Stocks for the Long Haul? Maybe Not.

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Ocean77
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Re: Stocks for the Long Haul? Maybe Not.

Post by Ocean77 »

willthrill81 wrote: Sun Jul 31, 2022 10:26 pm
Ocean77 wrote: Sun Jul 31, 2022 9:42 pm
Lecture wrote: Sun Jul 31, 2022 5:03 pm
Ocean77 wrote: Sun Jul 31, 2022 4:07 pm This may be another indication that the bull market in bonds that has run over several decades is now coming to an end....
People comment about this "bull market in bonds".....I know rates were routinely at >7% 20-30 yrs ago, but for the past 10 yrs, bond rates (Treasury, muni & corporate) have been much, much less.....so I struggle to understand...at least for new issue bonds- a) has this really been a bond bull mkt in the past 10 yrs (ie, new issue), and b) if so....why??! Thanks.

I.e. look at the 10 year Treasury and how it went from 15% or so in 1981 to about 0.5% in 2020. So we had about 40 years of a bond bull market.
https://www.macrotrends.net/2016/10-yea ... ield-chart
Considering that the real return of 10 year Treasuries since 2013 was -1.4% annualized, I don't think we should call that time part of a 'bond bull market'.
If you look at the chart, it is pretty clear that bond bull market that started in 1981 ended in 2020, not in 2013.
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Re: Stocks for the Long Haul? Maybe Not.

Post by willthrill81 »

Ocean77 wrote: Sun Jul 31, 2022 11:27 pm
willthrill81 wrote: Sun Jul 31, 2022 10:26 pm
Ocean77 wrote: Sun Jul 31, 2022 9:42 pm
Lecture wrote: Sun Jul 31, 2022 5:03 pm
Ocean77 wrote: Sun Jul 31, 2022 4:07 pm This may be another indication that the bull market in bonds that has run over several decades is now coming to an end....
People comment about this "bull market in bonds".....I know rates were routinely at >7% 20-30 yrs ago, but for the past 10 yrs, bond rates (Treasury, muni & corporate) have been much, much less.....so I struggle to understand...at least for new issue bonds- a) has this really been a bond bull mkt in the past 10 yrs (ie, new issue), and b) if so....why??! Thanks.

I.e. look at the 10 year Treasury and how it went from 15% or so in 1981 to about 0.5% in 2020. So we had about 40 years of a bond bull market.
https://www.macrotrends.net/2016/10-yea ... ield-chart
Considering that the real return of 10 year Treasuries since 2013 was -1.4% annualized, I don't think we should call that time part of a 'bond bull market'.
If you look at the chart, it is pretty clear that bond bull market that started in 1981 ended in 2020, not in 2013.
Considering that bonds barely kept pace with inflation from 2013-2018, I don't think so. They got a temporary boost from dropping interest rates afterward, but they've already given that back and then some.
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Ocean77
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Re: Stocks for the Long Haul? Maybe Not.

Post by Ocean77 »

willthrill81 wrote: Mon Aug 01, 2022 12:35 am
Ocean77 wrote: Sun Jul 31, 2022 11:27 pm
willthrill81 wrote: Sun Jul 31, 2022 10:26 pm
Ocean77 wrote: Sun Jul 31, 2022 9:42 pm
Lecture wrote: Sun Jul 31, 2022 5:03 pm

People comment about this "bull market in bonds".....I know rates were routinely at >7% 20-30 yrs ago, but for the past 10 yrs, bond rates (Treasury, muni & corporate) have been much, much less.....so I struggle to understand...at least for new issue bonds- a) has this really been a bond bull mkt in the past 10 yrs (ie, new issue), and b) if so....why??! Thanks.

I.e. look at the 10 year Treasury and how it went from 15% or so in 1981 to about 0.5% in 2020. So we had about 40 years of a bond bull market.
https://www.macrotrends.net/2016/10-yea ... ield-chart
Considering that the real return of 10 year Treasuries since 2013 was -1.4% annualized, I don't think we should call that time part of a 'bond bull market'.
If you look at the chart, it is pretty clear that bond bull market that started in 1981 ended in 2020, not in 2013.
Considering that bonds barely kept pace with inflation from 2013-2018, I don't think so. They got a temporary boost from dropping interest rates afterward, but they've already given that back and then some.
We do have this tendency to look mostly at the recent past, I think it is called recency bias. We remember interest rates fluctuating around 2 percent, give or take a percent, and think this will continue more or less. And if we cherry pick 5 years of data, we can read anything into it. But if we look at multiple decades, then there is another picture.
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Apathizer
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Re: Stocks for the Long Haul? Maybe Not.

Post by Apathizer »

Very interesting. This gives me additional solace in my portfolio. While stocks are more likely to have higher returns that's not guaranteed even long-term, so being as well diversified as possible makes sense. This means global diversification in both bonds and stocks, with factor slants, so I'm pretty well covered.
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Tellurius
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Re: Stocks for the Long Haul? Maybe Not.

Post by Tellurius »

Leesbro63 wrote: Sat Jul 30, 2022 1:21 pm
visualguy wrote: Sat Jul 30, 2022 1:05 pm That's the reason many have a big chunk of their assets in direct real estate.
I'd be curious as to how direct real estate has correlated to stocks in places and during periods where stocks did poorly over long periods. I'm guessing that real estate would also have done poorly, but I don't know that.
You have other factors sometimes.

A touristic country with irreplaceable, uncopyable, historic architecture could possibly fare better in real estate than stocks, no?
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Re: Stocks for the Long Haul? Maybe Not.

Post by Apathizer »

Tellurius wrote: Mon Aug 01, 2022 2:07 am
Leesbro63 wrote: Sat Jul 30, 2022 1:21 pm
visualguy wrote: Sat Jul 30, 2022 1:05 pm That's the reason many have a big chunk of their assets in direct real estate.
I'd be curious as to how direct real estate has correlated to stocks in places and during periods where stocks did poorly over long periods. I'm guessing that real estate would also have done poorly, but I don't know that.
You have other factors sometimes.

A touristic country with irreplaceable, uncopyable, historic architecture could possibly fare better in real estate than stocks, no?
If you have enough money to invest in direct real estate in many different markets it's probably a good option, but most of us don't. Most of us would have difficulty acquiring 1 or 2 rental properties, much less the quantity needed for comprehensive diversification.
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Tellurius
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Re: Stocks for the Long Haul? Maybe Not.

Post by Tellurius »

Apathizer wrote: Mon Aug 01, 2022 2:15 am [quote=Tellurius post_id=6802046 time=<a href="tel:1659337624">1659337624</a> user_id=137118]
[quote=Leesbro63 post_id=6799879 time=<a href="tel:1659205307">1659205307</a> user_id=22011]
[quote=visualguy post_id=6799842 time=<a href="tel:1659204344">1659204344</a> user_id=51038]
That's the reason many have a big chunk of their assets in direct real estate.
I'd be curious as to how direct real estate has correlated to stocks in places and during periods where stocks did poorly over long periods. I'm guessing that real estate would also have done poorly, but I don't know that.
[/quote]

You have other factors sometimes.

