# S&P long term chart - perspective



## Pluto (Sep 12, 2013)

Starts in the 1920's. Each bar is a year. Amazing how much green there is in recent years.


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## james4beach (Nov 15, 2012)

Yes, in recent years, it just goes up all the time. And if it's ever in danger of going down, the central bank stimulates and pushes the market higher.

Charts like this are kind of fake though. The S&P 500 did not exist before roughly 1980, and there is hindsight bias involved here. It's a great chart since 1980, though and we do have 40 years of real data.

IMO people take historical stock market returns a bit too seriously. The funny thing about the stock market is that it's a dynamic system which constantly evolves, and it changes according to new information. The stock market of today is totally unlike the stock market of 1940. Index funds didn't exist in 1940.

Very few people ever talk about this. Not only do these historical returns tell you nothing about future returns, but they don't even tell you what PAST returns were. Charts like this *do not* reflect the investment experience if you had started in these prior years.

The real question, which I doubt you'll ever find the answer to, is: what was the typical or average investment experience at that time?

Applying index returns to 1930-1970 is a stretch, because nobody invested that way back then.


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## Pluto (Sep 12, 2013)

Apparently the S&P 500 commenced in 1957. 
I'm not sure the "investor experience" is something that actually exists. Its kind of abstract. Different individuals had different experiences so I think there were a multitude of unique experiences as there are now. Every age has its optimists and pessimists. 
Sure etf's did not exist but mutual funds are plentiful. The Magellan fund, and the Templeton growth found were well known and loved by investors.


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## james4beach (Nov 15, 2012)

Pluto said:


> Apparently the S&P 500 commenced in 1957.


Oh was it 1957? That's a bit longer than I thought earlier. There's still the problem that nobody actually invested this way until Vanguard's first index fund which appeared in 1976.



Pluto said:


> I'm not sure the "investor experience" is something that actually exists. Its kind of abstract. Different individuals had different experiences so I think there were a multitude of unique experiences as there are now. Every age has its optimists and pessimists.


You can measure the average or median rate of return across common investment vehicles. For example, we have statistics on the performance of the average mutual fund in Canada or the US over the last couple decades. Those are useful numbers because they show the average (likely) investor experience in the real world.

The problem with applying theoretical index performance before 1976 is that you are taking a methodology which (in hindsight) turned out to be pretty great, and retroactively applying it to the past and pretending that people could have invested like that back then. Well, did they invest like that? No.

What actually was popular in the 1960s was the "Nifty Fifty" but I can't remember the last time anyone showed me the long term CAGR performance of that. This is the problem. Things come in and out of fashion. Once they do kind of badly, people forget about them.

50 years from now, there will be some new and even greater way to invest. Let's call it the MegaHyper6000. They will show people charts that say, look at how much money you would have made if in 2020 you started investing like this. They will laugh at the morons who used the outdated and useless S&P 500 method*

50 years from now, when someone says the MegaHyper6000 made +29% in 2020, does that number mean anything at all?


_* some older outdated, dumb ways to invest were: the Dow index, mutual funds, the Nifty Fifty, closed end funds_


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## :) lonewolf (Feb 9, 2020)

The S&P 500 has not always tracked 500 stocks. In 1923 the index was introduced & only tracked a few stocks called the composite index. In 1926 it was expanded to 90 stocks. The S&P divisor has not stayed the same over the years. Years ago it was not easy to invest in the S&P without the modern day ETF. Most of the original stocks are not even in the index anymore.

Remember your playing against some of the most powerful corrupt people in the world & they need to make money off the masses. The chart is really smoke & mirrors to what is really going.


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## MrBlackhill (Jun 10, 2020)

james4beach said:


> 50 years from now, there will be some new and even greater way to invest. Let's call it the MegaHyper6000. They will show people charts that say, look at how much money you would have made if in 2020 you started investing like this. They will laugh at the morons who used the outdated and useless S&P 500 method*


That's why a wise investor must reassess its decisions and pick up on new trends.

