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%.
Depends, dollar cost averaging shifts things around. For a typical 401k style investor having down years mid career improves returns at retirement, but then increases risks in retirement.
1. Im not sure that’s what the Kelly criterion is but I didn’t look it up.
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:
Who cares about returns over the next 150 years? Even half that is excessive. Someone investing at age 18 might care about the subsequent 50 years.
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.
Keep in mind that the present value depends somewhat on the discounted future earnings, which by definition extends to the end of time. That being said, the associated time discounting heavily reduces the impact of earnings envisaged say 100 years from now (a 5% discount rate would mean ~13k USD in 100 years is worth about 100 USD now, and that's probably generous given historic market returns).
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.).
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.
Or we see a contraction in globalization in general in which all economies shrink.
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.
1. After what happened to Russia every planner in China has
"the US government seizes our assets" as a plausible in the next 50 years.
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.
>Someone investing at age 18 might care about the subsequent 50 years
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.
> Someone investing at age 18 might care about the subsequent 50 years.
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.
My understanding is that development in some modern areas is exponential. This is the reason why China grew so fast. So a case could be made for faster timelines. US may not slow considerably but it will stop leading and being the only one.
Your assumptions presume that the pace of historical developments is the same as it was in the late 19th century, which seems clearly untrue. The rate that these things transform today may be breathtaking.
"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."
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.
For a civilizational basket case, Japan's GDP/capita has held up pretty well. Their industrial output is very strong for a country with sparse internal resources.
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.
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.
> whether much of the growth of the last 10-15 years (enormous empty cities) was substantive or useful at all.
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.
> Japan is undergoing civilizational and cultural collapse.
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.
> Europe's northern savers and taxpayers have to pay for southern workers to retire at 60
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".
More interesting that power and influence, which is an open question, is demographics. There is little to be done about shifting world demographics. Even if the us stays the premier world superpower, can that offset massive declines in the amount of people producing and consuming everywhere? While the us may actually be okay with shifting demographics (Zeihan has some interesting stuff on this), most major economies are facing rapidly declining populations over the next couple of decades.
Underrated comment. You can’t print human capital, and if fertility rates are declining everywhere, every nation is competing for a shrinking young, productive talent pool.
I’m actually not concerned about demographics. With coming automations and workforce becoming irrelevant societal changes are going to be so tremendous, that age of the population is not going to matter.
I've always wondered, why do American investors get to benefit from companies like Apple? Why does Apple choose to be a U.S. company? We're obviously in competition with other countries globally in terms of getting companies like Apple to give us their tax dollars.
Sweden, Switzerland, and the US are obvious outliers. Their economies have been abnormally stable, because they have not faced revolutions, civil wars, foreign occupations, and other forms of widespread destruction in a long time.
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.
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.
> 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.
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.
> 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.
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.
I always hate this “If it doesn’t work we have much more serious problems” attitude.
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.
Therefore investing mechanically in the whole world might be a safer bet. Other than currency risk, home bias investment never felt like the optimal approach to me, even if your home is the world’s most powerful economy.
> 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.
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.
Your point is valid - we shouldn't take single-country risk in investing. Assuming you believe the world as a whole will get more productive and value creating, globally diversifying your stocks is the answer.
As an example that supports your point, the Japan stock market (Nikkei) peaked in 1989 and STILL has not returned to that high.
> Nikkei) peaked in 1989 and STILL has not returned to that high.
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.
If you continued to invest in Japan throughout that period after, you'd be up today. The only case you were forever screwed is if you really aren't pouring more money into that (e.g. retirement).
I think about this a lot when you consider the world's largest companies today aren't stocks but sovereign wealth funds and oil reserves. Similarly in days past they were other state-owned entities like the East India Company.
The S&P 500 is not everything there is to be had...
A long time ago, naive me learned that tech companies also invest their money and that those returns count toward their valuation, and that seems wildly backwards to me, but I'm an engineer, not a financial expert.
