
Visualization of stock market performance over time, adjusted for inflation - noahlt
http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html?ref=business
======
vanschelven
IMHO the colors are somewhat misleading. Since the data have already been
corrected for taxes and inflation positive returns are net-positive and should
be green. In the original picture even 0-3% returns were red.

This is what it looks after shifting all the colors one step towards green:

<http://imgur.com/KqU1B>

~~~
mjs
The reason they're coloured like that is that you can get to the pale red
(0%-3%) by putting you money is much safer vehicles like term deposits or
bonds. If you're getting less than 3% out, stocks aren't worth it.

~~~
vanschelven
Possibly, though I have serious doubts that bonds make 3% when corrected for
both inflation and taxes.

In any case I would love to see (or make myself) the comparison with other
vehicles.

~~~
borism
bond yields rise with inflation

<http://www.hussmanfunds.com/rsi/yieldsinflation.htm>

~~~
vanschelven
As far as I understand it, your statement is correct at face value, but
incorrect in the context of this discussion, since we're discussing the
relative yields of bonds and other investment vehicles over a long time
period.

Say use all my money to buy a long term bond today. If inflation would rise
tomorrow, you correctly point out that bond yields of tomorrow's bonds will
rise. However, mine is fixed. This means I'm hit, firstly, by the inflation,
and secondly, by the fact that the price of the bond will fall. (The price
will fall because competing bonds will have better yields tomorrow).

Correct me if I'm wrong.

~~~
lsc
my understanding is that you can buy government bonds indexed to certain
measures of inflation. TIPS, I believe they are called. Obviously, they yield
less than a regular bond, if inflation doesn't go up, but they do keep you in
positive territory, if inflation does go up.

~~~
smeatish
TIPS currently have negative real yields - you pay for the privilege of
hedging against inflation. When inflation is expected, TIPS do not necessarily
guarantee positive real returns.

[http://www.bloomberg.com/news/2010-10-25/treasury-draws-
nega...](http://www.bloomberg.com/news/2010-10-25/treasury-draws-negative-
yield-for-first-time-during-10-billion-tips-sale.html)

------
MarkMc
This is a great visualisation - it's easy to understand, and punches you in
the face with information that would be difficult to convey through words
alone.

One example is that the first few years give no clue as to your long-run
outcome. In fact, the first year may as well have been a coin flip. This shows
what rubbish articles with a 1-year timeframe like this are:
[http://www.moneyweek.com/investment-advice/share-tips-
moneyw...](http://www.moneyweek.com/investment-advice/share-tips-moneyweeks-
top-ten-tipsters-of-2010-51814.aspx)

~~~
shasta
A better visualization would IMO just show the adjusted market value and
superimpose some exponential growth curves over that (1% in green, -1% in red,
etc.). This confusingly takes 1D data and makes it 2D.

------
jmulho
Here is a summary of the 71 20-year holding periods on record.

color return occurs chances

red <0% 8 11.3%

pink 0-3% 18 25.4%

beige 3-7% 31 43.7%

light green 7-10% 14 19.7%

dark green >10% 0 0.0%

Here is the 20 year growth multiple at various returns.

return multiple

-0.02 0.67

-0.01 0.82

0 1.00

0.01 1.22

0.02 1.49

0.03 1.81

0.04 2.19

0.05 2.65

0.06 3.21

0.07 3.87

0.08 4.66

0.09 5.60

0.1 6.73

0.11 8.06

Optimistic conclusion:

If you hold a diversified portfolio of large domestic stocks for 20 years, you
will likely double (and maybe even quadruple) your spending power.

The chances of ending up with less than your original spending power: 11.3%.

The chances of quadrupling your original spending power (exceeding 7% per
year): 19.7%.

The chances of achieving 6.73 times your original spending power (the elusive
10% per year): It hasn't occurred yet.

------
noahlt
Investing in index funds has been lauded around here, but the goodness of that
strategy revolves around its consistency in returning 10% over ten to twenty
years. This graph makes index funds look much less consistent!

Does this graph debunk the index fund strategy, or am I missing something?

~~~
dschobel
Index investing isn't predicated on 10% returns nor was it ever a guarantee of
such returns. Index investing is simply the theory that the markets are
efficient and reflect all possible information on a security and that you're
not smarter than the market.

Think of it this way-- buying a stock is a way of saying "the market is wrong,
I think $COMPANY is worth more than the price at which it is trading". Unless
you have information which the market does not (the next Apple product will be
a flop, etc) this becomes, by definition, a speculative position.

