Are we entering an era of diminishing returns ?

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Destiple
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Are we entering an era of diminishing returns ?

Post by Destiple »

Are we headed to an era in which stock market will offer meager returns for decades? With no major downturns and exponential inflation
Obviously no one has a crystal ball but let’s share opinions and why you think that way
Thanks
ososnilknarf
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Re: Are we entering an era of diminishing returns ?

Post by ososnilknarf »

I don't have any strong belief in any future predictions, but my expectations are such that I wouldn't be surprised by lower returns for the coming decade.

But *decades* (plural)? As you said no one has a crystal ball, and the further out you look the hazier it gets, so I wouldn't presume to project any expectations beyond that.
luckyducky99
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Re: Are we entering an era of diminishing returns ?

Post by luckyducky99 »

What is “exponential inflation”?
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SmileyFace
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Re: Are we entering an era of diminishing returns ?

Post by SmileyFace »

No, no, no, and no.
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Re: Are we entering an era of diminishing returns ?

Post by z3r0c00l »

Maybe, then again we were supposed to enter this era in 2018 and we have what, almost doubled our money in that time? And also bond interest rates couldn't go lower then they did.

I am sticking with my prediction that the 2020's will give us another 100%, I call SP500 at least 6,500 by 2030.
Last edited by z3r0c00l on Fri Jul 09, 2021 5:05 pm, edited 2 times in total.
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RickBoglehead
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Re: Are we entering an era of diminishing returns ?

Post by RickBoglehead »

Yes.
No.
Maybe.

Opinions are worth nothing.
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Dave55
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Re: Are we entering an era of diminishing returns ?

Post by Dave55 »

It's tough to make predictions, especially about the future.

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taojaxx
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Re: Are we entering an era of diminishing returns ?

Post by taojaxx »

Shiller got a Nobel prize (actually the Swedish Riksbank prize in memory of Alfred Nobel) predicting decades of low return and has been doing so for. well, decades.
John Hussman similarly. And Jeremy Grantham pops up regularly forecasting that long overdue catastrophe he seems to relish.
Therefore that question elicits John Bogle's famous response.
I just stay in the market.
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Brianmcg321
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Re: Are we entering an era of diminishing returns ?

Post by Brianmcg321 »

They said we were 10 years ago. Lol. Best ten years of my investing career.
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Re: Are we entering an era of diminishing returns ?

Post by nisiprius »

For eleven years, at the beginning of each year Larry Swedroe published a list of the "sure things," the things that just about everyone agreed were sure to happen over the next year, and kept score. Overall, in eleven years, about a third of them happened, a third of them didn't happen, and a third couldn't be scored.

In April of 2014, Bloomberg polled 68 economists on what would happen to the 10-year Treasury yield over the next six months. 68 out of 68 said it would rise. It fell.

Impressions that "it must be true because everybody is saying so" are unreliable for several reasons. First, as the Bloomberg example shows, "everybody" can be wrong. Second, because of groupthink "everybody" may be just be echoing each other, rather than coming to independent conclusions, so near-unanimity shouldn't raise our level of trust too much. Third, the apparent "near-unanimity" is usually illusory--you can usually find plenty of experts expressing contrary opinions.

There is a good deal of talk about muted expectations going forward, and John C. Bogle was one of the people saying so. What to do about it? Maybe scale back expectations just on the basis that
In 'A Shropshire Lad,' A. E. Housman wrote:Therefore, since the world has still
Much good, but much less good than ill,
And while the sun and moon endure
Luck's a chance, but trouble's sure,
I'd face it as a wise man would,
And train for ill and not for good.
Beyond that, ignore predictions that don't include a range and pay attention to the range. In a recent Vanguard forecast, I think the ranges are more interesting than the center values:

Image

In planning, think "Over the next ten years, U.S. large-caps might well average anywhere anything from a -2% annual loss to a +12% annual gain." That is the problem and always the problem, not the value of the center point. Notice that the historical average for the stock market, about 10%, is within the range of Vanguard's forecast, so Vanguard is forecasting that it is literally within the range of possibilities for next ten years could have the same return as the historic average.
Last edited by nisiprius on Fri Jul 09, 2021 8:05 pm, edited 1 time in total.
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Re: Are we entering an era of diminishing returns ?

