Great chart on SP500 returns over time



The brevity WAS quite frustrating. I did seem to google academic papers by that Harvard guy, but nothing dumbed down to my level. Maybe they are referring to the way inflation can slam bonds, like in the late 1970's.
I think the ivy league endowment approaches are interesting to follow. They were doing wonders, then took a black eye in 08/09. I have earlier posted a long video lecture here by the Yale fund manager, but it was all useless platitudes. Now I realize it was done just as his miracle record was crashing. The article I posted seems to put this in a "glass half full" perspective, in saying they have a great approach other than for deep crashes.
But on the surface the Yale/Harvard fluid diversification seems like any other prudent manager who fine tunes asset allocations based on business cycles etc. - just that they include more exotic and leading edge assets. Here is a monthly example from Northern Trust with suggested conservative allocation tweaks: http://www.northerntrust.com/pws/jsp/display2.jsp?rr=ep&TYPE=interior&XML=pages/nt/0402/46298669_3644.xml
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload
On Fri, 25 Mar 2011 19:53:50 CST, snipped-for-privacy@fractious.net wrote:

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?
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload
On 3/26/11 10:27 AM, HW "Skip" Weldon wrote:

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.)
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload
On Sat, 26 Mar 2011 10:12:44 CST, JoeTaxpayer

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. http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm So my question to EIA promoters is this: Do you cover the difference between indexing a price-only index and a total return index in your presentations? If so, how do you portray a price-only as a benefit to the buyer?
(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.)
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload
On 3/28/11 11:34 AM, HW "Skip" Weldon wrote:

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.
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload

One of the best pieces of advice about investments and finance I have heard over and over again, which many knowledgeable people seem to agree on, is: Don't invest in something you don't understand.
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload
On 3/28/2011 4:34 PM, JoeTaxpayer wrote:

The fact that EIAs are not regulated by the SEC may be a bit of a red herring. As investment vehicles, they are little different from principal protected notes (PPNs) aka equity linked notes, though wrapped inside an annuity (thus returning less than a comparable PPN). Like PPNs, they are general obligations of the issuer (here, the insurance company); like PPNs (and like traditional fixed annuities), the cost borne by the issuer is typically embedded in the return offered.
The opaqueness seems to come less from the fact that these are annuities than from the inherent nature of this type of debt instrument.
See, e.g. http://personal.fidelity.com/products/fixedincome/ppn_overview.shtml.cvsr (Fidelity's overview of PPNs), http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p120596.pdf (FINRA regs on selling PPNs, illustrating their convoluted complexities)
And for another irony, here's a very clear (IMHO) detailed description of equity linked notes from - wait for it - Lehman Bros: http://www.math.uic.edu/~tier/Finance/equity-link-notes.pdf
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload
On 3/30/11 9:16 AM, Mark Freeland wrote:

Perhaps. To be clear, all I want is full disclosure. It's not (to another poster's suggestion) that I don't understand them. It's the inability to pull a prospectus without having to sit through a delightful sales pitch.
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload
On Mar 25, 7:53pm, 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: http://www.crestmontresearch.com/pdfs/Unexpected-Returns-Excerpt-Row-Not-Sail1.pdf . Whereas studies time and again show the hazard of timing and hedge funds.
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.
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload

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
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload

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.
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload
On 3/26/11 3:03 PM, Elle wrote:

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 www.grandwealth.com/files/DALBAR%20QAIB%202009.pdf It's an advisor copy, the full report costs $750.
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload
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. .
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload
For convenience, the chart in question: http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html

Actually, even taking the table presented - even with some goofy assumptions I'd pointed out earlier (absurd expense ratios, realizing 90% of cap-gains each year!), that chart still shows that the median annual return over a 20-year period was 4.1% - that's 4.1% *above inflation*. That's still a great return. I can't think of anything else which has done anywhere near as well. From memory: real estate somewhere around 1% above, short-term gov't bonds? right around inflation. long-term bonds, either corporate or government: 1-2% above inflation. Commodities? 0% above. And my numbers, again, they're only approx and from memory, do not take into account taxes, management costs, etc.

