10 ms·

Visualization of stock market performance over time, adjusted for inflation

295 points by noahlt 16y ago

MarkMc 16y ago
This is a great visualisation - it's easy to understand, and punches you in the face with information that would be difficult to convey through words alone. One example is that the first few years give no clue as to your long-run outcome. In fact, the first year may as well have been a coin flip. This shows what rubbish articles with a 1-year timeframe like this are: http://www.moneyweek.com/investment-advice/share-tips-moneyweeks-top-ten-tipsters-of-2010-51814.aspx http://www.moneyweek.com/investment-advice/share-tips-moneyw...
- shasta 16y ago
  A better visualization would IMO just show the adjusted market value and superimpose some exponential growth curves over that (1% in green, -1% in red, etc.). This confusingly takes 1D data and makes it 2D.
1010011010 16y ago
"High inflation led to negative returns." True, dat. Printing money doesn't make us richer.
- 1010011010 16y ago
  Thanks for the downvotes. What's wrong with my observation?
  - jmulho 16y ago
    I think you meant to say "true, that."
    - capstone 16y ago
      I think he meant to say what he said. I get it.
- joshklein 16y ago
  Actually, this is false. Printing USD is a tax on all current holders of USD - that is, it dilutes the value of all existing USD while raising money for the US government. Since there are large foreign holders of USD, but the US government can (theoretically) spend all of its USD on US citizens, printing money does in fact make us richer. This method of raising money is called seignorage, and it is how the US can tax the rest of the world to pay for whatever we want. We used it extensively during the Vietnam war to, in effect, make the French (large holders of USD at the time) pay for our war effort. They were not happy. This says nothing of the long term effects of seniorage, just that printing money does, currently, make us richer.
  - danenania 16y ago
    Maybe if by "us" you mean large banks and defense contractors. Otherwise I don't buy it.
    - nostrademons 16y ago
      Also: recipients of social security & medicare, various federal grants in the arts & sciences, and employees of federal government agencies.
      - danenania 16y ago
        These sums are paltry compared to the unprecedented quantities of wealth that have been transferred and continue to be transferred from the middle and lower classes to the elite of the finance and defense industries. Aside from the wealth itself, there is a tremendous opportunity cost, since capital is moved from productive to outright destructive and criminal sectors of the economy. The primary vehicle of these transfers is monetary expansion. All else being equal, a sound currency would bring orders of magnitude improvement in the real economy and dramatically increase standards of living for the bottom 90% of the population far beyond what can be achieved through programs like the ones you mention. Of course, there would be a deflationary collapse first, but this would be the best thing that could possibly happen for the vast majority of us.
- mediaman 16y ago
  Printing money does, in fact, create wealth, in some limited contexts: 1. GDP growth requires printing money, or else it will create a deflationary environment, which is dangerous because it creates an incentive to delay business purchasing. 2. Low levels of inflation create a more efficient way for the economy to adjust the mix of labor skill demand. Research shows that it is difficult to nominally lower a worker's pay year over year, but giving no raise in an inflationary environment allows a company to do just that. This is important to lower the rewards for resources the economy has a lesser need for, such as when bar codes reduced the need for grocery store staff. 3. And finally, printing money can help an economy recover from an aggregate demand gap (i.e., a supply-demand disequilibrium that doesn't automatically recover). This can happen in period of high unemployment, where wages need to fall to create more demand for labor, but a fall in wages reduces personal income, further reducing aggregate demand, further reducing the demand for labor. Printing money reduces the cost of money and gives an incentive for companies to invest more, which reduces the aggregate demand gap.
  - 1010011010 16y ago
    You're arguing that printing money reallocates wealth, which it certainly does. But it does not create wealth. New dollars created from thin air do not also magically call into existence new goods and services. It's simply more dollars chasing the same goods and services. Either that, or counterfeiters also create wealth.
    - mediaman 16y ago
      With all due respect, you do not appear to have understood my reply. I specifically state that it does, in certain situations, create wealth. There is a tremendous amount of economic research to support this. Of course, I agree with you that printing money does not always create wealth. Far from it. There are many cases in which it does not create wealth. Highly inflationary economies are a good example of this. But if you re-read the three situations I describe, you will see that they do indeed describe places that the printing of money will create wealth that would not have existed otherwise without the printing of money, and which are above and beyond the mere reallocation of wealth. Perhaps to better understand why your point is not true is to understand your claim from a different perspective: that the money supply should always stay exactly constant, year after year. Even a cursory understanding of my first point (that economic growth in and of itself requires a corresponding increase in the money supply) shows this to not be true. Imagine the economy grows and the money supply stays constant. The value of products available per dollar now increases annually. This is deflation. Now you are implicitly claiming that deflation is a good thing. To read more on deflation, see: http://en.wikipedia.org/wiki/Deflation http://en.wikipedia.org/wiki/Deflation
thinkdifferent 16y ago
