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They don't have to . Even 5 year cd's are on par with total bond funds . So if you start from the peak in 2000 total bond funds beat stocks since rates fell . But while those results occassionally happen they are to few and far between.
Those are instruments you use with stocks not either or since hindsite is always great.
But don't forget ,returns mean little without being real returns those 20 year cd's have the potential to loose big purchasing power if inflation kicks up .
1966 saw inflation at 1% and jump to double digits in just a few years. No one saw that on the horizon
I think inflation is a neutral factor. Because inflation eats into most investment returns - no matter where they're coming from. The only exceptions would be investments whose returns vary depending on the rate of inflation (like TIPs - IBonds - a small number of corporate bonds IIRC). Neither bonds nor stocks did particularly well on a "real return" basis during the inflationary period between 1966 and 1982. Didn't help that the rates available on bank CDs were kept artificially low by Regulation Q:
OTOH - taxes aren't a neutral factor (except in tax deferred accounts). Taxes on capital gains (even long term capital gains) have been much higher in the past. And taxes on dividends have been sky high at times (70% during some of my working years):
I first got interested in municipal bonds back in the 70's because of taxes. And am still heavily invested in them today. I can't control the markets - or inflation/deflation - but I can control my tax situation (and the amount of fees I pay on investments). So I do the best I can.
Note that the war most central banks - including the fed - are fighting now (and not very successfully) - is the war against deflation - not inflation. So I am spending time thinking about how deflation will affect various investments. Note that it is much much worse being a debtor during a period of deflation than a period of inflation:
Inflation hurts all investments . But the difference is in the growth rate potential during the recovery as inflation falls.
But we are not talking high inflation. What was said was the fed could just have just raised rates to 6% under these conditions with no wage growth and this economy.
You're still not getting it. I'm betting that it will go up based on history of going up over almost all multi-decade periods going back over a hundred years, regardless of what analysis was done at any point in that history.
The history of what? The DJIA - one of the oldest indices (the DJT is older) has been around since 1896. But its composition has been anything but static. There isn't a single stock left in the index that has been in it continuously since inception (GE comes the closest). Instead - companies are dropped from the index when they falter/go out of business and are replaced by newer better performing companies. IOW - the index isn't a history of anything. If the index still had its original components - it would probably be selling for about 12 today .
The SP500 has only been around since the 1920's. And - again - today it isn't anything like it used to be. In fact - up until 1957 - it didn't have 500 stocks. Because it was too hard to follow the prices of 500 stocks and put a price on the index before we had computers. Also - like the DJIA - the stocks in the index are picked by a committee. So the crummy companies get dropped and are replaced by companies that are doing better. The SP500 as we know it today has only been around since 1988!
Of course - the Nasdaq is a tyke. It's only been around since 1971.
IOW - most of this "history" that people rely on is fiction. It not only has a pronounced survivor bias (https://en.wikipedia.org/wiki/Survivorship_bias) - which would be bad enough. It is simply a history of companies that survived and did well - not companies that failed. So - it's not surprising that the indices go up most of the time. The more interesting question is why they don't go up all of the time.
Which is not to say that some equities may not be good investments for some people at some times. Only that it's silly to rely on this kind of historical data to try to make one's case. Robyn
How about Vanguard Wellington (VWELX) it has been trading since 1929, a balanced fund with average annual returns of 8.2%. All your talk of survivor bias aside, how does one of the oldest mutual funds work for your history of what?
How about DODBX that is 1931, or FFIDX from 1930. Which barometer of long term investing for balanced funds are you interested in?
The same thing apply's to the so called dividend aristocrats you hear about over and over as if it was some magical group of holdings not subject to what other stocks are hit with.
The truth is they perform just as poorly as any other stocks but what folks don't realize is it isn't a static holding . That list changes all the time.
When stocks no longer perform or meet the criteria they are replaced.
Of course once you learn of the booting so you can change the price already plunged from being booted
The history of what? The DJIA - one of the oldest indices (the DJT is older) has been around since 1896. But its composition has been anything but static. There isn't a single stock left in the index that has been in it continuously since inception (GE comes the closest). Instead - companies are dropped from the index when they falter/go out of business and are replaced by newer better performing companies. IOW - the index isn't a history of anything. If the index still had its original components - it would probably be selling for about 12 today .
The SP500 has only been around since the 1920's. And - again - today it isn't anything like it used to be. In fact - up until 1957 - it didn't have 500 stocks. Because it was too hard to follow the prices of 500 stocks and put a price on the index before we had computers. Also - like the DJIA - the stocks in the index are picked by a committee. So the crummy companies get dropped and are replaced by companies that are doing better. The SP500 as we know it today has only been around since 1988!
Of course - the Nasdaq is a tyke. It's only been around since 1971.
IOW - most of this "history" that people rely on is fiction. It not only has a pronounced survivor bias (https://en.wikipedia.org/wiki/Survivorship_bias) - which would be bad enough. It is simply a history of companies that survived and did well - not companies that failed. So - it's not surprising that the indices go up most of the time. The more interesting question is why they don't go up all of the time.