Post by KlangFool »

Destiple wrote: Fri Jul 09, 2021 4:36 pm Are we headed to an era in which stock market will offer meager returns for decades? With no major downturns and exponential inflation
Obviously no one has a crystal ball but let’s share opinions and why you think that way
Thanks
I don't know and I don't care.

For better or worse, my 60/40 portfolio return will not be the same as the market return. And, my portfolio is big enough and I would do fine with a meager return if it is true,

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Destiple
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Re: Are we entering an era of diminishing returns ?

Post by Destiple »

So let’s go with the assumption the next 10 years we’re gonna have minimal returns on the market what should be the investing strategy you would adopt?
Just thinking out loud here I totally understand this is not a substitute for financial advice
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Re: Are we entering an era of diminishing returns ?

Post by KlangFool »

Destiple wrote: Fri Jul 09, 2021 6:40 pm So let’s go with the assumption the next 10 years we’re gonna have minimal returns on the market what should be the investing strategy you would adopt?
Just thinking out loud here I totally understand this is not a substitute for financial advice
Destiple,

Why do you think that we need a new investing strategy?

I have a very simple answer. I saved 1 year of expense every year. I can be FI in less than 20 years with near 0% real return. I never have a problem. It is a saving rate problem. It is not a return rate problem.

This is not the answer that most people like to hear. They hope that the return rate can solve their saving rate problem. But, the market return is always unpredictable.

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quantAndHold
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Re: Are we entering an era of diminishing returns ?

Post by quantAndHold »

KlangFool wrote: Fri Jul 09, 2021 6:39 pm
Destiple wrote: Fri Jul 09, 2021 4:36 pm Are we headed to an era in which stock market will offer meager returns for decades? With no major downturns and exponential inflation
Obviously no one has a crystal ball but let’s share opinions and why you think that way
Thanks
I don't know and I don't care.

For better or worse, my 60/40 portfolio return will not be the same as the market return. And, my portfolio is big enough and I would do fine with a meager return if it is true,

KlangFool
I care. But I really don’t know.

As far as what I should do, if I think this is going to happen? Keep working, saving, maintain a sensible asset allocation. Pretty much the same as I would do if I think this isn’t going to happen. Which is good, because none of us knows.
Yes, I’m really that pedantic.
nzahir
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Re: Are we entering an era of diminishing returns ?

Post by nzahir »

SmileyFace wrote: Fri Jul 09, 2021 4:57 pm No, no, no, and no.
Why no?

Logically and mathematically, returns are smaller after the market cap gets so large

This is why small caps have outperformed

But also after a good run with expensive stocks, returns have always been lower. There is proof of this and it makes sense
Johnny Thinwallet
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Re: Are we entering an era of diminishing returns ?

Post by Johnny Thinwallet »

My only ask is for returns in the next 10 years to be on par with the returns that we've seen in the last 10 years. If that happens, I'll retire before turning 50.

I hope that's not too much to ask for. :sharebeer
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Re: Are we entering an era of diminishing returns ?

Post by Vanguard Fan 1367 »

I think yes, we are entering a period of diminishing returns.
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456M
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Re: Are we entering an era of diminishing returns ?

Post by 456M »

Since I'm early in my accumulation stage, a decade of low returns followed by another bull run would be awesome. One can only hope.
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Destiple
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Re: Are we entering an era of diminishing returns ?

Post by Destiple »

456M wrote: Fri Jul 09, 2021 7:36 pm Since I'm early in my accumulation stage, a decade of low returns followed by another bull run would be awesome. One can only hope.
But that’s not good news for somebody who is 40 like me or is it
quantAndHold
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Re: Are we entering an era of diminishing returns ?

