Do Stocks Return 10-12% On Average? & Zero to Millionaire w/ Nicolas Bérubé | Rational Reminder 297
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- Опубликовано: 12 июн 2024
- Meet with PWL Capital: calendly.com/d/cpws-jyp-znp
As human beings, our brains are wired to solve problems. This can make long-term investment
strategies, like passive investing, surprisingly challenging, especially if you’re not accustomed to
the ups and downs of the market - it can feel pretty unintuitive to stay the course when your
instinct is to take more active steps to solve the problem! So, how can investors remain firm in
their strategy and not get spooked by market changes? Joining us today to unpack this question
is financial journalist, Nicolas Bérubé, whose new book From Zero to Millionaire: A Simple and
Stress-Free Way to Invest in the Stock Market serves as a guide to investors on how to grow
their wealth and achieve good portfolio diversification at a low cost. We talk with him about the
contents of his book, his observations on financial media and its effect on investors, how to stay
committed when making long-term investments, and more. We also spend the top half of the
show discussing a popular idea we’ve seen posted by influencers online, namely that investing
in stocks will give you a return of 10% or more per year on average, and the flaws in their
arguments. Tune in for a deep dive into investor psychology, financial media, and much more!
Timestamps:
0:00:00 Intro
0:01:48 Main Planning Topic: Do Stocks Return 10% on Average?
0:38:23 Special Guest: Nicholas Berube
1:09:55 Aftershow
Links From Today’s Episode:
Rational Reminder on iTunes - itunes.apple.com/ca/podcast/t...
podcast/id1426530582.
Rational Reminder Website - rationalreminder.ca/
Rational Reminder on Instagram - / rationalreminder
Rational Reminder on X - / rationalremind
Rational Reminder on RUclips - / channel
Rational Reminder Email - info@rationalreminder.ca
Benjamin Felix - www.pwlcapital.com/author/ben...
Benjamin on X - / benjaminwfelix
Benjamin on LinkedIn - / benjaminwfelix
Cameron Passmore - www.pwlcapital.com/profile/ca...
Cameron on X - / cameronpassmore
Cameron on LinkedIn - / cameronpassmore
Mark McGrath on LinkedIn - / markmcgrathcfp
Mark McGrath on X - / markmcgrathcfp
24 in 24 Reading Challenge - rationalreminder.ca/24in24
Nicolas Bérubé on LinkedIn - / nicolas-
b%C3%A9rub%C3%A9-27b9b111b/
From Zero to Millionaire - fromzerotomillionaire.com/
The Motley Fool - www.fool.com/
Rob Carrick - www.theglobeandmail.com/autho...
Andrew Hallam - andrewhallam.com/
Somebody Feed Phil - www.imdb.com/title/tt7752034/
Everybody Loves Raymond - www.imdb.com/title/tt0115167/
Shake Shack - shakeshack.com/#/
Figure 01 AI Robot Video on LinkedIn - / update
urn:li:activity:7173681028664901634/
Books From Today’s Episode:
From Zero to Millionaire: A Simple and Stress-Free Way to Invest in the Stock Market -
fromzerotomillionaire.com/
The Algebra of Wealth: A Simple Formula for Financial Security - www.amazon.com/
Algebra-Wealth-Formula-Financial-Security/dp/0593714024
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing -
www.amazon.com/Random-Walk-Down-Wall-Street/dp/0393358380
Everyone Believes It; Most Will Be Wrong: Motley Thoughts on Investing and the Economy -
www.amazon.com/Everyone-Belie...
The One-Page Financial Plan: A Simple Way to Be Smart About Your Money -
www.amazon.com/One-Page-Financial-Plan-Simple-Smart/dp/1591847559
Setting the Table: The Transforming Power of Hospitality in Business -
www.amazon.com/Setting-Table-Transforming-Hospitality-Business/dp/0060742763
Papers From Today’s Episode:
‘The Equity Premium’ - onlinelibrary.wiley.com/doi/f...