Just finished reading "A Random Walk down Wall Street" and I must confess I expected more consistency and less volatility in index funds returns. Great eye-opening graph. @MarkMc very good point
- thinkingeric 16y ago
  The premise of RWDWS is flawed by assuming that the secondary market in stocks is 'free'. This book was published in 1973, and after the 'analytic' schemes of the 1960s (and continuing in the 70s), it had obvious appeal. What it did not account for was government manipulation of financial markets through (de)regulation. For example, the Monetary Control Act of 1980 and the expansion of IRA coverage under ERTA in 1981 opened the flood gates to the securities markets and intensified the Ponzi-scheme nature of securities 'investing'. Prior to the publishing of RWDWS, it is reasonable to claim that the stock market was a arena for transferring risk, not pretending to be a savings institution. Something else to bear in mind is that there are little or no real alternatives to 'funds', and this exaggerates the influx of capital into them. The idealized view of stock and bond trading fails to fully account for the transaction costs, which are largely hidden, and this 'vigorish' makes it a losing game eventually. The costs associated with funds ('index' or otherwise) are also carefully and skillfully masked, but it is easier to market the diversification arguments. There's a reason that the 'financial industry' is so profitable: http://chartingtheeconomy.com/?p=665 http://chartingtheeconomy.com/?p=665 It's an increasingly elaborate wealth transfer mechanism.
noahlt 16y ago
Investing in index funds has been lauded around here, but the goodness of that strategy revolves around its consistency in returning 10% over ten to twenty years. This graph makes index funds look much less consistent! Does this graph debunk the index fund strategy, or am I missing something?
- borism 16y ago
  the goodness of that strategy revolves around its consistency in returning 10% over ten to twenty years and why would that be "the goodness" of index fund strategy? who told you that? "the goodness" of index funds is that they're low cost and diversified (sometimes) - so more of the returns stay in your pockets, not get handed over to fund managers. return of the over-all stock market has little to do with it!
- Huppie 16y ago
  It's actually interesting that they already account for dividends and taxes. Usually if people talk about a 10% return, they are talking about pre-tax returns. I remember seeing a 'rolling S&P500 results' page somewhere but can't remember exactly where, [0] is what a quick search comes with. As you can see in graph [1] there was quite a dip for everyone investing for a period of 20 years between 1974 and somewhere around 1994. That is a 30 year period of a total of 80 years measured with bad returns. [0]: http://allfinancialmatters.com/2007/06/12/sp-500-rolling-period-total-real-returns/ http://allfinancialmatters.com/2007/06/12/sp-500-rolling-per... [1]: http://allfinancialmatters.com/Graphics/S&P50020-YearTotalChartBig.GIF http://allfinancialmatters.com/Graphics/S&P50020-YearTot...
- mjs 16y ago
  The two green squares are 7% annual return or greater, so you can be in the beige somewhere and still be getting decent returns. It does seem somewhat difficult to end up on a green square though--there aren't that many of them and there are even fewer long runs.
- dschobel 16y ago
  Index investing isn't predicated on 10% returns nor was it ever a guarantee of such returns. Index investing is simply the theory that the markets are efficient and reflect all possible information on a security and that you're not smarter than the market. Think of it this way-- buying a stock is a way of saying "the market is wrong, I think $COMPANY is worth more than the price at which it is trading". Unless you have information which the market does not (the next Apple product will be a flop, etc) this becomes, by definition, a speculative position. Index investing is a way of opting out of the highs and lows of stock picking and still take part in the general growth in a market/sector/<whatever the index cover>. The story merely points out that for some timespans, the growth of the US markets was crap and that (unsurprisingly when you think about it for a second) returns have varied substantially over the past 50 years even for long time-spans. TLDR; if you think the US economy will keep growing and don't think you're smarter than marketɫ, index investing is probably still a really good way to go. ɫ hot tip: you're not
harscoat 16y ago
Great submit to HN: not because of the money stuff but because of this great visualization. Me thinks, to emulate and try to produce such great data visualization for our users, that's our best investment plan.
vanschelven 16y ago
IMHO the colors are somewhat misleading. Since the data have already been corrected for taxes and inflation positive returns are net-positive and should be green. In the original picture even 0-3% returns were red. This is what it looks after shifting all the colors one step towards green: http://imgur.com/KqU1B http://imgur.com/KqU1B
- mjs 16y ago
  The reason they're coloured like that is that you can get to the pale red (0%-3%) by putting you money is much safer vehicles like term deposits or bonds. If you're getting less than 3% out, stocks aren't worth it.
  - vanschelven 16y ago
    Possibly, though I have serious doubts that bonds make 3% when corrected for both inflation and taxes. In any case I would love to see (or make myself) the comparison with other vehicles.
    - borism 16y ago
      bond yields rise with inflation http://www.hussmanfunds.com/rsi/yieldsinflation.htm http://www.hussmanfunds.com/rsi/yieldsinflation.htm
      - vanschelven 16y ago
        As far as I understand it, your statement is correct at face value, but incorrect in the context of this discussion, since we're discussing the relative yields of bonds and other investment vehicles over a long time period. Say use all my money to buy a long term bond today. If inflation would rise tomorrow, you correctly point out that bond yields of tomorrow's bonds will rise. However, mine is fixed. This means I'm hit, firstly, by the inflation, and secondly, by the fact that the price of the bond will fall. (The price will fall because competing bonds will have better yields tomorrow). Correct me if I'm wrong.