But anyways, even an ultra-conservative investor would not do that bad... Buying the top 10 biggest US stocks of 1995, contributing a fixed amount in those stocks through 2020 and rebalancing every year would still get you about the same performance as S&P 500 as of end of 2019. Without ever changing stocks. During 25 years.


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## Pluto (Sep 12, 2013)

The really long term: 








Only two other times since George Washington was president has the U.S. stock market been as far above trend as it is now


The internet bubble in 2000, the 1973-74 bear market — and the current market — are alarming outliers in the U.S. market’s 227-year history, writes Mark...




www.marketwatch.com


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## MrBlackhill (Jun 10, 2020)

Pluto said:


> Amazing how much green there is in recent years.


Just be careful with the visual.

You could align 10 green bars of yearly +5% for a total return of +62.89% while you could be aligning a green a red bar of +13% and -2% for 10 years for a total return of +66.54%.


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## Pluto (Sep 12, 2013)

james4beach said:


> You can measure the average or median rate of return across common investment vehicles. For example, we have statistics on the performance of the average mutual fund in Canada or the US over the last couple decades. Those are useful numbers because they show the average (likely) investor experience in the real world.


You are using abstractions. The average or median rate of return is an abstraction. It doesn't tell you the actual investor experience of investors who bought units of the Templeton Growth Fund, for example. It doesn't tell you the investor experience of Jesse Livermore. Doesn't tell you the investor experience of Darvas. 
Its not correct to assume that everyone will be average over the ages. 

Your underlying premise is that every ones experience will be average. But average is abstract. It doesn't actually exist except in the mind. The only experiences that exist is that of particular individuals. 

I could cherry pick the worst performing individuals in order to learn what not to do. But I'd rather cherry pick the best and work on incorporating their methods. If someone want to learn to golf, why would they try to emulate the worst golfers? Why would they want to emulate an average golfer? 

The etf industry has provided a way for those who do not know what they are doing to invest in stocks. Wonderful. People who choose that method can get an average result. Nothing wrong with that. But that does not encompass everyone. Some people want to know what they are doing and strive to achieve an above average result. Nothing wrong with that either.


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## james4beach (Nov 15, 2012)

Pluto said:


> Your underlying premise is that every ones experience will be average. But average is abstract. It doesn't actually exist except in the mind. The only experiences that exist is that of particular individuals.


No, my underlying assumption is that the average of everyone's experience will be average.


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## james4beach (Nov 15, 2012)

Pluto said:


> The really long term:


As I said before, this is fiction. These are bogus measures created entirely with hindsight knowledge... vaguely representative of past historical markets, yes, but with uncertainty.


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## james4beach (Nov 15, 2012)

MrBlackhill said:


> But anyways, even an ultra-conservative investor would not do that bad... Buying the top 10 biggest US stocks of 1995, contributing a fixed amount in those stocks through 2020 and rebalancing every year would still get you about the same performance as S&P 500 as of end of 2019. Without ever changing stocks. During 25 years.


And yeah, grabbing those '10 largest' is the technique I use in my 5-pack ... so yes, these can be approximated by sticking to the largest market cap stocks.

But... there's still a problem here. What does the '10 largest' method do? It's market cap weighting. It's the same broad methodology of the S&P 500 and TSX Composite, which is why it's compatible, and matches up well.

There are hindsight cheats baked into all of the measures we are using. You have to think really hard about this to see it (and most financial professionals don't).

All of us are thinking right now that "market cap weighting is obvious" but this was not always the case! The Dow index measure was price based, and price weightings have been common for a long time.

Hell, the Dow was not a basket of securities anyway. It was just a daily price indicator tool. In the past, neither indexing nor market cap weighting was a method. These are newer innovations.

Neither of these (indexing or market cap weight) was "common knowledge" in the 1800s stock market, or in Amsterdam in 1610.

Do you see what I mean? The hindsight cheat is taking methods and knowledge that _turned out to work_ and then retroactively applying it, back to eras where those methods and knowledge did not exist. One hundred (and two hundred) years ago, indexing didn't exist and market cap weighting wasn't the norm.

