Opinion - A 10 year inflation adjusted doubling rate for a young investor is mediocre at best and this is the best buy and hold strategy you could have had with the benefit of hindsight. My feeling is that a young investor needs to be doubling their money every 6-7 years, which is a reasonable expectation for a decent aggressive buy and hold stock portfolio, adjusted annually.
Opinion - What is the worst performing fund data telling us? It says we must have outstanding years during the bull years to compensate for the enormous losses we are going to take in the bear years. Subsequently, the best performing data tells us we can get away with lagging the market in the bull years, as long as we do not get crushed in the bear years.
Your conclusion is that the bull benchmark is the wrong benchmark and that an average benchmark is more appropriate.
Also, I would like to draw to your attention, the fact that the same timer could have quadrulped their return if they lagged the best performing fund by 3% or less. They could have tripled their return if they were within 8%. I don't know the retirement horizon for all our members, but I have a general idea about enough of them that I am willing to propose that the majority of our young aggressive investors are on target for the later goal (with the right support network and some more experience). Given that most people here are still in the learning stages, I would call the site a preliminary success, but only time will tell. You may not agree with what I have to say, but I think you can see where the motivation comes from.
The last thing I want to mention, is that the 20% in each allocation would have only slightly better then doubled an investor's money WITHOUT adjusting for inflation over the ten year period - that IS abyssmal.
You draw different conclusions from similar data. That is your right. I think this side study is seriously skewed by the atypical data from 96-03. I bet if we widened it out to include the entire TSP period it would be more useful. I think it is a serious investment mistake to benchmark your return to the highest asset class return minus a certain percentage. What if you decide that if you can just stay within 12% of the top performing fund you'll meet your investment goals, and then for the next ten years NOTHING returns more than 15% a year, you could have poor investment returns and yet still beat your benchmark.
Now, I want to argue with your opinions. Doubling an investor's money in real terms every ten years is an excellent return, not an abysmal one. In fact, it is a better return than the long term returns of the S&P 500. I disagree that an investor needs to double his money (in real terms) every 6-7 years to reach his goals. Also, I DON'T feel that that it is a reasonable expectation for a decent aggressive buy and hold portfolio. I think a reasonable expectation for an aggressive buy and hold portfolio is 9-10% (6-7% real). Doubling your money every 6-7 years is the equivalent of a 10-12% annualized return, without counting inflation. Counting inflation, we're talking 13-16%. That is a fantastic return, and much better than I am planning on with my buy and hold investment portfolio. Let me tell you just how fantastic a 12% real return is, if an investor can pull it off.
An investor who saves a mere 10% of his income each year can retire after only 29-30 years of work and easily maintain his pre-retirement lifestyle (4% withdrawal rate) without any assistance from pensions or social security. Hell, if you can pull off 12% real returns consistently, you don't even need to limit yourself to a safe 4% withdrawal rate. Why not have a 8% withdrawal rate? Then you could retire after a 24-25 years. Since most investors will have at least social security, they could work even less years. Certainly this return is much better than is required for the typical investor. Perhaps those who start saving late or don't save much of their income need a 12% real return, but most of us shouldn't. I expect to fulfill my investment goals with a 24 year career, a 25% savings rate, and 5% real returns, without social security.
12% real return is extremely optimistic, especially for a buy and hold investor. The historical S&P 500 real return is 6.5-7%.
Real returns for the TSP funds over the last 10 years have been:
G Fund: 2.7% (money doubles every 27 years)
F Fund: 3.4% (money doubles every 21 years)
C Fund: 6.2% (money doubles every 12 years)
S Fund: 6.9% (money doubles every 10 years)
I Fund: 2.9% (money doubles every 25 years)
How do you figure you can pull off 12%? I think that is exceedingly optimistic and is an idea that was heard a lot during the roaring 90s. If your investment plan depends on 12% real returns I submit that you are likely destined to fail, no matter how good your asset allocation or how good you are at market-timing.
As far as benchmarks go, I have been thinking that the best benchmark for you market timers would be to take the average return of the 5 funds on a daily basis, and combine them to make up the entire year's return. This would be the equivalent of performing against 1000s of monkeys who traded their portfolio every day.
The last idea I would like to dispute is this idea that many of the market-timers are just learning. So are some of the buy and holders. How long of a learning curve can one tolerate? If half of your investing lifetime is the learning curve, how much better do you have to do in the last half to make up for your underperformance in the first half when compared to a simple buy and hold allocation that you could have developed during the first week of your investing lifetime? How long does it take to be a proficient market timer? Why do some people still not seem to be able to do it despite the fact that they study the markets every day for decades and even design websites to talk to others about it? Because it's hard? Maybe. Because it's impossible and those who seem to have success doing it are actually just lucky? Seems like a more likely explanation to me. But give it time. We'll see in a few years if all those people learning are getting better.
