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the caveat to "stocks for the long-term"

John Rekenthaler has been discussing some recent research that shows that Jeremy "Stocks for the Long Run" Siegel might, perhaps, have been relying on some selective, flawed and limited data. Siegel says that, in the long run, stocks have a 6.9% annualized real return. Scholars who did some of the hard archaeological work (for example, going through 19th century newspapers issue by issue to reconstruct the fate of long-dead stocks which aren't reflected in Siegel's data) find that the dominance of stocks is more limited, and more time dependent, than Siegel's faith would lead us to accept.

Nothing here is a definitive rejection of the pro-equity argument. More, it offers a heads up that it's entirely possible that stocks will lag and bonds will lead ... oh, between now and 2050?

JR's closing from today's essay:
The case for the ongoing dominance of stock is less overwhelming than we once believed. That observation bears consideration, especially for retirees tempted by advice that they invest heavily in equities. Such counsel is not necessarily wrong, depending upon individual circumstances (in particular, wealth levels), but it often is coupled with the implicit assumption that stocks will inevitably beat bonds over the long term.

Maybe. If not, though, retirees do not get a second bite at the financial apple. That lesson is very much worth pondering.

Note: When I sent Professor McQuarrie (Edward McQuarrie of Santa Clara University) the reader’s comment (NB: someone responded to JR's first essay on the subject by pointing out that mortality rates from surgery fell, and fell permanently so perhaps all of that old stuff from long ago reflects an age now forever past), he forwarded me the following response:

“My take is in the article’s title. Sometimes stock returns will soar far above bond returns, as after the war. That outperformance can be sustained for decades. Other times stocks will lag bonds, for decades. There’s no rhyme or reason to it, and in all likelihood, no predictability over the individual investor’s limited time horizon of several decades.

“As for your reader’s clever riposte, here is my redo: ‘The rate of death from disease and epidemics stayed at a relatively high and constant level from 1793 to 1920. Then advances in modern medicine fundamentally and permanently altered the trajectory ... or so it seemed until COVID-19 hit in February 2020.’”
For what interest it holds.
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Comments

  • edited January 12
    So ... the bottom line is that there is no broad advice which can be taken as generally helpful for all time? Uh, okay.

    >> Other times stocks will lag bonds, for decades.

    When was that, and why was it? The 'decades' part.

    I've been studying this site:

    https://www.financialsamurai.com/historical-returns-of-different-stock-bond-portfolio-weightings/

    As for individual stocks for the long term, which is how I understood the phrase, I came to think over my tech editorial career that tech was moving faster and faster for that to mean much.

    I had strongly recommended to me to buy lots of Verizon 35y ago, can't miss, but I had just spent a couple years working at Bell Labs, and was properly wary. My father-in-law long ago worked his entire career at Barnes Group, such a venerable and consistent-dividend outfit that its stock symbol is, yes, B.

    If you had held those two for 40+ years you would have done okay, but not like SP500 and with a lot more bumpy drama.
  • edited January 12
    I'm surely glad to have clicked on THIS thread. Thank you, David and David.

    Ever since I started out in investing, just beginning my 403b, always self-directed--- I knew I must constantly stay on top of whatever I could get my hands on in terms of information.

    THEN, the the job is to draw conclusions which mean something from it all. Yes, I'd bought into the "stocks for the long-run" argument.

    But over the years, I saw more and more clearly, that one must be at least a bit fluid and flexible. A refusal to make any changes can indeed spell doom.

    Now in retirement, I've got an income stream from both bonds and stocks, but don't need them, so they get reinvested. And EVERYONE'S circumstances are different. Still more stocks than bonds, however. If and when I get into PRCFX from David Giroux, that picture will change over time, but very slowly.
  • msf
    edited January 12
    If one thinks like an economist, then one makes the absurdly simplifying assumption that people act rationally. Add in the assumption (belief?) that stocks are more risky than bonds, and one must conclude that over a long enough time (whatever that may mean) stocks will outperform bonds. Else rational investors will invest in bonds for at least equal expected returns with less risk.