A touristic country with irreplaceable, uncopyable, historic architecture could possibly fare better in real estate than stocks, no?
[/quote]
If you have enough money to invest in direct real estate in many different markets it's probably a good option, but most of us don't. Most of us would have difficulty acquiring 1 or 2 rental properties, much less the quantity needed for comprehensive diversification.
[/quote]

Different topic but I’m curious as to whether high property taxes and HOA fees makes the USA a more risky market for real estate. If something goes wrong, you have large carrying costs, while in many parts of the world, carrying costs are much lower.
“And how shall I think of you?' He considered a moment and then laughed. 'Think of me with my nose in a book!” | ― Susanna Clarke, Jonathan Strange & Mr Norrell
Tellurius
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Re: Stocks for the Long Haul? Maybe Not.

Post by Tellurius »

Apathizer wrote: Mon Aug 01, 2022 2:15 am [quote=Tellurius post_id=6802046 time=<a href="tel:1659337624">1659337624</a> user_id=137118]
[quote=Leesbro63 post_id=6799879 time=<a href="tel:1659205307">1659205307</a> user_id=22011]
[quote=visualguy post_id=6799842 time=<a href="tel:1659204344">1659204344</a> user_id=51038]
That's the reason many have a big chunk of their assets in direct real estate.
I'd be curious as to how direct real estate has correlated to stocks in places and during periods where stocks did poorly over long periods. I'm guessing that real estate would also have done poorly, but I don't know that.
[/quote]

You have other factors sometimes.

A touristic country with irreplaceable, uncopyable, historic architecture could possibly fare better in real estate than stocks, no?
[/quote]
If you have enough money to invest in direct real estate in many different markets it's probably a good option, but most of us don't. Most of us would have difficulty acquiring 1 or 2 rental properties, much less the quantity needed for comprehensive diversification.
[/quote]

Different topic but I’m curious as to whether high property taxes and HOA fees makes the USA a more risky market for real estate. If something goes wrong, you have large carrying costs, while in many parts of the world, carrying costs are much lower.
“And how shall I think of you?' He considered a moment and then laughed. 'Think of me with my nose in a book!” | ― Susanna Clarke, Jonathan Strange & Mr Norrell
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Re: Stocks for the Long Haul? Maybe Not.

Post by dboeger1 »

I was about to start quoting comments, but there were too many to count in this thread that were along these lines, so this is pretty much a wholesale reply. I saw a lot of comments saying, "this index does this, that asset does that". There's a big difference between having done something over the past 10 years and continuing to do something in the future. Many of these comments are saying things that were likely mainstream sentiment about the Roman Empire. How are they doing these days? To be fair, most of us are investing for our lifetimes, not for the total collapse of our societies, but who's to say when that will be?
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Re: Stocks for the Long Haul? Maybe Not.

Post by phantom0308 »

PicassoSparks wrote: Sat Jul 30, 2022 11:14 am The paper is very readable with some extremely striking graphs. It raises a lot of questions. It offers troubling information for the 60/40 Boglehead.
...
I listened to the episode and felt it was far more troubling for 100/0 investors and having an allocation to bonds was more important. I have a higher stock allocation and thought 60/40 made more sense than before listening. I think the troubling thing is that regardless of asset allocation you can hit a rough period where it's not possible to hit your goals.
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Re: Stocks for the Long Haul? Maybe Not.

Post by martincmartin »

phantom0308 wrote: Mon Aug 01, 2022 4:30 am
PicassoSparks wrote: Sat Jul 30, 2022 11:14 am The paper is very readable with some extremely striking graphs. It raises a lot of questions. It offers troubling information for the 60/40 Boglehead.
...
I listened to the episode and felt it was far more troubling for 100/0 investors and having an allocation to bonds was more important. I have a higher stock allocation and thought 60/40 made more sense than before listening. I think the troubling thing is that regardless of asset allocation you can hit a rough period where it's not possible to hit your goals.
I agree. I'm reading the paper, and it's basically saying, over a decade or more, "sometimes stocks do better, sometimes bonds do better." That supports having a significant percentage of both stocks and bonds. And overall stocks do outperform bonds more often, and by a wider margin when they do, supporting a stock tilt. So, something like 60/40.
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Re: Stocks for the Long Haul? Maybe Not.

Post by alpine_boglehead »

The world's the world, and it will do what it has always done - change and surprise us both to the upside and the downside.

Bogleheads can make an educated guess about the future, take an educated bet with the financial system. We could be wrong, and we might need to change our plans.

Diversification is pretty much the only safe guess, so I think that stocks, bonds, cash (or short-term bonds), real-estate and other asset classes have their raison d'être.

And to top off the philosophical contribution, invest in yourself, your skills, your knowledge, your relationships. That will pay off most likely.
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Re: Stocks for the Long Haul? Maybe Not.

Post by PicassoSparks »

McQ wrote: Sat Jul 30, 2022 12:50 pm The paper discussed on the podcast can be downloaded at https://papers.ssrn.com/sol3/papers.cfm ... id=3805927
Happy to answer here in this current thread any questions about the research or the conclusions.
Beyond a general sense that "we should be far more cautious about saying we know anything about the long term performance of stocks than we have been" where do you hope this paper can help take us when it comes to understanding the properties of stocks and bonds? Does it open up new avenues of investigation that you are especially excited about?
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Re: Stocks for the Long Haul? Maybe Not.

Post by PicassoSparks »

For me, the most striking aspect of the paper is this pair of charts. The first essentially encompasses the furthest back that https://www.portfoliovisualizer.com reaches—which is the main source of backtest evidence used for casual arguments on this board. The second reaches almost as far back as the furthest 'deeper' looks go (it would need to go back to 1920s or so). They are both strange periods.

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Re: Stocks for the Long Haul? Maybe Not.

Post by Bud »

Not sure why the myth of REIT index performing poorly persists - I have owned the Vanguard REIT Index since 2002 and it has outperformed the S&P 500 during those 20 years (but not my Mid-cap Index holdings).

I posted the graph elsewhere but won't take the time to find it and post it again (sry).

One strategy which has benefited my investing is regression to the mean investing. This means adding more to the sectors which are down.

All the best.
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Re: Stocks for the Long Haul? Maybe Not.

Post by sureshoe »

Seeing various posts about "risk", assuming the market being down triggers all this.

I'm not sure people really understand what "risk" is. Risk is not just "Beta", or "stocks might go up and down, violently, but eventually give returns". Risk is the chance that "stocks go down and never go up for the next 100 years."

Nobody REALLY knows the ACTUAL risk of any investment. We are all just conjecturing based on historical and collective wisdom.

However, everything you do has risk and the general consensus is stocks provide the best chance at the best returns, factoring in that every holding might go to 0. The same could be said for all bonds or all cash or all US real estate. There is always a doomsday scenario.
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Re: Stocks for the Long Haul? Maybe Not.