Scott Cederburg research: ‘Long-Horizon Losses in Stocks, Bonds, and Bills: Evidence
from a Broad Sample of Developed Markets’ - www.paris-december.eu/sites/
default/files//papers/2023/4393_scederburg_2023_complete.pdf
Jules H. Van Binsbergen Paper: Is The United States A Lucky Survivor: A Hierarchical
Bayesian Approach - rodneywhitecenter.wharton.upe...
2020/12/30-20.Wachter.VanBinsbergen.pdf 
Хобби
Ok. I wasn't too sure about adding a third host but Mark dragging Ben from his cloud around minute 17 and forcing him to explain the theoretical concept was actually helpful. lol. Thank you guys!
Glad you think so, appreciate the feedback!
Mark's role and POV is definitely a great diversification move, guys! Congrats!
Excellent, quality content. Thank you for providing these podcasts.
On another note, a lot of the audience uses Monte Carlo simulators while analyzing our portfolios, and those are pretty limited to the last 30 years or so. So, I think that's where a lot of the 10-12% comes from.
Agreed. Also found that when I actually wasted time trying to figure out the basis for returns Dave Ramsey always gives. He’s right within a specific time period.
Nicolas is great!
I like the new dynamic in the podcast. See you next week.
Really great episode. Really enjoy Mark's addition. Hope he'll be part of the guest's interviews later on.
Congrats Ben on the trophy!
First episode I watch and omg this is so interesting!!
I planned on watching 15minutes, but stayed till the end
Good episode. Important topic
Great episode. It’s nice to see Mark taking a more prominent role, and it went really well.
love the trio! Mark has been great ever since he showed up :)
Very interesting show.
I spend about a 1.5 days a year combining the different buckets of my portfolio, assessing, and then rebalancing. Then it's hands off until next year. This was not a natural behavior for me to adopt, however.
It seems to me that people should think of investing as an n-person game. Because psychology drives outcomes to a great extent (and rarely for the better), it's important not to let psychological processes govern one's own investment decisions. Otherwise one will follow the flailing and failing mass.
Would be curious for thoughts on how/whether the historical returns segment has implications on increasing/decreasing VXUS weighting (slowly via DCA) against a base of VTI for a hypothetical DIY investor with a US home-bias. (...asking for a hypothetical friend who may or may not also be imaginary.)
Enjoyed the interview with Nicolas Bérubé - wonder if he writes columns in English too?
Excellent podcast; I particularly enjoy the acedemic perspective, which balances the emotionality of other finfluencers, who concentrate on the headline-grabbing "fantastic" (in its true sense) but unrealistic returns that they say are achievable. Regarding the time periods necessary to smooth the peaks and troughs of the market, what would be the guidance for retirees, who might well be looking at a much shorter horizon than 30 years? 10+ years for stocks and stock-based funds/ETFs is frequently mentioned, alongside a five year buffer of low-risk and liquid investments.
I suspect (but this may simply be my personal experience) that a substantial proportion of your audience are probably in the latter part of their careers, when income is peaking, costs (e.g. supporting a family) are falling and pension investments take centre stage and are (necessarily) many multiples of previous annual income.
Thank you, Ben and Rational Reminder Team, for your superb service in bringing financial literacy to masses. I have been a long time follower of the podcast and Ben's video series. Not an expert, but I try to learn as much as I can. Got a question for you folks. If I followed you correctly, ~2% of the ~7% real return of US total market between 1950 and 2020 is an unexpected return (~30%), i.e., non-repeatable return resulting from "luck" or "surprise". On the contrary, based on the research by Fama and French, the following five factors can explain more than 90% of the returns in the similar period - size, value, profitability, quality, and momentum. How do you reconcile the two? If factors explain more than 90% of the returns, how can we have 30% of return be an unexpected return? Thanks.
In the case of the market, we are only talking about one factor: market beta. A factor regression on the market will show factor loadings of 0 to the remaining four factors in the five factor model. Any factor can have a period of particularly strong or weak performance, and it would be useful to examine how the valuations of that factor changed over the measurement period to understand how much of the performance is explained by rising valuations.
