25 Yrs For The Dow To Recover From The Great Depression

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Mitchinvest
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25 Yrs For The Dow To Recover From The Great Depression

Post by Mitchinvest » Tue Jan 06, 2009 9:01 am

As a novice investor, I've been lulled into a certain complacency over the fact that the S&P has returned an average of 10% or 11% over the course of time. I imagine millions of investors buy equities with that mantra in mind. So, I was taken aback to learn that it took 25 years--a quarter of a century--for the stock market to recover from the Great Depression and reestablish where it was before the Depression hit and the market crashed. So much for those 10% average annual returns. What I'm learning, of course, is that there have been lengthy stretches in history in which the market has been stagnant, as evidenced by the flat S&P of the past ten years. I'm optimistic by nature and have high hopes for the next ten years and beyond, but, at the same time, I'm cognizant that this "buying opportunity of a lifetime" heard in various investing quarters could prove to be a continued rat hole of wasted investments for many years to come.

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Re: 25 Yrs For The Dow To Recover From The Great Depression

Post by Tramper Al » Tue Jan 06, 2009 9:07 am

Mitchinvest wrote:. . . I was taken aback to learn that it took 25 years--a quarter of a century--for the stock market to recover from the Great Depression and reestablish where it was before the Depression hit and the market crashed.
This is news to me as well.

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Post by dgrdfd » Tue Jan 06, 2009 9:12 am

Correct me if I am wrong, but investors only care about the returns that THEY get. So saying that it took the stock market 25 years to recover assumes that the investor put ALL the money in at the peak (and none after) and I don't think that includes dividends. So while what you say is true, from our perspective (the investor) it doesn't mean a lot.

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Post by Mitchinvest » Tue Jan 06, 2009 9:15 am

dgrdfd wrote:Correct me if I am wrong, but investors only care about the returns that THEY get. So saying that it took the stock market 25 years to recover assumes that the investor put ALL the money in at the peak (and none after) and I don't think that includes dividends. So while what you say is true, from our perspective (the investor) it doesn't mean a lot.
It means to me that it could take 25 years for the Dow to return to 14,000.

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Post by Stevewc » Tue Jan 06, 2009 9:19 am

Mitchinvest wrote:
dgrdfd wrote:Correct me if I am wrong, but investors only care about the returns that THEY get. So saying that it took the stock market 25 years to recover assumes that the investor put ALL the money in at the peak (and none after) and I don't think that includes dividends. So while what you say is true, from our perspective (the investor) it doesn't mean a lot.
It means to me that it could take 25 years for the Dow to return to 14,000.
But did you buy everything you own at 14000 ???
Thats the painful question.
I sure hope you didn't !!!
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Post by Mitchinvest » Tue Jan 06, 2009 9:26 am

Stevewc wrote:But did you buy everything you own at 14000 ???
Thats the painful question.
I sure hope you didn't !!!
I didn't buy everything at 14,000, although, I invested a whole lot of my income during that time. However, I imagine lots of younger investors flooded the market at that time.

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Post by smackfu » Tue Jan 06, 2009 9:38 am

Mitchinvest wrote: It means to me that it could take 25 years for the Dow to return to 14,000.
But the point is that the recovery of the Dow doesn't matter, just the recovery of the value of your investments. Ignoring the 3-5% dividend yield in your return makes no sense.

Like if you bought 1 imaginary share at $14,000, you wouldn't need the Dow to get back to $14,000 for you to have $14,000.

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Post by exeunt » Tue Jan 06, 2009 9:56 am

If stocks weren't so risky, they wouldn't have such high expected returns.

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Post by Mitchinvest » Tue Jan 06, 2009 9:57 am

Stevewc wrote:But did you buy everything you own at 14000 ???
Thats the painful question.
I sure hope you didn't !!!
I didn't buy everything at 14,000, although, I invested a whole lot of my income during that time. However, I imagine lots of younger investors flooded the market at that time.

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Post by nisiprius » Tue Jan 06, 2009 10:03 am

Mitchinvest, I think you're basically correct. In dealing with novice investors, in my opinion the financial community has touted stocks in an essentially dishonest way. You can never pin it on them because they are the master of the hedged statement, but they minimize the risk, they talk about the "long run" without naming what number of years they think the "long run" is, and they talk about "historic" rates of return without really showing people an honest picture of what history has really been like.

People really do need to take a good long hard look at the charts for themselves, and not pay too much attention to hand-waving talk about "the long run."

However, a mild correction. What's important to an average retirement saver is a) the growth of savings, with reinvested dividends, b) corrected for inflation. "A" is what every mutual fund publishes as a "hypothetical growth of $10,000" chart and I think they're by far the most important thing to look at when you're trying to understand a fund's performance.

