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Stock Market Returns Are Anything but Average

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Re: Stock Market Returns Are Anything but Average

#61

Post by ryanar »

ArtTimeInvestor wrote: post #11

The author falls for the "past equals future" fallacy. The only way to truly take the randomness out of the stock market is to have a multi-decade time horizon. He says so after looking at the data of a few decades. That makes no sense. It is like looking at 3 people and saying "People come in groups no larger than 3". The whole article is based on that premise. He has something like 90 data points and assumes the ne…

A war? A natural disaster? That is the point! If this happens, it doesn’t matter what you invested in, money is worthless. So outside of that, it is now safe to say invest and hold is a safe strategy for guaranteeing returns over a long time horizon (30 years).

Re: Stock Market Returns Are Anything but Average

#62

Post by TheHypnotist »

sojournerc wrote: post #9
tarruda wrote: post #5

Earlier quoted context omitted.

Instead of seeing as high returns, you can also look at it as money losing value due to excessive printing of last year.

Exactly. Same with housing. They are not more valuable, the dollar is less valuable relative to them and likely will only get worse as equities and real estate are the good hedges against inflation, causing a positive feedback loop. Higher interest rates would create an incentive for traditional savings, but would destroy companies (and gov) holding big debts.

I'm not sure where you are but housing over the last year is a real supply/demand market condition. They aren't arbitrarily being overbid 10%+ because the dollar is worth less suddenly.

Re: Stock Market Returns Are Anything but Average

#63

Post by slv77 »

ahelwer wrote: post #14
ArtTimeInvestor wrote: post #11

The author falls for the "past equals future" fallacy. The only way to truly take the randomness out of the stock market is to have a multi-decade time horizon. He says so after looking at the data of a few decades. That makes no sense. It is like looking at 3 people and saying "People come in groups no larger than 3". The whole article is based on that premise. He has something like 90 data points and assumes the ne…

I mean yes, past performance doesn't guarantee future results. But it does waggle its eyebrows suggestively at it, when you have a phenomenon that's gone unchallenged for probably a hundred years now. It isn't guaranteed. But nobody's lost their shirt betting it'll continue yet . People always bring up Japan in these discussions, of course. The Nikkei 225 peaked on 29 December 1989, still only at half that value over…

The stock market is nothing more then a claim on a future stream of dividends over a roughly 50 year time horizon. The longer the investment horizon the greater the uncertainty and the greater the volatility.

To compensate for that investors typically demand higher returns. Yields on 30 year bonds are typically higher then 10 year bonds.

Long term returns on the stock market can be broken down into two categories:

- Increase in corporate earnings - Increase in the price that investors are willing to pay for those earnings

Increases in long term corporate earnings are constrained by long term growth in GDP unless earnings as a percentage of GDP increases. GDP is a function of demographics and productivity increases.

Assuming that future returns will match historical returns is a bet that GDP growth rates will be close to historical trends along with earnings as a percentage of GDP will continue to increase. Demographics are long term trends that can be mostly predicted 20+ years into the future (you can’t go back in time and make a baby) and are mostly unfavorable compared to historical norms (lower percentage population in prime working age). There is also a limit on corporate earnings as a percentage of GDP unless taxes and wages go to zero.

So a bet on future returns matching historical trends is essentially a bet on a massive productivity growth across all sectors of the economy over the next 50 years. In addition the bulk of that productivity growth will need to fall into corporate coffers rather then tax revenues or wages. And it will need to sustain that over a 50 year time horizon.

Re: Stock Market Returns Are Anything but Average

#64

Post by aynyc »

berkes wrote: post #27
Someone1234 wrote: post #8

Earlier quoted context omitted.

It starts to when you ask yourself: Where else are people meant to store money? Since interest rates and bond rates were at historical lows. So you have people who are looking at 10% YOY returns on one hand and 0.2%/2% on the other and making the rational decision. Does this make stocks overinflated? Yes. Is it going to suddenly pop? Unlikely, since the conditions that caused it won't suddenly change (e.g. certain bo…

> Is it going to suddenly pop? Unlikely.. This is not financial advise, but an investor myself, I'm on the other end of the spectrum. "Is it going to suddenly pop? Certainly! We just don't know when, how much and for how long. It could be june 2021, it could be 10 years after the Great Sino-Russian war of 2038".

the markets can remain irrational longer than you can remain solvent.

Re: Stock Market Returns Are Anything but Average

#65

Post by berkes »

heliodor wrote: post #42
ahelwer wrote: post #25

Earlier quoted context omitted.

The ultimate point of these discussions is coming to a conclusion about "what should we do?". I can give you quite a few reasons why dumping all your money in market index funds could end in disaster. I'm not under the illusion these gains are guaranteed. But what the hell else am I going to do?

Put your money in real estate. Our political system is unable/unwilling to address housing needs. Home owners vote for whatever it takes to increase prices. Renters and young people looking to buy their first homes don't have as much political clout. The reality of the situation is sad but the results are clear!

This warrants some disclaimers.

