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There is tremendous opportunity cost for being highly fearful. Again, using long-term averages, over 50 years, a standard 60/40 allocation between stocks and bonds has generated returns 10x higher than 100% in government bonds.
Sure, if you select what is close to if not the best stock market ever in the history of man, you would get those numbers. Its called selection bias. Look it up. You continue to base you analysis of future return prospects on a sample that is biased in favor of survivors while insisting that rare events simply be discounted as not even relevant to the analysis. Even the stock indexes themselves are biased in favor of survivors.
.If productivity growth is 2%, population growth 1% and inflation 3%, then the nominal return on capital will be 6%
What happens when population growth is -5%?
If we have population growth of -5%, then you won't be getting SS either.
We can think of all sorts of apocalyptic scenarios. I've heard them all. Yet America endures.
Your comment about survivorship bias implies America won't survive.
There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.
the U.S. has continued to pay its debts through good times and bad.
Yeah, a call option with a strike price of zero.
I've no particular reason to think it will or won't except that for America to continue to have an economy that is growing indefinitely without end would be exceptional and highly unlikely indeed.
Why?
Again, if America stops growing, or there is a catastrophe, why do you think government liabilities are safe?
Did I ever say they would be? If we use your favorite metric, however - the PAST - we would see the U.S. has continued to pay its debts through good times and bad.
I just think any investment strategy that assumes stocks will always out-perform bonds in the long run is fundamentally flawed as it is based on a selective sampling of past data. You might think of any number of investment strategies to deal with this - 50/50 bonds and stocks from around the world, or maybe take some of your funds and put them into something with intrinsic worth like forest or farm land, or perhaps make delta neutral investments that seek to capitalize from movements in the market, or buy commodities. Whatever you do - blindly assuming stocks will always outperform treasuries over ~30 year periods is just fool and social security policy should not be based on it.
There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.
Over long periods of time, asset prices grow with the economy. That may not be true for any decade, or even two or three, but it is over long periods.
And over how many "long periods" is this observation based on?
100 years / 30 years = 3.33333
Barely more than 3.
That's a statistical sample size not even worthy of mention. I think you know that.
Sure, if you select what is close to if not the best stock market ever in the history of man, you would get those numbers. Its called selection bias. Look it up. You continue to base you analysis of future return prospects on a sample that is biased in favor of survivors while insisting that rare events simply be discounted as not even relevant to the analysis. Even the stock indexes themselves are biased in favor of survivors.
.
What happens when population growth is -5%?
If we have population growth of -5%, then you won't be getting SS either.
You think a lot of your ability to divine the future.We can think of all sorts of apocalyptic scenarios. I've heard them all. Yet America endures.
-5% population growth is an "apocalyptic scenario" ? I suppose it is if your retirement planning is based on the presumption the population will continue to grow!
Your comment about survivorship bias implies America won't survive.
Actually it in no way implies that one bit.
If we have population growth of -5%, then you won't be getting SS either.
You think a lot of your ability to divine the future.
-5% population growth is an "apocalyptic scenario" ? I suppose it is if your retirement planning is based on the presumption the population will continue to grow!
Your comment about survivorship bias implies America won't survive.
Actually it in no way implies that one bit.
Well, what do you mean by "survivorship bias" then? I've always known it to mean it excludes data that doesn't survive.
As for population growth, again, if the population is shrinking by 5%, you ain't getting your SS, or far less of it, because there are less people paying for more recipients. It's finished.
There is an economic logic to why equities will do better than government debt or any debt over the long run. It's because in the distribution of returns to capital, bonds get paid first and are thus less risky. Because equity is last to get paid, it's returns are higher to compensate for the risk. Higher risk means higher returns. Lower risk means lower returns. This is a basic tenet of economics and finance. If wealth is growing over long periods of time, stocks will always do better than debt. Equity should do better than real estate and commodities. Over long periods of time, real estate grows at about the rate of the economy, give or take a bit. Commodities are priced over marginal costs, which is influenced by production technologies and substitution effects.
Nobody is saying that SS should be 100% in equities. But it shouldn't be 100% government debt either. I know of no other pension plan in this country that does that. And many countries are now running their SS as real pension plans, with allocations across many asset classes.
There is an economic logic to why equities will do better than government debt or any debt over the long run. It's because in the distribution of returns to capital, bonds get paid first and are thus less risky. Because equity is last to get paid, it's returns are higher to compensate for the risk. Higher risk means higher returns. Lower risk means lower returns. This is a basic tenet of economics and finance. If wealth is growing over long periods of time, stocks will always do better than debt. Equity should do better than real estate and commodities. Over long periods of time, real estate grows at about the rate of the economy, give or take a bit. Commodities are priced over marginal costs, which is influenced by production technologies and substitution effects.
