Stocks for the Long Haul? Maybe Not.

[fisher0815]

Today the US stock market is the best diversified stock market of the world.

And a portfolio that is not 100% concentrated in US stocks would be even MORE diversified.

Uncompensated risks should be avoided, and putting all our eggs in one country's markets is an uncompensated risk.

Sorry that I expressed myself misleadingly. My point was not US vs. international investing.
My point was that the very poorly diversified US stock market of the very distant past does not compare to the well diversified US stock market of the recent past.
America's stock market was dominated by one industry in 1900

In this paper on side 23 you will find the number of stocks of the US market since 1815. It started with 8 stocks.

[willthrill81]

Upon further reflection, I find the question of whether stocks or bonds have been or will be better for the 'long haul' to be quite flawed for one simple reason: absent default risk, bond's returns are expected to be equal to their starting yield. That starting yields might have been higher or lower in the past has no bearing on their yields today. And right now, real yields are essentially 0% real.

History may be far more informative with regard to predicting stocks' future returns, but we know that past is not at all prologue with regard to bonds.

[McQ]

...
My point was that the very poorly diversified US stock market of the very distant past does not compare to the well diversified US stock market of the recent past.
America's stock market was dominated by one industry in 1900

In this paper on side 23 you will find the number of stocks of the US market since 1815. It started with 8 stocks.

No argument that the further back you go, especially before 1900, the less diversified the US stock market was.

But the bolded statement is false. Let me hasten to add that you are correct about what the Goetzmann et al. paper says; it is their error, not yours--except insofar as you did not grasp the limits of their sources (it was their publication source that started in 1815--not US stock trading).

Background

The paper linked by fisher0815 describes a new data collection effort to get at 19th century stock market performance (new, that is, in 2001). The authors are eminent and the paper(s) were published in peer-reviewed journals.

Jeremy Siegel esteemed it highly enough that, sometime after the 3rd book edition, he swapped in the Goetzmann et al. data in place of the Smith & Cole (1935) data that he had used for pre-1871 returns up to that point.

Goetzmann made the spreadsheet containing the data public and you can download it from the Yale site (Cowles' index data [Shiller's source] can be downloaded there as well).

Accordingly, it was one of the resources I consulted when I built my new index of pre-1871 stock returns. It contributed some additional dividend data. Unfortunately, as I worked with it more closely I found it to be rife with errors of commission and omission. The price series is notably inferior to the NYU data set that was my major source (downloadable at https://eh.net/database/early-u-s-securities-prices/). The errors are catalogued in Appendix B (p. 110) of this supporting working paper: https://papers.ssrn.com/sol3/papers.cfm ... id=3480838. Essentially, no program to detect outliers was run against the Goetzmann data collection, and some years are missing altogether (interpolated returns). In other years as few as four price-relatives were available to compute returns, as opposed to the dozens of stocks I found then.

I started my series in January 1793 when I could find three bank stocks to go along with the 1st Bank of the US. By 1815 there were dozens of stocks trading in New York, Philadelphia and Boston. By the Panic of 1837, hundreds.

Goetzmann et al. used a single publication covering a single exchange for those early years. I believe my pre-1871 series is superior; but again, acknowledge the lack of diversification across sectors in those early years.

[McQ]

Upon further reflection, I find the question of whether stocks or bonds have been or will be better for the 'long haul' to be quite flawed for one simple reason: absent default risk, bond's returns are expected to be equal to their starting yield. That starting yields might have been higher or lower in the past has no bearing on their yields today. And right now, real yields are essentially 0% real.

History may be far more informative with regard to predicting stocks' future returns, but we know that past is not at all prologue with regard to bonds.

I am missing some piece of your logic here.

1. Current real bond yields are about minus 6 percent. They were minus 4.5% at the end of 2021 and will be whatever they are at the end of 2022, 2023, 2024, etc.—all potential starting points for some future analysis.
2. Future real stock returns will be whatever they are—unless you assert that there is a lower bound on multi-year real stock returns that has never been violated, and cannot be exceeded?

If real stock returns are free to fall below zero over intervals of arbitrary length, then it does not matter what real bond yields are today. Stock returns could always be lower still.

Absent that fixed lower bound—which would be more credible if you can adduce historical evidence—the relative performance of future stock returns could be lower than that of bonds, whatever the current yield, real or nominal.

Per nigel_ht and others on this board, I spot you any nation that lost a war, and any nation that was invaded during one of the world wars, or suffered civil war, or collapsed in revolution, for the affected period.* I agree that none of those count when it comes to the question of, How bad could [US] stock returns get, and could they be lower than today's bond yields?

*I do not spot you returns in any such nation outside of the war period or for any neutral nation or any war victor. I more specifically reject nigel_ht’s contention that market returns in France post-1960 were an epiphenomenon of World War II and should be dismissed from the relevant set, as returns of a nation that lost a war.

FYI, I had Table 5 in the paper in view as I wrote.

Last, I was very careful in the paper to make no predictions. I have no idea how stocks and bonds will perform, in relative or absolute terms, over the next twenty years. The paper is focused on accurate retrodiction: assessing how stocks and bonds did (or did not) perform, for as far back as I was able to take the record.

Contra Siegel, in that historical record sometimes bonds outperformed stocks over intervals of arbitrary length.

[willthrill81]

Upon further reflection, I find the question of whether stocks or bonds have been or will be better for the 'long haul' to be quite flawed for one simple reason: absent default risk, bond's returns are expected to be equal to their starting yield. That starting yields might have been higher or lower in the past has no bearing on their yields today. And right now, real yields are essentially 0% real.

History may be far more informative with regard to predicting stocks' future returns, but we know that past is not at all prologue with regard to bonds.

I am missing some piece of your logic here.

1. Current real bond yields are about minus 6 percent. They were minus 4.5% at the end of 2021 and will be whatever they are at the end of 2022, 2023, 2024, etc.—all potential starting points for some future analysis.
2. Future real stock returns will be whatever they are—unless you assert that there is a lower bound on multi-year real stock returns that has never been violated, and cannot be exceeded?

If real stock returns are free to fall below zero over intervals of arbitrary length, then it does not matter what real bond yields are today. Stock returns could always be lower still.

Absent that fixed lower bound—which would be more credible if you can adduce historical evidence—the relative performance of future stock returns could be lower than that of bonds, whatever the current yield, real or nominal.

That's a fair point, but still, the evidence we have suggests that stocks are likely to at least outpace inflation over long-term periods (i.e., 20+ years), and that's about what inflation-linked bonds are priced to yield going forward. But you're correct that future stock returns are always a big unknown.

[martincmartin]

That's a fair point, but still, the evidence we have suggests that stocks are likely to at least outpace inflation over long-term periods (i.e., 20+ years), and that's about what inflation-linked bonds are priced to yield going forward. But you're correct that future stock returns are always a big unknown.

For two periods -- after the Civil War, and after World War I -- there was significant deflation. In fact, prices were cut in about half over many years. Stocks did keep up with inflation, which is why they did so much worse than bonds over those periods.

[willthrill81]

That's a fair point, but still, the evidence we have suggests that stocks are likely to at least outpace inflation over long-term periods (i.e., 20+ years), and that's about what inflation-linked bonds are priced to yield going forward. But you're correct that future stock returns are always a big unknown.

For two periods -- after the Civil War, and after World War I -- there was significant deflation. In fact, prices were cut in about half over many years. Stocks did keep up with inflation, which is why they did so much worse than bonds over those periods.

Count me among those that don't find financial data from the 19th century at least to be very useful in any meaningful way to that of the 21st century for many reasons.

[nisiprius]

...Count me among those that don't find financial data from the 19th century at least to be very useful in any meaningful way to that of the 21st century for many reasons...

To my mind it is a truly unsolvable problem.

It's made even more unsolvable by the fact that financial data, if not as bad as the Cauchy distribution, "settles down" more slowly with increasing sample length than Gaussian data would.

So long before you have enough data to overcome sampling error, you are into periods of time where nobody can seriously believe "the stock market" is really the "same thing" over the entire period.

I don't think anyone can seriously think the stock market is quantitatively similar before and after the foundation of the SEC. Or before and after the democratization of stock market investing after 1920 or so. Or before and after the end of fixed commissions. Or before and after the rise of the 401(k) plan.

