Real return from the S&P 500 for the last 50 years = 1.9% / year

[yllus]

Rethinking Stocks: Not Nearly the Pot of Gold We Thought

We all know that the market has had a rough few years, but new research from Bank of America Merrill Lynch suggests that stocks have been producing disappointing returns for much longer than that. Fifty years in fact.

BofA-Merrill chief US equity strategist David Bianco found that when you adjust for inflation, taxes and trading costs the real return on the Standard & Poor's 500 during the past half century is a measly 1.3% a year. Bloomberg has a story up about it. And CJR blog The Audit wonders why how this analysis can lead to someone to conclude that stocks are a buy, as Bianco does.

Bianco expects the S&P 500 to end the year at 1,275, a projection that's 11 percent higher than yesterday's close and 3.3 percent above the average estimate in a Bloomberg survey of brokerage strategists.

Nonetheless, if Bianco's research is correct, the implications on the 401(k) debate are huge. Here's why:

I have argued in the past that 401(k) plans just don't work as our nation's primary savings vehicle. But this underscores the point. The 401(k) system is heavily reliant on high stock returns for the scheme to work. That's what the plans have been sold on. And in response, most people fill their 401(k)s with stocks and keep that money in the market long after they should. That's because the small amount a year that most of us put away has to grow relatively fast in order to get to an amount that will pay our living expenses in our golden years.

When stocks return 10% a year, the 401(k) system works out. When stocks return 1.3% a year, we're all eating cat food. And remember stocks returned 1.3% in a time when the US was enjoying in general a period of great prosperity and world dominance. What could the next 50 years be like?

The thinking is that one or two bad years will over time get balanced out by years, like 1997, 1998, 1999, when the stock market produces double digit returns. But if this study is right, stocks can produce far less than we expect for far longer than we thought. Most retirement calculators are set by default to assume an 8% investment return. Reset that to 1.3% and you see how silly the 401(k) plan is.

Well, that's not good.

 

[Matthiasa]

Thats why you buy low and sell high... Hitting the right few days in the market and missing a few bad days changes the percentages a lot.

 

[Zebo]

They're really really good for officers of said corps, investment banks, and mutual fund managers. I don't have to tell you how they scrape the cream off the top.

 

[cubeless]

Thats why you buy low and sell high... Hitting the right few days in the market and missing a few bad days changes the percentages a lot.

yeeeaaahhhh... you tell us how that works out in a few years...

just give all the money to the gov't and they'll take care of us...

 

[Genx87]

This last decade has been brutal on stocks. S&P finished over 1500 nearly a decade ago.

 

[Zebo]

Course y'all have seen nothing yet. Wait till the govt seizes 401ks to pay off bankers and quell riots in the streets. You don't think they will? They seized our children to protect this nation in the past you can bet they'll seize your assets to save it.

 

[JSt0rm]

Course y'all have seen nothing yet. Wait till the govt seizes 401ks to pay off bankers and quell riots in the streets. You don't think they will? They seized our children to protect this nation in the past you can bet they'll seize your assets to save it.

Thats when they spend it on nerve gas to pump into your home. They have already changed the daily recommend allowances of vitamins to lower amounts to kill you off quicker too.

 

[BoberFett]

Where is Evan to tell us how gold is terrible and the stock market is great?

 

[Fern]

While the S&P 500 returned an average of 9.5 percent annually for the 50-year period, the comparable figure after all the adjustments (inflation, taxes and trading costs) was a mere 1.3 percent, according to Bianco’s calculations.

Taxes? On stock gains in a 401k?

I couldn't (quickly) find his chart, but if he's adjusting for income taxes then his chart doesn't tell you much about 410k plans because they are tax sheltered.

Edit: Found the chart - it includes income taxes on dividends and cap gains. Over the past 50 years we've had rates as high as 70% on dividends (which prior to approx the 80's is what stock investments focused on) and 35%-70% on cap gains. Chart needs to be re-worked to remove taxes for any meaningful implication to 401k plans.

Fern

 

[Matthiasa]

yeeeaaahhhh... you tell us how that works out in a few years...

just give all the money to the gov't and they'll take care of us...

Well most of the real loses in any given period of time are concentrated in a few key days, same goes with gains.

