
Annual Returns on Stock, T.Bonds and T.Bills: 1928 – Current - hydroreadsstuff
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
======
darawk
Do keep in mind that absolute returns are not the most important factor in
investing. What you should care about are risk-adjusted returns of a
particular asset, and return stability of your whole portfolio.

You can always use leverage to magnify the returns of any asset class up to
whatever level you want. The only limiting factor there is risk and the cost
of borrowing.

Before I learned about finance I thought that the purpose of diversification
was safety. And it is, in part. But as a consequence of the AM-GM inequality
[1], diversification actually increases your long-term returns. A returns
stream of 8% every year will have substantially more money than a returns
stream with a mean of 8%, that bounces up and down. If you play around with
some numbers, you'll quickly see how profoundly important this fact is.

1\.
[https://en.wikipedia.org/wiki/Inequality_of_arithmetic_and_g...](https://en.wikipedia.org/wiki/Inequality_of_arithmetic_and_geometric_means)

~~~
tunesmith
I'd love to see a primer for leveraged diversification for people at the
Bogleheads level. A lot of people are under the impression that a three-fund
portfolio is the pinnacle of responsible self-investing, or a target-date
retirement fund. But when I dig in I see people regularly make the point that
that isn't true diversification, that asset class diversification isn't
sufficient, that diversification is about measuring what investments move
counter to each other in different macroeconomic environments, that leveraging
is good, etc. I want to know more about how to apply all that when managing
retirement funds at Fidelity or Vanguard, but I'm never going to work for a
quant firm.

~~~
darawk
Yes, that's right. What you want to do is maximize your sharpe ratio. You can
play around with this python package to get a sense for how it works:

[https://github.com/robertmartin8/PyPortfolioOpt](https://github.com/robertmartin8/PyPortfolioOpt)

What you should be trying to achieve is a portfolio that earns the exact same
return every single year, and you can do that in part by looking at historical
covariance of the asset's time series. However, you also want to take a
prospective view, and think about which asset classes may become correlated in
the future.

There's no universal answer here (in the out of sample case - you can solve it
in-sample), however. And another huge, huge factor is tax. Making sure your
investments are tax-efficient is _extremely_ important. Nothing will do more
to ruin your compounding than taxes. So whatever you do, carefully consider
the tax implications of your choices.

A lot of people focus on the tax _rate_. But what's actually quite a bit more
important is the tax _frequency_. If you pay long term capital gains every two
years on your whole portfolio...that's much worse than paying short term
capital gains once at the very end (over a long period). What this means is
that you want to choose things like passive ETFs, that are not taxed on their
internal rebalancing. Even if you were to find a mutual fund that beat that
ETF by 1% every year, the tax consequences of that fund would likely make it
not worthwhile, before even considering the high fees it would likely charge
you.

~~~
wcoenen
> _What you should be trying to achieve is a portfolio that earns the exact
> same return every single year_

Perhaps this is a dumb question, but wouldn't that mean that you end up with a
100% cash portfolio? After all, that portfolio has exactly the same nominal
return every year: 0%.

I would expect that I have to choose a relative weight, to tune the trade-off
between maximizing expected returns vs minimizing dispersion of returns.

edit: after reading a bit, it seems that changing this weight would trace out
what is called the "efficient frontier".

~~~
darawk
Sorry, stable returns are not the _only_ consideration. You want them to be as
high as you can, while maintaining stability. There is obviously a tradeoff
there, and yes, 'efficient frontier' is the term of art for choosing points
along this optimal curve.

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refurb
Interesting that for the 2007 financial crisis, you only had to wait until
early 2012 to make up your loses.

Even for the crash of the early 1930's, after 8 years you were back to where
you were.

~~~
throwaway2048
That discounts businesses that collapse entirely, or under-preform enough to
exit the index market. Indexes are misleading because they have a strong
survivor bias. Stocks that slipped out of the S&P 500 entirely no longer
register, but the money you had in them sure does.

[https://seekingalpha.com/article/207935-is-there-
survivorshi...](https://seekingalpha.com/article/207935-is-there-survivorship-
bias-in-index-performance)

I'd like to see the S&P performance of _then current index stocks_ over the
same time period, im guessing it would be significantly worse.

~~~
faitswulff
What happens to your money if you invest in an index fund and companies drop
out of the index?

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atombender
The fund rebalances regularly. Before the company is dropped out its value
will have dropped, of course, causing the entire fund to drop proportionally
in value.

Index funds typically rebalance quarterly, I believe. The index also
rebalances, usually called reconstitution [1]; the Russell indexes rebalance
yearly, for example.

Which means there can be a discrepancy between the fund and the index at any
given time. This can result in arbitrage opportunities, I believe.

Interestingly, the selling and purchasing involved in adding or removing a
stock from an index/fund also has an effect on the market [2].

