For me it was the chart for investor house purchases. It's not shocking that investors are not excited to purchase properties with 7% interest rates when returns on investment properties are less than 7% usually.
It might have been useful to see a comparison of active-portfolio versus buy and hold (not the chart's stated purpose). Also, to someone who doesn't invest or who doesn't think about compound interest issues, a 4% annual return builds fairly quickly, so the chart's implicit conclusion may seem more bleak than it really is.
I saw that visualization back in 2011 and I think it's actually a pretty poor one. It uses shades of red for what are objectively not bad outcomes (return greater than inflation is red, real return between 3 and 7% is pink). IMO that's misleading.
It would be helpful if it compared against the same visualization for other straightforward market investments, like bonds, or savings accounts / CDs. Those asset classes would be red (or pink for long-term bonds, perhaps) across the board. Stocks look great in comparison.
But picking a slightly more reasonable color scale would help.
That said I think there's some important drawbacks to point out.
First, that 7% figure that's often quoted is usually meant to mean nominal return. At least, that's the way it works relative to the commonly cited 4% SWR.
Second, buying and selling exactly once will greatly increase the variability of returns and also the likelihood of negative returns. It's important though to realize that this isn't actually how almost anyone invests, so just counting periods of negative returns under that assumption isn't particularly meaningful.
Thank you for the reply again :). I saw your comment previously and I think you make a great point. As much as I criticize the chart for being unfairly pessimistic about equity returns, there is far too much literature suggesting you can get 7-8% real returns by parking your money in X, especially in the <20 year time frame for stocks. In comparison this chart is a good factual dose.
My concern is, that while this comparison is useful for people further along in their research trying to understand the volatility of the stock market, this chart has a number of misleading (IMO) traits that can dangerously/unfairly steer people who are newer to managing their own money away from index funds altogether.
I would hope that people see this chart, my comment, yours, and FabHK's excellent comparison to bond yields. But if you have limited attention and are getting started, I would hate for the original link to be the only thing you see.
Speaking for experience with family and friends, too many good people scared by charts like this bought gold in 2011 or trusted mutual fund managers to buy into funds with 4% front-end loads and 2% AUM fees.
The paper made me wonder: How many false negatives? ie, did the model declare an investment as "bad" even though the investment turned out well?
Essentially: I was looking for a scatter plot with "expected return" on one axis and "actual return" on the other. (Maybe I missed it: The paper is pretty long/dense, and I only skimmed.)
day-to-day no, however it means people are more keen to pay attention to market news. After all, choosing bad investments that earn you say 4% y/o/y return, vs 15% y/o/y results in _massive_ changes on the scale of 20-40 years.
Generally investors tend to care more about growth (especially the second derivative), so whenever I see only a zero’th order datapoint, I’m skeptical and wary of strategic omission.
My biggest criticism of this analysis is his wild overstatement of the benchmark return. Where in the world do you get 8% safely in equities and/or real estate? It's more like 3-5% because the world is awash in capital with precious few places to put it into play.
Which in a way would support his main point more strongly: venture returns are inevitably coming down from 12% to 7 or 8% annually.
I wished there was an article on "How Hard is it to generate a 10X return" for normal, Average-Joe investments (ie stocks, bonds, real estate), and how a 10X return is actually at most 6X return, because you need to take into account taxes, costs, and inflation.
Oh wow, that's a change. But FWIW, I don't think it's very helpful to look at an aggregate like that, which doesn't distinguish between (at least pre-crisis) ratings. For some other datapoints, I would recommend:
1) S&P BB-rated bond index (just below investment grade), which shows a 6.3% yield for that grade.
It's perhaps not in the checklists since the current low returns for the last ten years bad results for the industry is a new thing (at least in recent memory).
You could use that argument to justify spending more money on any unprofitable venture. If you discover that some market segment is higher risk or lower profit than you expected, that is a good reason to consider course correcting.
Around 2008, some investment banks famously had a single division manage to lose significantly more money than the entire rest of the company made over the same time period. Zillow not wanting to replicate their mistake isn't necessarily a bad decision.
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