If someone had invested $10,000 in the S&P 90 at the start of 1929--quite a trick since there were no mutual funds then. And if he managed to hold on despite incurring losses 91%... quite a trick if he had bills to pay. And if he still managed to hold on after seeing his stocks almost recover in 1936 only to crash again... then by the end of during 1943 this stout-hearted individual would have seen his portfolio value finally rise above $10,000 and stay there, reaching $11,000 by the end of the year and climbing steadily thereafter until about 1965. (Over 1922-1943 inflation and deflation roughly cancel).

So I'd say it really "only" took fourteen years, not twenty-five, to recover.

What I found amazing when I started to pay attention to this stuff the period from 1965 to 1983. There were no dramatic crashes, but from the point of view of a buy-and-hold saver it was worse than 1929. People probably miss it because it is not obvious on a chart that is not corrected for inflation--the big posters on the financial advisors' walls showing historical stock market performance never do seem to be corrected for inflation--but over that seventeen-year period, stocks earned just about zero real returns.

Someone who was planning on a 7.2% real (inflation-adjusted) rate of return from stocks, who invested at the start of 1929 and reinvested dividends, would have not only recovered their investment but would have enjoyed great returns for a couple of decades, to the point of being back on track by the end of 1955. That is, at the end of 27 years, they would have actually earned the hoped-for average of 7.2% real per year.

They would still be about on track by 1965.

Then came 1965-84, the years of no growth at all.

So by the end of 1984, over the whole 56-year period from year-end 1928 to 1984, well, you can put a positive spin on it and say they would have earned a 5% real rate of return... over a cherry-picked period of time including the two worst periods since 1925 so far. And multiplied their money fifteenfold after inflation.

Or, you can put a negative spin on it and say someone planning on the 7.2% real historical rate of return would have expected their money to grow fiftyfold, inflation-adjusted, and thus ended up with less than a third of what they'd been counting on.
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Post by White Coat Investor » Tue Jan 06, 2009 10:06 am

I didn't buy in at 14,000, but something like 75% of every dollar I ever put into the market went in with the Dow over 12,000. The longer this bear market goes on, the lower that percentage will be.
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Post by Kenster1 » Tue Jan 06, 2009 10:12 am

John Templeton bought 104 stocks in 1939 totaling $10,000.
His average holding period was 4 years and the $10k turned into $40k.
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Post by bob90245 » Tue Jan 06, 2009 10:20 am

RE: 25 Yrs For The Dow To Recover From The Great Depression

Price-only, yes. But you were able to spend your dividend checks for those 25 years.

Or if you didn't spend your dividend checks and instead reinvested the dividends to buy additional Dow shares, your recovery would be many years sooner.

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Post by Rick Ferri » Tue Jan 06, 2009 10:27 am

25 Yrs For The Dow To Recover From The Great Depression is not entirely correct. The total return of the Dow was higher over that 25 year period. The Dow was paying around 5% in dividend yield doing the period. The actual time it took people to break even including dividends was 15 years.

Rick Ferri

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Post by fishndoc » Tue Jan 06, 2009 10:41 am

Another point to consider, in addition to dividend yield shortening recovery time, is what if a depression era investor was a "pioneer boglehead", and continued to invest in the market each month? I suspect recover would be markedly shortened, and significant wealth would have accumulated by the 1954 "recovery point".
I realize very few in the 30's had expendable income for investing, but most of us do now.

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Post by Rodc » Tue Jan 06, 2009 10:47 am

A better measure is for a portfolio of stocks and bonds, not stocks alone.

Using monthly REAL returns (dividends reinvested) and (reconstructed) S&P 500 and 10-year treasuries funds from Global Financial Data I get the peak was 8/30/1929. Rebalancing monthly to 50/50 stocks and bonds you would be back to your 8/30/1929 value on 5/31/1933, or 45 months, a bit under 4 years. Returns go flat over the next two years, dipping 2% or 3% a couple of times, before heading steadily higher.

A lot shorter than 25 years.

Of course that is a highly optimistic scenario as you very like were not able to hang on to rebalance.

The period ending in the early 80s is in many ways worse, as nisiprius points out. There I get the peak on 12/31/72. You get back to even on 12/31/1984, a full 12 years later.

So, the stock and bond markets can and HAVE BEEN tough places to invest.

Using the same dataset I posted some results ( http://home.comcast.net/~rodec/finance/ ... nBonds.pdf ) from making monthly payments rather than lump sum. It turns out that someone starting to invests in the 1950's and investing for 30 years can still have negative real returns with a 50/50 portfolio. Steady well diversified investing does not guarantee success. I think being even more diversified would have helped, we can now add small caps, value, and international stocks at low cost, we now have TIPS which would have helped that 1950's investor. But investing is still risky, even over very long periods.
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Post by nisiprius » Tue Jan 06, 2009 11:00 am

Meanwhile, Valuethinker and people who've read Triumph of the Optimists, which I can't seem to get from my library's interlibrary loan network, warn that the U. S. stock market has done fabulously better than the rest of the world's stock markets, and nobody knows for sure whether it's because we're just so cool or whether it's luck. Or whether it's because we're at the period of our national life cycle when, as 1066 And All That puts it, we're "top nation." (And remember, "Merrill Lynch is bullish on America." Oops...)