Post by willthrill81 »

Ocean77 wrote: Mon Aug 01, 2022 1:03 am
willthrill81 wrote: Mon Aug 01, 2022 12:35 am
Ocean77 wrote: Sun Jul 31, 2022 11:27 pm
willthrill81 wrote: Sun Jul 31, 2022 10:26 pm
Ocean77 wrote: Sun Jul 31, 2022 9:42 pm


I.e. look at the 10 year Treasury and how it went from 15% or so in 1981 to about 0.5% in 2020. So we had about 40 years of a bond bull market.
https://www.macrotrends.net/2016/10-yea ... ield-chart
Considering that the real return of 10 year Treasuries since 2013 was -1.4% annualized, I don't think we should call that time part of a 'bond bull market'.
If you look at the chart, it is pretty clear that bond bull market that started in 1981 ended in 2020, not in 2013.
Considering that bonds barely kept pace with inflation from 2013-2018, I don't think so. They got a temporary boost from dropping interest rates afterward, but they've already given that back and then some.
We do have this tendency to look mostly at the recent past, I think it is called recency bias. We remember interest rates fluctuating around 2 percent, give or take a percent, and think this will continue more or less. And if we cherry pick 5 years of data, we can read anything into it. But if we look at multiple decades, then there is another picture.
I don't see how/why you think I'm 'cherry picking anything' when we're talking about what to call a narrowly defined period of time. I contend that bond bull market ended in 2012 as after that time, only brief periods of time have seen bonds return more than inflation, and in sum, the period resulted in net losses.

But this is why names are often not that it important. I don't even think that there's a widely agreed upon definition for a bond bull market like there is for stocks.
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Re: Stocks for the Long Haul? Maybe Not.

Post by Ocean77 »

willthrill81 wrote: Mon Aug 01, 2022 8:59 am
Ocean77 wrote: Mon Aug 01, 2022 1:03 am
willthrill81 wrote: Mon Aug 01, 2022 12:35 am
Ocean77 wrote: Sun Jul 31, 2022 11:27 pm
willthrill81 wrote: Sun Jul 31, 2022 10:26 pm

Considering that the real return of 10 year Treasuries since 2013 was -1.4% annualized, I don't think we should call that time part of a 'bond bull market'.
If you look at the chart, it is pretty clear that bond bull market that started in 1981 ended in 2020, not in 2013.
Considering that bonds barely kept pace with inflation from 2013-2018, I don't think so. They got a temporary boost from dropping interest rates afterward, but they've already given that back and then some.
We do have this tendency to look mostly at the recent past, I think it is called recency bias. We remember interest rates fluctuating around 2 percent, give or take a percent, and think this will continue more or less. And if we cherry pick 5 years of data, we can read anything into it. But if we look at multiple decades, then there is another picture.
I don't see how/why you think I'm 'cherry picking anything' when we're talking about what to call a narrowly defined period of time. I contend that bond bull market ended in 2012 as after that time, only brief periods of time have seen bonds return more than inflation, and in sum, the period resulted in net losses.

But this is why names are often not that it important. I don't even think that there's a widely agreed upon definition for a bond bull market like there is for stocks.
To look at the big picture, I recommend this brief interview with Jim Grant: https://www.morningstar.com/articles/10 ... t-to-begin

OF course it is anybody's guess what will happen over the next couple decades. But the past centuries do show a pattern of very long (multiple decade) long trends either up or down in interest rates. We can argue if any such period ended 5 years sooner or later, it does not really matter.
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Re: Stocks for the Long Haul? Maybe Not.

Post by alcon50 »

This is an interesting discussion. It was stimulated by Ben Felix commenting on an article that reevaluated Jeremy Siegel's "stocks for the long run" hypothesis that stocks consistently outperform bonds and that substantial exposure to the stock market is essential to growing your wealth.

Here is the link to the paper in question: https://papers.ssrn.com/sol3/papers.cfm ... id=3805927

This paper was written by Edward F. McQuarrie. He is listed as Professor Emeritus of the Leavey School of Business at Santa Clara University. Unfortunately, the paper is not peer reviewed. McQuarrie reports a series of articles in which he, with the help of others, did painstaking work to correct shortcomings in the data that Seigel used for his analysis. Siegel's bond data was based on an old analysis that not based on actual bond prices before 1926. Corporate bonds were not included. Bond yields were imputed. McQuarrie corrected this by painstaking analysis of digitized newspapers dating back to 1793. He found that bond performance was underestimated somewhat in the data that Siegel used. He then corrected stock performance data correcting for survivorship bias and constructing share counts from the now available digital archive to calculate capitalization-weighted total return on stocks. Siegel's data sources provided only equal-weighted stock results. Most of these changes effected the data before 1926. I would caution that the lack of peer-review concerns me, but the paper is interesting. I would also point out that this is not a criticism of Siegel. The problem is that the data sources he used were the best available but had significant limitations that can now be corrected.

McQuarrie finds that stock and bond performance tracked each other fairly closely from 1793 through the great depression. There were, of course, periods of stock outperformance followed by periods of bond outperformance. He contends the big deviation between stock and bond performance was from 1942 to 1981 when stocks clearly outperformed bonds. From 1982 to 2019, bonds and stocks performed closer to how they had performed prior to WWII.

His conclusion is that 226 years of data is a relatively small sample and we should be cautious extrapolating from this sample of past performance to make assumptions about the future. He questions whether we can count on stocks consistently outperforming bonds going forward. That scepticism seems like a view that comes up often on this discussion board!

I found this interesting. I would encourage Dr. McQuarrie to publish his work. What he reports doing seems sensible and would be a valuable contribution to our understanding of historical markets.

Alcon
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Re: Stocks for the Long Haul? Maybe Not.

Post by willthrill81 »

alcon50 wrote: Mon Aug 01, 2022 12:20 pm His conclusion is that 226 years of data is a relatively small sample and we should be cautious extrapolating from this sample of past performance to make assumptions about the future. He questions whether we can count on stocks consistently outperforming bonds going forward.
Thanks for your candid and thoughtful summary of the paper.

While I agree with Dr. McQuarrie that we always want more data, the reality is that investors have to make investment decisions today.

We all must invest based on our own situation, risk tolerance, beliefs, attitudes, etc., and we will all live with the results, if we don't die first.
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Re: Stocks for the Long Haul? Maybe Not.

Post by garlandwhizzer »

There is no absolute certainty about "stocks for the long haul" or anything else in investing when we're talking about future outcomes. All we investors have to judge future outcomes is the relative probability of one outcome versus another. Neither long term backtesting nor a rock solid plausible explanation as to why a given outcome should happen in the future--neither are error proof indicators of the future. If you're looking for future certainty in investing or anything else, I fear that you're on the wrong planet.

