Stocks for the Long Haul? Maybe Not.

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Leesbro63
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Stocks for the Long Haul? Maybe Not.

Post by Leesbro63 »

I listened to this recent Ben Felix podcast, "Stocks For the Run?". I found it fascinating and interesting in that he discusses updates to Jeremy Siegel's 1994 data and shows how stocks might not be the best asset class for the long term after all. Bonds might be. And how some developed countries have gone 30, 40 and even 50 years with negative stock returns. I think there is a lot in here worth discussing here. In particular, might this change the way we invest?

There is a lot of unrelated chatter in the beginning. I suggest starting at 38 minutes into this podcast. 38:00

https://rationalreminder.ca/podcast/211
Last edited by Leesbro63 on Sat Jul 30, 2022 10:10 am, edited 1 time in total.
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Re: Stocks for the Long Haul? Maybe Not.

Post by Soon2BXProgrammer »

Leesbro63 wrote: Sat Jul 30, 2022 9:58 am I listened to this recent Ben Felix podcast, "Stocks For the Run?". I found it fascinating and interesting in that he discusses updates to Jeremy Siegel's 1994 data and shows how stocks might not be the best asset class for the long term after all. And how some developed countries have gone 30, 40 and even 50 years with negative returns. I think there is a lot in here worth discussing here. In particular, might this change the way we invest?

There is a lot of unrelated chatter in the beginning. I suggest starting at 38 minutes into this podcast. 38:00

https://rationalreminder.ca/podcast/211
It reinforces the idea that you shouldn't allow single country concentration/risk to dominate your portfolio, and maybe an all public equity portfolio is short sighted.
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Re: Stocks for the Long Haul? Maybe Not.

Post by Trance »

There is a big difference between the ex-us developed market and America. If you look at the ETF's or mutual funds tracking the index (like VEA for Vanguard and FSPSX for Fidelity) they do under perform America but they are no way stagnant Note that theses two did not start at the same time so this difference can be attributed by the market timing of their creation.


Annualized Returns
VEA - 5.27%
FSPSX - 6.02%

Even with Emerging Markets they perform pretty badly (due to no fault of their own but instead because of off topic social economic factors) but they still do not give negative returns.

The key here is that each country is different and can stall at different times which is why you are supposed to by the entire index. Japan as an example hasn't recovered from their lost decade, but their small cap has been consistently growing. I'm sure you can find certain countries in the EU that aren't doing well at any time but if you hold them all it balances out.
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Re: Stocks for the Long Haul? Maybe Not.

Post by PicassoSparks »

The paper is very readable with some extremely striking graphs. It raises a lot of questions. It offers troubling information for the 60/40 Boglehead.

The story I’ve come to understand from the community, repeated in so many variations is, “Stocks for growth & risk, bonds for ballast and to help you sleep at night.” In other words, you are accepting lower expected returns from your bonds in return for managing your ‘taste’ or ‘risk aversion’. A more stable ride at the cost of lower expected returns. Bonds are routinely described as a mechanism to de-risk your portfolio. If you have low risk aversion you should go 100% equities. If you have high risk aversion you should put in more and more bonds. Taylor Larimore regularly posts a table showing that Bonds have never lost more than 2.9% in a year (it’ll be interesting to see where we land at the end of 2022).

I’ve also seen a lot of discussion suggesting that the 1982-2022 data is an anomaly because falling interest rates have resulted in a never-to-be-repeated bond bull market. We must expect even lower returns from bonds going forward because there is nowhere for interest rates to go but up. The paper suggests that, actually, bonds match stocks for long term returns—with arbitrarily long periods of one or the other pulling ahead. In fact, over 20 year periods, bonds have been more volatile than stocks.

This suggests that the 60/40 investor is not accepting lower returns for lower volatility at all. They are doing something else.

It’s a little like if you buy a car and you pay for the extra-cushion safety suspension knowing that it’ll drop your max range but make for a more comfortable ride and then reality is like, “Safety suspension?! lol, no these are SPEED SPRINGS.”

It may make for a faster race, but it’s not what you thought you’d bought. It’s a mix of good and bad news. I am not sure what to make of it.
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Re: Stocks for the Long Haul? Maybe Not.

Post by Random Walker »

PicassoSparks wrote: Sat Jul 30, 2022 11:14 amIt’s a mix of good and bad news. I am not sure what to make of it.
Admittedly, I haven’t listened to the podcast, but I won’t let that stop me from commenting :-). I’m sure the big takeaway is DIVERSIFICATION. And we really need to look at diversification as broadly as we can. I would say that means spreading our investments across as many unique and independent sources of risk / expected return as possible. On the equity side at a minimum it means international diversification. I would contend that one should also diversify as much as possible across the equity factors too. Diversification would also mean a generous dose of bonds; and a good starting point may well be splitting those evenly between TIPs and nominals. Beyond that, one can diversify into alternatives talked about around here. Lastly people can try much less liquid, less public investments, such as rental property. It’s all about mixing unique and independent sources of risk / expected return within a single portfolio. Of course, can’t forget about costs.

