To reiterate my comment another time this was posted in a comment thread:
I feel this graphic, while informative and delightful, is insidious in its choice of scale and its lack of comparisons.
On scale, it colors +3% to +7% real returns as "neutral". This makes it seem like the stock market is sometimes good sometimes bad but overall it may as well be just okay. I feel that 0% nominal returns, or even 0% real returns, is more honest as a neutral anchor, and even with the latter it would need some comparisons against other asset classes to paint an accurate picture.
On comparisons, it does a disservice to its readers by not adding a tab showing bond yields and a tab showing cash/treasury yields (which would be dark red across the board except light red around 1930).
These slights in the graphic unfairly make the stock market look unfavorable and makes the suboptimal strategy of keeping your money out of the market seem much more favorable than it is.
Adding a specific example, the "worst 20 years" is 1961 to 1981 with a BIG RED -2.0% a year, as if someone loses money and in retrospect would have been better stowing cash away under one's mattress. According to the BLS[1], US inflation was 5.7% over that period, so the mattress strategy yields at best -5.7% in real returns, not at all better than investing in the S&P.
True. Bond yields would be super useful. In 1961, 10yr US treasury yields were 3.84%, and in 1971 they were 6.24%, so you'd have made some 5% nominally by rolling (I don't have 20yr yields at hand), or -0.7% in real terms, beating equity handily.
So, for that period, treasuries > shares > cash.
HOWEVER, I think the chart is not so useful (or intended) as a decision aid for asset allocation (equity/debt/...), but quite good to disabuse people of that notion that "over the long term, you can't lose with equities", or the idea that you can pretty much rely on a 6% real return on your savings.
These returns are before taxes. There is no inflation discount on taxes so your real after tax returns can be negative with a 1% nominal ROI.
Further people don't really invest all their money in year X, and then take it all out in year Y. Cost dollar averaging helps returns and needing to take money out to live off of in down years hurts returns.
Finally the baseline is not the mattress strategy, it's spending all your money now and investing nothing.
You're missing that there are other investment options.
My college expenses were largely paid for with US Savings Bonds which paid between 4-9%. I cashed in the last one, which ceased paying 9% interest in 2011. My ING Direct 5%, 10-year CD matured last year.
The problem is is with this weird never-land world where we're printing money with no inflation, it's difficult to make money anywhere. My son's 529 plan is in a basket of volatile stock and bond funds. I'll probably make a similar return to my dad's savings bond portfolio, but at substantially higher risk.
Also, it does not seem to be an accident that they have chosen the range 3% to 7%. The historic average excess return of stocks vs. government bonds is 6.5%. If their range was 2% to 6%, the graphic might look very different.
It's interesting to note that at the beginning of the best periods to invest (the big green regions on the graph, like 1942-1960s or 1980s-2000), the stock market was often not just low in terms of broad valuation. It was just "empty". It had typically gone through many years of very little participation, little activity and low liquidity.
E.g. in 1980 the (Belgian) stock market was pretty much comatose. The typical stock owners were wealthy families, often holding their family fortune as a large stake in a single company. To most non-financial people in 1980, owning public common stock would have been something from a bygone era. They didn't consider it an option.
Rather, people in 1980 were standing in line to buy gold coins. People then feared that Volcker's dramatic rate hikes would cause severe problems. When the stock market sprang to life in early and mid 80s, back offices were often not able to keep pace and doing transactions could be cumbersome.
Compare this with 2016, where central bankers are walking on egg shells to hike rates with as little as 0.25%. Stocks and bonds are more expensive than ever. Yet almost everybody I know has a trading account. Regular people can trade advanced derivatives with minimal hassle. Every time I visit a bank, I see desks and booths filled with people getting talked into investing their savings into various kinds of "high" yielding constructions. Because "TINA".
Feels to me like the worst time to invest. 36 years of buy-the-dip reinforcement learning. But then again I've felt like this for years.
