U.S. stock market returns – a history from the 1870s to 2022
themeasureofaplan.com
themeasureofaplan.com
The geometric mean (6.9) is all that really matters for investors, not the arithmetic mean (8.4) - the arithmetic mean under-weights the importance of negative years to long term performance.
For example, if the market is down 20% one year and up 20% the next year, the arithmetic mean will be 0%, but you'll be down 4% (0.8*1.2 = 0.96), which is reflected in the geometric mean of (about) -2%.
The public tech company employee has less to invest because a large portion of their income is in stock.
The private tech company employee is screwed because statistically, they have equity that won’t amount to shit in a bull market let alone a bear market.
Not if they're unemployed, which is more likely in down markets.
Besides, isnt the opportunity cost is completely independent of the return you're getting from the sp500?
The opportunity cost is the inverse of the S&P500 in that case.
This is why people say to increase the bond ratio in retirement, but that also reduces expected returns.
Based on this, I'd consider a 3.5% return assumption over 20+ years to be conservative.
I'll just share this. I've recorded every retirement contribution and date since I started saving for retirement back in the late 90's. From that, I can figure APY at any time by comparing to my balance.
I had some learning experiences early on but never totally lost my shirt. I went through the dotcom crash, the finsys crash, and the more recent stuff. And I've been following Bogle philosophy for a very long time, of an allocation model with a percentage in US stocks, intl stocks, bonds, and cash.
I would love to have 3.5% real over that time period.
Now, it's possible I'm the world's lousiest investor, but I don't think so. Because I did a similar exercise pretending "what if I had just bought S&P500 on those dates?" and looked at dividend-adjusted-close. And the results there were also nowhere near as high as you'd expect.
People just can't equate "stock market performance" with what their own performance will be. You might get laid off when economy is bad and markets are down. You might have more money to invest at the top of the market, and less at the bottom, which totally screws up dollar-cost-averaging. You won't be entirely in the stock market, keeping some in bonds in cash. Your "well, I'm getting old so I should keep less in the market" decision might align with the beginning of one of the most irrational bull markets in history. (All of the above have been true for me.)
I think the only real answers are just to save like crazy, keep expenses low, and push for a better social safety net. My own retirement projections assume Social Security will only pay out at 74%, and I'm feeling the need to have a big buffer due to economic/political uncertainty, which really sucks.
Been 90% stocks/10% bonds the whole time, though the underlying basket has shifted a few times as I made decisions about how to skew the basket using Betterment's portfolio options.
8 years on, I have a total annualized return of 4.9%, with Betterment saying "All performance figures displayed reflect the actual performance of your account since its creation in terms of total time-weighted returns, net of Betterment's management fee, fund fees, and certain other fees, if applicable."
The most volatile part of my retirement journey has been how much money I am able to contribute in a given month; some of these years I've had the job security and consistent income to dollar cost average the whole year's worth of contributions every 2 weeks or every month; other years I've had to wait until some amount of money became available to do a more "lump sum" contribution.
Thank you for your comment as far as it can at least help me set expectations for how I might see this performance number continue to go up and down over time!
Then tell me the 95th percentile and the median geometric returns based of fixed periods (say, copy the 20 years.)
Let us also grab what an inflation linked gov bond would have given over those same periods. Classically I would always think of pension returns as vs the risk free rate (heh, us gov credit risk) which is essentially an IL bond.
Then repeat the analysis on, say, the G8 or G20 countries. Oh, and lets do a variety of stock indexes as well. I am a great believer in diversification - so betting on the US is not my standard behaviour.
6.9% assumed return is mad for any individual. It would be mad for a DB scheme _and they at least have some risk pooling in their favour_.
But. I am hella risk averse and see the world through that lens.
Using the historical data set for the S&P500 index, a 3.5% average annual return over a 20 year holding period is approx. 20th percentile.
When investing over multi-year periods, the geometric average is more relevant.
You can see the impact on this chart, where the average return (and volatility) drops over longer time periods: https://themeasureofaplan.com/wp-content/uploads/2023/01/Rol...
If you expect returns to be similar to the past, that would be mean(log(1+return) for every year).
1) What _really really_ really matters is the Sharpe Ratio, as in "how much returns you get per unit of volatility".
The returns themselves are meaningless if not compared to the volatility to earn them.
Also, you want to discount the risk free rate (at least), as your benchmark.
2) The market as a whole is the biggest exposure you can have, you'd want to discount it as being X% of your portfolio
But once you lost everything, there is no capital to invest, so the score should be infinitely bad.
Arithmetic averages are dangerous in geometric environments.
Use the expected log-return or the geometric mean instead of the arithmetic one in Sharpe's formula.
But maximizing log-return was proven by Kelly to be optimal, and you don't need to further penalize volatility.
The subjective satisfaction we get from a certain amount of money is something that would take a lot of experimental science to figure out, and subject to change as society changes. How high up Maslows hierarchy of needs can you climb, and how long can you stay there until age brings you low?
Now where log returns really shine is if you make a very large number of similar bets. Thats where the asymptotic behavior dominates. But if you make a big once in a lifetime decision of whether to bet the farm on a new business idea, that's where you have to figure out your own values.
Unless you are risk adverse. Which it's probably rational to be.
Let's say the risk-free rate of return is 3%.
Asset 1:
Every year, with 99% probability you get 8% return, and with 1% probability you get -100% return, i.e., you lose everything. This has an expected return of 7%, which is 4% above risk-free; the standard deviation is 0.1; and the Sharpe Ratio is 0.36. But the exponential of the mean log annual multiplier is zero; you will eventually lose everything.
Asset 2:
With 90% probability you get the risk-free rate of 3%, and with 10% probability, you get a 10,000% return (multiply balance by 101). Yes, this has a good average return of 1,000%, but it also has a giant standard deviation of 30, so its Sharpe Ratio is slightly worse, at 0.33. But, the exponential of the mean log multiplier is 1.62, which means that over time it will have a 62% annual return. Moreover, it literally never goes down; there's no risk.
Asset 3:
You just take the "risk free rate of return" at 3%.
Surely, the best choice is Asset 2. It's literally Asset 3 plus free lottery tickets. But it has the worst Sharpe Ratio of the three. And Asset 1, which has the flavor of some prudent tradeoff, is actually guaranteed to bankrupt you eventually.