And William Bernstein has a piece called Only Two Centuries of Data that should be required reading. The charts we all stare at come from both a place and a time when stock market returns have been just great.

The historical chart for Japan isn't really all that bad, although its a shock for anyone who's been staring at nothing but the S&P 500 chart, and of course it's not over 'til it's over and it ain't over. I'm told other countries have had much longer dry spells. If anyone has links to relevant charts, I'd love to see them. Stock markets apparently can stay down for fifty years. But not ours, of course [insert irony emoticon here]. I glommed the chart below from some random website and of course it's just a) nominal b) price. Does anyone have one that includes reinvested dividends and Japanese inflation?

Image
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Re: 25 Yrs For The Dow To Recover From The Great Depression

Post by HomerJ » Tue Jan 06, 2009 11:47 am

Mitchinvest wrote:So much for those 10% average annual returns.
You need to learn the definition of "average".

Those 10% average returns over the last 80-100 years include flat times and 50% downturns (we had 16 years before from 1966-1982 where the market was flat, and there was a 50% drop in 1973-1974 - sound familiar?).

And yet we still see 10% average returns over the long run (25-30 years)

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Post by HomerJ » Tue Jan 06, 2009 11:58 am

nisiprius wrote:Meanwhile, Valuethinker and people who've read Triumph of the Optimists, which I can't seem to get from my library's interlibrary loan network, warn that the U. S. stock market has done fabulously better than the rest of the world's stock markets, and nobody knows for sure whether it's because we're just so cool or whether it's luck. Or whether it's because we're at the period of our national life cycle when, as 1066 And All That puts it, we're "top nation." (And remember, "Merrill Lynch is bullish on America." Oops...)

And William Bernstein has a piece called Only Two Centuries of Data that should be required reading. The charts we all stare at come from both a place and a time when stock market returns have been just great.

The historical chart for Japan isn't really all that bad, although its a shock for anyone who's been staring at nothing but the S&P 500 chart, and of course it's not over 'til it's over and it ain't over. I'm told other countries have had much longer dry spells. If anyone has links to relevant charts, I'd love to see them. Stock markets apparently can stay down for fifty years. But not ours, of course [insert irony emoticon here]. I glommed the chart below from some random website and of course it's just a) nominal b) price. Does anyone have one that includes reinvested dividends and Japanese inflation?

Image
Personally, I think the Nikkei was just a freak irrational super-bubble... like the tulip craze in Holland centuries ago... I mean it went from 10000 to 40000 in like 5 years... The Nikkei was never really worth that much... And the fact that it hasn't regained that height doesn't mean that stock markets can drop and stay down forever... It just means that price was never realistic in the first place.

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Re: 25 Yrs For The Dow To Recover From The Great Depression

Post by Mitchinvest » Tue Jan 06, 2009 12:08 pm

rrosenkoetter wrote:
Mitchinvest wrote:So much for those 10% average annual returns.
You need to learn the definition of "average".

Those 10% average returns over the last 80-100 years include flat times and 50% downturns (we had 16 years before from 1966-1982 where the market was flat, and there was a 50% drop in 1973-1974 - sound familiar?).

And yet we still see 10% average returns over the long run (25-30 years)
I understand, at the same time, the "average" investor thinks if they invest their money in the stock market, they will inevitably become multi-millionaires by the time they retire because of that "average" 10% rate of return. This is what drives Wall St.

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Post by Oicuryy » Tue Jan 06, 2009 12:12 pm

Mitchinvest wrote:It means to me that it could take 25 years for the Dow to return to 14,000.
Or it could take a month. From 7/8/32 to 8/8/32 the Dow gained 64%.

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Re: 25 Yrs For The Dow To Recover From The Great Depression

Post by johnb » Tue Jan 06, 2009 12:17 pm

Mitchinvest wrote:So, I was taken aback to learn that it took 25 years--a quarter of a century--for the stock market to recover from the Great Depression and reestablish where it was before the Depression hit and the market crashed.
This is wrong. Counting re-invested dividends, the September 1929 high was again reached in November 1936, and was surpassed the next month.

What's the opposite of taken aback? That's what you should be now that you have this new piece of information. :)

John

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Post by Rodc » Tue Jan 06, 2009 12:17 pm

The main take away I think from Japan is don't buy when the P/E is 100. I'm not too keen on the whole valuation matters deal because most of the time valuations are somewhere in the middle where they don't mean much. But even I know P/E of 100 is not so great.