[willthrill81]

...Count me among those that don't find financial data from the 19th century at least to be very useful in any meaningful way to that of the 21st century for many reasons...

To my mind it is a truly unsolvable problem.

It's made even more unsolvable by the fact that financial data, if not as bad as the Cauchy distribution, "settles down" more slowly with increasing sample length than Gaussian data would.

So long before you have enough data to overcome sampling error, you are into periods of time where nobody can seriously believe "the stock market" is really the "same thing" over the entire period.

So you're telling me that 800 years from now, when we finally have 30 non-overlapping 30 year periods of post-Federal Reserve data, that the folks pounding the 'only non-overlapping periods count' drum will be outnumbered by folks like me?

[AerialWombat]

That's the reason many have a big chunk of their assets in direct real estate.

Sadly most reits do not perform well so the index is pretty bad

REITs =/= direct real estate.

[anoop]

Zvi Bodie makes the same argument all the time.

This is from 2011.
https://www.marketwatch.com/video/dont- ... 397A4.html

Of course his advice went out of favor as stocks went up 7x from GFC bottom to recent peak.

[AerialWombat]

Upon further reflection, I find the question of whether stocks or bonds have been or will be better for the 'long haul' to be quite flawed for one simple reason: absent default risk, bond's returns are expected to be equal to their starting yield. That starting yields might have been higher or lower in the past has no bearing on their yields today. And right now, real yields are essentially 0% real.

History may be far more informative with regard to predicting stocks' future returns, but we know that past is not at all prologue with regard to bonds.

So, nobody knows nothin'?

[willthrill81]

Upon further reflection, I find the question of whether stocks or bonds have been or will be better for the 'long haul' to be quite flawed for one simple reason: absent default risk, bond's returns are expected to be equal to their starting yield. That starting yields might have been higher or lower in the past has no bearing on their yields today. And right now, real yields are essentially 0% real.

History may be far more informative with regard to predicting stocks' future returns, but we know that past is not at all prologue with regard to bonds.

So, nobody knows nothin'?

We still can't predict the future with precision, no. But given where we are now, I'm very much inclined to believe that the equity risk premium is alive and well.

[seajay]

...Count me among those that don't find financial data from the 19th century at least to be very useful in any meaningful way to that of the 21st century for many reasons...

To my mind it is a truly unsolvable problem.

It's made even more unsolvable by the fact that financial data, if not as bad as the Cauchy distribution, "settles down" more slowly with increasing sample length than Gaussian data would.

So long before you have enough data to overcome sampling error, you are into periods of time where nobody can seriously believe "the stock market" is really the "same thing" over the entire period.

I don't think anyone can seriously think the stock market is quantitatively similar before and after the foundation of the SEC. Or before and after the democratization of stock market investing after 1920 or so. Or before and after the end of fixed commissions. Or before and after the rise of the 401(k) plan.

Measures of the stock market 'average' also gyrate towards the most efficient model/method that weren't known/used in advance but where backtesting using those models is used to suggest the historic 'average'. For decades the UK followed the FT30, a geometric equal weighted method that naturally tends to lag cap weighted, before cap weighted became more the normally adopted choice. Perhaps in 30 years time it might be common to individually index, buy a diverse 30 stocks across a diverse range of sectors in initial equal weight, selecting the best valued choice in each case, and just hold-as-is. LEXCX, John Mauldin ...etc. have indicated such to broadly yield 1 to 1.5% more than the Dow/S&P500 and as such may become the more preferred 'average' choice, and backtesting using such methodology indicating historic average rewards were 1.5% higher than what the average investor actually achieved (who held S&P500 trackers).

When Dow and Jones devised their Utilities, Industrial, Transport indexes, only a third of investors might have averaged the better performing Industrial index outcome in having selected the best/right choice of the three. The suggested historic average looking back was - above average.

[nigel_ht]

Per nigel_ht and others on this board, I spot you any nation that lost a war, and any nation that was invaded during one of the world wars, or suffered civil war, or collapsed in revolution, for the affected period.* I agree that none of those count when it comes to the question of, How bad could [US] stock returns get, and could they be lower than today's bond yields?

*I do not spot you returns in any such nation outside of the war period or for any neutral nation or any war victor. I more specifically reject nigel_ht’s contention that market returns in France post-1960 were an epiphenomenon of World War II and should be dismissed from the relevant set, as returns of a nation that lost a war.

Er what? I checked upthread and have no idea what you're talking about and only vaguely recollect other discussions about WWII.

At the risk of repeating myself and taking this thread down this odd tangent but since I've been mentioned by name:

Post war France through the 1960s certainly were an "byproduct of World War II" (sorry, I can't spell epiphenomenon).

On the eve of WWII the French Empire controlled 12.3 million km2 of land and a population of 110M. That WWII accelerated de-colonization is without much controversy and the post war period saw the collapse of the 4th French Republic and the loss of West French Africa, French Equatorial Africa, Morocco, French Indochina, Algeria, etc until France was reduced to a population of 48M in 1963 and controlled only 539,000 km2.

Now what this has to do with stocks for the long haul, I dunno but yeah, if French stock performance was really bad in the 60s there's a lot of reasons why and the root cause (gosh, still can't spell epiphenomenon) was still largely WWII since that instigated the final collapse of the empire.

wrt to US stock performance, presumable someday we too will revert to mean when our empire collapses but as Ive said in the past, our empire is CONUS. That's harder to decolonize...

[JackoC]

That's a fair point, but still, the evidence we have suggests that stocks are likely to at least outpace inflation over long-term periods (i.e., 20+ years), and that's about what inflation-linked bonds are priced to yield going forward. But you're correct that future stock returns are always a big unknown.

For two periods -- after the Civil War, and after World War I -- there was significant deflation. In fact, prices were cut in about half over many years. Stocks did keep up with inflation, which is why they did so much worse than bonds over those periods.

The US price level also dropped to ~54% of its 1815 level by 1860, vs. to ~61% of its 1865 level by 1913 (inception of the Fed). It was true for long periods in various places with basically specie money: prices would stay basically stable or drift down after big increases due to debasement of money during wars, though productivity advances were a new factor in this with combination of specie money and industrial revolution. It's interesting in purely academic terms to look at very old US returns but IMO very questionable to weight these more heavily than returns in other countries in a time when the other countries had economies and monetary systems less totally different than the current US one as compared to the US over 100 yrs ago, let alone 200+.

Or perhaps do look at all returns for really long periods. I think I gave earlier on this thread or similar one Schmelzing's finding of real sovereign borrowing rates generally declining from the mid double digits in late 14th century to today's approx 0% in a relatively steady trend. The very long term answer seems to be returns declining, and while equity return is impossible to estimate anywhere near that far back (the limited liability public stock company is itself a much more recent invention) seems the world isn't becoming systematically more uncertain (where you'd expect a higher and higher premium to take equity risk). Some things are more uncertain (human ability to wreak planetary level destruction is higher now but it's debatable how much that finds its way into stock prices) but most things less I'd say (normal economic life tends to be more transparent and benign for a much higher % of people than the 700 yr avg). Therefore the base assumption IMO would be equity return, with underlying asset return on capital, is on a very longterm downtrend.
papers on his site
https://www.pfschmelzing.me/

[seajay]

That's a fair point, but still, the evidence we have suggests that stocks are likely to at least outpace inflation over long-term periods (i.e., 20+ years), and that's about what inflation-linked bonds are priced to yield going forward. But you're correct that future stock returns are always a big unknown.

For two periods -- after the Civil War, and after World War I -- there was significant deflation. In fact, prices were cut in about half over many years. Stocks did keep up with inflation, which is why they did so much worse than bonds over those periods.

The US price level also dropped to ~54% of its 1815 level by 1860, vs. to ~61% of its 1865 level by 1913 (inception of the Fed). It was true for long periods in various places with basically specie money: prices would stay basically stable or drift down after big increases due to debasement of money during wars, though productivity advances were a new factor in this with combination of specie money and industrial revolution. It's interesting in purely academic terms to look at very old US returns but IMO very questionable to weight these more heavily than returns in other countries in a time when the other countries had economies and monetary systems less totally different than the current US one as compared to the US over 100 yrs ago, let alone 200+.