You've been right for years. Easy money has kept things stable but starting from right now, if you invest in stocks and bonds and hold for 20 years, you should expect pretty low returns. Everything is expensive
Except there are alternatives, there are plenty of alternatives, and in the year 2046 your successor is going to be writing the same post as this one cleverly pointing out how the assets to be in during the 2010s had comparatively little activity and little liquidity.
If you're interested in an alternative to the traditional suggestions, I'd suggest the derivative-trading approach you can find espoused at tastytrade.com. It's not for those who don't want to learn and engage though.
And that's the S&P 500, based on American stock exchanges, which have probably had the best & most consistent returns over the past 100 years than stock exchanges everywhere else.
The past 100 years witnessed the rise of American domination of global business. Even if American business stays dominant, there's probably less growth from #1 -> #1 then there was during the rise to #1. And that's a big if.
In other words, the future returns of the S&P 500 is probably going to look more like the returns of a basket of international stock markets over the past 100 years than it will look like the returns of the S&P 500 over the past 100 years.
Many people believe that since the S&P 500 has never lost money over any 10 year period that it's never going to do so. It may be highly unlikely, but if you keep rolling those dice eventually you're going to come up snake eyes.
> "S&P has never lost money over any 10 year period"
Investing a dollar in 1929 meant 20 bad years. Sitting on that dollar for 3 years and investing it in 1932 meant no bad years.
If I look at some expectations and common beliefs that people hold in 2016, I can't help but wonder whether we have one of those 20 bad year periods coming up.
(By the way, part of the success of US assets is definitely related to American companies leading the way in business innovation like IT. But another part is related to the US running trade deficits and the dollar being the reserve currency, meaning large amounts of dollar liquidity flooded back into the US and mostly into its financial system.)
The real question is your investing period. I'm 48; my 90% life expectancy is around 90. So, yes, I make the assumption that I'll get around 3% after inflation, taxes, etc.
CAPE (aka price-to-ten-year-earnings, PE10[1]) helps devising a rule of thumb for timing.
Stocks don't deviate from their expected earnings for long, so when the ratio jumps over the median PE10, the market becomes expensive.
Holding cash during the period of high PE10 and investing it in stocks under low PE10 is a good idea for a person who's saving for retirement and doesn't want to become a professional investor.
I found this Vanguard report that considered 15 popular metrics used to predict returns (and 1 control: rainfall). CAPE did indeed perform best, explaining ~43% of variance. I'm not an expert at finance or statistics, but I'm finding it an interesting read.
It's really important to remember that these are inflation adjusted returns, meaning that in most cases, if you were not invested, you would have lost even more money than this graphic indicates.
While there are total return (i.e. with dividends re-invested) and net total return (i.e. with dividends partially re-invested, as if after tax) versions of the S&P 500, they're almost never quoted.
The German DAX is the only major index I can think of that's primarily quoted as a total return index.
The problem is that you and I don't have access to the best hedge funds and the best private equity funds and even the best real estate deals.
You need real money, or connections, or a long investment history with a specific VC/PE firm to get into the most lucrative opportunities.
Endowments have very different requirements than many investors. They need the money to last forever, and they need it not to dip too precipitously during the downswings.
Shouldn't this be compared to an alternative like buying bonds or holding the money in an average bank account? If inflation ate up the gains from the index value increase, wouldn't the same be true for other forms of investment?
"The Standard & Poor’s 500-stock index has posted double-digit gains for the second year in a row. But the index is still below where it was in early 1999."
Right, there are two questions: "What should I invest in?" and "How much do I need to save?".
In answering the first question inflation-adjusting is useless because inflation hits all investments equally, but in answering the second you do need to adjust for inflation.
Investors often have expectations of real annual returns greater than 7 percent — the areas in green. But over 20 years or longer, rates that high are rare.
The 7% annual return figure may be related to something Warren Buffet said around 2013:
The economy, as measured by gross domestic product, can be expected to grow at an annual rate of about 3 percent over the long term, and inflation of 2 percent would push nominal GDP growth to 5 percent, Buffett said. Stocks will probably rise at about that rate and dividend payments will boost total returns to 6 percent to 7 percent, he said.” [1]
Note that Buffet's 6-7% estimate is for nominal annual returns. His estimate of real annual returns is 4-5%
There was a recent McKinsey study [2] also describing a likely long-term scenario of 4% real returns on US equities.