That said, war, famine, political upheaval, can and does sometime occur and could occur here as well. Or, just plain silliness as appears to have happened in Japan and the NASDAQ back in the Great Tech Bubble.

Here is a graph from some Global Financial Data data: World Price Index from 1919 to 2006. This does not include reinvesting dividends which would make things look better. Data from the last two years would be nice, but I grabbed this data back in 2007 and today their site seems to be down.

Image

The take away I suppose is that a Japanese investor should have been globally diversified.

Probably a good idea for us too.

But, unless dividends were really good, the picking were slim in the first third of the century, and there are clear periods of persistent poor performance even if diversified globally.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Post by Mitchinvest » Tue Jan 06, 2009 12:22 pm

Oicuryy wrote:
Mitchinvest wrote:It means to me that it could take 25 years for the Dow to return to 14,000.
Or it could take a month. From 7/8/32 to 8/8/32 the Dow gained 64%.

Ron
Nice wish, however, Bogle and others are predicting modest, single-digit-returns in the market for the foreseeable future, if and when the market delivers positive returns again. Just trying to keep my feet on the ground.

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Re: 25 Yrs For The Dow To Recover From The Great Depression

Post by Rodc » Tue Jan 06, 2009 12:23 pm

johnb wrote:
Mitchinvest wrote:So, I was taken aback to learn that it took 25 years--a quarter of a century--for the stock market to recover from the Great Depression and reestablish where it was before the Depression hit and the market crashed.
This is wrong. Counting re-invested dividends, the September 1929 high was again reached in November 1936, and was surpassed the next month.

What's the opposite of taken aback? That's what you should be now that you have this new piece of information. :)

John
Where did you get that from? Might be some quirk of the DOW if true, or whatever index you are using.

S&P 500 is a much better measure of "The Market" and with reinvested dividends, and counting inflation (as one should), it took until 1945 to regain the 1929 peak (according to Global Financial Data).

This agrees pretty closely with Rick's earlier claim of 15 years.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Stocks in the Great Depression

Post by Taylor Larimore » Tue Jan 06, 2009 12:33 pm

I was taken aback to learn that it took 25 years--a quarter of a century--for the stock market to recover from the Great Depression and reestablish where it was before the Depression hit and the market crashed.
Anytime you see past performance statistics without dividends, you are not getting a true picture. Also, during the Great Depression, deflation occured which increases the value of returns. Finally, it is very unlikely that anyone would invest 100% of their portfolio in stocks -- and at the exact market peak.

The fact is that even if you had invested $1,000,000 in U.S. stocks at the market's peak in September 1929, you would have had $1,142,000 in real (after inflation) return at the end of 1936 ($921,000 in nominal return).

7 years--not "25 years."

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Post by muddlehead » Tue Jan 06, 2009 12:52 pm

think more or less 20 year increments for bull and bear markets.

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Re: 25 Yrs For The Dow To Recover From The Great Depression

Post by johnb » Tue Jan 06, 2009 1:33 pm

Rodc wrote:
johnb wrote:
Mitchinvest wrote:So, I was taken aback to learn that it took 25 years--a quarter of a century--for the stock market to recover from the Great Depression and reestablish where it was before the Depression hit and the market crashed.
This is wrong. Counting re-invested dividends, the September 1929 high was again reached in November 1936, and was surpassed the next month.

What's the opposite of taken aback? That's what you should be now that you have this new piece of information. :)

John
Where did you get that from? Might be some quirk of the DOW if true, or whatever index you are using.

S&P 500 is a much better measure of "The Market" and with reinvested dividends, and counting inflation (as one should), it took until 1945 to regain the 1929 peak (according to Global Financial Data).

This agrees pretty closely with Rick's earlier claim of 15 years.
I'm using the S&P 500.

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Re: 25 Yrs For The Dow To Recover From The Great Depression

Post by nisiprius » Tue Jan 06, 2009 1:34 pm

johnb wrote:
Mitchinvest wrote:So, I was taken aback to learn that it took 25 years--a quarter of a century--for the stock market to recover from the Great Depression and reestablish where it was before the Depression hit and the market crashed.
This is wrong. Counting re-invested dividends, the September 1929 high was again reached in November 1936, and was surpassed the next month.
And then the market immediately crashed again.

What's with this "recovered by 1936" meme? It's simply not an honest way to present what happened. It's spin, darn it, although I'm not sure who's doing the spinning, or why.

"Recovered by 1942" is fair. "Recovered by 1936" is technically true but misleading... except, of course, to someone who knows how to time the market and spot the top. Someone able to sell out in 1936 would of course have been fine. But someone able to spot 1936 as a top would doubtless have been able to foresee the crash of '29, in the first place, would have sold out in 1928, and done even better. :roll:

See my posting above, and Rick Ferri's. It didn't take 25 years to recover, but it did take 15... just to recover... and it took longer than that to catch up to the sort of returns that presenters in 401(k) employee training sessions tell people to expect.