-Ben
Great video guys. Out of curiosity, how many years or decades of US unexpected/exceptional outperformance need to continue before academic research suggests that these higher returns should and will be expected? Thanks!
I think the problem is that the research is backwards looking at what historical returns were. This is fine for a statistic methodology for average returns. However it is not forward looking. There might be very good reasons why valuations are higher now than in the past. E.g. higher expected earnings growth. Therefore in 5 years we could have experienced 10% stock price appreciation per year and we would say that it is because of upwards surprises but in reality earnings growth was what the market expected. We will only know what returns are in the future. The market is a random walk and even if we improve the estimates for market parameters we will never know ahead of time what returns will be.
Historical data are backward looking. Financial theory is forward looking. Theory makes conditional predictions about the future. The theoretically predicted expected return for US stocks based on current valuations is low.
The question is really asking at what point will asset pricing theory change?
I think the most promising avenue for the "this time is different for the US" argument is the work Robert Novy-Marx has done on profitability. More profitable stocks tend to outperform less profitable ones. That could boost US returns despite their high valuations, but it does not remove the fact that a large part of the past returns were explained by rising valuations.
-Ben
Early on in the episode you mentioned that risk should be lower with the increased availability of stocks, and as a result, returns should decrease as well. Have you seen data that show standard deviation has decreased as well?
Ben,
I’m wondering what you think of this.
Jeremy Siegel (good friends with Bob Schiller) had argued that the CAPE is no longer what it once was due to how GAAP/ how companies account for earnings have changed over time.
He has said in interviews that Bob has admitted this is true.
I can see that making sense, but US stocks are expensive on any metric.
-Ben
@@rationalreminder agreed.
@@rationalreminder i do agree. however, would it be reasonable to believe that if this has merit, expected us returns, while lower than historically realized returns, are likely higher than the 3% real that you mention?
@Bobventk yes I agree with that. I also think increasing profitability can lead to higher expected returns with higher valuations, and the U.S. market has strong profitability.
@@rationalreminder is this because the market is paying up for HIGHER expected future profits as opposed to SAFER expected future profits (to an extent)
Today I learned I am as stoic as all hell.
Thanks 😂 Canada !
🤘...its insane the content quality you guys provide , and youre still under 30k subs...i guess slow and steady wins the race...most people are happier listening to the average uneducated Joe talk about finance in 10 minutes or less... when i see a 60-90 minute video on finance/investing posted i get pumped , while many say they dont have time for that...meanwhile , theyll spend HOURS each day scrolling tiktok , twitter , facebook , or shopping on amazon 🤔
Buffett isnt buying "cheap" stocks. He is buying stocks that earn a high rate of return on tangible assets. PE is kind of a useless measure doesnt tell you how much capital is required to generate a dollar of earnings, tells you nothing about the durability of those earnings. US stocks trade at a higher p/b, higher PE ratio Vs. Say the TSX 60 bc they earn much higher returns on capital.
I really enjoyed this episode. Cameron seem's to have a nice mural, do we know the story of that and can we see it in full somewhere?
It is bespoke I think. If you go back in the episodes for some years you will see it at some point starting episode XY popping up.
They discuss it then as well if I remember correct
Can you cover more about how Canadian fund expense ratios are very high and what specific steps Canadians could take to find index funds? As a US investor I was shocked to see the expenses my Canadian brother pays. As far as I know vanguard recently started a few index ETFs and it would be good to learn what others are available.
There are some excellent Canadian options now. I believe the US equivalents are somewhat cheaper, but for simplicity I use a one fund Vanguard solution that is 0.23% MER (VEQT). You can subdivide and end up paying around 0.15% MER to hold the underlying ETFs themselves. iShares and BMO are two other index ETF providers I’m aware of.
Great idea for a topic, thanks!
