"Investment Lessons From The 21st Century"

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Taylor Larimore
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"Investment Lessons From The 21st Century"

Post by Taylor Larimore » Wed Oct 18, 2017 10:07 pm

Bogleheads:

What was the best performing fund in The Three-Fund Portfolio during the first 16 years of this century?

Boglehead Allan Roth gives us the surprising answer:

Investment Lessons From the 21st Century

Best wishes.
Taylor
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Re: "Investing: What We've Learned This Century"

Post by JaneyLH » Wed Oct 18, 2017 10:27 pm

Thanks Taylor! I'm staying the course!

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Re: "Investing: What We've Learned This Century"

Post by Sandtrap » Wed Oct 18, 2017 10:33 pm

Outstanding!
Thanks, "Taylor"
I do like that green squigly line. . . . :D
It confirms my allocation preference is on target.
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Re: "Investment Lessons From The 21st Century"

Post by abuss368 » Wed Oct 18, 2017 11:37 pm

I was going to guess Total Bond!
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Re: "Investing: What We've Learned This Century"

Post by abuss368 » Wed Oct 18, 2017 11:38 pm

Stay the course!
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Re: "Investing: What We've Learned This Century"

Post by Artsdoctor » Wed Oct 18, 2017 11:47 pm

Certainly brings back memories: on January 1, 2000, the 10-year treasury yielded 6.6%, if I’m reading the charts correctly ... That graphic is a nice reminder.

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Re: "Investing: What We've Learned This Century"

Post by Ari » Thu Oct 19, 2017 3:26 am

Start measuring from the peak of one of the biggest runups of the last 100 years and just before the crash. Not very suprising that stocks don't do well. Fortunately, most investors will not suddenly invest all of their savings in a lump sum at one specific point (and even if they do, chances are slim they will land on a peak like in the years 2000).

What the author has not learned is that you should not cherry-pick your data to fit your conclusion. This does not seem like it has much applicability to the average investor.
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Re: "Investment Lessons From The 21st Century"

Post by LadyGeek » Thu Oct 19, 2017 4:52 am

Taylor - You had a duplicate post, which I've removed. I merged the reply into this thread.
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Re: "Investment Lessons From The 21st Century"

Post by Top99% » Thu Oct 19, 2017 6:48 am

Given I already knew equity values can crash the main thing I have learned so far this century is interest rates and bond yields can go a lot lower and stay there a lot longer than the "experts" predicted. I guess coming of age during the 70s - 90s I had a view that "normal" interest rates on 1 years CDs were in the 3-6% range.
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Re: "Investing: What We've Learned This Century"

Post by digarei » Thu Oct 19, 2017 10:00 am

Ari wrote:
Thu Oct 19, 2017 3:26 am
Start measuring from the peak of one of the biggest runups of the last 100 years and just before the crash. Not very suprising that stocks don't do well. Fortunately, most investors will not suddenly invest all of their savings in a lump sum at one specific point (and even if they do, chances are slim they will land on a peak like in the years 2000).

What the author has not learned is that you should not cherry-pick your data to fit your conclusion. This does not seem like it has much applicability to the average investor.
Any dataset that doesn’t include every year since the beginning of the capital markets might fairly be described as cherry-picked. This doesn’t mean that it shouldn't or can’t be used to illustrate a point. If the author concluded that everyone should load up on bonds because during the past 16 years bonds had done very well, your argument would be more persuasive.

However, that’s not what the author has concluded (see below).

I suggest a re-read.

  • Conclusions from Allan Roth

• Understand that stocks are risky and invest accordingly.

• Understand how long your long run is.

• Don't invest based on the recent past.

• High-quality bonds act as a shock absorber and give you the ability to rebalance your investment portfolio.


• U.S. stocks don't provide enough international diversification.

...
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Re: "Investment Lessons From The 21st Century"

Post by oldzey » Thu Oct 19, 2017 1:05 pm

I won't live for 214 years, but I like this chart of the 19th, 20th, and 21st centuries for contrast/comparison:

Source (page 6): https://www.cfasociety.org/sandiego/Lin ... 17-CFA.pdf

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Taylor Larimore
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Re: "Investment Lessons From The 21st Century"

Post by Taylor Larimore » Thu Oct 19, 2017 4:00 pm

Bogleheads:

This is one of my favorite graphs. It shows the importance of stocks and stay-the-course.

Best wishes
Taylor
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Re: "Investment Lessons From The 21st Century"

Post by nisiprius » Thu Oct 19, 2017 6:58 pm

Here's another surprising thing.

Roth mentions that from 2000 through 2016 inclusive, the average annualized growth rate for Total Bond was 4.98%.
That means a $10,000 investment in Total Bond would have grown to $22,846.

Over the same period of time, a $1,000 United States Series I savings bond grew in value to $25,888.
That's an average annualized growth rate of 5.75%.

Source for the savings bond: eyebonds.info

So, the bond fund beat the stock fund, and savings bonds beat the bond fund.

And I actually bought some series I savings bonds in 2000. I thought they were reasonable, being the kind of risk-averse guy I am, but I never would have expected them to beat stocks.

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Re: "Investing: What We've Learned This Century"

Post by Ari » Fri Oct 20, 2017 2:48 am

digarei wrote:
Thu Oct 19, 2017 10:00 am
However, that’s not what the author has concluded (see below).

I suggest a re-read.

  • Conclusions from Allan Roth

• Understand that stocks are risky and invest accordingly.

• Understand how long your long run is.

• Don't invest based on the recent past.