 

[Zebo]

Thats when they spend it on nerve gas to pump into your home. They have already changed the daily recommend allowances of vitamins to lower amounts to kill you off quicker too.

hahaha ... It's no conspiracy bro. There is precedence. Check out right now in Ca not paying refunds, stiffing vendors and whatnot.

 

[Zebo]

the other story linked (401(k) plans just don't work ) is really good too... thx

 

[Zebo]

Where is Evan to tell us how gold is terrible and the stock market is great?

Doesn't anyone believe in cash flow anymore? e.g. a towing service, a McDonalds, a four plex, a gas well? Screw the Wall Street Casino which you have zero cash flow and zero control and gold just sits there but at least says with inflation.

 

[yllus]

Where is Evan to tell us how gold is terrible and the stock market is great?

I think he'd be right on gold not being any better than the market.

Another culprit in the big hurt

It was an idea inspired by Ivy League research. The research said that enhancing your portfolio with a splash of commodities -- things such as gold, oil and pork bellies -- could allow you to reap stock-like profits while providing a safe harbour during market downturns.

It sounded lovely in theory. But commodity investing flopped in practice. Despite a mild recovery, broad commodity indexes are still below their levels of 2008. Rather than being a counterbalance to equities, commodities have bounced up and down in tandem with Wall Street.

...

[Commodity ETFs] don't pay dividends or interest, so commodity investors make -- or lose --most of their money by trying to outguess the market about where the price of, say, copper or natural gas will jump next.

If you're still tempted to put money into commodities, ask yourself why. A broad commodity index, such as the iPath Dow Jones-AIG Commodity Index Total Return ETN (DJP/NYSE) or the iShares S&P GSCI Commodity-Indexed Trust ETF (GSG/ NYSE), can diversify your portfolio, but the experience of the past couple of years suggests that the benefits are dubious.

 

[nonlnear]

This article is terrible. It intentionally tries to confuse the reader by equating real and nominal returns. Such horseshit passages as

When stocks return 10% a year, the 401(k) system works out. When stocks return 1.3% a year, we're all eating cat food. And remember stocks returned 1.3% in a time when the US was enjoying in general a period of great prosperity and world dominance. What could the next 50 years be like?

The thinking is that one or two bad years will over time get balanced out by years, like 1997, 1998, 1999, when the stock market produces double digit returns. But if this study is right, stocks can produce far less than we expect for far longer than we thought. Most retirement calculators are set by default to assume an 8% investment return. Reset that to 1.3% and you see how silly the 401(k) plan is.

Intentionally misconstrue the real underlying facts stated elsewhere:

While the S&P 500 returned an average of 9.5 percent annually for the 50-year period, the comparable figure after all the adjustments was a mere 1.3 percent, according to Bianco’s calculations.

What that means is that the stocks really were producing nominal returns that make an assumption of 8-10% very reasonable.

The real issue is that people don't really have a proper idea of how pervasive inflation is. A real ror of 2% is actually not that bad for a passive investment. (Even moreso if you consider that counting 50 years back from now is kind of cherry picking a bad point in time.) It only sounds bad when you're used to hearing the nominal number for the same investment, but those extra percentage points we're so used to seeing are just the secondary effects of the Fed sucking the wealth out of the bottom of our accounts. The biggest impediment to accruing wealth through savings is not the 401(k) model, but the insidious wealth tax created by one of the biggest taxes of all: inflation + capital gains.

 

[LegendKiller]

This article is terrible. It intentionally tries to confuse the reader by equating real and nominal returns. Such horseshit passages as
Intentionally misconstrue the real underlying facts stated elsewhere:What that measn is taht the stocks really were producing nominal returns that make an assumption of 8-10% very reasonable.

The real issue is that people don't really have a proper idea of how pervasive inflation is. A real ror of 2% is actually not that bad for a passive investment. (Even moreso if you consider that counting 50 years back from now is kind of cherry picking a bad point in time.) It only sounds bad when you're used to hearing the nominal number for the same investment, but those extra percentage points we're so used to seeing are just the secondary effects of the Fed sucking the wealth out of the bottom of our accounts. The biggest impediment to accruing wealth through savings is not the 401(k) model, but the insidious wealth tax created by one of the biggest taxes of all: inflation + capital gains.

