Does past performance really = future returns?

[MikeT]

Having spent the last two days reading through the wiki's here, I understand that based on the past, a stock heavy portfolio is the most likely to grow and out pace inflation in the long run.

However, taking a step back, allow me to question the central assumption: does the past really predict the future?

For example, if you look at a 15 year old child who has grown from 1 foot tall to 6 feet tall, does he continue growing, to become 12 feet tall?

Even if Moore's Law (the doubling of transistor density doubled every 2 years) was true for a long time, does that mean it will continue to be true forever?

I'm intentionally keeping this general, not about me or my circumstances.

Thoughts please,

-Mike

[nalor511]

At the bottom of every single brokerage webpage, you see "past performance is not indicative of future results". Nobody (here) ever said it was. But since we don't have the future to look at, the past is the best you can do.

So, no, past performance will almost certainly not be the same as the future.

[mtn biker]

I don’t think anything in the wiki suggests the past will predict the future.

What are you thinking of doing differently based on your concerns about the past not predicting the future?

[MikeT]

Since no on one knows during the next 30 years if stocks will do better or bonds will do better, why isn't it the consensus view to split the baby and go 50/50 ?

Likewise, 50/50 USA vs non-usa stocks?

-Mike

[Wiggums]

The prior performance is what happened in the past. The market goes up, down, and sideways. Unfortunately, past performance is not indicative of future results. Otherwise it would be easy to pick winners.

[MikeT]

What are you thinking of doing differently based on your concerns about the past not predicting the future?

I'm glad I'm not 20 because there's a big chance that a 50/50 would be the wrong answer.

However, since I'm 56 and I've often heard "your age in bonds", that happens to coincide with my split baby

Mike

[alex_686]

Since no on one knows during the next 30 years if stocks will do better or bonds will do better, why isn't it the consensus view to split the baby and go 50/50 ?

Likewise, 50/50 USA vs non-usa stocks?

-Mike

The logic on why stocks will grow faster than bonds is called the “Equity Risk Premium” (ERP). Investors can either buy a 10 year government bond (the risk free choice) or equities (a risky choice). The only reason why someone would choose the riskier choice is because it offers higher returns.

[Raspberry-503]

Since no on one knows during the next 30 years if stocks will do better or bonds will do better, why isn't it the consensus view to split the baby and go 50/50 ?

Likewise, 50/50 USA vs non-usa stocks?

-Mike

Neither is a horrible idea. Many people go 60/40 stock/bond and the global market (say VT) is roughly 60% US. That 10% from 50/50.is not going to make a huge difference.
Of course maybe fiat money is on its way out so you should have 50% crypto? 50% gold? 50% real estate? Some people do.i think the all-weather, permanent and golden butterfly portfolios all use a similar idea of own a bit of everything.

Some animals keep growing forever

Nobody knows the future.

Regarding ERP, some people will argue that current prices are high for US stock, and bond rates are no too shabby, so the premium is currently low and you should own more bonds. They are still relying in historical analysis to make a determination of "overvalued" and who knows what will happen to bonds.

[dbr]

Past performance informs our thinking about future returns but it does not predict future returns.

It is possible to get all balled up with semantics and context here.

Usually stern warnings not to predict future performance from past performance are offered in the context of someone noticing few years of outstanding results from some investment being told that they should not assume the same results will continue for a few more years, even if in fact it turns out they do. Contentions that show that on average over long terms stocks outperform bonds but with more volatility would be expected to be good for long future terms on average. There are other contentions such as the famous Fama-French result that a difference can be predicted between small and value stocks and large and growth stocks, that difference in their data for that period of time being that small cap returns more than large value. People don't know if that should persist and may currently not be persisting. It isn't clear what the meaning of recent underperformance of international stocks should mean going forward.

In fixed income, interest rates are notoriously difficult to predict. Usually trying to predict future interest rates from past interest rates does not work. It might be credible that there is a 200 year trend for interest rates to decline: https://advisor.visualcapitalist.com/us-interest-rates/
Stock dividends have declined considerably over the last many decades. Who knows if that is a continuing trend.