    The question is what "long enough" means. I like the way Keynes put it:
    In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.
    However, when it comes to investing in stocks, it is worth recalling another well-worn if misquoted observation: the "rich are different from you and me".

    Most stocks are owned by the wealthy, who invest multi-generationally. Their time horizon is often not limited to several decades. Not that this helps the other 99%, who tend to invest primarily for their own benefit and perhaps secondarily for a legacy.

    The updated data suggest another quote by Keynes: “When the facts change, I change my mind - what do you do, sir?” Or to put it another way, perhaps this adds support for 60/40.
  • Very useful article.

    I haven't finished it but I do not see data about returns taking into account the starting value, ie returns when stock P/E's are high or interest rates low

    I have always heard and believed that one of the reasons Buffet has done so well is he bought gobs of stock during 1974 at very cheap valuations

  • edited January 13
    Nicely put by @msf. I agree. Assumptions that investors as a lot act rationally are way off base. It’s interesting that we so often speak in generalities about stocks”. I’ll leave it there.:)
  • edited January 13
    Speaking of @msf, he mentions "If one thinks like an economist ...". Made me wonder how many very wealthy economists there are.
  • @Old_Joe - Rono is the only one I can think of
  • Mark said:

    @Old_Joe - Rono is the only one I can think of

    Grin. Truth?

  • edited January 13
    Than there’s Mario Gabelli in this week’s Barron’s who, after citing a litany of ominous signs, including budget deficits and a recent 50% drawdown in the U.S. Strategic Petroleum Reserve, shrugs them off and says:

    ”But what does it matter? Short-termism is prevalent as algorithms, momentum investing, and exchange-traded funds influence trading. The Dow industrials will be the equivalent of 1,000,000 in 40 years and was under 1,000 about 40 years ago. So, invest long term.”

    Gabelli’s point is later reaffirmed by Henry Ellenbogen (no investing lightweight):

    “I agree with Mario: You have to take a long-term view and be positive on the prospects for the U.S. The agility and ability of the American business sector is like nothing else in the world”.
    -


    Excerpts from: ”The Market’s Gains Won’t Come Easy From Here, Barron’s Roundtable Pros Say. 8 Stocks for Now.” Barron’s January 15, 2024


  • edited January 14
    From reading articles and watching markets:
    1) It is known that the US stock market is the best LT. Bogle, Buffett, and Malkiel (Random Walk) told us for a long time to invest mainly in the SP500 or VTI.
    2) The further you go in the past, the less it matters. How 1802 is similar to 2000+. We are more advanced, and things are developed much faster and influence our lives. Two weeks ago, I hiked with a heart surgeon. He retired 10 years ago and told me that in the last 10 years, things changed and advanced so quickly and much faster than in the previous 40 years.
    3) In the ST (months-years) bonds can do better. The SP500 lost money over 10 years in 2000-2010, see (https://schrts.co/sSpxKTXr). Indexes for total bond, SC, Value, and International beat it.
    This is why I always believed and practiced investing in what works lately using a wide range of categories.
  • edited January 14
    ”Two weeks ago, I hiked with a heart surgeon. He retired 10 years ago and told me that in the last 10 years, things changed and advanced so quickly and much faster than in the previous 40 years.”

    It’s truly incredible. My first (of several) eye surgeries in the early 70s required a 2-night hospital stay, horrific pain for a day or two and rendered mediocre results. The last one five-six years ago was accomplished in an hour’s time in an outpatient setting while fully clothed - shoes and all. No pain. Terrific results. A lot of eye surgery is done under local anesthesia (for medical reasons) so that you are aware of and listening to the surgical team during the entire process. On that first one in the 70s they were frantically running around looking for a needed instrument they couldn’t / never did locate. On the last one the surgeon was discussing with colleagues her plan to fly to Colorado with her husband for a ski trip at the end of the day. :)
  • Trying to convince myself to diversify and invest in small cap and internationals, and expanding FT1000 observation:

    From 1 January 2000 to 1 January 2013 SPY moved up only 2%. During the same time, Vanguard International Value VTRIX was 84% up, and Vanguard Small Cap VSMAX was 131% up.

