
In Investing, It’s When You Start and When You Finish (2011) - Tomte
http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html
======
cairo140
To reiterate my comment another time this was posted in a comment thread:

I feel this graphic, while informative and delightful, is insidious in its
choice of scale and its lack of comparisons.

On scale, it colors +3% to +7% real returns as "neutral". This makes it seem
like the stock market is sometimes good sometimes bad but overall it may as
well be just okay. I feel that 0% nominal returns, or even 0% real returns, is
more honest as a neutral anchor, and even with the latter it would need some
comparisons against other asset classes to paint an accurate picture.

On comparisons, it does a disservice to its readers by not adding a tab
showing bond yields and a tab showing cash/treasury yields (which would be
dark red across the board except light red around 1930).

These slights in the graphic unfairly make the stock market look unfavorable
and makes the suboptimal strategy of keeping your money out of the market seem
much more favorable than it is.

Adding a specific example, the "worst 20 years" is 1961 to 1981 with a BIG RED
-2.0% a year, as if someone loses money and in retrospect would have been
better stowing cash away under one's mattress. According to the BLS[1], US
inflation was 5.7% over that period, so the mattress strategy yields at best
-5.7% in real returns, not at all better than investing in the S&P.

[1] - [http://data.bls.gov/cgi-
bin/cpicalc.pl?cost1=1&year1=1961&ye...](http://data.bls.gov/cgi-
bin/cpicalc.pl?cost1=1&year1=1961&year2=1981): $1 in 1961 was $3.04 in 1981,
3.04^(1/20) = 1.057

~~~
Retric
These returns are before taxes. There is no inflation discount on taxes so
your real after tax returns can be negative with a 1% nominal ROI.

Further people don't really invest all their money in year X, and then take it
all out in year Y. Cost dollar averaging helps returns and needing to take
money out to live off of in down years hurts returns.

Finally the baseline is not the mattress strategy, it's spending all your
money now and investing nothing.

~~~
torkins
I'm pretty sure I replied to you last time ;) One important aspect of looking
at returns is comparing different strategies, but another one is in realistic
planning. There's a lot of literature and marketing out there touting, in my
view, grossly unrealistic numbers like 7-8% annualized compound returns as a
reasonable expectation for sticking your money in an index fun on the S&P.
Considering the huge differences in the effect of small changes to the
annualized returns, it's important people have a realistic idea of the
volatility in that expected number when they allocate the amount of money they
save for the kind of retirement they want.

This graphic is awesome primarily because it shows that it is not correct to
assume that volatility in the equity markets is averaged out completely during
a timespan that is comparable to the average savings portion of a career.

edit: oops, meant to reply to GP

~~~
cairo140
Thank you for the reply again :). I saw your comment previously and I think
you make a great point. As much as I criticize the chart for being unfairly
pessimistic about equity returns, there is far too much literature suggesting
you can get 7-8% real returns by parking your money in X, especially in the
<20 year time frame for stocks. In comparison this chart is a good factual
dose.

My concern is, that while this comparison is useful for people further along
in their research trying to understand the volatility of the stock market,
this chart has a number of misleading (IMO) traits that can
dangerously/unfairly steer people who are newer to managing their own money
away from index funds altogether.

I would hope that people see this chart, my comment, yours, and FabHK's
excellent comparison to bond yields. But if you have limited attention and are
getting started, I would hate for the original link to be the only thing you
see.

Speaking for experience with family and friends, too many good people scared
by charts like this bought gold in 2011 or trusted mutual fund managers to buy
into funds with 4% front-end loads and 2% AUM fees.

~~~
torkins
It's funny because I agree with all those statements and add "people will
listen to Jeff Siegel and just jam their money into index funds and close
their eyes until its time to retire". So they lose coming and going (but lose
less relying on index funds than buying gold funds).

Personally I think actively managing your money is the better solution, but
the active desire not to manage money from so many people (even otherwise
active and engaged people like the HN crowd) has led me to being in favor of a
stronger govt-backed pension system rather than tax-deferred accounts that
hurt our tax base and are a windfall for trustees.

~~~
stouset
> Personally I think actively managing your money is the better solution...

To what degree do you believe people should actively manage their money? Are
you advocating that people should be more active in choosing their
distribution of assets across risk:reward categories, or are you advocating
for more active trading?

