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Hi RIP readers,
As you probably know if you’ve read my last two posts (2020 Q4 Financial Update Part 2 and Part 2-BIS) I’m a bit concerned that the stock market is heavily overpriced, in a bubble. A bubble that in my opinion has a lot in common with the DotCom Bubble of 2000-2002. This is making me reluctant of investing in stocks again, in fact I sold most of them in July-August 2020.
I want to quantify my reluctance in this post.
Many readers suggested me to “just invest in stocks, this is for the long term!“, “stocks always go up!“, “don’t care about daily fluctuation, they’re just noise… in the long term stocks will return their promised 6-7-10% per year!“, “time in the market beats timing the market“, “YOLO!“.
I already addressed my fears in the previous two posts: fear that we might be at the bubble peak, and fear that it might take a loooong while to recover from a crash – and I’m not as young as you probably are.
“But look at Bob, who only invested at market peaks and still ended up being trillionaire!”
Congrats Bob, but today I want to introduce you Rolf, the Swiss investor who invested all of his grandma inheritance, 1 Million CHF, in an ETF tracking MSCI World Index on January 1st 2000.
Rolf wanted to invest in an All Country World index (ACWI, which is Developed + Emerging), but since I couldn’t find enough data on EM before 2007, we’ll make a World (Developed only) Index be enough for today study. Anyway, Emerging Markets never accounted more than 10% of the World Market Cap, so it’s not a big deal I guess.
Rolf was also incredibly lucky with his investment instrument: even though he started investing when discount brokers and cheap ETFs were not the norm, he found an ETF with 0.00% TER and a commission & custody free broker! It means that we’ll only focus on the index total return.
Rolf “bought and forgot”, sure that in 20+ years his fortune would have at least quadrupled (at 7% per year) according to common investing knowledge.
How much do you think Rolf’s investments returned per year, in CHF, after taxes on dividends and inflation? Is Rolf sitting on 4M CHF (inflation adjusted) as promised? More? Less?
Make your guess 🙂
Before we math the shit out, two things:
First, I didn’t run this experiment backward, to try to prove something. I didn’t cherrypick the dates. I was genuinely curious to discover “when”, not “if”, the initial investment was recovered in real terms, considering returns, dividends, taxes, CHF vs USD exchange rate.
Second, I don’t think we’re in a December 1999 scenario today. We’re definitely in a tech bubble, but there are markets which are probably not in a bubble as well. We’re probably in a less worse overall situation, but there’s a pandemic running, market valuations are dangerously getting close to DotCom Bubble era, and T.I.N.A., meaning that as soon as an alternative pops up all the other asset classes could clash… what I want to say is that nothing prevents the future 20 years to unroll in a similar (or worse) way compared to 2000-2020.
Ok, let’s get started!
MSCI World Returns
First of all, let’s gather MSCI World returns since Y2K. Official docs list data starting from year 2005, I had to dig a bit deeper to find data back to last Millennium.
In the end, I decided to rely on Wikipedia:
Awesome! Mind that those are total returns, i.e. they include dividends being reinvested in the same Index, which is exactly how Rolf’s 0.00% TER Accumulating ETF works.
Income Tax Bracket
Rolf knows that even if the ETF is accumulating and reinvesting profits, he has to pay taxes on dividends anyway.
Rolf has a solid upper middle class salary in Zurich, say 120k CHF/Year, and his marginal tax bracket is more or less 25%. I’m talking about “marginal” tax bracket, not average. My marginal tax bracket during Hooli years was easily in the 30-35% range.
At 120k CHF per year Rolf would hit the 8.80% Federal marginal tax bracket (7% if married and his spouse earned ZERO), 10% Cantonal Tax (8% if married), and 11.9% City Tax (9.52%) (source). It’s exactly 30%, but let’s assume Rolf has enough deductions to bring the marginal tax rate down to 25%.
MSCI World Dividend Yields
Finding the exact MSCI World dividend yields for the last 20 years resulted harder than I though.
I used for my calculation Vanguard VT dividend yields (source) which are available back to 2009. I know VT tracks MSCI ACWI and not MSCI WORLD, but I assume the impact of the EM (less than 10%) on the dividend yields is negligible.
Since my sources lack dividends data from 2000 to 2008 I also assumed that during the missing years the yield has been equal to the geometric average of the yield for the years we have data about, which is 2.37%.
USD vs CHF
Investment performances are expressed in USD, and Rolf doesn’t give a Rösti about the American Dollar. He only cares about returns in his beloved currency: the Swiss Franc!
I’ve took historical forex data from macrotrends website (source)
Inflation Rate In Switzerland
Rolf would love to see his purchasing power grow, not just the nominal value of his investments.
Luckily, in Switzerland inflation has been low for at least a decade.
Let’s take a look at the official CPI inflation data (source), and take that into account for our simulation:
After having complained for a while that his health insurance premiums (along with child care costs, rent prices, transportation tickets, swimming pools tickets, beers, restaurants, grocery stores…) have probably “forgot” to adhere to the “negative official inflation” of the 2010s, Rolf finally accepts the data.
Ok, time to put all together!