Or perhaps do look at all returns for really long periods. I think I gave earlier on this thread or similar one Schmelzing's finding of real sovereign borrowing rates generally declining from the mid double digits in late 14th century to today's approx 0% in a relatively steady trend. The very long term answer seems to be returns declining, and while equity return is impossible to estimate anywhere near that far back (the limited liability public stock company is itself a much more recent invention) seems the world isn't becoming systematically more uncertain (where you'd expect a higher and higher premium to take equity risk). Some things are more uncertain (human ability to wreak planetary level destruction is higher now but it's debatable how much that finds its way into stock prices) but most things less I'd say (normal economic life tends to be more transparent and benign for a much higher % of people than the 700 yr avg). Therefore the base assumption IMO would be equity return, with underlying asset return on capital, is on a very longterm downtrend.
papers on his site
https://www.pfschmelzing.me/

Shiller's data since 1871 and measuring maxDD's (monthly values) against real (inflation adjusted) prices



Just saying.

[nisiprius]

...When Dow and Jones devised their Utilities, Industrial, Transport indexes, only a third of investors might have averaged the better performing Industrial index outcome in having selected the best/right choice of the three...

It would be interesting to see how investors really did behave, and how they used these indexes. But as I understand it, the idea was not to invest in any of them, or all of them, or an MPT-optimum mix of them. They were simply numbers whose relative movements with respect to each other were used to derive market timing signals, within a system of technical analysis that became known as "Dow theory."

Much as one might use the bond yield curve as an input for a timing system in stocks, without actually investing in bonds at all.

I would be curious to know how the Dow Jones Industrial average became the only one commonly cited, and how it became taken as a measure for "the stock market" as a whole.

[JackoC]

That's a fair point, but still, the evidence we have suggests that stocks are likely to at least outpace inflation over long-term periods (i.e., 20+ years), and that's about what inflation-linked bonds are priced to yield going forward. But you're correct that future stock returns are always a big unknown.

For two periods -- after the Civil War, and after World War I -- there was significant deflation. In fact, prices were cut in about half over many years. Stocks did keep up with inflation, which is why they did so much worse than bonds over those periods.

The US price level also dropped to ~54% of its 1815 level by 1860, vs. to ~61% of its 1865 level by 1913 (inception of the Fed). It was true for long periods in various places with basically specie money: prices would stay basically stable or drift down after big increases due to debasement of money during wars, though productivity advances were a new factor in this with combination of specie money and industrial revolution. It's interesting in purely academic terms to look at very old US returns but IMO very questionable to weight these more heavily than returns in other countries in a time when the other countries had economies and monetary systems less totally different than the current US one as compared to the US over 100 yrs ago, let alone 200+.

Or perhaps do look at all returns for really long periods. I think I gave earlier on this thread or similar one Schmelzing's finding of real sovereign borrowing rates generally declining from the mid double digits in late 14th century to today's approx 0% in a relatively steady trend. The very long term answer seems to be returns declining, and while equity return is impossible to estimate anywhere near that far back (the limited liability public stock company is itself a much more recent invention) seems the world isn't becoming systematically more uncertain (where you'd expect a higher and higher premium to take equity risk). Some things are more uncertain (human ability to wreak planetary level destruction is higher now but it's debatable how much that finds its way into stock prices) but most things less I'd say (normal economic life tends to be more transparent and benign for a much higher % of people than the 700 yr avg). Therefore the base assumption IMO would be equity return, with underlying asset return on capital, is on a very longterm downtrend.
papers on his site
https://www.pfschmelzing.me/

Shiller's data since 1871 and measuring maxDD's (monthly values) against real (inflation adjusted) prices

Just saying.

Familiar with it, not sure how it's relevant to my post about much older data though. To 1871 isn't actually a huge sample of independent 30 yr periods, and the tangential relevance to my post is that 1871-1913 is also a different monetary system, significant implication for nominal bond *vs* stock return. It's a dilemma as others have noted, short period of directly relevant data, also generally characterized by significantly lower starting asset valuations than now. We'd like to expand the time axis, but then it's comparing very different places (the US even 100 yrs ago was the same country perhaps in some symbolic way which I'd actually go along with in a discussion of abstract beliefs, but a quite different country in a lot of practical ways economically, demographically, etc). It seems expanding the data set to other countries in the modern age, putting aside nationalism/exceptionalism type beliefs, might be relatively more fruitful. And the market does tell us the expected return (centroid of the future return distribution) now, apparently quite a bit lower than geometric averag return of last century or so. Any method of planning that completely ignores that is basically flawed IMO. But there's no provable 'solution' to this issue as was noted earlier.

[seajay]

I would be curious to know how the Dow Jones Industrial average became the only one commonly cited, and how it became taken as a measure for "the stock market" as a whole.

Via media guidance. October 1916 and the Wall Street Journal started a new 20 stock index, 8 stocks from the old index along with 12 other new stocks added. In October 1928 during/near the Roaring 20's highs the index was extended to 30. When that's the common financial media presentation of a market average guide, so investors look to it.

In the UK the FT30 was the common reference for many decades. But was a geometric equal weight based index that has a negative bias and as such was later put onto the back-burner and the FT100 cap weighted index became the common reference. Such that over time the 'better' index methodology has become the reference point of market average measures, but where obviously that's a above average actual measure/indicator compared to the FT30.

Market cap isn't the 'optimal' either. The more optimal is to buy a broad range of stocks in initial equal capital weight, bought and held. But that's not a viable general index, is specific to each individual/start date time-point. Such optimisation yields around 1.5%/year more than the regular Dow, so not a trivial difference. Nor is it a viable general product. https://www.forbes.com/forbes/1999/0614 ... 598b268747

Bogle recommends the ultimate in buy-and-hold investing: a completely static portfolio. He would buy the 50 largest companies in the S&P 500 and then never buy another. The portfolio would ignore the constant small adjustments that Standard & Poor's makes in the index. If a stock were lost in a merger, Bogle would not replace it.

Alas, his successor as chief executive of the nonprofit Vanguard Group, John Brennan, doesn't plan to offer the product. Creating new portfolios annually (because newcomers would not be allowed into an existing portfolio) would be an administrative headache with each distinct one lacking sufficient economies of scale, Vanguard believes.

John Mauldin noted the effect back in 2009 https://www.mauldineconomics.com/frontl ... -mwo040309

Next, we find that the S&P 500 cap-weighted index outperforms the Dow by about 0.2% annually, for a total return of 9.1%. Not much difference there.

Now we come to the interesting part. The next-to-the-top line is the original Dow 30, using a price-weighted index, just like the current Dow 30 uses. The only changes in the next 80 years are companies getting bought or dying. That "Original 30" gives us an annual return of 9.6%. Just 0.7% a year, so you might think, not much difference. But if you start with $100 and compound it for 80 years, that 0.7% becomes a quite large differential. With the Dow 30, your $100 would have grown to $96,993 as of December 2008, but the Original 30 would have grown to $161,603.

And there is an even bigger differential if you simply equal-weight the components rather than use a price-weighting methodology. Your $100 grows at a 10.4% clip and becomes $272,554, or almost three times the actual Dow 30.

LEXCX is a real world example case, that bought and held 30 stocks back in the mid 1930's, but where its relative benefit has a sizeable chunk being lost via its 0.5% relatively high fees.

If in 20, 30, whatever years time the likes of the S&P500 are no longer viewed as being the daily reference/average, but instead a 1.5% higher average index has stepped up to replace that, then back-tests using that index will obviously be inclined to overstate what average investors actually achieved who had followed a index that lagged that average by 1.5%.

[nigel_ht]

Market cap isn't the 'optimal' either. The more optimal is to buy a broad range of stocks in initial equal capital weight, bought and held. But that's not a viable general index, is specific to each individual/start date time-point. Such optimisation yields around 1.5%/year more than the regular Dow, so not a trivial difference. Nor is it a viable general product. https://www.forbes.com/forbes/1999/0614 ... 598b268747

Bogle recommends the ultimate in buy-and-hold investing: a completely static portfolio. He would buy the 50 largest companies in the S&P 500 and then never buy another. The portfolio would ignore the constant small adjustments that Standard & Poor's makes in the index. If a stock were lost in a merger, Bogle would not replace it.

June 14, 1999...lol.

