S&P undulations across time

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Bwlonge
Posts: 145
Joined: Wed Nov 22, 2017 6:36 am

S&P undulations across time

Post by Bwlonge » Thu Dec 06, 2018 2:04 pm

I'm looking at a chart of the S&P 500. Its a pretty steady rise from 1980 to 1995. Then between 1995 and 2008 there are two humps- the crash from what I presume tech stocks, then the 2008 crash. Then from 2008 on, it skyrockets.

If you invested at the peak in the 90's, it took you 7 years to break even if you cashed out at the next peak. If you invested in 2007, it took you 7 years to break even. If you invested in the 90s and didn't cash out, it was 14 years before you broke even.

How can anyone look at the run away market over the last several years and feel ok about investing right now?

retiringwhen
Posts: 646
Joined: Sat Jul 08, 2017 10:09 am
Location: New Jersey, USA

Re: S&P undulations across time

Post by retiringwhen » Thu Dec 06, 2018 2:11 pm

That is what we call the Risk Premia.

There are short term undulations, and there are long-term undulations.....

User avatar
ReformedSpender
Posts: 228
Joined: Fri Mar 16, 2018 1:24 pm
Location: Stone's Throw from Vanguard

Re: S&P undulations across time

Post by ReformedSpender » Thu Dec 06, 2018 2:12 pm

Bwlonge wrote:
Thu Dec 06, 2018 2:04 pm

How can anyone look at the run away market over the last several years and feel ok about investing right now?
Because in 100% of all cases, the stock market resumed higher. Hence the term "investing"

:beer
Market history shows that when there's economic blue sky, future returns are low, and when the economy is on the skids, future returns are high. The best fishing is done in the most stormy waters.

User avatar
David Jay
Posts: 5811
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: S&P undulations across time

Post by David Jay » Thu Dec 06, 2018 2:15 pm

First, a question, is the chart you are using a chart for the "SP500 Index" or "SP500 Total Return"? An easy way to approximate SP500 Total Return is to use the Morningstar graph of VFINX which shows it in relation to SP500 Total Return.

Second, most people in their accumulation phase do not put a fixed chunk of cash into the SP500 and never add to it. Most people are investing through 401Ks, etc. They add to their holdings every month. When prices are down they get more shares for the same monthly contribution. When prices are up they get fewer. Looking at the market from peak-to-peak is not very representative of how most people invest.
Last edited by David Jay on Thu Dec 06, 2018 2:32 pm, edited 1 time in total.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

alex_686
Posts: 4071
Joined: Mon Feb 09, 2015 2:39 pm

Re: S&P undulations across time

Post by alex_686 » Thu Dec 06, 2018 2:22 pm

Bwlonge wrote:
Thu Dec 06, 2018 2:04 pm
How can anyone look at the run away market over the last several years and feel ok about investing right now?
I understand what you are seeing. The problem is that humans are very good at detecting patters - even when they are not there. Haul out statistical tools and you find something more troubling and complex. Past performance means very little. So the fact that we have had a good 10 years means nothing - it has no power to predict on what will happen next.

First, we know that returns and risk are linked. If you want equity like returns you need to take equity like risk.

Second, what are your goals?

I might suggest that there are re-balancing techniques between stocks and bonds that can limit your risk.

deltaneutral83
Posts: 913
Joined: Tue Mar 07, 2017 4:25 pm

Re: S&P undulations across time

Post by deltaneutral83 » Thu Dec 06, 2018 2:41 pm

Bwlonge wrote:
Thu Dec 06, 2018 2:04 pm
How can anyone look at the run away market over the last several years and feel ok about investing right now?
Most people don't lump sum the majority of their invest-able assets at one point in time. 401k contributions can be auto enrolled and friction-less because you never saw the money in the first place which is the goal to overpower psychological emotions. John Doe staring at a windfall of 1-5x annual salary (or even more) can be daunting and while it's better to invest all at once 66% of the time, dollar cost averaging can provide a huge sense of relief. That being said, every day you don't sell, you are essentially buying. So if you're not going to invest dry powder, why are you not selling what you do own currently. It's the same thing to me, money is fungible.

