When DID the stock market recover from 1929?

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nisiprius
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Re: When DID the stock market recover from 1929?

Post by nisiprius » Thu Nov 07, 2019 7:52 am

tadamsmar wrote:
Tue Nov 05, 2019 10:54 am
What if a Boglehead and his nest egg instantly poofed into existence (like the sperm whale in Hitchhiker's Guide to the Galaxy) at the top in 1929 ready to retire?

Is that supposed to be a realistic scenario?
No, it isn't. Your point is that statistics based on buying at a top are not much more than trivia items, and I agree.

But since people do write articles and make talking points based on "how long it took the stock market to recover" it's worth asking what the right answer is. The result of that exploration for me has been simply to underline how arbitrary it all is, without a Guinness records team to make a final judgement.

The most serious issue is that I constantly see advice that is predicated on things like "the average length of a bear market." If you are seriously planning "a cash bucket to ride out a bear market," it really matters whether the longest bear market was 7 years or 15. And the average is affected by whether you are averaging in two sevens or one fifteen.
A real Boglehead would have been beavering away for decades to build an adequate nest egg. He would have used realistic projections for stock market growth...
No, he wouldn't have, because people didn't invest that way in those days.

I would say that the idea of saving for retirement using stocks, and systematic withdrawals, did not begin until around the 1950s. You could date it as dating from the formation of CREF (in TIAA-CREF) in 1952. Before that, it was taken for granted by pension managers that pensions must be invested entirely in bonds (indeed, it might not have been legal to do otherwise; not sure when that changed).

The idea of stocks as prudent long-term investments had been bruited about. Edgar Lawrence Smith published Common Stocks as Long-term Investments in 1924. John Jakob Raskob presented something like a modern understanding in 1929 in a magazine article, "Everybody Ought to be Rich:" make regular purchases $15 a month in "good common stocks" and you will be financially independent in twenty years. He said. The numbers don't work unless you assume that you can pick "good common stocks" that are twice as good as the market average.

But Raskob might not even have known that, because what might be called "long-term stock statistics as we know them" didn't exist until the 1937 publication of Common-Stock Indexes, 1871-1937 by the Cowles Commission. And even that was just year-by-year data. Long-term averages weren't really well-known until Merrill Lynch sponsored the creation of the Center for Research in Securities Prices, in order to get data to back an ad they wanted to run. The data analysis was published in 1964.

But even more important than that is a reading of Benjamin Roth's The Great Depression: A Diary. During the Depression, Roth, a young lawyer, was constantly lamenting the fact that he just didn't have the money to snap up the bargains in stocks and real estate that he saw all around them.

Paper studies of how well you'd have done if you'd "just" carried out Raskob's plan of investing $15 every month (equivalent to $225/month in 2019 dollars) ignore the fact that even a young lawyer--let alone a salaried worker--had little chance of being able to do it.

So your theoretical 1929 Boglehead didn't have those "realistic projections" for stock market growth (Raskob's were double what was realistic), and couldn't have been "beavering away" saving because times were tough--even for what Roth calls "professional men"--and job income was insecure.
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Re: When DID the stock market recover from 1929?

Post by JBeck » Thu Nov 07, 2019 8:51 am

nisiprius wrote:
Thu Nov 07, 2019 7:52 am
No, he wouldn't have, because people didn't invest that way in those days
While reading The Great Depression A Diary by Benjamin Roth I was surprised to find out that everyone essentially borrowed to invest, many times taking out second mortgages, etc.

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Re: When DID the stock market recover from 1929?

Post by tadamsmar » Thu Nov 14, 2019 8:53 pm

nisiprius wrote:
Thu Nov 07, 2019 7:52 am
tadamsmar wrote:
Tue Nov 05, 2019 10:54 am
What if a Boglehead and his nest egg instantly poofed into existence (like the sperm whale in Hitchhiker's Guide to the Galaxy) at the top in 1929 ready to retire?

Is that supposed to be a realistic scenario?
No, it isn't. Your point is that statistics based on buying at a top are not much more than trivia items, and I agree.

But since people do write articles and make talking points based on "how long it took the stock market to recover" it's worth asking what the right answer is. The result of that exploration for me has been simply to underline how arbitrary it all is, without a Guinness records team to make a final judgement.