pama 16y ago
Does anyone know how inflation was adjusted?
- danenania 16y ago
  Probably with government inflation statistics, which makes the reliability questionable.
  - iwwr 16y ago
    The rate of inflation may be underestimated, but the trend is still a good indicator. You check out the charts at http://www.shadowstats.com/ http://www.shadowstats.com/ . It may be helpful to put together your own "basket of goods" for a more personalized estimate of inflation.
    - yummyfajitas 16y ago
      Actually, inflation is generally overestimated. All CPI numbers up to 1996 are well known to be more than 1% too high. http://en.wikipedia.org/wiki/Boskin_Commission http://en.wikipedia.org/wiki/Boskin_Commission An intuitive way to see this: CPI-adjusted wages have not increased much since the 1970's. Yet in terms of goods and services, we have vastly more than we had in the 70's - I doubt you can name a single good we consume less of than in the 70's (besides perhaps telephone land lines and typewriters). If CPI properly measured inflation, that would not be the case.
      - iwwr 16y ago
        Still, this realization should not be seen as a license by the government to start printing more money. Having a decades long effective deflation, but with economic growth, would also mean that "price stability" can be equivalent with negative price increases.
      - danenania 16y ago
        This could easily be turned around to say that since innovation naturally lowers prices over time, inflation is greatly underestimated. Say that without monetary expansion, prices would decrease 3 percent per year. This would mean that in reality inflation is 3 points higher than its nominal value.
jvdongen 16y ago
I'm a noob regarding investing, so bear with me if I use incorrect terms or kick open doors that are already open etc. but if my interpretation of this graph is correct, it also offers some guidelines for investing in funds (not individual companies): 1) from the visual it seems to me that the starting year is the most relevant. If you start in a good year, it will mostly turn out right, regardless whenever your end (exceptions aside, for which see point 2). If you start in a bad year it will mostly work out badly unless you really have some time to spare or manage to run into a very rare occasion (e.g. starting in 1947 and ending in the mid 1950's). But that's just from the visual, which can be very misleading, so the raw data points would be interesting to do some statistic exercises. If that holds true though, it could be a good guideline - assess the current returns of a particular fund and do not invest [in it] if the current returns are not high enough. While this would make you, by definition, miss out on any really spectacular returns, it could reduce risk enormously without sacrificing much in terms of returns. 2) if you happen to have invested in a fund that took a nose-dive, hang on to it and don't sell for a long while, as in the long run you're apparently very likely to end up at the 20-year median (guess it's called a median for a reason ;-) which is not too bad. At the very least your loss is going to be minimized with time.
- roadnottaken 16y ago
  No.... 1) in reality you're constantly investing. nobody invests a lump-sum one time and hopes they chose a good moment to enter the market. the chart gives you some idea of your long-term chances. 2) "* if you happen to have invested in a fund that took a nose-dive, hang on to it and don't sell for a long while*" unless it goes bankrupt in which case you definitely want to sell. This is one reason why strategists advocate diversification and investing in index funds: you're sheltered from the (possibly poor) performance of any single company/stock.
iwwr 16y ago
Compare a stock portfolio with a simple precious metals basket. The stock market is a poor longterm store of value. It's very hard to stay ahead of inflation with securities whose value can be fudged by cheap money. In fact, pension funds can't even make +inflation guarantees, only best efforts through low-risk investments. And even if they did, they would be lying.
- lsc 16y ago
  >Compare a stock portfolio with a simple precious metals basket. The stock market is a poor longterm store of value. while I agree that this would make a very interesting chart, do you have a reference for that? I mean it's clear that during the last 10 years, nothing has touched metals, but if you were in gold for the 10 years before that, things wouldn't have gone quite as well.
  - encoderer 16y ago
    I keep hearing "Gold always goes up." It gave me this thought.. 2010 "Gold Always Goes Up" 2004 "House Prices Always Go Up" 1999 "The US stock market always goes up"
    - deleted 16y ago
      [deleted]
    - bodyfour 16y ago
      Sort of like: 1979 "Gold Always Goes Up" http://mjperry.blogspot.com/2010/09/chart-of-day-inflation-adjusted-gold.html http://mjperry.blogspot.com/2010/09/chart-of-day-inflation-a...
    - nostrademons 16y ago
      I think it's fairly obvious that there's a bubble in gold right now, and I would gleefully short it if I didn't suspect that the market will stay irrational longer than I can stay solvent...
  - mynameishere 16y ago
alexk7 16y ago
The chart is not color-blind friendly :(
- dgallagher 16y ago
  If you're on a Mac, try: Control + Option + Command + 8 That'll invert your screen colors, and "might" make it readable. Press the same key combo to de-invert.
myth_drannon 16y ago
This chart is pretty useless following the current world events. Right now stock market(US & EU) is supported by QE,QE1.5,QE2 and the next QEs. The tools that could be used to analyze the previous years are worthless.
- tricky 16y ago
  For those of us who don't know - QE is Quantitative Easing which is nicely explained in this great xtranormal video: http://www.youtube.com/watch?v=PTUY16CkS-k http://www.youtube.com/watch?v=PTUY16CkS-k
  - yummyfajitas 16y ago
    Xtranormal would do the world a great service if they replaced the teddy bears and legos with straw men.
    - tricky 16y ago
