Charts & Tea Leaves

Brad DeLong  posted this chart.  I’ll assume I understand this.

These lines show your annual return on a stock portfolio.  The pink line is the return on a portfolio held for a decade, and the blue is the return for two decades.  The pink line ends in 2000, if you had invested then and cashed 10 years later you’d have lost between 5% and 10% per year.  Nice work Republicans.  The blue line ends in 1990, and if you cash out now you’d make maybe 4% per year over those 20 years.
Stock brokers do not lie, the average for both curves indicates a positive return on average.  But they don’t tend to highlight how volatile the market it.  One two decades is a long time in a person’s life.  Some periods have been awful – 1910 was a bad time to buy and hold for a decade – as well as some wonderful ones, see 1950!
We don’t live forever, so if your playing the market for you retirement you might want to think about how many decades you’ll have to smooth out these bumps.
20100207 Shiller Da#23FC8FE.xls
This chart also shows four dips, or cycles, and so, of course, an obvious question is does this chart say “Buy Buy Buy!” or “Sell Sell Sell”?
It says sell if you think the last dip is predictive of what will happen this time.  Notice how happy you’d be if you’d cashed out in 1960, and how long you’d have wanted to stay on the sidelines.  Very U-shaped.
It says buy if you think the dip will be more like the other two.  Or, if you hold period is long enough to wait out the dip.
Of course all that presumes that this kind of chart analysis is actually meaningful; or put another way the underlying system has cycles and the there is something consistent about the system over a period of 150 years.  I find that a bit hard to believe.
I find it interesting that buying in 1930, 1931 to hold for a decade got you a pretty good return.

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