My apologies if it made this group when the chart was first published:
-- Rich Carreiro snipped-for-privacy@rlcarr.com
Wow. A huge amount of data here. I like the inclusion of dividends, discussing the index (any index) is silly if dividends are ignored. Over a long enough period the start/end for an index is meaningless. So including inflation works for me as well, although I think inflation is different for two different people. Scary to see how many 20 year returns failed to keep up.
And if you want somewhat finer binning of the returns, the original that the NYT based its chart on is here:
-- Rich Carreiro snipped-for-privacy@rlcarr.com
And it amazes me just how often the dividends are ignored. I'd say more often than not. (And that's without even starting to talk about equity-indexed annuities...)
Presumably, they used the CPI-U which, as we all know, is no individual person's actual inflation experience, but rather an aggregate estimate.
I'd like to know how they figured "average taxes and fees" though. If they are assuming average marginal tax rate on the dividends with the remainder reinvested, when do we see the capital gains (at the end point of each period assuming a full sell-out?) And "fees" - are they also assuming an average mutual fund's expense ratio (which is vastly higher than a well-run index fund's expense ratio). Those "fees" could easily be eating up a full percent per year.
I take it back - poking around, I found some answers to these questions - here:
And they charged "fees" of 2% (!) per year from 1900-1975, then 1.5% until 1999 and 1% since.
Still, it's a fascinating study. Thanks again for posting it, Rich.
These fees are not what a long term investor would experience. The charts are close to what I'd like, but I'd rather see zero on fees than this. My S&P index in my 401(k) has a .05% expense. 1% over 20 years is nowhere near the 20%+ assumed here. No wonder the chart is so grey, tough to overcome 2% plus inflation.
For those of us who are not sure what you meant by the above, let me ask a question.
Are you saying that equity-indexed annuities do not index to the dividends-reinvested index, but to the price-only index instead?
I've analyzed two EIAs, both did not include the dividend. When you go back to the Crestmont Assumptions, you see a 100 year average of 4.3%. Even if we are at a new plateau of lower dividend yields, it's still money out of the client's pocket. In adition to the other EIA rules such as capped or a percent participation to the index itself, as well as fees.
It only adds insult to injury that these products are regulated differently (than stocks or mutual funds) so the information we seek (a clear prospectus for analysis) is not readily available to the public.
(any seller of these products wishing to sent me a full prospectus, not a marketing flier, I'd be happy to see it. This is a working email I send from.)
On Mar 25, 7:53 pm, snipped-for-privacy@fractious.net wrote: On the origins and meaning of a chart printed in the NY TImes in 2011:
Bread, well done.
I think the NY Times chart should be labeled as an advertisement for Crestmont Research (founder, Ed Easterling) and a plug for Easterling's book, _Unexpected Returns_.
Newspapers everywhere need to have a sub-section of the Business section called, "Business Gossip and Fanciful Thinking" with the disclaimer: "Someone stands to profit from the product this article promotes."
I looked at the chart for general validity. At first glance, I thought it was undoing all the arguments for long-term stock investing. Then I read the line towards the bottom that says, "After accounting for dividends, inflation, taxes and fees, $10,000 invested at the end of
1961 would have shrunk to $6,600 by 1981." This seemed a cause for concern. 60 to 133 for an average annual return of about 4%. The average yearly dividend yield was over 3%. The yearly annual return before inflation, taxes and fees is therefore 7%. Then Ed Easterly (not the Times and not some generally agreed upon expert) has the gall to throw in assumptions about fees, taxes and inflation. The fees assumption is not applicable to today and in my opinion should not be used for future decisions regarding investing. As for inflation and taxes, why Easterly fails to do the same study for bonds is interesting. I suspect Mr. Easterly (formerly a used car salesperson?) knows that bonds did similar or after taxes, worse.Stuffing $10,000 dollars in a mattress from 1961 to 1981 and using the CPI over this period would appear to result in a reduction to about $6900.
So what should a person have done from 1961 to 1981? Mr. Easterling elsewhere on his Crestmont "research" site will tell you: Time or buy into a hedge fund. The following excerpt from his book is surely one of the most eloquent pitches for timing I have ever seen:
Mr. Easterling and his company sell a hedge fund. His chart argues against buy-and- hold, to me via a not very clever manipulation of numbers.