For stocks, the proverbial "long run" is twenty to thirty years, not five to ten.
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Re: 25 Yrs For The Dow To Recover From The Great Depression

Post by craigr » Tue Jan 06, 2009 2:07 pm

nisiprius wrote:For stocks, the proverbial "long run" is twenty to thirty years, not five to ten.
But wait, an investor who bought at the market peak in 1999 recovered completely by 2006!!! That's only seven years!





...and then 2008 happened and they're underwater again...


oops.

I too find the "stocks always win over the long run" arguments very misleading. The long run can be really long for stocks. You better be diversified.
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Re: 25 Yrs For The Dow To Recover From The Great Depression

Post by Rodc » Tue Jan 06, 2009 2:11 pm

johnb wrote:
Rodc wrote:
johnb wrote:
Mitchinvest wrote:So, I was taken aback to learn that it took 25 years--a quarter of a century--for the stock market to recover from the Great Depression and reestablish where it was before the Depression hit and the market crashed.
This is wrong. Counting re-invested dividends, the September 1929 high was again reached in November 1936, and was surpassed the next month.

What's the opposite of taken aback? That's what you should be now that you have this new piece of information. :)

John
Where did you get that from? Might be some quirk of the DOW if true, or whatever index you are using.

S&P 500 is a much better measure of "The Market" and with reinvested dividends, and counting inflation (as one should), it took until 1945 to regain the 1929 peak (according to Global Financial Data).

This agrees pretty closely with Rick's earlier claim of 15 years.
I'm using the S&P 500.
Ok. In looking at my data which are real returns it did come really close to back to even late 1936/early 1937 so might have actually come back up using some other "S&P 500" data source (since there was no such beast at the time different reconstructions differ a bit). But as nisiprius points out this was fleeting and meaningless.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: 25 Yrs For The Dow To Recover From The Great Depression

Post by HomerJ » Tue Jan 06, 2009 2:16 pm

Mitchinvest wrote:
rrosenkoetter wrote:
Mitchinvest wrote:So much for those 10% average annual returns.
You need to learn the definition of "average".

Those 10% average returns over the last 80-100 years include flat times and 50% downturns (we had 16 years before from 1966-1982 where the market was flat, and there was a 50% drop in 1973-1974 - sound familiar?).

And yet we still see 10% average returns over the long run (25-30 years)
I understand, at the same time, the "average" investor thinks if they invest their money in the stock market, they will inevitably become multi-millionaires by the time they retire because of that "average" 10% rate of return. This is what drives Wall St.
Well, someone who started investing in 1966 experienced a very crappy market for 16 years, including a 50% drop in 1973-74 (8 years after he started investing)... By 1996, all those shares he picked up from 1966-1982 (at prices ranging from 500-1000 DOW) were worth a fortune (where DOW was around 6000)

I'm not saying there is a pattern to the stock market... I'm not saying that there will be huge bull market to follow this bear... There may not be...

But I am saying this has happened before, and the long-term investor still made the "average" 10%. So it IS possible to have years of crap, including 50% downturns, and STILL come out with a 10% average return...

What that average return means... The person investing $5k a year from 1966 to 1996 with flat markets, 50% drops, 40% gains, etc. etc. ended up with the same amount of money as someone who would have made a steady 10% each year.

Again, that doesn't mean the future will look like the past... but we can say for certain that it is certainly possible we'll see 10% average returns from 2000 to 2030, even with the last 8 years dismal record.

Count on 7% returns though and save accordingly. :)

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Re: 25 Yrs For The Dow To Recover From The Great Depression

Post by HomerJ » Tue Jan 06, 2009 2:17 pm

craigr wrote:The long run can be really long for stocks. You better be diversified.
Well... duh....

:roll:

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Re: 25 Yrs For The Dow To Recover From The Great Depression

Post by johnb » Tue Jan 06, 2009 6:54 pm

I would just point out that it's important to have a large allocation to bonds. A bond allocation allows you to "bank" your equity profits by rebalancing using rebalancing bands. So when the market swings upward, you can rebalance from equity into bonds.

As Larry Swedroe (I think) pointed out, it's not really necessary to rebalance from bonds into equity.

Anyway then, my point is that if you have a portfolio consisting of a lot of fixed income, the long market recoveries aren't so bad, since there's often a ton of volatility (bear market rallies, etc.).

Best,
John
nisiprius wrote:
johnb wrote:
Mitchinvest wrote:So, I was taken aback to learn that it took 25 years--a quarter of a century--for the stock market to recover from the Great Depression and reestablish where it was before the Depression hit and the market crashed.
This is wrong. Counting re-invested dividends, the September 1929 high was again reached in November 1936, and was surpassed the next month.
And then the market immediately crashed again.