Index investing is a way of opting out of the highs and lows of stock picking
and still take part in the general growth in a market/sector/<whatever the
index cover>.

The story merely points out that for some timespans, the growth of the US
markets was crap and that (unsurprisingly when you think about it for a
second) returns have varied substantially over the past 50 years even for long
time-spans.

TLDR; if you think the US economy will keep growing and don't think you're
smarter than marketɫ, index investing is probably still a really good way to
go.

ɫ hot tip: you're not

~~~
6ren
Caveat: Market prices are largely driven by huge pension funds and other
institutional funds. These are judged by their customers on their annual or
even quarterly returns. Therefore, given a choice between long-term and short-
term returns, their managers are compelled to choose the former.

Thus, stocks with great long-term returns but poor short-term returns will not
be correctly priced by the market - even if it's obvious from well-known
information.

An example is when a stock is hit by publicized litigation, that will drain
some cash, but not impact their core business. Not only does it _look_ bad,
but it will negatively impact their hard numbers... in the short-term.

------
jond2062
Although it may spark some interesting conversation and debate, this chart
isn't really all that relevant in light of modern portfolio theory and asset
allocation. While I don't disagree with the data itself, the premise that a
reasonable retirement portfolio would include a single mutual fund (or ETF)
that is composed of 100% stocks, not to mention the fact that they are
primarily large-cap growth stocks (the S&P 500), is illogical at best.

Not only should a retirement portfolio be exposed to a much wider range of
risk factors than simply large-cap U.S. growth/blend stocks (bonds, TIPS,
international stocks, REITs, small-cap value, etc.), but holding only a single
asset class eliminates the possibility for an investor to rebalance their
portfolio to maintain an appropriate asset allocation that is in line with
their ability, willingess, and need to take risk (not to mention the fact that
rebalancing, by definition, requires an investor to sell investments that have
increased in price and purchase those that have decreased in price).

In my opinion, a more interesting chart is The Callan Periodic Table of
Investment Returns:
[http://www.callan.com/research/download/?file=periodic/free/...](http://www.callan.com/research/download/?file=periodic/free/360.pdf)

Quite simply it demonstrates that the performance of different asset classes
relative to each other can change drastically from one year to the next. It
would actually be a much better chart if it included more asset classes, but
at the very least it shows that returns are unpredictable in the near-term and
that diversification doesn't simply mean holding a bunch of stocks (especially
when they are all large-cap U.S. growth/blend like the S&P 500).

~~~
kenjackson
I do think this is still pretty relevant. I'm not a portfolio theorist, but I
believe a lot of modern asset allocation is structured around risk of short-
term liquidity. That is why allocation becomes more stock heavy as you have
more years until retirement (for retirement accounts).

I think a lot of people would say, "if you gave me 50 years, and a five year
window in which to divest, you should definitely go all stock". I don't think
that would be absurdly controversial. Looking at this data though, given the
risk, it actually isn't a slam dunk.

Now this isn't to say that one shouldn't diversify among equities, but I
suspect you'd see similar charts for random selection diversified among mutual
funds/indices.

~~~
jond2062
What you are referring to is known as the "glide path." An investor in the
early accumulation years starts off with a high allocation to equities and
reduces it over time as they gets closer to retirement (thus reducing risk, in
theory). However, I'm not sure I understand your comment as this concept that
you are referring to is part of the point that I was trying to make.

What happens specifically to the S&P 500 would not be the primary concern for
an investor whose portfolio consists of a wide variety of asset classes and
who follows a glide path approach by reducing their allocation to stocks (and
increasing their allocation to bonds) over time. Thus an investor using this
approach would not be 100% invested in the S&P 500 at the beginning or the end
horizon (or at any point in between) of their investment.

I guess my point is that even just adjusting this data to include a 60%/40%
equity/bond portfolio, rebalanced annually would be a heck of a lot more
useful for retirement planning.

------
harscoat
Great submit to HN: not because of the money stuff but because of this great
visualization. Me thinks, to emulate and try to produce such great data
visualization for our users, that's our best investment plan.

------
alexk7
The chart is not color-blind friendly :(

~~~
dgallagher
If you're on a Mac, try: Control + Option + Command + 8

That'll invert your screen colors, and "might" make it readable. Press the
same key combo to de-invert.