      I don't know, xtranormal seems to be chock full o' amazing financial advice. Here's one for you if you don't trust teddy bears: http://www.youtube.com/watch?v=jllJ-HeErjU http://www.youtube.com/watch?v=jllJ-HeErjU Seriously, buy the effing dip.
      - trotsky 16y ago
        The best thing about this link is the "recommended video" in the big slot, "Piper Jaffray's Gene Munster Says Buy the Dip in Apple" submitted by "TradeTheTrend"
  - patrickk 16y ago
    That video is fantastic. Didn't know if I should be laughing or shitting my pants most of the way through.
jmulho 16y ago
Here is a summary of the 71 20-year holding periods on record. color return occurs chances red <0% 8 11.3% pink 0-3% 18 25.4% beige 3-7% 31 43.7% light green 7-10% 14 19.7% dark green >10% 0 0.0% Here is the 20 year growth multiple at various returns. return multiple -0.02 0.67 -0.01 0.82 0 1.00 0.01 1.22 0.02 1.49 0.03 1.81 0.04 2.19 0.05 2.65 0.06 3.21 0.07 3.87 0.08 4.66 0.09 5.60 0.1 6.73 0.11 8.06 Optimistic conclusion: If you hold a diversified portfolio of large domestic stocks for 20 years, you will likely double (and maybe even quadruple) your spending power. The chances of ending up with less than your original spending power: 11.3%. The chances of quadrupling your original spending power (exceeding 7% per year): 19.7%. The chances of achieving 6.73 times your original spending power (the elusive 10% per year): It hasn't occurred yet.
jond2062 16y ago
Although it may spark some interesting conversation and debate, this chart isn't really all that relevant in light of modern portfolio theory and asset allocation. While I don't disagree with the data itself, the premise that a reasonable retirement portfolio would include a single mutual fund (or ETF) that is composed of 100% stocks, not to mention the fact that they are primarily large-cap growth stocks (the S&P 500), is illogical at best. Not only should a retirement portfolio be exposed to a much wider range of risk factors than simply large-cap U.S. growth/blend stocks (bonds, TIPS, international stocks, REITs, small-cap value, etc.), but holding only a single asset class eliminates the possibility for an investor to rebalance their portfolio to maintain an appropriate asset allocation that is in line with their ability, willingess, and need to take risk (not to mention the fact that rebalancing, by definition, requires an investor to sell investments that have increased in price and purchase those that have decreased in price). In my opinion, a more interesting chart is The Callan Periodic Table of Investment Returns: http://www.callan.com/research/download/?file=periodic/free/360.pdf http://www.callan.com/research/download/?file=periodic/free/... Quite simply it demonstrates that the performance of different asset classes relative to each other can change drastically from one year to the next. It would actually be a much better chart if it included more asset classes, but at the very least it shows that returns are unpredictable in the near-term and that diversification doesn't simply mean holding a bunch of stocks (especially when they are all large-cap U.S. growth/blend like the S&P 500).
- kenjackson 16y ago
  I do think this is still pretty relevant. I'm not a portfolio theorist, but I believe a lot of modern asset allocation is structured around risk of short-term liquidity. That is why allocation becomes more stock heavy as you have more years until retirement (for retirement accounts). I think a lot of people would say, "if you gave me 50 years, and a five year window in which to divest, you should definitely go all stock". I don't think that would be absurdly controversial. Looking at this data though, given the risk, it actually isn't a slam dunk. Now this isn't to say that one shouldn't diversify among equities, but I suspect you'd see similar charts for random selection diversified among mutual funds/indices.
  - 16y ago
gojomo 16y ago
Great chart. Would love to see something similar as an option on finance sites, with controllable assumptions/coloring, for any investment/portfolio (or pairwise comparison of two). I suspect a reversing of one or the other axis might help: putting the shortest, most-recent holding periods top-right, for example, so those periods overlapping living memory are most prominent.
grammaton 16y ago
Why is this only tracking the S&P 500? Wouldn't a saavy investor be choosing from a wider range of stocks than just the ones in the S&P?
- jrockway 16y ago
  I think if you redid the chart with the S&P 1000, it would be about the same. Choosing specific stocks is meaningless: given perfect knowledge about events, of course you can make a ton of money. For example, your retirement plan in 1990 could have been "buy a million shares of Apple". You would be exceedingly wealthy today. But your plan could have been "buy a million shares of Wang", in which case, you'd be a welfare recipient. The key to getting rich is to be able to predict the future perfectly. This is difficult, so people average it out and choose something like the S&P 500. As this is a decent investment strategy, it's what the article shows.
robak 16y ago
If you bought gold instead of stocks is 1929, you'd still be ahead of the game now in 2011. Remembering that gold is just another currency - it just keeps pace with inflation and there's no return on it long time - makes one wonder why to 'invest' at all. Just save the money. In the right currency, that is. Like gold.
kevinburke 16y ago
Does the chart take into account the fact that returns compound over time? How were the values calculated?
- palewery 16y ago
  Returns on stocks do not compound. If you bought a stock at X and sold it at Y your gain/loss percentage is simply Y/X. There is no reason to use the Pert formula.
stretchwithme 16y ago
I guess this all depends on how you measure inflation. If the S&P 500 is compared against something more stable than paper money like gold, similar things emerge: http://steadfastfinances.com/blog/wp-content/uploads/2010/07/Historical-SP-500-to-Price-of-Gold-Ratio-1900-to-2010-credits-Zero-Hedge.jpg The declines on this graph map to the red areas on the nytimes graphic.
NHQ 16y ago
Conclusions: deflation is good, and you should put all your money in the stock market for a short period of time.