This is what I'm questioning. We do need to further penalize volatility, if that is our preference.
The criteria is optimal in the sense of greatest expected return, in the limit of infinite number of bets. But we don't make infinite numbers of bets, and the variance matters.
Any truly optimal strategy has to factor in subjective preferences.
Example: We play a game where you are ill and need to pay for medical treatment. At the beginning of the game you obtain a sum of money exactly enough to pay for the treatment. Then you are allowed to place (a finite number of) bets in some gambling, possibly increasing your payoff, or losing part of it. I'd argue that in this scenario the "optimal" strategy is not playing, no matter what criteria is used to select the size of the bets.
2. Arithmetic mean of log returns is the same as the geometric mean of returns. Indeed it’s pretty typical to work with log returns for this reason as adding is easier/better for computers than multiplying. This equivalence is easy to prove:
gm(returns) = prod(returns)^(1/N)
log(gm(returns)) = 1/N * log(prod(returns))
= 1/N * sum(log(returns))
= mean(log(returns))
gm(returns) = exp(mean(log(returns)))
The question is whether the power and influence of the U.S. will grow similarly over the next 150 years as it has over the last 150.
To invest mechanically without thinking about what’s actually happening in the world is cargo cult behavior.
It's going to be a long time before some other country takes over the "reserve currency/investment market of last resort" position the US currently has. No other market is even close to providing the deep liquidity and rule of law the US market has over a wide variety of instruments.
Sure, someone will eventually take over that role, but there are no candidates today. And, to your point: it was clear by the late 19th century that the US dollar would displace Sterling, but it took another half a century for that to happen. On the scale of current human lifespan, you can assume it won't happen at all.
So, the US doing extremely well 100 years from now vs. the US doing very badly 100 years from now could have a non-trivial impact on the perceived value of US assets. I suspect that the large uncertainty about what the world will look like in 100 years means there is just some sort of seldom changing value baked into assets to account for this, but it nonetheless exists, and could change if there was some huge geopolitical shift.
And before you mention anyone on earth would be dead in 150 years, yes that's true, however you can always sell it to someone later on who will be alive in 150 years (or sell it to someone who can later sell it to someone etc. etc.).
It’s like food. Food in 100 years does not help the need for food now.
Also, the US stock market, US Dollar and US economy/gdp aren't hard linked to one another these days. The companies listed can be selling to non US markets, employing internationally, founded internationally. They're just listing on the US stock market because well.. that's where the stock market is. The US could, in theory, become more or less popular a stock market regardless of its currency's popularity.
Meanwhile, both the Euro and RMB have similar size markets backing their currency. Neither one is currently trying to displace the USD. I think the importance of owning the international currency is somewhat speculative.
If countries then acquire dollar surpluses by running trade surpluses with the US, the US by contrast has a trade deficit. This is equivalent to having a capital surplus for the US. It means excess capital is funneled back into the US into the capital markets buying stocks and bonds.
This is maybe a chicken and egg phenomenon..is it the demand to invest in the US creating a capital surplus that creates the dynamic whereby the $ becomes reserve currency and the US runs increasingly large trade deficits? Is it the military/political power that creates all of the rest? Probably all of above. But in any case the reserve currency system has at its core the financial markets of the US that the rest of world invests their surplus into, incentivizing them to produce in excess and trade real goods and work with US in exchange for paper IOU's that they can invest into the US markets.
A big aspect of this $ financial/trade system isn't just the $ as currency itself but the unique and important position of US treasury debt as the premier reserve asset that countries store their surplus and forex reserve in, and which is the center piece of the eurodollar[0] lending markets.
Is there anything stopping the NYSE, Nasdaq or CME/CBOT from handling trades in another currency?
It's entirely reasonable that we could enter a period of long, slow decline across the board. Especially as we continue to push the limits of natural resources and global supply chains.
For example suppose the US continues to move its push to return chip manufacturing to the US. This might mean both that US chip manufactures have a more healthy future than other more fragile tech companies and that they shrink in size. We could see a return of manufacturing to the US which leads to continued employment in US labor for while also meaning that labor force gets paid much less.
We're already starting to see evidence of this happening.
The concerning thing is that I'm not at all sure that our incredibly debt dependent global economy, which assumes future growth, can really handle a gradual contraction to a more sustainable economic structure.
Either way, assuming up is the only way for the market to go is a very naive assumption, but one nobody is happy questioning.
Why do you assume that it requires a contraction to reach a sustainable economic structure?
What prevents the economy from growing for the foreseeable future while also becoming more sustainable at the same time?
Interesting! Why is it happening? Shouldn’t labor earn more in this scenario?
With a gradual decline in exposure to equities over time.
https://www.google.com/search?q=what+asset+allocation+should...
2. It is implausible that the US will ever pay back its foreign debts in real terms. Anyone who lends to them will end up with less stuff in total.
3. We live in an age of computers and pervasive digital communication; things can happen a lot more quickly these days than in the 50s.
4. There is a consistent trend of dropping energy security in Western countries.
This is no time to be forecasting assuming things will happen at a comfortable pace. People should have contingencies ready in case something unprecedented happens. It is tense out there.
2. No sovereign government debt is paid down in real terms over the very long run (this doesn't have to be so, but the data). So why should a non-national buy it?
If you buy US debt you get an asset that is supremely liquid and extremely unlikely to default. Over shorter terms from right now it appears likely to outperform other sovereign assets.
In very short terms at various times you can make money trading marginal countries' debt (even Argentinian!). But you take on a big risk premium for that!
3. There is so much analysis of technological advances of the 20th century that I won't even bother to try an summarize. WWII began with horse drawn artillery and ended with jet aircraft and ICBMs. My own grandmother was alive from kitty hawk to moon landings and robots spread out through the solar system. Things move frustratingly (for me) slowly these days.
4. Arrant nonsense, with the trend pointing the other way.
Only if they plan on doing something akin to starting a war against Ukraine.
Based on the credit rating of the US government, they will certainly not end up with less in nominal terms.
Those 50 years are part of the next 150, and are no easier to forecast. Most market projections are for numbers ~7% annually, but periods worse than that would drastically alter investing plans, and hence social infrastructure planning.
Too lazy to web search for an answer, but are those real returns? (i.e. inflation-adjusted).
I get what you are saying, but your math here is a bit off.
50+18 = 68.