• High-quality bonds act as a shock absorber and give you the ability to rebalance your investment portfolio.
The author constructs a graph that assumes a single lump-sum investment. This is not how most investors buy stocks and bonds. It exaggerates the riskiness of stocks and thus makes a stronger case for the author's conclusions than is warranted. Most of an investor's money that was invested at the beginning of 2000 had been growing already during at least a large part of the huge run-up of the 1990's. It's likely that any real investor who was invested in the period shown by the author would have earned more money from the stock part of their portfolio than from the bond part. The graph is thus highly misleading, even if factually accurate.

I see a lot of these graphs, and a lot of people talking about how stocks can fall 50% at any time, but they always assume lump-sum investing at a market peak. A better way to compare stocks and bonds (or portfolios with an AA of stocks AND bonds) would be using regular investments over the time period in question, or (for decumulators) regular withdrawals. These sorts of graphs are, unfortunately, much less common, but in my opinion much more useful.
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Re: "Investing: What We've Learned This Century"

Post by digarei » Fri Oct 20, 2017 5:13 am

Ari wrote:
Fri Oct 20, 2017 2:48 am
The author constructs a graph that assumes a single lump-sum investment. This is not how most investors buy stocks and bonds. It exaggerates the riskiness of stocks and thus makes a stronger case for the author's conclusions than is warranted. Most of an investor's money that was invested at the beginning of 2000 had been growing already during at least a large part of the huge run-up of the 1990's. It's likely that any real investor who was invested in the period shown by the author would have earned more money from the stock part of their portfolio than from the bond part. The graph is thus highly misleading, even if factually accurate.

I see a lot of these graphs, and a lot of people talking about how stocks can fall 50% at any time, but they always assume lump-sum investing at a market peak. A better way to compare stocks and bonds (or portfolios with an AA of stocks AND bonds) would be using regular investments over the time period in question, or (for decumulators) regular withdrawals. These sorts of graphs are, unfortunately, much less common, but in my opinion much more useful.
An arguable point. Perhaps it would be more useful; but if not lump sum, what algorithm would you use to increase utility for the “average investor” while making comparisons possible? I think you overstate the case by saying that the information contained in the article isn’t applicable to the average investor.

The decline experienced at the start of the Great Depression is often framed in the same way: an 89% devaluation beginning at the market peak in 1929. If one had been invested (or was investing periodically) in the months and years before the October 1929 crash, it becomes a correction but nothing as serious as what was felt at the time. But what lessons can be drawn from such ambiguity?
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Re: "Investing: What We've Learned This Century"

Post by Ari » Fri Oct 20, 2017 5:25 am

digarei wrote:
Fri Oct 20, 2017 5:13 am
An arguable point. Perhaps it would be more useful; but if not lump sum, what algorithm would you use to increase utility for the “average investor” while making comparisons possible?
One dollar (or a hundred euros, or whatever) invested at the end of each month during the period examined, for example? Then compare the outcome for stocks, bonds and stock-bond portfolios.
I think you overstate the case by saying that the information contained in the article isn’t applicable to the average investor.
Yeah, that's fair; of course it's applicable. I think people tend to get an exaggerated view of the risks of stock investing when looking at graphs like this, however. I think it's misleading.
The decline experienced at the start of the Great Depression is often framed in the same way: an 89% devaluation beginning at the market peak in 1929. If one had been invested (or was investing periodically) in the months and years before the October 1929 crash, it becomes a correction but nothing as serious as what was felt at the time. But what lessons can be drawn from such ambiguity?
I think the lesson to be drawn is to put stock declines in perspective. This might be useful to keep in mind especially in the middle of a crash. When you lose 30% of your savings, remember that a lot of the money you're losing wouldn't be yours if you hadn't been in the stock market in the first place. The market giveth and the market taketh away, but dollar cost averaging smooths out a lot of the rough patches.
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Re: "Investing: What We've Learned This Century"

Post by digarei » Fri Oct 20, 2017 12:42 pm

Ari wrote:
Fri Oct 20, 2017 5:25 am
digarei wrote:
Fri Oct 20, 2017 5:13 am
An arguable point. Perhaps it would be more useful; but if not lump sum, what algorithm would you use to increase utility for the “average investor” while making comparisons possible?
One dollar (or a hundred euros, or whatever) invested at the end of each month during the period examined, for example? Then compare the outcome for stocks, bonds and stock-bond portfolios.
Yes, I often see multiple permutations of data presented over rolling periods and using different contribution rates in Vanguard white papers. However, this is probably not possible in a column or short article for AARP.
Ari wrote:
Fri Oct 20, 2017 5:25 am
digarei wrote:
Fri Oct 20, 2017 5:13 am
The decline experienced at the start of the Great Depression is often framed in the same way: an 89% devaluation beginning at the market peak in 1929. If one had been invested (or was investing periodically) in the months and years before the October 1929 crash, it becomes a correction but nothing as serious as what was felt at the time. But what lessons can be drawn from such ambiguity?
I think the lesson to be drawn is to put stock declines in perspective. This might be useful to keep in mind especially in the middle of a crash. When you lose 30% of your savings, remember that a lot of the money you're losing wouldn't be yours if you hadn't been in the stock market in the first place. The market giveth and the market taketh away, but dollar cost averaging smooths out a lot of the rough patches.
A good lesson, to be sure. I think the illustration is more powerful when using a lump sum from some memorably defined peak (or valley) but I have to be agnostic in my preference. It works for me but maybe other ways to view the data help others.

It seems that for the inmates of the Institute for the Very Very Nervous [Mel Brooks reference] no example, graphic or counter factual is effective in relieving them of their fear of the markets.
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