    As for the next 10 years, see https://www.morningstar.com/portfolios/experts-forecast-stock-bond-returns-2024-edition

  • It all depends on when you need the money, and how much. People who retired in 2000 expecting to live on the returns of the SP500 were in trouble for a long time.

    Most projections, like American Associations of Individual Investors claim 3 to 5 years of cash/short term bonds for living expenses above pension and SS is enough to ride out "Any" market decline. But if you look at how long it has taken the SP500 to get back to a previous high permanently, it is 13 years in recent memory, and it took 25 years after September 1929.

    I agree we live in different times than 1929, but 3 years of living expenses is not much of a cushion for a recent retiree. Unfortunately, most people don't even have that.

    As for medical progress, we kept patients hospitalized for days after gallbladders ( 7-10 days) Heart attacks ( at least a week) and hip surgery ( a week) in 1978. I was home walking up stairs a the night of surgery after my hip replacement in 2021. My wife had a grapefruit sized benign tumor taken out of her chest in 2018. She went home in 2 days.


  • \\\ Other times stocks will lag bonds, for decades.
    >> When was that, and why was it? The 'decades' part.

    Answered my own question, sort of, if not exactly the 'decades' quantity.

    I knew that for the period Jan 2000 - Jan 2010 SP500 was flat, but what I did not know, or had forgot, was that DODIX (say) did as well as it did, doubling. Better than BND and BSV.

    FPACX almost tripled.
  • But if you look at how long it has taken the SP500 to get back to a previous high permanently, it is 13 years in recent memory, and it took 25 years after September 1929.

    According to Mark Hulbert,
    On a dividend- and inflation-adjusted basis, the broad stock market had recovered from the 1929 collapse by March 1937, only 7½ years later.
    https://www.wsj.com/articles/lessons-from-the-dot-com-bust-11583192099

    He doesn't define what "broad stock market" means, though he does observe that the DJIA took a lot longer to recover because it was full of stocks that underperformed the market. And the S&P 500 started only in 1957, though various people have approximated the index going backward.

    The 13 years mentioned for the S&P 500 to recover likewise seems to overstate the time for recovery of the broader market, even after accounting for inflation. Hulbert wrote (in 2020) that
    The longest recovery time in U.S. history was from the 1973-74 bear market: It wasn’t until the end of 1984 that the broad market, on an inflation- and dividend-adjusted basis, was back to where it stood at its January 1973 peak—nearly 12 years later.
    Here's a table of S&P 500 recovery times, including divs and adjustments for inflation/deflation:

    image

    Source: https://monevator.com/bear-market-recovery/

    That piece primarily discusses UK data. It reports that Wade Pfau calculated the recovery time for the 1972-74 bear market in the UK was 11 years (compared with Hulbert's 12 in the US). But in nominal terms, it took less than five years to recover. That suggests that inflation could be as big a risk as sequence of returns.

    When looking at how much cash to keep on hand, one should balance these risks. ISTM that five years cash is adequate, bearing in mind that it's not critical to recover all the way (in real terms) to the prior peak. Getting well along the way to recovery can suffice.

  • A balanced portfolio may only drop 1/2 those numbers, With rebalancing. I would think recovery times are somewhat less than those shown.
  • Just goes to show that the stock market is NOT a utility, doesn't care that you need 7% annual returns to fund your retirement and it is very risky...what have we had like TWO, 50%+ drawdowns in the past 15 years or something and another couple -20%.......it exists to provide capital to fund companies so they theoretically can grow their business.

