128 comments

Introducing IndexView: Become One with the Economy

punditGood investing is really simple: get yourself into the position of owning a portion of a profitable business or property, keep it as long as possible, and live off the resulting stream of dividends and appreciation. For even greater wealth, just reinvest the earnings into still more profitable ventures.

This high-level view is liberating because it allows you to tune out of what the politicians and financial pundits of the day are up to. Joe Trader is raving on his TV show about interest rates and technical analysis, and Josephine Doomer is speculating about the role of precious metals “once all this fiat currency goes up in smoke”. While they keep speculating, we’ll keep quietly owning the show and working in our garden or woodshop while our stable of thousands of companies and their millions of employees remain innovative and productive on our behalf.

Although you don’t need to know much more than the above for successful investing and even early retirement, many of us enjoy going further and learning about  how it all works behind the scenes. I still like to read a book or two on investing, economics or the stock market every year, and I am also fascinated by the trends of world history and finance that slowly evolve over the decades and even centuries. This helps you take the long view on finance, which in turn brings you back to the start of the first paragraph so you can remain relaxed.

To make this Long View even more fun and convenient to absorb, I’ve commissioned the creation of a very handy (and free) interactive piece of software called IndexView, because I think it paints the picture of US economic history in a uniquely useful way. Let’s go straight to the tool itself, and then explain what is so cool about it immediately afterwards. To use it, try rolling your mouse wheel, pulling that scrollbar left and right, and using the pulldown and date boxes.

First of all, let’s give credit where it is due: This tool was entirely programmed by a young (and completely brilliant in my opinion) reader named Tristan Hume. I met this guy last year at an Ottawa MMM meetup, and he whipped out an iPad running a slick app he had created called StashLine. It is a financial planning app designed specifically to help plan the early financial freedom that is so rare outside of readers of this blog. I mentioned my own idea: a web-based graph that lets you really easily see the returns of the stock market with and without dividend reinvestment, as well as other useful data, over recorded US history. He emailed me a few days later with an early version, and we’ve been developing it ever since*.  At this point, I think it is great enough to share with you.

Why This is So Important

The stock market is still widely misunderstood. Beginners dive in and think you can outsmart it by identifying the next “head and shoulders formation” (you can’t). Others repeat common misunderstandings like “The stock market actually returned nothing for 25 years between 1929 and 1955″. This is incorrect, because companies were paying dividends like crazy during those years, and if reinvested the wise shareholder would have returned almost 7% compounded – not bad for the famously worst period in recent investing history.

To look at a more contemporary example, I like to be able to identify when stocks are on sale. This golden opportunity pops up when the stock market’s overall price is cheaper than average. In June 2011, I did the analysis for you and determined that they were priced just about right: the 1-year price-to-earnings ratio was about 16.2. If you had bought stocks then, you’d have seen compounded annual returns of about 16% to today.

Just two months later, the pundits and doomers got scared and caused a crash, and the stocks were on sale. I wrote about it again in an article called A Summer Clearance on US Stocks! Plugging the dates into IndexView again, smart readers who bought at that moment would have seen returns over 20% per year to this point.

Understanding history is useful, but it is still only a general guide in predicting the future. Right now, for example, our stock market is more expensive: the P/E ratio is over 19, and the even more meaningful trailing 10-year P/E (also called “Shiller P/E” or “P/E10“) is over 25. Is this a scary bubble and a terrible time to invest?

Consulting the IndexView oracle above yet again, we can use the dropdown to select “Shiller P/E ratio” and see what happened the last time stocks were this expensive. Roll that mouse wheel to zoom way out. It was at a similar price in 1903, then again in the ’20s, 30s, 60s, 70s, and then way more expensive for much of the time since the Internet was invented. The peak of overpricing was in the year 2000, when the P/E10 was over 40.

Going back to S&P500 with dividend reinvestments, we can see what has happened to people who invested in these situations before:

Investing in the worst time of 2000 (P/E10 was over 40), you would have a seen annual compound returns to date of just under 4%. Pretty terrible by stock market terms, but still an overall increase in your money of 64%, because 14 years is quite a long time, and compounding is some powerful shit.

More significantly, let’s see what happens if we invest at some earlier time the market was at its current moderately expensive P/E10 of around 25. Set IndexView to invest from 1996 to 2014. Over that 18-year period, investors have made a compounded 8.2% return, or a total of 321% before inflation.

You would probably get quite excited and proclaim yourself to be a real estate genius if you bought a $200,000 house in 1996 and found it to be worth $642,000 today. But to the long-term stock market investor, this is just typical performance.

I think IndexView is a great educational and investing tool, and thanks to Tristan for building it. If you like it, set yourself a bookmark and share it around the web so others can share the benefit and encourage further development of a promising** new set of financial tools.

 

*and it’s still a work in progress, of course. If you have suggestions or bug reports for Tristan, feel free to mention them in the comments  for future development.

**And by the way, this guy just finished high school. If you’re running a tech company and in search of unusually bright talent, you might get in touch with him before it’s too late ;-)

  • Free Money Minute August 25, 2014, 11:06 am

    Very cool tool. Thank you for keeping us focused on what is really important while tuning out all of the noise.

    Reply
    • Money Saving August 26, 2014, 5:29 am

      MMM,

      Very cool tool! I have been messing around with it for the past 15 minutes and cannot get enough!

      I am very passionate about investing in the stock market after making a royal mess of things when first getting started. I was one of those “head and shoulders” types that thought the market could be predicted.

      Now that I’ve got my head on straight (no thanks to this blog) I’ve spent time writing my own stock market investing book for newbies. It espouses much of the same advice you give on this blog around investing. If anyone is interested, you can check it out here: http://www.amazon.com/Stock-Market-Investing-Newbies-Chamberlain/dp/150023527X – It’s called: Stock Market Investing for Newbies.

      The first chapter is free on Amazon. If anyone interested emails me and lets me know you read about it from MMM, I can send you an electronic copy for free :-)

      Reply
      • Dividend Growth Investor August 26, 2014, 5:17 pm

        Most investors merely look at stock prices, when calculating historical returns. The charts here are helpful, since they show how reinvested dividends have essentially accounted for a very large portion of total returns over time.

        Reply
  • Jacob August 25, 2014, 11:14 am

    Bookmarked, done and done! Very cool tool, and I’m glad to ignore all the crazy charts and graphs and scare tactics of investing sites. Quick and simple, the way money ought to be presented and handled. Well done you two!

    Reply
  • mike August 25, 2014, 11:16 am

    Sounds cool but I dont know a moustachian that uses Iphone/Ipads? Me and my moustachian friends are all paying a fraction of what Iusers are for our mobile computing and investing the difference in index funds…

    Reply
    • Mr. Money Mustache August 25, 2014, 11:26 am

      Haha.. I’d say the percentage of iPhone vs Android Mustachians is still roughly at 50/50 based on my own sampling. But there is definitely a strong trend towards Republic Wireless because $25 unlimited service appeals to people of this mindset: (http://www.mrmoneymustache.com/2014/05/13/moto-x-vs-moto-g/)

      Reply
      • Brian August 25, 2014, 1:37 pm

        I have an unlocked iPhone 3gs that I paid $80 for on Ebay, and use it in conjunction with the Airvoice $10 a month plan. Not sure how you might be paying “a fraction” of what I pay for my iDevice, but I’d be happy to learn your tricks! ;-)

        Reply
        • mike August 25, 2014, 4:23 pm

          That’s great Brian. This is kind of off topic for the discussion here but I meant that in general idevice users pay quite a bit more for hardware than android/windows users. I think that you must agree with that. For example you sound like a smart shopper and I am willing to bet that you could have found a stellar android phone for $50 or less to use with your airvoice plan.