Post by quantAndHold »

Destiple wrote: Fri Jul 09, 2021 7:43 pm
456M wrote: Fri Jul 09, 2021 7:36 pm Since I'm early in my accumulation stage, a decade of low returns followed by another bull run would be awesome. One can only hope.
But that’s not good news for somebody who is 40 like me or is it
I turned 45 in 2008. Best thing that ever happened to me. I retired at 53. A big chunk of what I retired on was because I doubled down on my 401k and IRA starting in 2008.
Yes, I’m really that pedantic.
456M
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Re: Are we entering an era of diminishing returns ?

Post by 456M »

Destiple wrote: Fri Jul 09, 2021 7:43 pm
456M wrote: Fri Jul 09, 2021 7:36 pm Since I'm early in my accumulation stage, a decade of low returns followed by another bull run would be awesome. One can only hope.
But that’s not good news for somebody who is 40 like me or is it
Depends on how close you are to retirement. I'm 32 so pretty far still.
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CommitmentDevice
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Re: Are we entering an era of diminishing returns ?

Post by CommitmentDevice »

Economic growth is already being dampened by climate change, and that party is just getting started (https://en.wikipedia.org/wiki/Economic_ ... ate_change).

Whether or not this will outweigh countervailing forces is anybody's guess.

Invest we must.
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JoeRetire
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Re: Are we entering an era of diminishing returns ?

Post by JoeRetire »

Destiple wrote: Fri Jul 09, 2021 4:36 pm Are we headed to an era in which stock market will offer meager returns for decades?
No.
With no major downturns and exponential inflation
No.
Obviously no one has a crystal ball but let’s share opinions and why you think that way
Reply hazy. Try again later.
Just remember: it's not a lie if you believe it.
brian91480
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Re: Are we entering an era of diminishing returns ?

Post by brian91480 »

The day of this post... the S&P 500 went up a fantastic 1.13%.

So.... this prediction starts... next Monday! 🤣👍
aj44
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Re: Are we entering an era of diminishing returns ?

Post by aj44 »

I think humans are on the doorstep of great expansion, Blue Origin and Virgin Galactic both have significant launches coming up.

The question is when does that really drive the stock market. My hope is it’s in decades and not centuries.
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Re: Are we entering an era of diminishing returns ?

Post by anoop »

My view is that we are entering an era of increased returns but those returns are unlikely to keep up with real inflation (not the CPI but inflation everyone is experiencing) after accounting for taxes.
rich126
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Re: Are we entering an era of diminishing returns ?

Post by rich126 »

Destiple wrote: Fri Jul 09, 2021 4:36 pm Are we headed to an era in which stock market will offer meager returns for decades? With no major downturns and exponential inflation
Obviously no one has a crystal ball but let’s share opinions and why you think that way
Thanks
I've seen several stories talking about deflation a more likely scenario than high inflation. Much will depend on the situation with the virus. Many countries are still struggling with that and that is causing some supply issues leading to price spikes due to shortages that won't last (such as computer chips).

Even with something like lumber that went from $350 per thousand board feet to 1750 and now back to 700, that was the price of finished lumber and the price of raw lumber hasn't really moved.
https://www.npr.org/2021/07/08/10138197 ... ic-economy

The labor shortage is mostly a short term issue as well.

I do think over the next decade real returns could be quite low, maybe 1% which hurts short timers but hopefully over 20+ years things will be better.
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Re: Are we entering an era of diminishing returns ?

Post by nisiprius »

nzahir wrote: Fri Jul 09, 2021 7:24 pm
SmileyFace wrote: Fri Jul 09, 2021 4:57 pm No, no, no, and no.
Why no?

Logically and mathematically, returns are smaller after the market cap gets so large

This is why small caps have outperformed
But have small caps outperformed?

Source

Image

The DFA US Micro Cap Portfolio (blue) is one of the oldest and most admired small-cap funds. Since inception it has, in fact, underperformed the Vanguard 500 index Fund (red).

And it underperformed despite taking on a quite noticeably higher level of risk, which shows up here both as higher standard deviation (almost a third higher, 20.01% versus 15.06%), and as deeper drawdown. Once you allow for risk, the small-cap fund had much lower risk-adjusted return, as shown by the Sharpe and Sortino ratios.
Last edited by nisiprius on Fri Jul 09, 2021 8:19 pm, edited 1 time in total.
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Re: Are we entering an era of diminishing returns ?