@@TheGreatAgnostic that seems like an all in one excellent ETF. I'll let my brother know about it.
What effect will AI and other technologies have on US and world productivity and GDP growth? I don't think there is any consensus on this and without this knowledge of the effects one cannot make economic or market predictions with any specificity.
What precisely is meany by the phrase 'rest of the world' when y'all talk about stock market returns? Which countries are you including?
That is the DMS World ex-US index which includes 90 countries in total, and 23 countries back to 1900. More counties are added throughout the series as the data become available.
In the book "stock for the long run" it is claimed that investors should expect 7% real return. Jeremy Siegel is not a RUclips influencer, but a finance professor. Is he wrong? Why do you claim that 7% real is exceptional?
He's wrong.
His data are flawed as described here papers.ssrn.com/sol3/papers.cfm?abstract_id=3805927
He's not looking at enough countries as described here papers.ssrn.com/sol3/papers.cfm?abstract_id=891620
Edit to add: these are professors disagreeing with him, not me (though I also disagree!).
-Ben
If we use PWL expected real return of ~5%, accounting for taxes and the behavioral biases of investors (which cost them ~1-2%), a conservative real return expectation would be 3%. This highlights the need for a good financial advisor to keep one honest and focused on the financial plan.
If people's real return expectation is 7% not taking account for biases, taxes and investment expenses, they will underestimate how much they need to save, have a false sense of security (not seek financial advice) and fail to meet their retirement goal.
Totally agree.
-Ben
In Buffets annual letter he compares Berkshire returns to the s&p 500. From 1965 to 2023 the US market averaged 10.2% CAGR. Also if you area a canadian investor, Mark Schmehl FID1298, FID5973 and FID265. You are welcome
The fact that relatively few invested in the stock market in previous generations is still more nuanced than presented. Most investors today have far more diversification. I suspect it is true to say that in the USA in the 40's, 50's, and 60's, the number of stocks followed by investors was considerably fewer than today. Americans likely invested primarily in GE, Kodak, steel producers, auto makers, big oil, and big banks. In Canada they likely invested in big banks, railroads, and insurance companies. Whatever the actual stocks getting stock investors' attention then, it certainly was far fewer than in recent years even without considering index investors.
I think fundamentally, there are two main ways people interpret it: either (1) the US has outperformed - I should get in on that!, or (2) the US has outperformed; that seems likely to regress towards the mean in the long run. My rational brain understands and expects the latter, but the emotional side sees my international holdings underperform for the last 20 years and wants to double down on the US.
For anyone born in the US after 1930 (which, I expect, is 99.99% of all Americans), their entire life experience has been that 7% real return, and US outperforming international. They have literally never experienced anything different, and the 5% growth prior to that is purely theoretical.
It is funny that as an index fund investor part of me hopes that there will be a big market crash so I can buy more in "cheaper" price. On the other hand, seeing them going up is kind of nice too. I guess I am fine with either way.
Why isn't this basic stuff taught in middle and high schools?
The only thing my children learned about investments was in high school and that was to essentially trade. They had a class about the stock market, given some fictitious money, and told to trade. And see who made the most by the end of the semester.
Probably one of the worst ideas of all time.
Why was that?
The average teacher in the United States had an SAT score, the last I checked, 200 points on average below the average student at their university. In other words, the worst students received their degrees in teaching. The best universities don't even offer such degrees.
That's not a minor statistical difference.
Teaching is the secure route for the least capable.
And no, it's not lack of financial resources. The US has historically been one of the highest spenders on education in the world.
And of course, there are some very good ones.
It is, but no one listens
This question is raised quite frequently. What would you include in the curriculum? RR has been running for nearly six years. How many hours of content? Young students and even young employees, right through to middle age typically have no more than a paying interest in pensions and investments. Often this is because they don't believe they have any surplus cash to spare and only commit to the minimum required by legislation. It really requires a major cultural shift and that will take more than one generation, or a major shift away from personal pensions (which are the only significant investment for most people) being viewed as the icing on the cake of the state pension by the majority of low and middle income earners.