We might very well be in a housing-bubble. So put your money only in there if you can miss it and if it is safe for you. And always consider spreading your money.

E.g. consider paying off mortgage, which could be seen as a safe version of "investing in real estate". As well as putting aside some cash, and buying in on some ETFs.

Re: Stock Market Returns Are Anything but Average

#66

Post by PeterWhittaker »

tut-urut-utut wrote: post #32
ahelwer wrote: post #6

There are all sorts of interesting facts you can pull out of this, like how if you missed the top 10 best days in the market from 1999-2019, your return was cut in half. If you missed the top 20 best days, you actually lost money: https://www.fool.com/investing/2019/04/11/what-happens-when-... Basically never mistake annualized return over a long period of time for your expected return in a given year (or day, etc).…

And if you avoided the worst 10 days, your earnings double. If you avoided 20 worst days, your earning doubled again. What is the point of such trivia? That most of the profit or loss happens during the days of high volatility?

This "trivia" points out the flaw in the "long term average" argument: The stock market is occasionally so volatile that 40 days out of 34,675 have an inordinate effect on returns over those 34,675 days.

Over 95 years of trading, 0.12% of days account for far, far, far, far more than 0.12% of market impacts.

Re: Stock Market Returns Are Anything but Average

#67

Post by heliodor »

aklemm wrote: post #47
bryanlarsen wrote: post #28

Earlier quoted context omitted.

We get articles on HN about once a week arguing that massive inflation is coming soon. I think all of these articles are misguided. With such low interest rates, the Fed can and will raise those rates to prevent inflation. That interest rate rise will likely pop the bubble.

Prices are on the rise throughout the economy, so I'm starting to think the inflation has arrived.

Covid has disrupted many things in the economy. That alone means some prices will go up. But it might be temporary.

Re: Stock Market Returns Are Anything but Average

#68

Post by panax »

bryanlarsen wrote: post #22
ahelwer wrote: post #14

Earlier quoted context omitted.

I mean yes, past performance doesn't guarantee future results. But it does waggle its eyebrows suggestively at it, when you have a phenomenon that's gone unchallenged for probably a hundred years now. It isn't guaranteed. But nobody's lost their shirt betting it'll continue yet . People always bring up Japan in these discussions, of course. The Nikkei 225 peaked on 29 December 1989, still only at half that value over…

Or the German stock market of 1914. An 1914 investor would have had to have held for 100 years to get his investment back. The major point is that only looking at 90 years of American stock market returns is very serious cherry picking. We can get a lot more data by including non-American stock markets. The last century was a century of American ascendance. 100 years from now America still might be at the top, but I…

I feel reasonably confident that we will probably continue to see decent gains over the medium term of the next few decades, barring major wars. But what is always in the back of my mind is just how long can human civilization continue this incredible rate of exponential growth. If you assume that economic growth requires any amount of increase in energy consumption, then there are physical limits to how much growth can occur over the long term and we are rapidly approaching them[1]. Eventually growth will need to slow and it looks like this is already starting to happen [2]. Japan may be the endgame for most of us. Eventually there could be zero growth and then things become zero-sum which may encourage conflict.

If we are able to colonize other parts of the solar system and export industry off the planet that will allow for several more decades and probably centuries (millenia?) of growth. Hopefully civilization will survive conflict long enough to make this transition.

[1] https://arxiv.org/abs/2005.05244 [2] https://www.economist.com/graphic-detail/2021/03/15/young-pe...

Re: Stock Market Returns Are Anything but Average

#69

Post by bryanlarsen »

ryanar wrote: post #61
ArtTimeInvestor wrote: post #11

The author falls for the "past equals future" fallacy. The only way to truly take the randomness out of the stock market is to have a multi-decade time horizon. He says so after looking at the data of a few decades. That makes no sense. It is like looking at 3 people and saying "People come in groups no larger than 3". The whole article is based on that premise. He has something like 90 data points and assumes the ne…

A war? A natural disaster? That is the point! If this happens, it doesn’t matter what you invested in, money is worthless. So outside of that, it is now safe to say invest and hold is a safe strategy for guaranteeing returns over a long time horizon (30 years).

WW2 didn't make money worthless, COVID-19 didn't make money worthless. A limited nuclear war won't make money worthless. Climate change won't happen fast enough to make money worthless.

Re: Stock Market Returns Are Anything but Average

#70

Post by nfRfqX5n »

hourislate wrote: post #60
hpkuarg wrote: post #2

I mean, just look at last year, when the S&P 500 index plunged over 30%, then proceeded to nearly double from then until now, in the midst of a global pandemic that froze big chunks of the world economy. Stock market returns make no sense.

A Pandemic and multiple conflict zones were no more than a pot hole. The markets have pushed higher with no end in sight. The Fed and Treasury are making sure that if there is no one to buy stocks they will. There is no end to the support the Federal Reserve will shoulder for the markets. With Governments around the world determined to never let the Economy fall or stay down even if it means directly sending money to…

i've been thinking the same thing for a couple years now. lots of people keep harping on doomsday scenarios, but it seems too many people have too much invested in the market for it to fail
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