[GaryA505]

Having spent the last two days reading through the wiki's here, I understand that based on the past, a stock heavy portfolio is the most likely to grow and out pace inflation in the long run.

However, taking a step back, allow me to question the central assumption: does the past really predict the future?

For example, if you look at a 15 year old child who has grown from 1 foot tall to 6 feet tall, does he continue growing, to become 12 feet tall?

Even if Moore's Law (the doubling of transistor density doubled every 2 years) was true for a long time, does that mean it will continue to be true forever?

I'm intentionally keeping this general, not about me or my circumstances.

Thoughts please,

-Mike

There have been periods of time when bonds outperformed stocks. Take a look at 2000-2009.

[LadyGeek]

This thread is now in the Investing - Theory, News & General forum (theory).

(Thanks to the member who reported the post and explained what's wrong.)

[alex_686]

They are still relying in historical analysis to make a determination of "overvalued" and who knows what will happen to bonds.

I hope not. The good ones are not.

The current forward S&P is in the low 20s. Lets call it 20 to keep the math simple.

The argument that the S&P will mean revert is false. Historically it hasn’t ever mean reverted with a handful of exceptions.

However it does mean it takes $20 to buy $1 in profits. Thats a 5% earnings yield. That means we can expect earnings growth, and thus real stock returns, of around 5%. This is born out historically - vaguely.

There are lots of interlocking moving parts here. But yeah, expected forward returns are low unless you assume a very high growth rate.

[dcabler]

Having spent the last two days reading through the wiki's here, I understand that based on the past, a stock heavy portfolio is the most likely to grow and out pace inflation in the long run.

However, taking a step back, allow me to question the central assumption: does the past really predict the future?

For example, if you look at a 15 year old child who has grown from 1 foot tall to 6 feet tall, does he continue growing, to become 12 feet tall?

Even if Moore's Law (the doubling of transistor density doubled every 2 years) was true for a long time, does that mean it will continue to be true forever?

I'm intentionally keeping this general, not about me or my circumstances.

Thoughts please,

-Mike

There have been periods of time when bonds outperformed stocks. Take a look at 2000-2009.

This is one of the reasons I cringe when I see simple growth charts comparing 2 assets, or asset allocations over some finite time period. There's a very good tool for making comparisons and it's called a Tell-Tale chart. It's the cumulative growth of one asset or allocation divided by the cumulative growth of another asset or allocation at each point in time. With this method, you can now clearly see when the first outpaced the second (positive slope), the second outpaced the first (negative slope) and when more or less on-par performance occurred.

This helps to remove the effects of cherry picking start and stop dates, whether such cherry picking was deliberate or accidental. It certainly helped me see the bigger picture. Now it's still backwards looking so there's still no guarantee that any of these regimes will be as large (or as small) in magnitude in the future or whether they might last longer (or shorter) in the future or even whether past repetitive patterns may repeat themselves in the future. And that also may end up prompting further thought.

https://www.bogleheads.org/wiki/Telltale_chart

Not a lot of the canned tools have this capability, but the Simba spreadsheet available on this forum is one that does.
https://www.bogleheads.org/wiki/Simba%2 ... preadsheet


Cheers.

[Northern Flicker]

Suppose you have a choice between two hypothetical investments: investment A generates $100/yr for 10 years, guaranteed by the US treasury. For investment B we estimate it will return $100/yr on average for 10 years, but there is no guarantee-- it may return zero or any other amount each year.

Which would you pay more for? Both have a projected return of $100/yr, but you would expect to pay less for investment B to compensate for its uncertainty. If these are publicly traded, the market will discount in a larger risk premium for investment B to reflect the uncertainty. Buying B at a "discount" relative to A will increase its projected return relative to A.

Notice that we do not need to know anything about how well investments like investment B have performed in the past to believe that it has a higher expected return than investment A.

[Northern Flicker]

There's a very good tool for making comparisons and it's called a Tell-Tale chart. It's the cumulative growth of one asset or allocation divided by the cumulative growth of another asset or allocation at each point in time. With this method, you can now clearly see when the first outpaced the second (positive slope), the second outpaced the first (negative slope) and when more or less on-par performance occurred.