Post by Vtsax100 »

z3r0c00l wrote: Fri Jul 09, 2021 5:02 pm Maybe, then again we were supposed to enter this era in 2018 and we have what, almost doubled our money in that time? And also bond interest rates couldn't go lower then they did.

I am sticking with my prediction that the 2020's will give us another 100%, I call SP500 at least 6,500 by 2030.
I wish I knew if you are right. I wouldn’t even go back to work tomorrow.
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Re: Are we entering an era of diminishing returns ?

Post by anoop »

rich126 wrote: Fri Jul 09, 2021 8:12 pm I've seen several stories talking about deflation a more likely scenario than high inflation.
How many of those story tellers have a record, say over the last 10-12 years, of making accurate calls?

This is the first time in history where all central banks are trying to inflate together. Do you really think it's wise to fight them?
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Re: Are we entering an era of diminishing returns ?

Post by anoop »

Vtsax100 wrote: Fri Jul 09, 2021 8:18 pm
z3r0c00l wrote: Fri Jul 09, 2021 5:02 pm Maybe, then again we were supposed to enter this era in 2018 and we have what, almost doubled our money in that time? And also bond interest rates couldn't go lower then they did.

I am sticking with my prediction that the 2020's will give us another 100%, I call SP500 at least 6,500 by 2030.
I wish I knew if you are right. I wouldn’t even go back to work tomorrow.
What if it goes up 100% but your cost of living goes up 150% during that time?
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Re: Are we entering an era of diminishing returns ?

Post by KlangFool »

Destiple wrote: Fri Jul 09, 2021 7:43 pm
456M wrote: Fri Jul 09, 2021 7:36 pm Since I'm early in my accumulation stage, a decade of low returns followed by another bull run would be awesome. One can only hope.
But that’s not good news for somebody who is 40 like me or is it
A) Why should you care if your saving rate is high enough?

B) If you care, you should save more and spend less.

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Re: Are we entering an era of diminishing returns ?

Post by windaar »

Destiple wrote: Fri Jul 09, 2021 4:36 pmObviously no one has a crystal ball
Doesn't that answer the question pretty quickly?
Nobody knows nothing.
anoop
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Re: Are we entering an era of diminishing returns ?

Post by anoop »

windaar wrote: Fri Jul 09, 2021 8:22 pm
Destiple wrote: Fri Jul 09, 2021 4:36 pmObviously no one has a crystal ball
Doesn't that answer the question pretty quickly?
I do, but it only works some of the time. :D
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Re: Are we entering an era of diminishing returns ?

Post by Vtsax100 »

anoop wrote: Fri Jul 09, 2021 8:19 pm
Vtsax100 wrote: Fri Jul 09, 2021 8:18 pm
z3r0c00l wrote: Fri Jul 09, 2021 5:02 pm Maybe, then again we were supposed to enter this era in 2018 and we have what, almost doubled our money in that time? And also bond interest rates couldn't go lower then they did.

I am sticking with my prediction that the 2020's will give us another 100%, I call SP500 at least 6,500 by 2030.
I wish I knew if you are right. I wouldn’t even go back to work tomorrow.
What if it goes up 100% but your cost of living goes up 150% during that time?

Thats unlikely enough to be out of the realm of things I consider.
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Re: Are we entering an era of diminishing returns ?

Post by Ferdinand2014 »

Destiple wrote: Fri Jul 09, 2021 6:40 pm So let’s go with the assumption the next 10 years we’re gonna have minimal returns on the market what should be the investing strategy you would adopt?
Just thinking out loud here I totally understand this is not a substitute for financial advice
Increase your savings rate, lower your expenses and expectations. It is as simple as that. My plan does not count on any particular prediction of return.
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MarkBarb
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Re: Are we entering an era of diminishing returns ?