The raw number looks reasonable and comparable to the ones posted in the NYT graphic: 8.35% - minus (inflation + management + taxes) leaves about 4% at best, especially if using their inflated management and tax costs.
And, yes, investor returns are vastly different from investment returns. Investor returns typically demonstrate terrible timing and performance chasing. People buy funds *after* those fund have great years and then go and sell them after the bad years. Nothing like buy-high-sell-low to destroy one's capital.
--
Plain Bread alone for e-mail, thanks. The rest gets trashed.


Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload

There was once, when I was a child, a cartoon character named Leghorn. That apparently, I learned, is a type of rooster. His lines were often prefaced by something like, "I say ... I say again ..." and he was quite an assertive character, very opinionated, but likeable, as his point of view was rarely if ever 'obscure'.
I say ... I say again ... if people spent half as much time as they do analyzing funds and fees and studies of averages and variances, as they might spend reading up on publicly traded corporations, then they'd certainly see that major averages are almost irrelevant to investor long term returns. The price is the last thing to look at before buying; the earnings are the first.
There is also the factor of optimism v. pessimism, which can tint one's glasses, but just to say again what Buffett said one way: study the business. Good business with excellent products and/or services that are properly managed and whose management are forthcoming in their annual reports and 10k filings showing increasing sales and earnings, and a solid market base with expansion, will increase their sales and their profits and their stock will go up. That's the law, ma'am.
As for funds, I agree, it's obviously to their monetary advantage to convince the individual that it is impossible for her/him to select a portfolio of stocks. I didn't find the chart easy to read at all, and I really wonder how the guy came up with those numbers, but don't really care.
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload
On Mar 25, 7:53pm, snipped-for-privacy@fractious.net wrote:

Can someone translate this? The way I read it Easterling is taxing an investor in the S&P from 1961 to 1981 to the tune of around 20% (income tax) of 90% of all the investor's cap gains each year.
For those who counsel buy-and-hold index funds, what is a better assumption? If someone is investing for 20 years, this to me means retirement investing, so the wise investor would let it sit and not mess with it. So how about an assumption of a one-time taxation at the end of 20 years of say 20%?
The discussion does not seem complete without mentioning the better assumption for this point.
Elle Student of the Socrates, Plato and Aristotle of stock investing (Graham, Siegel and Shiller)
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload

That's pretty much how I read it.
It's not necessarily as absurd an assumption as I've been making it out to be. It depends on what you are using the S&P500 for in the example. If it's a proxy for a typical equity investor, then that level of turnover (plus the, to me, outrageously high expense assumption) are actually pretty good. Actively managed equity funds *do* have turnovers of over 100%/yr typically, and *do* have expense ratios from 1-2%.
However, I and many others here have long been advocates of people doing better than that by limiting costs that they can control. We can't control whether an active manager will consistently beat his benchmark for 20 years. We can control our expenses by choosing low-expense fund and we can control our taxes by choosing to hold low-turnover funds. If we do those things, we should be able to beat the returns shown in that chart. Most people don't do these things (and Wall Street gets very much richer off of all those people).

That's basically the assumption that fund companies are now forced to use when they display past performance in their marketing materials. Take a look at, say, the prospectus for Vanguard's Index funds. (The link was huge - just go to Vanguard.com, search for VFINX, click on "prospectus" tab at the top of the page, click on appropriate link).
On page 4, you'll find: Return Before Taxes Return After Taxes on Distributions Return After Taxes on Distributions and Sale of Fund Shares Standard & Poor's 500 Index (reflects no ded. for fees, expense or tax) and 1, 5 and 10 year returns adjusted appropriately for each of those four variations.
They do add the following: Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations.
For many folks, it's probably pretty close to a wash if you ignore state taxes but put federal at the highest bracket (since most of us are at lower federal marginal rates, but do pay state taxes).
For folks holding in IRAs, 401(k)s, Roth IRAs, etc, the most relevant line is the probably the first (though in some respects, if the money is in a traditional IRA, you are actually getting hit worse if you pull out all the gains or distributions, since you are turning all those long term capital gains into ordinary income).