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Re: Stocks for the Long Haul? Maybe Not.

Post by McQ »

The paper discussed on the podcast can be downloaded at https://papers.ssrn.com/sol3/papers.cfm ... id=3805927

An earlier BH thread on the paper started by SimpleGift is: viewtopic.php?t=352394

The new historical data that was unavailable to Jeremy Siegel when he launched the “Stocks for the Long Run” project thirty years ago is discussed in this thread: viewtopic.php?t=353607

Happy to answer here in this current thread any questions about the research or the conclusions.
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Re: Stocks for the Long Haul? Maybe Not.

Post by Leesbro63 »

McQ wrote: Sat Jul 30, 2022 12:50 pm The paper discussed on the podcast can be downloaded at https://papers.ssrn.com/sol3/papers.cfm ... id=3805927

An earlier BH thread on the paper started by SimpleGift is: viewtopic.php?t=352394

The new historical data that was unavailable to Jeremy Siegel when he launched the “Stocks for the Long Run” project thirty years ago is discussed in this thread: viewtopic.php?t=353607

Happy to answer here in this current thread any questions about the research or the conclusions.
I’m the OP and I would be fine if a moderator decided to merge these threads.
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Re: Stocks for the Long Haul? Maybe Not.

Post by visualguy »

That's the reason many have a big chunk of their assets in direct real estate.
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Re: Stocks for the Long Haul? Maybe Not.

Post by Trance »

visualguy wrote: Sat Jul 30, 2022 1:05 pm That's the reason many have a big chunk of their assets in direct real estate.
Sadly most reits do not perform well so the index is pretty bad
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Re: Stocks for the Long Haul? Maybe Not.

Post by Leesbro63 »

visualguy wrote: Sat Jul 30, 2022 1:05 pm That's the reason many have a big chunk of their assets in direct real estate.
I'd be curious as to how direct real estate has correlated to stocks in places and during periods where stocks did poorly over long periods. I'm guessing that real estate would also have done poorly, but I don't know that.
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Re: Stocks for the Long Haul? Maybe Not.

Post by Riprap »

Leesbro63 wrote: Sat Jul 30, 2022 9:58 am stocks might not be the best asset class for the long term after all.
What is meant by best? Highest real return?

What is long term? > 30 yeas?

I haven't listened to the podcast. I'm interested in a summary.

I'm of the impression that it would be tough to find an asset class available to the average retail investor whose real (inflation adjusted) earnings paid out as dividends would beat common stocks over a 30 year period.
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Re: Stocks for the Long Haul? Maybe Not.

Post by Leesbro63 »

Riprap wrote: Sat Jul 30, 2022 1:26 pm
Leesbro63 wrote: Sat Jul 30, 2022 9:58 am stocks might not be the best asset class for the long term after all.
What is meant by best? Highest real return?

What is long term? > 30 yeas?

I haven't listened to the podcast. I'm interested in a summary.

I'm of the impression that it would be tough to find an asset class available to the average retail investor whose real (inflation adjusted) earnings paid out as dividends would beat common stocks over a 30 year period.
He says there are long periods where bonds outperformed.
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Re: Stocks for the Long Haul? Maybe Not.

Post by JoeRetire »

Leesbro63 wrote: Sat Jul 30, 2022 9:58 amI found it fascinating and interesting in that he discusses updates to Jeremy Siegel's 1994 data and shows how stocks might not be the best asset class for the long term after all. Bonds might be.
Stock might not be the best.
Bonds might be the best.
Of course bonds might not be the best.
And stocks might be.

Fascinating! Interesting! Fun! And seemingly based on an unpublished paper!
In particular, might this change the way we invest?
Perhaps it might change the way you invest. But not we.
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Re: Stocks for the Long Haul? Maybe Not.

Post by martincmartin »

PicassoSparks wrote: Sat Jul 30, 2022 11:14 am If you have low risk aversion you should go 100% equities.
If your time horizon is > 20 years and you're neither contributing to or withdrawing from your investments, that's true. But that describes very few people.

If you're in retirement and withdrawing, you'll minimize the chance of running out of money by having bonds, at least at the start. Because of sequence of returns risk. This has nothing to do with emotions, risk aversion or being able to sleep at night.
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Re: Stocks for the Long Haul? Maybe Not.

