Here is my main point to refute your above statement, you have indicated an 87 year period for your likely return rate if you buy and hold. This is patently false to do, as no body can truly hold their assets for that long (paleo peeps have a better chance, but not many of us live that long), a far more likely occurrence is 10-20 year exposure. If you plug in those time frames to the CAGR calculator you linked, you get a wide variance of results.
some 10 year variances I got were from -1% annualized to 19% annualized.
All this arguing over the actual mean returns of the market is not my main question to you and quikky, here it is:
What is your strategy to prevent this from happening to your capital?
Japan nikkei 25 year chart
50% loss over 25 years
25% loss over 20 years
small gain over 10 years due to unsustainable government stimulus (4x the rate of the US stimulus per GDP in 2012 - 2014) otherwise a loss there too.
highest loss = 75% from 1990 to 2012
Let me guess your answer.... It wont happen in the USA, we got a different economy, government etc blah blah blah.
The very fact that this happened to a modern booming (in the 80's) economy leaves it as a possibility to happen anywhere in the world. It is not even what they call in the armed forces an "unknown unknown", it is a "known unknown". ie its a known risk vs being an unknown risk outside of our prediction models. There is also a fairly solid hypothesis WHY it happened to Japan and why the same thing is likely to happen to rest of the modern World.
Diversification as the answer? not likely.
Japanese bonds and cash rates have been low for 20 years (under 1%). Property has declined 60% over 20 years.
Dollar cost averaging? nope.
A steady 20 year decline doesn't allow this strategy to make many gains all it would do is spread your loss between varying percentages (average your loss, like it averages your gains in a bull market).
As I said before you have to actively reduce tail risk in your portfolios and stop picking up pennies in front of the steamroller.
Last edited by dilberryhoundog; 02-21-2014 at 06:42 PM.
You're arguing against math and it's becoming comical.
S&P 500 Index Rolling Calendar Year Risk and Return Statistics from 1926 through 2012
Look at that data for annualized returns during rolling 20 and 30 year periods. 100% have been positive. All had great returns. Every single 30 year investing period in modern US history, including the Great Depression, produced more than 10% annualized returns. Every. Single. One.
I also invest globally, 45% of my stock investments are non-US. I also own bonds.
There is no more proven strategy.
If so, you are one of the imprudent investors that you mention. The US government (and the EU) are currently in a major battle with deflation. They are printing so much money trying to keep the deflation monster at bay, but seems as they know they have lost the battle, as QE is being wound back. Interest rates are as low as you can get (If thats not a flag for rampant deflation, I don't know what is), so they have already exhausted that deflation weapon. Seems there's nothing left to fight with. Your assets are already deflating, you just don't know it yet. I think time will show how the Japanese economy shakeout, sounded the warning bells for the rest of the world, 20 years later.
I know it seems like i don't know much, because im not divulging my specific strategies. Trying to explain this stuff to you guys feels eerily similar to trying to explain paleo to a main stream, low fat, high run mileage dieter. Buy and hold investing is extremely main stream, everybody is doing it. This leads to a great big back patting, hip hip horay, lets bash the idiot telling us we're wrong mentality, there is a certain safety in following the crowd. Well i'm trying to tell ya the crowd is heading over a cliff.
A butcher feeds a turkey for 1000 days, from day 1 everyday confirms with more statistical significance that things are great for turkeys. The turkeys risk analyst and economist give him great reports on his future of being a turkey. One day thanks giving rolls around, guess what? its not so great to be a turkey on that day.
The turkey problem explains confirmation bias. Everything will happen. If it hasn't happened yet, you just need more time to sample probabilities. The turkey was always gunna be dinner on thanks giving after about three years, he just couldn't see the possibility of that happening by looking at how he had fared so far.
I have already given a real life example of what you say is impossible (negative returns for 20 - 30 years) in Japan. If you turn a blind eye to that, well you may just be a turkey.
Also 100% of the world is exposed to China, Euro and US economies. So your just 45% exposed to a world wide problem and 55% exposed to a local problem ( USA markets). Bonds are shit in all countries that are stimulating their economies with QE.
Last edited by dilberryhoundog; 02-22-2014 at 01:10 AM.
If not my strategy, then what? Everything else you mentioned has more risk or less reward, i.e. worse strategies.
Now you're talking about black swans, which is complete nonsense when it comes to investment planning. You know why? You can't plan for the unpredictable! Certainly, not with strategies that are even today more prone to failure.
You will probably say yes (it probably is, nothings perfect), because the big risks that I see in the buy and hold strategy, don't come into view with your model, your model probably delivers far less risks into view for a particular reward than it is actually exposed to, which makes it seem like the reward is an attractive proposition.
If your model encompasses most of the risks of buy and hold, then the things I've mentioned become alot more attractive. My strategies rely on the majority of investors underestimating the risks in the market, I buy massive leverage for cheap because a lot of people don't think my positions are possible.
To you, the last 20 years in Japan is a black swan, to me it lies very much within my prediction models and IS NOT a black swan.
You cannot PREDICT the unpredictable, but you can most certainly PLAN for the unpredictable.
A great example is the Seat belt in your car. There is no way you can predict the day you have a major car accident, but with a tiny bit of planning (ie wearing a seat belt) and a tiny cost to you of a little more discomfort while driving. You can greatly minimize or even eliminate the effect and the damage the unpredictable event (black swan) does to you. This example has so many parallels with my strategy for investing in the markets that I'm gunna stop now.