I personally believe that in terms of future returns, stocks for the long run relative to bonds is about as close to 100% probability as it gets, especially if we're talking widely diversified global equity. Current expectations for real returns in bonds going forward are zero real, perhaps less, for at least a decade, perhaps longer. Long term backtesting of real bond returns is a total joke going forward. The bond bull is dead and buried. We're now in bond bear market and it's not going to make up its lost ground in real inflation adjusted terms anytime soon.Equities also have been hit hard and also have reduced expected real returns going forward. But equity's expected long term returns going forward are both positive real and definitely higher than bond's.

In theory there are only two ways you can lose over the very long term holding widely diversified global equity. First, panic selling in a deep bear market, a very common behavioral error that must be avoided if you are to harvest the rewards for your patience. If you're unsure that you can hang on when the market tanks, you'll need sufficient safe assets like cash and quality bonds to emotionally see you through that crisis. You have to plan that in advance, not during the crisis which is too late. Second, is for the whole world economy to go into the toilet and stay there for decades. That is possible but very, very unlikely. Like a shark attack, it is incredibly unlikely to happen to us but it can creates plenty of fear when we enter the ocean.

I personally am willing to take that chance with stocks in return for expected payoff, but I realize it's not guaranteed. Each of us has to make that decision for himself/herself, hopefully with accurate and honest self-knowledge. You won't find the right answer that works for you as an individual in a book, article, or the talking heads. You have to know yourself and act accordingly.

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Re: Stocks for the Long Haul? Maybe Not.

Post by martincmartin »

alcon50 wrote: Mon Aug 01, 2022 12:20 pm Alcon
Thanks Alcon. I just read (most of) the paper, and find your summary fair and accurate.
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Re: Stocks for the Long Haul? Maybe Not.

Post by Broken Man 1999 »

I cast a jaded eye to stocks AND bonds, I have low expectations of both, and probably won't be disappointed.

The 7-11 a mile or so away is always an option for DW to return to the labor force should our retirement portfolio crater. Maybe the place would allow her to occasionally take home the hot dogs that have been rolling on the grill for days, and stale coffee set aside when making a fresh pot for the poor folks who buy 7-11 coffee.

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Re: Stocks for the Long Haul? Maybe Not.

Post by martincmartin »

garlandwhizzer wrote: Mon Aug 01, 2022 1:38 pm I personally believe that in terms of future returns, stocks for the long run relative to bonds is about as close to 100% probability as it gets, especially if we're talking widely diversified global equity.
I take it you haven't read the paper.
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Re: Stocks for the Long Haul? Maybe Not.

Post by willthrill81 »

martincmartin wrote: Mon Aug 01, 2022 1:59 pm
garlandwhizzer wrote: Mon Aug 01, 2022 1:38 pm I personally believe that in terms of future returns, stocks for the long run relative to bonds is about as close to 100% probability as it gets, especially if we're talking widely diversified global equity.
I take it you haven't read the paper.
Why should a single paper that hasn't even been peer reviewed (no offense intended toward Dr. McQuarrie) change someone's perspective in that regard?
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Re: Stocks for the Long Haul? Maybe Not.

Post by Logan Roy »

I think Bogle believed that, over the very long-term, bonds probably returned the same as stocks. As we saw in the 19th century (although there are plenty of other factors), these things can play out over long periods. I do wonder, if it weren't for the monopolistic practices Big Tech's been able to get away with in the west, how our 21st century stock market returns might look, despite all that stimulus(?).

However, buying bonds on 17% yields, with falling inflation, is one thing. Buying bonds on deeply negative real yields, with the threat of persistent inflation, is quite another. We've also got global debt at levels that really necessitate negative real yields (to inflate away debt, rather than having to keep refinancing it at greater cost), and likely will for quite a while. So I wouldn't bank on bonds. Looking at broad macro themes, if the 19th century was about bonds, the 20th was about stocks, the 21st could be the turn of real assets(?) – inevitably, the thing most investors are under-allocated to at the moment. But that's pure speculation.
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Re: Stocks for the Long Haul? Maybe Not.

Post by vineviz »

willthrill81 wrote: Mon Aug 01, 2022 2:07 pm
martincmartin wrote: Mon Aug 01, 2022 1:59 pm
garlandwhizzer wrote: Mon Aug 01, 2022 1:38 pm I personally believe that in terms of future returns, stocks for the long run relative to bonds is about as close to 100% probability as it gets, especially if we're talking widely diversified global equity.
I take it you haven't read the paper.
Why should a single paper that hasn't even been peer reviewed (no offense intended toward Dr. McQuarrie) change someone's perspective in that regard?
The question I'm more interested in is this one: why dismiss the findings of a research paper without first reading it?
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Re: Stocks for the Long Haul? Maybe Not.

Post by martincmartin »

willthrill81 wrote: Mon Aug 01, 2022 2:07 pm
martincmartin wrote: Mon Aug 01, 2022 1:59 pm
garlandwhizzer wrote: Mon Aug 01, 2022 1:38 pm I personally believe that in terms of future returns, stocks for the long run relative to bonds is about as close to 100% probability as it gets, especially if we're talking widely diversified global equity.
I take it you haven't read the paper.
Why should a single paper that hasn't even been peer reviewed (no offense intended toward Dr. McQuarrie) change someone's perspective in that regard?
“When the facts change, I change my mind - what do you do, sir?” - John Maynard Keyes, probably apocryphal
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Re: Stocks for the Long Haul? Maybe Not.

Post by willthrill81 »

martincmartin wrote: Mon Aug 01, 2022 3:09 pm
willthrill81 wrote: Mon Aug 01, 2022 2:07 pm
martincmartin wrote: Mon Aug 01, 2022 1:59 pm
garlandwhizzer wrote: Mon Aug 01, 2022 1:38 pm I personally believe that in terms of future returns, stocks for the long run relative to bonds is about as close to 100% probability as it gets, especially if we're talking widely diversified global equity.
I take it you haven't read the paper.
Why should a single paper that hasn't even been peer reviewed (no offense intended toward Dr. McQuarrie) change someone's perspective in that regard?
“When the facts change, I change my mind - what do you do, sir?” - John Maynard Keyes, probably apocryphal
Referring to the findings of a single individual in a single paper that hasn't been peer reviewed as 'facts' is not something that the academic community would endorse.
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Re: Stocks for the Long Haul? Maybe Not.

Post by Logan Roy »

vineviz wrote: Mon Aug 01, 2022 2:29 pm
willthrill81 wrote: Mon Aug 01, 2022 2:07 pm
martincmartin wrote: Mon Aug 01, 2022 1:59 pm
garlandwhizzer wrote: Mon Aug 01, 2022 1:38 pm I personally believe that in terms of future returns, stocks for the long run relative to bonds is about as close to 100% probability as it gets, especially if we're talking widely diversified global equity.
I take it you haven't read the paper.
Why should a single paper that hasn't even been peer reviewed (no offense intended toward Dr. McQuarrie) change someone's perspective in that regard?
The question I'm more interested in is this one: why dismiss the findings of a research paper without first reading it?
I've had a skim-read. It's essentially something I've been saying for a long time – that 20th century market data is not generalisable to the 19th century, and that this century likely won't be. Survivorship and flaws in long-term data. I'm an All Weather investor for exactly these reasons.