295 points by noahlt 16y ago

This is a great visualisation - it's easy to understand, and punches you in the face with information that would be difficult to convey through words alone. One example is that the first few years give no clue as to your long-run outcome. In fact, the first year may as well have been a coin flip. This shows what rubbish articles with a 1-year timeframe like this are: http://www.moneyweek.com/investment-advice/share-tips-moneyweeks-top-ten-tipsters-of-2010-51814.aspx http://www.moneyweek.com/investment-advice/share-tips-moneyw...

shasta 16y ago
A better visualization would IMO just show the adjusted market value and superimpose some exponential growth curves over that (1% in green, -1% in red, etc.). This confusingly takes 1D data and makes it 2D.

1010011010 16y ago

"High inflation led to negative returns." True, dat. Printing money doesn't make us richer.

1010011010 16y ago
Thanks for the downvotes. What's wrong with my observation?
- jmulho 16y ago
  I think you meant to say "true, that."
  - capstone 16y ago
    I think he meant to say what he said. I get it.
joshklein 16y ago
Actually, this is false. Printing USD is a tax on all current holders of USD - that is, it dilutes the value of all existing USD while raising money for the US government. Since there are large foreign holders of USD, but the US government can (theoretically) spend all of its USD on US citizens, printing money does in fact make us richer. This method of raising money is called seignorage, and it is how the US can tax the rest of the world to pay for whatever we want. We used it extensively during the Vietnam war to, in effect, make the French (large holders of USD at the time) pay for our war effort. They were not happy. This says nothing of the long term effects of seniorage, just that printing money does, currently, make us richer.
- danenania 16y ago
  Maybe if by "us" you mean large banks and defense contractors. Otherwise I don't buy it.
  - nostrademons 16y ago
    Also: recipients of social security & medicare, various federal grants in the arts & sciences, and employees of federal government agencies.
    - danenania 16y ago
      These sums are paltry compared to the unprecedented quantities of wealth that have been transferred and continue to be transferred from the middle and lower classes to the elite of the finance and defense industries. Aside from the wealth itself, there is a tremendous opportunity cost, since capital is moved from productive to outright destructive and criminal sectors of the economy. The primary vehicle of these transfers is monetary expansion. All else being equal, a sound currency would bring orders of magnitude improvement in the real economy and dramatically increase standards of living for the bottom 90% of the population far beyond what can be achieved through programs like the ones you mention. Of course, there would be a deflationary collapse first, but this would be the best thing that could possibly happen for the vast majority of us.
mediaman 16y ago
Printing money does, in fact, create wealth, in some limited contexts: 1. GDP growth requires printing money, or else it will create a deflationary environment, which is dangerous because it creates an incentive to delay business purchasing. 2. Low levels of inflation create a more efficient way for the economy to adjust the mix of labor skill demand. Research shows that it is difficult to nominally lower a worker's pay year over year, but giving no raise in an inflationary environment allows a company to do just that. This is important to lower the rewards for resources the economy has a lesser need for, such as when bar codes reduced the need for grocery store staff. 3. And finally, printing money can help an economy recover from an aggregate demand gap (i.e., a supply-demand disequilibrium that doesn't automatically recover). This can happen in period of high unemployment, where wages need to fall to create more demand for labor, but a fall in wages reduces personal income, further reducing aggregate demand, further reducing the demand for labor. Printing money reduces the cost of money and gives an incentive for companies to invest more, which reduces the aggregate demand gap.
- 1010011010 16y ago
  You're arguing that printing money reallocates wealth, which it certainly does. But it does not create wealth. New dollars created from thin air do not also magically call into existence new goods and services. It's simply more dollars chasing the same goods and services. Either that, or counterfeiters also create wealth.
  - mediaman 16y ago
    With all due respect, you do not appear to have understood my reply. I specifically state that it does, in certain situations, create wealth. There is a tremendous amount of economic research to support this. Of course, I agree with you that printing money does not always create wealth. Far from it. There are many cases in which it does not create wealth. Highly inflationary economies are a good example of this. But if you re-read the three situations I describe, you will see that they do indeed describe places that the printing of money will create wealth that would not have existed otherwise without the printing of money, and which are above and beyond the mere reallocation of wealth. Perhaps to better understand why your point is not true is to understand your claim from a different perspective: that the money supply should always stay exactly constant, year after year. Even a cursory understanding of my first point (that economic growth in and of itself requires a corresponding increase in the money supply) shows this to not be true. Imagine the economy grows and the money supply stays constant. The value of products available per dollar now increases annually. This is deflation. Now you are implicitly claiming that deflation is a good thing. To read more on deflation, see: http://en.wikipedia.org/wiki/Deflation http://en.wikipedia.org/wiki/Deflation

thinkdifferent 16y ago

Just finished reading "A Random Walk down Wall Street" and I must confess I expected more consistency and less volatility in index funds returns. Great eye-opening graph. @MarkMc very good point