I strongly caution against taking historical index returns too seriously. Same with the MSCI and FTSE measures of historical multi-century returns. There are hindsight cheats baked into all of this stuff.


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## MrBlackhill (Jun 10, 2020)

james4beach said:


> And yeah, grabbing those '10 largest' is the technique I use in my 5-pack ... so yes, these can be approximated by sticking to the largest market cap stocks.
> 
> But... there's still a problem here. What does the '10 largest' method do? It's market cap weighting. It's the same broad methodology of the S&P 500 and TSX Composite, which is why it's compatible, and matches up well.


No, it's not the same thing. My example is a very dumb "buy & never reassess". I was saying that someone would buy the 10 largest caps in 1995 (GE, AT&T, Exxon, Coca-Cola, Merck, Royal-Dutch Petrol, Philip Morris [Altria], Procter & Gamble, Johnson & Johnson, Microsoft), allocate 10% to each (equal weighting), rebalance every year, reinvest in those same 10 stocks every month/quarter/year and 25 years later he'd end up with about the same performance as S&P 500 even if most of the top 10 stocks of S&P 500 aren't those stocks anymore. Obviously, after a very long time, the "method" will start lagging, but I'm just saying that it did well for as long as 25 years, which is very interesting. Even better - that portfolio's drawdown was less than S&P 500! And with less volatility! Funny.

Very interesting because S&P 500 is an index "always adapting", "highly diversified", "picking on new rising stocks", - which is all true - yet I have an example of a situation where only 10 stocks were picked, equal-weighted, fixed to only those 10 stocks and yet performing as good as S&P 500 over 25 years. The explanation is maths. And there is absolutely no hindsight because the 10 stocks are the top 10 stocks of 1995 picked in 1995.





__





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## james4beach (Nov 15, 2012)

MrBlackhill said:


> No, it's not the same thing. My example is a very dumb "buy & never reassess". I was saying that someone would buy the 10 largest caps in 1995 (GE, AT&T, Exxon, Coca-Cola, Merck, Royal-Dutch Petrol, Philip Morris [Altria], Procter & Gamble, Johnson & Johnson, Microsoft),


Curious, do you think this approach (holding the largest market caps) would have been obvious to someone in 1820 as well?

You responded to my post saying it's not the same thing. Not exactly the same but very similar. Picking the largest market caps (10 largest market caps) is quite close to a market-cap weighting strategy, which the core feature of the popular modern indexes.

Your approximation method (10 largest market caps) ends up duplicating the S&P 500 because it, too, focuses on large market caps. Both methods share a same core trait and will give similar returns. For the same reason, my 5-pack (5 largest market caps) gives similar returns to the TSX.

But in 1650 Amsterdam, there was no such methodology. The innovation had not arrived yet. What you might have done, instead, was pick some stocks with the highest prices in a price-weighting scheme like the Dow index. Or pick whichever stocks the regent or noble council had given their seal of approval of. I have no idea. But I'm quite certain that Mr Blackhill of the year 1650 would not have picked the "10 largest caps" and held them passively.

There was some other method in play at the time, and it certainly wasn't an indexing (or cap weighting) style of thinking which came _three hundred years later_. Again my point is that the historical index returns are a hindsight cheat which apply modern day knowledge retroactively, which is inappropriate.


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## Pluto (Sep 12, 2013)

james4beach said:


> No, my underlying assumption is that the average of everyone's experience will be average.


Well your assumption doesn't get you anywhere. Its just an abstraction that doesn't tell you how to invest in an above average way.


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## Pluto (Sep 12, 2013)

james4beach said:


> As I said before, this is fiction. These are bogus measures created entirely with hindsight knowledge... vaguely representative of past historical markets, yes, but with uncertainty.


not really. I think they are using real stocks, not made up ones.


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## MrBlackhill (Jun 10, 2020)

james4beach said:


> But in 1650 Amsterdam, there was no such methodology. The innovation had not arrived yet. What you might have done, instead, was pick some stocks with the highest prices in a price-weighting scheme like the Dow index. Or pick whichever stocks the regent or noble council had given their seal of approval of. I have no idea. But I'm quite certain that Mr Blackhill of the year 1650 would not have picked the "10 largest caps" and held them passively.
> 
> There was some other method in play at the time, and it certainly wasn't an indexing (or cap weighting) style of thinking which came _three hundred years later_. Again my point is that the historical index returns are a hindsight cheat which apply modern day knowledge retroactively, which is inappropriate.