I also show that if you invested in the S&P on the third Thursday of October 2007 you would have waited until Dec 2012/Jan 2013 to recover assuming the dividends from the S&P match inflation (when in fact the inflation rate was probably less just eyeballing it and from memory so the break even in real terms would have been even less time). To undergo the second worst economy/bear market of the US and combining that with the worst luck known to man in that you invested everything you own into the market at the all time high, you're looking at a 5.33 year break even. That's not that bad to me.

User avatar
nisiprius
Advisory Board
Posts: 37104
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: S&P undulations across time

Post by nisiprius » Thu Dec 06, 2018 6:08 pm

Bwlonge wrote:
Thu Dec 06, 2018 2:04 pm
...How can anyone look at the run away market over the last several years and feel ok about investing right now?...
Never, ever, ever have I personally "felt OK" about investing the stock market.

The Bogleheads investment philosophy isn't obvious. Almost everyone starts out by thinking there has to be a better way, and of course they hear noise on all sides from people selling what they claim are better ways. Almost everyone starts out by saying "it's crazy to just buy and hold, there must be a way to avoid the crashes, to pull out when you see the bear coming." Just as almost everyone starts out by thinking "it's crazy to hold every stock, even if you can't do it perfectly it must be better to at least try to hold only the good ones... or, barring that, avoid holding the dogs."

Most of us got here because we eventually decided that staying the course is better than timing the market, just as (to paraphrase John C. Bogle) we eventually decided that buying the haystack is better than trying to find the needle in the haystack.
If you invested at the peak in the 90's, it took you 7 years to break even if you cashed out at the next peak. If you invested in 2007, it took you 7 years to break even. If you invested in the 90s and didn't cash out, it was 14 years before you broke even.
I don't think those figures are accurate.

As nearly as I can tell, $10,000 invested in the Vanguard 500 Index Fund on 10/12/2007 was back to $10,020.96 on 8/10/2012, less than five years:

Source
Image

Similarly, $10,000 invested in the Vanguard 500 Index Fund on 8/31/2000 was back to $10,081.80 on 10/31/2006. If you then continued to hold, you were up to 11,623, sickening plunge to $5,262, and were again back to $10,046.23 on 12/31/2010. Just under ten years, the infamous "lost decade."

14 years later, 8/31/2014, you were not back to even, you were at $17,213.83. Not double, but not "back to even," either. That's an average return of 3.96% per year.

Image

So, yeah, the "lost decade" was bad, but let's not make it out to be worse than it was.

And what are you going to do? You're going to get some good decades and some lousy decades, that's what we've had in the past and surely it's what we'll have in the future.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

nmclean
Posts: 14
Joined: Wed Nov 14, 2018 10:40 am

Re: S&P undulations across time

Post by nmclean » Thu Dec 06, 2018 9:38 pm

As mentioned your post ignores dividends. From 1995 to 2010 your investment would have tripled. That isn't as good as 1980 to 1995, but it was certainly worthwhile.

The worst case would have been 2000 to 2010, or 10 years break-even. But that takes some precise cherry-picking, and doesn't last.

It seems like this post boils down to a prediction based on the most recent couple decades - that we're now at the top of a third "hump". Of course, we've all been hearing arguments to that effect for the past 5 years at least, and would have lost out significantly already if we'd taken them seriously. On a wider timescale, the so-called "runaway market" isn't very unusual at all.

pdavi21
Posts: 219
Joined: Sat Jan 30, 2016 4:04 pm

Re: S&P undulations across time

Post by pdavi21 » Thu Dec 06, 2018 9:45 pm

1. Not many feel good about investing for the past 5 years, but upward it went anyway.
2. It's down about 10% from a peak right now. EDIT: 20% ex US. There are probably people (with a short memory) who are ecstatic about investing right now.
3. Not many people felt good in the early 80s either...big oops for them. EDIT: Except they still did pretty well with bonds in some cases.

This blog is going to have a bias towards avoiding market timing and long term investing. If that is not something you are interested in, perhaps should should act accordingly with your money. You actually have a good chance of outperforming. I will continue holding and buying, myself, though.

EDIT: Also, you are starting with poor analysis. Price alone (sans dividends), without looking at earnings, revenue, growth, GDP, etc. is not useful for long term investment analysis...although those factors might scare your even more.

Post Reply