How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 years?
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How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 years?
How likely is it that the global stock market will be higher in 40 years than it is today? Are there fundamental reasons, other than looking to historical data, to assume this will be the case? And if not, how could or should this affect planning for retirement for young investors?
- arcticpineapplecorp.
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Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
since companies adjust prices along with inflation or prices are adjusted due to inflation (after all other factors fail like reducing expenses, shrinkflation, lowering costs due to scaling up, etc) then you could reasonably assume that the market would grow at least by the amount of inflation, right?
there's speculative return on top.
while GDP growth is not perfectly correlated with stock market growth you can assume as long as countries continue to grow their GDP their stock market should grow as well (not by the same amount though, could be more or less. There's articles by Swedroe showing this : https://www.cbsnews.com/news/why-succes ... k-returns/)
this has been the ranges over time periods in the past:
I don't think it's unreasonable to think returns over 30 or more years would be between 5-7% cagr. That's not a stretch based on earnings growth, speculative return, gdp growth (Gordon Equation), etc.
That being said, a global thermonuclear war would probably lead to more muted returns.
ymmv.
best of luck.
there's speculative return on top.
while GDP growth is not perfectly correlated with stock market growth you can assume as long as countries continue to grow their GDP their stock market should grow as well (not by the same amount though, could be more or less. There's articles by Swedroe showing this : https://www.cbsnews.com/news/why-succes ... k-returns/)
this has been the ranges over time periods in the past:
I don't think it's unreasonable to think returns over 30 or more years would be between 5-7% cagr. That's not a stretch based on earnings growth, speculative return, gdp growth (Gordon Equation), etc.
That being said, a global thermonuclear war would probably lead to more muted returns.
ymmv.
best of luck.
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Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
I mean, what are the alternatives to build sufficient wealth for retirement if stocks have a crumby return?VartAndelay wrote: ↑Mon Dec 06, 2021 10:42 am How likely is it that the global stock market will be higher in 40 years than it is today? Are there fundamental reasons, other than looking to historical data, to assume this will be the case? And if not, how could or should this affect planning for retirement for young investors?
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Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
To be honest, I'm not sure.cabfranc wrote: ↑Mon Dec 06, 2021 10:54 amI mean, what are the alternatives to build sufficient wealth for retirement if stocks have a crumby return?VartAndelay wrote: ↑Mon Dec 06, 2021 10:42 am How likely is it that the global stock market will be higher in 40 years than it is today? Are there fundamental reasons, other than looking to historical data, to assume this will be the case? And if not, how could or should this affect planning for retirement for young investors?
Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
99.837% likelihood it will be higher in 40 years.VartAndelay wrote: ↑Mon Dec 06, 2021 10:42 amHow likely is it that the global stock market will be higher in 40 years than it is today?
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
I don’t know.
You don’t know.
We don’t know.
You don’t know.
We don’t know.
Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
The likelihood is probably but not certainly greater than the likelihood that you will be alive 40 years from now.VartAndelay wrote: ↑Mon Dec 06, 2021 10:42 am How likely is it that the global stock market will be higher in 40 years than it is today? Are there fundamental reasons, other than looking to historical data, to assume this will be the case? And if not, how could or should this affect planning for retirement for young investors?
What you can do about it is recognize that nobody knows what will happen, but time will tell. That means that as time goes on you will have a better idea how things might turn out. If you want to offset the possibility that investments might not grow in the long run then you should plan on working longer and spending less in retirement while working more and spending less now. Expect that you will have a very poor standard of living in retirement if this happens.
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Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
Q: how do you know economists have a sense of humor?David Jay wrote: ↑Mon Dec 06, 2021 11:03 am99.837% likelihood it will be higher in 40 years.VartAndelay wrote: ↑Mon Dec 06, 2021 10:42 amHow likely is it that the global stock market will be higher in 40 years than it is today?
A: they use decimal points
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Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
In truth, I was a bit uncertain about the third digit after the decimal (could be anything from 5 - 9), probably should have rounded up. But what the heck, live large!arcticpineapplecorp. wrote: ↑Mon Dec 06, 2021 11:54 amQ: how do you know economists have a sense of humor?David Jay wrote: ↑Mon Dec 06, 2021 11:03 am99.837% likelihood it will be higher in 40 years.VartAndelay wrote: ↑Mon Dec 06, 2021 10:42 amHow likely is it that the global stock market will be higher in 40 years than it is today?