One big caution, with which Bogle agrees: All 50 stocks may currently be overpriced (read the story on page 294). But if you are planning to hold for 50 years, this might be a good idea.

But yes, it shouldn't be too hard to implement on your own at any place that provides fractional shares...

If you want to do global then I think IB might be the best as I'm going to guess the 50 biggest will at least trade as ADRs.

I might say the biggest company from every sector and then 39 of the largest from there...that probably gives you a little more sector diversification...

[seajay]

Market cap isn't the 'optimal' either. The more optimal is to buy a broad range of stocks in initial equal capital weight, bought and held. But that's not a viable general index, is specific to each individual/start date time-point. Such optimisation yields around 1.5%/year more than the regular Dow, so not a trivial difference. Nor is it a viable general product. https://www.forbes.com/forbes/1999/0614 ... 598b268747

Bogle recommends the ultimate in buy-and-hold investing: a completely static portfolio. He would buy the 50 largest companies in the S&P 500 and then never buy another. The portfolio would ignore the constant small adjustments that Standard & Poor's makes in the index. If a stock were lost in a merger, Bogle would not replace it.

June 14, 1999...lol.

One big caution, with which Bogle agrees: All 50 stocks may currently be overpriced (read the story on page 294). But if you are planning to hold for 50 years, this might be a good idea.

But yes, it shouldn't be too hard to implement on your own at any place that provides fractional shares...

If you want to do global then I think IB might be the best as I'm going to guess the 50 biggest will at least trade as ADRs.

I might say the biggest company from every sector and then 39 of the largest from there...that probably gives you a little more sector diversification...

It's not a free lunch benefit however, leads to concentration risk. More reward on average, but also with greater (concentration) risk. Present day cap weighted indexes cap that risk by liming the largest single holding to no more than 10% ... or suchlike. Haven't looked, but if I recall correctly LEXCX when I last looked (some years back) was close to having half of its value in a single stock (Union Pacific Railroads IIRC).

[nigel_ht]

Market cap isn't the 'optimal' either. The more optimal is to buy a broad range of stocks in initial equal capital weight, bought and held. But that's not a viable general index, is specific to each individual/start date time-point. Such optimisation yields around 1.5%/year more than the regular Dow, so not a trivial difference. Nor is it a viable general product. https://www.forbes.com/forbes/1999/0614 ... 598b268747

Bogle recommends the ultimate in buy-and-hold investing: a completely static portfolio. He would buy the 50 largest companies in the S&P 500 and then never buy another. The portfolio would ignore the constant small adjustments that Standard & Poor's makes in the index. If a stock were lost in a merger, Bogle would not replace it.

June 14, 1999...lol.

One big caution, with which Bogle agrees: All 50 stocks may currently be overpriced (read the story on page 294). But if you are planning to hold for 50 years, this might be a good idea.

But yes, it shouldn't be too hard to implement on your own at any place that provides fractional shares...

If you want to do global then I think IB might be the best as I'm going to guess the 50 biggest will at least trade as ADRs.

I might say the biggest company from every sector and then 39 of the largest from there...that probably gives you a little more sector diversification...

It's not a free lunch benefit however, leads to concentration risk. More reward on average, but also with greater (concentration) risk. Present day cap weighted indexes cap that risk by liming the largest single holding to no more than 10% ... or suchlike. Haven't looked, but if I recall correctly LEXCX when I last looked (some years back) was close to having half of its value in a single stock (Union Pacific Railroads IIRC).

50 stocks means 2% initial allocation in each…while any given tranche might end up lopsided over time the subsequent tranches would be allocated as equal weight.

A fintech company could easily automate 50 companies according to whatever rules you wish to apply.

Today you’d have to do it manually with something like M1 pies and simply use the too 50 holdings of whatever ETF you wanted to base it on (VOO, VTI, VT…whatever).

Maybe build a new pie every year as rankings change…I dunno, I don’t use M1. It’s not entirely clear if new investments go into the next series (if it’s different) or over the course of your entire investment career you stick with the same original 50.

It’s interesting because it’s passive, the ER is simply your time to build and maintain it and you can tailor it based on your preferences…like above where I would add in any missing sectors.

You could also skip companies for whatever reason (geographic/political risks, industries/companies you don’t want to invest in, whatever). Maybe you don’t like Nestle or Apple for some reason…so it’s off your own personal ETF.

You have to buy in that equal weighted is better or equal to cap weighted…

Prior to zero commissions and fractional shares it was impossible for an individual investor to DIY this but it seems possible today.

I assume fractional shares means you’re locked into a particular company unless you are willing to pay taxes on any gains.

[jabberwockOG]

That's a fair point, but still, the evidence we have suggests that stocks are likely to at least outpace inflation over long-term periods (i.e., 20+ years), and that's about what inflation-linked bonds are priced to yield going forward. But you're correct that future stock returns are always a big unknown.

For two periods -- after the Civil War, and after World War I -- there was significant deflation. In fact, prices were cut in about half over many years. Stocks did keep up with inflation, which is why they did so much worse than bonds over those periods.

Count me among those that don't find financial data from the 19th century at least to be very useful in any meaningful way to that of the 21st century for many reasons.

What I have learned from the past in terms of investing is that the future will be nothing like the past. Complexity increases over time. The butterfly effect is real. This time (meaning every time) it really is different - increasing disintermediation, globalization, tech change, and endless and unpredictable environment and political black swans, make predicting what is the best asset class a fool's errand.

What's best? We have long had the answer - diversification and time in the market.

Looking backwards 100 or more years to make any kind of prediction about the next 100 years is what I can most generously describe as fanciful navel gazing.

[nigel_ht]

What I have learned from the past in terms of investing is that the future will be nothing like the past.

…

What's best? We have long had the answer - diversification and time in the market.

If the future will be nothing like the past how do you know that diversification and time in market is the best?

What we have are some folks saying we don’t have enough data because there has only been 3-4 independent periods since 1920 (or whenever) and other folks saying that data from the 19th century is of little value…taken together that pretty much eliminates using historical data for anything.

So without using any historical data…show me that the BH three index fund passive investing strategy is better than picking individual stocks or using actively managed funds.

Good luck with that.

[AnEngineer]

Looking at history for its own sake is interesting, but I'm more keen to know how it applies to today. To that end I'm curious the extent to which different affects have caused bonds to outperform stocks:
1) stocks did very poorly
2) bonds benefited from falling interest rates
3) bonds were offered with high yields
4) something else

To the extent the answer is 3, I expect this should have no bearing on the investor now, as current yields available are not very high.

[willthrill81]

What I have learned from the past in terms of investing is that the future will be nothing like the past.

…

What's best? We have long had the answer - diversification and time in the market.

If the future will be nothing like the past how do you know that diversification and time in market is the best?

What we have are some folks saying we don’t have enough data because there has only been 3-4 independent periods since 1920 (or whenever) and other folks saying that data from the 19th century is of little value…taken together that pretty much eliminates using historical data for anything.

So without using any historical data…show me that the BH three index fund passive investing strategy is better than picking individual stocks or using actively managed funds.

Good luck with that.

Exactly. Completely ignoring the past when forming one's investment strategy is nigh on, if not completely, impossible.

[steve r]

The concern I have, without knowing, is if the treatment of the 2nd bank of the US is appropriate. Siegel did not include it. Should he have? IDK. It is not at all clear to me.

The question, I think most will agree, is important. At its peak, 2nd BUS accounted for 30 percent market cap. Thirty!

Wikipedia says it is a "private corporation with public duties." But, 20 percent of its capital was owned by the federal government. That is a lot. It was also highly dependent on the government for revenue and absolutely needed political support for its charter. I am sure we cannot discuss the politics around the banks charter (and its predecessor 1st Bank of U.S.).

That said, including 2nd BUS paints a different picture on stocks relative performance (and is perhaps actionable in terms of asset allocation.)

So I ask without knowing: apart from state pensions and the like -- how many other corporations in history have had the government as a major stake holder? Feel free to include ex-U.S. examples.

[McQ]

Looking at history for its own sake is interesting, but I'm more keen to know how it applies to today. To that end I'm curious the extent to which different affects have caused bonds to outperform stocks:
1) stocks did very poorly
2) bonds benefited from falling interest rates
3) bonds were offered with high yields
4) something else

To the extent the answer is 3, I expect this should have no bearing on the investor now, as current yields available are not very high.