@@davem.4003 There's a lot of things that should be absolutely hammered home to them. The specifics of how loans and interest work, simulations even of how loans accrue interest, how to fill out tax forms, following the stock market, student loans, specific plans about investment long-term etc. I've met many people who have masters degrees and things and they simply were not aware of student loans and things when they were younger because they were first-generation college people. There are tons of kids who have gone to college today who didn't have to, didn't want to, or just shouldn't have gone, and yet, they accumulated large debts without serious consideration of the cost, when they should have been informed by schools of great career options out there for them. They don't need to be trained to do everything but they need to be informed about specific career paths and how to use their funds to invest. If you make $8 an hour from age 18 without going to college and work 40 hours a week, and save $20 a day every day for 30 years and buy S&P 500 funds, assuming a normal rate of growth, you will have a million dollars at age 48. Even for someone making $8/hour, saving $20 a day is not absolutely insane or out of reach, and the overwhelming majority of people even without a college degree will substantially outperform that level, but if they are not encouraged to save starting right away at age 18 they may miss critical early investment time. If you join the post office or military and work full-time for them for 20 years, u can retire at age 38 with a lifetime pension. Etc. These are not things that should just be mentioned once or twice but should be HAMMERED HOME by high schools and middle schools. This approach, if taken in schools, would save society and many individuals a lot of pain and suffering.
The criticism that investing was only for the rich before the 1950’s doesn’t really make sense to me either. An example is president Herbert Hoover. He encouraged the population during the 1920’s to participate actively in economic growth as much as possible and, above all, to invest in shares ("A small amount every month", was his advice). I’m sure that he had quite an audience that approved that message
Yes, please, more Canadian planning topics! And some attention to older decumulators would be very helpful.
I always wonder, like if I open an account with current apps, how would that work out in 30 years? an email with a password does not seem sound enough to me, given how much can change.. any thoughts?
I wonder: at what point do you stop looking backwards and keep predicting a reversion to the mean in the future if that reversion doesn't come? 20 years? 30 years? 50 years?
What if there was actually some kind of paradigm change that has happened? There have been plenty of suggestions of what could be driving US outperformance (such as tech earnings explosion making buyers willing to pay a premium, more automatic buying that is not price sensitive leading to upwards pressure in prices, more capital for investment available, etc). What if one of these turn out to be real, and we've been handwaving them away for years?
They are all real, but they are also reflected in current prices. Historical data is only one input. It is backward looking. Financial theory is the other input, and it is forward looking. Both suggest that the recent US experience is unlikely to repeat.
-Ben
You're right Ben, but considering the US war economy and current deficit spending, I'm not so certain about 10% real stock returns in the future.
It's not 10% real return.
@@rui569 I know, just kidding. More like 4%
1. The inflation adjuted historical US return was 10-12% - 7% inflation
2. The US valuations are higher than historical.
So it seems now it makes sense to invest in US market only if you expect further unexpectedly high returns 🤔
If your model predicts the market perfectly before Bretton Woods and then falls apart after 1950, the problem is with your model. When people trade dollars for shares and shares for dollars they aren't just evaluating the value of the shares. When what a dollar is changes fundamentally, it would be bizarre if human behaviour remained constant. Or put another way, why wouldn't you account for the deflationary impact of the gold standard on asset prices when evaluating pre-WWII returns?
I welcome Mark's addition to the podcast, he provides valuable insights. However, his microphone settings seem quite off - whenever he speaks, the sibilance physically hurts my ears. It should be an easy software fix.
Yes, this is the second time I've left a comment about this, sorry.
We will address the sibilance. We tried to fix it after your last comment but clearly need to do more.
-Ben
Thank you!
Bitcoin a scam? 😂😂😂😂
...is an absolutely accurate characterization.
@@nwahallywhat makes it a scam though? I don’t think it’s a good asset to invest into, but I also don’t think it’s a scam on its own.