A: they use decimal points
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
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Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
The big driver for equity return long term is GDP growth which in turn depends on population growth and productivity growth. Population growth is very small to negative in the developed economies (absent immigration), but there should still be some for a while in developing markets. Growing the proportion of folks in developing countries that can achieve a rising standard of living can raise GDP even if population world-wide is not growing.
Productivity growth rates in developed markets have been declining of late. Still is positive, but not as high a rate as previously. Maybe post-Covid labor shortages will drive investment to boost output without boosting labor input. Labor-intensive "green" energy seems a step backward in terms of output per capita. More workers in the developing countries that have access to the capital goods that would enhance their productivity would be a positive for GDP growth. Look how much growth China has achieved in recent decades as workers moved from farms to factories. There are billions more who could potentially join this trend worldwide.
Overall, the outlook seems positive, if maybe not as high as 20th century norms. If you can't get a good return on your capital in equities going forward, you cannot expect bonds to do well either. Then if equities and bonds are both poor, expect a flood of capital into real estate, which will suppress returns going forward.
Productivity growth rates in developed markets have been declining of late. Still is positive, but not as high a rate as previously. Maybe post-Covid labor shortages will drive investment to boost output without boosting labor input. Labor-intensive "green" energy seems a step backward in terms of output per capita. More workers in the developing countries that have access to the capital goods that would enhance their productivity would be a positive for GDP growth. Look how much growth China has achieved in recent decades as workers moved from farms to factories. There are billions more who could potentially join this trend worldwide.
Overall, the outlook seems positive, if maybe not as high as 20th century norms. If you can't get a good return on your capital in equities going forward, you cannot expect bonds to do well either. Then if equities and bonds are both poor, expect a flood of capital into real estate, which will suppress returns going forward.
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Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
Stock prices are based on earnings. If you don’t understand this relationship look up the dividend discount model. It can be hard to understand this fundamental relationship between stock price and earnings with all the noise. Suffice it to say the ratio between the stock price and earnings of public companies in aggregate has remained relatively constant for over a century. (There has been some modest growth in this ratio but it represents less than 5% of total historical stock returns).VartAndelay wrote: ↑Mon Dec 06, 2021 10:42 am How likely is it that the global stock market will be higher in 40 years than it is today? Are there fundamental reasons, other than looking to historical data, to assume this will be the case? And if not, how could or should this affect planning for retirement for young investors?
The fundamental reasons for earnings growth are
1) population growth
2) productivity growth
3) inflation
So there are very strong theoretical reasons stock prices are likely to be much higher in 40 years.
Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
+ Thank you for that sage post, skierincoloradoskierincolorado wrote: ↑Mon Dec 06, 2021 4:45 pmStock prices are based on earnings. If you don’t understand this relationship look up the dividend discount model. It can be hard to understand this fundamental relationship between stock price and earnings with all the noise. Suffice it to say the ratio between the stock price and earnings of public companies in aggregate has remained relatively constant for over a century. (There has been some modest growth in this ratio but it represents less than 5% of total historical stock returns).VartAndelay wrote: ↑Mon Dec 06, 2021 10:42 am How likely is it that the global stock market will be higher in 40 years than it is today? Are there fundamental reasons, other than looking to historical data, to assume this will be the case? And if not, how could or should this affect planning for retirement for young investors?
The fundamental reasons for earnings growth are
1) population growth
2) productivity growth
3) inflation
So there are very strong theoretical reasons stock prices are likely to be much higher in 40 years.
My seat of the pants answer to OP is that "if stocks aren't higher in 40 years, society is in trouble."
Population growth is interesting. https://www.washingtonpost.com/politics ... story.html. But if it slows, I would expect AI, machines and the like to pick up the slack. Indeed, those technologies will likely continue to displace homo sapiens in the work force. I think technology will continue to be the story going forward for a long long time, perhaps until the end of the cosmos. Maybe markets will be different at the end of the century because of AI, quantum computing and the like. Who will own the machines?