People generally can live longer than 68 years old, If we go out on longevity and assume people can live to 100 or 120, then it's more like 100 years.
Your next thought is, but people will retire before/around 68, fair enough, but they stay invested generally the entire rest of their lives.
So if the US dominance ends in the next 100 years, then today's teenagers might need to care about it. People in their 30's or 40's probably don't though.
The next 150 years, you are right todays teenagers might not need to care, unless many/all of our aspirational longer living goals happen.
If you’ve been alive long enough you’ve realize the “end of US dominance” has been in headlines since the 60’s.
No, I think the question is more subtle ...
Will the relative power and influence of the US grow similarly.
... and I think that may be a very good bet.
The three closest "competitors" - the Eurozone, China and Japan - are, in their own unique ways, dysfunctional basket cases:
Europe's northern savers and taxpayers have to pay for southern workers to retire at 60 ... and southern workers need to eat benefit losses to avoid further (br)exits. This is a not-insignificant economic and cultural mismatch and the results of even minor adjustments are riots in the streets[1] ... or boring, orderly referenda[2].
It is unknown whether the CCP can survive any meaningful slowdown in growth and whether much of the growth of the last 10-15 years (enormous empty cities) was substantive or useful at all.
Japan is undergoing civilizational and cultural collapse.
So ... while there is much dysfunction - both economically and politically - in the United States, it is an enormous, resource rich country that can exist wholly independently from the rest of the world.
It also enjoys absolute control of the worlds oceans and brutally dictates economic and geo politics[3].
In a world of troubled and fraught investments, the US is probably the least troubled and fraught.
[1] https://en.wikipedia.org/wiki/Yellow_vests_protests
[2] https://en.wikipedia.org/wiki/Dutch_withdrawal_from_the_Euro...
[3] https://en.wikipedia.org/wiki/2022_Nord_Stream_pipeline_sabo...
Europe's problems are not unlike the U.S. internal problems where the tech and financial centers mainly on the coasts subsidize the rest of the country. The difference of course is that the states of the EU can exit, where the American states cannot. I'm not sure which situation is preferable.
China is a black box, but so far recent history has indicated the populace will go along with a lot of pain to avoid chaos.
US wealth distribution is much flatter than European. The GDP/capita ratio between Mississippi and Connecticut is less than 1:2, while for Germany to Hungary it's more like 1:4.
China is... China. You can't call yourself the Communist Party and run the global financial system. The world can only tolerate so much contradiction.
The open question now is whether the dollar can be dethroned by nothing: can a basket of currencies become the default reserve?
Perhaps, but you could as easily make the argument that the interior subsidizes the stomachs of the coasts. That seems more like a symbiotic relationship than the parasitic one you seem to be implying.
Trend last few years is PRC closing gap and approaching parity in indicators like GDP (already exceeded by PPP), % of global gdp / trade, science and innovation indexes, value chain upgrades etc. Even PRC military development and diplomacy is sufficient to get countries hedge / not commit to US alignment, which was unthinkable 10+ years ago. IMO US will find it difficult to maintain relative "lead" when, in the words of state department, "China is the only country with the economic, diplomatic, military, and technological power to seriously challenge" US order. That said, I think US has headroom via dictating economic and geopolitics within her relatively wealthy bloc and grow at the expense of others.
>It is unknown whether the CCP can survive any meaningful slowdown in growth and whether much of the growth of the last 10-15 years (enormous empty cities) was substantive or useful at all.
Western fixation with PRC real estate waste as proxy indicator of China (econ) collapse is particularly stupid. It's like suggesting US who spends ~20% of GDP on healthcare (approximately PRC real estate) with suboptimal result is spinning development wheels. Same with PRC wasting a few trillion in suboptimal real estate when significant (majority) resources being invested to bring up other (above) indictators that has substantively contributed more to PRC "comprehensive national power". Like US isn't initiating unprecented PRC containment policies because of a bunch of empty of housing units.
I don't think anyone who has seen the development in China over the last 10-15 years first-hand would say this.
There has been massive development in nearly every area, both in quantity and quality. Just to give one example, anyone who follows the scientific literature in just about any field will be aware of the massive increase in high-quality publications coming out of China over the last decade.
There are one or two examples of "ghost cities" (though most supposed "ghost cities" actually become populated over time), but that doesn't negate the massive, real development that is visible everywhere in China.
Yes, France retires at 62 but that'll change very soon...
Writing that the "north pays for the south" by looking at the GDP per capita instead of the GDP is... naive. [2]
[1] https://en.wikipedia.org/wiki/Retirement_in_Europe [2] https://en.wikipedia.org/wiki/List_of_sovereign_states_in_Eu...
What will happen (by design or not) is PRC demographics is being "strategically optimized" with the greatest demographic uplift/upgrade in recorded history. Roughly replacing 2 low skilled, under-educated workers with 1 skilled worker with additional automation. Every ~10 years for the next few decades, PRC will be upgrading / swapping the human capita potential of 1 Nigeria for 1 Japan, it's less people, but much more productive people. With PRC pop base effect this is still multiple more educated labour pool per year than US or other blocs can generate with immigration, and 100s of million more in net talent. Less people also alleviates import dependency, PRC with 1B (400M less) people would have substantially more strategic space to operate. It works towards close relative power potential. CCP wants to smooth out the pyramid with more births for better managed transition, which structurally/culturally PRC with some of the highest house hold savings rate and minimal expectation for safety net is positioned to weather, but long term PRC comprehensive national power is best improved by having less net people, with more % skilled people.
Certainly doesn't seem this way when you visit Japan. Sure, they haven't experienced wildly growing excessive consumption like some American states in the past couple decades, but their society is far from undergoing any sort of collapse.
Using the yellow vests as representative of "southern workers" makes me doubt how well you've researched this answer. Paris is hardly in "southern Europe", and the rest of the southern European countries have retirement ages comparable to those of the "northern savers".
Are you implying that US sabotaged Nord Stream?
It was a Keyser Soze move that basically destroyed Russias bargaining position.
At the same time, it was an enormous fuck you to EU citizens and, in particular, Germany: "Oh yes you will buy our gas ..."
It appears to be panning out in a non-destructive way for the EU citizenry as they muddle through this winter but it was not obvious that would be the case and this (relatively) benign outcome could not have been predicted.
