Inlation adjusted Dow 1906 to 1985

[stone]

I thought that this was an interesting artical showing that, when adjusted for inflation, the Dow dipped back down to 1906 levels in 1985.

http://seekingalpha.com/article/287915- ... ial-crisis

For a buy and hold investor over that period, dividends might have saved the day. But now that companies "return capital to shareholders" via buybacks (and then replenish those shares via stock options) it seems sobering.

[Gumby]

I agree. But, I actually mentioned this over at BH, and nobody seemed willing to believe it.

http://www.bogleheads.org/forum/viewtop ... 24#1152175

[Gumby]

Would you believe that the S&P 500 closed at the exact same price yesterday, Oct 3, 2011, as it did on Oct 3, 2008...to the penny?

It did...

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[MediumTex]

Would you believe that the S&P 500 closed at the exact same price yesterday, Oct 3, 2011, as it did on Oct 3, 2008...to the penny?

It did...

I would believe it, but because you posted it I don't.

I heard over on BH that the things you post are not believable.  They were rounding up a group of messengers to be shot when I heard this.  :D

Seriously, though, as I recall France's stock market had a similar multi-decade inflation-adjusted sideways movement over a similar period.

Stocks are simply not as surefire as many people imagine, even over long periods.

[Indices]

That BH thread almost gave me an aneurism there was so much stupidity on it.

[HB Reader]

That BH thread almost gave me an aneurism there was so much stupidity on it.

I just read it, too.  I don't know that I would call it stupidity exactly.  I respect their opinions, but I'm glad they aren't anywhere close to my (or my loved one's) assets.

To me their biggest problem is a lack of humility.  They seem incapable of understanding that the US dollar is not part of the firmament.

[moda0306]

They also seem to have a lack of understanding about modern portfolio theory, or at least a lack of respect of it in terms of what gold can provide.

They repeatedly try to claim that gold makes a portfolio less safe than adding more treasuries.  I'm the first to say that I think 25% gold is a bit too much, but that said, it's THE best diversifier to when both stocks & bonds drop.  That may not be often... even 50/50 VTI & TLT over the past decade have shown pretty solid risk/reward.... but it IS a consideration.  If our currency truly is backed by the power of our government to collect taxes and society's acceptance of that government as a legitimate entity, then I want to hedge against the rejection of our government by owning gold... notice that doesn't have to be 100% rejection & hyperinflation, but simply collectively doubting what we once took for granted.

[Lone Wolf]

I think the Bogleheads are in almost every way "the good guys" when it comes to understanding investing.  They have an extremely solid basic philosophy (keep costs low, diversify, index rather than actively trade) that they apply to the data of the last few decades.  I think that if you take that same philosophy and start thinking instead about the last few centuries, you get something very much like the Permanent Portfolio.

To me, they seem like a bunch of very smart guys that are saddled with recency bias.  On the whole, I think that they recommend a very fine suite of portfolios that I expect will be quite successful in the long term.  I think, though, that if they considered data past the span of a single human lifetime or the span of a single government they'd understand a bit better where we're coming from.

[moda0306]

Funny... they'd probably argue that we're the ones with recency bias (40 years of PP returns) and they have the longer-term skew (200 years of solid stock market returns, much of which where owning gold is a moot point).

I'd disagree with their analysis, but I think it's a valid point for discussion.

I think their bias may be more "institutional bias," where they base everything on the dollar, and don't show enough intellectual curiosity towards a breakdown of the implied "promises" that back that dollar up.

If the value of the dollar, not just to the general price level but to that of the basic resources we use to stay alive, is considered constant, then their argument holds water... treasury bonds & stocks make an excellent match. The problem is, that's not in any way an accurate description of the behavior of fiat currency.

[Lone Wolf]

Funny... they'd probably argue that we're the ones with recency bias (40 years of PP returns) and they have the longer-term skew (200 years of solid stock market returns, much of which where owning gold is a moot point).

That's true.  However, gold would have a bigger role to play than you might think.  I certainly agree that gold is much more crucial in the fiat currency world of today where we have every nation locked in a "race to debase."

Offhand, gold would have been great to hold instead of Greenbacks during the Civil War.

And I probably don't even need to bring up the early 30s and FDR's gold confiscation.  Even though we were on a gold standard, Roosevelt devalued the dollar overnight from $20 per ounce of gold to $35 per ounce!  Anyone who "forgot" to let Roosevelt steal their gold from them made a tidy 75% profit!

That being said, I do agree with your basic point.  Still interesting to consider that even if the fiat genie weren't out of the bottle you'd always want to have that physical gold (IMO).  You never know when someone may think that a promise they made to you is suddenly "negotiable".

[moda0306]

LW,

Even a pro-fiat guy like myself agrees that even in a gold standard world you'd want a decent chunk of actual gold.  I mean look at the 30's... not just the US, but several other countries dropped it as well.