What's with this "recovered by 1936" meme? It's simply not an honest way to present what happened. It's spin, darn it, although I'm not sure who's doing the spinning, or why.

"Recovered by 1942" is fair. "Recovered by 1936" is technically true but misleading... except, of course, to someone who knows how to time the market and spot the top. Someone able to sell out in 1936 would of course have been fine. But someone able to spot 1936 as a top would doubtless have been able to foresee the crash of '29, in the first place, would have sold out in 1928, and done even better. :roll:

See my posting above, and Rick Ferri's. It didn't take 25 years to recover, but it did take 15... just to recover... and it took longer than that to catch up to the sort of returns that presenters in 401(k) employee training sessions tell people to expect.

For stocks, the proverbial "long run" is twenty to thirty years, not five to ten.

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Re: 25 Yrs For The Dow To Recover From The Great Depression

Post by johnb » Tue Jan 06, 2009 7:00 pm

Rodc wrote:
johnb wrote:
Rodc wrote:
johnb wrote:
Mitchinvest wrote:So, I was taken aback to learn that it took 25 years--a quarter of a century--for the stock market to recover from the Great Depression and reestablish where it was before the Depression hit and the market crashed.
This is wrong. Counting re-invested dividends, the September 1929 high was again reached in November 1936, and was surpassed the next month.

What's the opposite of taken aback? That's what you should be now that you have this new piece of information. :)

John
Where did you get that from? Might be some quirk of the DOW if true, or whatever index you are using.

S&P 500 is a much better measure of "The Market" and with reinvested dividends, and counting inflation (as one should), it took until 1945 to regain the 1929 peak (according to Global Financial Data).

This agrees pretty closely with Rick's earlier claim of 15 years.
I'm using the S&P 500.
Ok. In looking at my data which are real returns it did come really close to back to even late 1936/early 1937 so might have actually come back up using some other "S&P 500" data source (since there was no such beast at the time different reconstructions differ a bit). But as nisiprius points out this was fleeting and meaningless.
It is fleeting, but if you're allocating to bonds it's not meaningless. You can use bear market rallies to rebalance into bonds.

Also, make sure your data set includes reinvested dividends as follows:

1929 - 4.53% yield
1930 - 6.32%
1931 - 9.72%
1932 - 7.33%
1933 - 4.41%
1934 - 4.86%
1935 - 3.60%
1936 - 4.22%

These dividends made a big difference in the long run.

Best regards,
John

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Post by vadalpathi » Tue Jan 06, 2009 7:09 pm

Just for the record. I would like to point out that average returns over a long periods were never 10%. It was more like 6.5% to 7% including dividends. When i say longterm i am thinking more like 50yrs or 100yrs. I did that calculation is 2007 when i had access to bloomberg. They have a total return screen.

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Re: 25 Yrs For The Dow To Recover From The Great Depression

Post by deepdrive » Tue Jan 06, 2009 7:13 pm

Mitchinvest wrote:I'm optimistic by nature and have high hopes for the next ten years and beyond, but, at the same time, I'm cognizant that this "buying opportunity of a lifetime" heard in various investing quarters could prove to be a continued rat hole of wasted investments for many years to come.
Well, the stock market has lost around what, 35% or so the last year? Why then should you, a novice investor, be concerned with the market getting back to where it was before the decline? You should only be concerned with your money getting back to where it was when you invested it.

Also, this is considered a big buying opportunity because anything invested now is going into the market at lower prices; post-decline prices. And that's a good thing for people investing now. For money previously invested? Eh, not so much.

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Post by bob90245 » Tue Jan 06, 2009 7:50 pm

vadalpathi wrote:Just for the record. I would like to point out that average returns over a long periods were never 10%. It was more like 6.5% to 7% including dividends. When i say longterm i am thinking more like 50yrs or 100yrs. I did that calculation is 2007 when i had access to bloomberg. They have a total return screen.
Factoring out inflation, your 6.5% to 7% including dividends is correct. Nominal returns including dividends were 10%.

Source: http://bobsfiles.home.att.net/download.html#Performance

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Post by jh » Tue Jan 06, 2009 8:32 pm

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Post by AnotherCFP » Tue Jan 06, 2009 11:01 pm

jh wrote:
Mitchinvest wrote:
dgrdfd wrote:Correct me if I am wrong, but investors only care about the returns that THEY get. So saying that it took the stock market 25 years to recover assumes that the investor put ALL the money in at the peak (and none after) and I don't think that includes dividends. So while what you say is true, from our perspective (the investor) it doesn't mean a lot.
It means to me that it could take 25 years for the Dow to return to 14,000.
This is why for now on I will invest only in funds that have a good dividend (subjective). Currently I am putting new money into Vanguard's Equity Income (Roth IRA), Value Index (Taxable), High Dividend Yield Index (Taxable), European Index (Taxable) and DFA's International Value (401k).
I'm not sure what you consider good but most indexes are paying north of 4%. International especially. That is amazing when you consider where they were at just 8 years ago. Is it a mustard seed? No. (unless you are Larry Kudlow.) It just means you getting paid good money to hold equities. Especially when you consider the spread over treasuries and the very low inflation environment. (Also assuming you can put them in a tax advantaged account.)