Note that these are returns on equities, which is considered to be the riskiest asset class in a traditional investment portfolio. A balanced portfolio of equities and bonds is expected to have a long-term annual nominal return of just 4-4.5% (corresponding to an annual real return of 2-2.5%) [3]
Pension funds and endowments typically invest in a mix of equities and bonds. These pension funds are structured by actuaries who have made outrageously optimistic assumptions about future returns, with the average US state pension plan assuming a 7.69% nominal annual return. [3] In a rare public admission, in 2008 a pension actuary for New York State declared his work to be "a step above voodoo." [4] In a more recent dose of reality, it was disclosed by Calpers that the public pension fund earned a return of 0.6% in 2015. [5]
Also, note that individual investors do not earn the "average long-term return" (which is just a theoretical number). Actual returns experienced by individual investors are more volatile and highly sensitive to the timing of when the started and finished invested. This timing is completely out of an individual's control, it is based on when a person was born and when they reach retirement age. One way to think about this problem is, what would be the cost of insuring investors against this "timing" volatility? Based on current market rates and some back of the envelope calculations, the rough answer is that it costs about 1.5 to 2% per year to buy such protection on a balanced portfolio. Once you deduct the insurance expense from the expected 2-2.5% real return, you are left with an expected 0% to 1% annual real return. To put this in perspective, a $100,000 investment compounding at 1% for 20-years would earn just $22,000 over 20 years. Meanwhile, "millennials" are apparently banking on a 10% annual return on their investments. [6]
What all this says to me, personally, is that the traditional narrative of individual "retirement," "saving" and "investment" is a delusion. There is no "safe," "slow and steady" approach for lower and middle-class people to build up for financial survival later in life. A different kind of strategy is needed, one that is based on higher risk taking. This is one reason that I think doing a startup makes a lot of sense for people who are talented - better to take a big risk, invest yourself, amp up the risk massively, and then work extremely hard and gradually "derisk" by doing all the things that good startups do. This probably has better odds of a successful "retirement" than the traditional idea of working in a corporate job and trying to climb the overcrowded corporate ladder while saving little by little in a defined contribution group pension plan.
1. Agreed that people today banking on returns of 10%, or even 6%, are quite likely to be disappointed. I'd plan with a 3% real return assumption, and put in a substantial buffer, and also plan with at most 3% safe withdrawal rate (see Trinity study [1]).
2. This in turn means that you have to accumulate, say, at least $1m (in today's dollars) at retirement, to live on a modest $2500 a month.
3. This in turn means that you have to put aside basically $1100 a month for 40 years.
3b. In other words, whatever your target retirement income stream is, you'll have to set aside about half of that over your working life.
3c. Another way of looking at it is that you should put basically a quarter to a third of your income into retirement saving.
4. Disagree that startups are the best option for most people. While the average return might be high, this is skewed by a few super successful ones. I posit that the median return is rather mediocre. Thus, startup might maximise your chance to retire super early and opulently. However, to maximise your chance to reach a certain (more modest) level of retirement income, living frugally with a "normal" well paying job might be best.
5. A further problem I see with your "startup" suggestion is that it cannot work for everyone - if everyone pursued startups, there'd be no one to run the actual economy.
However, if everyone reduced their consumption and ramped up their savings rate as much as I'd suggest, the economy would most likely collapse, as well. So, I dunno.
I miss d3.js at nyt. I would consider a few dollars a month if digital media meant digitally interactive. same goes for you Economist. let's agree to use the power of the web for all our web publishing, not just some of it.
It might have been useful to see a comparison of active-portfolio versus buy and hold (not the chart's stated purpose). Also, to someone who doesn't invest or who doesn't think about compound interest issues, a 4% annual return builds fairly quickly, so the chart's implicit conclusion may seem more bleak than it really is.