If I were an EU citizen (particularly a German) I would be upset. Even as an American I am disturbed ...
EDIT: You know that thing ... that crazy thing that Dick Cheney said in that interview[1] ? About how there is no reality and reality is whatever we say it is:
"We're an empire now, and when we act, we create our own reality."
... every day that goes by I become more and more convinced that he could be right. NS2 sabotage makes it hard to argue with him.
[1] https://www.theatlantic.com/daily-dish/archive/2009/04/were-...
It kind of reminds me of the polonium poisoning that has become a Russian signature move. Despite not taking credit, the number of actors who have the capability to do it is so limited that it's basically outing them regardless.
Hmmmm immigration. That's how fast growing powers have always done it.
Sad that nobody has been able to come up with something better that doesn't involve "infinite growth".
Companies in the S&P500 index are based in the U.S., but most of them earn revenues internationally as well.
"Roughly 40% of S&P 500 revenues are generated outside of the U.S., and about 58% of Information Technology company sales were sourced from abroad."
Source: https://www.globalxetfs.com/sector-views-sp-500-sensitivity-...
So, the performance of the U.S. stock market in the next 150 years will not rely solely on U.S. specific economic growth.
I know Apple does this https://en.wikipedia.org/wiki/Double_Irish_arrangement#:~:te....
I just wonder, can they really not find a more favorable country to route the gross of their revenue through?
It does not need to . What matters is how much profits large companies are earning. There is no indication that profits are slowing. Even if GDP only grows at 2%/year, if multinationals generate 10% annual profit margins, that is $ that must still go to investors even if GDP growth is much lower.
When you compare foreign markets to the US, the US still comes out ahead by almost every metric. There is little indication to suggest this will change. Every problem that the US has, other countries have worse. So relatively speaking ,the US still will be ahead.
I don't think that's required. Most of these analyses use US stock data because it's so easy to gather compared to international data. The do trends hold internationally, but the magnitudes are reduced. So if you think the US will regress closer to the international mean (and I'd agree) then you can use things like the shape of the bell curve, just not the height. And indeed, this bears out if you look at the markets of the UK or most of the EU. Pretty much any reputable adviser will tell you that that's the consensus, that future returns will probably be lower for the next few decades than they were for the last few. (Usually you see this in the media amplified to a more ridiculous version but that's modern clickbait reporting for you.)
There are other possibilities like we could stagnate for 3 decades like Japan. But yes, that's investing, that's the nature of the bets you're taking.
I'm having trouble finding the quotes but around the turn of last century British economists were looking at the US's explosive economic growth compared to the UK and attributed it to the US having the equivalent of a sudden injection of capital in the form of a whole continent full of free real estate. That is, they reasoned that the UK's growth was limited to what they could do on their existing, mostly already owned and developed land but the US had more physical space for the balloon to expand into. They reasoned that soon that would happen though and the US would grow to fill that space and eventually its economic growth would slow down closer to the UK's. That clearly didn't happen then. I don't think the lesson is the US is exceptional and will continue to outpace the world forever, but I do think that a lesson is that predicting this stuff is hard and reasonable-sounding ad hoc hypothesis don't always bear out.
Over the next 150 years I have no idea. But over the next 30-50 then almost certainly. No other country is even close and most seem quite comfortable with the global state of affairs all things considered. USA hegemony has created a stable world where the vast majority of people are far better off than their ancestors. It isn't perfect of course but there's no reason to think anyone else would do better. Especially when compared to the previous tenant, Europe.
Of course the whole world could go into a multi-decades-long recession, but then we’ll have much more serious problems anyway.
If the world did go into a multi-decade recession, what “more serious” problems would you have then your investments doing poorly?
You might answer things like “ buying food due to shortages” or something, but surely whatever problem you name, being more rich is going to solve it?
Now you can invest on the thesis that this isn’t going to happen, but to argue that the whole concept of investment is useless if it does seems very suspect to me.
Being rich only matters as long as your investments/assets hold any value. If truly serious problems around your investments go to 0, your assets are only worth something as long as you can maintain control of them (police won't be around, nor will judges be) and even then your car will be worthless without gas.
It all depends on what meaning a person assigns to "serious" in this context. Personally as long as being rich solves my Problems I wouldn't describe any situation as serious.
> To invest mechanically without thinking about what’s actually happening in the world is cargo cult behavior.
This is why it's suggested that unthinking mechanical investors invest globally, not just in the US. For example, VT, a single set and forget index fund has 40% international exposure. That's to speak nothing of the S&P 500 companies that do business internationally.
As an example that supports your point, the Japan stock market (Nikkei) peaked in 1989 and STILL has not returned to that high.
However, even if you were incredible unlucky and had bought in at the 1989 peak in Japan, if you had an internationally diversified portfolio, you would be OK. E.g. a 30/30/20/20 Jp Stocks/Intl Stocks/Jp Bonds/Intl Bonds portfolio purchased in 1989 at the Nikkei peak would have more than doubled by 2014 (see here: https://www.bogleheads.org/forum/viewtopic.php?t=265807 and also https://www.afrugaldoctor.com/home/japans-lost-decades-30-ye...).
Also, the FTSE 100 has been almost flat since the financial crisis, so basically just a little over 10 years. It was at about 6300 in the first half of 2013, it's at ~7700 now, a ~22% return over 10 years is nothing to write home about. For comparison the SP500 was at ~2300 in the first half of 2013 vs ~3800 now, a 66% return. And that's after last year's 23% decline.
The S&P 500 is not everything there is to be had...
Stock market success depends entirely on when in history you got in and got out. When it comes to US dominance over the next century - who knows. I do trust in Fed interventionism and willingness to print money - so that certainly favors stock market investment.
Personally I find stock market is too high a variance and I prefer not speculate with money I can't afford to lose.
Buffet himself said their biggest peak to trough was 50%. Fine if you're already rich and investing a fund. Not so great if it's kiddos college money.
There is probably more at play too. The number of banks, for example, has been declining steadily over time [1] as has the internet allowed single corporations connect to more buyers (nationally and internationally). Just think of all the local stores that Amazon has displaced.
[1]: https://www.stlouisfed.org/on-the-economy/2021/december/stea...
If things go badly then the money I would have from not investing "mechanically" would probably be as useless as the investments. If everything is going to decline continually it seems the greater reward will almost always be in the investment. This also assumes you only invest in the current world superpower, seeking global diversification would probably be wise if you see a major change in polarity.