Post by MarkBarb »

Probably. Long term rates are very low, implying low growth. They have also pushed up stock prices relative to earnings, so you shouldn't expect too much stock price appreciation. But it is what it is. I don't see any way to avoid it. Hopefully we'll have strong growth and grow out of the issue relatively quickly, but I'm not counting on it.
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Re: Are we entering an era of diminishing returns ?

Post by Hyperchicken »

luckyducky99 wrote: Fri Jul 09, 2021 4:54 pm What is “exponential inflation”?
2% a year.

That works out to be an exponential function y = 1.02^x.
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Re: Are we entering an era of diminishing returns ?

Post by TheDDC »

No. I expect the historic returns of the total market... 10%+ nominal.

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Re: Are we entering an era of diminishing returns ?

Post by Stormfloatter »

Let’s say that S&P 500 at 10000 in 10 years or roughly a 9% year over year.

The current Market cap is 36.32T. That’s at a PE ratio of around 30. You can calculate the estimated Market Cap at 10000….

So the question becomes: do you really want to get to 10000? At the end of the day it is all a zero sum game with a small premium given for the risk you take. You gain in stock appreciation, you lose in purchasing power. These past 10 years, with the last supercharged year have been a a glitch in the Matrix.

The only way I see that earnings justify the 10000 valuation would be via inflation. You may still get a real positive return, and you will definitely outperform owning debt or cash if this becomes the case. But again, do we really want to get there?

interesting years ahead. Buckle up.

Interesting data:

http://pages.stern.nyu.edu/~adamodar/Ne ... spearn.htm

Year Earnings Yield Dividend Yield S&P 500 Earnings Dividends Payout Ratio
1960 5.34% 3.41% 58.11 3.10 1.98 63.86%
1961 4.71% 2.85% 71.55 3.37 2.04 60.51%
1962 5.81% 3.40% 63.1 3.67 2.15 58.52%
1963 5.51% 3.13% 75.02 4.13 2.35 56.81%
1964 5.62% 3.05% 84.75 4.76 2.58 54.27%
1965 5.73% 3.06% 92.43 5.30 2.83 53.40%
1966 6.74% 3.59% 80.33 5.41 2.88 53.26%
1967 5.66% 3.09% 96.47 5.46 2.98 54.59%
1968 5.51% 2.93% 103.86 5.72 3.04 53.18%
1969 6.63% 3.52% 92.06 6.10 3.24 53.09%
1970 5.98% 3.46% 92.15 5.51 3.19 57.86%
1971 5.46% 3.10% 102.09 5.57 3.16 56.78%
1972 5.23% 2.70% 118.05 6.17 3.19 51.63%
1973 8.16% 3.70% 97.55 7.96 3.61 45.34%
1974 13.64% 5.43% 68.56 9.35 3.72 39.81%
1975 8.55% 4.14% 90.19 7.71 3.73 48.42%
1976 9.07% 3.93% 107.46 9.75 4.22 43.33%
1977 11.43% 5.11% 95.1 10.87 4.86 44.71%
1978 12.11% 5.39% 96.11 11.64 5.18 44.51%
1979 13.48% 5.53% 107.94 14.55 5.97 41.02%
1980 11.04% 4.74% 135.76 14.99 6.44 42.93%
1981 12.39% 5.57% 122.55 15.18 6.83 44.96%
1982 9.83% 4.93% 140.64 13.82 6.93 50.15%
1983 8.06% 4.32% 164.93 13.29 7.12 53.60%
1984 10.07% 4.68% 167.24 16.84 7.83 46.47%
1985 7.42% 3.88% 211.28 15.68 8.20 52.29%
1986 5.96% 3.38% 242.17 14.43 8.19 56.71%
1987 6.49% 3.71% 247.08 16.04 9.17 57.16%
1988 8.69% 3.68% 277.72 24.12 9.75 40.42%
1989 6.88% 3.32% 353.4 24.32 11.06 45.48%
1990 6.86% 3.74% 330.22 22.65 12.09 53.38%
1991 4.63% 3.11% 417.09 19.30 12.20 63.21%
1992 4.79% 2.90% 435.71 20.87 12.39 59.37%
1993 5.77% 2.72% 466.45 26.90 12.58 46.77%
1994 6.91% 2.91% 459.27 31.75 13.17 41.48%
1995 6.12% 2.30% 615.93 37.70 13.79 36.58%
1996 5.49% 2.01% 740.74 40.63 14.90 36.67%
1997 4.54% 1.60% 970.43 44.09 15.50 35.16%
1998 3.60% 1.32% 1229.23 44.27 16.20 36.59%
1999 3.52% 1.14% 1469.25 51.68 16.69 32.29%
2000 4.25% 1.23% 1320.28 56.13 16.07 28.63%
2001 3.38% 1.37% 1148.09 38.85 15.74 40.51%
2002 5.23% 1.81% 879.82 46.04 15.96 34.67%
2003 4.92% 1.61% 1111.91 54.69 17.88 32.69%
2004 5.58% 1.57% 1211.92 67.68 19.01 28.09%
2005 6.12% 1.79% 1248.29 76.45 22.34 29.23%
2006 6.18% 1.77% 1418.3 87.72 25.04 28.55%
2007 5.62% 1.92% 1468.36 82.54 28.14 34.09%
2008 5.48% 3.15% 903.25 49.51 28.45 57.46%
2009 5.10% 1.97% 1115.1 56.86 21.97 38.64%
2010 6.66% 1.80% 1257.64 83.77 22.65 27.04%
2011 7.67% 2.11% 1257.60 96.44 26.53 27.51%
2012 6.79% 2.19% 1426.19 96.82 31.25 32.28%
2013 5.68% 1.89% 1848.36 104.92 34.90 33.26%
2014 5.64% 1.92% 2058.90 116.16 39.55 34.04%
2015 4.92% 2.12% 2043.94 100.48 43.41 43.20%
2016 4.75% 2.04% 2238.83 106.26 45.70 43.01%
2017 4.66% 1.83% 2673.61 124.51 48.93 39.30%
2018 5.92% 2.14% 2506.85 148.34 53.61 36.14%
2019 5.03% 1.82% 3230.78 162.35 58.80 36.22%
2020 3.68% 1.51% 3756.07 138.12 56.70 41.05%
Nathan Drake
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Re: Are we entering an era of diminishing returns ?