[+] [-] cairo140|9 years ago|reply
I feel this graphic, while informative and delightful, is insidious in its choice of scale and its lack of comparisons.
On scale, it colors +3% to +7% real returns as "neutral". This makes it seem like the stock market is sometimes good sometimes bad but overall it may as well be just okay. I feel that 0% nominal returns, or even 0% real returns, is more honest as a neutral anchor, and even with the latter it would need some comparisons against other asset classes to paint an accurate picture.
On comparisons, it does a disservice to its readers by not adding a tab showing bond yields and a tab showing cash/treasury yields (which would be dark red across the board except light red around 1930).
These slights in the graphic unfairly make the stock market look unfavorable and makes the suboptimal strategy of keeping your money out of the market seem much more favorable than it is.
Adding a specific example, the "worst 20 years" is 1961 to 1981 with a BIG RED -2.0% a year, as if someone loses money and in retrospect would have been better stowing cash away under one's mattress. According to the BLS[1], US inflation was 5.7% over that period, so the mattress strategy yields at best -5.7% in real returns, not at all better than investing in the S&P.
[1] - http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=1&year1=1961&ye...: $1 in 1961 was $3.04 in 1981, 3.04^(1/20) = 1.057
[+] [-] FabHK|9 years ago|reply
So, for that period, treasuries > shares > cash.
HOWEVER, I think the chart is not so useful (or intended) as a decision aid for asset allocation (equity/debt/...), but quite good to disabuse people of that notion that "over the long term, you can't lose with equities", or the idea that you can pretty much rely on a 6% real return on your savings.
[+] [-] Retric|9 years ago|reply
Further people don't really invest all their money in year X, and then take it all out in year Y. Cost dollar averaging helps returns and needing to take money out to live off of in down years hurts returns.
Finally the baseline is not the mattress strategy, it's spending all your money now and investing nothing.
[+] [-] Spooky23|9 years ago|reply
My college expenses were largely paid for with US Savings Bonds which paid between 4-9%. I cashed in the last one, which ceased paying 9% interest in 2011. My ING Direct 5%, 10-year CD matured last year.
The problem is is with this weird never-land world where we're printing money with no inflation, it's difficult to make money anywhere. My son's 529 plan is in a basket of volatile stock and bond funds. I'll probably make a similar return to my dad's savings bond portfolio, but at substantially higher risk.
[+] [-] Hermel|9 years ago|reply
[+] [-] unknown|9 years ago|reply
[deleted]
[+] [-] unknown_apostle|9 years ago|reply
E.g. in 1980 the (Belgian) stock market was pretty much comatose. The typical stock owners were wealthy families, often holding their family fortune as a large stake in a single company. To most non-financial people in 1980, owning public common stock would have been something from a bygone era. They didn't consider it an option.
Rather, people in 1980 were standing in line to buy gold coins. People then feared that Volcker's dramatic rate hikes would cause severe problems. When the stock market sprang to life in early and mid 80s, back offices were often not able to keep pace and doing transactions could be cumbersome.
Compare this with 2016, where central bankers are walking on egg shells to hike rates with as little as 0.25%. Stocks and bonds are more expensive than ever. Yet almost everybody I know has a trading account. Regular people can trade advanced derivatives with minimal hassle. Every time I visit a bank, I see desks and booths filled with people getting talked into investing their savings into various kinds of "high" yielding constructions. Because "TINA".
Feels to me like the worst time to invest. 36 years of buy-the-dip reinforcement learning. But then again I've felt like this for years.
[+] [-] Jugurtha|9 years ago|reply
He said that because often the part that sees the thing for what it is gets shorted when the average person sees it through the "investment" prism.
[+] [-] tonyedgecombe|9 years ago|reply
Which is what you would expect most of the time in a growing economy.
[+] [-] gmarx|9 years ago|reply
[+] [-] dbancajas|9 years ago|reply
[+] [-] cloudjacker|9 years ago|reply
[+] [-] torkins|9 years ago|reply
[+] [-] bryanlarsen|9 years ago|reply
The past 100 years witnessed the rise of American domination of global business. Even if American business stays dominant, there's probably less growth from #1 -> #1 then there was during the rise to #1. And that's a big if.