I really think millenials should consider hedging their bet, maybe even spend 100% of their income.
Maybe, but this describes the investment strategy of pretty much every index-based fund and they've been the big winners over a long time frame. Why do you care what happens to a market 100+ or even 50 years from now?
If some other superpower does come around you could just try to find a foreign index fund and adjust your investments.
[1] Actually, is this literally true?
Would also be good to compare to CPI to understand real returns. Or whatever other number seems to be a truer measure of inflation (house prices, for example).
And even then, you don’t have to be the dominant superpower to see a rising stock market. Plenty of examples of smaller countries who have seen substantial market gains.
I’m sure given an investment in Argentina’s stock market in 1900, it would have now been lost many times over.
For example, Spotify is a Swedish company listed on the NYSE.
The qualities of the U.S. that helped it become a superpower, also help it have a high-performing domestic economy.
A few insights:
The average return of the U.S. stock market has been 8.4% per year over the past 151 years (1871 to 2022); this is the "real total return" reflecting dividends and inflation
While the U.S. stock market has trended upwards over time, the market has declined in 31% of all years on record (47 years out of 151 years in total); for example: in 2022, the U.S. stock market dropped by 23.3%
The range of returns across 1-year periods has varied significantly (from negative 37.0% to +53.2%). However, the annualized returns across 20-year periods have a much tighter range (from +0.5% to +13.2%)
In other words, the stock market has never declined over any 20-year time period!
Sources: Professor Robert Shiller and Yahoo Finance; note: the “U.S. stock market” refers to the S&P Composite index from 1871 to 1957, and the S&P 500 index from 1957 until today
You'd expect something like this. For a normally distributed iid, the annualised volatility of returns over n years scales as sigma / root(n). So if your one year vol was 10%, the annualised vol over a 20 year period would be 10%/sqrt(20) = 2.23%.
It should be true for any distribution that has a variance, and the 150-year historic return certainly has a variance.
It's not E log X-optimal though.
Edit: typo
That's not true. It is if you cheat by taking useless averages. It as declined, as you say too, a lot of times, and very badly, many many times.
What isn't true about the above statement? It's incredibly specific, yes, but it shows that at least historically buying and holding over time limits huge gains but also limits losses.
Now, let's assume what I said up to now is wrong. I don't pretend to know the absolute truth anyway. Reflect on this: even if something has made a profit buying and holding for 20 years consistently for a millennia, it means nothing for my future. What guarantees me that I will make my profit in my 20 years? I can't travel back in time. Before discovering black swans, everyone thought swans could only be white.
Also, 150 years of data on a phenomenon that changes almost daily is nothing.
The specific point being made is that there has never been a 20-year period where the U.S. stock market declined -- when comparing the start versus end value of the S&P 500 index, on a dividend / inflation adjusted basis.
https://fortune.com/1999/11/22/warren-buffett-on-stock-marke... [a]
For me, the most shocking passage of his piece is this one:
> ...from the end of 1964 through 1981. Here’s what took place in that interval:
DOW JONES INDUSTRIAL AVERAGE
Dec. 31, 1964: 874.12
Dec. 31, 1981: 875.00
--
https://dqydj.com/sp-500-return-calculator/
This website shows a nominal 6.34% return with dividends reinvested from Dec 1964 to Dec 1981.
Note that the compound rate of inflation over that 17-year period was 6.5%. So, net of inflation, at the end of the 17 years, the market was valuing the DJIA's blue-chip companies at two-thirds less (!!!) than at the beginning of the 17 years. The S&P500, with all dividends reinvested, net of inflation, returned -0.2%/year over those 17 years.
In real dollars it less than doubled (https://fred.stlouisfed.org/series/gdpc1#0).
the market was valuing what at the time was the most prominent index of blue-chip companies at the same market capitalization they had at the beginning of the 17 years.
And during those 17 years those companies paid out roughly their entire original value in dividends.
It's true that the Dow lagged the overall economy during that period, but not nearly to the degree that the quote implies.
Makes you think that perhaps the stock market is not a great reflection of any on-the-ground reality, and that then makes you wonder what it is a reflection of, and... well, best not to think about it. Let's destroy pensions and put all of our savings into this casino run by the wealthy.
This means nothing because the DJIA means nothing, and is not a good proxy for anything.
>The S&P500, with all dividends reinvested, net of inflation, returned -0.2%/year over those 17 years.
This means something, which is that reward is proportionate to risk. Investing in the broad US market means your investment is backed by the federal US government, which means it is riskless on a sufficiently long timeline (assuming the US is still relatively powerful in the world stage).
You invest in SP500 (or Russell 3000 or whatever broad market fund) to keep up with inflation, over many years, not to earn more than inflation. If you want to do that, you have to take risks.
I'm not an economist or big time investor but even I know to basically ignore the DJIA for all useful purposes.
It's an expectations market.
Here are some reasons why - does this include dividends? Are the dividends reinvested? Does this include ongoing contributions in the interim, perhaps at times when the index was down, now leading to an increase in value?
Absolutely doesn't include ongoing contributions, I think that is the big thing. It is rare to just buy a stock or ETF and hold it for 20 years... usually people are buying more or selling the position during that period.
https://dqydj.com/dow-jones-return-calculator/
Plugging in those dates gives 0.078% return without reinvesting dividends (basically the figures given in the parent comment), 4.632% with dividends reinvested, and -1.941% with dividends reinvested and taking CPI into account.
So, you still come out negative due to inflation, even after reinvesting the dividends.
Zero change in index value over any period of time does not necessarily imply zero growth, especially when the time frame involved is over a decade.
Interesting to note that if you'd bought and held the S&P500 index for the 20-year period of 1998 to 2018, you would have invested through the dotcom bubble and the great recession -- but still ended with an average real total return of 3.3% per year over that timeframe (adjusted for dividends and inflation)!
Edit: typo
Most people invest at some interval (through their 401k, IRA, or whatever) and it is much better to run some kind of test that mimics this to some degree.
