Saturday, 29 August 2015

Investing Like a Sloth

Stock market prices go up and down continuously.  Stock market prices also trend up and down over longer periods of time.  In recent weeks we've been seeing prices go down at a faster rate than up resulting in a trend downwards.  This has resulted in plenty of press/blog inches from experts trying to explain what’s going on.

In response to this my investing strategy is unchanged despite having lost, on paper at least, over £53,000 from my peak 2015 wealth valuation even after new contributions.  That is multiple years of post FIRE spending and so not an insignificant amount of money.  I continue to passively rebalance but importantly everything is done in slow motion and contains no ‘backing the truck up’ or ‘going all in’.  I think of it as investing at the pace of a sloth.

I do this because even though there is lots of investing noise around I am very conscious that price down trends can occur for long periods of time.  Let me demonstrate with a chart looking at US stock market price downtrends.

US Market Percentage Falls from Real New Highs
Click to enlarge, US Market Percentage Falls from Real New Highs    

This chart shows 4 bad bear markets that have occurred since 1900.  In brief these are:
  • A new real (inflation adjusted) price high was reached in September 1906 which then led into the 1907 Bankers Panic (marked in purple on the chart).  From the high it took until December 1920 to reach its real low of -70.0%.  That’s 171 months or 14 years and 3 months for prices to bottom in real terms.
  • A new real price high was reached in September 1929 which then led into the well known Great Depression (marked in blue on the chart).  From the high it took until June 1932 to reach its real low of -80.6%.  The decline to the real low was reasonably rapid at 33 months or 2 years and 9 months.  What’s interesting with this period though is that even 20 years later the market was still more than 60% below the previous real high and didn’t actually reach a new real price high for more than 29 years.  
  • A new real price high was reached in reached in December 1968 which then led into the stock market crash of 1973 to 1974 which came after the collapse of the Bretton Woods system and also incorporated the 1973 Oil Crisis (marked in olive on the chart).  This time from the real high it took until July 1982 to reach its real low of -62.6%.  That’s a period of 13 years and 7 months.
  • Finally, a new real high was reached in August 2000 which led us into the Dot Com Crash and before we could recover we were straight into the Global Financial Crisis (marked in red on the chart).  Over this period the real market fell 58.6% by March 2009.  That’s a period of 104 months or 8 years and 8 months.
Eye balling this chart results in two things leaping out at me:
  • Markets can trend down a long way.  This is no secret and talked about frequently.
  • Markets can take a long time to reach bottoms after previous highs.  This is less frequently discussed but an important point. 
So how do the falls of 2015 thus far compare.  We had the real high in May 2015 and are so far down 6.2%.  That’s a period of 3 months.  I show this in black on the chart and because of its insignificance compared to the other examples shown have also marked it with a big orange circle.  It reinforces why I’m happy to be an investing sloth.

As always DYOR.

Assumptions include:
  • Inflation data from the Bureau of Labor Statistics.  August 2015 inflation is extrapolated.
  • Prices are month averages except August 2015 which is the S&P 500 closing price on the 28 August 2015.


  1. Interesting charts but can you confirm that they aren't about total return ie you aren't taking account of dividend re-investment? If you did the time to recovery would presumably be much better. After all dividends account for most of the real return of the stock market (ie the return after taking account of inflation)

    1. You are quite correct that the charts are not total return but simply based on the S&P 500 (or former equivalents).

      Your point about dividends being important is an important one and it's one of the reasons that I'm trying to get my portfolio to a yield of 3% before pulling the FIRE pin. 2.5% will be for me to live off and the 0.5% will be earmarked for reinvestment in the good times and to allow for a fall in dividend payments during down turns.

  2. "In recent weeks we've been seeing prices go down at a faster rate than up resulting in a trend downwards." Who could gainsay that? :)

    The big lesson from your charts is that people who chatter about drawing only the natural yield (i.e. divis) from their pension funds really ought to decide whether they would be happy to see their capital values gyrate like that.

    I visit the MSE boards quite a lot, and am gobsmacked at how many people think they "should" be able to make a real 3% p.a. (or 4%, or 5%) from equities without much risk. Occasionally someone will enquire what they mean by "should", but answer comes there none. They're about as daft as the wild BTL enthusiasts.

    I suppose the biggest lesson of them all is that a fool and his money are soon parted.

    1. Don't really visit MSE anymore except to check best buy savings rates on the main site.

      Was thinking about 100% equities portfolio and those real %'s as a strategy though, so had a quick play on cFIREsim, which admittedly is US stocks so not like for like with the UK. Assumptions were drawdown rate increases with US CPI, expenses of 0.25%.