In other words, the future returns of the S&P 500 is probably going to look more like the returns of a basket of international stock markets over the past 100 years than it will look like the returns of the S&P 500 over the past 100 years.
Many people believe that since the S&P 500 has never lost money over any 10 year period that it's never going to do so. It may be highly unlikely, but if you keep rolling those dice eventually you're going to come up snake eyes.
[+] [-] unknown_apostle|9 years ago|reply
Investing a dollar in 1929 meant 20 bad years. Sitting on that dollar for 3 years and investing it in 1932 meant no bad years.
If I look at some expectations and common beliefs that people hold in 2016, I can't help but wonder whether we have one of those 20 bad year periods coming up.
(By the way, part of the success of US assets is definitely related to American companies leading the way in business innovation like IT. But another part is related to the US running trade deficits and the dollar being the reserve currency, meaning large amounts of dollar liquidity flooded back into the US and mostly into its financial system.)
[+] [-] mcguire|9 years ago|reply
The real question is your investing period. I'm 48; my 90% life expectancy is around 90. So, yes, I make the assumption that I'll get around 3% after inflation, taxes, etc.
[+] [-] anton_tarasenko|9 years ago|reply
Stocks don't deviate from their expected earnings for long, so when the ratio jumps over the median PE10, the market becomes expensive.
Holding cash during the period of high PE10 and investing it in stocks under low PE10 is a good idea for a person who's saving for retirement and doesn't want to become a professional investor.
[1] https://en.wikipedia.org/wiki/Cyclically_adjusted_price-to-e...
[+] [-] sf_rob|9 years ago|reply
https://personal.vanguard.com/pdf/s338.pdf
[+] [-] AnimalMuppet|9 years ago|reply
[+] [-] haiworld|9 years ago|reply
[+] [-] erl|9 years ago|reply
[+] [-] BeetleB|9 years ago|reply
http://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-or-in...
[+] [-] FabHK|9 years ago|reply
[+] [-] FabHK|9 years ago|reply
While there are total return (i.e. with dividends re-invested) and net total return (i.e. with dividends partially re-invested, as if after tax) versions of the S&P 500, they're almost never quoted.
The German DAX is the only major index I can think of that's primarily quoted as a total return index.
[+] [-] baccredited|9 years ago|reply
[+] [-] uiri|9 years ago|reply
[+] [-] FabHK|9 years ago|reply
[+] [-] ceejayoz|9 years ago|reply
[+] [-] FrojoS|9 years ago|reply
"The Standard & Poor’s 500-stock index has posted double-digit gains for the second year in a row. But the index is still below where it was in early 1999."
Is this true when adjusted for inflation?
https://www.google.ch/search?hl=en&q=Standard%20&ei=EuQEWOaq...
[+] [-] OscarCunningham|9 years ago|reply
In answering the first question inflation-adjusting is useless because inflation hits all investments equally, but in answering the second you do need to adjust for inflation.
[+] [-] base|9 years ago|reply
[+] [-] n00b101|9 years ago|reply
The 7% annual return figure may be related to something Warren Buffet said around 2013:
The economy, as measured by gross domestic product, can be expected to grow at an annual rate of about 3 percent over the long term, and inflation of 2 percent would push nominal GDP growth to 5 percent, Buffett said. Stocks will probably rise at about that rate and dividend payments will boost total returns to 6 percent to 7 percent, he said.” [1]
Note that Buffet's 6-7% estimate is for nominal annual returns. His estimate of real annual returns is 4-5%
There was a recent McKinsey study [2] also describing a likely long-term scenario of 4% real returns on US equities.