[1]
[https://www.investopedia.com/terms/r/reconstitution.asp](https://www.investopedia.com/terms/r/reconstitution.asp)

[2] [https://www.cxoadvisory.com/miscellaneous/strategies-for-
exp...](https://www.cxoadvisory.com/miscellaneous/strategies-for-exploiting-
index-rebalancing/)

~~~
refurb
The broad index funds (VTI, Russel) are indexed to market cap, so when
individual stock prices change, it stays balanced or very close to it.

When a fund rebalances, it has tax consequences, so funds are incentivized not
to do it.

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bryanlarsen
Keep in mind that these are cherry-picked, they only include American returns.
The 20th century was an exceptional one for the United States. The 21st
century may also be, but you should definitely be diversifying globally.

The worst case return definitely isn't on this list, it's the returns from
1914 Germany, which didn't break even until 2014...

~~~
whb07
Definitely. Having said that very few countries have an advanced financial
system. Probably a handful of cities globally, and even then some like
Singapore or HK werent a thing 100 years ago.

But about that whole Germany thing, they did kinda, sorta, really screwed the
pooch on that one by starting 2 world wars. Maybe they kinda, sorta, you
know...had it coming.

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jedberg
Now the fun part. Pick any 30 year period, and you will beat inflation with
stocks. Even if you get in at a peak, 30 years later, you will be well ahead.

~~~
grandridge
This happened for one 100 year period when the world grew from 2bn to 7bn.
Good luck in the next 30

~~~
tunesmith
You think we're at market top for the next 30 years? Inflation adjusted?

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bozoUser
It would have been great if someone could have also added REITs. The argument
I always hear is real estate vs the stock market.

~~~
bagacrap
Real estate is tricky because you're usually gambling with someone else's
money (ie a mortgage) and your access to that is dependent on many factors
like provable income and credit rating.

~~~
sdinsn
He said REITs- ones' personal income and credit rating is not relevant

~~~
bagacrap
You're right, he did, but "the argument I always hear is real estate vs the
stock market" doesn't make me think REIT, it makes me think of a renter
considering buying a house as an investment.

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typpo
Last weekend I built an S&P returns calculator that exposes similar statistics
and adjusts for inflation.

Accounting for inflation reduces the ROI by an order of magnitude, but the
result is still impressive! (36,560.12% return)

[https://www.in2013dollars.com/us/stocks/s-p-500/1928](https://www.in2013dollars.com/us/stocks/s-p-500/1928)

~~~
pedrosorio
The bar plot below "Here's the rate of gains and loss by month, including
dividends" has the y-axis off by 100x (i.e. 0.2% instead of 20%).

~~~
typpo
Thanks. Decimal conversion issue!

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ChuckMcM
I recommend you download the spreadsheet, it can be really helpful in doing
the 'null' hypothesis in financial analysis. I always like to compare my
choices in investments versus the 'stick it into SPX500 ETFs' as the
alternative. To do that you need to collect all this data, which is doable,
but hey here they have it all in a nice package.

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legatus
I'm curious -- what does HN think of factor investing [0]? It has been shown
over long periods of time to outperform the total market, and has seen many
new ETFs available. Does anyone here tilt towards small cap value? Do you
think those effects will last, now that they're more widely known, or are the
last 15 years evidence of them weakening? I've been looking into investing but
I'm probably going with a total world stock market. Part of the reason I find
those ETFs less attractive are the higher associated fees as well as the more
"active" look. I have trouble believing anyone who claims there is a way to
consistently outperform the market while charging me for it.

[0] [https://www.investopedia.com/terms/f/factor-
investing.asp](https://www.investopedia.com/terms/f/factor-investing.asp)

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jonbarker
Which 30 year period you get to live and work in is what matters most, and the
timing of the bad years. Which is why I recommend this calculator:
[https://firecalc.com/](https://firecalc.com/).

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tunesmith
I'd love to see this plugged in to a tool that asks 1) What allocation
percentage of stocks/bonds do you want, 2) What length of period in years
(i.e. 20 years, 40 years), 3) What confidence level (50%, 75%, 90%) and yields
what APY you can expect. (The higher the confidence, the lower the APY.)

I'm still convinced that the general advice out there is highly out of whack,
and that someone's expected returns should be very low. I'm currently modeling
under 2% (post-inflation, more like 4% with) for the future, for a simple
allocation model and a 10-year window.

~~~
jonas21
I like to use Portfolio Visualizer for that sort of thing:

[https://www.portfoliovisualizer.com/monte-carlo-
simulation](https://www.portfoliovisualizer.com/monte-carlo-simulation)

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2drew3
Given the bulk of a median American household's wealth is tied to the equity
of their primary residence, it would be interesting to see how these returns
stack an investment in a single family residential home.

I imagine it would be difficult to parse out home improvements and so forth,
but it would be a comparison that more people to could relate to given the
average person doesn't buy T-bills and such.

