Asset allocation in a US stock market bubble

[SquirrelChaser]

I only have annual data to hand but let’s follow the argument to end of 2022 so your last year is negative 18.1 and you don’t get the last 2 years

1929 is 10.1%
1940 is 11.3
1970 is 10.4
1987 is 10.4
2000 is 6.3
2007 is 8.6
2020 is 7.7

Doesn’t seem to make that much difference

Can i ask what that table is from?

I've spent way too much time using compound interest calculators and running numbers through excel and that looks like the lazy option I've been wanting for a while!

 

[joe sod]

Historical data is hardly irrelevant when trying to estimate your expected return.

2020 and 2021 were both positive years and the final year was a nightmare for investors.

But what are you going to buy instead. This is the reason why index investing works.
You buy everything and don’t worry about getting it perfectly right. You just know you’ll do better than sitting it out fretting about market timing.

This is another way of looking at the same data over more “reasonable” time period

yes that table is more realistic, all I am saying is that the prognosis for the US economy is way too optimistic and that the recent performance in a very strong bull market is making all the comparison figures look too rosy. We know that most people don't have the patience and fortitude to sit through long bear markets, they didn't after 2001, they didn't after 2008 and even the short one in 2020 .
If you were reading all the stuff after 2001, everyone was negative on the US, then it was all about China, commodities, Europe, oil, tech stocks , banks and property, that lasted a long time. People forget that all that, its only since 2015 that there has been all this exclusivity about the US markets being the only show in town.

 

[Marc]

Can i ask what that table is from?

I've spent way too much time using compound interest calculators and running numbers through excel and that looks like the lazy option I've been wanting for a while!

It’s the Dimensional Retuns book which they publish annually.

I’ve been using it since 2008 with my clients.

 

[Marc]

yes that table is more realistic, all I am saying is that the prognosis for the US economy is way too optimistic and that the recent performance in a very strong bull market is making all the comparison figures look too rosy. We know that most people don't have the patience and fortitude to sit through long bear markets, they didn't after 2001, they didn't after 2008 and even the short one in 2020 .
If you were reading all the stuff after 2001, everyone was negative on the US, then it was all about China, commodities, Europe, oil, tech stocks , banks and property, that lasted a long time. People forget that all that, its only since 2015 that there has been all this exclusivity about the US markets being the only show in town.

What was the annual return in the years following 1940? It was good right?
Yet Pearl Harbour was 1941.

If you buy in 1926 ahead of the Wall Street crash you make money.

If you buy ahead of WWII you make money.
If you buy at the end of the 1960s you make money despite the 1970s inflation.

The message is this. Stop fretting about the short term and all the reasons you can tell yourself not to invest.


For the avoidance of doubt I’m not recommending just investing in the S&P 500, just that investors shouldn’t fret about trying to time the market.

 

[RonnieShinbal88]

Stop fretting about the short term and all the reasons you call tell yourself not to invest.

It depends on investment horizon, if someone has a 10 to 15 year investment horizon they should look at that time period in a rolling window historically and look at the distribution of returns matching that time period (not an 84 year period starting in world war 1 as per the first graphic).

They should also pay attention to the amount of money made or lost and whether it matches their targets/needs (not simply 'makes money'/'loses money' as per the second graphic).

There were certainly people around the great financial crisis who had to continue working, because they couldn't afford to retire due to hits to their pension pots, a quick google will throw up news stories there.

 

[Marc]

It depends on investment horizon, if someone has a 10 to 15 year investment horizon they should look at that time period in a rolling window historically and look at the distribution of returns matching that time period (not an 84 year period starting in world war 1 as per the first graphic).

They should also pay attention to the amount of money made or lost and whether it matches their targets/needs (not simply 'makes money'/'loses money' as per the second graphic).

There were certainly people around the great financial crisis who had to continue working, because they couldn't afford to retire due to hits to their pension pots, a quick google will throw up news stories there.

Hang on a minute. Some Irish people lost much more money during the global financial crisis than they needed to/should have done due to over leverage/profound home bias and frankly just shockingly poor investment advice.

Sean Quinn is the poster boy for that surely?

 

[SquirrelChaser]

It depends on investment horizon, if someone has a 10 to 15 year investment horizon they should look at that time period in a rolling window historically and look at the distribution of returns matching that time period (not an 84 year period starting in world war 1 as per the first graphic).

They should also pay attention to the amount of money made or lost and whether it matches their targets/needs (not simply 'makes money'/'loses money' as per the second graphic).

There were certainly people around the great financial crisis who had to continue working, because they couldn't afford to retire due to hits to their pension pots, a quick google will throw up news stories there.

??

Looking at the rolling 10 or 15 year window only tells you (at best) the range of expected returns over that investment period which swing from negative to positive depending on the window you choose. It tells you nothing about the 10 year window which starts today.

What you could-usefully- do with 10-15 year windows is compare the returns with the alternate investment options and inflation. That's an eye opener- over the last 10 years house prices here have doubled while the S&p 500 has tripled.

You could also incorporate a 10 year window to model the next 10 years under the assumption returns will revert to long term averages. Right now that suggests returns over the next 10 years will be far lower than the last 10 years- but there's also the (low in my opinion) possibility that high returns will act to further increase the long term average which works mathematically as well.

But the key elements will be risk tolerance and alternatives- you'll always have to balance certainty with potential returns. Targets and needs are very different. If you absolutely need a certain amount of cash in 10 years then you have to put that amount of cash into an account over the next 10 years. If you're happy to risk the (historically small) possibility of having half that amount for the (historically high) chance of having 50% more, you put it into an index tracker.

For myself, my base assumption is that the return on my chosen indexes will, over my 40 year odd investment timeframe, be 75% or higher than the long term annualised return. That or higher and I'll be fine, lower and I'll have to work part-time for a few more years.  BUT even if it's half tthe long term average (the worst case i could find over 20 years) I'll still be far better off (relative to the alternatives) than I would have been otherwise AND be able to retire in significantly more comfort. So it'll just be a smaller win rather than a loss.

 

[SquirrelChaser]

It’s the Dimensional Retuns book which they publish annually.

I’ve been using it since 2008 with my clients.

That is an extremely useful resource which I never heard of before and is probably going to heavily influence my decision making.

Thanks.