~~~
torkins
I think the short answer to your question is "both". You need a portfolio with
diversified product risk and diversified strategies. You don't need to be a
quant to make a basic stab at this with the typical retail portfolio size,
there are tons of tools for free on the internet to do this kind of thing.
Most people who know enough to not be in managed funds still have no idea how
to have anything but basically a 100% long equity market portfolio (I'm
intentionally grouping together mostly meaningless 'diversification' between
highly correlated segments like midcap/largecap/nasdaq/dow) except to make it
long bonds. So I think there's basic product and strategy knowhow to
organizing and maintaining a portfolio.

The reason I said both is because of the 'maintaining' part. Without some
level of activity, its effectively impossible to be engaged with the market
enough to take advantage of opportunities and manage your portfolio to keep
enough diversification and reduce the internal correlations in your
holdings/strategies.

It might sound complicated but it can be learned and it isn't rocket science,
and there is a lot of great technology to assist anyone, not just software
devs. Managing your life savings is a better investment of time than many
other pursuits, in my view.

~~~
smogcutter
Sounds good in principle but how well does advice like this scale? Similar
problem to Waze - side streets are great when you're the only one taking them,
but once everyone does your advantage is gone. It's hard to expect a large
population of amateur investors with no edge to outperform the market. In the
general case, what's the marginal return on time and effort spent actively
managing your money vs dumping it in a vanguard 50 and learning a different
hobby?

~~~
torkins
That's possible, but it isn't currently the case. At a minimum, having a long
vanguard 500 position has a roughly 50% + positive drift - fees chance of
success. Part of the long vanguard 500 price bakes in the unlimited
theoretical upside that comes along with it. Selling option contracts against
that long position to give up that upside beyond a certain price reduces your
cost basis and pushes your position's success rate over 50%. Repeated over
many events creates a net positive expected value.

Even if there was no edge in the market, as in your premise, it's still the
case that the upside of a long S&P 500 equity position is unlimited, and the
upside of a long S&P 500 equity position with an option sold against it is
limited, therefore would be priced to have a superior chance of success
relatively speaking. More market participants would improve the price accuracy
of risk, it wouldn't reduce the price of risk to zero.

As for whether its worth it, I think the aggregate effect is significant and,
of course, is subject to the benefits of compounded returns, so it doesn't
take much to severely outperform your other prospects in the long term. It's
up to each of us to decide if its worth learning.

edit: typo

~~~
durkie
it sounds like you're basically advocating something like an s&p 500 buy-write
index investment instead of just an s&p index investment, right? basically
selling covered calls on your index investment.

I agree with your premise, and make a pleasant bit of side-income selling
covered calls on individual stocks that I own, but it seems like the buy-write
indices don't actually fare well, or at least $BXM doesn't. Way worse than I
would have expected actually...any idea why?

~~~
todd8
If the strategy worked, that would mean that calls were overpriced. Why would
that be? Why wouldn't their price reflect their value?

Since indexes by themselves have such low overhead costs, more complex
strategies have difficulty generating superior returns.

~~~
durkie
that's a good point -- i suspect the s&p 500 receives so much attention in
comparison to any particular individual stock that there is very probably
little change to fish out of its couch cushions

------
unknown_apostle
It's interesting to note that at the beginning of the best periods to invest
(the big green regions on the graph, like 1942-1960s or 1980s-2000), the stock
market was often not just low in terms of broad valuation. It was just
"empty". It had typically gone through many years of very little
participation, little activity and low liquidity.

E.g. in 1980 the (Belgian) stock market was pretty much comatose. The typical
stock owners were wealthy families, often holding their family fortune as a
large stake in a single company. To most non-financial people in 1980, owning
public common stock would have been something from a bygone era. They didn't
consider it an option.

Rather, people in 1980 were standing in line to buy gold coins. People then
feared that Volcker's dramatic rate hikes would cause severe problems. When
the stock market sprang to life in early and mid 80s, back offices were often
not able to keep pace and doing transactions could be cumbersome.

Compare this with 2016, where central bankers are walking on egg shells to
hike rates with as little as 0.25%. Stocks and bonds are more expensive than
ever. Yet almost everybody I know has a trading account. Regular people can
trade advanced derivatives with minimal hassle. Every time I visit a bank, I
see desks and booths filled with people getting talked into investing their
savings into various kinds of "high" yielding constructions. Because "TINA".

Feels to me like the worst time to invest. 36 years of buy-the-dip
reinforcement learning. But then again I've felt like this for years.