Here is a partial answer to your question, with discussion below the chart.



The gray bars are the difference between the annualized returns over the trailing 10 years (stock minus bond). A negative bar means that bonds outperformed.

The answer as to why bonds outperformed when they did varies. Starting from the left:
1. High yielding case: after the war of 1812, with stocks taking it on the chin in the panic of 1819.
2. Stocks doing poorly: imperfect recovery after the Panic of 1837, when both assets had plunged; stocks held back by a railroad post-boom bust in the mid 1850s.
3. Another high yielding case: bonds rallying year after year after the Civil War, even as stocks suffered in the Panic of 1873 and the Panic of 1893.
4. Stocks doing poorly: after the Crash bottom in 1933, stocks briefly recovered most of their losses by the end of 1936, only to plunge anew in 1937-38, putting bonds back in the lead.
5. Briefly, in the late 1970s, stocks performing even worse than bonds.
6. And then, in 2008-09, stocks performing poorly.

In short: all kids of permutations and combinations can be found over even this all too short history. Sometimes stocks and bonds go up together, sometimes they go down together, and sometimes one suffers more than the other.

There is only a single clear one-off in the chart: 1945 - 1968, when stocks went up and up, and bonds went down and down, thus setting up Siegel's thesis. Otherwise, a see-saw.

[abuss368]

Jack Bogle would say we can’t stuff our cash under the mattress so what other choice do we have!

Invest for the long term as this too shall pass.

Best.
Tony

[McQ]

The concern I have, without knowing, is if the treatment of the 2nd bank of the US is appropriate. Siegel did not include it. Should he have? IDK. It is not at all clear to me.

The question, I think most will agree, is important. At its peak, 2nd BUS accounted for 30 percent market cap. Thirty!

Wikipedia says it is a "private corporation with public duties." But, 20 percent of its capital was owned by the federal government. That is a lot. It was also highly dependent on the government for revenue and absolutely needed political support for its charter. I am sure we cannot discuss the politics around the banks charter (and its predecessor 1st Bank of U.S.).

That said, including 2nd BUS paints a different picture on stocks relative performance (and is perhaps actionable in terms of asset allocation.)

So I ask without knowing: apart from state pensions and the like -- how many other corporations in history have had the government as a major stake holder? Feel free to include ex-U.S. examples.

You ask a good question. Discovery of the capitalization and price trajectory of the 2nd BUS was a major milestone in assembling my challenge to Siegel. How could his historical record have left out the largest single stock of the time? One that plunged from the $120s per share to just under $1.00 per share as the panic of 1837 bottomed out?

Note the careful phrasing, "his historical record": Siegel didn't decide to include the 2nd BUS, or exclude it. He did not collect any data himself, hence did not make any decisions of that kind. His genius was to concatenate series assembled by others. His current series (Goetzmann) is New York only; 2nd BUS traded in Philadelphia. His original stock series was from Smith and Cole (1935), one of whom later wrote a book on the 2nd BUS. They knew of it, and deliberately excluded it, because they were cycle theorists looking for lagged predictors of economic events. In deciding what stocks to include (they had price records for dozens more than the 7 they did include), they stacked charts on transparencies, and kept only the stocks that moved similarly to one another. 2nd BUS didn't make the cut, with its not-quite-unique but unusual price plunge.

But the new findings don't depend totally on the 2nd BUS. I also included the railroads that never paid a dividend, the canals destroyed by the railroad, the turnpikes destroyed by the canals; and the banks that failed in the Panic of 1819, as well as the other ones that failed in the Panic of 1837.

Funny story: 2nd BUS was my first discovery of "they left out the bad stuff." When I revised my pre-1871 series, I knew by then that plenty of other banks, from Philadelphia south and west through New Orleans, had also suffered severe declines in the Panic of 1837. And I was eager to add them, from new sources I had identified. And I did add a dozen or two, almost all of which declined more than the New York and Boston banks that had dominated the historical record to that point. Result: my estimate of stock returns improved from what it would have been, if I had stuck with just the 2nd BUS. Because most of these additions went down only 40%, 60% or 70%, not 99%.

Bottom line: having some government ownership is only one of many factors that make the antebellum stock market different (the history of the Union Pacific is on point here). I do not see how the historical record can exclude the largest capitalization stock of the era, with, I believe the largest number of stockholders.

[McQ]

...

What I have learned from the past in terms of investing is that the future will be nothing like the past. Complexity increases over time. The butterfly effect is real. This time (meaning every time) it really is different - increasing disintermediation, globalization, tech change, and endless and unpredictable environment and political black swans, make predicting what is the best asset class a fool's errand.
...

I agree, actually, and want to reiterate that the paper makes no predictions. It's about getting right all the different things that did happen in the past.

Note, however, that Siegel won acclaim for his assertion, and seeming demonstration, that the future (=stock returns in the present day) is exactly similar to the past (=stock returns before 1926 and the modern record).

It is Siegel you want to beat on, with his idea that stocks always go up 6.6% real, always have, always will, everywhere, everywhen, just hold on; and that stocks cannot and will not fall short of what bondholders might get over any lengthy period.

To me, the most pernicious effect Siegel had on the ordinary investor was the encouragement to regard investment in stocks as like a certificate of deposit, but paying higher rates. In his telling, hefty long term returns on stocks are about that certain, everywhere, everywhen.

[SimpleGift]

Looking at history for its own sake is interesting, but I'm more keen to know how it applies to today. To that end I'm curious the extent to which different affects have caused bonds to outperform stocks:
1) stocks did very poorly
2) bonds benefited from falling interest rates
3) bonds were offered with high yields
4) something else...

Rather than say that "bonds outperformed stocks" during the 1800 to 1940 historical period, Dr. McQuarrie's research would seem to indicate that bonds were an equal source of real return to stocks over that time period (chart below) — a point that Siegel's incomplete data and research entirely missed.

• 
  Source: McQuarrie

As to why bonds were an equal source of real returns before 1940 — but not after — one needs to look at the prevailing pattern of price changes in these two periods, I believe. From 1800 to the Second World War, the U.S. economy experienced a predominantly deflationary pattern of prices doubling around wars, and then falling back into deflationary cycles between wars (chart below). But after World War II and the demise of the gold standard, U.S. prices have shown a consistent inflationary trend.

• 
  Data source: McQuarrie.

Since U.S. monetary policy today is focused on maintaining a positive inflation regime, and avoiding deflation at all costs, it might be reasonable to assume that stocks in the future will continue to outperform bonds over long holding periods.

[McQ]

Per nigel_ht and others on this board, I spot you any nation that lost a war, and any nation that was invaded during one of the world wars, or suffered civil war, or collapsed in revolution, for the affected period.* I agree that none of those count when it comes to the question of, How bad could [US] stock returns get, and could they be lower than today's bond yields?

*I do not spot you returns in any such nation outside of the war period or for any neutral nation or any war victor. I more specifically reject nigel_ht’s contention that market returns in France post-1960 were an epiphenomenon of World War II and should be dismissed from the relevant set, as returns of a nation that lost a war.

Er what? I checked upthread and have no idea what you're talking about and only vaguely recollect other discussions about WWII.

At the risk of repeating myself and taking this thread down this odd tangent but since I've been mentioned by name:

Post war France through the 1960s certainly were an "byproduct of World War II" (sorry, I can't spell epiphenomenon).

I reproduce below portions of your June 21st post: viewtopic.php?p=6740112#p6740112

The earlier post is relevant to this thread, because it raises the question of whether bad stock returns cannot occur except through loss of a war or devastating invasion, making such instances irrelevant to the US investor at present.

In the paper under discussion in this thread, I asserted France 1960 – 2020 as one of the worst cases of negative equity premium, and not dismissible as a function of war & invasion.

Now in fairness, in the remarks below nigel_ht was responding to a later paper on sustainable withdrawal rates (https://papers.ssrn.com/sol3/papers.cfm ... id=4001986)

Be that as it may, on June 21st,

Post 1960s France was when the British and French realized they were no longer tier 1 powers after the Suez and from losing their colonies. Empires that lose their colonies tend to do poorly for a while. France lost Lebanon in 1943 and Syria in 1945. Cambodia, Laos and Vietnam by 1954, Morocco and Tunisia in 1956, French West Africa and French Equatorial Africa in 1960, Algeria in 1962 (after 8 years of war). Not a particularly stellar time for France.