          Reply
        • space August 25, 2014, 11:24 pm

          Red pocket’s unofficial $5 plan. Or swapping T-Mobile 200mb tablet sims if they haven’t closed the loophole of being able to activate multiple sims on one IMEI (you’d need an imported iPhone for that, however). Could also use grandfathered Boost/Verizon prepaid “hotspot” plans, but that requires a significant amount of hacking to work – nearly bricked the first one I converted.

          Reply
        • Huxley August 26, 2014, 7:47 am

          Well, you’re also using a steam powered antique. I paid twice (!) what you did, but I have a Moto G that does everything at lighting speed.

          Reply
          • Rob in Munich August 30, 2014, 1:29 am

            Understand where the OP is coming from but I wanted iphone for ease of use but unwilling to pay 600€ or so, instead bought used.

            I made an expection for the ipad as I spend hours online and even at 500€ it’s about the price of a decent PC. Unless I’m on the road alot I wouldn’t bother with a Mac.

            In Germany I use Alditalk, 7.99 a month for iphone, and 15 for a data heavy ipad, between 3 devices I pay less than what most people pay for a phone alone.

            Reply
    • James August 25, 2014, 3:24 pm

      We buy our iThings via the simple method of saying “Hey, can we buy your old one?” to our friends/family whenever Apple releases a new gadget. We have yet to pay anything remotely resembling retail.

      Reply
    • Jeff August 25, 2014, 9:05 pm

      My girlfriend gave me her old iPhone and I use Airvoice prepaid $10 for 90 days in combination with Google Voice and pay $3.33/mo.

      Reply
    • Spaceman Spiff August 27, 2014, 7:01 am

      One of the benefits I have from my job is that they provide a phone for me. As such, I am able to have a brand new iPhone 5s without paying a cent. This is just one of many ways such a device could be obtained easily. My sister employs a method more available to everyone in that she simply her friends if any of them are getting rid of their current version each year when the new one comes out. I think this year she was actually able to sell her 2 year old phone on Craigslist for the same price she paid for the 1 year old version she was getting. I’m sure there are plenty of other ways to get one without paying the rediculous retail prices most pay.

      Reply
  • Steve August 25, 2014, 11:16 am

    Intelligent Investing is and always will be at its core fairly simple. I think people have a hard time understanding this because they just can’t imagine that simplicity is the answer. Simple arithmetic clearly shows that successful investors minimize mistakes and costs and allow their investments to grow and compound unimpeded.

    When your investment time horizon becomes “forever”, market fluctuations, however wild, fade to the background.

    Reply
  • mike August 25, 2014, 11:24 am

    What is the usefulness of looking at the shiller home price index without adjusting for inflation?

    I think that looking at long term trends of the shiller index without adjusting for inflation may be misleading (and potentially harmful) to the casual investor since it portrays a false view of the performance of the housing market.

    Reply
    • Jeremy Tweet August 26, 2014, 4:43 am

      The home price index is already inflation adjusted. Notice the value today isn’t very above what it was in the 1950’s.

      Reply
      • mike August 26, 2014, 4:10 pm

        Right. There are real world reasons for this. Most importantly, if housing prices were to increase at the same rate as the S&P500 no one (except maybe the 1%) would be able to afford to buy a house. The percentage of consumer spending on housing has not varied greatly over the years since it really cant vary much, people have to spend money on food and other things as well. Secondly, construction costs keep decreasing as technology improves.

        Reply
    • Neil August 26, 2014, 12:10 pm

      Replace Shiller home price index in that sentence with “performance of any investment,” and your statement makes sense. In its current formation, it betrays a bias specifically against the housing market.

      Reply
      • mike August 26, 2014, 12:23 pm

        Even when adjusting for inflation the S&P 500 has been extremely profitable, not so with housing as the shiller index shows us. Yes, you are correct the data show a bias against the housing market. There are exceptions of course.

        Furthermore, since most housing investments are heavily leveraged I think the inflation affect plays into peoples perception of the performance of housing. This is much better explained by shiller himself and the wikipedia article: http://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index

        “Shiller notes that there is a strong perception across the globe that home prices are continuously increasing, and that this kind of sentiment and paradigm may be fueling bubbles in real estate markets. He points to some psychological heuristics that may be responsible for creating this perception. He says that since homes are relatively infrequent purchases, people tend to remember the purchase price of a home from long ago and are surprised at the difference between then and now.[7] However, most of the difference in the prices can be explained by inflation.”

        Reply
        • Mo Bro August 28, 2014, 7:06 am

          When considering housing returns, are you treating the rent as a dividend? Shares have dividend income, houses have rental income, it’s quite the same except the rent comes to you more frequently and hence earlier, allowing slightly better compounding if you were to ‘reinvest your housing dividend’ ..

          Another factor to consider is the ability to loan a large percentage of the cost of the house at the lowest interest rates generally available .. so while the house may go up less than the shares, you can own more value of the house and thus have a bigger asset base going up. Of course this is only useful if it really is going up more than inflation. Make sure you buy in an area where the population is growing to get real price appreciation :)

          Reply
  • Kris August 25, 2014, 11:25 am

    Great tool. One UI suggestion I have: when scrolling across the graph, have the actual data numeric value show up in a constant location rather than tracking where your cursor is going. It is easier to read that way. Also, in addition to a readout of the Y axis, it would be nice to have the date that you are scrolling across displayed so that you don’t have to interpolate between graph gridlines.

    Reply
    • Huck August 26, 2014, 7:49 am

      This. With the PEs overlaid there’s no way to see their value

      Reply
  • Jordan Read August 25, 2014, 11:28 am

    Wow! That’s a pretty neat tool. Way better than the hacky scripts I wrote. Thanks for showing this tool. It definitely puts things in perspective.

    Reply
  • EarlyRetirementGuy August 25, 2014, 11:30 am

    An excellent tool and an excellent point in that so many investors ignore dividend returns in their calculations. This is even more important when those dividends are reinvested and start to compound!

    Hopefully UK stock tracking will be available on this?

    Reply
    • Tristan Hume August 25, 2014, 2:30 pm

      If you can find a good source of long term UK stock market index data, I’d be happy to include it. The data is static and is only really meaningful over the long term.

      I tried to find some data sets for other countries but there doesn’t seem to be any international data like Robert Shiller’s.

      Reply
      • Happyback August 25, 2014, 9:16 pm

        Tristan,
        I am impressed! GREAT work!

        Reply
      • Ric August 26, 2014, 4:34 am

        You could look at the sources RIT uses… http://www.retirementinvestingtoday.com/p/latest-charts.html

        Reply
      • Pyrroc August 26, 2014, 2:29 pm

        Tristan, Yahoo has some handy historical data available and they have all of the major markets and indices available.

        The URL would look like “http://chart.yahoo.com/table.csv?s=^FTSE&a=0&b=1&c=2000&d=0&e=1&f=2014&g=d” for FTSE historical prices from 1/1/2013 to 1/1/2014.

        Breakdown:
        s: symbol(s) separated by a ‘+’, i.e. s=AAPL+MSFT
        a: beginning month (0=Jan, … 11=Dec)
        b: beginning day
        c: beginning year
        d: ending month (0=Jan, … 11=Dec)
        e: ending day
        f: ending year
        g: granularity (d=daily, w=weekly, m=monthly)

        It’s really easy to use this in a Google Sheet:
        =ImportData(“http://chart.yahoo.com/table.csv?s=^FTSE”)

        Have fun :)
        -Pyrroc

        Reply
  • Parker August 25, 2014, 11:46 am

    Like they say…”take the long-term view.” This article points out why that’s important. I agree with your comment about ‘…outside of readers of this blog.’ I have noticed among people I work with who are 10-20 years older than me are still paying mortgages and still talk about our workplace’s pension as their ‘retirement.’ I’m not entitled to that pension because of my employment status, but unlike them I don’t plan on having a mortgage after the age of 47, nor do I feel I need to worry about a pension as I’m taking responsibility for my own savings. Freeeeeeedommmmmm!

