[SEQ RERUN] Investing for the Long Slump

by MinibearRex1 min read9th Feb 201314 comments


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Today's post, Investing for the Long Slump was originally published on 22 January 2009. A summary (taken from the LW wiki):


What should you do if you think that the world's economy is going to stay bad for a very long time? How could such a scenario happen?

Discuss the post here (rather than in the comments to the original post).

This post is part of the Rerunning the Sequences series, where we'll be going through Eliezer Yudkowsky's old posts in order so that people who are interested can (re-)read and discuss them. The previous post was Failed Utopia #4-2, and you can use the sequence_reruns tag or rss feed to follow the rest of the series.

Sequence reruns are a community-driven effort. You can participate by re-reading the sequence post, discussing it here, posting the next day's sequence reruns post, or summarizing forthcoming articles on the wiki. Go here for more details, or to have meta discussions about the Rerunning the Sequences series.

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[-][anonymous]8y 10

This does not negate the original post, but $10,000 invested in the S&P 500 on Jan 22, 2009 would be $20,038.80 today. (According to morningstar.com; note that this is "total return" with dividends reinvested. They get both this and mutual funds (where distributions are reinvested) correct. Google Finance does not do this.)

With a market this volatile and divorced from reality you can pick a timeframe to make any point whatsoever. No human or algorithm can reliably call these things.

To be fair to STL, though, he made the natural choice of timeframe for this case, starting with when the original post was published and ending at the latest possible date.

There's a hypothesis out there that, on average, people have "worse than average" market timing. After all, mass stock sell-offs are highly correlated with abnormally low stock prices, and mass stock purchases are highly correlated with abnormally high stock prices...

And what would $10,000 invested on Jan 22, 2007 be today?

[-][anonymous]8y 9

It would be $12,167.87, approximately a 3.3% annual percentage yield in nominal terms, or more approximately a 1.2% APY in real terms. Not awesome, but not throwing money in the furnace.

Possibly overly specific, but are there industries and/or products which do relatively well during slumps?

Sure. Anything called countercyclical might count; more generally, a lot of stocks are priced high based on estimates of future growth, so if the economy isn't growing then shorting them and going long on value investing strategies might work.

Bonds. They generally do well when equities do poorly, but stagflation (low growth + high inflation) can mess with that strategy. In theory, gold/silver should be relatively good to own in the event of stagflation (due to partial remonetization/low returns elsewhere).

Pair trade: sell a company that makes a luxtury good, and buy a company that makes a similar but cheaper item. You're protected against swings in the general value of the sector, but will do well if consumers down-grade.

Vaguely related question:

Do index funds, in practice, actually get returns that match the numbers people quote when they say "The S&P 500 returned X% over this time period"? After all, index funds have to actually go out and buy the stocks that are listed on stock indexes, which makes them subject to transaction costs, temporary fluctuations in supply and demand, and other issues that can cut into their returns. There are enough index funds that the mere fact of being chosen to be listed on an index can cause a stock's price to rise as index funds run out and buy the stock, and my brother's job at Goldman Sachs largely consists of finding ways to make money by exploiting the way market prices change in response to trades that index funds have to make. All this makes me suspicious that there might be a big difference between the returns earned by "The S&P 500" and by "Giant Bank's S&P 500 Index Fund."

Suggesting it'd better to buy the top 501 instead, to avoid the threshold effects.

According to Morningstar data, last year the average S&P 500 fund missed by the amount of their expense ratios plus an additional 0.38%, or 38 basis points (one basis point is 1/100th of a percent)

That doesn't seem all that bad to me, but Vanguard seems to claim that they stay within 5 basis points, which is a lot better.

I did some research on index funds a while ago, and it does seem that individuals who invest in index funds do substantially worse than the index funds themselves, because they buy into the funds during bull markets and sell on the dips. But people who buy and hold index funds for the long haul return close to the same as the fund itself.

Important question considering the popularity of the Great Stagnation hypothesis. Current answers include pay down debt and investing in human capital, which is pretty vague unfortunately. Anyone have better ideas?