I find the inflation as a variable very interesting. Countries that don't have strong economies generally tend to have higher inflation. So we may continue to see the stock market continue to rise indirectly due to inflation but the net return would be much lower.
You can only evaluate returns compared to the risk-free return (ie treasuries) - and favor treasuries cause less variance.
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.
> Of course a country’s stock market will perform well as that country ascends to become the world’s dominant superpower.
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.
> To invest mechanically without thinking about what’s actually happening in the world is cargo cult behavior.
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.
It's too hard to swallow for most people but you're right. There are significant headwinds coming ahead for most markets whilst productivity gains have stalled. See Robert J. Gordon's paper "IS U.S. ECONOMIC GROWTH OVER? FALTERING INNOVATION CONFRONTS THE SIX HEADWINDS".
I really think millenials should consider hedging their bet, maybe even spend 100% of their income.
>> To invest mechanically without thinking about what’s actually happening in the world is cargo cult behavior.
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?
I don’t think we were much of a dominant superpower until after World War 2. Lots of Europe was decimated but our infrastructure wasn’t and we also won the Cold War . We had large factories created also.
If some other superpower does come around you could just try to find a foreign index fund and adjust your investments.
It's weird how most of the return from bonds comes not from yield but from capital appreciation [1], which happens because yields are dropping. There's something perverse and circular about it: "Make sure you buy your collectible widget today! It'll go up in value, because next year's widgets won't be as good! Prices only go up, because everything's downhill from here!"
I’d argue the average person’s investing window is more like 30-40 years, not 150.
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.
Actually it looks like the US is already on the way of demotion from a global superpower to a regional power. There is no single country which comes as a replacement, but a multipolar world order instead. Many countries, mostly asian are emerging.
This is an analysis of U.S. stock market returns over the past 150 years.
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
> 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%)
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%.
if I invest for say 10 years with a conditional exit/hold strategy at tne end (i book profit and exit if I am in green, or decided to wait up to 5 more years till i turn green / with a minimum threshold) ...would that flexibility in investing strategy bump up my annualized returns (and presumably significantly reduce negative returns)?
This sounds at its core like a "wait until I've made my money back" strategy. And yes, per definition you're guaranteed to make your money back if you follow it.
There doesn't appear to be any period in question where you could invest in a broad-based index of funds and withdraw that investment 20 years later at a loss. That's what is shown in the FA and what the comment above means. Nobody's saying it has never declined.
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.
The linked page covers this in detail. The market goes down often, and sometimes goes down significantly for several years!
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.
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
Now I’m known as a long-term investor and a patient guy, but that is not my idea of a big move.
And here’s a major and very opposite fact: During that same 17 years, the GDP of the U.S.–that is, the business being done in this country–almost quintupled, rising by 370%. Or, if we look at another measure, the sales of the FORTUNE 500 (a changing mix of companies, of course) more than sextupled. And yet the Dow went exactly nowhere.
The point is that, despite massive economic growth (GDP quintupled) and very high rates of inflation (in the 1970's) during that 17-year period, at the end of those 17 years 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. In short, it seems that market valuations and economic performance can decouple for a very long time.
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.
That's not what he was doing. He was pointing out that stocks and the economy aren't the same thing. As in his example, if prices are too high at point X, then over the next 17 years prices can go down even if GDP is going up.
Comparing the value of a stock market index at two arbitrary points is not a good analysis.
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?
Generally it would include dividends in their returns, yeah. However, unless your adjusting the size of the position when the dividend was paid, these analysis would not reinvest the dividends.
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.
Outside America this has been pretty common or even worse. FTSE100 (UK), CAC40 (France) are right now trading the same values as 1999. Nikkei is the same level as 1988. HK is same as 2007.
Of course, those are cherry-picked selective endpoints used to make the point look more extreme than it is. Look at any other 17-year interval, or better yet the average of all of them, and you will see that the expected value of growth is indeed solidly high.