Well, if you had felt like potentially learning something instead of going off on yet another one of your tiresome ad hominem rants against anyone who dares to attempt to make money as a manager or adviser, you might have noticed that there's a whole set of those charts at his website, including ones that show nominal returns with no adjustments for taxes. You would then have been free to make your own assumptions about what taxes and inflation might be and how that could affect things instead of complaining about assumptions you disagree with.
But doing that would have deprived you of the chance to get up on your self-constructed high horse.
-- Rich Carreiro snipped-for-privacy@rlcarr.com
Easterling's chart's assumptions are off-the-wall; investing for the long term in a mix of stocks and bonds has been studied and proven; timing and hedge funds have been established to be a gambler's game. The chart is another interesting example of how the latest investing fashion sells in the media if only because it seems new. Easterling's writings are a flash in the pan compared to those of Siegel, Shiller and Ben Graham. My post is directed at the interested, thoughtful reader who should hear all opinions and then decide for him/herself.
Ask and ye shall receive:
Your friendly, neighborhood applied mathematician, Bill
Thanks - maybe throw in more colors to distinguish between 0 and 0.1+, like with green, purple, etc?
Rich/Elle - I appreciate the time everyone spends sharing here. I'm certainly glad Rich brought this article/chart to our attention. If we can get away from the personal attacks, I'd just like to discuss the effect of the Times publishing such charts without the data to explain it. People tend to see things the same way we hear, in sound bites. The takeaway from the Time's chart is that stocks have brief periods of excelling, but far more frequently barely stay ahead of inflation. How would the typical investor react to this? After seeing the rest of the assumptions, I'd only ask why they (the Times and Author) chose to ignore. Over the years, I've become cynical as to how any data, especially those I can't easily reproduce, are constructed. Dalbar has a great report (QAIB 2009- Extract of Quantitative Analysis of Investor Behavior) claiming the 20 year return of the S&P (ending
12/31/08) was 8.35%, but the average equity investor saw a return of 1.87%. The number was not inflation adjusted.The 2009 report (2010 public available report did not show the numbers as clearly as '09) is still available at
It's beautiful, Bill. Given how little is blue to dark blue, I'd only adjust to put the granularity from say -5% thru +10% or so. As is, it tells a different story, (than the Times' chart) doesn't it?
big snip
Peter Lynch made a similar observation (can't remember where I saw it) that most of the investors in Fidelity Magellan never made the returns that the fund did because they tended to buy high (or near high) and sell somewhere near low. .
And here's a similar source document from the original author that the NYT got their chart from.
This one (right from the source) includes dividends but omits both inflation and taxes (I agree with "Bread" that the assumption of realizing 90% of gains every year is unrealistic):
-- Rich Carreiro snipped-for-privacy@rlcarr.com
a few points- first, thanks for hanging in, and staying with this thread second, this chart is more to my liking, as I can pull inflation out if I wish, or at least adjust on my own. last - I've never been more thankful that I sit in front of dual 24" monitors.
Done.
--Bill
EIA's are popular, largely due to the appeal of the "you match the market on the way up, and are guaranteed not to lose money when the market goes down" idea. At least this (or something very similar) is how EIA owners have explained their buy decision to me.
Yet when I review the difference between tracking a price-only SP500 index and a total return SP500 index, what I usually get is a blank stare. That indicates to me that either they were not advised of this when they bought the annuity, or they suffer from a uniform lack of comprehension.
Here's a link that suggests that over the past 80 years, dividends have accounted for 44% of the total return - a significant statistic.
(Apologies in advance to those who actually index to a total return index. I know of none, but if anyone has evidence to the contrary, please correct me.)
Ironic. The fees that Crestmont showed are below the underlying fees plus dividends which are the extra cost of EIAs. So, at best, that 20 year line on the original chart was more indicative of an EIA investor's return.
I am just ignorant enough of insurance regulations to really not understand why the information doesn't flow. We can openly discuss mutual fund expenses, returns over time, correlation to any data set we wish. These pseudo-investments (not pejorative, but they are an odd beast) are not regulated like stocks, but sold as stock replacements. Every last salesman of this product in particular will explain how I don't understand them, yet won't spell out the equations used to produce the results. As I mentioned, the two I analyzed were from people who were about to buy, the had all the paperwork ready for signature.
The last one mention here certainly had a missing piece as it was described as giving up only 3%/yr to clip all down years. Too good to be true.
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