    Reply
    • Rob in Munich August 30, 2014, 1:50 am

      That’s because most of us never heard of frugal living or early retirement till we got older than it takes the longer it takes to the years

      Reply
  • Scooze August 25, 2014, 11:51 am

    Just out of curiosity – what is the difference between the Shiller P/E ratio and the S&P500 P/E ratio? Thanks!

    Reply
    • James August 25, 2014, 4:16 pm

      I think the Schiller PE ratio is a rolling 10-year average for earnings while the S&P 500 ratio is current quarter only, with the idea being that Schiller is less cyclical.

      Reply
      • James August 26, 2014, 2:37 pm

        * I almost had it right. The Shiller is indeed over the past 10 years, but the S&P is over the past 12 months, not current quarter as I mentioned above.

        Reply
  • LeisureFreak Tommy August 25, 2014, 11:58 am

    I am one of those freaks that uses a flip-phone with a prepaid plan so I can’t view the tool right now but I do have an old stripped I-Phone4 at home that I use to stream to my TV that I got for free from someone who always gets the latest and greatest so I will definitely check it out. One recent lesson we all learned was what happened March 2009. Everyone thought the world was going over the cliff with calls of the new normal, etc. Anyone who held the course recovered. Being a freak I retired in 2009 anyway going against the fear mongers. Any tool that points out the long-term and keeps me and others focused on that long-term and that it is still OK to invest is an awesome thing to share.
    Many thanks. Prost!

    Reply
  • Andrew August 25, 2014, 12:01 pm

    Feature request: please add the ability to make the Y-axis logarithmic.

    Reply
    • Tristan Hume August 25, 2014, 2:27 pm

      Yah this would be nice. Even though logarithmic gives you more information I wouldn’t make it the default, it makes the growth look less impressive. I might add a checkbox though.

      Reply
      • Rickard August 26, 2014, 10:51 am

        Not sure about that – the linear scale mostly distorts the effect of similar percentage gains in different parts of the time scale. Late gains seem more impressive, while early gains seem less impressive. That does not reflect reality, of course – an early doubling is as valuable as a late doubling.

        Reply
      • Ralph Cramdown August 27, 2014, 9:09 am

        One of the major problems with a log scale and a long time period is that it makes recent history appear much more volatile than earlier times, which reinforces humans’ psychological recency bias. This plays right into the hands of the goldbugs, the US-dollar-is-going-to-collapse-gang and real estate cultists, all of whom attempt to convince the hapless investor to avoid “risky” stocks and the stock market “casino.” Others will look at the near vertical line at the right and compare it to the near horizontal line on the right, proclaiming “bubble!”

        Reply
  • Ree Klein August 25, 2014, 12:08 pm

    It seems that your posts lately have been written just for me…so THANK YOU! This tool is an amazing feat of coding. Trisan must be crazy smart to be able to build this; you must have some level of understanding of the data behind the code to be able to create something this complex and have it actually work in a meaningful way!

    Hat’s off to both of you and thank you for sharing it with us :)

    Reply
  • Darrell August 25, 2014, 12:18 pm

    I know that it wasn’t your intention…but more than anything, this tool scares me. I’ve incorrectly been under the assumption that a 10% return was a reasonable expectation because of the long term. What if I decided to retire in late 1998? In my first ten years of retirement, my nest egg would have gone down before taking a penny out to pay for living expenses. Let’s pretend that I needed $25k income (after soc. sec.) and had a nest egg of $625k. With major rounding from the charts, I’d end up with only $315k ten years later in 2008. If someone else was working towards retiring at that time, they certainly wouldn’t settle for a nest egg of $315k when their spending needs were $25k (I didn’t even account for COLI). How would that decision be different for someone that was already retired? Wouldn’t that person need to go back to work? What if they were 75? This is scary…please make me feel better!

    Reply
    • JB August 25, 2014, 12:23 pm

      You can never time the market. You can say coulda, shoulda woulda, but if your house was paid for, what huge expenses do you have?

      Reply
      • Darrell August 25, 2014, 1:44 pm

        I’m not even talking about timing the market…I’m talking about planning your retirement date. MMM says: save 25 times your expenses…withdrawing 4% is safe. Well, if 1998 me followed that advice, it would not have worked out. Obviously, I was using round numbers and imperfect assumptions (for instance, I wouldn’t be in all stocks at retirement). I’m not talking about huge expenses, I used $25k because that’s what MMM uses. Unfortunately, I spend WAY more.

        Reply
        • Charles August 25, 2014, 3:49 pm

          It gets a layer more complex, but once you have a number locked in (an assumption that you’ve gotten there or close) you can use a % of your portfolio to “insure” that number through the use of S&P 500 options. It’s also a way to essentially move money from a 401k/IRA via a the insurance against – and the subsequent realization of – a drop in the index if you are younger than 59.5 when you hit your number. Something to kick around, anyway. The problem you’re dealing with is one of fragility, and Antifragilty coupled with The Dao of Capital might be two books to read if you’re interested.

          Reply
    • Scooze August 25, 2014, 12:35 pm

      It’s true that there are periods where the market goes down. There are recessions and dips every so often. You can’t time the market, but you can make sure that you don’t have to take money out of stocks in a down market. Conventional thinking is that you should have at least 5 years’ worth of expenses in safe investments before you retire (and for some, they keep much more than that in safe investments). That is the reason people move more and more into bonds or cash as they get older. I have read many articles on this topic and you will have a choice as to how aggressive to be when the time comes. If you have at least 5-7 years’ expenses in cash (or bonds), the rest of your money can generally ride out a downtown.

      Reply
      • Darrell August 25, 2014, 1:49 pm

        So if I have a nest egg of $625k, this means I should be keeping $125k – $175k in safe stuff that can ride these waves. I guess this helps, but it still creates a really precarious situation when you go 10 years losing money. I’m sure the 4% withdrawal rate assumes that over time, you’re investments go up.

        Still worried about these prospects, but I’m just worrying about hypotheticals anyway. I just want to make sure I plan appropriately.

        Reply
        • Kera McMiller August 25, 2014, 1:54 pm

          I would hope that during a downturn in the market we would decrease our regular spending. Maybe not travel; stay home; do free stuff around town. We can go back to regular spending when we feel comfortable with the market. This would also be a good example of why a healthy safety margin can limit early retirement stress :)

          Reply
        • Scooze August 25, 2014, 2:34 pm

          Are you very close to retirement? Or are you just experiencing a lot of anxiety even though you’re 10 + years out? I’m asking because if you are just planning, but still have some time, then you can course correct now.

          If you are very close to retirement then there are things you can do to make your retirement money more safe. You can put a portion of that $625k into an immediate annuity. I recently read that someone is getting 5.75% annually today. It’s not inflation-adjusted, but you could get that for the rest of your life.

          Also, I think a 10 year downturn sounds very pessimistic. Even the near-depression of 2008 has been in recovery for several years now. The economy will recover from any setbacks, and usually within a few years.

          Reply
          • Darrell August 25, 2014, 3:14 pm

            It’s the latter…I’m years from retirement, but dreaming of doing so early (by conventional standards). This makes me wonder if my plan is feasible, but I have about 10 years before I’m realistically faced with this decision. Thanks for the advice.

            Reply
            • Chris August 26, 2014, 12:07 pm

              Couldn’t you start working again? Even if it’s part time? I mean, if you don’t have a mortgage you really don’t need a lot of money. People over-estimate this all the time. And personally, I have a lot of side interests that make money but don’t have the time to work on them now (but would if I wasn’t at a 9-5)…

              Reply
        • mike August 25, 2014, 3:04 pm

          Im pretty sure there has never been a 10 year period where the market didn’t recover its losses and then some. That is not to say it could not happen though. Everything in life is a gamble.

          Reply
          • andre August 27, 2014, 7:28 pm

            Look at the graphs for 2000 to 2010. Even with dividends reinvested you would be down. This is cherry picking, but you said the word never.