~~~
tonyedgecombe
"Stocks and bonds are more expensive than ever."

Which is what you would expect most of the time in a growing economy.

~~~
jazzyk
Growing economy?

The growth rate in the past several years in the developed world has been the
lowest in any economic expansion. In the US, around 1.5% lately and is only
positive because the inflation rate calculated by the government (by which it
is adjusted) is significantly under-estimated.

~~~
tonyedgecombe
I wasn't making a political statement.

~~~
ericd
I don't think his was a political statement either, just that your implication
that it's the result of growth doesn't seem accurate.

------
bryanlarsen
And that's the S&P 500, based on American stock exchanges, which have probably
had the best & most consistent returns over the past 100 years than stock
exchanges everywhere else.

The past 100 years witnessed the rise of American domination of global
business. Even if American business stays dominant, there's probably less
growth from #1 -> #1 then there was during the rise to #1. And that's a big
if.

In other words, the future returns of the S&P 500 is probably going to look
more like the returns of a basket of international stock markets over the past
100 years than it will look like the returns of the S&P 500 over the past 100
years.

Many people believe that since the S&P 500 has never lost money over any 10
year period that it's never going to do so. It may be highly unlikely, but if
you keep rolling those dice eventually you're going to come up snake eyes.

~~~
unknown_apostle
> "S&P has never lost money over any 10 year period"

Investing a dollar in 1929 meant 20 bad years. Sitting on that dollar for 3
years and investing it in 1932 meant no bad years.

If I look at some expectations and common beliefs that people hold in 2016, I
can't help but wonder whether we have one of those 20 bad year periods coming
up.

(By the way, part of the success of US assets is definitely related to
American companies leading the way in business innovation like IT. But another
part is related to the US running trade deficits and the dollar being the
reserve currency, meaning large amounts of dollar liquidity flooded back into
the US and mostly into its financial system.)

~~~
bryanlarsen
Where "20 bad years" meant that your investment did not keep up with
inflation, or barely kept up with inflation, but it still grew in dollar
terms.

In terms of bad things happening, that's fairly benign. It could be worse, and
probably will be some time. I'm just not going to predict when.

~~~
loeg
And only because there was an exceptionally fast run-up in 1929. If you had
bought in 1928 instead, for example, you weren't down nearly as much in 1930.

~~~
unknown_apostle
The chart from the article disagrees.

Investing in the mid- to late 20s generally, a period of overvaluation, you
would have done well initially. But for people who didn't have perfect timing
to cash out (aka most shmuks like me), every buy-and-hold dollar invested in
that timespan would remain deeply in the red for a very long period of time.

Due to the severity of the actual 1929 crash, a brief moment of semi-good
investment returns (measured over multiple timespans from a few years to
decades) occurred in 1933-1935.

------
mcguire
The larger, updated versions of that chart are available here:
[http://www.crestmontresearch.com/stock-matrix-
options/](http://www.crestmontresearch.com/stock-matrix-options/)

The real question is your investing period. I'm 48; my 90% life expectancy is
around 90. So, yes, I make the assumption that I'll get around 3% after
inflation, taxes, etc.

------
anton_tarasenko
CAPE (aka price-to-ten-year-earnings, PE10[1]) helps devising a rule of thumb
for timing.

Stocks don't deviate from their expected earnings for long, so when the ratio
jumps over the median PE10, the market becomes expensive.

Holding cash during the period of high PE10 and investing it in stocks under
low PE10 is a good idea for a person who's saving for retirement and doesn't
want to become a professional investor.

[1] [https://en.wikipedia.org/wiki/Cyclically_adjusted_price-
to-e...](https://en.wikipedia.org/wiki/Cyclically_adjusted_price-to-
earnings_ratio)