thinkingeric 16y ago
The premise of RWDWS is flawed by assuming that the secondary market in stocks is 'free'. This book was published in 1973, and after the 'analytic' schemes of the 1960s (and continuing in the 70s), it had obvious appeal. What it did not account for was government manipulation of financial markets through (de)regulation. For example, the Monetary Control Act of 1980 and the expansion of IRA coverage under ERTA in 1981 opened the flood gates to the securities markets and intensified the Ponzi-scheme nature of securities 'investing'. Prior to the publishing of RWDWS, it is reasonable to claim that the stock market was a arena for transferring risk, not pretending to be a savings institution. Something else to bear in mind is that there are little or no real alternatives to 'funds', and this exaggerates the influx of capital into them. The idealized view of stock and bond trading fails to fully account for the transaction costs, which are largely hidden, and this 'vigorish' makes it a losing game eventually. The costs associated with funds ('index' or otherwise) are also carefully and skillfully masked, but it is easier to market the diversification arguments. There's a reason that the 'financial industry' is so profitable: http://chartingtheeconomy.com/?p=665 http://chartingtheeconomy.com/?p=665 It's an increasingly elaborate wealth transfer mechanism.

noahlt 16y ago

Investing in index funds has been lauded around here, but the goodness of that strategy revolves around its consistency in returning 10% over ten to twenty years. This graph makes index funds look much less consistent! Does this graph debunk the index fund strategy, or am I missing something?

borism 16y ago
the goodness of that strategy revolves around its consistency in returning 10% over ten to twenty years and why would that be "the goodness" of index fund strategy? who told you that? "the goodness" of index funds is that they're low cost and diversified (sometimes) - so more of the returns stay in your pockets, not get handed over to fund managers. return of the over-all stock market has little to do with it!
Huppie 16y ago
It's actually interesting that they already account for dividends and taxes. Usually if people talk about a 10% return, they are talking about pre-tax returns. I remember seeing a 'rolling S&P500 results' page somewhere but can't remember exactly where, [0] is what a quick search comes with. As you can see in graph [1] there was quite a dip for everyone investing for a period of 20 years between 1974 and somewhere around 1994. That is a 30 year period of a total of 80 years measured with bad returns. [0]: http://allfinancialmatters.com/2007/06/12/sp-500-rolling-period-total-real-returns/ http://allfinancialmatters.com/2007/06/12/sp-500-rolling-per... [1]: http://allfinancialmatters.com/Graphics/S&P50020-YearTotalChartBig.GIF http://allfinancialmatters.com/Graphics/S&P50020-YearTot...
mjs 16y ago
The two green squares are 7% annual return or greater, so you can be in the beige somewhere and still be getting decent returns. It does seem somewhat difficult to end up on a green square though--there aren't that many of them and there are even fewer long runs.
dschobel 16y ago
Index investing isn't predicated on 10% returns nor was it ever a guarantee of such returns. Index investing is simply the theory that the markets are efficient and reflect all possible information on a security and that you're not smarter than the market. Think of it this way-- buying a stock is a way of saying "the market is wrong, I think $COMPANY is worth more than the price at which it is trading". Unless you have information which the market does not (the next Apple product will be a flop, etc) this becomes, by definition, a speculative position. Index investing is a way of opting out of the highs and lows of stock picking and still take part in the general growth in a market/sector/<whatever the index cover>. The story merely points out that for some timespans, the growth of the US markets was crap and that (unsurprisingly when you think about it for a second) returns have varied substantially over the past 50 years even for long time-spans. TLDR; if you think the US economy will keep growing and don't think you're smarter than marketɫ, index investing is probably still a really good way to go. ɫ hot tip: you're not

harscoat 16y ago

Great submit to HN: not because of the money stuff but because of this great visualization. Me thinks, to emulate and try to produce such great data visualization for our users, that's our best investment plan.

vanschelven 16y ago

IMHO the colors are somewhat misleading. Since the data have already been corrected for taxes and inflation positive returns are net-positive and should be green. In the original picture even 0-3% returns were red. This is what it looks after shifting all the colors one step towards green: http://imgur.com/KqU1B http://imgur.com/KqU1B

mjs 16y ago
The reason they're coloured like that is that you can get to the pale red (0%-3%) by putting you money is much safer vehicles like term deposits or bonds. If you're getting less than 3% out, stocks aren't worth it.
- vanschelven 16y ago
  Possibly, though I have serious doubts that bonds make 3% when corrected for both inflation and taxes. In any case I would love to see (or make myself) the comparison with other vehicles.
  - borism 16y ago
    bond yields rise with inflation http://www.hussmanfunds.com/rsi/yieldsinflation.htm http://www.hussmanfunds.com/rsi/yieldsinflation.htm
    - vanschelven 16y ago
      As far as I understand it, your statement is correct at face value, but incorrect in the context of this discussion, since we're discussing the relative yields of bonds and other investment vehicles over a long time period. Say use all my money to buy a long term bond today. If inflation would rise tomorrow, you correctly point out that bond yields of tomorrow's bonds will rise. However, mine is fixed. This means I'm hit, firstly, by the inflation, and secondly, by the fact that the price of the bond will fall. (The price will fall because competing bonds will have better yields tomorrow). Correct me if I'm wrong.

pama 16y ago

Does anyone know how inflation was adjusted?