------
grammaton
Why is this only tracking the S&P 500? Wouldn't a saavy investor be choosing
from a wider range of stocks than just the ones in the S&P?

~~~
jrockway
I think if you redid the chart with the S&P 1000, it would be about the same.
Choosing specific stocks is meaningless: given perfect knowledge about events,
of course you can make a ton of money. For example, your retirement plan in
1990 could have been "buy a million shares of Apple". You would be exceedingly
wealthy today. But your plan could have been "buy a million shares of Wang",
in which case, you'd be a welfare recipient. The key to getting rich is to be
able to predict the future perfectly.

This is difficult, so people average it out and choose something like the S&P
500. As this is a decent investment strategy, it's what the article shows.

------
jvdongen
I'm a noob regarding investing, so bear with me if I use incorrect terms or
kick open doors that are already open etc. but if my interpretation of this
graph is correct, it also offers some guidelines for investing in funds (not
individual companies):

1) from the visual it seems to me that the starting year is the most relevant.
If you start in a good year, it will mostly turn out right, regardless
whenever your end (exceptions aside, for which see point 2). If you start in a
bad year it will mostly work out badly unless you really have some time to
spare or manage to run into a very rare occasion (e.g. starting in 1947 and
ending in the mid 1950's). But that's just from the visual, which can be very
misleading, so the raw data points would be interesting to do some statistic
exercises. If that holds true though, it could be a good guideline - assess
the current returns of a particular fund and do not invest [in it] if the
current returns are not high enough. While this would make you, by definition,
miss out on any really spectacular returns, it could reduce risk enormously
without sacrificing much in terms of returns.

2) if you happen to have invested in a fund that took a nose-dive, hang on to
it and don't sell for a long while, as in the long run you're apparently very
likely to end up at the 20-year median (guess it's called a median for a
reason ;-) which is not too bad. At the very least your loss is going to be
minimized with time.

~~~
roadnottaken
No....

1) in reality you're constantly investing. nobody invests a lump-sum one time
and hopes they chose a good moment to enter the market. the chart gives you
some idea of your long-term chances.

2) "* if you happen to have invested in a fund that took a nose-dive, hang on
to it and don't sell for a long while*"

unless it goes bankrupt in which case you definitely want to sell. This is one
reason why strategists advocate diversification and investing in index funds:
you're sheltered from the (possibly poor) performance of any single
company/stock.

------
pama
Does anyone know how inflation was adjusted?

~~~
danenania
Probably with government inflation statistics, which makes the reliability
questionable.

~~~
iwwr
The rate of inflation may be underestimated, but the trend is still a good
indicator. You check out the charts at <http://www.shadowstats.com/> . It may
be helpful to put together your own "basket of goods" for a more personalized
estimate of inflation.

~~~
yummyfajitas
Actually, inflation is generally overestimated. All CPI numbers up to 1996 are
well known to be more than 1% too high.

<http://en.wikipedia.org/wiki/Boskin_Commission>

An intuitive way to see this: CPI-adjusted wages have not increased much since
the 1970's. Yet in terms of goods and services, we have vastly more than we
had in the 70's - I doubt you can name a _single_ good we consume less of than
in the 70's (besides perhaps telephone land lines and typewriters). If CPI
properly measured inflation, that would not be the case.

~~~
danenania
This could easily be turned around to say that since innovation naturally
lowers prices over time, inflation is greatly underestimated. Say that without
monetary expansion, prices would decrease 3 percent per year. This would mean
that in reality inflation is 3 points higher than its nominal value.

~~~
nostrademons
That's an odd definition of "inflation" you have, where a quantity that
supposedly measures the rate of change in prices is positive even though the
rate of change in prices is negative...

~~~
danenania
Is it really odd to measure relative to the actual natural base rate of
inflation, which is negative in a healthy economy, instead of ignoring
opportunity cost and arbitrarily assigning zero as the base rate? If an
economy's natural rate of inflation would be -3%, but government monetary
expansion keeps it at zero, are you just going to pretend there's no
inflation?

~~~
yummyfajitas
You seem to wish that "inflation" was defined as "monetary expansion". It
isn't.

~~~
danenania
Some economists do define it that way, but that wasn't my argument. However, I
do see your point if we define inflation as strictly the rise in prices, which
certainly is the most common definition. My reasoning was off.

------
stretchwithme
I guess this all depends on how you measure inflation.

If the S&P 500 is compared against something more stable than paper money like
gold, similar things emerge:

    
    
      http://steadfastfinances.com/blog/wp-content/uploads/2010/07/Historical-SP-500-to-Price-of-Gold-Ratio-1900-to-2010-credits-Zero-Hedge.jpg
    

The declines on this graph map to the red areas on the nytimes graphic.

