2000-09 worst decade for large cap stocks in 109 years

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Robert T
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2000-09 worst decade for large cap stocks in 109 years

Post by Robert T » Sat Dec 09, 2017 8:56 am

.
From Jim O'Shaughnessy

Image

Diversification paid off:

2000-2009: Annualized real return (inflation-adjusted) (according to portfolio visualizer)

Vanguard 500 [VFINX] = -3.47%
DFA US Small Value [DFSVX] = +6.44%
Vanguard EM [VEIEX] = +7.12%

Vanguard Intermediate Try [VFITX] = +4.09%
Vanguard Total Bond Market [VBMFX] = +3.44%

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by letsgobobby » Sat Dec 09, 2017 8:59 am

Huh, it's almost like a record high CAPE actually did predict something...

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by Wagnerjb » Sat Dec 09, 2017 9:54 am

Robert T wrote:
Sat Dec 09, 2017 8:56 am

Diversification paid off:
Time diversification sure did pay off. The decade prior to the worst decade was the second best. The eight years since the worst decade have yielded (by my rough calculations) around 13.5% annually.

There aren't three decades in a row with sub-par returns, and most investors will be invested for four or more decades.

That's no guarantee that time diversification will continue to pay off, but it sure looks like reversion to the mean works.

Best wishes.
Andy

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by Dottie57 » Sat Dec 09, 2017 9:58 am

It certainly answers why my 401k didn't do that well. Of course the financial crisis did not help. Nor did the recession earlier in the decade. :beer

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by livesoft » Sat Dec 09, 2017 10:06 am

It sure answers why my 401(k) did so well in the years after 2009. :shock:

We routinely see youngish accumulators say they are wishing for a market crash so that they can buy more shares at lower prices. Well, guess what? That happened for those of us who could sock it away from 2000-2009. We are making a killing with our investments in just the years since 2009.
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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by nisiprius » Sat Dec 09, 2017 10:16 am

That's just an artifact of the coincidence of the crash happening to occur in a year ending in 9. According to a list of the "Largest Declines in U.S. Stock Market History," from 1871-present there were 1. There were, respectively, 4, 1, 2, 2, 1, 0, 0, 2, 4, 1 crashes whose bottom was in years ending in 0, 1, 2, 3, 4, 5, 6, 7, 8, 9.

If you'd chosen decades ending in 2, i.e. 1913-1922, 1923-1932, 1933-1942, etc. you'd have gotten a different result.

All this proves is that a) there isn't really all that much data, b) one year isn't long enough for the stock market to be even reasonably stable, therefore it can matter enormously if the bottom happened to occur mid-year or near the end of the year, c) ten years isn't long enough for stock market fluctuations to "average out."

What bothers me is the feeling that optimists like to gen up stuff like this to "prove" that 2008-2009 was so extraordinary that it shouldn't count in our planning, because it surely won't happen again. I can only imagine how people felt when the stock market crashed in 1937, a 50% decline (i.e. about the same as 2008-2009) occurring just after it looked as if it had finally recovered from 1929-1932.

As Nassim Nicholas Taleb has pointed out, it is always true that the "worst" to date, at the time it occurred, was worse than anything that had ever happened before. The Olympics would be boring if we couldn't count on athletes breaking records every Olympiad, but sometime it seems as if we don't expect that to happen with financial statistics.
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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by Solo Prosperity » Sat Dec 09, 2017 10:36 am

I agree Nisi. My guess is 29-38 is the worst "decade". Also, if this was done on a real basis, my guess is that the 70-79 period wins.

Anyways, the point remains. Diversify and stay the course. Whether that's geographically, by factors, etc. Find the mix that works for you, save, and go live.

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by SimpleGift » Sat Dec 09, 2017 11:11 am

Robert T wrote:
Sat Dec 09, 2017 8:56 am
Diversification paid off.
Yes, diversification does pay off in some decades. Prior to 2000, and after about 2013, the S&P 500 was consistently near the top of best performing asset classes (chart below). But for the so called "Lost Decade" of 2000-2009, holding almost any other asset class — including small caps, emerging market stocks, value stocks — really paid off.
In recent decades, this dynamic seems mostly driven by the tech sector booms and busts (large-cap growth stocks).
Last edited by SimpleGift on Sat Dec 09, 2017 11:18 am, edited 1 time in total.
Cordially, Todd

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by Robert T » Sat Dec 09, 2017 11:18 am

QuietProsperity wrote:
Sat Dec 09, 2017 10:36 am
I agree Nisi. My guess is 29-38 is the worst "decade". Also, if this was done on a real basis, my guess is that the 70-79 period wins.
Can check this in DFA matrix book https://www.ifa.com/pdf/matrix%20book%202017.pdf

Worst 10-year period for US large cap stocks of any 10-year period from 1926 to 2016 (annualized real return, %)

It’s a tie:

1999-2008 = -3.8%
1965-1974 = -3.8%

1929-1938 = +1.1%

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by Toons » Sat Dec 09, 2017 11:59 am

Sounds like the "best buying opportunity to me"
:happy
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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by inbox788 » Sat Dec 09, 2017 12:00 pm

Robert T wrote:
Sat Dec 09, 2017 11:18 am
Can check this in DFA matrix book https://www.ifa.com/pdf/matrix%20book%202017.pdf
Interesting report. Don't understand all those complicated tables, but the World Equity Market Capitalization on page 38 is a very interesting graphic.

US 54% - no surprise there

AAPL $618B is relatively small compared to total US, but bigger than all of South America combined (including Brazil and Mexico)! It's also bigger than Sweden, Spain or India, and nearly the size of South Korea, which should include it's arch-rival Samsung along with dozens of other large companies in that country. Another way to compare it is that it's about half the market cap of Canada, France, Germany or China.

BTW, the following page Global Bond Market may give you pause when the US is only 32% of the total world market and you may only be holding US bonds. Or reassurance if you like to look at things like debt/GDP or debt/market cap type ratios. Eyeballing it, the US is 2/3 Government debt vs 1/3 corporate, while the rest of the world is largely Government debt (dark green), FWIW.

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by arcticpineapplecorp. » Sat Dec 09, 2017 12:20 pm

Toons wrote:
Sat Dec 09, 2017 11:59 am
Sounds like the "best buying opportunity to me"
:happy
beat me to it. ^This. If you're buying stocks do you want the price to rise or fall (read closely...the question was "buying" stocks, not "selling" stocks)? Of course you want the prices to fall. 40% decline (2000-2002) and 50% decline (2007-2009) in one decade sounds like two great buying opportunities to me.

2000-2009 was great for investors (buyers), not so much for retirees (sellers). The last 8 years (2010-2017) have been great for sellers, buyers have been continuing to buy shares at ever increasing prices (and returns shouldn't be as good as if you bought those same shares at lower prices).