Post by Nathan Drake »

I only think we are entering an era of diminished returns if you are highly concentrated in certain regions (US) or assets with guaranteed low expected returns (Bonds).

But looking around at other asset classes, they seem reasonably valued for historical performance.
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Destiple
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Re: Are we entering an era of diminishing returns ?

Post by Destiple »

Nathan Drake wrote: Fri Jul 09, 2021 10:10 pm I only think we are entering an era of diminished returns if you are highly concentrated in certain regions (US) or assets with guaranteed low expected returns (Bonds).

But looking around at other asset classes, they seem reasonably valued for historical performance.
For instance what assets please elaborate
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Destiple
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Re: Are we entering an era of diminishing returns ?

Post by Destiple »

KlangFool wrote: Fri Jul 09, 2021 8:20 pm
Destiple wrote: Fri Jul 09, 2021 7:43 pm
456M wrote: Fri Jul 09, 2021 7:36 pm Since I'm early in my accumulation stage, a decade of low returns followed by another bull run would be awesome. One can only hope.
But that’s not good news for somebody who is 40 like me or is it
A) Why should you care if your saving rate is high enough?

B) If you care, you should save more and spend less.

KlangFool
Like your approach
How much % of your net pay can you realistically save
Esp let’s say you have a wife and kid
My goal is 50% for next 10 yrs
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HomerJ
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Re: Are we entering an era of diminishing returns ?

Post by HomerJ »

Destiple wrote: Fri Jul 09, 2021 6:40 pm So let’s go with the assumption the next 10 years we’re gonna have minimal returns on the market what should be the investing strategy you would adopt?
Just thinking out loud here I totally understand this is not a substitute for financial advice
Are you close to retirement or accumulating?

I was accumulating during 2000-2010... And I was mostly in stock, even though stocks ended up not doing that well during those 10 years...

