How long do you have to hold stocks to smoothe out all of the swings?

This is a question, or some variant thereof, I get quite a lot. We very often hear that you'll earn anywhere between 7-10% on stocks per year over the long term. This is true, but just how long are we talking here? If we do the stretch of 1928-2013, the historical compounded annual growth rate (CAGR) was around 9.2%.

The problem is that after an 85-year holding period you'll look something like this:

5 years isn't anywhere near enough and neither is 10 years. The answer is that you'll have to hold for 20 years or more to really guarantee that you'll get something in that range. Even the 20 year holding periods can swing a little bit above or below those long-term targets, but once you get out to 30 year or 40 year periods we're finally there. You get nice stable rates of return that don't vary much at all. Over those periods, stocks are basically as risky as going to the bathroom. See the chart below. The way to read this is that each line represents the annualized return of that holding period through that year. So, for 1968, the 40-year line represents the annualized return for the 40 years through 1968.

So, if you're thinking 10 years gets the job done and averages everything out, think again. You have to invest with a long time horizon if you want to truly wash out the wild swings.

More Nonsense About Public Pensions

http://www.nytimes.com/2011/03/11/business/11pension.html?src=busln


What follows does not represent the views of the State of Wisconsin, the Department of Administration, or the State Budget Office. 


Let me be blunt. Joshua Rauh, the Northwestern University professor behind nearly all of the scare-mongering on public pensions, is a malignant tumor and a fairly heavily metastasized one at that. His basic premise has been that public pensions are much more poorly funded than they look because they use unrealistic assumptions about rates of return. He claims that you should use a risk free rate of return, rather than a balanced portfolio's rate of return (historically nearly 8%), to discount future pension liabilities. For the uninitiated, discounting future liabilities at a lower interest rate makes your future liabilities a good deal larger. 


His real claim to fame was an article he published, along with a University of Chicago professor, at the pits of the stock market's decline in the most recent bear market where assets of the pensions funds were measured at fair market value (artificially depressed by nearly 50%) and compared it to liabilities discounted using 10-year treasury rates at the time (roughly 3.5%). I'm not actually sure that I need to explain what is wrong with this, but I will anyway because it actually offended me. In essence, what he did was take an artificially depressed portfolio and then assume an artificially low return from an artificially low level and say "My God! These things are horribly underfunded!". I would actually be curious what the fair market value measures would look like right now.


In any case, we all know that the assets of these funds have recovered sharply. That is evident in the Federal Reserve's Flow of Funds Report. Since Q1 2009, the assets of state and local government pension funds have recovered nearly $800 billion, or over 35%. What is more troubling is his bizarre assertion that pension liabilities should be discounted at a risk free rate of return. My simple response is: Why? That actually makes no sense. Why should long term assets be discounted at a rate that would only make sense if we expected to need them at short notice? His choice quote is “If you don’t want to count on the stock market to pay for all this, this is what you’re going to have to contribute.”. All I have to say is "Huh?!".


I wonder what the "unfunded liabilities" of 401(k)s look like if you compare current balances to future liabilities (i.e. your retirement expenses) if you discount them back at 10-year treasury rates. They are absolutely dependent on stock market returns after all. All of these plans rely on the stock market. Nothing else provides the returns reliably enough (yeah, I know what the response to this is). No person earning up through an upper middle class income could possibly afford to save enough through fixed income securities, even if they lived like a monk. If Rauh was honest, that's what he would say, but he doesn't. 

Handy Dandy Personal Finance Calculators

I've been a religious Bloomberg visitor for probably nearly nine years, but I never noticed that they had this absolute bevy of personal finance calculators. A few of these I have at one point or another made a spreadsheet for, but most of them I have not. Definitely worth checking out.