Everything else I put in two categories. Either we destroy ourselves (e.g., war, revolution, the sixth extinction). Or nature does that for us (e.g., meteor strike, disease). Completely anecdotally (and thus irrelevant) but I work in academia, and many youth I come in contact with are pessimistic about the future. That pessimism has been cited for declining birth rates, for example. I know folks between the ages of 20 and 30 who don't want to have children because they think the future will be bleak. Not sure I buy that, but it is interesting.
Nothing above would change my position as an investor, as I would still be long in stocks. The future remains unknowable though, even for an old optimist like me.
Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
It really depends on whether they can keep the printers running or not. That requires some macro forecasting.
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Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
I think it’s in our DNA to work and produce stuff. It’s also in our DNA to accumulate stuff. These behaviors demonstrated by most people throughout their lives keep the economy going and businesses growing. So it follows that investments in business will most likely continue to be profitable for investors over the long run.
Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
I’m very confident in it, but obviously I can’t prove it. I have faith that humanity will continue to find ways to “grow the pie”, and that will make my sliver of it more valuable.
In an uncomfortable sort of way though, I’m relying on “past performance indicating future returns”, which as we all know, is a big no-no.
At some level, it’s like tithing. I faithfully put in my 10%, week after week, year after year, and I’m hoping for a big payoff at the end. But if it doesn’t work out, I’m just out the 10%.
In an uncomfortable sort of way though, I’m relying on “past performance indicating future returns”, which as we all know, is a big no-no.
At some level, it’s like tithing. I faithfully put in my 10%, week after week, year after year, and I’m hoping for a big payoff at the end. But if it doesn’t work out, I’m just out the 10%.
Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
I agree. In fact I would say: If in 40 years, US businesses are worth less (in real terms) than they are today, then we won't need retirement anymore.
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Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
Ask a German investor from the early 20th century how their globally- diversified stock portfolio did over 40 years. According to Dimson and Marsh, it took 57 years for such a pre-WW1 portfolio to get back to inflation-adjusted break even. So, maybe something like 98% odds is about what you might guess from historic data. "Very likely but possibly not" works too.
Life did go on for Germans who survived, by the way, despite the poor investment returns.
Life did go on for Germans who survived, by the way, despite the poor investment returns.
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
+1HootingSloth wrote: ↑Mon Dec 06, 2021 7:16 pm Ask a German investor from the early 20th century how their globally- diversified stock portfolio did over 40 years. According to Dimson and Marsh, it took 57 years for such a pre-WW1 portfolio to get back to inflation-adjusted break even. So, maybe something like 98% odds is about what you might guess from historic data. "Very likely but possibly not" works too.
Life did go on for Germans who survived, by the way, despite the poor investment returns.
A sage observation on various fronts; thank you for your post.
A historian might additionally weigh in and offer that one constant in human history is conflict, though there is academic literature suggesting that conflict has decreased over recent centuries based on various factors.
Still, conflict among homo sapiens is always with us, and in fact is quite common. So if somebody asked me to lay odds on the probability of a market-altering global conflict arising between now and 2050, I would say "likely" based on history and what I know about homo sapiens generally. Our species are quite proficient at fighting, with the weapons growing more effective (cue Taleb, N. "Antifragile").
All this said, if I was 35 years or younger I'd still be 100/0/0 in broad equity funds; as you note, homo sapiens are also resilient and capable of recovering from seemingly grievous conflict.
More broadly and as a amateur cosmologist, I have come to accept that most everything around us is antithetical to existence.
Everything seems fragile.
Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
OP,
1) Why would I care unless I am 100% stock?
2) Why would I care if my portfolio is big enough? It would be bigger every year even after my annual withdrawal.
3) If it is really bad enough, I would still be better than 90+% of folks out there. In practical term, it is still does not matter to me.
In summary, it won't matter to me. As to why it should matter to you, I have no idea. Please explain that to us.
KlangFool
1) Why would I care unless I am 100% stock?
2) Why would I care if my portfolio is big enough? It would be bigger every year even after my annual withdrawal.
3) If it is really bad enough, I would still be better than 90+% of folks out there. In practical term, it is still does not matter to me.
In summary, it won't matter to me. As to why it should matter to you, I have no idea. Please explain that to us.
