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Interest rates have been all over the map over the last 60 years, including double digits in the 80s, and yet low-cost index funds have been a reliable driver o

Interest rates have been all over the map over the last 60 years, including double digits in the 80s, and yet low-cost index funds have been a reliable driver of wealth that entire time.

nostrademons 2y ago
"That entire time" only holds if you're looking at 20+ year time horizons, and zooming in shows the effect of interest rates. If you bought the S&P 500 in November 1968 and sold it in July 1982, you lost money in nominal terms, despite the CPI nearly tripling during that time period (so in real terms, you lost 2/3 of your investment). During that time period, interest rates went from 6% to 19%, also roughly tripling. Then if you held from 1982 to 1987, the S&P 500 nearly tripled, despite low inflation and relatively few major technological changes. What was the difference? Interest rates went from 19% to 6%. A useful lens with which to view this and other phenomena is "Which factors cancel out, and under what timeframes?" Technological development leads to large microeconomic winners and losers but little macroeconomic effect under short time frames, less than the business cycle, because the mechanism by which it increases overall welfare is to put workers out of work and firms into bankruptcy, freeing up those workers and that capital to be invested in new enterprises. Interest rates have a large effect over that timeframe, because they affect all firms in the economy equally. Over long time frames (multiple business cycles), the effect of interest rates washes out because they go up and then they go down and eventually they equilibrate near the long-term average. Technological development dominates then because you've given the economy a chance to adapt to new production methods and re-employ workers in obsolete jobs.
- samus 2y ago
  Broad index funds are indeed recommended to be held for a very long time for maximum yield. Continuous investment over at least 15 years is better precisely because it spans multiple business cycles and allows taking advantage of the lower prices during dips and recessions. But that's completely fine for those that want to save up for retirement.
Calavar 2y ago
The US population today is twice what it was in 1960. I know I am oversimplifying, but so much of the the history of long term growth could be intepreted as older people benefitting from progressively larger younger generations. More people = more production and more consumption = growth. I really wonder if this is sustainable with the projected future of population decline.
crystalmeph 2y ago
https://fred.stlouisfed.org/series/DGS10/ https://fred.stlouisfed.org/series/DGS10/ Zoom out to "Max" to get the full 60 year history. You can clearly see a full four decades of declining interest rates running from 1981-2020. That very neatly corresponds with the amazing stock market growth most HN readers, myself included, have grown up with. The stock market growth is neatly correlated with declining interest rates, not with the actual value of the interest rates currently. That is, until the interest rates can't go any lower. The 10-year yield got as close as I hope it will ever get to zero back in 2020. There's nowhere to go but up from there. For myself, I'm dusting off the old magic - a 60/40 stock/bond portfolio, with the stocks focused on value funds, plus a relatively small amount in "breakout" funds that could multiply a few times if technology goes the way I think it will. Maybe if interest fall a little bit I'll dial it to a 70/30 mix, but bonds are definitely part of the equation now.
- AnimalMuppet 2y ago
  But if interest rates rise, bonds lose too. That is, the bonds you hold today lose market value (the value you could get if you sold them today). The longer the duration of the bond, the more they lose. So if you expect interest rates to rise, I'm not sure holding bonds (especially long bonds) is the protection you want. On the other hand, I may be missing something. Ray Dalio's All Weather Portfolio is 55% bonds, and it's supposed to be safe-ish for any market conditions.
  - crystalmeph 2y ago
    They lose in the short term, but if you're buying and holding to maturity, you get that money back. If you're worried about losing "market value" in a rising interest rate regime, buy shorter-term bonds. You can buy short-term bond funds, or buy bonds individually on Fidelity, Vanguard, etc.

Interest rates have been all over the map over the last 60 years, including double digits in the 80s, and yet low-cost index funds have been a reliable driver of wealth that entire time.

nostrademons 2y ago

"That entire time" only holds if you're looking at 20+ year time horizons, and zooming in shows the effect of interest rates. If you bought the S&P 500 in November 1968 and sold it in July 1982, you lost money in nominal terms, despite the CPI nearly tripling during that time period (so in real terms, you lost 2/3 of your investment). During that time period, interest rates went from 6% to 19%, also roughly tripling. Then if you held from 1982 to 1987, the S&P 500 nearly tripled, despite low inflation and relatively few major technological changes. What was the difference? Interest rates went from 19% to 6%. A useful lens with which to view this and other phenomena is "Which factors cancel out, and under what timeframes?" Technological development leads to large microeconomic winners and losers but little macroeconomic effect under short time frames, less than the business cycle, because the mechanism by which it increases overall welfare is to put workers out of work and firms into bankruptcy, freeing up those workers and that capital to be invested in new enterprises. Interest rates have a large effect over that timeframe, because they affect all firms in the economy equally. Over long time frames (multiple business cycles), the effect of interest rates washes out because they go up and then they go down and eventually they equilibrate near the long-term average. Technological development dominates then because you've given the economy a chance to adapt to new production methods and re-employ workers in obsolete jobs.

samus 2y ago
Broad index funds are indeed recommended to be held for a very long time for maximum yield. Continuous investment over at least 15 years is better precisely because it spans multiple business cycles and allows taking advantage of the lower prices during dips and recessions. But that's completely fine for those that want to save up for retirement.

Calavar 2y ago

The US population today is twice what it was in 1960. I know I am oversimplifying, but so much of the the history of long term growth could be intepreted as older people benefitting from progressively larger younger generations. More people = more production and more consumption = growth. I really wonder if this is sustainable with the projected future of population decline.

crystalmeph 2y ago

https://fred.stlouisfed.org/series/DGS10/ https://fred.stlouisfed.org/series/DGS10/ Zoom out to "Max" to get the full 60 year history. You can clearly see a full four decades of declining interest rates running from 1981-2020. That very neatly corresponds with the amazing stock market growth most HN readers, myself included, have grown up with. The stock market growth is neatly correlated with declining interest rates, not with the actual value of the interest rates currently. That is, until the interest rates can't go any lower. The 10-year yield got as close as I hope it will ever get to zero back in 2020. There's nowhere to go but up from there. For myself, I'm dusting off the old magic - a 60/40 stock/bond portfolio, with the stocks focused on value funds, plus a relatively small amount in "breakout" funds that could multiply a few times if technology goes the way I think it will. Maybe if interest fall a little bit I'll dial it to a 70/30 mix, but bonds are definitely part of the equation now.

AnimalMuppet 2y ago
But if interest rates rise, bonds lose too. That is, the bonds you hold today lose market value (the value you could get if you sold them today). The longer the duration of the bond, the more they lose. So if you expect interest rates to rise, I'm not sure holding bonds (especially long bonds) is the protection you want. On the other hand, I may be missing something. Ray Dalio's All Weather Portfolio is 55% bonds, and it's supposed to be safe-ish for any market conditions.
- crystalmeph 2y ago
  They lose in the short term, but if you're buying and holding to maturity, you get that money back. If you're worried about losing "market value" in a rising interest rate regime, buy shorter-term bonds. You can buy short-term bond funds, or buy bonds individually on Fidelity, Vanguard, etc.