For a young person to start investing with historically low p/e's across the board. Combine this with ridiculous dividend yields and you can almost forget about last year......... Really.......No Not Really. :lol:
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Post by Karl » Wed Jan 07, 2009 2:09 am

Rick Ferri wrote:The Dow was paying around 5% in dividend yield doing the period. The actual time it took people to break even including dividends was 15 years.
As a professional advisor you've surely meet huge numbers of investors. How many have you met that could accept 15 years of going nowhere with extreme volatility along the way? And that's excluding fees -- we can't ignore them just as we can't ignore dividends.

Too many investors look at the average and think "I'll make 10% a year," which is totally inaccurate. Anyone who looks at market history quickly finds that there are decades of going nowhere (such as the last 10 years) and then decades with extraordinary returns.

Investors should also note that "risk" if we define it as standard deviation can vary greatly -- std deviations were far higher during the 1930s than during any other decade and 2008 showed those not around during the 1930s what a wild ride Wall Street can provide.

And what about Japan? Over the years I've had so many tell me it can't happen here (I regularly heard this back in 1999 when suggesting that buying tech funds was stupid). Somehow it can't happen here, yet Japan is a technology leader with probably has the best educated population on earth and their market still stunk for decades. Japan has managed to go nowhere in 30 years. Their market stands at the same level today as I near middle age as it did when I was in first grade. Jeez, talk about waiting to win in the long run. I think we can pretty much ignore dividends in the case of Japan as they were minuscule and would all have been consumed by real world investment costs. 30 years is pretty long in terms of human life spans, which can't be ignored except by the truly rich who plan to pass on a dynasty to the great great grandkids (assuming their own kids don't blow the cash first).

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Post by AnotherCFP » Wed Jan 07, 2009 2:46 am

Karl wrote:[
Investors should also note that "risk" if we define it as standard deviation can vary greatly -- std deviations were far higher during the 1930s than during any other decade and 2008 showed those not around during the 1930s what a wild ride Wall Street can provide.
Standard Deviation is just Volatility...Risk is what happens when those in charge of managing it simply forget about history and most importantly that 100 year floods will (should) occur 100% of the time once every 100 years.

100% of the time, It works every time.
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Post by Karl » Wed Jan 07, 2009 2:56 am

AnotherCFP wrote:Standard Deviation is just Volatility...
I recognize that std dev is far from perfect when it comes to measuring risk. Real risk is how likely are you to be able to afford retirement at age 65 and other such investment goals.

Of course, after nearly a decade on this forum & its predecessor, I've gotten a good sense of how real investors react to volatility. Many of them run for the hills. No investment is going to win in the long run if you run for a MM every time the market is falling and then finally feel safe enough to step back into stocks when they're near another peak, yet we all know plenty of investors behave this way.

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Post by AnotherCFP » Wed Jan 07, 2009 2:59 am

Karl wrote:
AnotherCFP wrote:Standard Deviation is just Volatility...
I recognize that std dev is far from perfect when it comes to measuring risk. Real risk is how likely are you to be able to afford retirement at age 65 and other such investment goals.

Of course, after nearly a decade on this forum & its predecessor, I've gotten a good sense of how real investors react to volatility. Many of them run for the hills. No investment is going to win in the long run if you run for a MM every time the market is falling and then finally feel safe enough to step back into stocks when they're near another peak, yet we all know plenty of investors behave this way.
Like a moth to a flame.

You sound like you might just be a little frustrated by this. I can empathize
:!:
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Post by DaleMaley » Wed Jan 07, 2009 6:57 am

nisiprius wrote:
If someone had invested $10,000 in the S&P 90 at the start of 1929--quite a trick since there were no mutual funds then.
A sideline note: I remember Jack Bogle citing the expenses of the oldest mutual fund in America......Massachusetts Investors trust.....in his book The Battle for the Soul of Capitalism. I googled and it looks like there might have been a couple of mutual funds available back in 1929.......including the Wellington fund:
The Arrival of the Modern Fund
The creation of the Massachusetts Investors' Trust in Boston, Massachusetts, heralded the arrival of the modern mutual fund in 1924. The fund went public in 1928, eventually spawning the mutual fund firm known today as MFS Investment Management. State Street Investors' Trust was the custodian of the Massachusetts Investors' Trust. Later, State Street Investors started its own fund in 1924 with Richard Paine, Richard Saltonstall and Paul Cabot at the helm. Saltonstall was also affiliated with Scudder, Stevens and Clark, an outfit that would launch the first no-load fund in 1928. A momentous year in the history of the mutual fund, 1928 also saw the launch of the Wellington Fund, which was the first mutual fund to include stocks and bonds, as opposed to direct merchant bank style of investments in business and trade.
Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. – Warren Buffett