Post by visualguy »

Leesbro63 wrote: Sat Jul 30, 2022 1:21 pm
visualguy wrote: Sat Jul 30, 2022 1:05 pm That's the reason many have a big chunk of their assets in direct real estate.
I'd be curious as to how direct real estate has correlated to stocks in places and during periods where stocks did poorly over long periods. I'm guessing that real estate would also have done poorly, but I don't know that.
Not really. Take a look at the Israeli stock market, for example. The nominal annual return over the last 15 years has been a little over 3%, while real estate in Tel Aviv has gone up by double that rate (over 6%/yr). Similarly, look at coastal California real estate during the financial crisis and other periods when the US stock market was doing poorly. Stocks fell 50% during the financial crisis, but real estate dropped only 15% in the core parts of the Bay Area, for example. Highly desirable locations tend to be persistent and robust. There always seem to be enough people with the means to drive up prices in such areas with a chronic supply/demand imbalance.
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Re: Stocks for the Long Haul? Maybe Not.

Post by seajay »

Prior to the ending of the gold standard and inflation broadly averaged 0% (but with considerable volatility at times that tended to cluster). Money and gold were interchangeable at a fixed rate such that interest on cash deposits/treasuries was akin to a real rate of return (and tended to be quite generous too).

Stocks were for speculators. Share around the funding/risk/rewards rather than individuals taking on excessive concentration risk.

Since the ending of that coupling/anchor, money not bound by finite gold limits, treasuries shifted to be more broadly 0% real, broadly similar outcomes whether you were a borrower or a lender. Investors had to look elsewhere for real rates of return - such as stocks.
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Re: Stocks for the Long Haul? Maybe Not.

Post by Soon2BXProgrammer »

PicassoSparks wrote: Sat Jul 30, 2022 11:14 am I’ve also seen a lot of discussion suggesting that the 1982-2022 data is an anomaly because falling interest rates have resulted in a never-to-be-repeated bond bull market. We must expect even lower returns from bonds going forward because there is nowhere for interest rates to go but up. The paper suggests that, actually, bonds match stocks for long term returns—with arbitrarily long periods of one or the other pulling ahead. In fact, over 20 year periods, bonds have been more volatile than stocks
We have been in an 700-800 year Bond bull market (falling rates):

https://www.bankofengland.co.uk/working ... -var-shock

With temporarily periods of rising rates sprinkled in, the question is can bond yield continue this trend?
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Re: Stocks for the Long Haul? Maybe Not.

Post by willthrill81 »

Leesbro63 wrote: Sat Jul 30, 2022 1:29 pm
Riprap wrote: Sat Jul 30, 2022 1:26 pm
Leesbro63 wrote: Sat Jul 30, 2022 9:58 am stocks might not be the best asset class for the long term after all.
What is meant by best? Highest real return?

What is long term? > 30 yeas?

I haven't listened to the podcast. I'm interested in a summary.

I'm of the impression that it would be tough to find an asset class available to the average retail investor whose real (inflation adjusted) earnings paid out as dividends would beat common stocks over a 30 year period.
He says there are long periods where bonds outperformed.
That's true, but how many? At least in the U.S., I don't believe that there are any 20 periods where stocks underperformed intermediate-term Treasuries, and there have only been two 30 year periods where long-term Treasuries beat stocks. In literally all the others, stocks outperformed and usually by a very big margin.

Let's not forget that U.S. bonds returned -1.6% from 1941-1981. That was a 41 year period of cumulative negative real returns and could easily have encapsulated an investor's entire accumulation or retirement.

Inflation-linked bonds are yielding about 0% real right now. So, everybody should just load up on them because Felix thinks that bonds 'might be the best asset class'? What does that phrase even mean? It's 100% false because there is no such asset. It's called personal finance with good reason.
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Re: Stocks for the Long Haul? Maybe Not.

Post by willthrill81 »

Soon2BXProgrammer wrote: Sat Jul 30, 2022 6:58 pm
PicassoSparks wrote: Sat Jul 30, 2022 11:14 am I’ve also seen a lot of discussion suggesting that the 1982-2022 data is an anomaly because falling interest rates have resulted in a never-to-be-repeated bond bull market. We must expect even lower returns from bonds going forward because there is nowhere for interest rates to go but up. The paper suggests that, actually, bonds match stocks for long term returns—with arbitrarily long periods of one or the other pulling ahead. In fact, over 20 year periods, bonds have been more volatile than stocks
We have been in an 700-800 year Bond bull market (falling rates):

https://www.bankofengland.co.uk/working ... -var-shock

With temporarily periods of rising rates sprinkled in, the question is can bond yield continue this trend?
The math is very clear that bonds cannot continue providing robustly positive real returns from where they are right now.

Perhaps bond yields will eventually rise and inflation will fall to the point that bonds are yielding 5% real again. But I'm not holding my breath.
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Re: Stocks for the Long Haul? Maybe Not.