    A lot of this looking backwards is just a bunch of hooey...what if...what if...so much is different...most successful companies now have way less employees, use way less capital...market valuations have trended higher in the past what 20 years or something? Sooo much more private and gov't debt out there....It's like saying "the last time the Yankees played in a World Series 12 years ago where they had home field advantage they won...never mind that only 2 playes were on the team then, they are playing a different team etc etc...(this is a hypothetical example)..like WTF does the recovery time in 1974 etc etc have anything to do with today? Please.

    Jared Dillian said it best recently..."a lot of "investing" is just entertainment"...that is why crap like CNBC exists....the largest comedy show on TV these days...

    All that being said, as long as we don't go full blown Bolshie in this country and still have a semblence of Capitalism, I would not bet against the USA...but am thinking you might not be able to do better than a Berkshire that owns blue chips stocks, well run relevant businesses, utilities, railroads, insurance companies...AND has what $150B of Tbills...might be the way to go, who knows?
  • @msf...I would not be comfortable having anything less than 20 years of cash/tbill/gold (not paper) of funding for your current lifestyle living...and then, only then invest in the markets. Ya, I know, most would say this is nuts....my reply would be, ya, ok, we'll see.

    Kind Regards to ALL,

    Baseball Fan
  • A little bit of back-door bragging, @Baseball_Fan? You can afford to sit on 20 years' worth of a security-cushion? Unimaginable to me. And we live modestly.
  • Or ... we can see now (sort of). Using the conventional 30 year horizon and the usual 4%/year (inflation adjusted) assumed spend down amount, a 20 year cash cushion would result in 80% in cash, 20% invested. Setting aside 5 years of cash would result in 20% in cash, 80% invested.

    Portfolio Visualizer only goes back to 1985, but that covers the 1987 crash, the dot com bust, and the great financial crisis. Run PV through 30 year periods (or to 2024 when starting after 1994), rebalance annually, withdraw 4% annually, inflation adjusted.

    The worst start year, not surprisingly, is 2000. That's starting with a market collapse and going through another one in the same decade. A lost decade for large cap stocks.

    Here are the nominal results of three portfolios from Jan 2000 - Dec 2023. The first starting with 20 years of cash, the second with 5 years of cash and the rest in VFINX. The third with 5 years of cash and the rest invested 60/40 VFINX/VBMFX. After the 24 year period ...

    20% stock/80% cash - 14% remaining (7.7% inflation adjusted)
    80% stock/20% cash - 42% remaining (23% inflation adjusted)
    48% stock/32% bond/20% cash - 73% remaining (40% inflation adjusted)

    For the remaining six years, you'd like at least 24% (4% x six years) remaining in real dollars. The 80/20 mix almost makes it, and the balanced portfolio makes it with ease.

    If you're wondering what would happen to the 80% cash portfolio without rebalancing, it would have come out about the same (a half percent worse). The others would have come out worse than with rebalancing.

    Here's the PV run. You can experiment with it yourself.

    Many years ago, Suze Orman said she was keeping almost all of her assets in TIPS. Which was fine for her - she didn't need to grow her portfolio and TIPS wouldn't be degraded by inflation. That doesn't work for most people, who need growth even in retirement. (4% withdrawals with no growth lasts only 25 years.)

    I think @Crash said something similar, though in a different way.
  • edited January 14
    I am confused about Hulbert's '70s-'80s assertion, even though (perhaps because) I lived through it, from lowly Catholic-schoolteacher to tech writer w new family in thriving CE.

    FPURX from Jan '73 to summer '82, Ray Gun era, way more than doubles. Granted the end period was a time of 15% inflation. But was that performance due chiefly to its bond holdings?

    If you simply advance to summer '84 it way way more than triples. Start of bull times.

    We could as well argue in what ways it must be different this time and cannot repeat. What is true is that Fed policy is aggressively different and we will not have a '74-'84 repeat for those reasons.