However .. the market's ability to allocate capital intelligently has changed radically over the decades. Before mainland Chinese markets were open to foreign investment, they returned effectively nothing. They were driven by speculation, and a minority of research-driven active managers did very well. But this means only a small amount of capital was going where it needs to be. That we'd find a similar breakdown of long-term US market returns, the further back we go, shouldn't be surprising. I was always far more surprised at how good 19th century stock market returns looked in Siegel's work.

The same issues I have with factor research: the 1926 market wasn't running on the same software. There's no reason stocks should behave similarly, or be generalisable. I think the paper does a great job in shattering some of those illusions. And if we were going on historic returns, I'd probably be buying more bonds. (my paper will be something about how the past is only loosely generalisable to any future)
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Re: Stocks for the Long Haul? Maybe Not.

Post by McQ »

martincmartin wrote: Sun Jul 31, 2022 2:56 pm Is the data publicly available? Should we put it into Simba's spreadsheet?
Thanks for the encouragement. The data are public and I’d be delighted to see them added to the Simba spreadsheet. But that’s Siamond’s call.

If you don’t want to wait, find my website by entering my first and last name in a web search (I’m not allowed to link to it here under the BH no-promotion policy). You’ll see a post on the paper. Further down in the post is a link to a spreadsheet that holds the new index return data.

If you need the stock detail or bond detail spreadsheets (returns at the level of individual securities), just email me, using a burner email to protect your anonymity if desired.

In short: it’s all public.
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Re: Stocks for the Long Haul? Maybe Not.

Post by HalfMillionaire »

McQ wrote: Sat Jul 30, 2022 12:50 pm The paper discussed on the podcast can be downloaded at https://papers.ssrn.com/sol3/papers.cfm ... id=3805927

An earlier BH thread on the paper started by SimpleGift is: viewtopic.php?t=352394

The new historical data that was unavailable to Jeremy Siegel when he launched the “Stocks for the Long Run” project thirty years ago is discussed in this thread: viewtopic.php?t=353607

Happy to answer here in this current thread any questions about the research or the conclusions.
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Re: Stocks for the Long Haul? Maybe Not.

Post by McQ »

alcon50 wrote: Mon Aug 01, 2022 12:20 pm This is an interesting discussion. It was stimulated by Ben Felix commenting on an article that reevaluated Jeremy Siegel's "stocks for the long run" hypothesis that stocks consistently outperform bonds and that substantial exposure to the stock market is essential to growing your wealth.

Here is the link to the paper in question: https://papers.ssrn.com/sol3/papers.cfm ... id=3805927

This paper was written by Edward F. McQuarrie. He is listed as Professor Emeritus of the Leavey School of Business at Santa Clara University. Unfortunately, the paper is not peer reviewed. McQuarrie reports a series of articles in which he, with the help of others, did painstaking work to correct shortcomings in the data that Seigel used for his analysis. Siegel's bond data was based on an old analysis that not based on actual bond prices before 1926. Corporate bonds were not included. Bond yields were imputed. McQuarrie corrected this by painstaking analysis of digitized newspapers dating back to 1793. He found that bond performance was underestimated somewhat in the data that Siegel used. He then corrected stock performance data correcting for survivorship bias and constructing share counts from the now available digital archive to calculate capitalization-weighted total return on stocks. Siegel's data sources provided only equal-weighted stock results. Most of these changes effected the data before 1926. I would caution that the lack of peer-review concerns me, but the paper is interesting. I would also point out that this is not a criticism of Siegel. The problem is that the data sources he used were the best available but had significant limitations that can now be corrected.

McQuarrie finds that stock and bond performance tracked each other fairly closely from 1793 through the great depression. There were, of course, periods of stock outperformance followed by periods of bond outperformance. He contends the big deviation between stock and bond performance was from 1942 to 1981 when stocks clearly outperformed bonds. From 1982 to 2019, bonds and stocks performed closer to how they had performed prior to WWII.

His conclusion is that 226 years of data is a relatively small sample and we should be cautious extrapolating from this sample of past performance to make assumptions about the future. He questions whether we can count on stocks consistently outperforming bonds going forward. That scepticism seems like a view that comes up often on this discussion board!

I found this interesting. I would encourage Dr. McQuarrie to publish his work. What he reports doing seems sensible and would be a valuable contribution to our understanding of historical markets.

Alcon
Thanks, Alcon, for an outstanding summary. If I ever get a request for the Cliff Notes version, I think I’ll just link to your post. :sharebeer

In truth, I can boil it down even further, if the query is: How does this change what we already knew from reading Siegel?
1. I found that Siegel’s sources for stock returns prior to the Civil War left out the bad stuff;
2. and, that Siegel misunderstood his sources for bond yields after the Civil War, and as a result considerably underestimated bond returns through 1900.

We use the same data sources after 1926, so all I did for that period was re-present the data in a hopefully illuminating way, per the two charts reproduced by PicassoSparks upthread.
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Re: Stocks for the Long Haul? Maybe Not.

Post by alcon50 »

McQ wrote: Mon Aug 01, 2022 5:55 pm Thanks, Alcon, for an outstanding summary. If I ever get a request for the Cliff Notes version, I think I’ll just link to your post. :sharebeer
I really enjoyed your paper McQ! Thank you!

I often show the Siegel graph of stock and bond data from 1802 to the present to make the point to inexperienced investors that they need to have exposure to a diversified portfolio of stocks (ideally a total market index fund) if they want to grow their wealth. That advice is probably still sound but I will need to add an appropriate amount of caution since I am now less confident that stocks will consistently outperform bonds in the future.

I knew that the pre-1871 data had significant limitations so when demonstrating the effect of buying and holding stocks for 20, 30 and 40 years on return and variability, I would only use the Cowles and Ibbotson data. I was very impressed by the considerable amount of work you have done. Having US data from 1793 to 2019 that more reliably and more accurately captures the stock markets from 1793 to 1871 and the bond markets from 1793 into the 20th century is extremely useful. It is a very valuable contribution to our understanding of US markets in the early years of our country.

I would encourage you to publish this work in a peer reviewed journal. It will give reviewers a chance to critique your methods and conclusions and will increase the confidence others will have in your work. You have clearly worked hard on this project and thought deeply about it. I don't think you would have trouble finding an editor who would be interested in publishing it. Failing that, you should consider publishing a monograph or report that includes the multiple papers explaining you corrections to the data and this excellent summary paper. I would buy it! I want to see you get appropriate credit for your work.

Thanks again.

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Re: Stocks for the Long Haul? Maybe Not.

Post by Frank2012 »

McQ wrote: Mon Aug 01, 2022 5:55 pm
alcon50 wrote: Mon Aug 01, 2022 12:20 pm This is an interesting discussion. It was stimulated by Ben Felix commenting on an article that reevaluated Jeremy Siegel's "stocks for the long run" hypothesis that stocks consistently outperform bonds and that substantial exposure to the stock market is essential to growing your wealth.