Post by er999 »

If you go mostly bonds and are accumulating you’d better be willing to work a long time. Personally I’d go mostly stocks and be willing to work longer if stocks have no returns in the next decade rather than mostly bonds with virtually no real growth. Other options are real estate or your own business but I don’t think mostly bonds makes since unless you’ve already made your fortune another way.
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Re: Stocks for the Long Haul? Maybe Not.

Post by PicassoSparks »

willthrill81 wrote: Sat Jul 30, 2022 7:11 pm So, everybody should just load up on them because Felix thinks that bonds 'might be the best asset class'?
We’re, like, three layers deep in a game of telephone now. Felix never makes the claim that you attribute to him here. Not even close.
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Re: Stocks for the Long Haul? Maybe Not.

Post by willthrill81 »

er999 wrote: Sat Jul 30, 2022 7:19 pm If you go mostly bonds and are accumulating you’d better be willing to work a long time.
Indeed. The Networthify calculator says that with a 1% return on one's investments and a 30% saving rate, it would take about 57 years to reach financial independence.
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Re: Stocks for the Long Haul? Maybe Not.

Post by willthrill81 »

PicassoSparks wrote: Sat Jul 30, 2022 7:22 pm
willthrill81 wrote: Sat Jul 30, 2022 7:11 pm So, everybody should just load up on them because Felix thinks that bonds 'might be the best asset class'?
We’re, like, three layers deep in a game of telephone now. Felix never makes the claim that you attribute to him here. Not even close.
I haven't listened to the podcast and have no desire to. But the OP said "I found it fascinating and interesting in that he discusses updates to Jeremy Siegel's 1994 data and shows how stocks might not be the best asset class for the long term after all. Bonds might be." So, was it the OP or Felix that said that "bonds might be [the best asset class for the long term]?"
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Re: Stocks for the Long Haul? Maybe Not.

Post by nisiprius »

McQ wrote: Sat Jul 30, 2022 12:50 pm The paper discussed on the podcast can be downloaded at https://papers.ssrn.com/sol3/papers.cfm ... id=3805927
Wow. Just wow.

I do want to point out a sort of anticipation in William J. Bernstein's essay, Only Two Centuries of Data, which makes the point that
Modern investors tend to focus on the 20th century data, showing that stocks return almost 5% more per year than bonds, and ignore the more equivocal message of the 19th century. But it is not at all obvious that the older data are less relevant. Which do we believe? In the famous words of Paul Samuelson, "We have but one sample of history." And that sample contains only two centuries.
Even Siegel implicitly acknowledges this in a somewhat obfuscated way. In the fourth (2008) edition of Stocks for the Long Run, in an often misquoted or incorrectly paraphrase statement, he wrote:
never in any of the past 175 years would a buyer of newly-issued 30-year bonds have outperformed an investor in a diversified portfolio of common stocks held over the same period.
The phrase "the past 175 years" forces us to do mental arithmetic (2008-175 = 1833) to understand that he is not including his whole data set. The fifth edition is more straightforward:
In the first four editions of Stocks for the Long Run, I noted that the last 30-year period when the return on long-term bonds beat stocks ended in 1861, at the onset of the Civil War.
(And he then has to add, "That is no longer true.")
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Re: Stocks for the Long Haul? Maybe Not.

Post by Soon2BXProgrammer »

willthrill81 wrote: Sat Jul 30, 2022 7:13 pm
Soon2BXProgrammer wrote: Sat Jul 30, 2022 6:58 pm
PicassoSparks wrote: Sat Jul 30, 2022 11:14 am I’ve also seen a lot of discussion suggesting that the 1982-2022 data is an anomaly because falling interest rates have resulted in a never-to-be-repeated bond bull market. We must expect even lower returns from bonds going forward because there is nowhere for interest rates to go but up. The paper suggests that, actually, bonds match stocks for long term returns—with arbitrarily long periods of one or the other pulling ahead. In fact, over 20 year periods, bonds have been more volatile than stocks
We have been in an 700-800 year Bond bull market (falling rates):

https://www.bankofengland.co.uk/working ... -var-shock

With temporarily periods of rising rates sprinkled in, the question is can bond yield continue this trend?
The math is very clear that bonds cannot continue providing robustly positive real returns from where they are right now.

Perhaps bond yields will eventually rise and inflation will fall to the point that bonds are yielding 5% real again. But I'm not holding my breath.
I think you made my point. There is not an easy way for the future to be like the past. And for bonds to raise to 5% real the path to get there would be very very painful.

And if the future is not like the past, we should throw out most historical data.
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Re: Stocks for the Long Haul? Maybe Not.

