I'm wondering what you think of the argument that I've been nurturing, since it's not on your list, drawing a line around 1990 motivated by what appears to be a permanent departure from historical valuations (i.e. Shiller PE). In a couple old posts I've offered......
May I ask where you draw the line—at what date does the history of past asset returns become relevant?
I think there are some things that explain the difference between the past 30 years (and now) vs. the preceding century. There was the introduction of the 401k and IRA in the 1980s and 1990s. In conjunction with that, there was the subsequent spread of information (both more research, due to more interest from people managing their 401k and IRA, and more accessibility due to the Web) about investing which has mostly taught people to invest in stocks (especially US stocks) because they were arguably just undervalued over the preceding century and thus provided fantastic returns. See also good competition among fund families and custodians, and greater regulation of those companies and the market, which has all made things safer and better for investors who might have previously chosen only US savings bonds and bank CDs.
Note that I have only a weak belief in this argument that pre-1990 is irrelevant. For practical purposes, I continue to use long-term historical data exactly in the ways that SimpleGift so elegantly described:Once everyone knows that a higher allocation to equities is near-certain to produce a better long-term outcome, and is thus "safer" or "less risky" in some sense, and advises everyone else of this near-certainty, then it may no longer hold true going forward.
I think that one problem with long-term equity returns data and back-testing is that it includes many decades when the average person didn't hold equities, and institutions held lots of bonds on their behalf. Looking at a Shiller PE chart, it appears to me that maybe equities were just under-priced between 1880 (when the data starts) and the 1980s. Incidentally, 1980s gave us the 401k plan, followed by the Roth IRA in the 1990s, and there was a proliferation of research and literature about how individuals should invest their savings, and equity valuations shot upwards and have remained relatively high ever since. So pick almost any starting point prior to the 1980s, and almost any end point since then, and equities look fantastic. But for anyone starting in the 1990s or later? It's really not obvious to me that equities will be such a great deal.
- 1. Setting reasonable return expectations. The long-term global average returns of 5% real for stocks and 2% real for bonds are not a bad place to start at any point in time — with certain allowances for current valuations.
2. Understanding potential variability. The variability of real stock and bond returns over generations is important psychological information for the passive investor to have, I believe, if only to motivate one to prepare backup plans, if expected returns do not pan out. Certainly, modern monetary policy and inflation targets have helped to decrease the variability of financial markets compared with centuries ago — but still it cannot be avoided, only understood.
3. Understanding specific market conditions. Historical examples would include the impact of high inflation on both stock and bond returns, the tendencies of markets to become irrationally exuberant at times with subsequent crashes, and the potential for markets to underperform return expectations for long periods.
Statistics: Posted by warner25 — Tue Jul 16, 2024 11:41 am — Replies 60 — Views 5101