Here is the link to the paper in question: https://papers.ssrn.com/sol3/papers.cfm ... id=3805927

This paper was written by Edward F. McQuarrie. He is listed as Professor Emeritus of the Leavey School of Business at Santa Clara University. Unfortunately, the paper is not peer reviewed. McQuarrie reports a series of articles in which he, with the help of others, did painstaking work to correct shortcomings in the data that Seigel used for his analysis. Siegel's bond data was based on an old analysis that not based on actual bond prices before 1926. Corporate bonds were not included. Bond yields were imputed. McQuarrie corrected this by painstaking analysis of digitized newspapers dating back to 1793. He found that bond performance was underestimated somewhat in the data that Siegel used. He then corrected stock performance data correcting for survivorship bias and constructing share counts from the now available digital archive to calculate capitalization-weighted total return on stocks. Siegel's data sources provided only equal-weighted stock results. Most of these changes effected the data before 1926. I would caution that the lack of peer-review concerns me, but the paper is interesting. I would also point out that this is not a criticism of Siegel. The problem is that the data sources he used were the best available but had significant limitations that can now be corrected.

McQuarrie finds that stock and bond performance tracked each other fairly closely from 1793 through the great depression. There were, of course, periods of stock outperformance followed by periods of bond outperformance. He contends the big deviation between stock and bond performance was from 1942 to 1981 when stocks clearly outperformed bonds. From 1982 to 2019, bonds and stocks performed closer to how they had performed prior to WWII.

His conclusion is that 226 years of data is a relatively small sample and we should be cautious extrapolating from this sample of past performance to make assumptions about the future. He questions whether we can count on stocks consistently outperforming bonds going forward. That scepticism seems like a view that comes up often on this discussion board!

I found this interesting. I would encourage Dr. McQuarrie to publish his work. What he reports doing seems sensible and would be a valuable contribution to our understanding of historical markets.

Alcon
Thanks, Alcon, for an outstanding summary. If I ever get a request for the Cliff Notes version, I think I’ll just link to your post. :sharebeer

In truth, I can boil it down even further, if the query is: How does this change what we already knew from reading Siegel?
1. I found that Siegel’s sources for stock returns prior to the Civil War left out the bad stuff;
2. and, that Siegel misunderstood his sources for bond yields after the Civil War, and as a result considerably underestimated bond returns through 1900.

We use the same data sources after 1926, so all I did for that period was re-present the data in a hopefully illuminating way, per the two charts reproduced by PicassoSparks upthread.
So, what is an investor to do? I'm currently 50% stocks and 50% bonds all in broad-based index funds. Seems like I should keep things as is, especially if bonds sometimes outperform stocks for long stretches.....
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Re: Stocks for the Long Haul? Maybe Not.

Post by Logan Roy »

Frank2012 wrote: Tue Aug 02, 2022 6:29 am So, what is an investor to do? I'm currently 50% stocks and 50% bonds all in broad-based index funds. Seems like I should keep things as is, especially if bonds sometimes outperform stocks for long stretches.....
McQuarrie finds that stock and bond performance tracked each other fairly closely from 1793 through the great depression. There were, of course, periods of stock outperformance followed by periods of bond outperformance. He contends the big deviation between stock and bond performance was from 1942 to 1981 when stocks clearly outperformed bonds. From 1982 to 2019, bonds and stocks performed closer to how they had performed prior to WWII.
Of course, around 1942 happens to be when US debt-GDP peaked, and yields bottomed – prior to that, you've got lots of borrowing, and as debt grows, you want to be able to refinance that debt at lower costs – so yields fall, bond prices rise, etc. But there's a limit to that, because at some point, yields are so low, no one's going to lend. So we deleverage, and you've got 40 years (to about 1981) where next year's bonds are going to be better value than this year's, and they're going to struggle against stocks until yields get sufficiently high again. I think where we are in the cycle is always going to dictate whether stocks or bonds are likely to do better over periods meaningful to the individual. (i.e. I don't think bonds are likely to be good standalone investments for a long time – but I think long duration will continue to have valuable diversifying characteristics.)

Maybe the problem is we can't just look at what happened over 100, 200, 500 years, and assume that tells us much of anything about the next 50. Which could mean we all have to be somewhat aware of macroeconomics in order to invest optimally? (as we need to be aware of driving conditions in order to drive safely.)

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Re: Stocks for the Long Haul? Maybe Not.

Post by nisiprius »

willthrill81 wrote: Mon Aug 01, 2022 2:07 pm
martincmartin wrote: Mon Aug 01, 2022 1:59 pm
garlandwhizzer wrote: Mon Aug 01, 2022 1:38 pm I personally believe that in terms of future returns, stocks for the long run relative to bonds is about as close to 100% probability as it gets, especially if we're talking widely diversified global equity.
I take it you haven't read the paper.
Why should a single paper that hasn't even been peer reviewed (no offense intended toward Dr. McQuarrie) change someone's perspective in that regard?
Because it dovetails with, clarifies, and improves on things already known.

Some of the general points had been made by William J. Bernstein in his short essay, Only Two Centuries. The disturbingly sketchy nature of Siegel's 1800's data had been pointed out by Jason Zweig, Does stock market data really go back 200 years?. The fact that the first sixty or so years of Siegel's own data don't support his thesis was something I'd noticed myself, and then was illustrated in a graphic by Rob Arnott in 2009:

Source

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Re: Stocks for the Long Haul? Maybe Not.

Post by Ramjet »

McQ wrote: Sat Jul 30, 2022 12:50 pm Happy to answer here in this current thread any questions about the research or the conclusions.
Have you changed the way you personally invest based on your findings/conclusions?
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Re: Stocks for the Long Haul? Maybe Not.

Post by willthrill81 »

nisiprius wrote: Tue Aug 02, 2022 6:57 am
willthrill81 wrote: Mon Aug 01, 2022 2:07 pm
martincmartin wrote: Mon Aug 01, 2022 1:59 pm
garlandwhizzer wrote: Mon Aug 01, 2022 1:38 pm I personally believe that in terms of future returns, stocks for the long run relative to bonds is about as close to 100% probability as it gets, especially if we're talking widely diversified global equity.
I take it you haven't read the paper.
Why should a single paper that hasn't even been peer reviewed (no offense intended toward Dr. McQuarrie) change someone's perspective in that regard?
Because it dovetails with, clarifies, and improves on things already known.
I'm not commenting on the accuracy of the data used, analyses, nor discussion provided in the paper, all of which might be excellent. I'm only pointing out, as I did in a later post above, that the academic community would never lend much credence to the findings of a single individual in a single paper that hasn't even been peer-reviewed.
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Re: Stocks for the Long Haul? Maybe Not.

Post by McQ »

alcon50 wrote: Mon Aug 01, 2022 10:50 pm ...