Whether or not devaluation is "good" or "bad" for the macroeconomy as a whole is irrelevant to a person trying to maintain purchasing power with their savings... so you'll find me in strict agreement with you on this matter.

Can you elaborate on gold vs Dollar during the Civil War?

[MediumTex]

To me, they seem like a bunch of very smart guys that are saddled with recency bias.  On the whole, I think that they recommend a very fine suite of portfolios that I expect will be quite successful in the long term.  I think, though, that if they considered data past the span of a single human lifetime or the span of a single government they'd understand a bit better where we're coming from.

That's nicely put.

[Lone Wolf]

Can you elaborate on gold vs Dollar during the Civil War?

The Union was hard-pressed to pay for the war and still remain on the gold standard (a pattern you saw repeated in World War II and Vietnam).  The short version of the story was that the Union began to print money (called "greenbacks") that was not convertible to gold.  I'm not sure precisely how bad inflation got in the Union, but IIRC it was north of a cumulative 100% over the course of the war.

It probably goes without saying that you'd really have rather had gold than a Confederate dollar! 

[moda0306]

Ha... I didn't realize "greenback" was a literal term.

I tend to wonder how much inflation is a result of monetary vs other coercive policies.

I've been thinking about our conversation on the fed buying homes and whether that's inflationary and I think we have to consider 2 things.  

1) The gov't is printing money... it could very well just send a check to individuals, or debit cards, or whatever it deemed to be the "least coercive" form of getting the money out there.  This will be inflationary or expansionary or what-have-you.

2) The government using that money to "buy" goods and services and investments, whether for productive purposes, destructive purposes, or just to fool around with the economy.  This was our example of the fed buying houses.  This is also done when the fed buys bonds.  In fact, it doesn't even have to be the fed, or increasing the money supply.  Since the government has a military, judges, agencies, the IRS, etc, it can do a ton of STUPID things that make things more expensive overall, some things more expensive than others, or decrease the social trust in a society or its fait in government as a legitimate entity.

I'm not going to get into debating whether one allows the other, or what caused the problems of the day, but maybe that we just need to put the two in quasi seperate boxes.  If the fed were to truly buy $500 billion worth of homes on the market, it would have a quite a bit different affect than buying $500 billion of short-term treasury bonds.

[rickb]

I think the Bogleheads are in almost every way "the good guys" when it comes to understanding investing.  They have an extremely solid basic philosophy (keep costs low, diversify, index rather than actively trade) that they apply to the data of the last few decades. 

(snip)

I think, though, that if they considered data past the span of a single human lifetime or the span of a single government they'd understand a bit better where we're coming from.

I completely agree the Bogleheads are "the good guys", and although the very, very long term might be an issue I think their major shortcoming is their trust that MPT is based on an accurate model of financial markets.  Investment returns are NOT random within statistically normal distributions and different investment classes do NOT have invariant correlations - which are the preconditions for MPT's expected return and expected risk formulas.  The genius of Browne's PP is that it is diversifies based on asset behavior during specific economic environments rather than "average" historical correlations.  This paradoxically leads to a safe but simple asset allocation that I suspect performs in the real world better than MPT would predict.

I haven't seen anyone do this, but my hunch is if you take the average returns, standard deviations, and correlations of stocks, LTT, gold, and cash and feed them to a MPT model the predicted standard deviation of the PP mix will be significantly higher than the actual standard deviation observed over the last 40 years.  And, on the flip side, if you model a "diversified" stock-heavy Boglehead portfolio the observed standard deviation will be higher than predicted.  MPT's expected return is likely dead-on, but its risk prediction is seriously flawed.

[Gumby]

Stock-heavy investors typically expect an annual rate of return between 10%-15%, based on January-to-January past performance going back the 1870s. But, here's an interesting article on how the odds of achieving that kind of return are extremely difficult (with 5%-6% being far more likely when measured with rolling returns)...

The Charts Wall Street Doesn't Want You To See On Annual Returns

The smart investor does not ignore the reality of the current markets cycle and blindly chase promises of better returns.  Instead, after looking over the hard data, he will lower his expectations to be aligned with what he knows the current environment can deliver.
Source: The Charts Wall Street Doesn't Want You To See On Annual Returns

[Gumby]

I think the Bogleheads are in almost every way "the good guys" when it comes to understanding investing.  They have an extremely solid basic philosophy (keep costs low, diversify, index rather than actively trade) that they apply to the data of the last few decades.  

(snip)

I think, though, that if they considered data past the span of a single human lifetime or the span of a single government they'd understand a bit better where we're coming from.

I completely agree the Bogleheads are "the good guys", and although the very, very long term might be an issue I think their major shortcoming is their trust that MPT is based on an accurate model of financial markets.

Just for kicks, I posted a new thread today on BH to attempt to illustrate how dire the state of the world economy is — to see if anyone would respond with an intelligent comment.

No such luck...

http://www.bogleheads.org/forum/viewtopic.php?p=1199549

They seem to be delusional — even the moderators. I have no idea what the future holds, but those guys are incapable of even considering a serious bear market.

