the likely scenario.

3. If there were not variability in returns, even over the long term, then there would not be higher average returns, due to risk return tradeoff

4. Agree with others that he really doesn't offer up an alternative

5. It may be more useful to look at 35-40 years annuity in, and 15-20 years annuity out.

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TD2626
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Re: Are long-term market returns reliable?

Post by TD2626 » Sun Sep 17, 2017 11:37 pm

JBTX wrote:
Sun Sep 17, 2017 11:22 pm
1. I do think the variability of longer term returns is underplayed. It is always pretty much assumed over a 30 year time frame using some sort of stocks/bond balance you will get a respectable real return. It is a bit discouraging to think that zero percent real is in the realm of possibilities over 30 years. Obviously that is a worst case scenario (at least in terms of US history, Japan obviously has worse than that)
JBTX wrote:
Sun Sep 17, 2017 11:22 pm
1. Zero percent real, even as a worst case scenario, is still positive nominal return. I would guess a greater percentage of bond scenarios come out with negative real return. If you purchased a 30 year treasury right now and held it to maturity you probably won't get much better than zero percent real.

2. The zero is a worst case scenario. The vast majority of other outcomes are decently positive rates of returns. One should be prepared for the worst case, but shouldn't base an investment policy as if it were the likely scenario.
It's worth noting that zero real is not a worse case scenario. Literally anything can happen - we could have a repeat great depression, or a Japan-type scenario. However, if one wants to just simply say "I will stress-test my plans such that they should work even in a 0% return scenario" and accept that failure would occur if returns are lower, that may be reasonable. It's essentially impossible to plan for every scenario, so picking a personal worse-case that one is prepared for and preparing for it could be a helpful framework for some. Investors should not, though, craft a plan that hinges on historical average returns recurring as the past is no guarantee.

That being said, though, investors shouldn't be surprised when and if the past reoccurs. Even though we need to prepare for the possibility of low returns, it is very much reasonable that returns could line up with historic averages - or even be above them slightly. One can never know the future with certainty.

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Re: Are long-term market returns reliable?

Post by CULater » Mon Sep 18, 2017 1:32 am

I'm not sure I agree with the comments that, even if poor outcomes can result after 30 years of disciplined saving and investing, that information is not actionable. It's in the hands of the Gods. All we can do is continue to chug along like good soldiers, do what we always do, and believe -- that's the only option available. Is that a completely rational argument do you think?

In most areas of our lives where some really bad outcomes are possible, even if they don't seem likely, we try to figure out a way to mitigate that risk. Even though I don't expect my home to burn to the ground, I keep valuable papers inconveniently in a bank safety deposit box or fireproof safe, I buy casualty insurance, maybe I give some thought to formulating a plan of where I would go and how I would live in the unlikely event this actually happens to me. But in the area of investing, the best we can come up with is "do nothing, it will probably turn out OK. And there's nothing we can do about it anyway?"

Just a few possibilities:
1) try to formulate contingency plans, just in case your investment savings plan doesn't work out as you hoped. We need a Plan B, C, and D.
2) spend more time and effort on things you actually can control, such as increasing your earning and savings rate.
3) prepare for the possibility of working longer than you want to; perhaps that means positioning yourself in your career and your choice of employment so that you actually could have the option of doing that if you needed to.
4) look at other ways to grow your money other than just plunking it all into some mutual funds and hoping that the magic will happen while you doze.
5) take the time to do some homework on how and why some historical 30-year market returns were so lousy. Maybe that will provide a little insight into the financial, economic, and investment management factors that were responsible, and that might turn out to be useful information.
6) spend some time and effort trying to discover other possibilities in addition to the preceding five.

Folks, we can do better. It's more important to think about how to invest and diversify your personal capital than your financial capital. Not a good idea to depend on luck any more than you have to.
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Re: Are long-term market returns reliable?

Post by qwertyjazz » Mon Sep 18, 2017 2:49 am

CULater wrote:
Mon Sep 18, 2017 1:32 am
I'm not sure I agree with the comments that, even if poor outcomes can result after 30 years of disciplined saving and investing, that information is not actionable. It's in the hands of the Gods. All we can do is continue to chug along like good soldiers, do what we always do, and believe -- that's the only option available. Is that a completely rational argument do you think?