Lousy years tend to make for great investments (because bad years pave the way for great years) while great years tend to make for lousy investments (because great years pave the way for bad years). Think about it.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by Solo Prosperity » Sat Dec 09, 2017 12:50 pm

Robert T wrote:
Sat Dec 09, 2017 11:18 am
QuietProsperity wrote:
Sat Dec 09, 2017 10:36 am
I agree Nisi. My guess is 29-38 is the worst "decade". Also, if this was done on a real basis, my guess is that the 70-79 period wins.
Can check this in DFA matrix book https://www.ifa.com/pdf/matrix%20book%202017.pdf

Worst 10-year period for US large cap stocks of any 10-year period from 1926 to 2016 (annualized real return, %)

It’s a tie:

1999-2008 = -3.8%
1965-1974 = -3.8%

1929-1938 = +1.1%

Robert
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Thank you Robert. Learned something new today.

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by nisiprius » Sat Dec 09, 2017 1:19 pm

Robert T wrote:
Sat Dec 09, 2017 11:18 am
QuietProsperity wrote:
Sat Dec 09, 2017 10:36 am
I agree Nisi. My guess is 29-38 is the worst "decade". Also, if this was done on a real basis, my guess is that the 70-79 period wins.
Can check this in DFA matrix book https://www.ifa.com/pdf/matrix%20book%202017.pdf

Worst 10-year period for US large cap stocks of any 10-year period from 1926 to 2016 (annualized real return, %)

It’s a tie:

1999-2008 = -3.8%
1965-1974 = -3.8%

1929-1938 = +1.1%

Robert
.
Interesting. Cool.
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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by nedsaid » Sat Dec 09, 2017 1:40 pm

Thanks Robert. This is in line with my comments about secular bear markets, extended periods of time where the stock market is essentially flat. Sometimes you have to be really patient to get the equity premium. The market was essentially flat from about 1929 - 1948, from 1968 - 1984, and from 1999 - 2012. Perhaps Robert can produce more precise time periods and state them in terms of real rates of return. I also want to make the point that even though stocks are perceived as an inflation hedge, inflation spikes can be devastating to stocks in the shorter term. Stagflation was very hard on stocks and even worse for bonds.
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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by nisiprius » Sat Dec 09, 2017 3:23 pm

nedsaid wrote:
Sat Dec 09, 2017 1:40 pm
...I also want to make the point that even though stocks are perceived as an inflation hedge, inflation spikes can be devastating to stocks in the shorter term. Stagflation was very hard on stocks and even worse for bonds...
Indeed.
In 1973, Benjamin Graham wrote:On this point we can be categorical. There is no close time connection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices. The obvious example is the recent period 1966-1970. The rise in the cost of living was 22%... but both stock earnings and stock prices have declined since 1965. There are similar contradictions in both directions in the record of previous five-year periods.
In 1979, in 'The Death of Equities,' BusinessWeek wrote:The one rule whose demise did the stock market in could be summed up thus: By buying stocks, investors could beat inflation. Stocks were a reasonable hedge when inflation was low. But they proved helpless against the awesome inflation of the past decade. "People no longer think of stocks as an inflation hedge, and based on experience, that's a reasonable conclusion for them to have reached," says Richard Cohn, an associate professor of finance at the University of Illinois. Indeed, since 1968, according to a study by Salomon of Salomon Bros., stocks have appreciated by a disappointing compound annual rate of 3.1%, while the consumer price index has surged by 6.5%.
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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by nedsaid » Sat Dec 09, 2017 3:36 pm

nisiprius wrote:
Sat Dec 09, 2017 3:23 pm
nedsaid wrote:
Sat Dec 09, 2017 1:40 pm
...I also want to make the point that even though stocks are perceived as an inflation hedge, inflation spikes can be devastating to stocks in the shorter term. Stagflation was very hard on stocks and even worse for bonds...
Indeed.
In 1973, Benjamin Graham wrote:On this point we can be categorical. There is no close time connection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices. The obvious example is the recent period 1966-1970. The rise in the cost of living was 22%... but both stock earnings and stock prices have declined since 1965. There are similar contradictions in both directions in the record of previous five-year periods.
In 1979, in 'The Death of Equities,' BusinessWeek wrote:The one rule whose demise did the stock market in could be summed up thus: By buying stocks, investors could beat inflation. Stocks were a reasonable hedge when inflation was low. But they proved helpless against the awesome inflation of the past decade. "People no longer think of stocks as an inflation hedge, and based on experience, that's a reasonable conclusion for them to have reached," says Richard Cohn, an associate professor of finance at the University of Illinois. Indeed, since 1968, according to a study by Salomon of Salomon Bros., stocks have appreciated by a disappointing compound annual rate of 3.1%, while the consumer price index has surged by 6.5%.
Investors did get their inflation adjustment, though it took until sometime in the mid-1980's before they got it. So yes, stocks do hedge inflation but with a very important qualification, you might have to wait awhile to get your inflation adjustment. In the case of 1970's stagflation, it took a decade or more.
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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by david1082b » Sat Dec 09, 2017 3:49 pm

letsgobobby wrote:
Sat Dec 09, 2017 8:59 am
Huh, it's almost like a record high CAPE actually did predict something...
CAPE doesn't have to be at record highs for its proponents to predict bad returns, I mean here is Shiller from the summer of 1996:

"Today, with a ratio of 29.72, well above average though not at record levels. The fitted value for today of the regression is –.479, implying an expected decline in the real Standard and Poor Index over the next 10 years of 38%" http://www.econ.yale.edu//~shiller/data/peratio.html

The next ten years saw positive returns. These days CAPE is used almost every year to predict bad returns. If you use it every year you will be correct eventually due to stopped-clock syndrome. Shiller kept on repeating himself and published a book and got turned into a legend. His 1996 mis-step has become a tiny footnote that almost nobody hears about.