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jashkenas
Here’s a quickie (linear/log) line chart of the data in this table:

[https://observablehq.com/@jashkenas/annual-returns-on-
stocks...](https://observablehq.com/@jashkenas/annual-returns-on-stocks-
treasury-bonds-and-treasury-bills)

------
nostromo
I'm interested in how they're pricing the S&P 500 before it existed.

Yes, you could just say, "the biggest 500 public companies in the US" \-- but
it's a little more nuanced than that, so it'd be interesting to see how it's
calculated.

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jakeinspace
So a $100 investment in an S&P 500 equivalent (not yet an established index)
on January 1st 1928 would be worth $382,850 by January 1st 2019? That's over a
250x return after adjusting for inflation, pretty neat.

~~~
duxup
With maybe the note that $100 in 1928 was worth quite a bit...

I am drifting into another point entirely and your point still stands.

~~~
monknomo
Looks like back then most people made $.40-$.60 an hour, so figure $900 a
year?

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Booktrope
Wait! These figures are not inflation adjusted. Inflation has been about 15X
since 1928. So, the $382,000 shown on the chart for 2018 is now worth about
$26,000 in 1928 dollars, against $143 value sometime in 1928. That is, in
constant dollars, about 180 x over 90 years, not a bad return on investment,
but, not what's shown on this chart!

However, if you start your comparison with 1932 instead, market average value
has increased from about $50 into about $26000, or 520 times return over
investment over 86 years, a dramatically better result! Illustrating the
second most basic rule of investing: buy low.

Consider, if you'd invested in a market fund in 1999 instead, you'd have
turned $156,000 into about $253,000 (inflation adjusted) or a gain of about
(uh-oh) much less than 2x over almost 20 years. In other words, ROI of much
less than 10% per year. Investments not so good in this century, even with the
huge stock market run-up of the past few years!

Just for comparison, a plumber in the US seems to have made about $1.25 an
hour or so in 1928, compared to about $27 an hour in 1998 (according to BLS).
In constant dollars, wages seem to have less than doubled. So, long term,
investors did much, much better than workers, that's for sure!

And since 1997 plumbers have just kept up with inflation, according to BLS
(going from $17.50 an hour in 1997 to to $27 an hour in 2019 -- equivalent to
$17.50 in 1997 dollars).

So, big news. Invested capital has increased much faster than compensation of
labor in the US, both long and short term. Well, if you think plumbers are
typical.

Obviously in the past 20 years, hacker pay has done much better than plumber
pay! In fact, hacker pay has increased much more than return on investment!
Does this mean, capitalists should fight for lower hacker wages? Or does it
mean, we have met the enemy and it is us? Only time will tell...

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kyleblarson
The volatility of equities in the 1928-1942 period is crazy.

~~~
YayamiOmate
Yeah, but given the historical contex it's understandable if not expected.
It's the great crisis (probably including it's preludium) untill 2nd WW
situation clarified.

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ferros
Why is the volatility so high only recently on the 10 year note.

e.g. historically it only fluctuated low single digits, while stocks have
always had large volatility ranges.

~~~
foota
Possibly due to the weird interest rates in the last 10 years? I think T-Bond
pricing will vary based on interest rates, like if the interest rate has
declined since you bought your bond it will be worth more iirc, so the weird
interest rates market recently could have an outsized effect here?

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maerF0x0
I wish they'd say what "Stocks" means. Is it the entire market? On which
exchanges?

This is a relevant read:
[https://www.investopedia.com/terms/s/survivorshipbias.asp](https://www.investopedia.com/terms/s/survivorshipbias.asp)

~~~
pmiller2
The very leftmost column of the table has the heading 'S&P 500 (includes
dividends)', so I assume that's the meaning of 'stocks' in the other columns.
If not, that would be very misleading.

~~~
baot
I think it's worth noting that S&P 500 index funds didn't exist until the 70s.
You'd be spending a lot of time and money to approximate it before that.

~~~
sdinsn
The S&P 500 just tracks the largest 500 publicly traded companies. So no, it's
not difficult to approximate.

~~~
baot
You need to pay commission and spread every time you rebalance your portfolio
(daily, if you copy the frequency of modern funds)

So at the £5ish/trade of my current broker, that's a cool £912500/year on just
commission.

For some reason the massively reduced ease of entry to a trading strategy like
this is never considered when lauding its historical performance.

~~~
sdinsn
> daily, if you copy the frequency of modern funds

Modern S&P500 funds like SPY or VOO rebalance quarterly FYI

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nullbyte
Is this adjusted for inflation?

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nappy-doo
FYI, stocks show CAGR of 9.59%.

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rolltiide
The way to play treasuries are in massive highly leveraged carry trades.
They're not for actually holding, unless you are starting with $100,000,000*
in capital.

*This amount is tied to how much you want to make a year based on the treasury bond's interest rate. This will always be lower than inflation.

~~~
AnthonyMouse
> The way to play treasuries are in massive highly leveraged carry trades.

Isn't that how you lose all your money when e.g. the Fed lowers interest
rates?

~~~
navaati
I guess hint was in the word "play", hehe