In most areas of our lives where some really bad outcomes are possible, even if they don't seem likely, we try to figure out a way to mitigate that risk. Even though I don't expect my home to burn to the ground, I keep valuable papers inconveniently in a bank safety deposit box or fireproof safe, I buy casualty insurance, maybe I give some thought to formulating a plan of where I would go and how I would live in the unlikely event this actually happens to me. But in the area of investing, the best we can come up with is "do nothing, it will probably turn out OK. And there's nothing we can do about it anyway?"

Just a few possibilities:
1) try to formulate contingency plans, just in case your investment savings plan doesn't work out as you hoped. We need a Plan B, C, and D.
2) spend more time and effort on things you actually can control, such as increasing your earning and savings rate.
3) prepare for the possibility of working longer than you want to; perhaps that means positioning yourself in your career and your choice of employment so that you actually could have the option of doing that if you needed to.
4) look at other ways to grow your money other than just plunking it all into some mutual funds and hoping that the magic will happen while you doze.
5) take the time to do some homework on how and why some historical 30-year market returns were so lousy. Maybe that will provide a little insight into the financial, economic, and investment management factors that were responsible, and that might turn out to be useful information.
6) spend some time and effort trying to discover other possibilities in addition to the preceding five.

Folks, we can do better. It's more important to think about how to invest and diversify your personal capital than your financial capital. Not a good idea to depend on luck any more than you have to.
Possibilities 1-3 make sense to me. The problem is I do not know how to do 4,5 or 6. Also, I do not know of anyone who knows how to do 4-6. There are a lot of smart people trying to do that and why would I succeed if they all failed?
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ignition
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Re: The myth about long-run stock returns

Post by ignition » Mon Sep 18, 2017 7:46 am

selters wrote:
Sun Sep 17, 2017 1:10 pm
So when did the worst 30 year period end? And are these real or nominal returns?
Using the same data set, the worst periods were 1891-1920, 1892-1921 and 1952-1981 which had an annual real return of less than 2%. So in 97% of the cases you would have had a real return of over 2%. Also note that 1921 and 1981 were the beginnings of 2 great bull markets.

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Re: Are long-term market returns reliable?

Post by dbr » Mon Sep 18, 2017 9:21 am

qwertyjazz wrote:
Mon Sep 18, 2017 2:49 am
CULater wrote:
Mon Sep 18, 2017 1:32 am
I'm not sure I agree with the comments that, even if poor outcomes can result after 30 years of disciplined saving and investing, that information is not actionable. It's in the hands of the Gods. All we can do is continue to chug along like good soldiers, do what we always do, and believe -- that's the only option available. Is that a completely rational argument do you think?

In most areas of our lives where some really bad outcomes are possible, even if they don't seem likely, we try to figure out a way to mitigate that risk. Even though I don't expect my home to burn to the ground, I keep valuable papers inconveniently in a bank safety deposit box or fireproof safe, I buy casualty insurance, maybe I give some thought to formulating a plan of where I would go and how I would live in the unlikely event this actually happens to me. But in the area of investing, the best we can come up with is "do nothing, it will probably turn out OK. And there's nothing we can do about it anyway?"

Just a few possibilities:
1) try to formulate contingency plans, just in case your investment savings plan doesn't work out as you hoped. We need a Plan B, C, and D.
2) spend more time and effort on things you actually can control, such as increasing your earning and savings rate.
3) prepare for the possibility of working longer than you want to; perhaps that means positioning yourself in your career and your choice of employment so that you actually could have the option of doing that if you needed to.
4) look at other ways to grow your money other than just plunking it all into some mutual funds and hoping that the magic will happen while you doze.
5) take the time to do some homework on how and why some historical 30-year market returns were so lousy. Maybe that will provide a little insight into the financial, economic, and investment management factors that were responsible, and that might turn out to be useful information.
6) spend some time and effort trying to discover other possibilities in addition to the preceding five.

Folks, we can do better. It's more important to think about how to invest and diversify your personal capital than your financial capital. Not a good idea to depend on luck any more than you have to.
Possibilities 1-3 make sense to me. The problem is I do not know how to do 4,5 or 6. Also, I do not know of anyone who knows how to do 4-6. There are a lot of smart people trying to do that and why would I succeed if they all failed?
I agree that 1-3 make sense and 5-6 less so. In addition, when it come to reliability, there is plenty of uncertainty in 1-3 as much as in investment returns.

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Re: Are long-term market returns reliable?