I would encourage you to publish this work in a peer reviewed journal. It will give reviewers a chance to critique your methods and conclusions and will increase the confidence others will have in your work. You have clearly worked hard on this project and thought deeply about it. I don't think you would have trouble finding an editor who would be interested in publishing it. Failing that, you should consider publishing a monograph or report that includes the multiple papers explaining you corrections to the data and this excellent summary paper. I would buy it! I want to see you get appropriate credit for your work.
Much obliged, Alcon. I owe you an explanation for why that journal submission probably will not occur, even though its absence will permit continued skepticism as expressed by JoeRetire, willthrill81, and others (“not yet published,” “not peer-reviewed”).

I did publish dozens of papers in peer-reviewed journals during my career, most not relevant to this forum (https://scholar.google.com/citations?us ... l=en&oi=ao), and am proud to have 10,000 citations to my name.

But now I’m retired, and don’t have to run that gauntlet anymore. I can post a paper on SSRN as soon as I’ve completed a manuscript to my satisfaction, and move on immediately to start the next working paper (the blank page of a new paper is my absolute favorite place to be).

I’ve concluded that the peer-reviewed journal game is not worth the candle. To get past the journal gatekeepers I’d have to cut my word count by 66% or more; engage in multiple rounds of re-writing to satisfy gatekeepers; and spend one unit of time (=1 additional working paper) writing responses to said reviewers. And that’s in the best case. Rejection, and resubmission to a new journal with a new set of gatekeepers imposing different demands (xN), was the more typical case in my career.

Not worth it to me. I now write to reach some tens of thousands of historically-minded investors, rather than some hundreds of scholars in a sub-sub-discipline. I believe I can reach my audience by publishing on SSRN, participating in podcasts, responding to journalists, and contributing to discussion forums.

But I would acknowledge that readers have to do their own diligence on these working papers. There is no prestigious journal underwriting my conclusions; readers have to decide for themselves if the paper is any good. (A side thank you to Nisiprius, who gives a concise example of how this is done.)

Would a journal publication add credibility? Certainly. Would it help me reach a wider audience? Doubtful. Would the rewards, net of costs, justify the effort? It seems not. (I could change my mind at any point, of course.)

PS: If you are not part of academia you may not have tracked how decadent the publication enterprise has become (channeling Ross Douthat). The peer review process has proved incapable of weeding out fabricated data and other forms of fraud and error (Dan Ariely being the most recent case: https://www.science.org/content/article ... researcher). In the social sciences, studies don't replicate. In the natural sciences, preprints predominate.

Long story short: for some decades, during most of my career, Is it peer-reviewed? was a reliable determinant of quality. Now, not so much.
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Re: Stocks for the Long Haul? Maybe Not.

Post by willthrill81 »

McQ wrote: Tue Aug 02, 2022 1:57 pm I did publish dozens of papers in peer-reviewed journals during my career, most not relevant to this forum (https://scholar.google.com/citations?us ... l=en&oi=ao), and am proud to have 10,000 citations to my name.

But now I’m retired, and don’t have to run that gauntlet anymore. I can post a paper on SSRN as soon as I’ve completed a manuscript to my satisfaction, and move on immediately to start the next working paper (the blank page of a new paper is my absolute favorite place to be).

I’ve concluded that the peer-reviewed journal game is not worth the candle. To get past the journal gatekeepers I’d have to cut my word count by 66% or more; engage in multiple rounds of re-writing to satisfy gatekeepers; and spend one unit of time (=1 additional working paper) writing responses to said reviewers. And that’s in the best case. Rejection, and resubmission to a new journal with a new set of gatekeepers imposing different demands (xN), was the more typical case in my career.

Not worth it to me. I now write to reach some tens of thousands of historically-minded investors, rather than some hundreds of scholars in a sub-sub-discipline. I believe I can reach my audience by publishing on SSRN, participating in podcasts, responding to journalists, and contributing to discussion forums.

But I would acknowledge that readers have to do their own diligence on these working papers. There is no prestigious journal underwriting my conclusions; readers have to decide for themselves if the paper is any good. (A side thank you to Nisiprius, who gives a concise example of how this is done.)

Would a journal publication add credibility? Certainly. Would it help me reach a wider audience? Doubtful. Would the rewards, net of costs, justify the effort? It seems not. (I could change my mind at any point, of course.)

PS: If you are not part of academia you may not have tracked how decadent the publication enterprise has become (channeling Ross Douthat). The peer review process has proved incapable of weeding out fabricated data and other forms of fraud and error (Dan Ariely being the most recent case: https://www.science.org/content/article ... researcher). In the social sciences, studies don't replicate. In the natural sciences, preprints predominate.

Long story short: for some decades, during most of my career, Is it peer-reviewed? was a reliable determinant of quality. Now, not so much.
First, let me say thank you for your willingness to openly share your research and entertain criticism pertaining to it.

I agree with you that the peer-reviewing process has its share of flaws. Having worked on both sides of the fence, I see it from both the authors' and the reviewers' perspectives. And while I'm not retired, I'm close enough to the end of my career that I too have decided to no longer participate in the process on any level due to the workload involved, especially as an author.

That said, we both agree that peer-reviewed papers are, in general, significantly more credible than those that aren't. And the peer-reviewing process is still clearly viewed as being worthwhile by the academy, virtually everyone of whom is aware of the issues pertaining to the process. A prestigious journal being willing to put its reputation on the line to endorse a given paper is not a light thing.

Further, we both know that research methods can be incredibly dense, even for those who have been extensively trained in how to use them and who have done so for many years. Expecting casual readers of an Internet forum to be able to make truly informed decisions about a paper using such methods, many of whom likely don't even know how to properly interpret a p-value, is highly unrealistic, to say the least.

However, we have enough here who are knowledgeable about such matters that if many carefully scrutinize the paper and give it the 'green light', less knowledgeable readers can likely trust it about as well as any such research can be trusted.
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Re: Stocks for the Long Haul? Maybe Not.

Post by McQ »

Leesbro63 wrote: Sat Jul 30, 2022 1:21 pm
visualguy wrote: Sat Jul 30, 2022 1:05 pm That's the reason many have a big chunk of their assets in direct real estate.
I'd be curious as to how direct real estate has correlated to stocks in places and during periods where stocks did poorly over long periods. I'm guessing that real estate would also have done poorly, but I don't know that.
Sorry for the delayed reply, Leesbro63. You can test your thesis by going to https://www.macrohistory.net/database/ and downloading their (free) data. They compiled an index of returns on (residential) real estate for over a dozen countries, going back to 1871 in many cases. You can compute the correlation / diversification benefit over any interval you like.

In a later paper I found that adding their real estate index typically allowed withdrawals to be sustained for years longer, especially in cases where the three-fund portfolio had produced disappointing results. Download https://papers.ssrn.com/sol3/papers.cfm ... id=4001986 and go to p. 55. Continue to read through the limitations section (I have some qualms about the measure of real estate returns).
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Re: Stocks for the Long Haul? Maybe Not.