Post by willthrill81 »

Soon2BXProgrammer wrote: Sat Jul 30, 2022 8:31 pm
willthrill81 wrote: Sat Jul 30, 2022 7:13 pm
Soon2BXProgrammer wrote: Sat Jul 30, 2022 6:58 pm
PicassoSparks wrote: Sat Jul 30, 2022 11:14 am I’ve also seen a lot of discussion suggesting that the 1982-2022 data is an anomaly because falling interest rates have resulted in a never-to-be-repeated bond bull market. We must expect even lower returns from bonds going forward because there is nowhere for interest rates to go but up. The paper suggests that, actually, bonds match stocks for long term returns—with arbitrarily long periods of one or the other pulling ahead. In fact, over 20 year periods, bonds have been more volatile than stocks
We have been in an 700-800 year Bond bull market (falling rates):

https://www.bankofengland.co.uk/working ... -var-shock

With temporarily periods of rising rates sprinkled in, the question is can bond yield continue this trend?
The math is very clear that bonds cannot continue providing robustly positive real returns from where they are right now.

Perhaps bond yields will eventually rise and inflation will fall to the point that bonds are yielding 5% real again. But I'm not holding my breath.
I think you made my point. There is not an easy way for the future to be like the past. And for bonds to raise to 5% real the path to get there would be very very painful.

And if the future is not like the past, we should throw out most historical data.
There's a big difference between learning broad lessons from historical data and expecting history to literally repeat itself.

As human beings, we have all learned from what is now the past.
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Re: Stocks for the Long Haul? Maybe Not.

Post by Nathan Drake »

As others have mentioned, this underscores the importance of diversification. The standard 60/40 is not very diversified. One market. One factor. Generally one type of bonds (US Treasuries).

There are much better ways of constructing portfolios that diversify across multiple regions, factors, and types of bonds/fixed income. The inclusion of these diversifiers may not seem important on the way down from double digit interest rates to zero. But in a landscape of interest rates and inflation rising meaningfully relative to the recent past, the standard 60/40 will certainly not be optimal.

The fact remains that 60/40 is investing in some of the most overvalued and crowded assets in the world. This suggests lower expected returns. Diversifying into other areas increases the expected return on your portfolio. Sometimes embracing risk is just part of successful investing, so you need to diversify out of areas that presuppose much less risk due to elevated valuations.
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Re: Stocks for the Long Haul? Maybe Not.

Post by Drew31 »

willthrill81 wrote: Sat Jul 30, 2022 7:26 pm
PicassoSparks wrote: Sat Jul 30, 2022 7:22 pm
willthrill81 wrote: Sat Jul 30, 2022 7:11 pm So, everybody should just load up on them because Felix thinks that bonds 'might be the best asset class'?
We’re, like, three layers deep in a game of telephone now. Felix never makes the claim that you attribute to him here. Not even close.
I haven't listened to the podcast and have no desire to. But the OP said "I found it fascinating and interesting in that he discusses updates to Jeremy Siegel's 1994 data and shows how stocks might not be the best asset class for the long term after all. Bonds might be." So, was it the OP or Felix that said that "bonds might be [the best asset class for the long term]?"
Re-reading OP’s post and having listened to the podcast, I’m reading it as that was a possible interpretation OP drew from it. Don’t want to speak for OP. On the podcast I don’t ever recall Felix saying anything like that around bonds. Seemed his take home message was it’s really just about diversification which has been touched on in this thread. I didn’t feel Felix was taking any sides but again, think deeply about diversification was what I gathered. It was certainly not go buy bonds.
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Re: Stocks for the Long Haul? Maybe Not.

Post by Beensabu »

willthrill81 wrote: Sat Jul 30, 2022 8:35 pm As human beings, we have all learned from what is now the past.
Have we, though? You really think so? It sure doesn't seem like it to me.
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Re: Stocks for the Long Haul? Maybe Not.

Post by willthrill81 »

Beensabu wrote: Sat Jul 30, 2022 11:32 pm
willthrill81 wrote: Sat Jul 30, 2022 8:35 pm As human beings, we have all learned from what is now the past.
Have we, though? You really think so? It sure doesn't seem like it to me.
We haven't learned as much as we probably should have, but yes, we have learned something.
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Re: Stocks for the Long Haul? Maybe Not.

Post by willthrill81 »

Drew31 wrote: Sat Jul 30, 2022 10:36 pm
willthrill81 wrote: Sat Jul 30, 2022 7:26 pm
PicassoSparks wrote: Sat Jul 30, 2022 7:22 pm
willthrill81 wrote: Sat Jul 30, 2022 7:11 pm So, everybody should just load up on them because Felix thinks that bonds 'might be the best asset class'?
We’re, like, three layers deep in a game of telephone now. Felix never makes the claim that you attribute to him here. Not even close.
I haven't listened to the podcast and have no desire to. But the OP said "I found it fascinating and interesting in that he discusses updates to Jeremy Siegel's 1994 data and shows how stocks might not be the best asset class for the long term after all. Bonds might be." So, was it the OP or Felix that said that "bonds might be [the best asset class for the long term]?"
Re-reading OP’s post and having listened to the podcast, I’m reading it as that was a possible interpretation OP drew from it. Don’t want to speak for OP. On the podcast I don’t ever recall Felix saying anything like that around bonds. Seemed his take home message was it’s really just about diversification which has been touched on in this thread. I didn’t feel Felix was taking any sides but again, think deeply about diversification was what I gathered. It was certainly not go buy bonds.
Thank you for that perspective.
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Re: Stocks for the Long Haul? Maybe Not.