December 31st 2020
It’s 21th anniversary of grandma departure, she was one of the few casualties of the Millennium Bug, and Rolf wanted to celebrate the event by logging into his brokerage account!
Yes, he made it! Rolf is way richer than he was 21 years before! A staggering 40.95% richer in real terms, in CHF!
Which is an astonishing 1.65% annualized return over 21 years.
Here is the full spreadsheet:
“Well, RIP, it doesn’t seem like a huge win…”
Well, imagine when the tax office will discover that Rolf forgot to pay the Wealth Tax for 20 years…
Nothing, nothing 🙂
Anyway, yes, this sucks.
Take a look at the 16 years drawdown, which has been in the below -25% territory for 10 years.
Please take also a look at the cumulative returns at the end of 2018: 4.78% over 20 years, or 0.25% per year. Try to apply the 4% rule!
But there’s more…
March 23rd 2020
Let’s say that Rolf logged into his account at the end of year 2008, 8 full years into his investing adventure. Cumulative real returns so far in CHF: -55.03%, “Holy Fondue! My wealth has been halved (and then some) in 8 years…” But he’s stubborn, he knows that “time in the market beats timing the market” so he HODLs.
He logged in 4 years later, in 2012, and “Crapclette! Why the hell I’m still at -38.40% after 12 years! I heard there’s a bull market going on…”
He then decided to stop logging in for the next 7 years, to preserve his mental sanity. It’s not easy to keep the focus on the long term after a more-than-a-decade long heavy loss.
It’s finally January 2020, and Rolf hasn’t logged into his brokerage account since 2012. It’s his Grandma’s 20th death anniversary, he’s a bit temped. Rolf listens to the news every day, and he knows we’re living thru one of the longest and strongest bull market of the entire history!
“Will I have 5 or 6 millions in stocks? 🙂 ” Rolf asks himself.
Then the Covid happens. At first it seems not to have any impact on the stock market. Then in late February 2020 Rolf heard that the stock market crashed.
“I should not sell! And I must have many millions by now… time in the market beats timing the market ah ah ah!” He laughed while sipping his Glühwein cup.
Then in mid March he got a call from his dad:
“Rolf, the market is crashing! Did you sell Mama’s stocks?”
“No daddy, I’m HODLing… and don’t worry, a correction is normal after a long bull market. I’ve enjoyed a decade of amazing returns, I can take a small loss!”
“So you have more money than Mama gave to you, right?”
“Well, sure… I hadn’t checked recently, but I invested in a perfectly diversified ETF, with zero TER, zero Tracking Error, zero brokerage fees. Trust me, it’s the perfect fund!”
“Sell it now! The world is doomed, we’re all going to die in this pandemic!!”
“But dad, time in the market beats…”
Rolf hands are shaking… he decided not to check his brokerage account yet.
“Time in the market beats…”
“OOps… Maybe daddy was right…”
“Oh shit, let me take a look at my millions, this 32% YTD market drop must have hurt… say I had 6 Millions, now I’m only left with 4”
On March 23rd, more than 20 years after he started investing, Rolf logged in (spreadsheet):
His total portfolio return in CHF, inflation adjusted, over 20+ years is negative 9%, it’s worth less than it was worth on January 1st 2000!
How would you feel if you were Rolf?
Time in the market beats… what? 20 fucking years have passed, and Rolf’s portfolio performed an annualized real return in CHF of -0.47%. Even though he invested in the perfect ETF, with no extra costs (also evading wealth tax for 20 years). Imagine the real return if he decided to use a 1% roboadvisor, or – worse – an active portfolio manager!
I don’t want to be Rolf!
What do I want to say? What did I want to demonstrate?
Nothing in particular.
I just wanted to double check that I’m not crazy when I feel the discomfort in reading comments like: “you shouldn’t care about daily fluctuations, just invest for the long term!“, “just buy an index fund, in the long term it doesn’t matter if we’re at market peak“, “simplify, simplify…“, “be like Bob“, “time in the market beats…”
…Beats the nails in my coffin!
If I lump sum into VT, and the future two or three decades happen to be similar to the last two (mind that we had two amazing decades in terms of productivity, we’re not talking about middle age here), I’ll be dead before I see any return.
The problem is that the Value and the Price of the market can diverge for a very long period of time.
The following picture is an oversimplification but it’s useful to make a point:
While we all believe that the Value of the overall human endeavors will keep going up (blue line), the Price tag we see at any point in time might be out of sync with the underlying value. And maybe after this cycle of exuberance, a depression will follow. Prices will be lower than intrinsic value, keeping your assets flat or at loss for a very long time. Maybe longer than you can stay liquid (or even “solid”, as a breathing human being).
“Does it mean you don’t believe in FIRE anymore? Does it mean you’re not investing anymore, and stashing CHF Bills under your mattress? What’s your address btw?”
And I will slowly converge to my investing strategy, which is designed to make me invest less in stocks when the red line is above the blue line, and more when the opposite is true.
I’ve finally put some numbers behind my “gut feeling”, and as usual I’ve added more questions than answers to my book of wisdom.
Keep the critical thinking flag flying high!
That’s all for today.