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
We can only go by historical returns, and the good news is historical returns would show consistent growth over 40 years. I wouldn't bet against the markets. Hence I'm 100/0.VartAndelay wrote: ↑Mon Dec 06, 2021 10:42 am How likely is it that the global stock market will be higher in 40 years than it is today? Are there fundamental reasons, other than looking to historical data, to assume this will be the case? And if not, how could or should this affect planning for retirement for young investors?
-TheDDC
Rules to wealth building: 75-80% VTSAX piled high and deep, 20-25% VTIAX, 0% given away to banks.
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Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
I am an optimist, and I have a strong conviction that the global stock market will be higher 40 years from now. I also believe that the global real estate market will be higher 40 years from now. It doesn't take a rocket scientist to figure out that if you want to compound your money above inflation, you need to invest in business or real estate. If you don't, you will more than likely be left behind. We live in a world where it is best to become an owner instead of a loaner.
Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
With 40 years of accumulation?
greater than 99.99%
You need both a less than 1% event to happen AND that event to happen in the last few years of accumulation.
The reasons for improvement are population growth, new markets, and efficiency increases.
Any diversified portfolio should do very well and what happens in the next 10 years is largely irrelevant to the 40 year accumulator.
greater than 99.99%
You need both a less than 1% event to happen AND that event to happen in the last few years of accumulation.
The reasons for improvement are population growth, new markets, and efficiency increases.
Any diversified portfolio should do very well and what happens in the next 10 years is largely irrelevant to the 40 year accumulator.
Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
Agreed.skierincolorado wrote: ↑Mon Dec 06, 2021 4:45 pmStock prices are based on earnings. If you don’t understand this relationship look up the dividend discount model. It can be hard to understand this fundamental relationship between stock price and earnings with all the noise. Suffice it to say the ratio between the stock price and earnings of public companies in aggregate has remained relatively constant for over a century. (There has been some modest growth in this ratio but it represents less than 5% of total historical stock returns).VartAndelay wrote: ↑Mon Dec 06, 2021 10:42 am How likely is it that the global stock market will be higher in 40 years than it is today? Are there fundamental reasons, other than looking to historical data, to assume this will be the case? And if not, how could or should this affect planning for retirement for young investors?
The fundamental reasons for earnings growth are
1) population growth
2) productivity growth
3) inflation
So there are very strong theoretical reasons stock prices are likely to be much higher in 40 years.
A 40 year bear case for global equities is a case that has for the next 40 years: 1) population flat or decreasing (unlikely but possible), 2) no inflation or deflation (very unlikely), and 3) flat or decreasing level of per capita productivity (used to be possible pre industrial revolution but is extremely unlikely now).
So stocks for the long run is the only way to go.
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Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
I think I'd look to leveraged real estate or building a business of my own.cabfranc wrote: ↑Mon Dec 06, 2021 10:54 amI mean, what are the alternatives to build sufficient wealth for retirement if stocks have a crumby return?VartAndelay wrote: ↑Mon Dec 06, 2021 10:42 am How likely is it that the global stock market will be higher in 40 years than it is today? Are there fundamental reasons, other than looking to historical data, to assume this will be the case? And if not, how could or should this affect planning for retirement for young investors?
"An investment in knowledge pays the best interest" - Benjamin Franklin
Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
Portfolio7 wrote: ↑Tue Dec 07, 2021 10:42 amI think I'd look to leveraged real estate or building a business of my own.cabfranc wrote: ↑Mon Dec 06, 2021 10:54 amI mean, what are the alternatives to build sufficient wealth for retirement if stocks have a crumby return?VartAndelay wrote: ↑Mon Dec 06, 2021 10:42 am How likely is it that the global stock market will be higher in 40 years than it is today? Are there fundamental reasons, other than looking to historical data, to assume this will be the case? And if not, how could or should this affect planning for retirement for young investors?
Unfortunately neither are likely to give a return if the global economy is in the toilet. Everything is connected.
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Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
Define “good investment”…compared to what?
“Those who move forward with a happy spirit will find that things always work out.” -Retired 13 years 😀
Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
I don't think the stock market has lost money over a 20 year time horizon, so a 40 year time horizon seems like a absolute lock for positive growth. Another assumption for a 40 year time frame is your stocks will outpace bond returns. Good luck
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Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
Pretty good, but not guaranteed.
Historically, in the Dimson and Marsh data from 1900, out of 23 national stock markets, 21 of them have continuously survived, while two of them literally went to zero--were wiped out--and then years later replaced by completely new stock markets in the same countries.