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by nisiprius » Sat Dec 09, 2017 4:11 pm

nedsaid wrote:
Sat Dec 09, 2017 3:36 pm
...Investors did get their inflation adjustment, though it took until sometime in the mid-1980's before they got it. So yes, stocks do hedge inflation but with a very important qualification, you might have to wait awhile to get your inflation adjustment. In the case of 1970's stagflation, it took a decade or more...
Yes, but, nedsaid, most things hold real value if you are willing to wait "awhile." Most things. Not just stocks. Not just real estate. Not just commodities. Also series I savings bonds, salaries, decent competitive interest-earning bank accounts, rolling bond ladders. Most things. The things that don't are the exceptions: individual nominal bonds when confronted with unexpected inflation, and literal cash (physical currency). Almost anything except nominal bonds and physical currency can be claimed as an "inflation hedge," just as almost anything can be claimed to be a "diversifier."
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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by nedsaid » Sat Dec 09, 2017 4:31 pm

nisiprius wrote:
Sat Dec 09, 2017 4:11 pm
nedsaid wrote:
Sat Dec 09, 2017 3:36 pm
...Investors did get their inflation adjustment, though it took until sometime in the mid-1980's before they got it. So yes, stocks do hedge inflation but with a very important qualification, you might have to wait awhile to get your inflation adjustment. In the case of 1970's stagflation, it took a decade or more...
Yes, but, nedsaid, most things hold real value if you are willing to wait "awhile." Most things. Not just stocks. Not just real estate. Not just commodities. Also series I savings bonds, salaries, decent competitive interest-earning bank accounts, rolling bond ladders. Most things. The things that don't are the exceptions: individual nominal bonds when confronted with unexpected inflation, and literal cash (physical currency). Almost anything except nominal bonds and physical currency can be claimed as an "inflation hedge," just as almost anything can be claimed to be a "diversifier."
Inflation spikes are tough on most things except for maybe commodities. Bond investors, according to Bill Bernstein, lost about 50% of purchasing power from about 1946-1982. Bond investors had to wait even longer than stock investors for their inflation adjustment. Some people saw their purchasing power reduced by inflation and never really recovered. In some situations for some people, even wages don't automatically adjust for inflation. I think we can agree that inflation spikes are a bad thing. The economy eventually adjusts and investments mostly, kind of, sort of, maybe, adjust for inflation too. I think we can also agree that the adjustments are sometimes uneven and certainly not guaranteed.
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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by CyclingDuo » Sat Dec 09, 2017 5:09 pm

nedsaid wrote:
Sat Dec 09, 2017 1:40 pm
Thanks Robert. This is in line with my comments about secular bear markets, extended periods of time where the stock market is essentially flat. Sometimes you have to be really patient to get the equity premium. The market was essentially flat from about 1929 - 1948, from 1968 - 1984, and from 1999 - 2012. Perhaps Robert can produce more precise time periods and state them in terms of real rates of return. I also want to make the point that even though stocks are perceived as an inflation hedge, inflation spikes can be devastating to stocks in the shorter term. Stagflation was very hard on stocks and even worse for bonds.
The visual...

Image
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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by Thesaints » Sat Dec 09, 2017 5:12 pm

In 109 years there are 99 different decades.

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by asif408 » Sat Dec 09, 2017 6:12 pm

david1082b wrote:
Sat Dec 09, 2017 3:49 pm
letsgobobby wrote:
Sat Dec 09, 2017 8:59 am
Huh, it's almost like a record high CAPE actually did predict something...
CAPE doesn't have to be at record highs for its proponents to predict bad returns, I mean here is Shiller from the summer of 1996:

"Today, with a ratio of 29.72, well above average though not at record levels. The fitted value for today of the regression is –.479, implying an expected decline in the real Standard and Poor Index over the next 10 years of 38%" http://www.econ.yale.edu//~shiller/data/peratio.html
Not sure your point quoting the above. That is pretty much exactly what happened: http://quotes.morningstar.com/chart/fun ... 2%3A955%7D

Actually fell over 40%, but overall, that's a pretty good prediction on Shiller's part.

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by siamond » Sat Dec 09, 2017 6:15 pm

I gave it a quick run with the Simba spreadsheet, where we can easily assemble rolling returns charts in real or nominal terms, for a given portfolio. Click (once or twice) to see a larger version of the charts.

Image

Image

I played a bit with the AA, adding some bonds. This would have (mostly) cured the issue in recent times, but wouldn't have helped much for the two other troublesome time periods (late 60s and beginning of the century).

Finally, since it always annoys me to see charts showing risks & rewards associated with stocks without also showing risks & rewards associated with bonds, I did the same with 100% bonds. Sobering, isn't it?

Image

Image

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by garlandwhizzer » Sat Dec 09, 2017 6:29 pm

Thanks for posting this, Robert T, it makes a critical point. The 2000 - 2009 period demonstrates that significant diversification may be achieved simply by using different slices of equity assets. US LC index had very different returns from EM or even a well-run US SCV fund. Of course bonds provided equity diversification as they always do. Some choose to add other non-correlated assets to further increase diversification. Whatever strategy you choose, diversification smoothes out the roller coaster ride.

The problem with serious market risk in the future is that we don't know when it will happen or which investment segments it will be most affected. It can come from a surprising source like the housing price/financial collapse 0f 2007-90 which almost no one foresaw. High quality bonds saved you then. But in the inflation crisis of 1970-1980, bonds suffered more than stocks. When you don't know where the future economic crisis in going to come from, having a widely diversified asset base is sound protection. You won't hit home run after home run, but neither will you strike out. My own portfolio includes high quality bonds (the best diversifier for equity volatility), cap-weighted equity indexes, fundamental index exposure, and both small and value factor exposure in all geographies (US,DM,EM) and all cap weight segments. It's a complicated portfolio for a 70 year old. At some point in the not too distant future, I may switch to a 3 fund or even simpler balanced fund or life strategy fund approach. Simplicity has great appeal as you get older. Whatever I choose, however, will be a broadly diversified portfolio.

The Bitcoin mania has been very rewarding to date, but many investors who flock to it are taking the opposite approach to diversification. Concentrating their investments in a tiny segment of the market whose appeal rests largely on an exciting new story and new product with theoretical appeal. You can get rich quick investing in it--many have--but I believe the opposite can happen as well. You can also get poor quick.

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by longinvest » Sat Dec 09, 2017 7:39 pm

Nedsaid,

First, for investors really worried about inflation, there now exist inflation-indexed bonds (TIPS) and inflation-indexed cash investments (I-Bonds).

Second, I think it's important to deconstruct an investment myth: that nominal bonds are vulnerable to inflation. Things are not as simple as a quick glimpse at an inflation-adjusted growth chart could lead one to think. One has to go beyond the chart and understand what happened in the real world and the choices a bond investor could have made at the time.
nedsaid wrote:
Sat Dec 09, 2017 4:31 pm
Inflation spikes are tough on most things except for maybe commodities. Bond investors, according to Bill Bernstein, lost about 50% of purchasing power from about 1946-1982.
Actually, the only worrisome bond losses happened in the 1940s and early 1950s, because interest rates were subject to price controls and interest rate pegging* **. In other words, during a period when inflation went, sometime, near 20%, the government forced all interest rates (short-term to long-term) to remain low near 2% to 3%. During this period, a 10-year ladder-like bond fund (selling its bonds on the market 1 year prior to maturity) would have lost almost 35%, in inflation-adjusted terms. And that was it. It was a one-time government-caused loss of purchase power.