Post by TheDoctor91 »

Nathan Drake wrote: Sat Jul 30, 2022 10:22 pm As others have mentioned, this underscores the importance of diversification. The standard 60/40 is not very diversified. One market. One factor. Generally one type of bonds (US Treasuries).

There are much better ways of constructing portfolios that diversify across multiple regions, factors, and types of bonds/fixed income. The inclusion of these diversifiers may not seem important on the way down from double digit interest rates to zero. But in a landscape of interest rates and inflation rising meaningfully relative to the recent past, the standard 60/40 will certainly not be optimal.

The fact remains that 60/40 is investing in some of the most overvalued and crowded assets in the world. This suggests lower expected returns. Diversifying into other areas increases the expected return on your portfolio. Sometimes embracing risk is just part of successful investing, so you need to diversify out of areas that presuppose much less risk due to elevated valuations.
Agreed, once you start throwing in all sorts of diversification, it's very hard to imagine a portfolio not doing well.

E.g. going from US and adding in INTL and EM.

Then throwing in small value, or equal weighted value portfolios.

Then throwing in momentum.

Then some stocks with low volatility.

Then adding in trend following

Then adding in bonds.

Then adding your personal real estate.
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Re: Stocks for the Long Haul? Maybe Not.

Post by McQ »

nisiprius wrote: Sat Jul 30, 2022 7:55 pm ---
I do want to point out a sort of anticipation in William J. Bernstein's essay, Only Two Centuries of Data, which makes the point that
Modern investors tend to focus on the 20th century data, showing that stocks return almost 5% more per year than bonds, and ignore the more equivocal message of the 19th century. But it is not at all obvious that the older data are less relevant. Which do we believe? In the famous words of Paul Samuelson, "We have but one sample of history." And that sample contains only two centuries.
Even Siegel implicitly acknowledges this in a somewhat obfuscated way. In the fourth (2008) edition of Stocks for the Long Run, in an often misquoted or incorrectly paraphrase statement, he wrote:
never in any of the past 175 years would a buyer of newly-issued 30-year bonds have outperformed an investor in a diversified portfolio of common stocks held over the same period.
The phrase "the past 175 years" forces us to do mental arithmetic (2008-175 = 1833) to understand that he is not including his whole data set. The fifth edition is more straightforward:
In the first four editions of Stocks for the Long Run, I noted that the last 30-year period when the return on long-term bonds beat stocks ended in 1861, at the onset of the Civil War.
(And he then has to add, "That is no longer true.")
Yes, Siegel’s not very good about looking at sub-periods in his data. Here’s his own data on the first 60 years of stock and bond returns in the US. (Stocks do even worse in this period in the new dataset I collected).

Stocks are the solid line, bonds the broken line. Siegel's bonds are Federal or municipal, whichever yielded least in the preceding year, with returns interpolated from successive yields. No Treasuries between 1835 and 1842 after Jackson paid off the debt. Typically long bonds with no stated maturity before 1842.

Image

[portion of the original appearing on p. 82 of the 5th edition]

So, if forty years qualifies as “long term,” Siegel’s thesis is not compatible with this portion of his own data.
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Re: Stocks for the Long Haul? Maybe Not.

Post by JBTX »

willthrill81 wrote: Sat Jul 30, 2022 7:13 pm
Soon2BXProgrammer wrote: Sat Jul 30, 2022 6:58 pm
PicassoSparks wrote: Sat Jul 30, 2022 11:14 am I’ve also seen a lot of discussion suggesting that the 1982-2022 data is an anomaly because falling interest rates have resulted in a never-to-be-repeated bond bull market. We must expect even lower returns from bonds going forward because there is nowhere for interest rates to go but up. The paper suggests that, actually, bonds match stocks for long term returns—with arbitrarily long periods of one or the other pulling ahead. In fact, over 20 year periods, bonds have been more volatile than stocks
We have been in an 700-800 year Bond bull market (falling rates):

https://www.bankofengland.co.uk/working ... -var-shock

With temporarily periods of rising rates sprinkled in, the question is can bond yield continue this trend?
The math is very clear that bonds cannot continue providing robustly positive real returns from where they are right now.