And the Algerian war was significant...400,000 French troops were in Algeria by 1956 and 1.5m mobilized on the French side. It was a significant cause for the fall of the Fourth Republic in 1958. In April 1961 there was the coup attempt against de Gaulle. Not entirely "no civil war" even it mostly happened in Algeria...for France the Algerian War was the final fall of their empire after 15 years of rearguard wars and decline.

And arguably the cause of the fall of the French Empire was WWII. They started losing colonies during the war and never stopped until their empire was gone.

The equivalent scenario for the US is to start losing states and heading we're back down to our original 13 states. Those are our colonial holdings...yes, if this starts happening things will go poorly.

…

[later in the June 21st post}: The primary failure cases remain WWI, WWII, going communist and Nikkei crash.

But … my paper discussed in this thread focused on France in the decades from 1960 through 2020, sixty years after most of the events cited by nigel_ht.

To sum up our disagreement: I claim that stocks have occasionally performed poorly over long stretches, historically in the US, and also internationally, even after weeding out the war losers and those ravaged by wartime invasions.

Nigel_ht claims that any sobering shortfall in international stock returns can always be traced back to war loss, war invasion, civil war, or revolution. Insofar as none of those events are likely to befall the US any time soon, he contends that those historically recorded low international stock returns are not relevant for financial planning in the US.

Back to you, nigel_ht: how would you summarize our opposing points of view? I hope in your reply you will address France, Italy and Japan since 1960—all with zero to negative equity premia over the six decades through 2020, per the Credit Suisse yearbooks. And none of those occurring during wartime, as I understand the term.

[jabberwockOG]

What I have learned from the past in terms of investing is that the future will be nothing like the past.

…

What's best? We have long had the answer - diversification and time in the market.

If the future will be nothing like the past how do you know that diversification and time in market is the best?

What we have are some folks saying we don’t have enough data because there has only been 3-4 independent periods since 1920 (or whenever) and other folks saying that data from the 19th century is of little value…taken together that pretty much eliminates using historical data for anything.

So without using any historical data…show me that the BH three index fund passive investing strategy is better than picking individual stocks or using actively managed funds.

Good luck with that.

diversification and time in the market - sorry I thought it did not need to be spelled out - this method admits that there is no way to predict where and when to invest so we invest in a wide range of assets in a diversified portfolio and accept the average returns of the market over time.

[nigel_ht]

Per nigel_ht and others on this board, I spot you any nation that lost a war, and any nation that was invaded during one of the world wars, or suffered civil war, or collapsed in revolution, for the affected period.* I agree that none of those count when it comes to the question of, How bad could [US] stock returns get, and could they be lower than today's bond yields?

*I do not spot you returns in any such nation outside of the war period or for any neutral nation or any war victor. I more specifically reject nigel_ht’s contention that market returns in France post-1960 were an epiphenomenon of World War II and should be dismissed from the relevant set, as returns of a nation that lost a war.

Er what? I checked upthread and have no idea what you're talking about and only vaguely recollect other discussions about WWII.

At the risk of repeating myself and taking this thread down this odd tangent but since I've been mentioned by name:

Post war France through the 1960s certainly were an "byproduct of World War II" (sorry, I can't spell epiphenomenon).

I reproduce below portions of your June 21st post: viewtopic.php?p=6740112#p6740112

The earlier post is relevant to this thread, because it raises the question of whether bad stock returns cannot occur except through loss of a war or devastating invasion, making such instances irrelevant to the US investor at present.

In the paper under discussion in this thread, I asserted France 1960 – 2020 as one of the worst cases of negative equity premium, and not dismissible as a function of war & invasion.

Certainly the further you move away from 1960 the less impact WWII has in the French.

On the other hand:



Now this isn’t a chart on equity premium but it doesn’t strike me as poor performance through 2000.

Be that as it may, on June 21st,

Post 1960s France was when the British and French realized they were no longer tier 1 powers after the Suez and from losing their colonies. Empires that lose their colonies tend to do poorly for a while. France lost Lebanon in 1943 and Syria in 1945. Cambodia, Laos and Vietnam by 1954, Morocco and Tunisia in 1956, French West Africa and French Equatorial Africa in 1960, Algeria in 1962 (after 8 years of war). Not a particularly stellar time for France.

And the Algerian war was significant...400,000 French troops were in Algeria by 1956 and 1.5m mobilized on the French side. It was a significant cause for the fall of the Fourth Republic in 1958. In April 1961 there was the coup attempt against de Gaulle. Not entirely "no civil war" even it mostly happened in Algeria...for France the Algerian War was the final fall of their empire after 15 years of rearguard wars and decline.

And arguably the cause of the fall of the French Empire was WWII. They started losing colonies during the war and never stopped until their empire was gone.

The equivalent scenario for the US is to start losing states and heading we're back down to our original 13 states. Those are our colonial holdings...yes, if this starts happening things will go poorly.

…

[later in the June 21st post}: The primary failure cases remain WWI, WWII, going communist and Nikkei crash.

But … my paper discussed in this thread focused on France in the decades from 1960 through 2020, sixty years after most of the events cited by nigel_ht.

This isnt really true. You paper didn’t “focus on France in the decades from 1960 through 2020”…instead, your paper focused on RMD and should have been around 10 pages long for that topic.

The parts we’re talking about start on page 17 in the section labeled “Worst Case Returns” and starts with 1926 US.

We get to “Global Results” around page 21.

The closet historical example for the US doesn’t happen until page 27 with Failed Hegemon and the fall of the UK.

Italy starts on page 28 and is essentially inflation sucks which is true. But Italy is economically about the size of New York.

And here is the start of your section on France (page 30):

“France was not immune to the general post-1960 malaise on the European continent; but inflation for 1960- 77 in France ran just over 6% annualized, much less than in Italy, and less than the worst seventeen years seen in the US in 1966-1983. Nonetheless, French investors who retired in 1960 fared poorly, despite experiencing only moderately high inflation. ”

So the context of our discussion in that other thread starts with the French 1960 retirement cohort which is immediately after the fall of the French Empire…

I didn’t see the results for the 1970 or 1980 French cohorts in your paper…so unless I missed it really your French section concentrates on 1960...

Nigel_ht claims that any sobering shortfall in international stock returns can always be traced back to war loss, war invasion, civil war, or revolution.

Nope. Remember my comments were in context of a thread titled “The day the 4% rule died”

Never claimed anything about “sobering shortfall in international stock” (other than perhaps resigned whining about my VXUS allocation) but instead my position was that the extremely low global SWR values tossed about are the result of war loss, civil war or revolution.

When you remove these cases global swr rates are lower than the US but not catastrophically so that SWR as a tool becomes meaningless.

I also claim that the US, being the dominant global power, is insulated from some effects in ways that smaller countries like Italy are not and that using these countries aren’t representative for the US.

Insofar as none of those events are likely to befall the US any time soon, he contends that those historically recorded low international stock returns are not relevant for financial planning in the US.

Back to you, nigel_ht: how would you summarize our opposing points of view? I hope in your reply you will address France, Italy and Japan since 1960—all with zero to negative equity premia over the six decades through 2020, per the Credit Suisse yearbooks. And none of those occurring during wartime, as I understand the term.

I would summarize it as the impacts of WWI and WWII are much wider than you assumed in your paper, that the countries you selected were generally not comparable to the US and the best historical case study is the UK…but it required 2 world wars, a Great Depression and decolonization to bring her down, and finally that from September 1966 thru December 2007 the US equity risk premium averaged -0.91% and was negative 76.9% of the months for those 42.25 years so this does not appear to be the driving factor for SWR as opposed to local inflation rates.

This can be seen when you look at the SWR rates using the same portfolio as a US investor while using that country’s inflation rate.



I would also recommend folks read the article on Portfolio Charts if they are still interested in this topic:

https://portfoliocharts.com/2017/06/09/ ... awal-rate/

Oh, and yes, it is my opinion that until the US loses its significant financial advantages (reserve currency, largest economy, superpower, etc) the US stock market and retiree is more insulated from negative effects than most international markets enjoy.