danenania 16y ago
Probably with government inflation statistics, which makes the reliability questionable.
- iwwr 16y ago
  The rate of inflation may be underestimated, but the trend is still a good indicator. You check out the charts at http://www.shadowstats.com/ http://www.shadowstats.com/ . It may be helpful to put together your own "basket of goods" for a more personalized estimate of inflation.
  - yummyfajitas 16y ago
    Actually, inflation is generally overestimated. All CPI numbers up to 1996 are well known to be more than 1% too high. http://en.wikipedia.org/wiki/Boskin_Commission http://en.wikipedia.org/wiki/Boskin_Commission An intuitive way to see this: CPI-adjusted wages have not increased much since the 1970's. Yet in terms of goods and services, we have vastly more than we had in the 70's - I doubt you can name a single good we consume less of than in the 70's (besides perhaps telephone land lines and typewriters). If CPI properly measured inflation, that would not be the case.
    - iwwr 16y ago
      Still, this realization should not be seen as a license by the government to start printing more money. Having a decades long effective deflation, but with economic growth, would also mean that "price stability" can be equivalent with negative price increases.
    - danenania 16y ago
      This could easily be turned around to say that since innovation naturally lowers prices over time, inflation is greatly underestimated. Say that without monetary expansion, prices would decrease 3 percent per year. This would mean that in reality inflation is 3 points higher than its nominal value.

jvdongen 16y ago

I'm a noob regarding investing, so bear with me if I use incorrect terms or kick open doors that are already open etc. but if my interpretation of this graph is correct, it also offers some guidelines for investing in funds (not individual companies): 1) from the visual it seems to me that the starting year is the most relevant. If you start in a good year, it will mostly turn out right, regardless whenever your end (exceptions aside, for which see point 2). If you start in a bad year it will mostly work out badly unless you really have some time to spare or manage to run into a very rare occasion (e.g. starting in 1947 and ending in the mid 1950's). But that's just from the visual, which can be very misleading, so the raw data points would be interesting to do some statistic exercises. If that holds true though, it could be a good guideline - assess the current returns of a particular fund and do not invest [in it] if the current returns are not high enough. While this would make you, by definition, miss out on any really spectacular returns, it could reduce risk enormously without sacrificing much in terms of returns. 2) if you happen to have invested in a fund that took a nose-dive, hang on to it and don't sell for a long while, as in the long run you're apparently very likely to end up at the 20-year median (guess it's called a median for a reason ;-) which is not too bad. At the very least your loss is going to be minimized with time.

roadnottaken 16y ago
No.... 1) in reality you're constantly investing. nobody invests a lump-sum one time and hopes they chose a good moment to enter the market. the chart gives you some idea of your long-term chances. 2) "* if you happen to have invested in a fund that took a nose-dive, hang on to it and don't sell for a long while*" unless it goes bankrupt in which case you definitely want to sell. This is one reason why strategists advocate diversification and investing in index funds: you're sheltered from the (possibly poor) performance of any single company/stock.

iwwr 16y ago

Compare a stock portfolio with a simple precious metals basket. The stock market is a poor longterm store of value. It's very hard to stay ahead of inflation with securities whose value can be fudged by cheap money. In fact, pension funds can't even make +inflation guarantees, only best efforts through low-risk investments. And even if they did, they would be lying.

lsc 16y ago
>Compare a stock portfolio with a simple precious metals basket. The stock market is a poor longterm store of value. while I agree that this would make a very interesting chart, do you have a reference for that? I mean it's clear that during the last 10 years, nothing has touched metals, but if you were in gold for the 10 years before that, things wouldn't have gone quite as well.
- encoderer 16y ago
  I keep hearing "Gold always goes up." It gave me this thought.. 2010 "Gold Always Goes Up" 2004 "House Prices Always Go Up" 1999 "The US stock market always goes up"
  - deleted 16y ago
    [deleted]
  - bodyfour 16y ago
    Sort of like: 1979 "Gold Always Goes Up" http://mjperry.blogspot.com/2010/09/chart-of-day-inflation-adjusted-gold.html http://mjperry.blogspot.com/2010/09/chart-of-day-inflation-a...
  - nostrademons 16y ago
    I think it's fairly obvious that there's a bubble in gold right now, and I would gleefully short it if I didn't suspect that the market will stay irrational longer than I can stay solvent...
- mynameishere 16y ago

alexk7 16y ago

The chart is not color-blind friendly :(

dgallagher 16y ago
If you're on a Mac, try: Control + Option + Command + 8 That'll invert your screen colors, and "might" make it readable. Press the same key combo to de-invert.

myth_drannon 16y ago

This chart is pretty useless following the current world events. Right now stock market(US & EU) is supported by QE,QE1.5,QE2 and the next QEs. The tools that could be used to analyze the previous years are worthless.

tricky 16y ago
For those of us who don't know - QE is Quantitative Easing which is nicely explained in this great xtranormal video: http://www.youtube.com/watch?v=PTUY16CkS-k http://www.youtube.com/watch?v=PTUY16CkS-k
- yummyfajitas 16y ago
  Xtranormal would do the world a great service if they replaced the teddy bears and legos with straw men.
  - tricky 16y ago
    I don't know, xtranormal seems to be chock full o' amazing financial advice. Here's one for you if you don't trust teddy bears: http://www.youtube.com/watch?v=jllJ-HeErjU http://www.youtube.com/watch?v=jllJ-HeErjU Seriously, buy the effing dip.
    - trotsky 16y ago
      The best thing about this link is the "recommended video" in the big slot, "Piper Jaffray's Gene Munster Says Buy the Dip in Apple" submitted by "TradeTheTrend"
- patrickk 16y ago
  That video is fantastic. Didn't know if I should be laughing or shitting my pants most of the way through.