This helps to remove the effects of cherry picking start and stop dates...

It still is sensitive to start date.

[MikeT]

In fixed income, interest rates are notoriously difficult to predict. Usually trying to predict future interest rates from past interest rates does not work. It might be credible that there is a 200 year trend for interest rates to decline: https://advisor.visualcapitalist.com/us-interest-rates/
Stock dividends have declined considerably over the last many decades. Who knows if that is a continuing trend.

Thanks for the history of interest rates chart !!!

That makes me wonder if I was dumb for having 40% in bonds when interest rates were at an all-time low since when interest rates rise, bond fund yields fall.

Should I have realized there was no where lower for rates to have gone and I should have gotten out of bonds sooner?

-Mike

[Kenkat]

For example, if you look at a 15 year old child who has grown from 1 foot tall to 6 feet tall, does he continue growing, to become 12 feet tall?

No, we know from past observation that this is not true. We know that the child is highly unlikely to grow past 6 feet tall, so there is no need to plan for that possibility.

What we do know is that through observation, there is a high likelihood that child will live to be 70, 80 or even 90 years old or more. So we plan around that. The child might not make it to that age, but it’s the most likely scenario.

It is similar with equities. It is not guaranteed that that will happen, it is simply the most likely scenario based on our observation of the past. It’s likely but not guaranteed, especially over shorter time frames or for a specific security. Just like the 15 year old, we expect most to live to old age, but for a single individual it is certainly and sadly not guaranteed.

Even if Moore's Law (the doubling of transistor density doubled every 2 years) was true for a long time, does that mean it will continue to be true forever?

Moore’s Law is dead and this was expected due to the basic limitations of chip density imposed by physics. What we have seen is that computing power is being scaled differently due to the limits being reached, with multi-core CPU and multi CPU designs. So the concept of Moore’s Law still applies even though the method of achieving it has changed.

[dcabler]

There's a very good tool for making comparisons and it's called a Tell-Tale chart. It's the cumulative growth of one asset or allocation divided by the cumulative growth of another asset or allocation at each point in time. With this method, you can now clearly see when the first outpaced the second (positive slope), the second outpaced the first (negative slope) and when more or less on-par performance occurred.

This helps to remove the effects of cherry picking start and stop dates...

It still is sensitive to start date.

If you think so,then I didn't explain myself clearly. The point isn't to ONLY look at the beginning and end of the analysis. If that were the case, then there wouldn't be any point. In fact this gives you as many start and stop dates are there are dates in the analysis. It's more informative, in my opinion, than just a single start and stop date which is often shown by folks on this forum.

Cheers.

[dogagility]

Do you think civilization will continue to innovate and that people will pay a premium for that innovation? If so, I think there's your answer.

Of course, the specific value of the future return may not perfectly match history, but there will be a positive return.

Will every investor see that return? Probably not, as there will be some economies that completely implode.

[MikeT]

Do you think civilization will continue to innovate and that people will pay a premium for that innovation? If so, I think there's your answer.

Interesting question but not sure why innovation would be *THE* metric.

For example, if robots replace all people and we end up with mass unemployment, inability to fund future social security obligations, I'm not sure that innovation of smart robots flipping burgers means the future is bright.

-Mike

[MikeT]

Allow me to ask an un-knowable question:

If people freak out during a correction of the USA stock market, do they typically just go to cash or do they try and find another home for their investments (e.g. bonds, or international stocks)?

Does anyone have any historical knowledge they can share?

Yes, I realize the irony of me asking for what happened in the past

-Mike

[Mr. Rumples]

No one knows really. The history folks refer to is relatively short in the scheme of things. The mixed economy we enjoy has only been around since the Washington Administration. That said, investing is faith that the system will survive and that folks won't end up with the worthless bonds of the Confederate States or the worthless stock certificates of companies like the Virginia and Tennessee Railroad (though as collector's items they fetch about $300.)