Post by CULater » Mon Sep 18, 2017 10:34 am

Regarding #5, just for starters a knowledge of favorable and unfavorable historical investment periods would be informative of the fact that favorable 30-year periods usually began during times the stock market was down the toilet, and vice versa. Given current valuations and indicators, it would be foolish to assume the next 30-year period is going to be a great one. No certainty, just probabilities. It's likely to be below median, perhaps assume in the 20th to 30th percentile at best. Should serve as motivation to start thinking harder about a Plan B, C, or D for beginning accumulators.

But it is the people in the latter stage of their investing horizon who have accumulated a substantial nestegg at this point who really need to be paying attention. For instance, check out the 1978-2007 period, during which a monthly investment in the S&P 500 of $100 would have grown to $330,842 over the 30 years. But, had your 30-year period started just one year later, the account would have only grown to only $180,713 due to the losses in 2008. A year or two can make a huge difference. If I were one of these people, I'd be getting real busy working on my Plan B. If you're in a target date fund, have a look under the hood and you might be surprised how large your stock allocation is -- do you really want that much in equities now if you're about to retire? TD funds took gas in 2008 and shocked a lot of people who were near their retirement.
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Re: Are long-term market returns reliable?

Post by wrongfunds » Mon Sep 18, 2017 12:04 pm

RE: John Norstad Reference
As long as we're talking about risk, let's consider a really bad case. If instead of investing our $1000 in the S&P 500, we put it in a bank earning 6% interest, after 40 years we'd have $10,286. This is 1.26 standard deviations below the median ending value of the S&P 500 investment. The probability of ending up below this point is 10%. In other words, even over a very long 40 year time horizon, we still have about a 1 in 10 chance of ending up with less money than if we had put it in the bank!
Can I have the name of the bank giving me 6% interest for next 40 years? I have some cash which I would like to put it in CD.

Not to be snarky, but wasn't it common knowledge way back when bank *was* giving 6% that you could NEVER get 40 year CD at that rate? How come a respected financial professional completely missed that?

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Re: Are long-term market returns reliable?

Post by rgs92 » Mon Sep 18, 2017 12:39 pm

I think the core of the risk is demonstrated by what you importantly note here:

check out the 1978-2007 period, during which a monthly investment in the S&P 500 of $100 would have grown to $330,842 over the 30 years. But, had your 30-year period started just one year later, the account would have only grown to only $180,713 due to the losses in 2008. A year or two can make a huge difference.

But that just vividly makes the point that, at any time, the market can sink a lot, so you need to set your asset allocation accordingly.
So if you are at the end of your 30 years and ready to use the money, by this time you should only have half your money in stocks so your portfolio would only drop by 25%. And that is something everyone must be prepared to live with.

Sad but true and it's the nature of the beast when using the stock market.
And still, the $100/month for 30 years ($36,000) would make anyone happy growing to $180K, and maybe more than that is just a bonus.
['not sure what Internal Rate of Return this constitutes, but it sure seems nice on the face of it nominally.]

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Re: Are long-term market returns reliable?

Post by rbaldini » Mon Sep 18, 2017 12:51 pm

CULater wrote:
Mon Sep 18, 2017 10:34 am
But it is the people in the latter stage of their investing horizon who have accumulated a substantial nestegg at this point who really need to be paying attention. For instance, check out the 1978-2007 period, during which a monthly investment in the S&P 500 of $100 would have grown to $330,842 over the 30 years. But, had your 30-year period started just one year later, the account would have only grown to only $180,713 due to the losses in 2008. A year or two can make a huge difference.
True, and I think there's probably some more realism we can throw in here for that reason. It's not as if we suddenly withdraw all our money upon retirement, thereby having our fate sealed by the exact end date. We keep the money invested and withdraw at a slow rate (hopefully), which means future returns also matter - and I think that would smooth out the big end-date effect here. Presumably one could improve on this analysis by somehow accounting for that fact. E.g. how big of a withdrawal rate can you take to stay afloat for another 20-30 years? What's the lowest historically observed value of this quantity?

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Re: Are long-term market returns reliable?

Post by rgs92 » Mon Sep 18, 2017 12:56 pm

True, and I think the SWR would be the same whether or not you started in 1977, 1978, or 1979. (I don't think Firecalc would have much different results based on a 1 or 2 year starting point.) And the SWR is what's important for stable income, although interim balances may be startling along the way. That's why staying the course is psychologically difficult.

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