      If you're happy to deplete your portfolio to $0, over a 30 year period and want "100% success" then you're at a starting drawdown rate of 3.3%.

      If you want your portfolio to be an endowment for the family (ie perpetual wealth) so portfolio value in real terms equals starting portfolio value, again with "100% success" then you're at a starting drawdown rate of 2.3%.

      In this example 3% therefore seems to work if you're not looking to pass on an inheritance. The psychology of seeing your portfolio at 30% of its original value 15 years into retirement is another thing all together though...

      4% fails (run out of wealth in less than 30 years) 8% of the time. 5% fails 16% of the time.

  3. Passive Investor's question is very important.

    Also - choose your index carefully - and know something about it .

    FTSE indices are interesting : FTSE 100 YTD -4.85% 12 months -8.20% Capital
    FTSE 250 YTD +6.35% 12 months +7.51% Capital

    FTSE 100 YTD -2.05% 12 months -4.81% Total
    FTSE 250 YTD +8.29% 12 months +10.40% Total

    This illustrates the differences between capital only performance and performance including dividends over a very short period ( max 1 year )

    It also illustrates FTSE 250 vs FTSE 100: + 11.4% YTD Cap
    + 10.34% YTD Total Return

    and also FTSE 250 vs FTSE 100 : +15.7% 12 months Cap
    +15.2% 12 months Total Return.

    Your charts illustrate periods varying from 14,13,8 and 3 years from highs to lows .

    Over such long periods of time the constituents of the Indices will have changed significantly.

    For the S&P 500 I found a figure of just over 1000 representing the different companies that had been a constituent of this index over a 20 year period.
    I think that represents a 100% turnover in 20 years ( but i may be wrong on this )

    If you are using a tracker fund obviously these changes are replicated - but not all tracker funds go about this the same way . Also - useful to know whether your tracker fund levies it's charges from capital or income - and DYO Research on the effects of the different approaches ( but if fees are very low it makes hardly any difference )

    One effect of companies entering and leaving an important index is in the volume of their shares that are traded . New companies often see a significant increase in trading of their shares on entering an index - which tends to push their share price
    up. So - in a way - the index makes it's own winners - although I think this effect must be very small unless there is significant turnover in the constituents.

    What am I trying to say : Know your index ( for tracking OR performance comparisons)
    Choose it carefully
    Choose your tracker fund carefully and monitor it's fees
    and performance .

    And - as RIT keeps reminding us - DYO Research.

  4. Sorry - the above comment has not appeared as I had wanted - the relative performance figures for the FTSE indices and different time periods should have appeared as a table for easier comparison.

  5. I'm surprised how long the impacts of a bear market last. Could you replot with an assumed uplift of 3% each year to assume re-invested dividends (I'd avoid being clever and assuming better yields in a depressed market). I'd expect (and hope!) to see 10 years knocked off all timescales. John B

  6. Year X into the slump you'd own 1.03^X units, so 1.81 after 20 years

  7. So much chatter on the internet over such an insignificant drop (thanks for posting the chart to illustrate just how insignificant!)

  8. Hi RIT,
    I recognise the symptoms - the pot is getting full, you watch the financials every day, you model the portfolio far to regularly and you are all too aware of downsides of what Mr Market brings every day.
    I have the same symptoms and the medicine to be taken every time it's needed is:-1) get out your strategy plan and ask if anything has changed - if not do nothing.
    2) Measure your 12 month average return - if it's on plan do nothing. If its below plan give yourself a couple of months thinking time and then do nothing.
    3) Review your plan in light of your goals - there's a different mindset for when the pot is full to when you are growing.

    For what it's worth my plan is down £30k over the last month but the rolling 12 month shows a net gain of 5.6%

  9. Good to be 5.6% up over a year. You clearly cannot have too much ( if any ) in a FTSE 100 or FTSE All Share tracker - and /or little exposure to the poor performers that are included in the FTSE 100 . Plenty of FTSE 100 companies have performed well but unless you have individual company shares - the only way I know to help pick the winners and avoid the losers is in an actively managed fund or IT. So -pick your fund manager wisely too !

  10. The Telegraph today have a pertinent article where they illustrate the dangers of being out of the market for some of the 'best days' of the 20 year span 95-05. 7.3% annualised return if always invested (and dividends reinvested, hurrah!), 3.8% if you missed the 10 days with greatest gains, which tend to be post-fall rebounds. John B