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)!
I never thought this was being too honest, as no one just buys the SPY once and forgets about it.
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?
I think a useful analogy for engineers is that companies are machines, a black box that takes some amount of resource as inputs, and turn it into some outputs.
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?)
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.
I don’t think we need to worry about steady state economics as long as we are on Earth. Ultimately the whole economy is a proxy for measuring the flows of transformations of useless material and energy in to useful ones. The sun shines every day. That makes crops, which drive labor. Labor writes software, profits go up. The true input is the hydrogen cloud around the sun.
You're raising very valid questions. It seems to me that we'd need to have continued breakthroughs in science, technology, medicine, etc. in order to drive sustainable increases in economic growth.
Forecasters have predicted the end of innovation at many points, but humans do seem to have a knack of finding something new and valuable.
> 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?)
> ...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.
That’s only for the money you put in the stock market in 2000 though. Usually you continually put new money into stocks, which somewhat flattens out the risk. Nevertheless, you arguably shouldn’t invest unless you’re prepared to hold for 10-15 years.
The argument that the US stock market always goes up over relatively long periods of time seems somewhat flawed to me. If it were true that it was always best to invest in US stocks, everyone’s (longish term) money would flow to that asset class, thus undervaluing something else in return. So it just seems that it can’t be a dominant strategy or else everyone would be doing it. Wouldn’t that leave assets like bonds, real estate, foreign stocks, etc undervalued?
I see it the other way: Corporations can invest in anything, so if any asset class outperformed equities we would soon see corporations listed on the stock market which simply held those assets. (This happened with BTC, with limited success, of course.)
So there are a couple of reasons that things wouldn't necessarily converge to equilibrium, and they're fairly well documented in all the asset classes you mention.
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.
So at ~7% it takes 10 years to double your money. So that gives one about 4 doublings in ones working career. So, a bad ten year stretch like 98-08 which provided basically 0% over the decade makes a huge difference in ones ability to retire based solely on 401K/etc style returns and should be a strong argument in favor of defined benefit plans that basically pool the risk over a much longer horizon vs going it alone.
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.
You're missing the part where ~7% is already the average including the bear periods. During bull periods, the market increases by more than that average.
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 doesn't solve any of these problems except to shift the investments from higher return/higher risk to lower return lower risk as you approach the target date. It helps with the problem that the market crashes right before you retire but in exchange you lose a percent or so over the lifetime of the fund. And while vangard is industry leading WRT to the expense ratio, right there on their page they note that the industry average is almost half a percent just in expenses. Never mind the lower returns.
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.
> 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
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.
Traditional US pension plans are all but dead except for a small number of people basically grandfathered into systems. Social security doesn't have a way to "buy up" and invest more to get it to say match ones yearly income.
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.
"So at ~7% it takes 10 years to double your money."
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.
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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%.
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
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:
Where returns is a list of the multipliers to go from the values before/after the returns, eg it has 1.01 not 1%.Deleted Comment
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.).
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.
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.
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.
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.
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.
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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.
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.
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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?
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Hmmmm immigration. That's how fast growing powers have always done it.
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.
> 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.
https://www.morningstar.com/etfs/arcx/vt/portfolio
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.
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I really think millenials should consider hedging their bet, maybe even spend 100% of their income.
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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?
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.
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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'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.
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:
Now I’m known as a long-term investor and a patient guy, but that is not my idea of a big move. And here’s a major and very opposite fact: During that same 17 years, the GDP of the U.S.–that is, the business being done in this country–almost quintupled, rising by 370%. Or, if we look at another measure, the sales of the FORTUNE 500 (a changing mix of companies, of course) more than sextupled. And yet the Dow went exactly nowhere.--
[a] https://archive.ph/ZbKZK
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.
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.
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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?
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”."
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/...
[2]https://www.yardeni.com/pub/stockmktequityrisk.pdf
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.
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.
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