How To Win Any Argument About the Markets

It’s simple really. Just change the time horizon so it suits your stance.

I’ve seen this play out over everyone’s favorite yellow metal the past few years. Gold is down almost 40% since it peaked in 2011. But it’s still up almost 350% since 2000. Although since 1980, on an inflation-adjusted basis, it’s basically flat. However, since the early-1970s it’s up over 7% per year (or about 3.4% after inflation).

See what I did there? There’s ammunition for both sides of the gold trade to use to their advantage.

Anytime an investor cites an exact time series with precise start and end dates to drive home their argument, it’s a good bet that they weren’t invested over that time horizon. The amount of data available to investors right now is both a blessing and a curse because you can always find something that adds to your confirmation bias.

Over the last 3 years the S&P 500 is up over 21% per year, while the 5 year returns are almost 16% annually. It’s been on fire. But if you go back 15 years to include both the tech bubble and the Great Recession, the S&P is only up around 4.3% a year.

Extend your time horizon to 1980 and the performance is almost 12% per year. From 1928 to 1979, annual returns were much smaller, at around 8% per year. So it must be all about the 1990s bubble right? But that 8% figure includes the Great Depression and enormous stock market crash from 1929-1932 that saw stocks drop over 80%. Starting in 1933 improves annual performance to 10.7% a year from 1933-1979.

How about the 1966-1982 period where the market went nowhere? The total real return of the S&P 500 was 0%. Extend your time horizon from 1966 to 30 years and the total real return jumps to 5.3%, pretty close to the long-term average. This is because the horrible returns of the first 17 years were followed by spectacular returns over the next 13 years.

If you think about it, there’s no way that stocks return 9.6% a year over the entire 1928-2014 time frame if we didn’t have the Great Depression, the 1966-1982 sideways grind, the tech bust or the Great Recession. Those periods of risk are a necessary evil.

Japan is a perfect example of this at an extreme level. Japanese stocks have returned -0.7% per year since 1989. Yes, negative returns for more than 25 years. This is the ultimate example people use to play devil’s advocate against buy and hold investing. But since 1970, Japanese stocks are up 9.3% per year. This is because they rose nearly 23% on an annual basis from 1970-1989. That’s how huge the bubble was in Japan. The long-term returns are close to that of the U.S., but they were just extremely front-loaded.

Your timing as an investor (something you have no control over whatsoever) can almost completely explain how you view the markets.

It’s very easy to cherry-pick historical data that fits your narrative to prove a point about the markets. It doesn’t necessarily mean you’re right or wrong. It just means that the markets are full of conflicting evidence because the results over most time frames are nowhere close to average.

If the performance of the markets was predictable over any given time horizon, there would be no risk.

Further Reading:
GLD’s Fall From Grace
Torturing Historical Market Data
Was the 1966-1982 Stock Market Really That Bad?


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  1. Jim Haygood commented on Nov 22

    ‘Your timing as an investor (something you have no control over whatsoever) can almost completely explain how you view the markets.’

    Substitute ‘retiree’ for ‘investor,’ and you’ve captured the dilemma faced by graying Boomers.

    With stocks and 10-year T-notes both yielding around 2 percent, trying to fund a traditional 4% annual withdrawal rate looks like a hard slog.

    Unlike institutional investors, individuals can make fairly drastic tactical allocation switches. For instance, switching between large and small caps, growth and value, foreign and domestic, etc., can squeeze some extra basis points out of these flinty markets. For me, mechanical models are the way to go about it consistently.

    A thousand years of data would be nice. But one can make do with a hundred.

    • Ben commented on Nov 22

      I agree. There are no easy answers for retirees right now. I think a systematci approach is likely the only way the majority of individual investors can succeed without a heavy dose of luck. Also, gotta think globally these days. It’s a mistake to put too much emphasis on the US.

    • Marc commented on Nov 23

      I disagree that “Trying to fund a traditional 4% annual withdrawal rate looks like a hard slog.” Like this article pointed out, it comes down to your timeframe. As a graying boomer, I know that the odds are good (about 25%) that I or my spouse will live to 94 years old. This gives me and many graying boomers a long investing time horizon of around 30 years, so a permanently balanced portfolio of roughly 60/40 stock/bonds is appropriate, since over a 30 year horizon a 3.5-4% withdrawal should be fine.

      Just keep your investments in the USA. If your future expenditures are based in dollars, your investments should be as well, or you can be badly hurt by currency fluctuations. Data proves that over the long haul international investments don’t improve return, and although they can sometimes decrease overall portfolio volatility (up as well as down), less volatility won’t buy you food, only investment return will. And you want that return to be in dollars, since that is what you will be spending.

      • Ben commented on Nov 24

        Good points. It’s also worth noting that what most people are really hoping for is something with a risk-free 4% yield. The 4% rule has been tested against the very worst market return outcomes, including the Great Depression scenario and it works. It’s actually a very conservative rule. You just have to be willing to dip into your principal balance for spending needs, which is perfectly reasonable.

  2. 10 Monday PM Reads | The Big Picture commented on Nov 24

    […] • The curse of Black Friday sales (NY Post) • How To Win Any Argument About the Markets (A Wealth of Common Sense) • New Abnormal Means Relying on Central Banks for Growth (Bloomberg) • Low Inflation: Why It […]

  3. Rolf commented on Nov 28

    I love this article and I totally agree that the average investor/trader is too narrow minded and doesn’t understand the whole complexity of financial markets – or maybe consciously avoids it because fully understanding it would be too big of a task!?

    But the cherry-picking and the hindsight-bias are two very common problems among “twitter-traders” as well which lead to a wrong image of trading and can often mislead rookie traders to follow seemingly ‘experienced’ traders.

    Great read!

    • Ben commented on Nov 28

      Thanks and I agree. It’s very easy to look back at the past and portray it as being clearcut and easy to predict. It’s why investors are constantly fighting the last war.

  4. What Strategy Works For You? - Retire Before Dad commented on Dec 03

    […] A Tired Debate I recently tweeted a must read article that I saw on my Blogfeed. Ben over at A Wealth Of Common Sense wrote another awesome piece, this time pointing out that any argument about investment returns can be won by simply changing the range of dates. Click here to read it. […]

  5. Updating My Favorite Performance Chart commented on Mar 08

    […] It’s amazing what a couple of year’s worth of performance can mean to long-term returns. Add a year here or take away a year there and the numbers can look completely different. Here was the ranking of these asset classes as of the end of 2013 (along with annual return numbers): emerging markets (+15%), mid caps (+13%), small caps (+13%), REITs (+11%), international stocks (+10%), large cap (+9%), TIPS (+5%), bonds (+5%), commodities (+3%) and cash (+2%). Things look quite different at year end 2015. This is why I always say the best way to win an argument about the markets is to change your start or end date. […]

  6. Kyle Pickner commented on Mar 09

    This is a great post and should be read at least once a week.