* Interest Rate Controls: The United States in the 1940s on JSTOR
** Before the Accord: US Monetary - Fiscal Policy 1945 -1951

Losses weren't due to free bond market pricing. The bond market wasn't allowed to set prices normally by devaluing bonds (due to high inflation) which would have caused yields to immediately spike. Losses were due to deliberate government action to keep bond prices high (yields low). But, here's the important point: The bond investor was perfectly aware of the situation at the time. He knew that money left into bonds was losing purchase power. He had the ability to act. The bond investor could have accepted the government's offer to buy back his bonds at a 2% to 3% yield to maturity in a high-inflation environment and invest his money elsewhere. The bond investor didn't have to accept low yields in a high-inflation environment. Of course, the question was: Where to invest it? Cash had lower yields than bonds, so it was no refuge. Private gold possession was outlawed since 1934. I guess that left little choice other than to invest the money into real estate and stocks.

Here's a chart I've shown, recently, in another thread:
longinvest wrote:
Tue Dec 05, 2017 11:15 am
Here's a historical inflation-adjusted bond total-return chart for 1940 to 1985:
Image
(Source data for constructing the chart: VPW backtesting spreadsheet)

We see the loss of purchase power in the 1940s, due to yields significantly trailing inflation. We also see a few years dip, in the late 1970s, when inflation was raging up and yields were following up. As expected, it took a few years lag for the impact of higher yields to be fully reflected into total returns; nothing surprising, here. What's actually surprising is how yields kept a big spread over trailing inflation afterwards, explaining a gain equivalent to the losses of the 1940s in a few years, in the early 1980s. My point is that both events are completely unrelated. There was a government-imposed real loss in the 1940s. In the 1980s, bond investors became very demanding for higher yields.
The government finally allowed the market to price bonds normally since 1952. If we look at the above chart starting in 1952, we see that nominal bonds did preserve their value on a total-return basis, in inflation-adjusted terms, and even gained additional purchase power over inflation. There was a dip in the second half of the 1970s, due to bond yields going continuously up, adjusting for inflation. As bond math tells us, this was normal. The higher yields explain the surge in total returns that followed.

In the 1970s, bonds actually did better than stocks; they were less volatile and yet delivered almost as much in returns. Here's a chart I've shown in another thread that makes this pretty obvious:
longinvest wrote:
Fri Aug 26, 2016 8:46 am
Just for reference, here's a total-return chart I made, on another thread, to show the comparative growth of an intermediate-duration ladder-like bond fund and the S&P 500 in the worst high-inflation part of the 1970s to mid-1980s:

viewtopic.php?f=10&t=198104#p3027801
Image

By looking at a nominal chart, we can clearly see that all along, the bond fund had positive annual total returns. The S&P 500 (with dividends reinvested), on the other hand, did as it always does, it fluctuated. In 1973-1975, it had a big down fluctuation, losing 30% while inflation was going up 20%, for example.

We're almost never shown such charts. Usually, the nominal fund returns are combined with the impact of inflation and we're shown inflation-adjusted charts, leading to the impression that bonds are volatile. This impression is compounded, of course, when long-term bonds (which are volatile) are used to represent bond returns.

People invested in intermediate bonds, during the above period, just saw an increasing portfolio balance on their annual statements, unlike stock investors who didn't fare much better, in the end, over that period.
In summary, I think that nominal bonds are way less risky than often portrayed. What's actually risky, for nominal bond investors, isn't inflation; it's to leave money into nominal bonds when their yields are way below current inflation... assuming that one knows of a better place where to put the money, of course...
Last edited by longinvest on Thu Apr 12, 2018 6:49 am, edited 2 times in total.
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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by SimpleGift » Sat Dec 09, 2017 7:50 pm

garlandwhizzer wrote:
Sat Dec 09, 2017 6:29 pm
The 2000 - 2009 period demonstrates that significant diversification may be achieved simply by using different slices of equity assets. US LC index had very different returns from EM or even a well-run US SCV fund. Of course bonds provided equity diversification as they always do. Some choose to add other non-correlated assets to further increase diversification. Whatever strategy you choose, diversification smooths out the roller coaster ride.
To further this point, during the so-called "Lost Decade" (January 2000-December 2009), I imagine those investors with portfolios dominated by U.S. large cap stocks had a very difficult time “staying the course,” when REITs, small value and emerging market stocks were all outperforming by such a large margin (chart below).
  • Image
    Note: This chart shows cumulative total returns for the decade.
    Source: Better Money
At times, a simple 2- or 3-fund portfolio requires just as much conviction and discipline as a more diversified portfolio!
Cordially, Todd

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by Toons » Sat Dec 09, 2017 7:51 pm

arcticpineapplecorp. wrote:
Sat Dec 09, 2017 12:20 pm
Toons wrote:
Sat Dec 09, 2017 11:59 am
Sounds like the "best buying opportunity to me"
:happy
beat me to it. ^This. If you're buying stocks do you want the price to rise or fall (read closely...the question was "buying" stocks, not "selling" stocks)? Of course you want the prices to fall. 40% decline (2000-2002) and 50% decline (2007-2009) in one decade sounds like two great buying opportunities to me.

2000-2009 was great for investors (buyers), not so much for retirees (sellers). The last 8 years (2010-2017) have been great for sellers, buyers have been continuing to buy shares at ever increasing prices (and returns shouldn't be as good as if you bought those same shares at lower prices).

Lousy years tend to make for great investments (because bad years pave the way for great years) while great years tend to make for lousy investments (because great years pave the way for bad years). Think about it.
You Hit The Nail On The Head
We Think Alike. :sharebeer
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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by Thesaints » Sat Dec 09, 2017 8:00 pm

Are bond prices free today ?

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by longinvest » Sat Dec 09, 2017 8:02 pm

Thesaints wrote:
Sat Dec 09, 2017 8:00 pm
Are bond prices free today ?
Is there a law that prohibits me from selling a Treasury bond or another bond, in my possession, at the price I want to sell it to another investor?
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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by staythecourse » Sat Dec 09, 2017 8:04 pm

Toons wrote:
Sat Dec 09, 2017 7:51 pm
arcticpineapplecorp. wrote:
Sat Dec 09, 2017 12:20 pm
Toons wrote:
Sat Dec 09, 2017 11:59 am
Sounds like the "best buying opportunity to me"
:happy
beat me to it. ^This. If you're buying stocks do you want the price to rise or fall (read closely...the question was "buying" stocks, not "selling" stocks)? Of course you want the prices to fall. 40% decline (2000-2002) and 50% decline (2007-2009) in one decade sounds like two great buying opportunities to me.

2000-2009 was great for investors (buyers), not so much for retirees (sellers). The last 8 years (2010-2017) have been great for sellers, buyers have been continuing to buy shares at ever increasing prices (and returns shouldn't be as good as if you bought those same shares at lower prices).

Lousy years tend to make for great investments (because bad years pave the way for great years) while great years tend to make for lousy investments (because great years pave the way for bad years). Think about it.
You Hit The Nail On The Head
We Think Alike. :sharebeer
Personally, I don't remember too many folks rejoicing having nothing to show for a year long run of no return. Guess you two experiences were different.