~~~
AnimalMuppet
What is the current value of CAPE/PE10? Where can I find the current value of
it?

~~~
ctchocula
This webpage seems to have the current value: [http://www.multpl.com/shiller-
pe/](http://www.multpl.com/shiller-pe/)

------
haiworld
It's really important to remember that these are inflation adjusted returns,
meaning that in most cases, if you were not invested, you would have lost even
more money than this graphic indicates.

------
erl
It should be noted that the chart shows s&p 500 which does not include
dividends. Real returns are higher when dividends are accounted for.

~~~
FabHK
Note that they do include dividends though, according to the legend. So
probably using the total return or net total return index.

~~~
erl
Indeed, I stand corrected. I missed that part. I thought the returns were too
low to include dividends, but that must me the inflation adjustment tricking
me.

------
baccredited
This is how a couple of university endowment funds do investing:

    
    
     	                Harvard	Yale
      Domestic Equity	15%	14% 
      Foreign Equity	15%	14% 
      Private Equity	13%	17% 
      Fixed Income (bonds)	27%	5%
      Real Assets	        23%	25% 
      hedge funds	        12%	25%

~~~
uiri
Your Harvard column adds up to 105%.

~~~
baccredited
Corrections are welcome

~~~
uiri
According to
[http://www.frontierim.com/files/file/download/id/1220](http://www.frontierim.com/files/file/download/id/1220)
the top 20 US Endowment funds allocate their assets like:

    
    
      Private Equity                   19%
      Domestic Equity                  13%
      Global Equity                     8%
      Emerging Equity                   8%
      Global Bonds                      9%
      Global Real Estate               10%
      Commodities/Natural Resources     8%
      Hedge Funds/Managed Futures      21%
      Cash                              4%

------
FrojoS
Shouldn't this be compared to an alternative like buying bonds or holding the
money in an average bank account? If inflation ate up the gains from the index
value increase, wouldn't the same be true for other forms of investment?

"The Standard & Poor’s 500-stock index has posted double-digit gains for the
second year in a row. But the index is still below where it was in early
1999."

Is this true when adjusted for inflation?

[https://www.google.ch/search?hl=en&q=Standard%20&ei=EuQEWOaq...](https://www.google.ch/search?hl=en&q=Standard%20&ei=EuQEWOaqIojnswGbiqPgBw#hl=en&q=Standard+poor+500)

~~~
OscarCunningham
Right, there are two questions: "What should I invest in?" and "How much do I
need to save?".

In answering the first question inflation-adjusting is useless because
inflation hits all investments equally, but in answering the second you do
need to adjust for inflation.

~~~
FrojoS
Thanks! I think I get it now. The message of the article/figure is "You
probably need to save more than you think in order to retire with X USD in
savings."

------
n00b101
_Investors often have expectations of real annual returns greater than 7
percent — the areas in green. But over 20 years or longer, rates that high are
rare._

The 7% annual return figure may be related to something Warren Buffet said
around 2013:

 _The economy, as measured by gross domestic product, can be expected to grow
at an annual rate of about 3 percent over the long term, and inflation of 2
percent would push nominal GDP growth to 5 percent, Buffett said. Stocks will
probably rise at about that rate and dividend payments will boost total
returns to 6 percent to 7 percent, he said.”_ [1]

Note that Buffet's 6-7% estimate is for _nominal annual returns._ His estimate
of _real annual returns_ is _4-5%_

There was a recent McKinsey study [2] also describing a likely long-term
scenario of 4% real returns on US equities.