------
gojomo
Great chart. Would love to see something similar as an option on finance
sites, with controllable assumptions/coloring, for any investment/portfolio
(or pairwise comparison of two).

I suspect a reversing of one or the other axis might help: putting the
shortest, most-recent holding periods top-right, for example, so those periods
overlapping living memory are most prominent.

------
iwwr
Compare a stock portfolio with a simple precious metals basket. The stock
market is a poor longterm store of value.

It's very hard to stay ahead of inflation with securities whose value can be
fudged by cheap money. In fact, pension funds can't even make +inflation
guarantees, only best efforts through low-risk investments. And even if they
did, they would be lying.

~~~
lsc
>Compare a stock portfolio with a simple precious metals basket. The stock
market is a poor longterm store of value.

while I agree that this would make a very interesting chart, do you have a
reference for that?

I mean it's clear that during the last 10 years, nothing has touched metals,
but if you were in gold for the 10 years before that, things wouldn't have
gone quite as well.

~~~
encoderer
I keep hearing "Gold always goes up."

It gave me this thought..

2010 "Gold Always Goes Up" 2004 "House Prices Always Go Up" 1999 "The US stock
market always goes up"

~~~
bodyfour
Sort of like: 1979 "Gold Always Goes Up"

[http://mjperry.blogspot.com/2010/09/chart-of-day-
inflation-a...](http://mjperry.blogspot.com/2010/09/chart-of-day-inflation-
adjusted-gold.html)

------
myth_drannon
This chart is pretty useless following the current world events. Right now
stock market(US & EU) is supported by QE,QE1.5,QE2 and the next QEs. The tools
that could be used to analyze the previous years are worthless.

~~~
tricky
For those of us who don't know - QE is Quantitative Easing which is nicely
explained in this great xtranormal video:
<http://www.youtube.com/watch?v=PTUY16CkS-k>

~~~
yummyfajitas
Xtranormal would do the world a great service if they replaced the teddy bears
and legos with straw men.

~~~
tricky
I don't know, xtranormal seems to be chock full o' amazing financial advice.
Here's one for you if you don't trust teddy bears:
<http://www.youtube.com/watch?v=jllJ-HeErjU>

Seriously, buy the effing dip.

~~~
trotsky
The best thing about this link is the "recommended video" in the big slot,
"Piper Jaffray's Gene Munster Says Buy the Dip in Apple" submitted by
"TradeTheTrend"

------
thinkdifferent
Just finished reading "A Random Walk down Wall Street" and I must confess I
expected more consistency and less volatility in index funds returns.

Great eye-opening graph.

@MarkMc very good point

~~~
thinkingeric
The premise of RWDWS is flawed by assuming that the secondary market in stocks
is 'free'. This book was published in 1973, and after the 'analytic' schemes
of the 1960s (and continuing in the 70s), it had obvious appeal. What it did
not account for was government manipulation of financial markets through
(de)regulation. For example, the Monetary Control Act of 1980 and the
expansion of IRA coverage under ERTA in 1981 opened the flood gates to the
securities markets and intensified the Ponzi-scheme nature of securities
'investing'. Prior to the publishing of RWDWS, it is reasonable to claim that
the stock market was a arena for transferring risk, not pretending to be a
savings institution. Something else to bear in mind is that there are little
or no real alternatives to 'funds', and this exaggerates the influx of capital
into them. The idealized view of stock and bond trading fails to fully account
for the transaction costs, which are largely hidden, and this 'vigorish' makes
it a losing game eventually. The costs associated with funds ('index' or
otherwise) are also carefully and skillfully masked, but it is easier to
market the diversification arguments. There's a reason that the 'financial
industry' is so profitable: <http://chartingtheeconomy.com/?p=665> It's an
increasingly elaborate wealth transfer mechanism.

------
NHQ
Conclusions: deflation is good, and you should put all your money in the stock
market for a short period of time.

------
kevinburke
Does the chart take into account the fact that returns compound over time? How
were the values calculated?

~~~
palewery
Returns on stocks do not compound. If you bought a stock at X and sold it at Y
your gain/loss percentage is simply Y/X. There is no reason to use the Pert
formula.

------
1010011010
"High inflation led to negative returns."

True, dat. Printing money doesn't make us richer.