The US hasn't defaulted on its bonds since 1814, though it has come perilously close since then; during the years following the Panic of 1873 corporate bond default was over 35%.

[alex_686]

Do you think civilization will continue to innovate and that people will pay a premium for that innovation? If so, I think there's your answer.

Interesting question but not sure why innovation would be *THE* metric.

For example, if robots replace all people and we end up with mass unemployment, inability to fund future social security obligations, I'm not sure that innovation of smart robots flipping burgers means the future is bright.

-Mike

It’s not. We have had periods of high innovation and low returns. Lots of spare capital chasing the same idea. And periods of low innovation and high returns. That is, times of scarce capital. Sometimes workers or entrepreneurs/management grab the growth, not capital.

[secondopinion]

Do you think civilization will continue to innovate and that people will pay a premium for that innovation? If so, I think there's your answer.

Interesting question but not sure why innovation would be *THE* metric.

For example, if robots replace all people and we end up with mass unemployment, inability to fund future social security obligations, I'm not sure that innovation of smart robots flipping burgers means the future is bright.

-Mike

I certainly hope people can find something better to do than flip hamburgers. People have a great ability to create unnecessary work (on top of the necessary), so I am not worried.

[seajay]

Simplify stocks to being ... a single farm that when worked yields harvests (dividends). What would someone pay for that farm 50 years ago, or 50 years in the future. In part the price will be influenced by other factors evident at the time, how large/small the dividends are relative to the current levels of interest rates/inflation etc. Given the same conditions the farm might be the same (inflation adjusted) price 50 years ago as in 50 years time. With dissimilar conditions one may be a relatively high price, the other a relatively low price. Interest rates/inflation have varied considerably from very low to high levels but absent total collapse are somewhat range bound, as might they be in the future. Look back far enough across a wide range of conditions and measure the limits/extremes of prices ... and if the future falls within similar limits (ranging from world wars to bonanza periods) then so also might future prices/valuations fall within similar limits. So yes the past can really be a guideline (predict) the future, but isn't guaranteed (past worst/best case limits could be breached in the future).

[dogagility]

Do you think civilization will continue to innovate and that people will pay a premium for that innovation? If so, I think there's your answer.

Interesting question but not sure why innovation would be *THE* metric.

For example, if robots replace all people and we end up with mass unemployment, inability to fund future social security obligations, I'm not sure that innovation of smart robots flipping burgers means the future is bright.

-Mike

Yeah, and what about the aliens, and the... and the...

[alluringreality]

Allow me to ask an un-knowable question:

If people freak out during a correction of the USA stock market, do they typically just go to cash or do they try and find another home for their investments (e.g. bonds, or international stocks)?

Does anyone have any historical knowledge they can share?

Yes, I realize the irony of me asking for what happened in the past

-Mike

I'm not sure how exactly to track down information that might provide clues. Generally colloquial discussion tends to presume that such events might revolve around having overestimated investment time horizon. If someone wants to shorten their time horizon, then presumably they may prefer to exchange the investment asset for cash-equivalents, and deleveraging margin may also work in that direction. Personally I make presumptions along the following lines, where flight to safety comes to mind, such as nominal government bonds possibly increasing in value during a disinflationary event. Markets suggest that various individuals may have non-matching preferences, for example portfolio insurance strategies plan to sell into price declines, while constant-mix intends to buy more as price falls.

Critical to understanding risk is investment horizon. Financial euphoria can be thought of as a condition in which investors have indefinitely long investment horizons and, thus, systematically undervalue liquidity. Financial crises can be thought of as the condition in which many intermediaries’ investment horizons are extremely short and, thus, an extremely high value is placed on liquidity. Most investors have a specified investment horizon but they can also be easily diverted from it; thus, in practice, investment horizons are elastic.

https://www.bis.org/publ/bppdf/bispap72l.pdf

[arcticpineapplecorp.]

For example, if you look at a 15 year old child who has grown from 1 foot tall to 6 feet tall, does he continue growing, to become 12 feet tall?

I think you're asking if the Stock market can keep going up because as has been said before "Trees don't grow to the sky." Google tells us about this phrase: "The adage taken from a German proverb is often used by financiers to warn that there are natural limits to upward growth. Growth leads to maturity and, inevitably, decline."

