Stocks can take long time to catch inflation

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stratton
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Stocks can take long time to catch inflation

Post by stratton » Sun Oct 06, 2013 6:05 pm

Interesting note in the Financial Times Tuesday, October 1, 2013 "The Short View" column on page 15.
Italian share, as measured by MSCI, are lower than they were in 1986, both in nominal terms and after adjusting for inflation and dividends. Losing money over 27 years might look painful; but it is nothing compared with the losses endured by Italians who bought shares in 1905. Academics Elroy Dimson, Paul Marsh and Mike Staunton calculate this investment did not break even, after inflation and dividends, until 1977.
Italy was on the winning side in WW1, but on the losing side in WW2.

So up to 72 years in Italy before stocks caught up with inflation.

Paul
...and then Buffy staked Edward. The end.

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nedsaid
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Re: Stocks can take long time to catch inflation

Post by nedsaid » Sun Oct 06, 2013 7:23 pm

Even in the United States stock market, stocks can trail inflation at times. One lesson is that the market goes up in spurts and sometimes violently. So the "inflation adjustment and then some" might come all at once a few years down the road. But over long periods of time, stocks beat infation and often handily.

The Italy example is interesting. Japan and Germany would have similar stories. It pays not to be on the losing side of a war. Postwar Italy has not been the model of political stabilty. I will also point out that you or I were not alive in 1905.

But I agree with your basic point. I would say that sometimes you have to wait a while to get your inflation adjustment.
A fool and his money are good for business.

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Robert T
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Re: Stocks can take long time to catch inflation

Post by Robert T » Mon Oct 07, 2013 2:35 am

.
Deep risk (to use Bernstein's term).

The linked Dimensional presentation provides more examples of how long it has taken to break-even (in real terms) after significant market declines across 19 countries between 1900-2010. Some of the longest include:

Equities
  • Germany: 45 years
    France: 43 years
    Italy: 37 years (I note this is a different number to the OP article - not sure why)
    Japan: 33 years
    Belgium: 31 years
The longest for a globally diversified equity portfolio: 7 years

Long-term bonds
  • Ireland: 62 years
    Spain: 62 years
    Australia: 58 years
    Netherlands: 58 years
    Sweden: 58 years
T-bills - have not faired much better
  • US: 67 years
    South Africa: 65 years
    Norway: 64 years
    Australia: 62 years
    Ireland: 62 years
6 of 19 countries had negative real bill and real long-term bond returns from 1900-2011.

The messages to me:
  • 1. Have an equity orientation (higher likelihood of long-term real returns - if history is any guide - similar to Swensen's guidance)

    2. Diversify across global equity markets (longest time to breakeven in real terms for global equity was 7 years, compared to 40+ years for equity concentrated in some individual countries)

    3. Adding bonds may have a long-term 'real return cost' - but worth it if the alternative is larger permanent capital losses (i.e. selling an all equity portfolio at market bottoms if declines exceeds risk tolerance. Adding bonds helps to stay the course).

    4. Add a value tilt to equities (as periods that took the longest to breakeven where often associated with periods of high inflation).

    5. Save and invest continuously over accumulation period (as at some point this will result in buying equities at very low relative prices).
Robert
.

staythecourse
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Re: Stocks can take long time to catch inflation

Post by staythecourse » Mon Oct 07, 2013 8:45 am

Robert T wrote:.
Deep risk (to use Bernstein's term).

The linked Dimensional presentation provides more examples of how long it has taken to break-even (in real terms) after significant market declines across 19 countries between 1900-2010. Some of the longest include:

Equities
  • Germany: 45 years
    France: 43 years
    Italy: 37 years (I note this is a different number to the OP article - not sure why)
    Japan: 33 years
    Belgium: 31 years
The longest for a globally diversified equity portfolio: 7 years

Long-term bonds
  • Ireland: 62 years
    Spain: 62 years
    Australia: 58 years
    Netherlands: 58 years
    Sweden: 58 years
T-bills - have not faired much better
  • US: 67 years
    South Africa: 65 years
    Norway: 64 years
    Australia: 62 years
    Ireland: 62 years
6 of 19 countries had negative real bill and real long-term bond returns from 1900-2011.

The messages to me:
  • 1. Have an equity orientation (higher likelihood of long-term real returns - if history is any guide - similar to Swensen's guidance)

    2. Diversify across global equity markets (longest time to breakeven in real terms for global equity was 7 years, compared to 40+ years for equity concentrated in some individual countries)

    3. Adding bonds may have a long-term 'real return cost' - but worth it if the alternative is larger permanent capital losses (i.e. selling an all equity portfolio at market bottoms if declines exceeds risk tolerance. Adding bonds helps to stay the course).

    4. Add a value tilt to equities (as periods that took the longest to breakeven where often associated with periods of high inflation).

    5. Save and invest continuously over accumulation period (as at some point this will result in buying equities at very low relative prices).
Robert
.
Excellent post. There is nothing wrong with being conservative, but those who do should understand they are increasing their shortfall/ inflation risk in the long term. Another reminder there is no free lunch in investing.

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

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