            Reply
        • cowboy Mike August 26, 2014, 7:51 am

          Hi Darrell, you might be interested to read a couple of books by Mike Piper who operates a great blog http://www.obliviousinvestor.com, on investing and he is also is an index fund investor. One book is named Investing Made Simple and the other is named Can I Retire Yet. Both can be found on Amazon.

          The one named Can I Retire Yet addresses something called Sequence Of Return Risk(a.ak.a. “Luck”). Essentially he writes there is no way to eliminate sequence of return risk however, there are ways to mitigate the bad effects if for example, someone has bad luck and retires during a stock market down turn or if the stock market has downturn shortly after you retire. A couple of possibilities include, reducing your withdrawal rate and another is to have purchased a single premium immediate annuity so you have a predictable amount of income that covers for example, you life essential expenses.
          Hope you find that information helpful.
          Happy trails, cowboy Mike

          Reply
    • Vickie August 25, 2014, 1:56 pm

      Darrell,
      I agree with you that people of a certain age have not seen a good outcome from buy and hold investing. I have a portion of my retirement savings in the stock market in low cost index funds and have seen a roller coaster ride with me ending pretty much where I started from 1998 to 2008. I have simultaneously been investing in real estate and have seen a much better outcome. My stress levels are not affected when the value of my income properties is lowered because the rent stayed the same or went up during that time. When the value of my stocks are lowered, the dividends are often lowered as well since the companies are not doing so well. Personally, I am more comfortable with real estate as a retirement vehicle. Do whatever makes you sleep well at night.

      Reply
      • Darrell August 25, 2014, 3:15 pm

        The next time the real estate market crashes, I’m going to jump into it. I live in SoCal…so it’s tougher to make a buck right off the bat.

        Reply
    • Kevin August 25, 2014, 3:00 pm

      To make you feel better, you should note that the Shiller P/E10 ratio was about 40 in late 1998. Right now, that ratio is about 25 and stocks are generally considered to be expensive and/or over-valued, which as the chart shows most people shouldn’t typically care about. However, f you are thinking of retiring and see that a P/E that unbelievably high you should probably think about waiting until things get to a more reasonable level before retiring or plan on retiring while withdrawing less than 4%. Anyways, that was at the highest P/E ratio of all time so in general circumstances you will be safe.

      Reply
      • Andreas K August 28, 2014, 5:36 am

        Is it really possible to compare today’s Shiller P/E to that of 1998?

        Shouldn”t one set the Shiller P/E in relation to long-term interest rates because investing in equity will primarily be compared to investing in debt.

        A Shiller P/E of 25 today (i.e. a yield of about 4%) is not that high when you compare it to current long-term interest rates of about 2.4% (10y treasury rates). In comparison, a Shiller of P/E of 40 (i.e. a yield of about 2.5%) in 1998 was very high compared to then long-term interest rates of then about 9%.

        Hence, I would find it helpful to be able to view the Shiler P/E divided by 10y treasury rates. What do you think?

        Reply
    • Brandon Curtis August 25, 2014, 3:07 pm

      If you want to see how you might have done historically, check out FIREcalc (http://firecalc.com/) and cFIREsim (http://www.cfiresim.com/). Not sure how up-to-date they are, but I think they’ll give you the data you’re interested in. [Tristan - cook up an open-source version of a tool like this!]

      For me, the specter of needing to return to work if the economy bombs is not the scariest thing in the world. Past results certainly do not guarantee future performance! Always need to stay flexible and roll with the punches.

      Reply
    • James August 25, 2014, 4:09 pm

      If you retire at the shittiest of times, you can always go back to work to supplement your income until things get better. You’ll still be in a much better position than spendy people.

      Reply
    • HattyT August 29, 2014, 10:57 am

      Darrell,
      Have you read this MMM article? It focuses on the benefits of flexibility. It made me feel more confident in taking the jump. I hope it will do the same for you.

      http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/

      Reply
  • Kera McMiller August 25, 2014, 12:21 pm

    Must say, Tristan, You Are Awesome! Really great apps. Downloaded and playing with my stash plan now.

    Reply
  • Interestingreadinglist August 25, 2014, 12:21 pm

    Very neat little tool. How do you attach / embed it? and does it update real time with daily changes?

    It’s funny, that many of the ‘stock experts’, have an at times greedy outlook, looking to profit from every turn in the economy, and panic when their predicted returns are not met. If investing savings, then it shouldn’t matter what money is returned in the next 2 years or more. If you are not thinking of spending it then you are more likely to make smart decisions and not be brash! Long term compounded returns, is the way forward, and excepting that dips in the market are all part of the game. No need to panic!

    Reply
    • Tristan Hume August 25, 2014, 2:21 pm

      You can copy the source code from http://thume.ca/indexView/widget_iframe.html to embed it, twiddle the width and height parameters to what you want before you do.

      The data is static from Excel files on Robert Schiller’s website, so no live updating unfortunately.

      Reply
      • interestingreadinglist August 26, 2014, 5:03 am

        Cool thanks Tristan.

        For non-techy people – that is right click (when on the page above Tristan provided) and select ‘view page source’ – if you are a chrome user that is.

        Reply
  • VarsityFinances August 25, 2014, 12:22 pm

    It makes me feel good that this is pretty much exactly how I value the market for my investing. While things aren’t cheap right now, that doesn’t mean to run for the hills and buy gold – it just means hang in there, keep dollar cost averaging, and enjoy the ride.

    Reply
  • JB August 25, 2014, 12:22 pm

    The stock market is going to be the best place to grow money with the easiest amount of time and effort. Being a landlord is more stressful and has just as much if not more risk than the stock market. One empty month, or one pet that destroys the carpet can ruin your returns.

    Reply
  • Brandon Curtis August 25, 2014, 12:52 pm

    I held my breath when I saw the title of this article, and then…

    YES. Open source! Way to go, Tristan!

    If anyone’s interested in building off of this excellent work, the source is available right here on Github: https://github.com/trishume/indexView. It’s built on the Jekyll parsing engine and the guts are Javascript.

    Reply
    • Tristan Hume August 25, 2014, 2:24 pm

      Thanks! It’s even hosted on Github pages so that my site doesn’t go down with all the traffic. I’m a big Github fan.

      If you like it so much, you could star the repo ;)

      Reply
      • Brandon Curtis August 25, 2014, 2:55 pm

        Done! Keep it up!

        Reply
      • Jordan Read August 25, 2014, 5:25 pm

        Starred. I’ll take a look at the code, and go from there. Great concept, great implementation.

        Reply
  • CanuckExpat August 25, 2014, 12:59 pm

    Very cool tool. I was just about to post and ask if you can make a version in real dollars, then I clicked on the drop-down box and saw that it already has that feature!

    I think it might be more meaningful for the default to be in real -dollars, but I also understand that might not be intuitive for non finance geeks. (i.e. in everyday conversation, we speak in nominal dollars).

    It’s interesting to note the long period of negative real returns in the 70s if you exclude dividends. I guess stagflation did suck, but I wasn’t alive then, and even if I was, I would have been re-investing my dividends (hopefully) :)

    Reply
  • Aldo August 25, 2014, 1:44 pm

    Pretty nifty tool. I like all the nice little features, but does it update daily? weekly? or quarterly?

    Either way, very good tool to have.

    Reply
    • Tristan Hume August 25, 2014, 4:24 pm

      Whenever-I-bother-to-process-and-upload-new-data-from-Robert-Shiller-ly.

      Reply
  • ael August 25, 2014, 2:35 pm

    This is wonderful. I have wished for something like this for a long time.

    Reply
  • ael August 25, 2014, 3:01 pm

    Normalizing the graph so it stays on page is nice but the absolute value of such overlays as Schiller P/E would be nice too. Could the cursor be tracked with this value as well as the main trace is tracked?

    Reply
  • Tawcan August 25, 2014, 3:15 pm

    Thanks for sharing, it’s a pretty neat tool. It’s interesting to see that the S&P real earnings is almost getting to the 2007/2008 level.