jmulho 16y ago

Here is a summary of the 71 20-year holding periods on record. color return occurs chances red <0% 8 11.3% pink 0-3% 18 25.4% beige 3-7% 31 43.7% light green 7-10% 14 19.7% dark green >10% 0 0.0% Here is the 20 year growth multiple at various returns. return multiple -0.02 0.67 -0.01 0.82 0 1.00 0.01 1.22 0.02 1.49 0.03 1.81 0.04 2.19 0.05 2.65 0.06 3.21 0.07 3.87 0.08 4.66 0.09 5.60 0.1 6.73 0.11 8.06 Optimistic conclusion: If you hold a diversified portfolio of large domestic stocks for 20 years, you will likely double (and maybe even quadruple) your spending power. The chances of ending up with less than your original spending power: 11.3%. The chances of quadrupling your original spending power (exceeding 7% per year): 19.7%. The chances of achieving 6.73 times your original spending power (the elusive 10% per year): It hasn't occurred yet.

jond2062 16y ago

Although it may spark some interesting conversation and debate, this chart isn't really all that relevant in light of modern portfolio theory and asset allocation. While I don't disagree with the data itself, the premise that a reasonable retirement portfolio would include a single mutual fund (or ETF) that is composed of 100% stocks, not to mention the fact that they are primarily large-cap growth stocks (the S&P 500), is illogical at best. Not only should a retirement portfolio be exposed to a much wider range of risk factors than simply large-cap U.S. growth/blend stocks (bonds, TIPS, international stocks, REITs, small-cap value, etc.), but holding only a single asset class eliminates the possibility for an investor to rebalance their portfolio to maintain an appropriate asset allocation that is in line with their ability, willingess, and need to take risk (not to mention the fact that rebalancing, by definition, requires an investor to sell investments that have increased in price and purchase those that have decreased in price). In my opinion, a more interesting chart is The Callan Periodic Table of Investment Returns: http://www.callan.com/research/download/?file=periodic/free/360.pdf http://www.callan.com/research/download/?file=periodic/free/... Quite simply it demonstrates that the performance of different asset classes relative to each other can change drastically from one year to the next. It would actually be a much better chart if it included more asset classes, but at the very least it shows that returns are unpredictable in the near-term and that diversification doesn't simply mean holding a bunch of stocks (especially when they are all large-cap U.S. growth/blend like the S&P 500).

kenjackson 16y ago
I do think this is still pretty relevant. I'm not a portfolio theorist, but I believe a lot of modern asset allocation is structured around risk of short-term liquidity. That is why allocation becomes more stock heavy as you have more years until retirement (for retirement accounts). I think a lot of people would say, "if you gave me 50 years, and a five year window in which to divest, you should definitely go all stock". I don't think that would be absurdly controversial. Looking at this data though, given the risk, it actually isn't a slam dunk. Now this isn't to say that one shouldn't diversify among equities, but I suspect you'd see similar charts for random selection diversified among mutual funds/indices.
- 16y ago

gojomo 16y ago

Great chart. Would love to see something similar as an option on finance sites, with controllable assumptions/coloring, for any investment/portfolio (or pairwise comparison of two). I suspect a reversing of one or the other axis might help: putting the shortest, most-recent holding periods top-right, for example, so those periods overlapping living memory are most prominent.

grammaton 16y ago

Why is this only tracking the S&P 500? Wouldn't a saavy investor be choosing from a wider range of stocks than just the ones in the S&P?

jrockway 16y ago
I think if you redid the chart with the S&P 1000, it would be about the same. Choosing specific stocks is meaningless: given perfect knowledge about events, of course you can make a ton of money. For example, your retirement plan in 1990 could have been "buy a million shares of Apple". You would be exceedingly wealthy today. But your plan could have been "buy a million shares of Wang", in which case, you'd be a welfare recipient. The key to getting rich is to be able to predict the future perfectly. This is difficult, so people average it out and choose something like the S&P 500. As this is a decent investment strategy, it's what the article shows.

robak 16y ago

If you bought gold instead of stocks is 1929, you'd still be ahead of the game now in 2011. Remembering that gold is just another currency - it just keeps pace with inflation and there's no return on it long time - makes one wonder why to 'invest' at all. Just save the money. In the right currency, that is. Like gold.

kevinburke 16y ago

Does the chart take into account the fact that returns compound over time? How were the values calculated?

palewery 16y ago
Returns on stocks do not compound. If you bought a stock at X and sold it at Y your gain/loss percentage is simply Y/X. There is no reason to use the Pert formula.

stretchwithme 16y ago

I guess this all depends on how you measure inflation. If the S&P 500 is compared against something more stable than paper money like gold, similar things emerge: http://steadfastfinances.com/blog/wp-content/uploads/2010/07/Historical-SP-500-to-Price-of-Gold-Ratio-1900-to-2010-credits-Zero-Hedge.jpg The declines on this graph map to the red areas on the nytimes graphic.

NHQ 16y ago

Conclusions: deflation is good, and you should put all your money in the stock market for a short period of time.