I conclude that if you'd chosen a country at random in 1900 and put all your money in it, you would have had an 8.7% probability of losing all your money sometimes in the last 120 years. 120 = 3 x 40 and it's silly to get too refined about the calculation, so let's divide 8.7% by 3 and say "the chances that a national stock market will be a really really really bad investment are at least 2.8%."
By coincidence, the chances of rolling "2" on a pair of dice is also 2.8%.
In a forty-year time period, the probability of escaping a national financial disaster is not 100.0000%, and the probability of catastrophe compounds, too.
I conclude that even with a forty-year horizon, the stock market is still something of a crapshoot.
(Global diversification must reduce the chance of total disaster, although the various things governments do in financial crises mean that in a crisis your international holdings might be inaccessible. Even with a global portfolio, if you invested the money globally in the early 1900s and happened to need it desperately during the Second World War, you might find that the stock market(s) had not been a "good" investments).
Historically, in the Dimson and Marsh data from 1900, out of 23 national stock markets, 21 of them have continuously survived, while two of them literally went to zero--were wiped out--and then years later replaced by completely new stock markets in the same countries.
I conclude that if you'd chosen a country at random in 1900 and put all your money in it, you would have had an 8.7% probability of losing all your money sometimes in the last 120 years. 120 = 3 x 40 and it's silly to get too refined about the calculation, so let's divide 8.7% by 3 and say "the chances that a national stock market will be a really really really bad investment are at least 2.8%."
By coincidence, the chances of rolling "2" on a pair of dice is also 2.8%.
In a forty-year time period, the probability of escaping a national financial disaster is not 100.0000%, and the probability of catastrophe compounds, too.
I conclude that even with a forty-year horizon, the stock market is still something of a crapshoot.
(Global diversification must reduce the chance of total disaster, although the various things governments do in financial crises mean that in a crisis your international holdings might be inaccessible. Even with a global portfolio, if you invested the money globally in the early 1900s and happened to need it desperately during the Second World War, you might find that the stock market(s) had not been a "good" investments).
Last edited by nisiprius on Wed Dec 15, 2021 7:56 am, edited 1 time in total.
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Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
I hold these truths to be self-evident. I think people who argue excessively against them are not risk-tolerant, but risk-denying.
1) Stocks are risky.
2) You can't avoid the risk of stocks in any major way.
1) Stocks are risky.
2) You can't avoid the risk of stocks in any major way.
- Not by holding for long periods of time.
- Not by selecting some category of stock (low-volatility, high-dividend, "consumer staples" sector).
- Not by any kind of tactical asset allocation or market timing.
- Not by financial engineering confections in which some combination of counter-rotating eccentric weighted assets is supposed to erase the risk of stocks without erasing their return.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
I was thinking the same. Can we define "good investment" first? Is it something like:
1- Overall annual growth at X percent rate
2- Keeping up with inflation
3- Preservation of at least 75% of total invested money
Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
Good investment is an investment plan as a whole that enables the investor to meet his objectives. Depending on the investor and the objectives that could be about anything. Probably excluded are "bad" investments that are risky out of proportion, too expensive, bound with unfavorable conditions, fraudulent, catering to greed and fear rather than rational purposes, and so on. I suspect that trying to put numerical criteria of one sort or another on things mainly results in getting painted into a corner where too many things that can be part of good plan are eliminated or where one starts to tilt at windmills, meaning chasing unreasonable objectives.
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Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
What the global stock market does over the next 40 years is out of your control. Focus on the things that are in your control.VartAndelay wrote: ↑Mon Dec 06, 2021 10:42 am How likely is it that the global stock market will be higher in 40 years than it is today? Are there fundamental reasons, other than looking to historical data, to assume this will be the case? And if not, how could or should this affect planning for retirement for young investors?
Our oldest child is about your age, and we remain optimistic for the next 40, 50, 60 years for him. Due to opening an UTMA immediately after getting a SS# following his birth, we began investing with the premise of not only a period of 40 years for this child, but also for 60 years, and 80 years, and beyond. We did the same with our youngest child as well.