What I do think this really shows is NOT to bet all on one basket even within the u.s. equity world.

Good luck.
Last edited by staythecourse on Sat Dec 09, 2017 8:48 pm, edited 1 time in total.
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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by Thesaints » Sat Dec 09, 2017 8:07 pm

longinvest wrote:
Sat Dec 09, 2017 8:02 pm
Thesaints wrote:
Sat Dec 09, 2017 8:00 pm
Are bond prices free today ?
Is there a law that prohibits me from selling a Treasury bond or another bond, in my possession, at the price I want to sell it to another investor?
Was there in 1951 ?

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by longinvest » Sat Dec 09, 2017 8:11 pm

Thesaints wrote:
Sat Dec 09, 2017 8:07 pm
longinvest wrote:
Sat Dec 09, 2017 8:02 pm
Thesaints wrote:
Sat Dec 09, 2017 8:00 pm
Are bond prices free today ?
Is there a law that prohibits me from selling a Treasury bond or another bond, in my possession, at the price I want to sell it to another investor?
Was there in 1951 ?
Here's a reply posted by Barry Barnitz in another thread:
Barry Barnitz wrote:
Fri Aug 26, 2016 1:52 pm
Hi:
Please note that interest rates in the 1940's were subject to price controls and interest rate pegging. See --->

Interest Rate Controls: The United States in the 1940s on JSTOR
Before the Accord: US Monetary - Fiscal Policy 1945 -1951

regards,
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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by Thesaints » Sat Dec 09, 2017 8:13 pm

How were those measures different from today’s ?

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by arcticpineapplecorp. » Sat Dec 09, 2017 8:16 pm

staythecourse wrote:
Sat Dec 09, 2017 8:04 pm
Toons wrote:
Sat Dec 09, 2017 7:51 pm
arcticpineapplecorp. wrote:
Sat Dec 09, 2017 12:20 pm
Toons wrote:
Sat Dec 09, 2017 11:59 am
Sounds like the "best buying opportunity to me"
:happy
beat me to it. ^This. If you're buying stocks do you want the price to rise or fall (read closely...the question was "buying" stocks, not "selling" stocks)? Of course you want the prices to fall. 40% decline (2000-2002) and 50% decline (2007-2009) in one decade sounds like two great buying opportunities to me.

2000-2009 was great for investors (buyers), not so much for retirees (sellers). The last 8 years (2010-2017) have been great for sellers, buyers have been continuing to buy shares at ever increasing prices (and returns shouldn't be as good as if you bought those same shares at lower prices).

Lousy years tend to make for great investments (because bad years pave the way for great years) while great years tend to make for lousy investments (because great years pave the way for bad years). Think about it.
You Hit The Nail On The Head
We Think Alike. :sharebeer
Personally, I don't remember to many folks rejoicing having nothing to show for a year long run of no return. Guess you two experiences were different.

What I do think this really shows is NOT to bet all on one basket even within the u.s. equity world.

Good luck.
but as Warren Buffet put it...If you're young and starting out investing you should get down on your knees and pray for a 30 year bear market. Then as you're coming into retirement you should be getting on your hands and knees and pray for a 30 year bull market.

So it doesn't matter that you don't get good returns for many years. That means you're buying stocks that haven't gone up yet. You want that. Otherwise you're just buying at higher and higher prices as the market goes up. Buying at higher prices leads to lower returns. If you're not planning on selling for decades (I'm not anyway) then I don't want the market to go up (well, ok, maybe just for the retirees' sakes).
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by grabiner » Sat Dec 09, 2017 8:25 pm

siamond wrote:
Sat Dec 09, 2017 6:15 pm
I gave it a quick run with the Simba spreadsheet, where we can easily assemble rolling returns charts in real or nominal terms, for a given portfolio. Click (once or twice) to see a larger version of the charts.

Image
So 1965-1974 was the worst ten-year period. The DFA data https://www.ifa.com/pdf/matrix%20book%202017.pdf says that 1965-1982 was the longest period that the S&P index underperformed inflation, and 1960-1974 the longest period that the total market (CRSP 1-10) underperformed.
Finally, since it always annoys me to see charts showing risks & rewards associated with stocks without also showing risks & rewards associated with bonds, I did the same with 100% bonds. Sobering, isn't it?

Image
This appears to imply that bonds are riskier than stocks over a 10-year period; they have been more likely to fall below inflation, and lost the same 4% annualized relative to inflation in their worst periods (1911-1920, 1941-1950, 1972-1981) as were stocks (1911-1920, 1965-1974, 1969-1978)

However, the actual risk of stocks is likely higher. You can now buy 10-year TIPS which are guaranteed to outperform inflation (by about 0.50%), and the risk of disasters affecting the stock market is probably greater but has not happened in the US.
Wiki David Grabiner

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by ClevrChico » Sat Dec 09, 2017 8:27 pm

Makes sense. I worked with someone fairly young that went to 100% stable value in their 401k after seeing negative returns year after year during this time period. Their AA will always likely be stable value. :shock:

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by staythecourse » Sat Dec 09, 2017 8:55 pm

arcticpineapplecorp. wrote:
Sat Dec 09, 2017 8:16 pm
staythecourse wrote:
Sat Dec 09, 2017 8:04 pm
Toons wrote:
Sat Dec 09, 2017 7:51 pm
arcticpineapplecorp. wrote:
Sat Dec 09, 2017 12:20 pm
Toons wrote:
Sat Dec 09, 2017 11:59 am
Sounds like the "best buying opportunity to me"
:happy
beat me to it. ^This. If you're buying stocks do you want the price to rise or fall (read closely...the question was "buying" stocks, not "selling" stocks)? Of course you want the prices to fall. 40% decline (2000-2002) and 50% decline (2007-2009) in one decade sounds like two great buying opportunities to me.

2000-2009 was great for investors (buyers), not so much for retirees (sellers). The last 8 years (2010-2017) have been great for sellers, buyers have been continuing to buy shares at ever increasing prices (and returns shouldn't be as good as if you bought those same shares at lower prices).

Lousy years tend to make for great investments (because bad years pave the way for great years) while great years tend to make for lousy investments (because great years pave the way for bad years). Think about it.
You Hit The Nail On The Head
We Think Alike. :sharebeer
Personally, I don't remember to many folks rejoicing having nothing to show for a year long run of no return. Guess you two experiences were different.

What I do think this really shows is NOT to bet all on one basket even within the u.s. equity world.

Good luck.
but as Warren Buffet put it...If you're young and starting out investing you should get down on your knees and pray for a 30 year bear market. Then as you're coming into retirement you should be getting on your hands and knees and pray for a 30 year bull market.