Which is not to say that some equities may not be good investments for some people at some times. Only that it's silly to rely on this kind of historical data to try to make one's case. Robyn
It all depends on how and for what historial data is being used for.
Market averages ? Not much meaning going forward. About the best we know is if we get to far above the mean there is always a regression back down , but we don't know to where.
1987 to 2003 as an example had 17 years of amazing gains near a cagr of 14% . That led in to 16 years of some awful performance starting in 2000. Combine them and you are somwhere around the mean numbers.
We had fabulous returns since 2009 , now those will revert back towards the mean.
We can't tell what the numbers will actually be but like dark follows light you know if you got to far a head a reversion back is in the cards.
Using data to define parameters that lead to repetitive or mathematical
outcomes is different and can have lots of meaning.
While a crappy short term indicator the cape become eerily predictive going out 8 to 15 years. Every time the cape has been in the 10-20% of all time highs starting at about 8 years and running as long as 15 years real returns have ended up over and over only in the 2-4% range.
That does not mean until then we won't have some great years ,it only means by the time 8 years comes the crappy years should dilute things down in to those real return ranges. Remember real returns are in flation adjusted returns. In fact since 2000 they have been just under 2% since 2000 was the high range.
We are still in that high range now so it would be prudent to plan for no more then that. Great if we get an upside surprise but bad if you planned on more.
Last edited by mathjak107; 02-12-2016 at 09:26 AM..
I just don't think the next 30 years is going to look like 1985 - 2015, I don't. I think the next 30 years is going to reshape the way people see the stock market as a whole.
I remember the time when the mantra was, "buy mutual funds or you are going to eat dog food in retirement," now all of a sudden index mutual funds come out and it's "buy index funds, you are stupid if you are buying mutual funds."
The number one rule on Wallstreet is that nobody's knows anything until AFTER it's happened. It's why none of the stock boys want to provide any prospective analysis, forecasts, trends, or anything that talks about how the S&P is going to go from it's current valuation to a higher valuation. We were sitting at DOW 18k last year and folks were talking about DOW 25k, DOW 30k. It's insane.
Stock price appreciation growth has to come from somewhere, if we are already sitting at extreme levels of over-valuation, there's only one place to go.....DOWN. There's a TOP to this thing guys, there's no way you see DOW 18k or 20k again unless the Fed goes negative rates.
If the Fed continues to increase rates like they should, balancing out rates that savers get and stop with the ultra cheap debt money, the stock market is going to go back down to proper valuation levels. That would be the time to look at buying if you believe in the long term growth/earnings of a particular set of companies or the stock market as a whole. Buying right now is just asking for a loss (due primarily to the inflated prices that the Fed said directly that they implemented for economic stimulation).
That's my analysis and it belongs in this forum, not the political forum, because all of this commentary is about investing.
Tell you what guys, how about we STOP the debate here? This thread will still be here in let's say by the middle of 2017, let's see if my theory comes true? If the Fed continues to raise rates like I said, let's see if we don't eventually see the DOW at 12k - 13k. Deal?
- If I'm right, I want an APOLOGY for every one of you stock boys
- If I'm wrong, I will APOLOGIZE to every one of you stock boys
I think it's a good thing companies are being replaced in the SP500, this is why it's best to invest in index.
True, sort of. The reason why an index is a good way to invest has more to do with fees. Here is a good example - Vanguard has two healthcare funds, one is an indexed fund (ticker symbol VHI) and the other is a managed fund (ticker symbol VGHCX). They perform almost identically, yet the fee for VHI is 9 BP while the fee for VGHCX is 34 BP.
Why the difference? The managed fund, VGHCX, has to pay a team of people to select the companies it will invest in, while the index fund does not since it simply does whatever the index is doing. It is important to note that both the managed fund and the index fund are replacing companies in the fund, it is just that the index fund does it more cheaply.
One other thing to note - a very popular index to follow is the so called Total Stock Market (TSM) index. There are a few agencies that provide a TSM index (e.g., MSCI, CRSP). The TSM index is pretty stable since it is for the entire US stock market and only changes when companies merge, go private (or bankrupt) or are newly created. There is no selection process as there is for the S&P 500. So this is an example of an index that does not replace companies.
As far as the S&P 500 index - it is a fine index if all one wants to do is invest in large cap companies. The big criticism against it is the exclusion of small cap. A lot of people like small cap because that is where a lot of explosive growth happens, although it is somewhat sporadic.
The same thing apply's to the so called dividend aristocrats you hear about over and over as if it was some magical group of holdings not subject to what other stocks are hit with.
The truth is they perform just as poorly as any other stocks but what folks don't realize is it isn't a static holding . That list changes all the time.
When stocks no longer perform or meet the criteria they are replaced.
Of course once you learn of the booting so you can change the price already plunged from being booted
There is actually quite a lot of turnover in the dividend aristocrat list, way more than in the S&P. You cannot at all rely on this list. There is very strong survivorship bias going on.
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