Well there's a couple things here:
1. There is a ceiling for certain things like children's height (although an overactive pituitary gland can push the limits there) and the height of trees (or mountains. I just read an interesting piece a few weeks ago saying the Himalayas which have still grown over the years will stop at some point because as they grow they are putting such pressure on the ground due to the weight that they will start sinking rather than rising. Something like that).

But is there a ceiling for stocks? No. Why? Because money depreciates over time due to inflation. A million dollars today isn't what a million dollars was 30 years ago. Similarly we will have the first $10 trillion company at some point in the future too (we already went from excitement of a $1 trillion company (Apple) but then there were $3 trillion companies (apple, nvidia and microsoft) and I don't remember similar excitement at that new milestone.

If inflation is 3.5% a year (historical average) prices are doubling every 20 years. Which means in 20 years you'd need $200 to buy what $100 will buy today. So why shouldn't the prices of stocks go up similarly? Prices go up with inflation. Companies have to pass on the higher costs to consumers which show higher profits (in absolute terms, could be no difference in relative terms) which then would increase the market valuation of the companies similarly. Of course, there is speculative return on top of that.

2. Going back to the proverb above, yes companies (and the market) goes through a business cycle which involves growth followed by recession followed by growth and so on. But the growth that happens often propels us further ahead (no law here, doesn't have to be this way) because the malinvestment in companies that didn't deliver on their promises means bad companies get pruned as they should. Friedman said capitalism is a profit AND loss system (not just profit). Poor performers are supposed to go out of business. And in doing so it makes the rest of the market healthier. There is more investment in fewer companies perhaps, but they are the ones who survived (darwinian). You wouldn't leave dead leaves on a plant to stifle the growth of the remaining branches, would you?

3. Finally, to leave you on a positive note (kidding here), if some event that has never happened before (globalthermonuclear war) then all bets are off. Companies can and will go out of business. People will still need things provided they're still alive, but the market may look very different at that point.

hope that helps. Don't watch "The Day After" before bed like we did when we were kids. Sweet dreams.

[dbr]

Just another comment about return, as in "future returns."

Keep in mind that return prospectively is not a single number but appears better understood as a statistical variable that might be thought as a sample from a distribution in each period of time. This means that even if we predict the distribution the actual data set will show all kinds of random variation, hence making predicting actual numbers impossible by definition. In that sense we could say that future returns are not predictable by nature of the beast.

After that is the problem that we don't know if we can predict the distribution or even what kind of distribution it is. This is not just not being able to estimate parameters such as mean and SD of a normal distribution but also that the distribution is not stationary, meaning the parameters change, and there may be autocorrelation so that samples are not independent. On the other hand it may be approximately correct that some estimated parameters of some model distribution will not be a crazy description of both past and future.

[alex_686]

If people freak out during a correction of the USA stock market, do they typically just go to cash or do they try and find another home for their investments (e.g. bonds, or international stocks)?

Well, why are we having a crash? Booms tend to be alike, crashes are unique.

Broadly speaking, lots of “Creative Destruction” so lots of assets get written down or just disappear. Companies lower leverage. There is a modest drift in US Treasuries, which isn’t exactly the sand thing as cash.

[dbr]

Here is another example of past performance which serves to illustrate how broadly uncertain the results from any point in time are and how much the range of results for different asset allocations overlap. This is informative but it is not predictive. In fact it destroys the idea that results are predictive. I also think the evidence makes a mockery of a lot of the engineering people try to do.

https://engaging-data.com/visualizing-4-rule/

[MikeT]

"Trees don't grow to the sky." Google tells us about this phrase:

I hadn't heard the tree quote, but yes, that's my question.

And, good point about inflation. How about we net out inflation. Is there sum upper limit? (e.g. only so much efficiencies that growth slows and eventually stops)?

I'm not talking about the ups & down, I'm talking about the trend line if we ignore inflation.

Thoughts?