If you bought the SPY once a year, once a month, once a XXX from 1998 to 2018, what are your returns looking like?
https://paulmerriman.com/lifetime-investment-calculator/
If you'd invested 100% in the S&P 500, say 10,000 a year on Jan 1 every year from 1998 to 2018, you'd have $522,135 from a $200,000 total principal, or roughly 13% annualized return (not including inflation)
The "rate of return" isn't quite as simple to define when you're talking about multiple contributions over time. The most straightforward approach is to look at it as a weighted average, and the exact value depends on how you do the weighting. But in this case, it's in the ballpark of 7%/year nominal, which is probably 4-5%/year after inflation.
As you can see, you get a big boost (at least in this cherry-picked example) by continuing to invest through the downturn.
This can be eye-balled on this chart: https://themeasureofaplan.com/wp-content/uploads/2023/01/Rol...
The bottom graph shows the annualized return for each 20-year period in market history. 20-year holding periods have this behaviour: - Max: 13.2% - Min: 0.5% - Average: 6.6% - Std. Dev.: 3%
So, if you dollar cost average over time and hold each of those investment cohorts for ~20 years, you should expect an average annual return of roughly 6% (+/- 3%).
The sp500 is going to look a lot more like the fortune 500 than the DOW. The takeaway I see here is that the Dow may be riskier.
But, it would be interesting to see the sp500 during this time.
If we collapse the vector of those inputs (such as labor, materials, capital) and outputs (products, services) to a single unit such as "dollars" by which we measure those things, then any sustainable (i.e. profitable) business creates more output than input.
Personally, I like owning companies, because I like owning black boxes that take money in and produce more money out. :)
I do think the long-termist view, which this page promotes, raises several questions:
Do you believe that companies will, on average, continue being profitable in the long term?
Or do you believe that in the long term, profit margins drop to zero?
If capital is abundant, can companies remain profitable without there being a positive return on capital? (I.e. do those profits flow to entities other than shareholders?)
Does a "steady state economy" exist? https://en.wikipedia.org/wiki/Steady-state_economy And if so, are steady-state corporate profits zero? Is there a "tendency of the rate of profit to fall" https://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit... or is this in some degree compartmentalized with the turnover of industry over time?
I do appreciate the graphs on this page, especially the rolling 5/10/20 year ones. When I get some free time, I may adapt that concept for my side project https://totalrealreturns.com/ which lets you graph the inflation-adjusted, dividend-reinvested returns of any publicly traded stock, ETF, or mutual fund.
Forecasters have predicted the end of innovation at many points, but humans do seem to have a knack of finding something new and valuable.
> If capital is abundant, can companies remain profitable without there being a positive return on capital? (I.e. do those profits flow to entities other than shareholders?)
> ...are steady-state corporate profits zero?
I learned the answers to these questions from economist George Reisman. I recommend his book Capitalism, specifically chapters 16 - 17, where he explains the answers and how he arrived at them. The book is available for free in PDF format here: https://capitalism.net/CAPITALISM_Internet.pdf
In short, the net amount of profit in the economy every year is the sum of the "net investment" plus "net consumption" during that year. "Net investment" and "net consumption" are both precisely defined in the text. Net investment is related to the changes in money supply and to the difference between the marginal productivity of capital versus the current rate of profit. And net consumption is related to the consumption behaviors of capital owners and the government. There is no general tendency towards a zero rate of aggregate net profit since there is no general tendency towards aggregate net investment + net consumption being zero.
"As always, Warren Buffet put it best: “the stock market is a device for transferring money from the impatient to the patient”."
https://givingpledge.org/pledger?pledgerId=177
He's not leaving them zero or anything, and three of the foundations he's funding are run by his three children, so they benefit from his wealth. But they won't receive most of it.
Foreign stocks: There's a well-documented effect called "home-country bias"[1]. Basically, investors tend to buy much fewer international stocks and are overly concentrated in their local domestic stocks. There's all kinds of reason for this, but they mostly seem to center around regulatory barriers (typically harder to open a fund to invest outside the country), political (major pension system are encouraged to invest at home for patriotic reasons), and reputational (losing money overseas tends to make the asset manager seem more reckless).
Real estate: Most governments heavily subsidize real estate from a combination of tax advantages and cheap credit. Look at how easy it is for the average Joe to buy a house with 400% leverage, no margin call, no capital gains on sale, and he gets all kinds of tax credits. Which means if you are getting those advantages than it's rational to invest in real estate, but if you look at raw returns real estate tends to underperform because investors with those advantages are willing to accept lower returns.
Bonds: The disparity between equity and bond returns is perhaps the most studied in all of finance, and is known as the "equity risk premium"[2]. There are numerous explanations, but two major ones standout. First, bond returns tend to be anti-correlated with the general economy. During recessions, when people are most likely to need liquidity, bonds tend to go up whereas stocks tend to go down. Second, many large classes of investors are basically forced to invest in bonds instead of stocks. For example insurance companies can only hold a tiny percent of their reserves in stocks and are required to invest in fixed income products. Similar story with banks, and to a lesser extent pension funds.
[1]https://www.gsam.com/content/dam/gsam/pdfs/common/en/public/...
That US stock market real total returns are positive doesn’t say anything about whether all long-term money will flow into it.
I would have expected someone to create a retirement insurance pool type thing that returns something close to the long term average s&p returns. But if you go looking for such a thing, the returns are closer to 1/2 the s&p. Its really the kind of thing the government should backstop but... "socialism" even if the math works out. Which really pisses me off because its apparently ok to "socalize" the poor mgmt at $BIGCORP that gets a handout once a decade or so at the current rate after spending billions on stock by backs but not socialize individual retirement risk in a meaningful way.
Between 2009 and 2021, the S&P 500 went up by 13.8% per year.
Between 2005 and 2022, the S&P 500 went up by 8.3% per year (which of course included some market crashes).
> I would have expected someone to create a retirement insurance pool type thing that returns something close to the long term average s&p returns.
Target date index funds are the way to go there: https://investor.vanguard.com/investment-products/mutual-fun...
And these days there really hasn't been anywhere to run since everything is so correlated. People close to retirement in those funds are going to be delaying retirement just like everyone else. -15% YOY with "safe" low risk/return investments really hurts. https://investor.vanguard.com/investment-products/mutual-fun...
The place I was at 15 years ago when I actually had money in a target date fund had a 1.5% expense ratio that was buried in a couple of different parts, fund expense ratio, and a underlying security expense ratio. And then on top of that the place I was at the "plan provider" or whatever they were called was scraping another .20% off of everything. There was a class action lawsuit, and the plan provider eventually lost. But, of the probably tens of thousands I lost vs just having my money in a IRA with vangard I think I got a check for something like $100.