[nigel_ht]

What I have learned from the past in terms of investing is that the future will be nothing like the past.
…
What's best? We have long had the answer - diversification and time in the market.

If the future will be nothing like the past how do you know that diversification and time in market is the best?

What we have are some folks saying we don’t have enough data because there has only been 3-4 independent periods since 1920 (or whenever) and other folks saying that data from the 19th century is of little value…taken together that pretty much eliminates using historical data for anything.

So without using any historical data…show me that the BH three index fund passive investing strategy is better than picking individual stocks or using actively managed funds.

Good luck with that.

diversification and time in the market - sorry I thought it did not need to be spelled out - this method admits that there is no way to predict where and when to invest so we invest in a wide range of assets in a diversified portfolio and accept the average returns of the market over time.

Except it's not a wide range of assets but US large cap, International large cap and US bonds/treasuries. The construction of the BH 3-fund portfolio is based on observations of historical performance/what worked in the past.

For the more generic diversification and time in market method...without historical data how do you know that passive time in market AA works better than momentum trading? How do you know that cap weight is better than equal weight for diversification? How do you know if some market or sector doesn't simply outperform all other market or sectors over long periods so concentration outperforms diversification?

Economic and investment theory are largely based on characterization of observations and/or validated by comparing against actual historical results.

Once you start "spelling it out" it becomes "obvious" that everything we believe about investing is based on the assumption that the future, in broad strokes at least, will look at least somewhat like the past.

Once you diverge too far from that...it hard to make any reasoned decisions on investing.

[rockstar]

The book Bull that covers just past the dotcom burst questions stocks for the long run. This isn’t anything new. There are periods where stocks provided horrible returns.

[McQ]

...

I would be curious to know how the Dow Jones Industrial average became the only one commonly cited, and how it became taken as a measure for "the stock market" as a whole.

I still don’t have a really good answer for you Nisiprius. But I have a better answer than when you raised the question last summer.

1. Dow Jones has a first mover advantage, dating back to 1885; and a powerful newspaper at their back. (I don’t understand Dow Theory to be the driver of the introduction, but rather, a later use of the data. The early indexes only or mostly had transportation (railroad) stocks). The goal was a simple index of whether the market went up or down yesterday that the reporter writing the “market action” column could point to.

2. Standard Statistics didn’t launch their index until the later 1920s, back dated to December 1925. And they published results in a quarterly bulletin, not a daily newspaper. Hathitrust.org has some early issues of the bulletin.

3. OTOH, as early as 1935, the Security and Exchange Commission research effort on mutual funds chose the Standard Statistics index as their benchmark for fund performance.

4. Until very recently, no Dow Jones index recorded total return. They were price indexes, designed to track daily movements in stock prices—eminently suitable for a daily newspaper, where annual total return was not an issue.

5. In 1946, the Wiesenberger mutual fund yearbooks (Morningstar before there was Morningstar) mentioned the Dow Jones composite but applied the S&P 90 as the index for benchmark returns to evaluate mutual fund performance 1937 - 1945. But by the 1950s, Wiesenberger was back to using the Dow Jones Composite.

6. After 1940, my understanding is that mutual funds had to file reports with the SEC showing performance against a benchmark. (Is that correct? Anyone have the relevant section of the Investment Company Act of 1940 to hand?) With no dividends on the Dow Jones average, Standard & Poor’s became the obvious choice for a mutual fund benchmark. (Standard Statistics merged with Poor’s Publishing in 1941). Henry Varnum Poor’s 1860 publication was perhaps the first book length publication of stock returns, and the Poor’s manuals dominated 19th century records of stock earnings and performance. But by 1941 Poor’s was deep into obsolescence, and Standard Statistics was young and aggressive—a business biography yet to be written.

7. So now it is the 1950s. Mutual fund ownership explodes; investors see the S&P index over and over in their annual reports. S&P is an index provider competing for revenue—an agent, not a passive bystander in this dogfight for recognition. The NY Times and other media competitors perhaps wanted an alternative to an index owned by a newspaper competitor. Slowly the landscape starts to shift.

8. The first Stocks Bonds Bills and Inflation account is published in 1976. It uses the S&P index to estimate long term returns.

9. By the 1980s, and the explosion of IRAs etc., and the mass diffusion of investing, academics are all in on the S&P index. There is still no total return metric available on the Dow Jones index.

10. By the 1990s, if a journalist, or a Bill Bernstein, wants to write a sentence like “Since 1926 stocks have …” then you have to report the S&P index. No alternative. No point in showing price appreciation without dividends, per Dow Jones.

11. In the 1960s Fisher and Lorie, founders of CRSP, could still report returns on an equal weight index, and defend the choice. Dow Jones price indexing was just another approach to index construction, not obviously bad or wrong or weird. The dominance of capitalization-weighting had not yet set. Once it did, the S&P index again became the preferred choice

12. As cap weighting became the intellectual standard, and once journalists began reporting one year and n-year total returns, there really was no alternative to the Standard & Poor’s index.

Thought experiment in 2022. You’ve been given a grant to conduct a poll of how investors keep track of whether their stocks are doing well. The poll question is,
[Qualifier: do you own stocks or mutual funds?] If yes:
How do you know whether your portfolio is having a good day or bad day? (Select the one indicator you most often reference during days the market is open)
A. Dow Jones index up or down
B. S&P 500 index up or down
C. Russell 3000 index up or down
D. Wilshire 5000 index up or down
E. I use a portfolio tracker showing my exact holdings and their change in value updated in real time

I think Dow Jones would still get a plurality among the general investor population (not Bogleheads) here in 2022…

[Zeno]

...

I would be curious to know how the Dow Jones Industrial average became the only one commonly cited, and how it became taken as a measure for "the stock market" as a whole.

I still don’t have a really good answer for you Nisiprius. But I have a better answer than when you raised the question last summer.

1. Dow Jones has a first mover advantage, dating back to 1885; and a powerful newspaper at their back. (I don’t understand Dow Theory to be the driver of the introduction, but rather, a later use of the data. The early indexes only or mostly had transportation (railroad) stocks). The goal was a simple index of whether the market went up or down yesterday that the reporter writing the “market action” column could point to.

2. Standard Statistics didn’t launch their index until the later 1920s, back dated to December 1925. And they published results in a quarterly bulletin, not a daily newspaper. Hathitrust.org has some early issues of the bulletin.

3. OTOH, as early as 1935, the Security and Exchange Commission research effort on mutual funds chose the Standard Statistics index as their benchmark for fund performance.

4. Until very recently, no Dow Jones index recorded total return. They were price indexes, designed to track daily movements in stock prices—eminently suitable for a daily newspaper, where annual total return was not an issue.

5. In 1946, the Wiesenberger mutual fund yearbooks (Morningstar before there was Morningstar) mentioned the Dow Jones composite but applied the S&P 90 as the index for benchmark returns to evaluate mutual fund performance 1937 - 1945. But by the 1950s, Wiesenberger was back to using the Dow Jones Composite.

6. After 1940, my understanding is that mutual funds had to file reports with the SEC showing performance against a benchmark. (Is that correct? Anyone have the relevant section of the Investment Company Act of 1940 to hand?) With no dividends on the Dow Jones average, Standard & Poor’s became the obvious choice for a mutual fund benchmark. (Standard Statistics merged with Poor’s Publishing in 1941). Henry Varnum Poor’s 1860 publication was perhaps the first book length publication of stock returns, and the Poor’s manuals dominated 19th century records of stock earnings and performance. But by 1941 Poor’s was deep into obsolescence, and Standard Statistics was young and aggressive—a business biography yet to be written.

7. So now it is the 1950s. Mutual fund ownership explodes; investors see the S&P index over and over in their annual reports. S&P is an index provider competing for revenue—an agent, not a passive bystander in this dogfight for recognition. The NY Times and other media competitors perhaps wanted an alternative to an index owned by a newspaper competitor. Slowly the landscape starts to shift.

8. The first Stocks Bonds Bills and Inflation account is published in 1976. It uses the S&P index to estimate long term returns.

9. By the 1980s, and the explosion of IRAs etc., and the mass diffusion of investing, academics are all in on the S&P index. There is still no total return metric available on the Dow Jones index.

10. By the 1990s, if a journalist, or a Bill Bernstein, wants to write a sentence like “Since 1926 stocks have …” then you have to report the S&P index. No alternative. No point in showing price appreciation without dividends, per Dow Jones.