    Reply
  • rjack August 25, 2014, 3:30 pm

    Nice tool! Please add an option to show inflation adjusted returns.

    Reply
    • Tristan Hume August 25, 2014, 4:23 pm

      Did you check the dropdown menu with the list of datasets? There’s inflation adjusted data in there, it just uses the finance term “Real”.

      Reply
      • RapMasterD August 25, 2014, 7:30 pm

        Well done, sir! Good things will come to you. Hold on, am I channeling Wayne Dyer here? HELP!!!

        Reply
      • rjack August 26, 2014, 4:42 am

        Oops..thanks for pointing out the dropdown – I missed it. Great tool!

        Reply
  • JT August 25, 2014, 4:21 pm

    An option to show vertical scale as logarithmic would be nice. This gives a better perspective of percentage increases/decreases when viewing over longer spans of time. Google finance has the option in the settings link under the stock chart…

    https://www.google.com/finance?q=INDEXSP:.INX

    Reply
  • Brandon Roper August 25, 2014, 4:52 pm

    This tool is a very useful piece of kit we should all use to remind ourselves not to get caught up in emotional roller coaster that is the national financial news. For the last few months whenever the market is up the media comes out with all sorts of articles like, 5 Reasons You Should Get Out Now! When the market is down for a day or two the mainstream media produces more negative articles like, The Market Will Continue to Plummet, Beware. Nothing but negativity. I always wonder why the powers that be in the media don’t try to throw a positive spin on things in an attempt to buoy the market.

    In the end, I love what you preach here (probably because it is what I think too), that the market will trend upward over long term investment horizons. If only we could get the majority of investors to get on board with that thinking the market would likely lose a good amount of volatility. Here’s to hoping, right?!

    Reply
  • Liam August 25, 2014, 6:10 pm

    “Good investing is really simple: get yourself into the position of owning a portion of a profitable business or property, keep it as long as possible, and live off the resulting stream of dividends and appreciation.”

    Not really that simple. This ignores the fact that the an apocalyptic-level crash could happen at any time. It’s not possible to keep getting rich forever.

    Reply
  • Amanda August 25, 2014, 6:45 pm

    This is cool and all, but what I’ve been wondering (and please forgive me if this has come up before, b/c I’m fairly new to MMM) is whether you ever focus on socially responsible investing. I think it’s great that you’re making money off of the stock market, but with your anti-consumerist style of living, I’m super surprised that you’re comfortable investing in–literally, contributing to–the big corporate/capitalist/consumerist world. I’m interested in investing too but I don’t want to be a part of that world; I’d looove some tips about whether it’s possible to use your approach in the SRI world, and how.

    Reply
    • Nicole August 26, 2014, 7:55 am

      I have been reading this blog for a couple of months and also thinking about how to make it all fit with our preference for SRI. Currently we’re in SRI mutual funds but given the high fees I’m looking into lower cost options. There are a few socially responsible etfs that are stocks based that I think would give you a similar effect as what’s advocated here. There’s also community impact bonds, some of which pay quite a decent rate of return (e.g. For Ontario residents there’s zooshare (7%) and solarbonds (5%)).

      Reply
    • John August 28, 2014, 11:50 am

      There are a few threads in the forums about socially responsible investing. If you are so inclined Vanguard has a fund which is still pretty low cost
      VFTSX
      https://personal.vanguard.com/us/funds/snapshot?FundId=0213&FundIntExt=INT

      You won’t have the level of diversification available and will likely see reduced returns as well, but if that makes you sleep better, then it is probably worth it. And you never know, maybe it will start a period of superior performance, it’s not impossible.

      Reply
  • McDuffy August 25, 2014, 7:01 pm

    Would it at all be possible to capture stock buy-back? Companies buying back their stock for the treasury is kind of like dividends disbursements…

    Would there be any way to do a dropdown selection of assumed withdrawal rate an then color-code the line for when stock performance preserves principal?

    What about an analog for the “total stock market” funds which fo well beyond the S&P500?

    Definitely second vote on the semilog (since compound growth is exponential after all).
    Pretty sick tool, dude, thanks!

    Reply
    • Brian Romanchuk August 26, 2014, 5:52 am

      Stock buybacks are already captured in the data because the per share earnings and dividends are increased via the lower share count. You would only need to worry about stock buybacks if you wanted to work with the aggregate dollars – e.g., total profits across all companies. People avoid working with that data since they change based on companies entering or leaving the stock index.

      Reply
      • McDuffy August 26, 2014, 12:55 pm

        Agreed, buyback effects show themselves when viewed on a per-share basis, number shares outstanding, etc.
        My thought was (and tell me if I’m approaching this wrong), the average Mustachian is basically trying to live off dividend (without eroding principle), aka funds returned to the shareholder from the company independent of market moves. Effectively, the company is payin a dividend that gets automatically reinvested (also savingthe investor income tax). The investor then chooses when to take the dividend by selling some stock, diluting back to original ownership position (and hopefully paying the lower capital gains tax rate). Teasing apart the stock buyback seems like a more correct to show the “with” or “without dividend” cases in the tool. …and through a more clear understanding, make the mustachian investor feel a little more comfortable with selling stock to fund their cost of living.

        Reply
        • Darkseas August 28, 2014, 9:56 pm

          No.

          Companies buy back stock for essentially two reasons. The first is to reduce the number of shares outstanding after they have issued a boatload of shares to compensate officers, directors, regular employees (rarely), or to buy another company which is dilutive to earnings (see goodwill). In this case, your percentage of ownership of the company was first diluted by the company issuing more shares, and then again by you selling more.

          The second reason is that the company believes that their shares are underpriced. When they buy for that reason, like many individual shareholders, they have tended to buy high and sell low. This might cause a small bounce in share price when announced, and it might maintain share price for a short time (like the IPO managers buying stock to support the price for the first 30 days after the IPO), but over the long term, company management would usually be just as effective if they flew over the country and threw $100 bills out the airplane window.

          It’s rare that a company has a rule (much less a well-thought out one) about when its stock is underpriced. BRK is the only one that comes to mind.

          Most of the people here are talking about buying an index fund or funds, so there’s no real way that stock buybacks by individual companies are going to be a very useful indicator of much of anything in that context. It might be useful if you’re buying individual stocks.

          As for dividend investors, some of them seem not to understand that money is fungible. A dollar of dividends buys no more or less than a dollar of capital gains.

          Moreover, principal (not principle) is simply what you originally invested plus any other money you have invested or re-invested. So if you buy $1000 worth of stock and the price goes up to $1,100 and you sell $100 worth, you have not eaten into your principal.

          What dividend investors are thinking is that IF the company doesn’t raise its dividend and you sell that $100 worth, you will have 1/11th fewer shares and you will therefore earn a 1/11th smaller total dividend. But the principal will not have changed.

          Reply
          • McDuffy August 29, 2014, 1:51 pm

            Additional literature review suggests a stock repurchase transaction, when viewed in isolation, is very similar to a dividend or other type of cash distribution from the balance sheet and to the shareholder. There are of course, subtle differences for each.

            In practice, index funds are based on market capitalizations and share pricing, so dilution or repurchase effects are largely irrelevant within that valuation scheme (however, it would be interesting to see a mutual fund invest in all companies of an index at a fixed, flat ownership position over all companies over time). In an efficient market, these effects should work themselves out.

            Long-term capital gains associated with selling shares at a price inflated by share repurchase (and no associated dilutive transactions) are generally taxed at a much lower rate than the regular income tax rate at which a dividend is taxed. A further advantage is the shareholder can choose when to pay that tax liability (by choosing when to sell stock) vs. being forced to pay the dividend-associated tax in the same tax year as dividend distribution.

            Agree that “principal” was incorrectly used to refer to both cost-basis and relative ownership position of a company. Thanks for the clarification!

