Comments on: If You Have a Long Investing Horizon, You Should Hope for Market Drops

By: Zach @ Four Pillar Freedom

Zach @ Four Pillar Freedom — Sat, 06 Jan 2018 15:38:29 +0000

In reply to Lejero.

Couldn’t agree more with those points. It is pretty incredible to realize how most market gains take place in such a small period of time, which as you said, makes timing the market incredibly difficult. This explains why a “buy and hold” strategy generally outperforms over the long run. I personally make all my investments with the thought that I’ll basically hold each stock/REIT/whatever else forever unless I see a strong reason to sell.

Thanks for the kind words 🙂

By: Lejero

Lejero — Fri, 05 Jan 2018 13:18:47 +0000

In reply to Zach @ Four Pillar Freedom.

Hi Zach,
thanks for the update, it is interesting that there is still such a big difference. What I would have expected is, that the average growth should in the long run be similar to the real world growth. I think there might be two reasons why it is not: 1. most of the time the real growth is below the average growth and the big steps up will be done in relatively short time periods. 2. the current evaluation of the S&P is much to high, e.g. with a average growth rate of 6% the Hypothetical and Actual Results might be the same (didn’t calculate it) and the S&P today would be round about 1475 points.
Conclusion from 1 would be: don’t try to time markets and hold your stocks, cause the chance is high to miss those short time periods where the market is doing the big steps.
Conclusion from 2: where is the Exit… 😉
Anyhow, like you I am a buy-continuously-and-hold-guy, I only sell (a part) when there is a great opportunity in another asset class opening up and not because I think a market is overevaluated.
Thanks again for your great blog that makes me think about new points of view.

By: Zach @ Four Pillar Freedom

Zach @ Four Pillar Freedom — Fri, 05 Jan 2018 12:19:29 +0000

In reply to Lejero.

Hey Lejero,

Thank you for pointing that out…that’s an embarrassing mistake on my part. I just went ahead and corrected all the charts and graphs to reflect the actual 7.3% annual growth path. It’s interesting to see that the same conclusions hold – the actual returns still beat the hypothetical consistent returns, but not as much as before obviously haha.

Thanks for double checking my work!

By: Lejero

Lejero — Fri, 05 Jan 2018 07:35:30 +0000

Sorry to say, but this calculation is based on a wrong assumption Zach. What you did is to divide the difference of S&P 2018 compared to S&P 1970 by 48 years (roughly 54 points a year) and plotted it in a linear way. This means you have a very high growth in the beginning 1970 (44% in first year) but very low growth in the end 2018 (2%). This is why those growth diagrams should always be pictured in a logarithmic way. A linear curve as you used it this case is in fact an negative expontional growth curve. For this growth related stuff you need to draw a linear line in a logarithmic graph, then you will see an average yearly growth of 7,3% throughout this 48 year phase and then you will not have that big difference between the real result and the result in case of an average yearly growth of 7,3 %.
As I am not a native speaker I hope my point is understandable 😉
Anyhow great blog, I really like to read your posts.

By: BusyMom

BusyMom — Thu, 04 Jan 2018 18:53:15 +0000

Great job explaining all of that. Even though I understand it, before reading this I wouldn’t have been able to explain it so well.

By: Mike @ Balanced Dividends

Mike @ Balanced Dividends — Thu, 04 Jan 2018 14:37:01 +0000

As always, nice graphs – very helpful, Zach.

Mrs. BD and I are both 33, so we have a long-term horizon for our retirement accounts. While I want the current bull market to continue as long as possible, we’re currently allocating new 401(k) contributions to a short-term bond fund to build up some cash-like holdings. We also cut back out retirement contributions, in general, to focus on taxable account growth.

We’ll see what happens this year.