Note that these are returns on _equities,_ which is considered to be the
riskiest asset class in a traditional investment portfolio. A balanced
portfolio of equities and bonds is expected to have a long-term annual nominal
return of just _4-4.5%_ (corresponding to an annual real return of _2-2.5%_ )
[3]

Pension funds and endowments typically invest in a mix of equities and bonds.
These pension funds are structured by actuaries who have made outrageously
optimistic assumptions about future returns, with the average US state pension
plan assuming a 7.69% nominal annual return. [3] In a rare public admission,
in 2008 a pension actuary for New York State declared his work to be "a step
above voodoo." [4] In a more recent dose of reality, it was disclosed by
Calpers that the public pension fund earned a return of _0.6%_ in 2015. [5]

Also, note that individual investors do not earn the "average long-term
return" (which is just a theoretical number). Actual returns experienced by
individual investors are more volatile and highly sensitive to the timing of
when the started and finished invested. This timing is completely out of an
individual's control, it is based on when a person was born and when they
reach retirement age. One way to think about this problem is, what would be
the cost of insuring investors against this "timing" volatility? Based on
current market rates and some back of the envelope calculations, the rough
answer is that it costs about 1.5 to 2% per year to buy such protection on a
balanced portfolio. Once you deduct the insurance expense from the expected
2-2.5% real return, you are left with an expected _0% to 1% annual real
return._ To put this in perspective, a $100,000 investment compounding at 1%
for 20-years would earn just $22,000 over 20 years. Meanwhile, "millennials"
are apparently banking on a 10% annual return on their investments. [6]

What all this says to me, personally, is that the traditional narrative of
individual "retirement," "saving" and "investment" is a delusion. There is no
"safe," "slow and steady" approach for lower and middle-class people to build
up for financial survival later in life. A different kind of strategy is
needed, one that is based on higher risk taking. This is one reason that I
think doing a startup makes a lot of sense for people who are talented -
better to take a big risk, invest yourself, amp up the risk massively, and
then work extremely hard and gradually "derisk" by doing all the things that
good startups do. This probably has better odds of a successful "retirement"
than the traditional idea of working in a corporate job and trying to climb
the overcrowded corporate ladder while saving little by little in a defined
contribution group pension plan.

[1] [http://www.csmonitor.com/Business/The-Simple-
Dollar/2013/050...](http://www.csmonitor.com/Business/The-Simple-
Dollar/2013/0506/What-Warren-Buffett-s-stock-market-math-means-for-your-
retirement)

[2] [https://www.bloomberg.com/news/articles/2016-04-27/be-
afraid...](https://www.bloomberg.com/news/articles/2016-04-27/be-afraid-be-
very-afraid-if-you-re-investing-for-the-long-run)

[3] [http://www.economist.com/news/finance-and-
economics/21678812...](http://www.economist.com/news/finance-and-
economics/21678812-pension-funds-and-endowments-are-too-optimistic-many-
unhappy-returns)

[4] [http://cityroom.blogs.nytimes.com/2008/05/16/speaker-
tosses-...](http://cityroom.blogs.nytimes.com/2008/05/16/speaker-tosses-work-
of-voodoo-actuary/)

[5]
[https://www.bloomberg.com/news/articles/2016-07-18/calpers-l...](https://www.bloomberg.com/news/articles/2016-07-18/calpers-
largest-u-s-pension-fund-earned-0-6-last-fiscal-year)

[6] [https://www.bloomberg.com/news/articles/2016-06-16/wanted-
bi...](https://www.bloomberg.com/news/articles/2016-06-16/wanted-big-returns-
low-risk-and-millennials-they-want-10-2)

~~~
FabHK
1\. Agreed that people today banking on returns of 10%, or even 6%, are quite
likely to be disappointed. I'd plan with a 3% real return assumption, and put
in a substantial buffer, and also plan with at most 3% safe withdrawal rate
(see Trinity study [1]).

2\. This in turn means that you have to accumulate, say, at least $1m (in
today's dollars) at retirement, to live on a modest $2500 a month.

3\. This in turn means that you have to put aside basically $1100 a month for
40 years.

3b. In other words, whatever your target retirement income stream is, you'll
have to set aside about half of that over your working life.

3c. Another way of looking at it is that you should put basically a quarter to
a third of your income into retirement saving.

4\. Disagree that startups are the best option for most people. While the
average return might be high, this is skewed by a few super successful ones. I
posit that the median return is rather mediocre. Thus, startup might maximise
your chance to retire super early and opulently. However, to maximise your
chance to reach a certain (more modest) level of retirement income, living
frugally with a "normal" well paying job might be best.

5\. A further problem I see with your "startup" suggestion is that it cannot
work for everyone - if everyone pursued startups, there'd be no one to run the
actual economy. However, if everyone reduced their consumption and ramped up
their savings rate as much as I'd suggest, the economy would most likely
collapse, as well. So, I dunno.

[1]
[https://en.wikipedia.org/wiki/Trinity_study](https://en.wikipedia.org/wiki/Trinity_study)