Skin in the game regarding working part-time jobs in high school and college as well as continually advocating saving a portion of income from one's human capital was the law of the land we laid out for our kids. They got their Roth IRAs going once they were working part-time jobs and they have continued adding to those for over a decade at this point. Now that our oldest adult child is out in the working world and turns 29 next year, automatic saving and investing remains a key focus. Same with the youngest child. We are big believers in the amount you save being just as important of a factor as the returns over the decades since it is an element you are more in control of compared to the global stock market.
Jonathan Clements embodies that premise rather well in this Humble Dollar blog post from a couple of years ago...
https://humbledollar.com/2019/09/show-me-the-money/
"That brings us to a perverse conclusion—one I’m almost reluctant to mention: Because savings are so crucial, and because they’re the key driver of your ultimate nest egg, how you invest is somewhat less important."
Save each and every day/week/month/year and automate it all into whatever savings vehicles you have available (401k/403b/457b/Roth IRA/tIRA/taxable, real estate, etc...). We remain optimistic for investors and savers your age for the next 40 years and beyond who are automating their savings regardless of what the global stock market does.
Automate it all, and enjoy life's journey along the way.
CyclingDuo
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"Pick a bushel, save a peck!" - Grandpa
Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
I see tennisplayr beat me to it, but I will post this anyway. First you have to define a good investment. When you ask if the stock market will be a good investment, you have to ask the question: compared to what? The three major asset classes are equities (stocks), fixed income (bonds) and cash. Over long time periods stocks have out performed bonds and cash, and I don't see any reason why this won't continue. It has to be that way doesn't it? If bonds and cash produced higher returns than stocks, investors would invest in them because they have less risk. It's all relative.
Slow and steady wins the race.
Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
And don't forget Berstein's admonition about results via financial calculators over the long term:nisiprius wrote: ↑Wed Dec 15, 2021 7:38 am Pretty good, but not guaranteed.
Historically, in the Dimson and Marsh data from 1900, out of 23 national stock markets, 21 of them have continuously survived, while two of them literally went to zero--were wiped out--and then years later replaced by completely new stock markets in the same countries.
I conclude that if you'd chosen a country at random in 1900 and put all your money in it, you would have had an 8.7% probability of losing all your money sometimes in the last 120 years. 120 = 3 x 40 and it's silly to get too refined about the calculation, so let's divide 8.7% by 3 and say "the chances that a national stock market will be a really really really bad investment are at least 2.8%."
By coincidence, the chances of rolling "2" on a pair of dice is also 2.8%.
In a forty-year time period, the probability of escaping a national financial disaster is not 100.0000%, and the probability of catastrophe compounds, too.
I conclude that even with a forty-year horizon, the stock market is still something of a crapshoot.
(Global diversification must reduce the chance of total disaster, although the various things governments do in financial crises mean that in a crisis your international holdings might be inaccessible. Even with a global portfolio, if you invested the money globally in the early 1900s and happened to need it desperately during the Second World War, you might find that the stock market(s) had not been a "good" investments).
"Thus, any estimate of long-term financial success greater than about 80% is meaningless."
http://www.efficientfrontier.com/ef/901/hell3.htm
Re: How would you evaluate the likelihood that the stock market is a good investment over a long time horizon, say 40 ye
Define "prove". The logic behind behind "Equity Risk Premium" is solid. A investor has a choice between a safe investment (risk free goverment bond) and a risk investment (equities). Rationally speaking the only reason why a investor would choose a risky investment would be for a return greater than the bond. i.e., the Equity Risk Premium. It is a fundamental bit of investment theory which has been well researched, including historically.Normchad wrote: ↑Mon Dec 06, 2021 6:57 pm I’m very confident in it, but obviously I can’t prove it. I have faith that humanity will continue to find ways to “grow the pie”, and that will make my sliver of it more valuable.
In an uncomfortable sort of way though, I’m relying on “past performance indicating future returns”, which as we all know, is a big no-no.
I will ding your second point. You don't need to have a growing economy to have positive returns. I can't think of any theory that supports it. You can have stable or negative growth. Lots of examples there. And a growing pie does not mean higher returns. Over the past 50 years not only have we had a growing pie but capital has been taking a growing slice of that pie. It does not have to be this way. There have been times when we have had a growing pie were capital's slice of that pie shrank, with labor, consumers, or government taking a larger slice. Under this régime equity returns would be low and stagnate.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.