Mike

[MikeT]

Neat:
https://engaging-data.com/visualizing-4-rule/

Thanks for the chart.

I'm actually in the process of modeling my plan using ProjectionLab - I really like their waterfall cash flow and other charts!

-Mike

[Northern Flicker]

It still is sensitive to start date.

If you think so,then I didn't explain myself clearly. The point isn't to ONLY look at the beginning and end of the analysis. If that were the case, then there wouldn't be any point. In fact this gives you as many start and stop dates are there are dates in the analysis. It's more informative, in my opinion, than just a single start and stop date which is often shown by folks on this forum.

I understood what you were describing, but I do not fully agree. I wasn't talking about the end date. The points along the curve at which the assets mean-revert are dependent on start date. The influence of the start date will diminish over time along the curve.

[arcticpineapplecorp.]

And, good point about inflation. How about we net out inflation. Is there sum upper limit? (e.g. only so much efficiencies that growth slows and eventually stops)?

I'm not talking about the ups & down, I'm talking about the trend line if we ignore inflation.

Thoughts?

Mike

i think you're asking is there a limit to innovation or maybe total factor productivity in a declining marginal utility kind of way. There might be, but I don't think we've seen it and I don't imagine we're going to see it any time soon (not in our lifetime). If we're talking about a world in which robots do all the work and we produce way more efficiently than ever before and beyond what we can imagine, we're a long way off from that world. I certainly wouldn't worry about it. If you think there's to be no new ideas, innovations, creative problem solving, then don't invest in stocks. Why would you? But if you have optimism based on new technologies (crispr cas-9, driverless cars, a.i. leading to creative innovation in cancer medicines, etc) then you'd want to invest in stocks because there's still many profits to be made. Even boring old companies that make products can be better than newer technologies that people run up valuations. I think back in the dot com bubble when everyone was pouring money into tech (many of which had no business model or earnings) a solid performer was Waste Management (trash removal). Things still need to be done while we're waiting for our flying cars and jet packs and there's money to be made.

I wonder if this thread might get shut down because I think we're just talking about hypotheticals, which I think are verbotten on bogleheads.

[ApeAttack]

If we all tried to guess what will happen over the next 30 years, all of us would miss some very important details. Some nations will fall, some new nations will come into being. Some stocks will fall, some new stocks will dominate the market. New technologies will dominant our lives.

Maybe we will all kill ourselves with nukes, or a new pandemic will wipe out half of humanity.

I dunno. I just bet on the entire US market (70% of portfolio), foreign stocks (20% of portfolio), and US bonds (10% of portfolio), and hope it will all work out by the time I retire in 16-ish years (assuming I make it to that age), because it seems to be a reasonable strategy historically. I would be disappointed, but not shocked, if some calamity happened before then.

[ApeAttack]

In fixed income, interest rates are notoriously difficult to predict. Usually trying to predict future interest rates from past interest rates does not work. It might be credible that there is a 200 year trend for interest rates to decline: https://advisor.visualcapitalist.com/us-interest-rates/
Stock dividends have declined considerably over the last many decades. Who knows if that is a continuing trend.

Thanks for the history of interest rates chart !!!

That makes me wonder if I was dumb for having 40% in bonds when interest rates were at an all-time low since when interest rates rise, bond fund yields fall.

Should I have realized there was no where lower for rates to have gone and I should have gotten out of bonds sooner?

-Mike

You wouldn't have felt dumb if stocks went down 30% and stayed there for several years because a big recession occurred in the wake of COVID (which some people predicted).

We all make decisions based on the information available at the time. Many decisions will be wrong or suboptimal.

[anoop]

This guy just put some charts out that address a bunch of questions that keep coming up over here.

Put These Charts on Your Wall (2024 Edition) | Charlie Bilello | Creative Planning

Past performance isn't indicative of future returns in the short term. However, in the long term, we know that the dollar will lose purchasing power and so assets have a tendency to go up.

[Alex Frakt]

Past performance does not predict future returns is reality if you are looking at the short term for anything or any term for single stocks or other investable assets.