The most serious issue is that I constantly see advice that is predicated on things like "the average length of a bear market." If you are seriously planning "a cash bucket to ride out a bear market," it really matters whether the longest bear market was 7 years or 15. And the average is affected by whether you are averaging in two sevens or one fifteen.
A real Boglehead would have been beavering away for decades to build an adequate nest egg. He would have used realistic projections for stock market growth...
No, he wouldn't have, because people didn't invest that way in those days.

I would say that the idea of saving for retirement using stocks, and systematic withdrawals, did not begin until around the 1950s. You could date it as dating from the formation of CREF (in TIAA-CREF) in 1952. Before that, it was taken for granted by pension managers that pensions must be invested entirely in bonds (indeed, it might not have been legal to do otherwise; not sure when that changed).

The idea of stocks as prudent long-term investments had been bruited about. Edgar Lawrence Smith published Common Stocks as Long-term Investments in 1924. John Jakob Raskob presented something like a modern understanding in 1929 in a magazine article, "Everybody Ought to be Rich:" make regular purchases $15 a month in "good common stocks" and you will be financially independent in twenty years. He said. The numbers don't work unless you assume that you can pick "good common stocks" that are twice as good as the market average.

But Raskob might not even have known that, because what might be called "long-term stock statistics as we know them" didn't exist until the 1937 publication of Common-Stock Indexes, 1871-1937 by the Cowles Commission. And even that was just year-by-year data. Long-term averages weren't really well-known until Merrill Lynch sponsored the creation of the Center for Research in Securities Prices, in order to get data to back an ad they wanted to run. The data analysis was published in 1964.

But even more important than that is a reading of Benjamin Roth's The Great Depression: A Diary. During the Depression, Roth, a young lawyer, was constantly lamenting the fact that he just didn't have the money to snap up the bargains in stocks and real estate that he saw all around them.

Paper studies of how well you'd have done if you'd "just" carried out Raskob's plan of investing $15 every month (equivalent to $225/month in 2019 dollars) ignore the fact that even a young lawyer--let alone a salaried worker--had little chance of being able to do it.

So your theoretical 1929 Boglehead didn't have those "realistic projections" for stock market growth (Raskob's were double what was realistic), and couldn't have been "beavering away" saving because times were tough--even for what Roth calls "professional men"--and job income was insecure.
Those people who were, in fact, investing in the 1920s certainly had the ability to invest the way Raskob suggested, and there must have been a lot of investors. It was not infeasible for those crowds of investors, it was a matter of choice. The Wellington Fund started in 1929, so the idea of balanced investing was conceived before that and seen as an investment vehicle worth creating. Balanced stock/bond investing was not merely an idea, it was implemented. Wellington was the 5th mutual fund created. It constituted at least 20% of all mutual funds. In percentage terms, there were perhaps more balanced funds in 1929 than there are now. The idea that everyone was a crazy hocked-up investor is a good story, but apparently not the whole story. When authors write about the 2008 crash, how many include a chapter, or even a paragraph, or even a sentence, about us Boglehead?

Stock markets had been around for over 300 years in 1929. Time has added about 30% to that, but you read your words one would think time added 99.9%. Boom and bust cycles had been evident for hundreds of years by 1929. I don't then the notion of using base-rates was a secret from the entire human race in 1929. And all our data is not all that good at removing the variance in the base rates because estimating variances is a data hog. There was more than enough market data for that guy in the picture to your right to test the efficient market hypothesis in 1900.

Anyway, the question raised in your OP is compelling precisely because of its forward-looking relevance. I am pointing out a flaw or bias that should be considered in terms of its forward-looking relevance. The same issue arises with the modern Trinity Study and the like that are certainly meant to have forward-looking relevance.

A Boglehead planning to retire in 10 years at a 4% withdrawal can easily end up needing only a 3% withdrawal rate after a bull market like that of the 1920s. So, as a practical matter, a crash at that point is not as bad in practice as the Trinity-style numbers imply. Depends on the nature of returns, more boom-and-bust or more random? And depends on how a Boglehead reacts to an unexpected run-up in one's nest egg during a bull market.

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