~~~
n00b101
_Disagree that startups are the best option for most people._

Right, it is definitely not a good option for "most people." What I was saying
is, " _startups make a lot of sense for people who are talented_."

To draw an analogy, if you are a highly talented athlete, then pursuing a
career in professional sports might make a lot of sense for you, even though
the expected payoff in pro sports is quite low for most people. Similarly, if
you are a particularly talented artist, then that career path might make a lot
more financial sense than a traditional corporate job. It seems obvious when
we talk about sports and arts, but I think it is less common for people to
think about their corporate careers in this way.

~~~
FabHK
Fair enough, and I agree with your qualification to _highly talented_ and
would add _highly motivated_ and _very lucky_.

It does not seem prudent to recommend that people become singers or actors or
soccer players on the basis that Madonna and George Clooney and David Beckham
have reached and exceeded their retirement saving goals.

------
gregstoll
I liked this chart so much I made my own version that adds options for non-
inflation adjusted and dollar-cost averaging instead of lump sum investment:
[https://gregstoll.com/~gregstoll/stockmarketreturns/](https://gregstoll.com/~gregstoll/stockmarketreturns/)

~~~
OscarCunningham
Does your graphic take into account dividend payments?

~~~
gregstoll
I'm not sure - most mutual funds include that in their returns, but I'm not
sure if stock prices/indexes do.

~~~
OscarCunningham
Ah, I just saw that you gave the sources of your data. It doesn't include
dividend payments.

------
threepipeproblm
Dave Ramsey, who is always telling everyone that average annualized returns
are around 10%, will be so disappointed.

~~~
pyromine
I mean Dave Ramsey is horrible, but AAR for the S&P 500 is in fact 10%, it's
just that there is a large volatility to returns.

Although average real returns are much lower due to inflation, but that's
another beast, though arguably more important beast.

~~~
threepipeproblm
Help me understand... I am seeing this article as showing the median returns
for 20-year periods around 4.1%. Are you saying you don't buy the article's
conclusion, or is there an apples/oranges thing that I'm missing here?

~~~
OscarCunningham
The article accounts for inflation. If you don't do that and you take an
average over the entire history of the S&P500 then you get returns of 9.0%
annually. That's not so far off from 10%.

Not accounting for inflation is fair enough in Dave Ramsey's case since he's
all about tying to get people to invest more. Since people's cash is going to
be hit just as hard by inflation as stocks it isn't necessary to account for
it.

------
BlickSilly
I miss d3.js at nyt. I would consider a few dollars a month if digital media
meant digitally interactive. same goes for you Economist. let's agree to use
the power of the web for all our web publishing, not just some of it.

~~~
micheljansen
To be fair, this is a fairly old article (2011). D3.js only came out that
year.

------
lutusp
It might have been useful to see a comparison of active-portfolio versus buy
and hold (not the chart's stated purpose). Also, to someone who doesn't invest
or who doesn't think about compound interest issues, a 4% annual return builds
fairly quickly, so the chart's implicit conclusion may seem more bleak than it
really is.

------
mdrzn
The preview for OP link on Facebook is broken, which is unexpected from
nytimes.com It's weird that it doesn't just grab the image from the article.

~~~
1wheel
Article is from over 5 years ago! Open Graph had only been around for a few
months.

------
jackreichert
And that's why, if you are investing in indices, it's important to
continuously invest.

------
jamisteven
TWSS