My observation is about comparing apples to apples. I'm just saying that picking what the index has in its top 10 can lead to performing as good as that index for _some_ extended period of time. I'm not talking about the changing methodologies through time.

When indices were weighted by price, well maybe someone would also have seen a correlation between picking the top 10 stocks of that price-weighted index and its performance compared to the whole index.

That also means that maybe picking the top 10 of whichever ranking methodology there was 300 years ago _could_ lead to performing as good as the whole ranking. (Depending on the ranking methodology)

I'm not saying that market cap weighting is optimal, in my opinion it is definitely flawed. If indices were price-weighted I would not say it's optimal neither. I'm just saying that picking the top from these kinds of indices can lead to similar performance of the whole index for _some_ extended period of time. And that's because of the maths of subsets of such indices. An example of flaw in the market cap weighting is overvaluation. AAPL, MSFT and AMZN could start a bearish trend leading to a total drop of -50% in the next 3 years and they would still be part of S&P 500 top 10 stocks. Funny fact, everybody talking about SPY yet no one talking about how RSP is outperforming SPY. People are scared of bubbles, yet they buy market cap weighted ETFs...

Indices which are reacting more actively to more market factors will lead to better performance and only then picking & holding a previous top 10 will not work for an extended period of time. A momentum-based index is a good example.

Indices are market cap weighted or equal weighted simply because it's very low maintenance and it can give a rough idea of the market performance, but it's definitely sub-optimal and that methodology has its own biases. We see it with the rise of some factor-based indices which are outperforming their benchmark.


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## kcowan (Jul 1, 2010)

You can see how removing 1929, has an impact. Perhaps more telling is the slope since The Fed started to bail out Wall Street, making equity returns more of a sure thing by lowering rates. It made bonds a bad investment and stocks pretty safe.


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## Pluto (Sep 12, 2013)

kcowan said:


> View attachment 20753
> 
> You can see how removing 1929, has an impact. Perhaps more telling is the slope since The Fed started to bail out Wall Street, making equity returns more of a sure thing by lowering rates. It made bonds a bad investment and stocks pretty safe.


Good observation.


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## calm (May 26, 2020)

The IMF is talking about a new Bretton Woods "Moment" and where China is #1 Economic Power.
A World digital currency.
International Monetary Fund - IMF
Washington, DC
By Kristalina Georgieva
October 15, 2020
Transcript:








A New Bretton Woods Moment


"We can do better than build back the pre-pandemic world – we can build forward to a world that is more resilient, sustainable, and inclusive." - Kristalina Georgieva



www.imf.org


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## james4beach (Nov 15, 2012)

calm said:


> The IMF is talking about a new Bretton Woods "Moment" and where China is #1 Economic Power.


Not sure if this will happen, but a change in the "world order" is exactly the kind of thing that can change the investment game significantly.

The current working assumption is that the US dollar and US markets are the most trusted, de facto store of wealth in the world. Everyone invests heavily in the US. Previously by the way it was Japan ... the largest equity market in the world.

Ray Dalio writes about the risk to an investor from new world orders. It's a serious risk. The time will come when the USA no longer performs like this.

Nobody can know whether that's going to happen in the next few years or not but it's a real danger. It's also why people have to be internationally diversified and not focus so much on the S&P 500. It's very unlikely that the S&P 500 will keep performing like this perpetually.

This is total speculation but Biden winning and restoring the US to typical/main stream government likely helps keep the US world order going for a while. In contrast, more of Trump or other rogues like him would (IMO) coincide with the US losing relevance, losing power, and a possible end to the US economic story. I'm not saying it's causation but perhaps more correlation (with the end of empires).