Perhaps bond yields will eventually rise and inflation will fall to the point that bonds are yielding 5% real again. But I'm not holding my breath.
Yeah there’s not a lot of mystery to bonds. One would expect a 20 year return in the ballpark of 3% at this point, and a real return not too far from zero. Sure, stocks could have a 20 year period with no real return, but that’s a risk I’m willing to take.
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Re: Stocks for the Long Haul? Maybe Not.

Post by nisiprius »

McQ wrote: Sun Jul 31, 2022 1:07 pm...So, if forty years qualifies as “long term,” Siegel’s thesis is not compatible with this portion of his own data...
I once asked Does Siegel every define "long run?" and failed to find an answer. In an introduction to the 2002 edition, Peter Bernstein (not Siegel) says it is 20 years:
..[Siegel demonstrates effectively] the consistency of real returns on equities when measured over periods of 20 years or longer.... that consistency [is] so visible in the historical data and [keeps] reappearing in so many different guises. Furthermore, he claims this consistency is the likely outcome of a profit-driven system....

...Professor Siegel did not lightly choose Stocks for the Long Run as the title of his book. The operative number is 20. Volatility of returns is high in periods of less than 20 years.
When I tried to find anything definite in the book itself, I found some vague indications that Siegel thinks it is 30 years, but couldn't find any place where he says that explicitly.
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Re: Stocks for the Long Haul? Maybe Not.

Post by Robot Monster »

JBTX wrote: Sun Jul 31, 2022 1:26 pm Yeah there’s not a lot of mystery to bonds. One would expect a 20 year return in the ballpark of 3% at this point, and a real return not too far from zero. Sure, stocks could have a 20 year period with no real return, but that’s a risk I’m willing to take.
Seems perfectly reasonable.

Of interest, BlackRock has a nicely designed visualization of expected returns (and probabilities) of various asset classes over different time periods. BlackRock link
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Re: Stocks for the Long Haul? Maybe Not.

Post by JBTX »

Robot Monster wrote: Sun Jul 31, 2022 1:54 pm
JBTX wrote: Sun Jul 31, 2022 1:26 pm Yeah there’s not a lot of mystery to bonds. One would expect a 20 year return in the ballpark of 3% at this point, and a real return not too far from zero. Sure, stocks could have a 20 year period with no real return, but that’s a risk I’m willing to take.
Seems perfectly reasonable.

Of interest, BlackRock has a nicely designed visualization of expected returns (and probabilities) of various asset classes over different time periods. BlackRock link
That’s the thing though. Lots of people will evaluate risks and returns based upon historical results as if long term bond returns are completely random. But with bonds, your starting point greatly affects where you end up. It is mathematically impossible to mirror some of the returns with starting points in the early 80’s.
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Re: Stocks for the Long Haul? Maybe Not.

Post by martincmartin »

Is the data publicly available? Should we put it into Simba's spreadsheet?
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Re: Stocks for the Long Haul? Maybe Not.

Post by Shallowpockets »

Maybe no return for anything and thus you are left with what you have acquired over the term of your saving for your future. You may or may not reach your goals based on savings alone. It is only over the last 40 years that most of the investment world has filtered down into the majority of people, and I believe it is not even a majority now.
All this retirement and striving for 25X expenses and the various methods to get there are so much fluff for many many people. Either unknown how to or unable to do.
Bogleheads and investment and LBYM and 60/40 and indexes and rebalancing.
Let’s face it, we are kind of full of ourselves.
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Re: Stocks for the Long Haul? Maybe Not.

Post by Ocean77 »

This may be another indication that the bull market in bonds that has run over several decades is now coming to an end. To be really sure, I'd look for the publication of a book titled "Bonds for the Long Run".
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Re: Stocks for the Long Haul? Maybe Not.

Post by nisiprius »

The take-home for me is that, while it may not be as bad as a Cauchy distribution, financial data does not settle down and does not converge to reliable averages as the sampling period gets longer and longer. It is not just daily fluctuations, monthly fluctuations, or yearly fluctuations... there are decade and century fluctuations.
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Re: Stocks for the Long Haul? Maybe Not.

Post by willthrill81 »

nisiprius wrote: Sun Jul 31, 2022 4:17 pm The take-home for me is that, while it may not be as bad as a Cauchy distribution, financial data does not settle down and does not converge to reliable averages as the sampling period gets longer and longer. It is not just daily fluctuations, monthly fluctuations, or yearly fluctuations... there are decade and century fluctuations.
True, but given the statements made in the OP, the question isn't how consistent stock returns are per se but rather how consistent has been the equity risk premium. And the data are pretty clear that over time, the likelihood of the ERP being positive has grown significantly.
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Re: Stocks for the Long Haul? Maybe Not.

