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admin

Compare an inflation adjusted chart of housing prices for the last century to an inflation adjusted chart of The Dow. Real housing prices have been much flatter and The Dow has had periods where you would have lost money for decades after investing. Also, that 10% return on stocks that you cited is largely the result of three components: 1) inflation, 2) the bull run starting in the early 1980s, which coincided with a unique period of declining inflation and declining interest rates, and 3) the use of the US stock market as your frame of reference (as opposed to a composite of stock markets across all countries). The real return of The Dow has been 1.64%, and the fact that this return is largely the result of one, recent, tremendous bull run makes me very skeptical that those past returns will predict future returns. I do, however, think that good returns are possible in the stock market with many years of study, as you say.

Also, here's an inflation adjusted chart of gold prices: http://inflationdata.com/inflation/images/charts/Gold/Gold_inflation_chart.htm I wouldn't be very comforted by holding gold. Real housing prices have been flatter and less prone to declines than both gold and stocks.

Of course, we probably have some substantial home price declines left to go, so I'm definitely not saying that buying a home right now is the least-bad inflation hedge (after you have reached the limit on I-Bonds). I just think that by the time inflation picks up, it might be.

- admin

john p · Joined: 10 Mar 2006 Posts: 1820

http://worldhistoryforusall.sdsu.edu/images/Popn_Graph2.jpg

http://www.usgcrp.gov/usgcrp/Library/nationalassessment/images/UrbanRural-o.jpg

http://www.sci.sdsu.edu/salton/GreenRedPopChartSm.gif

I always liked this chart, I would look at the buying segment and the seller segment in terms of just numbers. My theory was that empty nesters sold homes and younger families 30 to 45 would buy them. When prices went up, there were fewer empty nesters and significantly more younger families competing for those nests.

http://users.rcn.com/jkimball.ma.ultranet/BiologyPages/B/BabyBoom75.gif

Now the babyboomers are retiring and more nests are available.

http://www.valueinvest.org/27_files/image006.gif

this one is awesome:

http://www.valueinvest.org/27.html

http://www.chrismartenson.com/system/files/files/u4/Exp_Money_Exponential_Money_v2.jpg

AWESOME read!

http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

GenXer · Joined: 20 Feb 2009 Posts: 703

There is no guarantee we'd see the returns we have had in the past, this is why I stressed that the so-called inflation busters are known for their EXPECTED returns, not actual returns.

I would caution from reading too much into various charts and graphs. What you do NOT see is how much money people lost when trying to sell during times of distress. Historical housing prices do not contain this information. As I mentioned before, a power law type of a random process may NOT exhibit large volatility, even when considered over a large enough time period, and sharp spikes can completely change the actual returns.

Higher stock prices are NOT cause by inflation. We do not really know what CAUSES prices to go up and down. We may speculate. If we knew, we could simply bet on stocks when inflation is high. There is no causal relationship there. One more myth bites the dust...about a million more left to go.

Commodities provide hell of a growth. What they dont provide is compounding of dividends, which are a huge part of S&P500 returns, for example. Lets not lump treasuries with commodities - both have a place in a portfolio. As far as ROI on housing appreciation, the 4% figure does not include all the stupid things people do - it means that if you bought a house and sold it 30 years later, for a specific time period, your return would be 4%. It is what it is. You can cherry-pick your period, and have higher returns, but this doesn't change the fact that stocks are the best inflation hedge.

admin · Posted: Fri Feb 20, 2009 5:47 pm GMT Post subject: Re: returns

GenXer · Joined: 20 Feb 2009 Posts: 703

admin: you admit that there is no causal relationship, so my argument stands - you can not say that inflation CAUSES higher stock prices. Everything else is just noise (I don't deny inflation).

Inflation adjusted or not, annualized inflation is around 4% over the past number of years, and S&P500 returns are about 10% over the past 80 years, so inflation adjusted returns are around 6% give or take. Dow is not the market - its just 30 big companies. You may find that real estate beat stocks over some period, or vice versa. Long term this is not true (over 80 years).

A bad year (highly damaging random event) can change these statistics instantly, and depending on your time scale, you can come up with any type of returns for any kind of investment. However, stocks beat everything else as far as 'inflation hedge'. Yes, some parts of the market (US Large Capitalization Growth) may underperform in any selected time period (even 1% over inflation is still better than gold/housing prices), but if you hold a basket of indexes, you'll find that your returns are much better than Dow's over the same time period.

admin · Posted: Fri Feb 20, 2009 6:29 pm GMT Post subject: Re: stocks, etc

ConcernedCitizen · Guest

I agree that the US experience has generally biased expected rates of return for equities (see Triumph of the Optimists) and investing in Russian, German or Japanese equities at the wrong time (revolutions, wars, etc) would have meant total wipeout.

But I'm not sure really that if you looked at equities vs housing in 1980, ie before the big bull run, looking back 100 years, that equities would be worse than housing. I bet the Shiller data would let you see it, that's something to look at. If Shiller has all the data and has studied it intensively and has publicly stated that housing is a lackluster long run investment, he must be onto something?

But there's so many different opinions flying around about how to invest that I'm tempted just to pay what I think is an affordable price for housing then invest the rest in a global basket of equities and bonds. I know international equity investing hasn't provided a diversification benefit in 2008 but bonds did. And do ones best to rotate out of things tactically that feel like they're getting overheated (stocks in 99/00, commodities in early 2008, housing in 2006).

I haven't even seen consensus on the topic of whether the risk of investing in equities rises or falls the longer you hold them. If we had consensus that the risk rises you wouldn't see so many "sophisticated" defined benefit pension plan managers (and endowments etc) having such a big equity weighting.

There's also no consensus as far as I can tell about what protects you against normal inflation and hyperinflation.

Gold may not work because they'll just make it illegal if it suits the government...

My husband is Argentine and he has a bent towards owning housing as this is the only thing people ended up believing in when the currency was destroyed multiple times. But really what was even better than that was having a hard currency like USD offshore (and how can we do this now, are there any hard currencies left??)

admin · Posted: Sun Feb 22, 2009 5:23 pm GMT Post subject:

melonrightcoast · Joined: 22 Feb 2009 Posts: 236 Location: metrowest

balor123 · Joined: 08 Mar 2008 Posts: 1204

balor123 · Joined: 08 Mar 2008 Posts: 1204

GenXer · Joined: 20 Feb 2009 Posts: 703

admin: correlation does not mean causation. If inflation did INDEED cause higher stock prices, then there would be studies showing how inflation projections/figures can be used to time the stock market. In the absense of such studies, we know very well that we can not time the market given ANYTHING we know today.

GenXer · Joined: 20 Feb 2009 Posts: 703

admin: correlation does not mean causation. If inflation did INDEED cause higher stock prices, then there would be studies showing how inflation projections/figures can be used to time the stock market. In the absense of such studies, we know very well that we can not time the market given ANYTHING we know today.

By the way. Dividends account for 40% of S&P returns. The data you mention DOES NOT INCLUDE DIVIDENDS. Its like saying that you can eat the icing and not the cake. My argument stands. Stocks are the best hedge against inflation, at least, the more reliable one. And I still argue that if you KNOW how to build portfolios, you can receive S&P returns which are much less volatile over time, giving you more chances to hit your target.