~~~
joshklein
Actually, this is false. Printing USD is a tax on all current holders of USD -
that is, it dilutes the value of all existing USD while raising money for the
US government. Since there are large foreign holders of USD, but the US
government can (theoretically) spend all of its USD on US citizens, printing
money does in fact make us richer. This method of raising money is called
seignorage, and it is how the US can tax the rest of the world to pay for
whatever we want. We used it extensively during the Vietnam war to, in effect,
make the French (large holders of USD at the time) pay for our war effort.
They were not happy.

This says nothing of the long term effects of seniorage, just that printing
money does, currently, make us richer.

~~~
danenania
Maybe if by "us" you mean large banks and defense contractors. Otherwise I
don't buy it.

~~~
nostrademons
Also: recipients of social security & medicare, various federal grants in the
arts & sciences, and employees of federal government agencies.

~~~
danenania
These sums are paltry compared to the unprecedented quantities of wealth that
have been transferred and continue to be transferred from the middle and lower
classes to the elite of the finance and defense industries.

Aside from the wealth itself, there is a tremendous opportunity cost, since
capital is moved from productive to outright destructive and criminal sectors
of the economy.

The primary vehicle of these transfers is monetary expansion. All else being
equal, a sound currency would bring orders of magnitude improvement in the
real economy and dramatically increase standards of living for the bottom 90%
of the population far beyond what can be achieved through programs like the
ones you mention. Of course, there would be a deflationary collapse first, but
this would be the best thing that could possibly happen for the vast majority
of us.

~~~
nostrademons
Some numbers, albeit a couple years old:

[http://www.washingtonpost.com/wp-
srv/politics/interactives/b...](http://www.washingtonpost.com/wp-
srv/politics/interactives/budget07/category.html)

Social security and medicare combined are 35% of the Federal budget. Income
security is another 10%. National defense is 19%. Interest payments
(essentially a transfer of wealth from taxpayers to T-bill holders, i.e. poor
Americans to rich foreigners) are another 9%.

It's also not true, in strict monetary terms, that the vehicle of these
transfers is monetary expansion. Total federal spending is about $3T. The
total expansion in the monetary base since 2008, even with the massive
explosion due to quantitative easing, is only $1.2T. Tax receipts still form
the bulk of the budget.

I hate government waste as much as anyone, but get your facts straight before
arguing.

~~~
danenania
I'll admit to not having great command of the statistics, but I don't see how
the numbers you posted refute any of my points, and I don't appreciate your
little quip of condescension at the end.

First, spending on social security, medicare, income security, and domestic
programs is of a qualitatively different nature than military spending,
bailouts, and the interest payments you mention in that it is inserted
directly into the real economy instead of being diverted and for the most part
removed for good. Yes, some small portion of the military budget really is for
'National Defense' and so would come closer to domestic spending, and perhaps
some portion of the bailout funds wind up in the economy instead of banks in
Zurich or Dubai, but the bulk of it is simply absconded. So you must strongly
weight the impacts of these different types of expenditures in relation to
each other to gauge their true comparative impacts, which you haven't
addressed.

Second, the monetary base is only a small part of the picture since this only
includes physical currency and highly liquid assets. $1.2T is an enormous
expansion that constitutes a doubling of the base, but much more important are
M3 and MZM since these include credit, which contributes exponentially more to
inflation and wealth transfer due to fractional reserve banking, which is only
possible on anything remotely close to this scale in a fiat system. This graph
illustrates my point quite well, and it only shows up to M2, presumably since
the Fed stopped reporting the even more damning statistics:
[http://en.wikipedia.org/wiki/File:Components_of_US_Money_sup...](http://en.wikipedia.org/wiki/File:Components_of_US_Money_supply.svg).
So again you have ignored or confused critical factors.

The last point you left unaddressed is opportunity cost, which is really the
core of my argument. In a sound economy with sufficient resources available,
the capital stock (wealth) increases on an exponential scale, not linearly,
because the more capital that exists, the more that can be invested in
creating even more capital. Therefore, interfering with this process of
accumulation through wealth transfers and the instability caused by monetary
manipulations has deceptively gargantuan opportunity costs. All the resources
that are funneled into bombs and guns are employed in actively destroying
capital when they would otherwise be accelerating its accumulation. Likewise
for resources funneled into estates, yachts, and private jets for finance
industry billionaires that SHOULD have gone into producing capital goods for
the real economy. If you truly consider the full consequences of these
policies and the functional relationships involved, the implications are
almost unbelievably staggering.