Nobody is saying that SS should be 100% in equities. But it shouldn't be 100% government debt either. I know of no other pension plan in this country that does that. And many countries are now running their SS as real pension plans, with allocations across many asset classes.
The major problem we are having in this debate, is the fact that we are allowing apples compared to oranges, as if they are the same. We don't currently have an investment-based social security system. You do not invest in Social Security, you pay a SSI tax, what amounts to a premium for insurance. Insurance that, when it does finally pay off, is paid in monthly installments, only until you die. You have no "investment" in this system, it is purely a government distributed program, relying on the benevolence of Congress. By the way, Congress has already borrowed and spent all the money in the system, and if you are under 50, there will probably not be a benefit for your contributions at all, by the time you retire. So you would have been much better off investing in the Japanese stock market, and losing half your money, or stuffing your money in a mattress.
the U.S. has continued to pay its debts through good times and bad.
Yeah? Well how the hell did we get $13 trillion in the hole??? By paying off our debts???
Wow - no - clearly - you're the genius.You're such a goddamn genius, I am sure you can explain this to me. It looks to me like, we've been amassing more and more debt, instead of paying it off.
Why?
Again, if America stops growing, or there is a catastrophe, why do you think government liabilities are safe?
Did I ever say they would be? If we use your favorite metric, however - the PAST - we would see the U.S. has continued to pay its debts through good times and bad.
I just think any investment strategy that assumes stocks will always out-perform bonds in the long run is fundamentally flawed as it is based on a selective sampling of past data. You might think of any number of investment strategies to deal with this - 50/50 bonds and stocks from around the world, or maybe take some of your funds and put them into something with intrinsic worth like forest or farm land, or perhaps make delta neutral investments that seek to capitalize from movements in the market, or buy commodities. Whatever you do - blindly assuming stocks will always outperform treasuries over ~30 year periods is just fool and social security policy should not be based on it.
There is an economic logic to why equities will do better than government debt or any debt over the long run. It's because in the distribution of returns to capital, bonds get paid first and are thus less risky.
Yet your entire premise is based on the idea that a 30+ year investment in the stock market is actually low risk.Higher risk means higher returns. Lower risk means lower returns.
ONLY IF THE AVERAGE INVESTOR IS RISK AVERSE.This is a basic tenet of economics and finance.
You're making a prediction of the future based on a very tiny sample.If wealth is growing over long periods of time, stocks will always do better than debt.
Nobody is saying that SS should be 100% in equities.But it shouldn't be 100% government debt either.
There is a myth perpetuated in the world of finance that over long periods, the stock market will always net positive returns - some better than others - but it will always at least beat U.S. Treasuries.
This myth is based on the past performance of the U.S. stock market alone. Using on U.S. data creates quite a selection bias, as there is no fundamental reason to believe the future of the U.S. markets could not possibly look like the past markets of nations other than the U.S.
To give an example - look at the Japanese stock market over the past ~25 years. The Nikkei 225 has not even recovered to HALF of what it was before the crash.
Two words: Warren Buffett
Are the laws of nature different in Japan?Also, we're not in Japan.
the U.S. has continued to pay its debts through good times and bad.
Yeah? Well how the hell did we get $13 trillion in the hole??? By paying off our debts???
By spending exceeding revenue. Duh. What are you, a fucking idiot?
Wow - no - clearly - you're the genius.You're such a goddamn genius, I am sure you can explain this to me. It looks to me like, we've been amassing more and more debt, instead of paying it off.
So if you want statistical samples, starting in the year 1900, there are 62 discreet 50-year samples.
Yeah? Well how the hell did we get $13 trillion in the hole??? By paying off our debts???
By spending exceeding revenue. Duh. What are you, a fucking idiot?
Wow - no - clearly - you're the genius.You're such a goddamn genius, I am sure you can explain this to me. It looks to me like, we've been amassing more and more debt, instead of paying it off.
So we've obviously NOT been paying our debts, if we are spending more than our revenue. We are ACCUMULATING debt, not paying our debt. If you charge $5,000 on your charge card, and pay the minimum $140 monthly payment, you are not paying your debts. That's called FLOATING your debt. When you continue to spend $5,000 and pay $140, you will gain MORE debt, you are NOT paying the debt off.
Well, what do you mean by "survivorship bias" then?
As for population growth, again, if the population is shrinking by 5%, you ain't getting your SS, or far less of it, because there are less people paying for more recipients. It's finished.
Yeah, I get that criticism. I've been around pensions for most of my career, and I've looked at SS. Even though it is a pay-as-you-go system, it mimics a government bond fund. IOW, if rather than acting as a pass-through, it actually bought government bonds, the economics would be the same as the way the SS trusts are debited and credited now.
Every pension fund in America owns government bonds. SS should also. It just shouldn't be invested 100% in government bonds.