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## calm (May 26, 2020)

RT - Keiser Report
Host Max Keiser interviews Simon Dixon
October 22, 2020

__ https://twitter.com/i/web/status/1319699103803150338(YouTube Video)


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## james4beach (Nov 15, 2012)

It should be noted that RT (shown above) is owned by the Russian state and has a clear anti-American bias


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## MrBlackhill (Jun 10, 2020)

It will take a while before the worldwide sentiment for the top US stocks is reversed as those stock have a worldwide presence in the daily life of everybody.

Look at the world's top 1000 biggest market caps.





__





World Top 1000 Companies by market value as on August 2020


World Top 1000 Companies as on August 2020, World's Largest 1000 Companies as on August 2020, World's biggest Companies as on August 2020.




www.value.today





14 of the top 20 are from the US. 2 of the top 20 are from China (Alibaba and Tencent).

It will take a while before the US loses market power with such big names.


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## james4beach (Nov 15, 2012)

MrBlackhill said:


> 14 of the top 20 are from the US. 2 of the top 20 are from China (Alibaba and Tencent).
> 
> It will take a while before the US loses market power with such big names.


I might have shared this with you before, that I use a technical approach to choosing my foreign exposure. Currently it points to the US as it's clearly the strongest foreign market and I don't see any imminent signs of this changing. But don't rule out the possibility of change. The biggest, most exciting market used to be Japan.

In 1989, when CNBC launched, more than half of the 20 biggest companies in the world ranked by market value were based in Japan, versus less than a third in the United States. The U.S. still boasted the largest economy on earth, but many Americans were telling their children to learn Japanese so that they could speak to their expected new bosses.​
If back then, you had taken the approach of buying & holding the 5 largest market cap stocks in the world, you'd be holding: Industrial Bank of Japan, Sumitomo Bank, Fuji Bank, Dai-Ichi Kangyo Bank, Exxon

Some investors bet purely on the S&P 500, assuming that it will always be the global leader. I think that's a big mistake. I continually survey US, Europe, Japan, and emerging markets. For all we know, Japan could become the best performing stock market for the next 20 years and I intend to adapt if that happens.

Or, central Europe (perhaps Germany or UK) could turn out to be the hottest stock market for the rest of our lives. There is no way to know.


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## MrBlackhill (Jun 10, 2020)

james4beach said:


> I might have shared this with you before, that I use a technical approach to choosing my foreign exposure. Currently it points to the US as it's clearly the strongest foreign market and I don't see any imminent signs of this changing. But don't rule out the possibility of change. The biggest, most exciting market used to be Japan.
> 
> In 1989, when CNBC launched, more than half of the 20 biggest companies in the world ranked by market value were based in Japan, versus less than a third in the United States. The U.S. still boasted the largest economy on earth, but many Americans were telling their children to learn Japanese so that they could speak to their expected new bosses.​
> If back then, you had taken the approach of buying & holding the 5 largest market cap stocks in the world, you'd be holding: Industrial Bank of Japan, Sumitomo Bank, Fuji Bank, Dai-Ichi Kangyo Bank, Exxon
> ...


Actually, I'd only buy things I understand, so I wouldn't have bought Japan banks. I think the difference between the world top 20 biggest companies back then compared to now is the worldwide presence. Out of that top 20 list of 1989, I think the only Japan name known worldwide in the daily life of everybody is Toyota. Otherwise, I guess GE, IBM and Philip Morris were known worldwide back in 1989. Now, the biggest companies are also known worldwide. Out of the 14 US companies from the top 20 worldwide, I'd say there are at least 7 which are known and used daily by every developed country in this world.

But I totally agree with you that we should always watch the stocks in other countries. After all, it's not because US has the biggest market caps that it will have the best performers. Actually, I believe that the US is overvalued and people want geographic diversification which is a good thing. International stocks may rebound. Interestingly, I've recently read an article saying that one should add a dividend metric to reduce overexposure to Japan, and that metric was in favour of Canada. It was suggesting investing in VIGI instead of VXUS, for instance. Another interesting mention in that article was about global diversification through investing in Brookfield stocks such as BAM and BIP - Canadian stocks again. I'd add BEP to that list.


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