    2000-'09, when I went from startup doc manager (options ! IPOs !) to underemployed sub teacher and contract TW), I guess those circumstances could repeat, sort of and somehow. But banking / mortgage regs have changed majorly now as well. And again, as noted above, two of the better balanced funds doubled and tripled.

    So ... I am missing the direness of the problem. I suppose there's always something.

    (I am in complete agreement about modern medicine, as I've had 15 GA operations the last 30y, with more tk.)

    20y cash / cashish cushion, love it.
  • edited January 14

    ”I would not be comfortable having anything less than 20 years of cash/tbill/gold (not paper) of funding for your current lifestyle living...”

    Not intended as investment advice. However, @Baseball_Fan might want to take a look at PRPFX.

    Gold 25%
    Silver 5%
    Dollar assets / Treasury Bonds 35%

    There’s 65% of the asset mix you identify. Just saying …

    Link to Permanent Portfolio website and allocation model

  • edited January 14
    Crash said:

    A little bit of back-door bragging, @Baseball_Fan? You can afford to sit on 20 years' worth of a security-cushion? Unimaginable to me. And we live modestly.

    Not so fast. Depending on one’s macro view, a mix of cash, T Bills and gold might be a good long term investment. Not everyone thinks equities are the ultimate growth vehicle. I think BB’s “allocation” a bit extreme - but who knows? The whole world rolls over every 24-hours.
  • msf
    edited January 14
    FPURX from Jan '73 to summer '82, Ray Gun era, way more than doubles. Granted the end period was a time of 15% inflation

    Inflation in 1974 (the era of Watergate and Whip Inflation Now) was about the same as inflation in 1980 - a shade over 12%. There was no calendar year with 15% inflation. It peaked at 13¼% in 1979.

    Adjusted for inflation, the cumulative return of the S&P 500 over the calendar years 1973-1984 was 0.0266%. Unadjusted, it was 148%.

    In a time when fund managers could get inside information (no Reg FD), it wasn't hard for managers to beat the market. Puritan was especially successful, but lots of well known stock and balanced funds beat that 148% nominal return, such as VWINX (211%), FFIDX (201%), DODGX (193%), VWELX (175%).

    Cumulative fund returns are from 12/29/72 to 12/31/84 and M* charts.

    Other data are from NYU Stern spreadsheet (compound yearly data as needed):
    https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
    https://www.stern.nyu.edu/~adamodar/pc/datasets/histretSP.xls

    (Fed inflation data differs somewhat, though probably not significantly for purposes here.)
  • edited January 14
    @davidrmoran et al

    Starting Oct. 2000, chart of SPY v BAGIX, for 10 years, one decade.
    BAGIX is a well run, 'plain jane' intermediate term bond fund. Likely not the best compares of the period, but a curious look starting 7 months after the 'dot com' melt and moving into and through the big melt in the fall of 2008. This is a distributions included graphic.
    NOTE: Chart start date is default that can't be changed.
  • @crash. Nah, no humble bragging here, to be completely honest I actually typed 30 years and then changed it cause I thought it would be thought as even more out there... LOL!

    I've pre ordered the upcoming Jared Dillian book. No worries stress free...he speaks to a portfolio of 20% equal amounts cash, bonds, stocks, gold, real estate. Kinda like the perm portfolio that hank mentions. Great track record since the early 70s... it's that I don't completely trust the stock market, I can always cut my expenses but mentally I can't accept a draw down where I potentially lose 5 plus years of work compensation...no one can say that the market is cheap here.... you're gambling that Powell cuts and the market reacts the way the crowd thinks it will. Dangerous.
  • "The Madness of Crowds," eh? Which is why I look for the uncut, unpolished gems, the uncrowded trades.
  • "Which is why I look for the uncut, unpolished gems"

    Hey! That's me!!  :)   :)
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