However, past performance is actually an excellent predictor of future returns if you are talking about broad asset classes and long time frames. And by long, I mean hundreds of years of returns data to guide your decisions and multiple decades for the future returns to show up.

That's why an equity heavy portfolio makes sense at the beginning of your career, but you want to add bonds as you get closer to retirement to preserve your savings in the effect of a severe market downturn. (Unless you have accumulated so much wealth that market downturns won't affect your retirement lifestyle.)

BTW, the stuff in between gets tricky and is where a lot of people invest in asset classes that end up underperforming. Generally speaking, the relative performance of an asset class tends to persist for a few years and then flips. Since so many people rely on three or five year returns when deciding what to invest in, the result is buying high which is very often followed by selling low as a couple of years of underperformance cause them to move that money into something that has been recently outperforming and the cycle continues.

[gavinsiu]

You do need to look back on historical asset to get a sense of their behavior. You can see that stocks return more than bond more but only over a 20 to 30 years period. These long period of return hides how volatile it is. From 2000 to 2020 the return was about 7% nominal, but from 2000 to 2010 the return is about 1% and from 2011 to 2020 is 14%. This makes estimating return just 10 years or shorter problematic and you probably should not think your asset will double in 10 years. This is also why you add fixed income as you get close to retirement since a portfolio with higher bond allocation has a less variation in the next 10 years.

Performance over 10 years can vary a lot. Even 20 years can be unusual. From 2000 to 2020, long bond had a higher return than stock https://www.portfoliovisualizer.com/bac ... XwzHyQJe6P. Of course, jump forward 4 more years and you have a different story.

The lesson I learn is that a longer time period like 30 years is more predictable than a shorter one. If you are near retirement like 10 years old it is a good idea to have more fixed income to reduce variation of return. You should expect surprises like 2000-2002, 2008 and 2022. Don’t forget what levers you control such as your contribution level and what levers are out your hand like asset return for next 10 years.

[Mr. Rumples]

To what effect has the US dollar being the reserve currency played a role in past performance? In the past, the reserve currencies have been Portugal, Spain, the Netherlands, France, Great Britain and now the US. What will come next and what effect will that have?

(Great Britain not producing enough coinage resulted in the Spanish Dollar becoming the unofficial reserve currency of the American colonies; hence, the US's final adoption of the dollar in the Coinage Act of 1792, though by then the debate over it was almost 10 years old; https://founders.archives.gov/documents ... -0151-0005.) (All written with a quill pen.)

[nisiprius]

The dollar is not "the" reserve currency, merely the largest. There is no "the" reserve currency.

According to the International Monetary Fund (IMF), there are currently eight "Official Foreign Exchange Reserves:"

Source



Also, in that chart, no signs of the United States' percentage share declining.

You can make something, if you like, of the fact that the IMF chooses to present the the chart numbers in dollars.

I've no doubt that if, someday, the dollar were to become the second biggest reserve currency, there would be giant "new era" and "different reality" headlines, just as there were in 2011 when S&P downgraded the US debt rating from AAA to AA+.

[Valuethinker]

Likewise, 50/50 USA vs non-usa stocks?

-Mike

The US is about 65% of world developed markets.

Country of listing is somewhat arbitrary, so non-USA is arbitrary. By going 50/50 you are taking an active management bet that "non US" stocks will outperform. Rather than taking the market's best estimate of the relative future performance (the current 65/35 weighting).**

For example, BHP is the world's largest mining company. Dual listed London and Sydney. But now ending its London listing - fund management is totally international now so there's no important investors that can't access the Sydney listing (but can access the London now).

So it was a UK stock, and Australia, and it (will be) just Australia.

Pfizer was going to merge with Allergan and end its US listing and have an Irish one (they denied the logic of the merger was totally about taxation, but when Obama nixed these types of deals, suddenly the "strategic logic" just wasn't there and the makers of Lipitor and Botox (maybe the logic was that the same Boomer audience buys both?) called off the marriage).

** what you are actually doing is taking a sector bet. In particular against technology stocks, and against healthcare stocks. Those sectors are significantly smaller in international indices. There are very few super large tech cos outside the US listing.