            If an investor is choosing not to reinvest dividends, they are largely also agreeing to maintain a flat share ownership position over time(ignoring dilutive moves by the company’s management). In this case an investor could sell shares without eroding their ownership position (at least until the company distributes that big share bonus to the CEO). There may still be a clever and simple way to illustrate these effects in a graphical tool. Just some thoughts, definitely welcome input of the Mustachians!

            Reply
            • Darkseas August 30, 2014, 12:59 am

              McDuffy,

              I’m not sure to what literature you’re referring. Everyone says that dividends and share buybacks are similar, but in fact you have to really stretch “similar” and “subtle differences” to make this so.

              Let’s talk about the effect on the stock price of dividends and share buybacks.

              Just before a stock goes ex-dividend, the price of the stock drops roughly the amount of the dividend to be paid. Once a stock is ex-dividend, the price goes back down (assuming no news on the company in the interim). This has to happen, or investors would buy the stock, become entitled to the dividend, and then sell the stock to keep the sure profit. The amounts of the drop and increase aren’t exact matches with the amount of the dividend, of course, but they’re very close. So if the dividend isn’t raised or lowered, paying a dividend will have no net impact on share price.

              A stock repurchase, however, will reduce the number of shares outstanding and therefore, assuming that the dollar amount of earnings stays the same, will increase the earnings per share and thus probably the future stock price. This, however is only a short- and mid-term effect. In the long term, other news is likely to have a larger effect — things like earnings increases and decreases, mergers and acquisitions, lawsuits, new product introductions, new competitors, etc.

              In fact, there’s some room for nice gains here. Quarterly earnings per share are based on the average shares outstanding, not the number of shares outstanding at the end of the quarter. It makes a difference if the repurchase is done on the first day of the quarter or the last to the earnings per share. An investor following the company closely may have an advantage by knowing when share repurchases will have the greatest effect on the stock price due to the earnings surprise it may create. For mid- and small-cap stocks that are not closely followed, this may create a profit opportunity.

              Another problem is that when the corporate board approves a dollar amount for a buyback, that isn’t a commitment, but an authorization to management to buy back stock when and if management thinks prudent at whatever price management thinks prudent. Buybacks may be stretched over years, or never be fully completed if management comes up with a better use for the money.

              So unlike a dividend payment, a stock buyback may have an effect on the price in the short and mid terms, but the amount (and even sometimes the direction) are difficult to predict.

              It’s also worth noting that dividends and buybacks do share one negative characteristic. They are “give-up” strategies when management believes it can’t earn a return on its cash by investing it in the company that is on par with the current return on company assets. So no new factories, no R&D, no acquisition would be a better use of the cash than the dividend or buyback. In fact, very few companies seem to have a rule for when to buy back shares (BRK is a notable exception), and often overpay for the shares.

              As to the rate at which dividends are taxed, in the United States the Bush tax reform of 2003 changed the rate of taxation on “qualified” dividends to match the capital gains rates. Qualified dividends are paid by companies that pay tax on their income. For all intents and purposes, unqualified dividends are only paid by REITs.

              As to your desire to see share buybacks included in market indices, I believe that buyback information would be much more useful to buyers of individual stocks.

              Reply
              • McDuffy September 6, 2014, 7:05 am

                It’s really cool to grab the data from Schiller’s site and play with directly. Since average return over time is insufficient to determine a safe withdrawal rate, it’s fun to create simple “retirement models” from the data.

                For instance, by pulling the monthly real S&P(w/dividend) return and backing out a monthly flat(since it’s real) withdrawal (0.3% monthly for 4% annually), you can run retirements of different durations (25/40/50/60yr…) then determine, how many dollars the retirement would end with. Of course, if at any point, the value goes to zero, just kick it out as “bankrupt”.

                Looping through months in chronological order and blindly withdrawing the same flat monthly cost of living(since it’s real S&P), shows how often a 40 yr, 50 yr, 60 yr retirement would end bankrupt (or how risky a given withdrawal rate has been in the past). 2% and 3% withdrawal rates seem like near-guarantees, and as MMM has previously stated, 4% is very doable with a little cleverness. As others have noted here, it’s interesting to see how important start time is (probably even moreso than “life expectancy”).

                I’m trying to think of other retirement scenarios to run including “when value drops below initial principle, stop taking the flat withdrawal and switch to monthly real S&P without dividend return” (i.e. switching to living off dividend during a crash). Another scenario would be to just withdraw a flat percent of current value each month (not flat % of initial principal), then look at how often (and to what extent) the investor would have had to seek supplemental income to cover cost of living (there should be no bankruptcies in this scenario). It would also be cool to try Monte Carlo (instead of the chronological order of return) as a simulation of the “random walk”.

                I’m sure lot’s of analysts get paid (from my management fees) to skip sleep and do this stuff, but it’s still fun to DIY.

  • tom August 25, 2014, 7:31 pm

    Yes! Yes! Yes! Yes! Yes! Yes! Yes! Yes! Yes! Yes! Yes! Yes! Yes! Yes!

    I could go on. I was looking all over for a tool like this when arguing with someone (I won’t be mean and call him an idiot) over the Bank on Yourself BS that Pamela Yellen is hocking in her dung filled books. She loves to show that from March 24, 2000 to Feb 3. 2014, the S&P only had .95% annual growth, not 3.6% growth if you include dividends. While not stellar, it’s a huge difference when you include dividends, which these fools rarely do to make their points.

    Anyway, thanks! A great, simple tool that can be used to combat misinformation and misdirection.

    Reply
    • Jeremy Tweet August 26, 2014, 4:49 am

      If you look at the real (inflation adjusted) numbers you’ll see that .95% is probably about right. The real fallacy is measuring from the absolute peak of a bubble. Also, being diversified with bonds, international stocks, and small cap stocks would have helped.

      Reply
  • Escape to FIRE August 25, 2014, 7:32 pm

    Great article and an awesome new tool. I would love to see a poll at the end of the article capturing whether the readers feel that the amount of exposure Tristan just got is more valuable than a college degree. As a hiring manager, I would put more stock in an individual with demonstrated potential and a personal recommendation from MMM then a freshly graduated college kid.

    What is beautiful about this site is that you give this gift away for free. Just to be on shark tank a contestant needs to give up 5% of their company. You vouching for him and not trying to capitalize further reiterates your position of strength article.

    Reply
    • Mr. Money Mustache August 25, 2014, 9:43 pm

      Thanks very much, ETF. A comment like that is an even better paycheck than 5% equity in a startup in my opinion.

      Reply
    • insourcelife August 26, 2014, 12:19 pm

      ETF – agreed. The exposure Tristan is getting here is priceless. I’ve interviewed plenty of techies in IT and I wouldn’t hesitate to hire someone like Tristan for a second, even if they didn’t fit the requirements 100%.

      Reply
      • Mike August 27, 2014, 10:35 am

        What is “Shark Tank”?

        Yeah, Tristan sounds like an amazing young man. If Tristan’s not familiar, I’d recommend a site called “Uncollege”.

        As an aside, I wish this blog would add a “Like” button to the comments. Then the comments that are the “Most Liked” could be read, instead of having to sift though all the comments.

        Reply
        • Seumas August 29, 2014, 3:50 am

          “Shark Tank” is the US version of a TV show based on the original Japanese programme which translates as “Money Tigers”. The UK, Australia and NZ versions are called “Dragon’s Den”.

          Reply
    • Tristan Hume August 27, 2014, 6:23 pm

      I found the perspective of this comment very interesting. I spent a lot of time thinking about this and wrote down my thoughts in a notes document that is now over 1,000 words long. I could write an article, but I’ll just offer some choice thoughts:

      Your perspective would be correct if my main goal was to go from having no job to having any job. In that situation this post would be perfect since I’ve already received 4+ job offers. However, I already have an excellent job that I like. Many people will see this post and check if they can snatch talent for cheap but no one yet has emailed me and said “let me beat the offer of whoever you are working for, I’ll pay you like an experienced university graduate.” I make more than most high school students, but still less than I would with a degree in CS and multiple co-op jobs under my belt.