So it doesn't matter that you don't get good returns for many years. That means you're buying stocks that haven't gone up yet. You want that. Otherwise you're just buying at higher and higher prices as the market goes up. Buying at higher prices leads to lower returns. If you're not planning on selling for decades (I'm not anyway) then I don't want the market to go up (well, ok, maybe just for the retirees' sakes).
My point is NOT the logic behind it, but the fact so many folks seemed like they were in the midst of that time period jumping up and down thanking God the market was flat during that time. How many folks do you know during that time were jumping up and down and using that quote. Can we do a search on this very site and see how many folks used that line?? My guess, is few to NONE. It is bravado to use it now ex post.

BTW, I can easily quibble with that quote from Mr. Buffet or Dr. Bernstein (where I first read it in IAA). That is great IF (big if) that you don't get fired during that time AND have to withdraw from a flat 401k and no additional funds to continue to buy "cheaper" prices. Usually when stock prices are at its best to buy the reason is the economy is tanking and many folks lose their jobs so not so great overall.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by arcticpineapplecorp. » Sat Dec 09, 2017 10:15 pm

staythecourse wrote:
Sat Dec 09, 2017 8:55 pm
My point is NOT the logic behind it, but the fact so many folks seemed like they were in the midst of that time period jumping up and down thanking God the market was flat during that time. How many folks do you know during that time were jumping up and down and using that quote. Can we do a search on this very site and see how many folks used that line?? My guess, is few to NONE. It is bravado to use it now ex post.

BTW, I can easily quibble with that quote from Mr. Buffet or Dr. Bernstein (where I first read it in IAA). That is great IF (big if) that you don't get fired during that time AND have to withdraw from a flat 401k and no additional funds to continue to buy "cheaper" prices. Usually when stock prices are at its best to buy the reason is the economy is tanking and many folks lose their jobs so not so great overall.

Good luck.
I'm not using bravado. I stayed the course. I don't get upset at whatever the market does. It's going to do whatever it wants regardless of what I or others might want. I accept the return of the market. And I know returns are uneven. I am patient, which is what is required to invest. Like ClvrChico I watched my co-worker in 2008 sell out of the stock market completely and go entirely to stable value and money market. That was a mistake because she sold low and missed the run up since. It was a mistake because she wasn't at risk of losing her job as so many were at that time. it was a mistake because she had another 2 decades until retirement, so plenty of time to make up for losses.It was a mistake because while she didn't have enough to retire prior to 2008 (or else she wouldn't have been working. She didn't love the job), she certainly had even less by selling stocks low in 2008.

I sympathize with those that lost their jobs at that time and am fortunate to have not have been among them. But stocks are for the long term. They're not for cashing in when you lose a job. That's what emergency savings are for. And if you don't have enough emergency savings to cover you until your next job then the answer is to build up more emergency savings. I.E., stop investing if you don't have enough to cover your emergencies.

Finally, without going back and re-reading I don't remember anyone pointing out a 10 year return is essentially meaningless because:

1. who invests for just 10 years?
Assuming a normal retirment age of 65, that would be like a late investor who only bought stocks from age 55-65 and then retired. Not impossible, but not usual. Or would it be someone who starts investing from age 35-45 and then not making any new investments from ages 45-65? Why?

2. Looking at a 10 year (or decade, you'lll see the difference when we get to #3 below) means you lump summed at the start of the 10 year period and never invested another penny during those 10 years. Does that describe most people's actual behaviors? No. People dollar cost average. They invest when they get money. They might increase contributions with raises or decrease with job loss/change, etc. But the stated return from 2000-2009 is most definitely not what the average person did, i.e. lump sum 1/1/2000 and never add aother penny for the next 10 years.

3. Finally, it's a bit arbitrary to look at returns over decades. Why not 10 year periods instead? Some of you might say, "What's the difference?" The difference is a decade equals 10 years but 10 years does not have to equal a decade.

So look at 2000-2009 if you wish (a decade, which by definition is 10 years) and you'll see a lousy return.
Move the goal post 3 years and look at 2003-2012 (also 10 years, but NOT a decade) and you'll see that stocks doubled in value.

So we can cherry pick whatever we want to make a point. I feel like we've discussed this very topic before because the responses I've given above I'm pretty sure I've argued before.
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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by siamond » Sun Dec 10, 2017 12:08 am

grabiner wrote:
Sat Dec 09, 2017 8:25 pm
However, the actual risk of stocks is likely higher. You can now buy 10-year TIPS which are guaranteed to outperform inflation (by about 0.50%), and the risk of disasters affecting the stock market is probably greater but has not happened in the US.
I don't know if the actual risk of stocks is 'likely higher'. It strongly depends on one's definition of 'risk' and corresponding time horizons, and this is something highly personal. I do agree with you that one might see worst stock crises than what occurred so far in the US, but we can make a corresponding factual statement about -regular- bonds (there are multiple examples of bond crises in the history of developed countries which have been worse than US post-WW-II -- which was hardly a 'one time' event, governments under duress did and will do all sorts of extreme things).

I wasn't trying to say that bonds are more or less risky than stocks. They are just different animals, coming with their own risks, which are both severe. It just annoys me when people cherry-pick data points about stocks history, while trying to pull under the rug similar issues about bonds, that's all.

As to TIPS, this is an entirely different animal which comes with its own issues (and no meaningful history in times of extreme duress and/or high inflation, so... I don't know, nor does anybody else). And this has been discussed ad nauseam in other threads.

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by longinvest » Sun Dec 10, 2017 9:23 am

I am amazed at the fear of TIPS (and why not I-Bonds?) displayed here. Personally, I can't put on the same level of risk a security which promises CPI-adjusted payments (coupons and principal) on specific dates and another which only gives me a minority vote and a right to my share of unknown future dividends on unknown dates, and no promise for getting my money back.

In times of war or financial turmoil, governments can do a lot of bad things to investors. They can confiscate bonds, stocks, gold, real estate, and even lives. This has happened in the past. Governments can default. They can adopt fiscal policies leading to runaway inflation while keeping a tight lid on official interest rates. In some situations, investors can avoid the worst by moving their money from an asset to another, other times they can't. This is a practically-unavoidable deep risk.

The best way to mitigate this deep risk is to diversify one's investments. The way I do that is to invest into stocks (domestic and international), and bonds (nominal and inflation-indexed). I just don't know what a future government hungry for money will attack. A likely first target is domestic stock holdings by international investors, because it's an easy one (doesn't directly harm voters). In case of a loss of control on inflation, would the government be more tempted to selectively default on TIPS or repeat the 1940s interest-rate control policy, to inflate away debt? Would the government, instead, decide that stock holdings is where the easy money resides, and decide to change taxation rules for stocks, like having to pay taxes on unrealized capital gains annually at normal income tax rates? That could happen too, and it would be really bad for stocks.