[Indices]

I think the Bogleheads are in almost every way "the good guys" when it comes to understanding investing.  They have an extremely solid basic philosophy (keep costs low, diversify, index rather than actively trade) that they apply to the data of the last few decades.  

(snip)

I think, though, that if they considered data past the span of a single human lifetime or the span of a single government they'd understand a bit better where we're coming from.

I completely agree the Bogleheads are "the good guys", and although the very, very long term might be an issue I think their major shortcoming is their trust that MPT is based on an accurate model of financial markets.

Just for kicks, I posted a new thread today on BH to attempt to illustrate how dire the state of the world economy is — to see if anyone would respond with an intelligent comment.

No such luck...

http://www.bogleheads.org/forum/viewtopic.php?p=1199549

They seem to be delusional — even the moderators. I have no idea what the future holds, but those guys are incapable of even considering a serious bear market.

Virtually every week someone on that forum suggests 100 per cent equities, and many people say that's a smart move. So you have a pretty good idea of the level of smarts there.

That being said I don't think this economic crisis is as bad as the great depression. But it is horrible.

[moda0306]

I really don't want to insult the BH'ers, but to me, a well diversified portfolio is more important than indexing.

I'd take a PP'esque machine made up of a managed stock fund and the flawed Vanguard bond funds over 100% index stock portfolio any day.

I'm not trying to paint with a broad brush, so this doesn't apply to the "non-100%'ers," but any intelligence indicated by advocating index investing is moot if they think that a 100% stock portfolio will either 1) be safe, or 2) yield them more than something slightly more safe and diversified (thinking modern portfolio theory here).

[Indices]

I really don't want to insult the BH'ers, but to me, a well diversified portfolio is more important than indexing.

I'd take a PP'esque machine made up of a managed stock fund and the flawed Vanguard bond funds over 100% index stock portfolio any day.

I'm not trying to paint with a broad brush, so this doesn't apply to the "non-100%'ers," but any intelligence indicated by advocating index investing is moot if they think that a 100% stock portfolio will either 1) be safe, or 2) yield them more than something slightly more safe and diversified (thinking modern portfolio theory here).

I am beginning to come to this conclusion. This is the first time I've ever see anyone say this, and I think you have hit the nail on the head. Asset allocation is probably much more important than indexing, so long as you can keep costs relatively low. A stock heavy portfolio has a very good chance of being a disaster.

[Gumby]

Yes, but the topic of conversation wasn't even about portfolio allocation. From what I can tell, BH's are incapable of even discussing the possibility of a depression-like economic situation. We can't expect them to have an asset allocation that deals with that kind of scenario if they won't even acknowledge it as a possibility. It's as if they have been programmed to 'See no evil, hear no evil, speak no evil'.

[moda0306]

Well I'm just thinking of this mathmatically here.  A Vanguard treasury fund could, at absolute worst, fail you over the alternative by losing you 20% of its value by having been investing in crap bonds.

In this same world, it's likely that a 100% stock index will be doing a 1929 or 2008 and has lost over 50% of its value.  It's likely a managed fund has done the same, plus or minus a few %.

Plus, the very idea behind index investing is that 1) the future is very hard to predict, and 2) the market is pretty good at sorting out invesmtment value.  Why do they drop that line of thinking as soon as it comes to diversification?

[Gumby]

Yes, but the conversation wasn't even about allocation. They won't even discuss the possibility of a very negative economic situation. They are high on Hopeium and optimism.

[moda0306]

Gumby,

I guess since possible outcomes and diversification are obviously linked, I'm simply taking it to the next level.  Maybe I should be saying that they should be acknowledging a broader set of possibilities, and that's where their intelligence is faltering.   Since that's the source concern behind diversification, you're really getting to the core of the issue.

My point was more that we shouldn't be giving them too much credit just because they index.  It's smart in the same way tax-efficient investing is smart, or estate planning is smart, or shopping for good interest rates on a mortgage is smart.  If you have failed to understand the huge weaknesses of your indexed portfolio due to the potential for negative economic events, then the fact that you've indexed is almost completely irrelevant.

For instance, a 100% index stock investor was hardly in a good spot vs a managed fund investor (most likely) in 1929 or 2008.  Indexing is important, but far-less so than fully understanding the diverse economic circumstance we may encounter.  Better, Gumby?

I may be a smart tax-planner, but if I suggest somebody invest none of their money in bonds because they're tax inefficient, then I'm officially missing the forest through the trees.  I wonder if I'm even one of the "good guys" anymore if I'm suggesting this approach.

[stone]

Gumby I think the crucial thing to communicate is that rebalancing two assets that are poor performers individually can give a good portfolio return. For me that was the eureka moment. The concept that a buy and hold investor gets "rewarded for risk" is a fraud pure and simple. Being duped by that idea seems to pervade the 100% stock mindset. I have the horrible impression that the managers of the £21B employee pension fund I'm under also "don't get" modern portfolio theory.