      The other thing is that although the positive benefit of a degree is huge, the net financial benefit when subtracting tuition and the opportunity cost of not working might well be negative for me. Because I already have a fairly good job and I plan on working for a shorter career than normal, it is entirely likely that I will not recoup the financial cost of attending university. But that does not mean I shouldn’t go, I have no doubt I will enjoy university and I have a genuine desire to learn the things that are taught there. This blog may have a finance focus, but the real underlying goal is to enjoy life.

      The other thing I’d like to point out is your quote “you give this gift away for free.” This would be a valid statement if I hadn’t developed IndexView specifically for MMM with the understanding that it would be posted on his blog. It was not free in that I spent hours of time during which I could have worked and earned around $800. But I agree that the exposure of this post is great and it was well worth the $800 of opportunity cost I spent. That’s not to say MMM wasn’t generous, I would’ve have had to work far harder to get this much exposure without his help.

      Reply
  • Pete August 26, 2014, 12:05 am

    Some good advice. But beware of survivorship bias when focusing on just the U.S. market.

    Remember, as the saying goes, there are no Warren Buffett’s in Japan or Greece.

    Reply
  • Björn August 26, 2014, 1:25 am

    Hallo! Very nice tool. I´m from Germany. Is it possible to integrate the german Dax into this tool?
    Many thanks for your answer! I read your blog since one year and I´m very inspired from your new ideas.
    Sorry for my bad English. ;-)

    Reply
  • Jason August 26, 2014, 6:00 am

    Awesome stuff Tristan – simple, valuable tools that others can use for free to help them become better investors – when you create something like that, you really deserve some seriously positive karma in your life! Good on MMM for boosting your profile with this, and hope you keep building on what you’re doing! (and thank you again for delivering something great to the world)

    Reply
  • Gregory August 26, 2014, 6:46 am

    Read and listen Jeremy Siegel. Stocks for the long run. For everybody.

    Reply
  • Kenneth August 26, 2014, 7:41 am

    For me these charts of stocks increasing all the time did not make sense until I understood that most of the increase in stock prices are due to the money being less worth. Some of it is of course due to the economic profit of the companies. This also explains why gold/dow, or oil/dow make sense.
    In short stocks are protection against inflation which otherwise would reduce the value of your savings.

    In general prices of products should decrease as the the technology make things cheaper and better. In short things will get better and better like MrMoney says:)

    One can look at m2 vs sap500 like this graph: http://www.cxoadvisory.com/wp-content/uploads/2010/07/M2-SP500.png

    Hope this helps other

    Reply
  • freedom52 August 26, 2014, 7:49 am

    I would like to believe that investing is simple, but I don’t think it is at all. Money is a serious business, and if you don’t invest your own time and effort, you risk getting nasty surprises. Ignorance is not bliss.

    Compare investing your money in the stock market with another asset that also increases with value over time, your house. While there are great regional differences in real estate prices, generally, if you had bought a house between let’s say 2005-2007, my guess is that you would have paid a whole lot more than from 2008-2011. While those years may not be accurate, I think you get the picture that prices rise and fall. Paying 30% more could translate into 100k or more of your “employees” killed off needlessly. The same “genocide” can happen with your other investments.

    For some, $100k may not matter much. But for others it may mean postponing retirement for many years. My point is there is more than one way of looking at this, and that’s why I don’t believe that the one-size-fits-all approach is valid for everyone. While everyone frequenting this great website generally has the same end goal of early retirement, with all its wonderful advantages, we don’t share the same starting point, financially speaking. And we don’t have the same income and expenses. So, some of us will have to work harder at making our employees work harder.

    It has been mentioned by some posters, but I feel that the point of dividends has kind of been glossed over. In index funds, ETFs and in stocks, dividends have been and will be postponed and cancelled during difficult economic periods, exactly when you would could use them the most to buy at discount prices. Check out the payment history on Google Finance for SPY or IVV, two of the largest S&P 500 indexes.

    Buying when things are on sale and holding back when they are expensive isn’t timing the market. It’s just common sense for the patient, frugal and wealthy consumer. In fact that is one of the reasons they say the rich just keep getting richer. They keep cash on hand to buy at rock bottom prices when everyone else is fearful. There’s a Buffet quote in there somewhere. Speaking of which, his investing philosophy is buying wonderful companies at reasonable prices and holding them forever. Unfortunately his timeline and mine don’t match: I don’t have forever. He is not investing for his retirement. He’s investing for a fund that will be passed on. I am investing for my family and need to ensure as much as possible that my investment decisions match the economic cycles. That will mean, as an example, making adjustments when interest rates are low and going higher, and vice versa. The timing won’t be exactly right, but Janet Yellen has hinted enough to provide an idea.

    We will not all end up with the same financial cushion. While some will choose to “set it and forget it” some of us will need to employ guerrilla tactics to reach and retain financial freedom… so that our withdrawals cause the least harm to our employees.

    Reply
    • Brainiac August 26, 2014, 12:12 pm

      These points which you mentioned were what generally passed through my mind before I had gone through certain books such as “Common Sense on Investing” by Bogle. Let me try to explain why the point of buying index funds made by MMM (apart from others like Warren Buffet and Jack Bogle) are very much on the mark for the general population.
      When mentioning that the market may be 30% over the normal and hence due for a correction is nothing but market timing. When the market is 30% over the “normal”, it can stay so for another 10 years and the “normal” can grow at the normal rate of 4 – 5% above the inflation rate. This is much higher than what bonds can offer. If one stays for 10 years just for the market to come back to normal, the opportunity cost can be enormous where the money lying around in wait can dwindle down to nothing due to inflation. I guess that is another way of seeing the saying “The market can remain irrational longer than you can remain solvent”.
      Also, the dividends have been mentioned primarily not for glossing over but to show to everyone that this is a very important component over the long run which most of the fund houses try to hide in order to show their active funds doing better than the index.
      Also the point which Buffet makes of holding investments forever is about buying great companies which you would never trade. Of course if the individual has to draw down his investments during his retirement, there is nothing wrong in selling.
      The times in the market where “everyone is fearful” or “everyone is greedy” are very rare and may come once in a decade. Those times we can make a killing if we do change our asset allocation during that period but those times are so rare and the returns over the long term are small enough that we can do better by concentrating on frugal living rather than wait for those events.
      I would also like to know the viewpoints of others on this.

      Reply
  • MichaelJ August 26, 2014, 10:50 am

    for those of us still learning, it would be great to have a link for each of the plots to wiki or something along those lines that explains in some depth as to what each of these plots represent… great tool though

    Reply
  • Dan August 26, 2014, 11:58 am

    Amazing. So much fun to play with, and so useful for demonstrating some of the key insights to understand about investing.

    Quick correction: the text that displays with “Real S&P 500 (With Dividends)” at the bottom of the graph says that it is not adjusted for inflation, but should say that it IS adjusted for inflation.

    Reply
  • Evan August 26, 2014, 12:13 pm

    Great tool. I’d like to propose adding the nikkei 225 index (with and without dividends) to the drop down menu. That’s always a hot topic for long term investing. I’m honestly interested in how that looks here for a worst case comparison. Maybe it’s not so bad with dividends? I would like to see.

    Thank you!

    Reply
  • Slowpoke August 26, 2014, 6:22 pm

    Awesome post and tool! As already requested, an option to view in log scale would be great… The need to switch is important though as some views are better viewed on a linear scale.

    Thanks!

    Reply
  • Syed August 26, 2014, 10:22 pm

    Really great tool. I’ve known that reinvesting dividends produces a solid return, but I didn’t realize how profound of an effect it has over decades. Dividends are kind of overlooked since the next “hot” stock is always on people’s minds, but dividends seem to work well behind the scenes to help produce great returns.