You're asking for the long term returns on any given short term period. That's just not how investment works. You get the best gains by staying in it for a long time. You can't get that nice long-term average without bearing the risk yourself.
Who is going to bear the risk for free?
Remember that stocks are investments in actual companies that take months and years to turn inputs into outputs. If I give Boeing a billion dollars I don't just come pick up my new plane prototype tomorrow.
Imagine giving venture money to a startup company like Slack and then demanding monthly repayment at the S&P 500 long term average from day one. Wouldn't my money be better used funding Slack's expansion rather than going back to my pocket and stunting growth?
That's why you can't get good guaranteed returns, because money has to be put to use transforming inputs to outputs over time.
> People close to retirement in those funds are going to be delaying retirement just like everyone else.
Only if they have a short-term view of their money or their savings rate wasn't high enough in the first place. Don't forget that the fund you linked me had a 16.87% increase in 2020 and a 11.50% increase in 2020. Plus, your target date is 2 years from now.
Your original comment wished for the government to step in and make a fund like this. That already happened in the form of social security and medicare. Both are funded by contributions made during working years, effectively a savings account. If you're wishing for a better rate of return, well, sorry, see my first point. Social Security and Medicare are structured as guaranteed annuities. Being alive means you get them.
This sounds like you're describing a defined benefit pension plan, or an government old age pension plan like Social Security (in the US) / Canada Pension Plan (in, well, Canada).
As usual, higher risk begets higher reward. If you don't want to face the prospects of volatile returns, you'll likely need to accept a lower long-term average return in exchange for the predictability.
So really every individual investor is on their own until they get to the point where they can sell the risk and buy an annuity (although those tend to be terrible too largely I guess because they want to make $$$$ and other reasons).
So, in the US outside of Social security, which isn't a retirement plan, there isn't any option other than to hope you don't have to retire during a downturn, or that you have to go live in a box for a few years to avoid burning all your capital when its value temporary falls for a couple years. Because there isn't any way to recover except to go work at walmart as a door greeter.
There have been a number of articles about this over the past decade or two, which boil down to, in the US you can do everything "right" but whether you can actually retire comes down to a bunch of lucky decisions and market timing. So basically its random, with some probably of "success" of landing into a bucket that actually allows you to retire even at 65 which is well into the "everyone is dying off" part of the morality curve.
Work till you die is the official plan, but then people might start reconsidering their life choices when there isn't this "you will retire happy" carrot at the end.
No, it HAS taken 7% to double your money.
Most experts don't necessarily expect stocks to return 7% per year in the future. Instead they think stock returns are related to the price to earnings ratio, which has looked more and more unfavorable in recent years.
And even if you are basing your data merely on history, good luck designing an insurance that wouldn't have gone bankrupt during the great depression.
People born in the lucky periods almost always describe their results as due to hard work, never as due to luck. And unlucky timing is almost always attributed to personal failures, not the economic situation.
If I have 5% average stock market returns over 60 years and pay 0.5% fees, then $100k invested grows by $13M. If I pay 1.5% fees, it nearly halves. This is why I'm a fan of Vanguard and other low-fee index funds.
(1.045 ^ 60) - 1 --> 13.0
(1.035 ^ 60) - 1 --> 6.8
https://www.credit-suisse.com/media/assets/corporate/docs/ab...
It's funny how they talk of money and market value being erased as if the money is definitely subtracted from balance without being added somewhere else, literally deleted from existance.
When the market crashes for you and others, there's always someone in the high echelons of the game who ends up getting richer.
It's interesting how the DJIA has done so much better then the S&P 500. I think this shows the value of periodically removing weak components from the index and choosing only the largest of already large companies instead of 500 large companies. the DJIA also held up well in the 2000-2002 bear market.
https://www.hartfordfunds.com/practice-management/client-con....
Edit: Since I'm being downvoted, go read: "The misbehaviour of markets" by Mandelbrot or "The black swan" by Taleb, or just reflect on what "zooming " really is: averaging to keep out outliers.
Edit 2: to put it in less salty terms: yes, now it's down 23% from the previous year, so probably it will go up and you will make a profit, as long as US economy doesn't collapse. But you don't know the probability of such an event, since the distribution of returns in markets is unknown (we're not yet at the limit at which the central limit theorem holds). Not knowing that probability, you may die before you see your return. Or, as said, US economy may collapse, your bank or broker will, etc. Meaningless risks? Perhaps in a world of gaussian distributions, not our.
This shows that long term (20 years and plus) assets are best held in low cost stock index funds. Over cash (inflation), bonds, savings accounts, or other assets. It's the least bad option. And you are not suggesting something else. Hence I guess the downvotes.
Of course, markets can be irrational forever or tomorrow we could have a nuclear world war or aliens annex us or a meteor can hit us. This is life 101 though. This is not a deep insight.
We do know that the probability of a collapse is so small that it is not worth worrying about for investment strategy. Better to worry about the things that might lead to such collapses and strategies to mitigate those
Saying investing $1,000 in 1871 would be $22M now doesn't help me. Saying $1,000 in 1969 is now $23K doesn't help me - I wasn't alive then. It's not practical.
I didn't have $1,000 of savings until my late 20s. After paying for bachelors and masters, I had to borrow $500 from friend to eat and live until next pay check. Then car, house, furniture.
And if that $1,000 I invested in late 20s turns into $2,260 in 20 years - whoop-dee-doo, who cares.
Conclusion should be "buying and holding has been a simple and straightforward way to store wealth". But not going to build wealth unless I'm active - building resume, building business. In addition, I might as well take that $1,000 and swing for the fences and turn it into $10,000 or more looking for the next AAPL, GOOG etc. like venture capital.
This is the reason people take a more balanced approach where they split their investments in say a 70-30 or 90-10 ratio and put a smaller percentage in short term high risk - high return investment.
You can use this calculator to run different scenarios.
https://themeasureofaplan.com/net-worth-scenario-tool/
Example inputs: a 25 year old with a starting net worth of $10k and who invests $7k per year over 40 years, at a 5% average annual return.
Output: net worth of $915k at age 65. This provides retirement spending of $37k per year (using a 4% safe withdrawal rate assumption).