The problem is that any assumption, no matter how good, will be wrong for almost every individual. The best you can do is choose something useful in the aggregate. And, as I said, even though I made fun of the assumptions these guys made, they are actually probably pretty good if your goal is to show how a typical retail may have done.
To me, one of the big lessons is that with a little work, we should all be able to do better than that.
--
Plain Bread alone for e-mail, thanks. The rest gets trashed.


Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload
On Mar 30, 6:42am, snipped-for-privacy@fractious.net wrote:

I agree the chart could be a tool to argue against active management. Active management taking place either via a high expense fund or an individual inclined towards timing or similar.
My objection is that the headline etc. declare the chart is an argument /for/ timing. Crestmont Research's site confirms it is trying to make this argument. 'Don't sail. Row,' argues some of Easterling's literature. Yet laying back and sailing (letting one's investments pretty much sit, maybe with a little steering here and there) is precisely the proven approach.
[snip for brevity; I agree generally with what you said.]

Well we differ here. There is reasonable and there is unreasonable. Also failing to compare what one would have had one bought bonds or stuffed one's money in a mattress suggests to me the chart is a scare tactic based in fraud.

I would say one has to do even less work than Crestmont Research asks. 'Don't sail. Row,' argues some of Crestmont's (Easterling's) literature. Yet laying back and sailing (letting one's investments pretty much sit, maybe with a little steering (rebalancing, say) here and there) is the proven approach.
Thanks for sharing your view of the tax assumption. To me the assumption should read something more like, 'If you are one of those danged investors who does not buy and hold and tries to beat the market (but studies show, rarely do), then assume 90% of cap gains are realized each year... '
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload
On 3/25/2011 12:51 PM, Rich Carreiro wrote:

Interesting how the NYT presents this in a format that is arguably quite deceptive -- those who follow Edward Tufte know the NYT's graphics department has some very diligent people working on this stuff so this is a bit surprising. Some of their personal-finance stuff is top-notch. This one, not so much.
What I noticed first is how different this looks from the charts in a yearbook that DFA sends out every year in more or less the same format, which paint a much more positive picture of the index data. The cost and tax assumptions that people have mentioned explain that, and while they might be valid for high-turnover funds and higher-priced advisory/wrap fees it distorts the point about long-term real stock market returns.
[For reasons I do not know, DFA's stuff is stamped adviser use only and not on their site - it's basically that same chart format repeated for a bunch of different asset classes, as well as some balanced mixes of asset classes. For some of the data there are two sets of charts, showing both nominal & real (after inflation) returns.]
Another less-than-Tufte-esque aspect of the graphic is showing positive returns in pink hues. We all interpret pink as a shade of red which means "in the red" which means "lost money." Right? But some of the pinks are positive, and a real return of 2.99% annually would be shown in pink...while it represents an increase in wealth/purchasing power. Yellow perhaps, but pink?
Further, having the scale go all the way to figures like 10%+ wastes the upper end of the scale. Real returns of 10% are just off the map really and again, it introduces a distortion by making the top color (dark green) so atypical. Imagine instead a scale shift with more shades of green devoted to the range of 3% to 7%, with the chart dark green for all blocks that were 7%+. Add in index-fund-like investment costs and tax assumptions and the "amended" S&P 500 real return chart is a sea of green with little red. Like you see on the DFA kinds of charts.
So I give a solid D- on that graphic NYT, get thee to back to the Tufte message boards!
-Tad
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload

The note at the bottom of the NY Times page states, "Stock market matrix provided by Crestmont Research... Source: "Unexpected Returns by Ed Easterling, Crestmont Research, updated by the author." It is nearly identical to the chart at http://www.crestmontresearch.com/pdfs/Stock%20Matrix%20Taxpayer%20Real1%2011x17.pdf from 1920 forward. The chart appears to be essentially a copy and paste job and not something the NY Times graphics staff constructed.
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload

BeanSmart.com is a site by and for consumers of financial services and advice. We are not affiliated with any of the banks, financial services or software manufacturers discussed here. All logos and trade names are the property of their respective owners.

Tax and financial advice you come across on this site is freely given by your peers and professionals on their own time and out of the kindness of their hearts. We can guarantee neither accuracy of such advice nor its applicability for your situation. Simply put, you are fully responsible for the results of using information from this site in real life situations.