There might be reasons to want to do that. Concern with the valuations of the "Magnificent 7". But, then, you should do that explicitly.

[Valuethinker]

I think back in the dot com bubble when everyone was pouring money into tech (many of which had no business model or earnings) a solid performer was Waste Management (trash removal). Things still need to be done while we're waiting for our flying cars and jet packs and there's money to be made.

And WMX was an infamous stock scandal.

They were cooking the earnings. Like Worldcom, exploiting weaknesses in US GAAP accounting for mergers & acquisitions.

Waste is a tricky old business. It was "family owned" in a lot of cities (euphemism for Sopranos-type). The Feds encouraged takeover by professionally managed, public quoted firms. But some of the old stink associated with the industry still pertained.

I think a lot of the companies are Private Equity owned now, which makes sense. You have good cash flow (if you manage it right) and protected local franchises. But the stock market won't accord a high PE to a company in that field (they did with WMX, because they mistook acquisition-led growth as organic growth).

I don't know what the quoted multiples are now on waste companies.

[Sandtrap]

Past "patterns" can be a predicate (or determinant?) of future patterns.
But, are not "causal".
no more nor less.
Relying in past returns/yields = unreliable = uncertainty. (irrational).
IE: Radio Shack, Sears, Toy's R Us, Big Lots, Kodak, etc.
Callan periodic table of investment returns (Wiki)
https://www.bogleheads.org/wiki/Callan ... nt_returns

j

[Call_Me_Op]

Since no on one knows during the next 30 years if stocks will do better or bonds will do better, why isn't it the consensus view to split the baby and go 50/50 ?

Likewise, 50/50 USA vs non-usa stocks?

-Mike

There is strong relationship between risk and return. Stocks are inherently riskier compared to bonds, and thus have higher expected return.

[arcticpineapplecorp.]

And WMX was an infamous stock scandal.

ok a bad example then. There surely are other boring businesses that have done well for investors. Buffett has talked for many years about how investing in boring companies has made berkshire much money. I remember reading one of his shareholder letters during the dot com implosion where he was vindicated for shunning tech at that time and going with stodgy old economy companies.

[firebirdparts]

does the past really predict the future?

pretty much.

Next summer we might be living at the bottom of the ocean and eating rocks, but I doubt it.

If you're afraid, it's probably smart to diversify internationally. This is a little bit hard for USA customers, as it's going to probably be de-worsification if nothing weird happens.

[Thesaints]

Having spent the last two days reading through the wiki's here, I understand that based on the past, a stock heavy portfolio is the most likely to grow and out pace inflation in the long run.

However, taking a step back, allow me to question the central assumption: does the past really predict the future?

For example, if you look at a 15 year old child who has grown from 1 foot tall to 6 feet tall, does he continue growing, to become 12 feet tall?

Even if Moore's Law (the doubling of transistor density doubled every 2 years) was true for a long time, does that mean it will continue to be true forever?

I'm intentionally keeping this general, not about me or my circumstances.

Thoughts please,

-Mike

In this case, the past is a direct consequence of the intrinsic properties of the investment vehicle, plus randomness. If we manage to avoid being fooled by randomness, the past can offer guidance about the future.
In particular, stocks have a higher expected return than bonds not just because that is what has happened in the past, but because of the differences in the two types of contracts.

[rkhusky]

Since no on one knows during the next 30 years if stocks will do better or bonds will do better, why isn't it the consensus view to split the baby and go 50/50 ?

Likewise, 50/50 USA vs non-usa stocks?

-Mike

There is strong relationship between risk and return. Stocks are inherently riskier compared to bonds, and thus have higher expected return.

Higher risk doesn’t necessarily mean higher expected return, so I would say it a bit differently, investors should demand higher expected return for taking more risk.

It’s the responsibility of the investor to correctly determine the risk level and the expected return.

When we invest in the Total Market, we assume that enough of the millions of investors have done the due diligence, such that the rest of us can just accept the current price as being close enough to an accurate compensation for the risk, and we don’t need to do a deep dive into all the companies. Less common investments require more due diligence.