I was just about to post something like this.

I don't think there is a single analyst, broker, or fund manager who thinks the broad market would return 10% REAL returns over the last 50 years. That'd be like 20% nominal returns.

Article author is a fucking moron and intentionally obfuscates the truth. That, or he can't comprehend jack shit.

1.3% after taxes and inflation isn't horrible. What asset would perform better?

 

[Zebo]

I was just about to post something like this.

I don't think there is a single analyst, broker, or fund manager who thinks the broad market would return 10% REAL returns over the last 50 years. That'd be like 20% nominal returns.

Article author is a fucking moron and intentionally obfuscates the truth. That, or he can't comprehend jack shit.

1.3% after taxes and inflation isn't horrible. What asset would perform better?

How much money you got? A McDonalds nets out 250-500K a year depending on location. 1-1.5M investment.

 

[First]

Terrible article.

Where is Evan to tell us how gold is terrible and the stock market is great?

lmao, and both are still true.

 

[LegendKiller]

How much money you got? A McDonalds nets out 250-500K a year depending on location. 1-1.5M investment.

Great, lets chuck a few of those into each 401k, right?

Don't know much about McD franchises, but I doubt they are that cheap or yield that much cash. If that were the case, a 3year investment return horizon would result in huge entrants into the franchising.

I know a lot of people that do McD franchise loans, I'll ask.

 

[LegendKiller]

Where is Evan to tell us how gold is terrible and the stock market is great?

Are you that retarded? Go calculate the return on gold over the same period, adjusting for inflation, capital gains taxes, and fees.

Then come back and grovel for forgiveness.

 

[Patranus]

Well, that is much higher compared to the rate of return on social security for anyone make middle class wages.

 

[Zebo]

Great, lets chuck a few of those into each 401k, right?

Don't know much about McD franchises, but I doubt they are that cheap or yield that much cash. If that were the case, a 3year investment return horizon would result in huge entrants into the franchising.

I know a lot of people that do McD franchise loans, I'll ask.

401k is easy and cheap to get into. Most people don't have time to manage investments let alone a side business. But to claim market is a good performer compared to doing the later, and doing it successfully, is crazy. There is too much load on stocks e.g. CEO gets paid before you do vs. you getting paid first at or least somewhere near the top.

Good, then you'll see why people do them instead of trusting WS. Those were the #'s of couple I checked out locally....be very interesting to hear what you're colleagues report back.

 

[LegendKiller]

401k is easy and cheap to get into. Most people don't have time to manage investments let alone a side business. But to claim market is a good performer compared to doing the later, and doing it successfully, is crazy. There is too much load on stocks e.g. CEO gets paid before you do vs. you getting paid first at or least somewhere near the top.

Good, then you'll see why people do them instead of trusting WS. Those were the #'s of couple I checked out locally....be very interesting to hear what you're colleagues report back.

Of course managers get paid before you do. Are you a fucking communist? They allocate your money, they get paid, deal with it.

They trust their money in the stock market just the same. You make it seem like any moron can get a McDs franchise and self-fund it, plowing 100% of their money into the franchise. Sorry, but I *know* the franchisees take out huge loans through McDs, who protects their franchise business very well, only picking the most solvent and good people. It's why the failure rate for McD franchises is almost non-existent.

 

[Genx87]

How much money you got? A McDonalds nets out 250-500K a year depending on location. 1-1.5M investment.

Really? My dad looked into the fast food business. The numbers never came out even on the cherry picked best estimate of sales numbers. Unless you like working 80 hour weeks for 60-70K\year. I'll let you know what my friends day who owned 5 BKs does for a living now. Driving a bus so he can get health insurance until he qualifies for medicare. 30 years in the business and nearly nothing to show for it. I dont think those franchises make a whole of money for anybody but the corporations via license and royalty fee's.

 

[rchiu]

Heh, don't like the S&P 500 return, manage your 401k yourself in vest in other places, gold and other commodity has pretty decent return. Don't have the time and don't want the risk? go buy T-bills or some other risk free investments. Don't like the return and think that's not going to enough to feed you after retirement? Put more money into your 401k.

What the hell do you expect? Government or someone to come up with risk free 8% return so that you get your entitled retirement money?