In Canada, where I live, the government has just changed, last year, the law to force reporting the sale of one's principal residence in order to continue benefitting from the capital gains tax exemption on principal residence. In the US, I there's a $250K cap on exempted capital gains on the sale of one's house which isn't automatically indexed to inflation and is thus getting eroded by inflation. So, even real estate can be a target for a money-hungry government.

One could try to move to another country, but the destination country could take similar actions.

There's simply no place to hide. We must live with the uncertainty of deep risk.

A Boglehead solution to this conundrum is to diversify one's portfolio across stock and bonds. As I said, I like to diversify my stocks across domestic and international holdings, and my bond across nominal and inflation-indexed holdings. Other Bogleheads take a different approach. Some avoid TIPS and international stocks. Others avoid bonds and cash altogether. Others use CDs and/or I-Bonds instead of bonds. Others prefer high-interest savings accounts. The biggest holding of many U.S. Bogleheads is domestic stocks. Some concentrate part of their stock holdings into specific market segments, a popular one being small-cap value stocks.

I like how Taylor Larimore puts it: There is more than one road to Dublin.

But, other than for deep risk, by any reasonable measure or definition of risk, bonds* are less risky than stocks*. This doesn't mean that they're riskless. They're as exposed to deep risk as stocks.

* I mean total-market indexed bonds and stocks funds or ETFs, excluding actively managed or portfolios concentrated into narrow market segments.
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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by nedsaid » Sun Dec 10, 2017 11:00 am

longinvest wrote:
Sat Dec 09, 2017 7:39 pm
Nedsaid,

First, for investors really worried about inflation, there now exist inflation-indexed bonds (TIPS) and inflation-indexed cash investments (I-Bonds).

Second, I think it's important to deconstruct an investment myth: that nominal bonds are vulnerable to inflation. Things are not as simple as a quick glimpse at an inflation-adjusted growth chart could lead one to think. One has to go beyond the chart and understand what happened in the real world and the choices a bond investor could have made at the time.
In summary, I think that nominal bonds are way less risky than often portrayed. What's actually risky, for nominal bond investors, isn't inflation; it's to leave money into nominal bonds when their yields are way below current inflation... assuming that one knows of a better place where to put the money, of course...

Thanks, longinvest for your excellent post. You paint a more optimistic picture of bonds during that time period than Bill Bernstein did. I have heard a couple of stories that investors in War bonds during WWII lost about 1/2 their buying power. The government ran up lots of debt to win the war but pretty much grew and inflated their way out of the debt. I didn't realize the US Government was artificially holding down interest rates, but it makes sense.

As far as stocks during the 1970's stagflation era, dividend yields were 3% to 6%, so with dividends reinvested, stock returns looked less bad. Today stocks yield a bit less than 2%.

To me, the big thing with nominal bonds is that they are okay as long as you reinvest the interest, particularly when interest rates are rising. Younger investors need not worry about changes in interest rates, they have long enough time horizons to ride it all out. Ditto for stock valuations, for a young investor, earnings will catch up with high expectations set by the market.

If you are a retiree or near retiree, you need to be more concerned about volatility in both the stock and bond markets, though bonds are far less volatile. Presumably as a retiree, one is harvesting interest, dividends, and capital gains to pay bills. The power of reinvestment is far, far less.
A fool and his money are good for business.

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by pkcrafter » Sun Dec 10, 2017 12:40 pm

Robert T, thanks for starting an interesting discussion. Here's some more data on market vs inflation.

http://www.simplestockinvesting.com/SP5 ... eturns.htm

Here are several misc charts for the data chompers.

http://www.macrotrends.net/1319/dow-jon ... ical-chart

Paul
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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by CyclingDuo » Sun Dec 10, 2017 2:59 pm

asif408 wrote:
Sat Dec 09, 2017 6:12 pm
david1082b wrote:
Sat Dec 09, 2017 3:49 pm
letsgobobby wrote:
Sat Dec 09, 2017 8:59 am
Huh, it's almost like a record high CAPE actually did predict something...
CAPE doesn't have to be at record highs for its proponents to predict bad returns, I mean here is Shiller from the summer of 1996:

"Today, with a ratio of 29.72, well above average though not at record levels. The fitted value for today of the regression is –.479, implying an expected decline in the real Standard and Poor Index over the next 10 years of 38%" http://www.econ.yale.edu//~shiller/data/peratio.html
Not sure your point quoting the above. That is pretty much exactly what happened: http://quotes.morningstar.com/chart/fun ... 2%3A955%7D

Actually fell over 40%, but overall, that's a pretty good prediction on Shiller's part.
I believe the point intended was, that if you use the chart that you provided, and change the starting date of that chart back to the Summer of 1996 when Shiller wrote what he said (the paper was on July 21, 1996), you get this...

Image

A nice round trip of euphoria, with a trip back down to where it all began. At no point during the 10 years, was the S&P down 38% from the Summer 1996 levels when he said that. July 21, 1996 and the S&P was around 633. It went back down to around 683 for the lows in 2009. However, using the 10 year measurement that Shiller mentioned - the S & P stood at around 1240 on July 21 2006 which meant it was up 96% from the time of his paper for the duration of 10 years that he mentioned.

The fitted value for today of the regression is –.479, implying an expected decline in the real Standard and Poor Index over the next 10 years of 38.07%.

Of course, then another ride up the investing roller coaster until the Financial Crisis removed the air once again for the screaming descent, and then here we are at the end of 2017 up 319% from the July 21, 1996 Shiller paper...

Image

Whether one predicts the market will rise based on CAPE, or the market will fall based on CAPE: good luck with the timing of it all - not to mention actual percentages of the moves.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by arcticpineapplecorp. » Sun Dec 10, 2017 6:59 pm

CyclingDuo wrote:
Sun Dec 10, 2017 2:59 pm
I believe the point intended was, that if you use the chart that you provided, and change the starting date of that chart back to the Summer of 1996 when Shiller wrote what he said (the paper was on July 21, 1996), you get this...

Image

A nice round trip of euphoria, with a trip back down to where it all began. At no point during the 10 years, was the S&P down 38% from the Summer 1996 levels when he said that. July 21, 1996 and the S&P was around 633. It went back down to around 683 for the lows in 2009. However, using the 10 year measurement that Shiller mentioned - the S & P stood at around 1240 on July 21 2006 which meant it was up 96% from the time of his paper for the duration of 10 years that he mentioned.

The fitted value for today of the regression is –.479, implying an expected decline in the real Standard and Poor Index over the next 10 years of 38.07%.

Of course, then another ride up the investing roller coaster until the Financial Crisis removed the air once again for the screaming descent, and then here we are at the end of 2017 up 319% from the July 21, 1996 Shiller paper...