Post by abuss368 »

willthrill81 wrote: Sun Jul 31, 2022 12:08 am
Beensabu wrote: Sat Jul 30, 2022 11:32 pm
willthrill81 wrote: Sat Jul 30, 2022 8:35 pm As human beings, we have all learned from what is now the past.
Have we, though? You really think so? It sure doesn't seem like it to me.
We haven't learned as much as we probably should have, but yes, we have learned something.
Too many investors often make the same mistakes, often not learning from he past. Because this “time it is different”!

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Re: Stocks for the Long Haul? Maybe Not.

Post by Lecture »

Ocean77 wrote: Sun Jul 31, 2022 4:07 pm This may be another indication that the bull market in bonds that has run over several decades is now coming to an end....
People comment about this "bull market in bonds".....I know rates were routinely at >7% 20-30 yrs ago, but for the past 10 yrs, bond rates (Treasury, muni & corporate) have been much, much less.....so I struggle to understand...at least for new issue bonds- a) has this really been a bond bull mkt in the past 10 yrs (ie, new issue), and b) if so....why??! Thanks.
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Re: Stocks for the Long Haul? Maybe Not.

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Lecture wrote: Sun Jul 31, 2022 5:03 pm
Ocean77 wrote: Sun Jul 31, 2022 4:07 pm This may be another indication that the bull market in bonds that has run over several decades is now coming to an end....
People comment about this "bull market in bonds".....I know rates were routinely at >7% 20-30 yrs ago, but for the past 10 yrs, bond rates (Treasury, muni & corporate) have been much, much less.....so I struggle to understand...at least for new issue bonds- a) has this really been a bond bull mkt in the past 10 yrs (ie, new issue), and b) if so....why??! Thanks.
I contend that the bond bull market ended in 2012. Since then, TBM has returned -1.15% real.
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Re: Stocks for the Long Haul? Maybe Not.

Post by rick51 »

Fascinating podcast, but I’m not sure what to do with it. I occasionally listen to the podcast “Money for the Rest of Us”, hosted by David Stein. I may be misattributing this to him, but I recall a podcast where he said that the most valuable thing to you is your human capital. The stock market is there to help preserve the spending power of your hard earned savings. So save all you can, invest some in the stock market, but spread your savings over several types of investments (asset classes) to build a diversified portfolio to preserve your standard of living for your retirement years. I think he is trying to future proof his portfolio. I also read Ray Dalio’s stuff and I think he makes some excellent points about major trends in the world economy, but again the time frame is totally unknown so I’m not sure what to make of it. Surely the answer is not to buy gold and bury it in my backyard.
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Re: Stocks for the Long Haul? Maybe Not.

Post by Ocean77 »

Lecture wrote: Sun Jul 31, 2022 5:03 pm
Ocean77 wrote: Sun Jul 31, 2022 4:07 pm This may be another indication that the bull market in bonds that has run over several decades is now coming to an end....
People comment about this "bull market in bonds".....I know rates were routinely at >7% 20-30 yrs ago, but for the past 10 yrs, bond rates (Treasury, muni & corporate) have been much, much less.....so I struggle to understand...at least for new issue bonds- a) has this really been a bond bull mkt in the past 10 yrs (ie, new issue), and b) if so....why??! Thanks.

I.e. look at the 10 year Treasury and how it went from 15% or so in 1981 to about 0.5% in 2020. So we had about 40 years of a bond bull market.
https://www.macrotrends.net/2016/10-yea ... ield-chart
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Re: Stocks for the Long Haul? Maybe Not.

Post by averagedude »

Thanks for the link. I just downloaded it. I read that book and I love Jeremy Siegel.
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Re: Stocks for the Long Haul? Maybe Not.

Post by willthrill81 »

Ocean77 wrote: Sun Jul 31, 2022 9:42 pm
Lecture wrote: Sun Jul 31, 2022 5:03 pm
Ocean77 wrote: Sun Jul 31, 2022 4:07 pm This may be another indication that the bull market in bonds that has run over several decades is now coming to an end....
People comment about this "bull market in bonds".....I know rates were routinely at >7% 20-30 yrs ago, but for the past 10 yrs, bond rates (Treasury, muni & corporate) have been much, much less.....so I struggle to understand...at least for new issue bonds- a) has this really been a bond bull mkt in the past 10 yrs (ie, new issue), and b) if so....why??! Thanks.

I.e. look at the 10 year Treasury and how it went from 15% or so in 1981 to about 0.5% in 2020. So we had about 40 years of a bond bull market.
https://www.macrotrends.net/2016/10-yea ... ield-chart
Considering that the real return of 10 year Treasuries since 2013 was -1.4% annualized, I don't think we should call that time part of a 'bond bull market'.
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Re: Stocks for the Long Haul? Maybe Not.

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Came here for the arguments, stayed here for the excellent links. Thanks!
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