11. In the 1960s Fisher and Lorie, founders of CRSP, could still report returns on an equal weight index, and defend the choice. Dow Jones price indexing was just another approach to index construction, not obviously bad or wrong or weird. The dominance of capitalization-weighting had not yet set. Once it did, the S&P index again became the preferred choice

12. As cap weighting became the intellectual standard, and once journalists began reporting one year and n-year total returns, there really was no alternative to the Standard & Poor’s index.

Thought experiment in 2022. You’ve been given a grant to conduct a poll of how investors keep track of whether their stocks are doing well. The poll question is,
[Qualifier: do you own stocks or mutual funds?] If yes:
How do you know whether your portfolio is having a good day or bad day? (Select the one indicator you most often reference during days the market is open)
A. Dow Jones index up or down
B. S&P 500 index up or down
C. Russell 3000 index up or down
D. Wilshire 5000 index up or down
E. I use a portfolio tracker showing my exact holdings and their change in value updated in real time

I think Dow Jones would still get a plurality among the general investor population (not Bogleheads) here in 2022…

Fascinating history and analysis of the same, McQ. Thank you.

Another profound conclusion from your post: just how different the recent past was — and in your context, it is the changing legal and regulatory environment. And in just one country no less.

Folks here post about returns in 1970 or whatever, and do simplistic comparative calculations to compare those times to, say, 2021. Or worse, draw conclusions about what those post Vietnam War era returns (with the war always referenced as the “cause”) mean for a portfolio return in the year 2035.

Reality — existence — is of course much more complicated. And the future will never be like the past. It can’t be. This stuff is hard. People making binary, simplistic claims aren’t doing analysis.

So thank you for regrounding us in how hard all of this is.

Back to your post: Section 30 of the Investment Company Act of 1940 deals with reporting: https://www.govinfo.gov/content/pkg/COM ... S-1879.pdf. As expected, the statutory language is fairly generic, leaving it to the administrative regulator to flesh out the specifics via regulation. I’m not a securities lawyer, but love tracking stuff like this down. So I hereby volunteer to be your legal researcher. I will poke around in the SEC regulations from that period and report back.

[nigel_ht]

...Count me among those that don't find financial data from the 19th century at least to be very useful in any meaningful way to that of the 21st century for many reasons...

To my mind it is a truly unsolvable problem.

It's made even more unsolvable by the fact that financial data, if not as bad as the Cauchy distribution, "settles down" more slowly with increasing sample length than Gaussian data would.

So long before you have enough data to overcome sampling error, you are into periods of time where nobody can seriously believe "the stock market" is really the "same thing" over the entire period.

So you're telling me that 800 years from now, when we finally have 30 non-overlapping 30 year periods of post-Federal Reserve data, that the folks pounding the 'only non-overlapping periods count' drum will be outnumbered by folks like me?

By that time the average retirement will be 100 years and you’ll be down to 9 non-overlapping periods, most of which, according to purists, won’t count because they are pre-warp economies that didn’t use gold pressed latinum as interstellar currency.

Of course, only the Ferengi members of the board will care…

[Zeno]

Exhibit A

[JDave]

That's the reason many have a big chunk of their assets in direct real estate.

I'd be curious as to how direct real estate has correlated to stocks in places and during periods where stocks did poorly over long periods. I'm guessing that real estate would also have done poorly, but I don't know that.

Not really. Take a look at the Israeli stock market, for example. The nominal annual return over the last 15 years has been a little over 3%, while real estate in Tel Aviv has gone up by double that rate (over 6%/yr). Similarly, look at coastal California real estate during the financial crisis and other periods when the US stock market was doing poorly. Stocks fell 50% during the financial crisis, but real estate dropped only 15% in the core parts of the Bay Area, for example. Highly desirable locations tend to be persistent and robust. There always seem to be enough people with the means to drive up prices in such areas with a chronic supply/demand imbalance.

Cherry picking in the extreme.

[nigel_ht]

That's the reason many have a big chunk of their assets in direct real estate.

I'd be curious as to how direct real estate has correlated to stocks in places and during periods where stocks did poorly over long periods. I'm guessing that real estate would also have done poorly, but I don't know that.

Not really. Take a look at the Israeli stock market, for example. The nominal annual return over the last 15 years has been a little over 3%, while real estate in Tel Aviv has gone up by double that rate (over 6%/yr). Similarly, look at coastal California real estate during the financial crisis and other periods when the US stock market was doing poorly. Stocks fell 50% during the financial crisis, but real estate dropped only 15% in the core parts of the Bay Area, for example. Highly desirable locations tend to be persistent and robust. There always seem to be enough people with the means to drive up prices in such areas with a chronic supply/demand imbalance.

Cherry picking in the extreme.

It’s the difference between the experience of a smaller entity and the average of a larger one.

California is economically the size of the UK, Texas about the size of Italy, Colorado the size of Israel. Maybe the Bay Area and Singapore.

Individual states are more likely to see extremes than the US overall...just because California might be seeing a real estate boom but states in the central US isn’t so it evens out a bit.

So these scenarios are real but probably not applicable across the entire US…especially for something like RE that tends to be very local anyway…

[nigel_ht]

I think Bogle believed that, over the very long-term, bonds probably returned the same as stocks. As we saw in the 19th century (although there are plenty of other factors), these things can play out over long periods. I do wonder, if it weren't for the monopolistic practices Big Tech's been able to get away with in the west, how our 21st century stock market returns might look, despite all that stimulus(?).

You mean in comparison to the monopolistic practices of the East India Company or Standard Oil?

Big Tech are extremely mild in comparison to historical companies...

[Logan Roy]

I think Bogle believed that, over the very long-term, bonds probably returned the same as stocks. As we saw in the 19th century (although there are plenty of other factors), these things can play out over long periods. I do wonder, if it weren't for the monopolistic practices Big Tech's been able to get away with in the west, how our 21st century stock market returns might look, despite all that stimulus(?).

You mean in comparison to the monopolistic practices of the East India Company or Standard Oil?

Big Tech are extremely mild in comparison to historical companies...

Well the age of those businesses was the age of stocks underperforming treasuries, and always being on the verse of deflation. I think the first big attempt to regulate monopolies was the Clayton Act, 1936(?). So these features align with a very good period for capitalism.

Apple and Amazon are among the very few individual stocks I own. I'm a huge fan of the products, and compared to the 80s and 90s, when there were dozens of different tech standards, I love that everyone(*) knows how to use an iPhone. But I also know how unfairly creators and traders on these platforms are treated, and that it's not good for capitalism or society. I don't know that the East India Company could determine an election result or affect the thinking and beliefs of an entire demographic as easily as a company like Meta can.

[McQ]

...

So thank you for regrounding us in how hard all of this is.

Back to your post: Section 30 of the Investment Company Act of 1940 deals with reporting: https://www.govinfo.gov/content/pkg/COM ... S-1879.pdf. As expected, the statutory language is fairly generic, leaving it to the administrative regulator to flesh out the specifics via regulation. I’m not a securities lawyer, but love tracking stuff like this down. So I hereby volunteer to be your legal researcher. I will poke around in the SEC regulations from that period and report back.

Much obliged, Zeno. And thank you for that link to the text of the Act. It's clear that section 30 doesn't call for comparison to an index benchmark.

Over at mutualfundobserver.com, yogibearbull sent me this link:

"Funds follow the current SEC Form N-1A that has been revised over the years. This Form includes what the SEC thinks should be included by the funds now and probably doesn't include anything that would violate/contradict the letter or spirit of the ICA 1940.
https://www.sec.gov/about/forms/formn-1a.pdf"

If you follow that link, it is clear that today, the SEC *does* require comparison of fund performance to a broad index in annual reports (Item 27). So one way to proceed is to track earlier versions of Form N-1A, jumping first to the 1940s, if possible, and if no index comparison there at the beginning, then to a midpoint, like 1980, and then triangulating in front of 1980 or in back, depending on whether the index requirement was in place by then.

In that effort, does anyone here at Bogleheads have a mutual fund annual report from the 1940s, 1950s, or 1960s? Best if it's not a Bogle fund, as he might have been an early pioneer of index comparisons. Love to see an image of the performance reporting section if you do.