[cairo140]

To reiterate my comment another time this was posted in a comment thread:

I feel this graphic, while informative and delightful, is insidious in its choice of scale and its lack of comparisons.

On scale, it colors +3% to +7% real returns as "neutral". This makes it seem like the stock market is sometimes good sometimes bad but overall it may as well be just okay. I feel that 0% nominal returns, or even 0% real returns, is more honest as a neutral anchor, and even with the latter it would need some comparisons against other asset classes to paint an accurate picture.

On comparisons, it does a disservice to its readers by not adding a tab showing bond yields and a tab showing cash/treasury yields (which would be dark red across the board except light red around 1930).

These slights in the graphic unfairly make the stock market look unfavorable and makes the suboptimal strategy of keeping your money out of the market seem much more favorable than it is.

Adding a specific example, the "worst 20 years" is 1961 to 1981 with a BIG RED -2.0% a year, as if someone loses money and in retrospect would have been better stowing cash away under one's mattress. According to the BLS[1], US inflation was 5.7% over that period, so the mattress strategy yields at best -5.7% in real returns, not at all better than investing in the S&P.

[1] - http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=1&year1=1961&ye...: $1 in 1961 was $3.04 in 1981, 3.04^(1/20) = 1.057

[FabHK]

True. Bond yields would be super useful. In 1961, 10yr US treasury yields were 3.84%, and in 1971 they were 6.24%, so you'd have made some 5% nominally by rolling (I don't have 20yr yields at hand), or -0.7% in real terms, beating equity handily.

So, for that period, treasuries > shares > cash.

HOWEVER, I think the chart is not so useful (or intended) as a decision aid for asset allocation (equity/debt/...), but quite good to disabuse people of that notion that "over the long term, you can't lose with equities", or the idea that you can pretty much rely on a 6% real return on your savings.

[snikeris]

For some charts that _are_ useful aids to choosing an asset allocation, check out this guy's site:

https://portfoliocharts.com/

[FabHK]

Very cool site, thanks!

[Retric]

These returns are before taxes. There is no inflation discount on taxes so your real after tax returns can be negative with a 1% nominal ROI.

Further people don't really invest all their money in year X, and then take it all out in year Y. Cost dollar averaging helps returns and needing to take money out to live off of in down years hurts returns.

Finally the baseline is not the mattress strategy, it's spending all your money now and investing nothing.

[torkins]

I'm pretty sure I replied to you last time ;) One important aspect of looking at returns is comparing different strategies, but another one is in realistic planning. There's a lot of literature and marketing out there touting, in my view, grossly unrealistic numbers like 7-8% annualized compound returns as a reasonable expectation for sticking your money in an index fun on the S&P. Considering the huge differences in the effect of small changes to the annualized returns, it's important people have a realistic idea of the volatility in that expected number when they allocate the amount of money they save for the kind of retirement they want.

This graphic is awesome primarily because it shows that it is not correct to assume that volatility in the equity markets is averaged out completely during a timespan that is comparable to the average savings portion of a career.

edit: oops, meant to reply to GP

[cairo140]

Thank you for the reply again :). I saw your comment previously and I think you make a great point. As much as I criticize the chart for being unfairly pessimistic about equity returns, there is far too much literature suggesting you can get 7-8% real returns by parking your money in X, especially in the <20 year time frame for stocks. In comparison this chart is a good factual dose.

My concern is, that while this comparison is useful for people further along in their research trying to understand the volatility of the stock market, this chart has a number of misleading (IMO) traits that can dangerously/unfairly steer people who are newer to managing their own money away from index funds altogether.

I would hope that people see this chart, my comment, yours, and FabHK's excellent comparison to bond yields. But if you have limited attention and are getting started, I would hate for the original link to be the only thing you see.

Speaking for experience with family and friends, too many good people scared by charts like this bought gold in 2011 or trusted mutual fund managers to buy into funds with 4% front-end loads and 2% AUM fees.

[torkins]

It's funny because I agree with all those statements and add "people will listen to Jeff Siegel and just jam their money into index funds and close their eyes until its time to retire". So they lose coming and going (but lose less relying on index funds than buying gold funds).

Personally I think actively managing your money is the better solution, but the active desire not to manage money from so many people (even otherwise active and engaged people like the HN crowd) has led me to being in favor of a stronger govt-backed pension system rather than tax-deferred accounts that hurt our tax base and are a windfall for trustees.

[stouset]

> Personally I think actively managing your money is the better solution...

To what degree do you believe people should actively manage their money? Are you advocating that people should be more active in choosing their distribution of assets across risk:reward categories, or are you advocating for more active trading?

[torkins]

I think the short answer to your question is "both". You need a portfolio with diversified product risk and diversified strategies. You don't need to be a quant to make a basic stab at this with the typical retail portfolio size, there are tons of tools for free on the internet to do this kind of thing. Most people who know enough to not be in managed funds still have no idea how to have anything but basically a 100% long equity market portfolio (I'm intentionally grouping together mostly meaningless 'diversification' between highly correlated segments like midcap/largecap/nasdaq/dow) except to make it long bonds. So I think there's basic product and strategy knowhow to organizing and maintaining a portfolio.

The reason I said both is because of the 'maintaining' part. Without some level of activity, its effectively impossible to be engaged with the market enough to take advantage of opportunities and manage your portfolio to keep enough diversification and reduce the internal correlations in your holdings/strategies.

It might sound complicated but it can be learned and it isn't rocket science, and there is a lot of great technology to assist anyone, not just software devs. Managing your life savings is a better investment of time than many other pursuits, in my view.

[Spooky23]

You're missing that there are other investment options.

My college expenses were largely paid for with US Savings Bonds which paid between 4-9%. I cashed in the last one, which ceased paying 9% interest in 2011. My ING Direct 5%, 10-year CD matured last year.

The problem is is with this weird never-land world where we're printing money with no inflation, it's difficult to make money anywhere. My son's 529 plan is in a basket of volatile stock and bond funds. I'll probably make a similar return to my dad's savings bond portfolio, but at substantially higher risk.

[stouset]

> My son's 529 plan is in a basket of volatile stock and bond funds.

Depending on the age of your son, you may really want to consider investing in more stable assets. 20 years is a typically considered a minimum time-horizon for being heavily-weighted in stocks due to their volatility. If your son is older than 5, preservation of the earnings you've already made should start to become a significantly higher priority than high returns.

[sokoloff]

That's true iff the 529 plan money is "required" for college. If you take instead the view that the 529 plan is just one type of asset that your child has, that you are optimizing for lifetime returns, and that attending vs not attending college is not changed by the 529 returns, then you could take the view that the 529 funds are just as subject to optimal asset allocation as any IRA or brokerage investments the child might have.

Though my kids are 5 and 7, I plan to invest on their behalf in 529, UTMA, and other accounts with their anticipated lifespan as the controlling factor, not which moment I expect to need the funds (because it is overwhelmingly likely that there will be other funds available if needed).

[gohrt]

That's not a bad idea...for someone with substantial assets.

[Spooky23]

I absolutely will. He just turned 4. Thanks for the tip!

[Hermel]

Also, it does not seem to be an accident that they have chosen the range 3% to 7%. The historic average excess return of stocks vs. government bonds is 6.5%. If their range was 2% to 6%, the graphic might look very different.