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Post by HomerJ » Wed Jan 07, 2009 7:05 am

vadalpathi wrote:Just for the record. I would like to point out that average returns over a long periods were never 10%. It was more like 6.5% to 7% including dividends. When i say longterm i am thinking more like 50yrs or 100yrs. I did that calculation is 2007 when i had access to bloomberg. They have a total return screen.
Same thing... You're talking real returns (i.e. minus inflation), while people touting 10% are talking nominal returns (i.e. including inflation)

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Re: 25 Yrs For The Dow To Recover From The Great Depression

Post by Rodc » Wed Jan 07, 2009 11:09 am

johnb wrote: It is fleeting, but if you're allocating to bonds it's not meaningless. You can use bear market rallies to rebalance into bonds.
Yes agreed, this is the whole point of my first post way above that quantified this fact.
Also, make sure your data set includes reinvested dividends as follows:
If you reread the post above, I include reinvested dividends and inflation (deflation). Real returns are really what matter. :)
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Post by LH » Wed Jan 07, 2009 12:09 pm

Rodc wrote:The main take away I think from Japan is don't buy when the P/E is 100. I'm not too keen on the whole valuation matters deal because most of the time valuations are somewhere in the middle where they don't mean much. But even I know P/E of 100 is not so great.

That said, war, famine, political upheaval, can and does sometime occur and could occur here as well. Or, just plain silliness as appears to have happened in Japan and the NASDAQ back in the Great Tech Bubble.

Here is a graph from some Global Financial Data data: World Price Index from 1919 to 2006. This does not include reinvesting dividends which would make things look better. Data from the last two years would be nice, but I grabbed this data back in 2007 and today their site seems to be down.

Image

The take away I suppose is that a Japanese investor should have been globally diversified.

Probably a good idea for us too.

But, unless dividends were really good, the picking were slim in the first third of the century, and there are clear periods of persistent poor performance even if diversified globally.
The bold part makes intuitive sense. But so doea lot of things in investing. Each side of a stock trade has a wonderful list of reason they are making the right trade, even though they are doing the exact opposite move.... Is there any proof of a any valuation as a cutoff value? Or any PE cutoff value? If so, why is it not included in boglehead books?

Did bernstein, swenson, ferri, swedroe, Seigel, mandlebrot, malkael miss it? Something so simplistic? All the authors and academics miss it? No papers on it?

When PE hits value X, avoid stock. That aint rocket science as strategies go. Then what do you do? Start selling stock, or just dont buy it? then after that, what do you do with the money, hold cash or bonds, or pay off mortgage, what?

I just think the key is to look for proof, if we humans rely on when things "feel" right, doesnt the evidence show our returns suffer compared to just strict buy and hold??????

There is this human tendency amongst bogleheads to look for "boglehead plus" investing, i think the majority of bogleheads do it, some amount of timing. It just feels so right, and of course, we are amongst the sagest of investors (heheh) right?

But without evidence....... I just get a feeling we are fooling ourselves like typical humans, probably to our detriment as investors.

So if valuations matter, and there is some sort of cutoff, where is the proof, and what is the magic PE value? Or is it all sports pictures, fencing, runners running, buying wisely but not excessively, seeing "storms" and market "turbulance" with the ever present timing backdrop of absolutely no tracking/evidence whatsoever that it works going forward?

The takehome message for me is, boglehead investing is the only thing with proof behind it, and expected superior value relative to every other approach out there, including the "boglehead plus" type strategies.

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Post by bob90245 » Wed Jan 07, 2009 12:42 pm

LH wrote:Is there any proof of a any valuation as a cutoff value? Or any PE cutoff value? If so, why is it not included in boglehead books?
You are correct that implementing valuation-based stock allocation is "Bogleheads-plus" strategy. Jack Bogle mentions it without being specific when he discusses Tactical Asset Allocation. In other words, when you feel cautious, move 15% from stocks to bonds. And when you feel bold, move 15% from bonds to stocks.

My own view is that 15% one way or the other may not do much harm (or good?). That's why Bogle says to limit such moves to 15%. But at least it satisfies the human urge to do SOMETHING.
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Post by vadalpathi » Wed Jan 07, 2009 12:42 pm

Let clarify, some have interpreted my post as after inflation numbers. Nope these are before inflation numbers. 6.5% to 7% return is nominal. Average inflation was more like 3.5%.

Long term bonds were more like 4.5% to 5% before inflation. Again we are talking long term data more like 50yrs. I believe i looked at data between Aug 1957 to Aug 2007 For S&P , DOw and bonds.

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