Doesn't really fit the "do what Warren Buffett did and be wealthy" narrative that people imply with buy-and-hold. Buffett made concentrated bets. He effectively used leveraged (using insurance premiums) to make bets. He prefers to be a business owner instead of shareholder (i know it's a subtle distinction). The Warren Buffett quotes people use to justify these strategies is misleading.
The average Joe can't expect to re-create his returns.
There's a reason why Buffett regularly recommends (and bets on) the S&P 500 as a solid investing strategy: https://www.investopedia.com/articles/investing/030916/buffe...
If no physical object is involved but rather just changes or reconfiguration of the - let's say - human brain, in the end, all possible states are limited by the (overall) entropy of our universe. If multiverses turned out to be accessible (i.e. empirical objects) then according to our current understanding there seems to be no limit.
The closest limit isn't "economical" but much more "biological"/"societal". If we destroy the livelihood of our species before understanding/appreciating it - let alone transcending it fully (which some folks claim to be right around the corner) - we are just another failed (alien) civilisation who couldn't get past the threshold.
The mathematical "exponential" part isn't the isolated problem but in combination with our limited understanding; flawed evaluation and the gross deficiencies in our current social structures (institutions, governments, bureaucracies, corporations, distribution of resources, conflicts of interests, "war" ...). The current economical incentives are just a reflection of that.
What's more, an old junk car might be valued at $3,000, but we can take most of the same materials and transform it into a new car with $15K (or other goods we consider worth more than the $3K car). The same finite resources + energy & labor (when used productively) = economic growth!
edited typo
There's (at minimum) Time being exchanged. If A gives B a massage, A and B are investing that Time in this transaction (also, A is investing a space, a massage table, electricity for the physical space, etc.). All of these things are finite, and devoted to this service. If the service were not provided, these finite resources would not need to be locked up / extracted / used.
To say that the providing of this service happened in a vacuum of "extracts zero finite resources" seems a bit disingenuous.
I think we are possibly using "finite" too loosely. A googled definition of "finite resource" is, "A resource that is concentrated or formed at a rate very much slower than its rate of consumption and so, for all practical purposes, is non-renewable."
I do not believe space would be considered finite as it cannot really be "consumed." occupying a space does not deplete the resource of the space itself. Space on earth is more finite than "space", but still, there are many types of spaces for a massage to take pace: masseuses residence, the client's home, a park or yard, etc. In the economic sense, space doesn't seem finite while it may be in the Physics sense.
A massage table doesn't seem finite either. If its made from wood, leather/cotton, those would be regeneratable resources and tables made with metal or plastics probably does not meet the definition of finite as a table is reusable and has a very very low rate of consumption (replaceability in this sense).
Finally the most controversial: electricity! hard to argue against this without some squirming but 1) if the massage is rendered in a space with good natural lighting or outdoors, electricity is not mandatory 2) humans may find a way to make this resource much less "finite" in the future.
Using the massage example was not a full-proof attempt on my part, but I can imagine others examples (vocal lessons, tutoring, coaching, selling flowers/eggs from a farm stand etc) that can be done without the "finite" resources we are discussing. My main point was that not all economic output is tied to the depletion of a finite resource.
By 2025 the internet alone will consume 20% of all energy.
Your other assumption is we are going to stay on one planet, which I don't think is true. We will consume asteroids + resources on other planets when it is economically viable to do so.
Also, the economy doesn't permanently "use up" earth's resources (other than a few exceptions that are fixed like land or go through a 1 way process like uranium). Water, wood, food, etc are all renewable resources. Even Petroleum might not be as finite as we currently think it is (https://www.scirp.org/journal/paperinformation.aspx?paperid=...)
If you replicate the same analysis using European or emerging data the results are even worse.
Given GDP is growing at a slower rate than this, this means that the rich will genuinely just get richer and get a larger slice of the pie while the poor get squeezed.
Land/house prices will increase to the maximum the market can bear and as that market will be full of money from those inheriting from their parent's patient investment... we'll end up in a society where your quality of life depends on the wealth of your ancestors.
Over what interval are you observing this?
"The book's central thesis is that when the rate of return on capital (r) is greater than the rate of economic growth (g) over the long term, the result is concentration of wealth, and this unequal distribution of wealth causes social and economic instability. Piketty proposes a global system of progressive wealth taxes to help reduce inequality and avoid the vast majority of wealth coming under the control of a tiny minority."
Why is that? I'm European but the US doesn't seem too different from most of Europe in terms of stability and the risk of unrest.
How do I square that with this plot that seems to imply constant (although not stable) high returns for over a century? Are the stocks picked not representative (probably not) or not weighted properly? What does "adjusted for reinvested dividends" mean? (I could imagine in times of high inflation and low ROI, companies would want to get rid of cash and pay dividends, rather than investing it themselves for example.)
Adjusting for reinvested dividends refers to an assumption that the cash dividends paid out by a company are re-invested to buy more shares of the stock. The concept being that a company can pay out a cash dividend or use that money to invest / grow their business. Therefore, to calculate a "total return" we need to factor in the price increases of a stock + the dividends that were paid by the company.
Curious if you have a source for that?
> What does "adjusted for reinvested dividends" mean?
Dividends are payed out in cash and this means the analysis assumes they're used to buy more shares.
There's an argument that the American economy in the 20th century is itself a selection bias. It's the most successful economic period in history. Other countries in the same period or the world economy in other periods do not have such spectacular returns.
Some people think that we are facing secular stagnation, and the economic growth is slowing down. The avg federal reserve interest rates have been falling at 2% per decade for 5 decades, and signifies less growth in the economy. Sure, this low interest rates have actually fueled the stock market boom as the value of future earnings is high, but the growth is not sustainable. For one, we are going to end up with some stable p/e ratio, and the growth of stock market because of low interest rates will stop. And two, the interest rates will also stop going down as fast, as a rate of say -10% sounds pretty bad in what it means for the economy (negative growth of that magnitude), so people do not think we will have such a situation.
To be honest, the belief that the market is overvalued is a big part of my motivation for buying individual stocks despite the overwhelming evidence that it's a fool's errand.
[1] Using the S&P 500 as a proxy. There's non-linkable buttons to see the last 10, 20, 30 years https://www.macrotrends.net/1324/s-p-500-earnings-history