Note that these are returns on equities, which is considered to be the riskiest asset class in a traditional investment portfolio. A balanced portfolio of equities and bonds is expected to have a long-term annual nominal return of just 4-4.5% (corresponding to an annual real return of 2-2.5%) [3]
Pension funds and endowments typically invest in a mix of equities and bonds. These pension funds are structured by actuaries who have made outrageously optimistic assumptions about future returns, with the average US state pension plan assuming a 7.69% nominal annual return. [3] In a rare public admission, in 2008 a pension actuary for New York State declared his work to be "a step above voodoo." [4] In a more recent dose of reality, it was disclosed by Calpers that the public pension fund earned a return of 0.6% in 2015. [5]
Also, note that individual investors do not earn the "average long-term return" (which is just a theoretical number). Actual returns experienced by individual investors are more volatile and highly sensitive to the timing of when the started and finished invested. This timing is completely out of an individual's control, it is based on when a person was born and when they reach retirement age. One way to think about this problem is, what would be the cost of insuring investors against this "timing" volatility? Based on current market rates and some back of the envelope calculations, the rough answer is that it costs about 1.5 to 2% per year to buy such protection on a balanced portfolio. Once you deduct the insurance expense from the expected 2-2.5% real return, you are left with an expected 0% to 1% annual real return. To put this in perspective, a $100,000 investment compounding at 1% for 20-years would earn just $22,000 over 20 years. Meanwhile, "millennials" are apparently banking on a 10% annual return on their investments. [6]
What all this says to me, personally, is that the traditional narrative of individual "retirement," "saving" and "investment" is a delusion. There is no "safe," "slow and steady" approach for lower and middle-class people to build up for financial survival later in life. A different kind of strategy is needed, one that is based on higher risk taking. This is one reason that I think doing a startup makes a lot of sense for people who are talented - better to take a big risk, invest yourself, amp up the risk massively, and then work extremely hard and gradually "derisk" by doing all the things that good startups do. This probably has better odds of a successful "retirement" than the traditional idea of working in a corporate job and trying to climb the overcrowded corporate ladder while saving little by little in a defined contribution group pension plan.
[1] http://www.csmonitor.com/Business/The-Simple-Dollar/2013/050...
[2] https://www.bloomberg.com/news/articles/2016-04-27/be-afraid...
[3] http://www.economist.com/news/finance-and-economics/21678812...
[4] http://cityroom.blogs.nytimes.com/2008/05/16/speaker-tosses-...
[5] https://www.bloomberg.com/news/articles/2016-07-18/calpers-l...
[6] https://www.bloomberg.com/news/articles/2016-06-16/wanted-bi...
[+] [-] FabHK|9 years ago|reply
2. This in turn means that you have to accumulate, say, at least $1m (in today's dollars) at retirement, to live on a modest $2500 a month.
3. This in turn means that you have to put aside basically $1100 a month for 40 years.
3b. In other words, whatever your target retirement income stream is, you'll have to set aside about half of that over your working life.
3c. Another way of looking at it is that you should put basically a quarter to a third of your income into retirement saving.
4. Disagree that startups are the best option for most people. While the average return might be high, this is skewed by a few super successful ones. I posit that the median return is rather mediocre. Thus, startup might maximise your chance to retire super early and opulently. However, to maximise your chance to reach a certain (more modest) level of retirement income, living frugally with a "normal" well paying job might be best.
5. A further problem I see with your "startup" suggestion is that it cannot work for everyone - if everyone pursued startups, there'd be no one to run the actual economy. However, if everyone reduced their consumption and ramped up their savings rate as much as I'd suggest, the economy would most likely collapse, as well. So, I dunno.
[1] https://en.wikipedia.org/wiki/Trinity_study
[+] [-] gregstoll|9 years ago|reply
[+] [-] OscarCunningham|9 years ago|reply
[+] [-] threepipeproblm|9 years ago|reply
[+] [-] pyromine|9 years ago|reply
Although average real returns are much lower due to inflation, but that's another beast, though arguably more important beast.
[+] [-] BlickSilly|9 years ago|reply
[+] [-] micheljansen|9 years ago|reply
[+] [-] lutusp|9 years ago|reply
[+] [-] mdrzn|9 years ago|reply
[+] [-] 1wheel|9 years ago|reply
[+] [-] jackreichert|9 years ago|reply
[+] [-] jamisteven|9 years ago|reply