Post by seajay »

British pre WW1 years and investors were inclined to buy bonds, stocks were for speculators. Inflation was broadly flat (gold = money and finite gold), whilst bank rates paid interest, so it made more sense to convert gold to money, invest the money for interest - such that it bought back more ounces of gold.

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https://www.bankofengland.co.uk/statist ... h-datasets
A millennium of macroeconomic data


Banks tended to charge something like 2% above deposit interest rates as their 'cut'.

As such, comparing bonds and stocks when on the gold standard might be considered as comparing outcome of investing with that of a casino visitor, I guess 50/50 whether the gambler came out having won or lost.

Stock data for centuries ago is also inclined to be based on a very limited set, BoE data for instance has some earlier years based on just six stocks.
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Re: Stocks for the Long Haul? Maybe Not.

Post by will23 »

McQ wrote: Sat Jul 30, 2022 12:50 pm The paper discussed on the podcast can be downloaded at https://papers.ssrn.com/sol3/papers.cfm ... id=3805927

An earlier BH thread on the paper started by SimpleGift is: viewtopic.php?t=352394

The new historical data that was unavailable to Jeremy Siegel when he launched the “Stocks for the Long Run” project thirty years ago is discussed in this thread: viewtopic.php?t=353607

Happy to answer here in this current thread any questions about the research or the conclusions.
Hi, the paper "The Rate of Return on Everything" which you may be familiar with found that "the real safe asset return (bonds and bills) has been very volatile over the long run, more so than one might expect, and often even more volatile than real risky returns." If you are familiar with the paper, could you comment how we should think of this conclusion in contrast with your paper as individual investors? (I'm not implying the papers conclusions are incongruent btw).

I believed you mentioned real estate and how it might affect portfolio volatility and returns in another post on this thread, I have wondered if historical real estate returns properly account for the potentially catastrophic impact of war on property values. Sorry for a super vague question, but any thoughts on this one?

Appreciate the contribution to literature and the forum.
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Re: Stocks for the Long Haul? Maybe Not.

Post by ramram22 »

Interesting analysis. But, still, it just makes sense that stocks should outperform bonds long-term.

Stocks allow you to participate in the wonders of capitalism. Investing in companies run by the most innovative minds in the world should give you a better return than lending someone money at the prevailing interest rate, which is all bonds are. And that doesn't even factor in the volatility which stocks investors have to deal with.
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Re: Stocks for the Long Haul? Maybe Not.

Post by martincmartin »

ramram22 wrote: Thu Aug 04, 2022 7:54 am Interesting analysis. But, still, it just makes sense that stocks should outperform bonds long-term.

Stocks allow you to participate in the wonders of capitalism. Investing in companies run by the most innovative minds in the world should give you a better return than lending someone money at the prevailing interest rate, which is all bonds are. And that doesn't even factor in the volatility which stocks investors have to deal with.
It makes sense, yet as the data show, it is right during some periods and wrong during others.

For example, during periods of deflation, when prices go down by half, bonds will increase in nominal value, and more than double their purchasing power. Stocks, which tend to track inflation and deflation, can quite easily go down.
JackoC
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Re: Stocks for the Long Haul? Maybe Not.

Post by JackoC »

Apathizer wrote: Mon Aug 01, 2022 2:15 am
Tellurius wrote: Mon Aug 01, 2022 2:07 am
Leesbro63 wrote: Sat Jul 30, 2022 1:21 pm
visualguy wrote: Sat Jul 30, 2022 1:05 pm That's the reason many have a big chunk of their assets in direct real estate.
I'd be curious as to how direct real estate has correlated to stocks in places and during periods where stocks did poorly over long periods. I'm guessing that real estate would also have done poorly, but I don't know that.
You have other factors sometimes.
A touristic country with irreplaceable, uncopyable, historic architecture could possibly fare better in real estate than stocks, no?
If you have enough money to invest in direct real estate in many different markets it's probably a good option, but most of us don't. Most of us would have difficulty acquiring 1 or 2 rental properties, much less the quantity needed for comprehensive diversification.
If the direct real estate is a relatively small portion of portfolio it can increase diversification *of the portfolio* without the real estate portion itself being highly diversified. Seems like often the reaction to direct real estate assumes the direct real estate super fan 'stocks are for losers, real estate is, was and will be the way to wealth!' There have been a few such posters even here, though it's much more common in the 'popular literature', paid seminars etc. I think people here are sometimes reacting to that. If you're going to focus on RE to the exclusion of stocks I agree you have to have a bunch of properties and preferably in different areas of the country to be even close to as diversified as a somebody limiting their risk asset to even just the US stock index. If instead you have say 1/4 of your assets in direct RE, a few properties in one area isn't making you terribly concentrated in any one of those overall but you're benefiting from some differences in the return drivers of local direct RE vs stocks. IOW it's one part of diversifying, along with for example being globally diversified within stocks. That's not a 100% gamechanger either, but it also helps (in terms of diversification and on a forward looking basis; if instead one drives strictly by looking at a rearview mirror with a short range, few if any assets can compete with US stocks).

As to how uncorrelated direct RE is with stocks, that's not easy to objectively quantify IMO. Even the best, cleanest RE price data will show very low price correlation to stocks, especially small properties. But even the best and cleanest data has time lag factors and other imperfections and correlation calcs are very sensitive to apples v oranges factors in the two data series. Also, it's hard practically IME to fully mentally separate the fact that changes in stock value on the downside punch you in the nose every day, but it takes effort to get an accurate up to date estimate of if/how much your property values have declined (especially if it's not a SFH). Like using bonds for 'ballast' to 'emotionally see you through turbulence' it's not easy to say if this difficulty in price discovery is strictly bad or good, practically depending on the person.

On 'bond bull market' Paul Schmelzing has argued that real yields have generally declined since the 14th century. Per his findings, sovereign real borrowing rates in the wake of the Black Death were as high as the early 1980's peak in the US, mid double digits and stayed there for decades, then gradually declined over the centuries to current approx 0%, with the Volcker rate explosion an anomaly, almost literally a '500 year storm'. One such paper:
https://www.bankofengland.co.uk/-/media ... FB09FF4881
fisher0815
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Re: Stocks for the Long Haul? Maybe Not.

Post by fisher0815 »

seajay wrote: Wed Aug 03, 2022 7:47 pm Stock data for centuries ago is also inclined to be based on a very limited set, BoE data for instance has some earlier years based on just six stocks.
A very good point. If a stock market is less diversified, long periods of underperformance are more common.
Today the US stock market is the best diversified stock market of the world.
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vineviz
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Re: Stocks for the Long Haul? Maybe Not.

Post by vineviz »

fisher0815 wrote: Thu Aug 04, 2022 2:13 pm Today the US stock market is the best diversified stock market of the world.
And a portfolio that is not 100% concentrated in US stocks would be even MORE diversified.

Uncompensated risks should be avoided, and putting all our eggs in one country's markets is an uncompensated risk.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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