Image

Whether one predicts the market will rise based on CAPE, or the market will fall based on CAPE: good luck with the timing of it all - not to mention actual percentages of the moves.

fyi you posted a NAV chart not a growth chart. There can be big differences. The NAV drops everytime dividends are paid but the growth chart reflects how much your investment was worth INCLUDING dividends. Dividends are a big part of your overall return. So I'm posting the same two charts you did, but instead as growth charts not NAV charts. Note the highlighted areas. This shows what the investments were worth. In the first one an initial $10,000 investment on 6/17/96 was worth $12,808.92 by 9/30/02 (up 28%):

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source: http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

The second chart shows a $10,000 investment on 6/17/96 was worth $59,559.66 (up 495.59%):

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source: http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

I think these graphs make the points better IMHO.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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nedsaid
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Re: 2000-09 worst decade for large cap stocks in 109 years

Post by nedsaid » Thu Apr 12, 2018 7:53 pm

longinvest wrote:
Sat Dec 09, 2017 7:39 pm
Nedsaid,

First, for investors really worried about inflation, there now exist inflation-indexed bonds (TIPS) and inflation-indexed cash investments (I-Bonds).

Nedsaid: Yes, I own TIPs and I am a big believer in them. I also own I-Bonds as well.

Second, I think it's important to deconstruct an investment myth: that nominal bonds are vulnerable to inflation. Things are not as simple as a quick glimpse at an inflation-adjusted growth chart could lead one to think. One has to go beyond the chart and understand what happened in the real world and the choices a bond investor could have made at the time.
nedsaid wrote:
Sat Dec 09, 2017 4:31 pm
Inflation spikes are tough on most things except for maybe commodities. Bond investors, according to Bill Bernstein, lost about 50% of purchasing power from about 1946-1982.
Actually, the only worrisome bond losses happened in the 1940s and early 1950s, because interest rates were subject to price controls and interest rate pegging* **. In other words, during a period when inflation went, sometime, near 20%, the government forced all interest rates (short-term to long-term) to remain low near 2% to 3%. During this period, a 10-year ladder-like bond fund (selling its bonds on the market 1 year prior to maturity) would have lost almost 35%, in inflation-adjusted terms. And that was it. It was a one-time government-caused loss of purchase power.

Nedsaid: I have read that elsewhere in the forum, you aren't the first poster here to bring this up. I have heard a couple of anecdotal stories that people who bought the war bonds lost about 1/2 of their purchasing power. This was probably due to what you said above, the US Government artificially keeping yields low during that time period.

I also remember when there was a cap on what banks could pay on savings accounts. I think that cap went away sometime during the 1980's. If you could provide information on that I would appreciate it.


* Interest Rate Controls: The United States in the 1940s on JSTOR
** Before the Accord: US Monetary - Fiscal Policy 1945 -1951

Losses weren't due to free bond market pricing. The bond market wasn't allowed to set prices normally by devaluing bonds (due to high inflation) which would have caused yields to immediately spike. Losses were due to deliberate government action to keep bond prices high (yields low). But, here's the important point: The bond investor was perfectly aware of the situation at the time. He knew that money left into bonds was losing purchase power. He had the ability to act. The bond investor could have accepted the government's offer to buy back his bonds at a 2% to 3% yield to maturity in a high-inflation environment and invest his money elsewhere. The bond investor didn't have to accept low yields in a high-inflation environment. Of course, the question was: Where to invest it? Cash had lower yields than bonds, so it was no refuge. Private gold possession was outlawed since 1934. I guess that left little choice other than to invest the money into real estate and stocks.

Here's a chart I've shown, recently, in another thread:
longinvest wrote:
Tue Dec 05, 2017 11:15 am
Here's a historical inflation-adjusted bond total-return chart for 1940 to 1985:
Image
(Source data for constructing the chart: VPW backtesting spreadsheet)

We see the loss of purchase power in the 1940s, due to yields significantly trailing inflation. We also see a few years dip, in the late 1970s, when inflation was raging up and yields were following up. As expected, it took a few years lag for the impact of higher yields to be fully reflected into total returns; nothing surprising, here. What's actually surprising is how yields kept a big spread over trailing inflation afterwards, explaining a gain equivalent to the losses of the 1940s in a few years, in the early 1980s. My point is that both events are completely unrelated. There was a government-imposed real loss in the 1940s. In the 1980s, bond investors became very demanding for higher yields.
The government finally allowed the market to price bonds normally since 1952. If we look at the above chart starting in 1952, we see that nominal bonds did preserve their value on a total-return basis, in inflation-adjusted terms, and even gained additional purchase power over inflation. There was a dip in the second half of the 1970s, due to bond yields going continuously up, adjusting for inflation. As bond math tells us, this was normal. The higher yields explain the surge in total returns that followed.

Nedsaid: It sounds like the whole key is reinvesting the interest. If you were trying to life off that interest, the loss of purchasing power of your principal would be devastating. In the shorter run, inflation is bad for both stocks and bonds but if you wait long enough, you will very likely get your inflation adjustment. My suspicion is that it could take 7-8 years to get back to even on purchasing power on your bonds with reinvestment in the event of an inflation spike and higher sustained inflation after that. The 1970's would be a good test of that. Edit: I eyeballed your chart, it looked like it took a bond investor about nine years to recover purchasing power after the 1973-74 oil shocks. I wasn't far off.

In the 1970s, bonds actually did better than stocks; they were less volatile and yet delivered almost as much in returns. Here's a chart I've shown in another thread that makes this pretty obvious:
longinvest wrote:
Fri Aug 26, 2016 8:46 am
Just for reference, here's a total-return chart I made, on another thread, to show the comparative growth of an intermediate-duration ladder-like bond fund and the S&P 500 in the worst high-inflation part of the 1970s to mid-1980s:

viewtopic.php?f=10&t=198104#p3027801
Image

By looking at a nominal chart, we can clearly see that all along, the bond fund had positive annual total returns. The S&P 500 (with dividends reinvested), on the other hand, did as it always does, it fluctuated. In 1973-1975, it had a big down fluctuation, losing 30% while inflation was going up 20%, for example.

We're almost never shown such charts. Usually, the nominal fund returns are combined with the impact of inflation and we're shown inflation-adjusted charts, leading to the impression that bonds are volatile. This impression is compounded, of course, when long-term bonds (which are volatile) are used to represent bond returns.

People invested in intermediate bonds, during the above period, just saw an increasing portfolio balance on their annual statements, unlike stock investors who didn't fare much better, in the end, over that period.
In summary, I think that nominal bonds are way less risky than often portrayed. What's actually risky, for nominal bond investors, isn't inflation; it's to leave money into nominal bonds when their yields are way below current inflation... assuming that one knows of a better place where to put the money, of course...

Nedsaid: You post is reassuring, I don't think we are in for a repeat of the 1970's, but you never know. So worse case, it could take almost a decade for bonds to recover purchasing power in a 1970's stagflation scenario. That is why one should own TIPS.
A fool and his money are good for business.

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