    Reply
  • TSR Capital August 27, 2014, 10:14 am

    “Investing in the worst time of 2000 (P/E10 was over 40), you would have a seen annual compound returns to date of just under 4%. Pretty terrible by stock market terms, but still an overall increase in your money of 64%, because 14 years is quite a long time, and compounding is some powerful shit.”

    Factoring in inflation, the real total return would have been about 1.2%.

    In purchasing at such a price, one was making a poor investment in absolute terms and relative terms.

    1) The indicated yield on the investment was about 1/40 or 2.5%. That was roughly the inflation rate at the time. So an investor was taking equity risk for essentially no real return (over say a 10 year period).
    2) The high price/low yield was unlikely from a historical and financial perspective to have remained at that level.
    3) Optionality. The investor gave up the ability to wait and purchase when better deals were available. In reality, there were multiple times in the ensuing years in which the market presented a much better deal and was lower both nominally and in real terms. Some will argue that time out of the market is costly, which is a point worth making. But the higher the valuation of the market, the higher the likelihood that the future options will be better and offset to varying degrees the time spent out of the market. Secondly, the higher the valuation, the lower the actual intrinsic market gains would be. In the case above for example, only 2.5% not even factoring inflation. So with those two points becoming stretched, the higher the valuation becomes, the easier the decision should be to not invest.
    4) Other investments such as some medium and longer term bonds and bank CDs were available with higher yield. For example 5 year US Treasury rates were around 6.5% nominal at this time. These were lower risk, less volative investments, which were yielding more at the time then the SP500 and did actually prove over some time horizons to be better investments.

    The valuation (p/e,p/fcf,etc) matters. At some valuations, even a historically strong investment asset class such as SP500, can become a weak investment or even a dis-investment. See the 1989 Nikkei as an extreme example. Perhaps US homes as a more recent less extreme example. At some price it does not make sense to invest. Year 2000 SP500 peak was one of those times. Price matters in any business deal. There is no way to avoid its impact in investment decisions.

    Note, when I’m referring to yield, I’m saying total yield not just dividend yield.

    Reply
    • Darin August 30, 2014, 11:18 am

      That’s definitely a concern, especially if you may need to tap into the capital for FIRE dur to unexpectedly situations and/or lower than expected earnings.

      The S&P returned a real -.78% from 1965 to 1980 after reinvesting earnings, which was really crummy.

      To be fair, it looks like 3-month T-Bills over the same time period returned also returned about -.8% in real earnings, but a volatile market that’s on par with 3mo t-bills isn’t a good investment by any stretch.

      http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/histretSP.html

      Reply
  • Tim August 27, 2014, 3:44 pm

    Another interesting overlay would be GDP. That’s Buffet’s valuation indicator

    http://www.advisorperspectives.com/dshort/updates/Market-Cap-to-GDP.php

    Reply
    • Kenneth August 28, 2014, 12:31 am

      This have to be one of the simplest and best indicators. The value of the stock market can only be so big relative to the economy.

      Reply
  • S4gg3r August 27, 2014, 5:20 pm

    Tristan,great tool. I’m really enjoying your StashLine app as well, so thank you very much.

    Some may be tempted to plug in a year and celebrate or bemoan the particular returns. To you I offer the following advice:

    1). I believe that most of us don’t invest that way. That is to say we generally don’t stuff wads of cash in our mattresses and wait for the magic moment to dump it all in the stock market, then go “DOH, why did I invest in 1999 or 2007. I bought stocks in 2007. I bought more in 2008, and more in 2009. No doubt some of the returns in that period aren’t stellar. Some are pretty good. Overall I’m happy with the result. Point is you may not want to fixate on a particular point in time. 2). While this blog’s theme is early retirement, which involves investing, there’s a lot of great information here on being content and living a richer life. I highly recommend reading through those arcticles as well. 3). If you’re going to stress out about money anyway, buy a good term life insurance policy. Then when you drop dead from the stress, your family can use the proceeds to buy a nice Vanguard index fund.

    Reply
  • Lilnda August 28, 2014, 3:19 am

    Great app, really well done!

    This is fascinating, and the type of information I usually have to trawl the web for. Stock market history usually only goes back a few years on most financial websites, and they certainly don’t have a easily selectable Shiller P/E10 ratio!

    Thanks!

    Reply
  • Blue August 28, 2014, 9:55 am

    Nice tool! It would be useful to see just the dividends by themselves assuming you want to live out of them and not reinvest.

    Related to that, what do you make out of this article on retirement income http://www.forbes.com/sites/robertlaura/2014/08/28/this-is-what-1000-of-monthly-retirement-income-really-looks-like/

    Reply
  • mmw August 28, 2014, 3:13 pm

    Great website and wonderful tool Tristan . I don’t know how to do socially responsible investing in a way that yields the same as regular index investing and wondered whether MMM or anyone else here had any information on it. Are there any “index” funds for SRI? I would like to be able to reward corporations that do well by doing good.

    Reply
  • JJ August 28, 2014, 3:46 pm

    There are some common investment psychology errors in this article that have been raised before in the forums, but MMM seems determined that this “buy the S&P with both hands at any price and you can’t go wrong” attitude is the hill he wants to die on. Here are a couple common mistakes to watch out for so you don’t make them yourself:

    – Counting total returns when the market is up, but only counting income when it’s down. For buy-and-hold investors (like someone who is early retired and using investments for income), you should ignore all changes in market value and only count the actual income produced. The good news is that stock market crashes don’t matter as long as you still earn your dividend. The bad news is that huge market rallies don’t count either because all you actually earned was your dividend. If you want a fair accounting then you can’t have it both ways. And frankly it’s not that impressive to earn a 2% nominal dividend when there are other options available that throw off a lot more income, which brings me to…
    – Lack of benchmarking. It’s not about arguing whether the S&P 500 had a positive return over this or that time period, it’s about how it did relative to other options on a risk-adjusted basis. If you want to brag about how it doesn’t matter that you bought stocks in the tech bubble because at least you earned dividends for the next 10 years, it’s disingenuous not to mention that you’d have been better off buying T-bonds at 8% back then and earning a hell of a lot more income with significantly less risk.

    Prudent investing requires evaluating all the available options to identify the ones that best meet your needs. MMM is right to pan “10 hot stocks for 2014″ type strategies and technical analysis, but in his own way he’s just as fanatical as Jim Cramer in his insistence that STOCKS STOCKS STOCKS are the only acceptable core investment and lashing out at any suggestion that there might be other tools in the toolbox.

    Reply
    • Mr. Money Mustache September 1, 2014, 6:59 am

      Hmm.. I wasn’t planning to die on any particular hills and my apologies if I ‘lashed out’ at any other suggestions. In fact, if you read other articles around here you’ll find that I still hold international stocks, peer-to-peer lending notes, REITs, actual real estate, and a bit of local business. None of it is optimal and perfectly selected or managed, but it will do fine.

      The deliberately simple presentation of stock index investing is done this way not to pretend I know everything, but to encourage those afraid to invest for the first time, to just do it.

      Reply
  • Travis August 29, 2014, 7:08 am

    Another scale-related ask: Ability to fix the Y axis maximum. As it is now, regardless of growth rates, the line goes from lower left to the upper right corner, visually implying the same big gain over most long time periods. However, the gain is not the same. Compare these two 27-year periods (January each year):
    1971-1998 – total gain=2667%
    1956-1983 – total gain=770%
    The second period should show a much smaller “climb” than the first. As it is, the two look to be the same size.

    Reply
  • James August 30, 2014, 12:07 pm

    Id like to see some of these trend lines with inflation adjusted gains, would it be as simple as gains – inflation of particular year?

    Reply
  • Karen September 4, 2014, 12:14 pm

    I like to tool and I love the enterprising spirit of Tristan. I went to his site and thought the article about “the best programing game” was hilarious! I think I will introduce it on my son.

    Also I wanted to share my favorite site for economic data. http://www.multpl.com/sitemap
    You can’t manipulate the charts, but they offer many, many angles to view to economy.

    Reply

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