All that money I accumulated went up like 5x from 2010-2021.

So it totally paid off.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
reln
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Re: Are we entering an era of diminishing returns ?

Post by reln »

Destiple wrote: Fri Jul 09, 2021 4:36 pm Are we headed to an era in which stock market will offer meager returns for decades? With no major downturns and exponential inflation
Obviously no one has a crystal ball but let’s share opinions and why you think that way
Thanks
I think volatility will continue to be volatile and large draw downs will continue occur randomly. I think returns will continue to be high for random periods of time and returns will continue to be low for other random periods of time.
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ApeAttack
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Re: Are we entering an era of diminishing returns ?

Post by ApeAttack »

I would invest in waffle futures to help make up for diminishing returns.
https://youtu.be/fm2mlT7q7mY
Just another lazy index investor who recently found out about I-Bonds (https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm).
Nathan Drake
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Re: Are we entering an era of diminishing returns ?

Post by Nathan Drake »

Destiple wrote: Fri Jul 09, 2021 10:47 pm
Nathan Drake wrote: Fri Jul 09, 2021 10:10 pm I only think we are entering an era of diminished returns if you are highly concentrated in certain regions (US) or assets with guaranteed low expected returns (Bonds).

But looking around at other asset classes, they seem reasonably valued for historical performance.
For instance what assets please elaborate
P/Es for exUS, EM, and SCV are all attractively valued and trading at roughly historical norms despite lower interest rates of today. You can't say the same for US TSM.
HoraceMann76
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Re: Are we entering an era of diminishing returns ?

Post by HoraceMann76 »

If you believe in mean reversion AND we will not have an amazing productivity spike then yes, we are due for a period of meager returns at some point. Who knows when that will be. Could be crash, could be a gradual slide.
hi_there
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Re: Are we entering an era of diminishing returns ?

Post by hi_there »

nisiprius wrote: Fri Jul 09, 2021 8:17 pm
nzahir wrote: Fri Jul 09, 2021 7:24 pm
SmileyFace wrote: Fri Jul 09, 2021 4:57 pm No, no, no, and no.
Why no?

Logically and mathematically, returns are smaller after the market cap gets so large

This is why small caps have outperformed
But have small caps outperformed?

Source

Image

The DFA US Micro Cap Portfolio (blue) is one of the oldest and most admired small-cap funds. Since inception it has, in fact, underperformed the Vanguard 500 index Fund (red).

And it underperformed despite taking on a quite noticeably higher level of risk, which shows up here both as higher standard deviation (almost a third higher, 20.01% versus 15.06%), and as deeper drawdown. Once you allow for risk, the small-cap fund had much lower risk-adjusted return, as shown by the Sharpe and Sortino ratios.
"Logically and mathematically, returns are smaller after the market cap gets so large"

I would question this statement in light of market performance of the last 10-20 years. Amazon was still a huge company when it had 50% of its current market value. The same can be said for AAPL, MSFT, and so on. Just like asking when the stock market is "too high", we will have to ask when these companies can be considered to be "too large". In fact, rather than impeding growth, scale has allowed these companies to seed product lines that are long-term profitable, and to strategically scale new businesses to great effect. Perhaps there is a point where antitrust regulations will become a limiting factor, but market performance has not been affected so far.

It is interesting how the chart above suggests that small cap investors have not been adequately compensated for risk, relative to large cap investors. I wonder what could be the reason for this seeming inefficiency. Is this just a random result from relatively recent history, or perhaps something related to changing technology, which has allowed larger enterprises to capture larger value over time, and that continues to occur at a pace that is generally underestimated by stock prices.
Last edited by hi_there on Fri Jul 09, 2021 11:16 pm, edited 1 time in total.
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HomerJ
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Re: Are we entering an era of diminishing returns ?

Post by HomerJ »

Stormfloatter wrote: Fri Jul 09, 2021 9:03 pmAt the end of the day it is all a zero sum game with a small premium given for the risk you take.
This is incorrect.

It's not a zero-sum game. It's not a closed system. A couple billion humans go to work every day and input their work into the system making it more valuable over time.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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