While I agreed with a lot in this post, I'm also pretty wary of the underlying, unstated idea that average investors can avoid bubbles popping while also somehow taking advantage when things go up - that is, he doesn't really say it in so many words, but he's essentially talking about timing the market.
I started my tech career around the turn of the century, and made the mistake of putting a ton of money (at least for me, at the time) into Global Crossing. My thought was that while there were all these "fluffy" doomed dot coms at the time, Global Crossing had billions in real, physical infrastructure they built. Obviously I didn't quite understand debt at the time, never mind the actual fraud that Global Crossing committed (I remember thinking "Wow, stocks really can go to zero and never come back.")
Sure, you could argue I made every newbie investor mistake in the book, but the worse consequence for me was that it "spooked" me early in my investing career, such that I became very reticent to want to invest in things when I felt they were overvalued. E.g. I was one of those people who thought there was a giant tech bubble when Facebook bought Instagram for a billion dollars - in 2012...
So sure, you may think I'm an idiot, but I can quite guarantee I was far from alone. It was only at the point where I really, truly believed "I'm definitely not smarter than anyone else in the market" (and hardly anyone is) that I just put my money in index funds, did regular rebalancing, and otherwise forgot about it.
We may be in an AI bubble, we may not, but I've seen way too many "vastly overvalued" companies continue to be "vastly overvalued" for over a decade (and then only briefly coming down before shooting back up again) to think that Tim Bray has any special insight here.
My knee-jerk reaction is to point out that "even if you bought the S&P at the height of the dotcom bubble, the annualized return over the past 24 years was ~5.5% (not including dividends)"
And while I think this line of thinking is still more correct than not, I wonder how much I (and a lot of other folks in the US) are discounting the possibility of a prolonged period without growth.
Despite shocks like in 2000 and 2008, the S&P has spent very little time "underwater" over the past 50 years. But that's not the case if you look at something like the Nikkei, which took until this year to get back to its 1990 peak.
Whether or not they're discounting the possibility of a prolonged period with little growth, the fundamental issue is that this is essentially unknowable, at least to your average investor. The 2 issues I see with this line of thinking (i.e. comparing it to the Nikkei):
1. You wouldn't want to dump 100% of your money in an S&P 500 index fund. There is a reason to diversify.
2. The point of dollar cost averaging is essentially to reduce the risk of dumping all of your money in (or out) at a bad time. Taking your Nikkei example, I'd be curious to see if you looked at, say, investing the same amount of money on the first of the month over a 2 or 3 year period. The amount of time you'd be under water over the past 4 decades would be much less than just looking at any single instance in time.
I don't have monthly data, but as an approximation here's a rough test where you make a one time investment of $1000, either all at once, or equally spaced over 2 or 5 years. This is simulated starting at each year from 1985 to 2005, and we count the number of years underwater starting 5 years after the first year (after $1000 has been put in for all 3 "strategies") up until 2023.
S&P:
once dca_2yr dca_5yr
count 25.0 25.0 25.0
mean 0.7 0.8 0.7
std 1.8 1.5 1.1
min 0.0 0.0 0.0
max 8.0 6.0 3.0
Nikkei:
once dca_2yr dca_5yr
count 25.0 25.0 25.0
mean 11.4 11.5 11.8
std 9.1 9.5 9.4
min 0.0 0.0 0.0
max 29.0 29.0 28.0
So investing at once, the max number of years underwater for the S&P was 8, versus 3 when "dca"ing over 5 years. The average number of years underwater (averaged over when you would've invested) is quite low, while for the Nikkei all metrics look much worse.
Thanks! Curious, how/where did you get the data for this analysis? Also, don't know if you included dividend reinvestment - that has a huge overall impact.
I did not - adding an optimistic 2% dividend didn't change much for the S&P, but slightly reduced the underwater counts for the Nikkei (max 23, average ~7.5)
I had the exact same experience with Bitcoin back around 2014. Only now just getting back into investing as I realise it's an important thing to do for wealth preservation.
I suppose it's not uncommon for people to have this kind of experience, so I'm just glad I had it young.
It was only at the point where I really, truly believed "I'm definitely not smarter than anyone else in the market" (and hardly anyone is) that I just put my money in index funds, did regular rebalancing, and otherwise forgot about it.
I had this experience with 3D printing. In 2010 Google/Meta were transitioning to Mobile. It was not at all clear at the time that Mobile would turn them into multi-trillion dollar behemoths. To have bet the farm on FANG at the time would have been extreme.
Dropping money into an index fund is generally the right way of going about things. My suspicion is that those who talk about clearing N million on NVidia big bets either had enough money that they could go long with 1MM on a single stock with Y thousands or just got very lucky in their first trading experiences.
If someone gets 1/100 luck three times in a row - then they can easily get to 1-10MM portfolios from a ~10k starting point. You'd expect around 1 in one million traders to do this.
I thought that $10 billion valuation of Facebook in 2010 was crazy and sold of my Bitcoins around 2011-2012 because of similar sentiments. And since around the same time I've been reading stories about how tech is in a bubble on front page of HN.
You chose a portfolio distribution, 75% NASDAQ 25% S&P.
After 1 year, you look at your portfolio, and because of market movements, your portfolio is now 81% NASDAQ and 19% S&P.
So you sell some NASDAQ and buy some S&P to rebalance to 75% / 25%.
Rebalancing can be any mix of securities or assets (or both). You decide how you want your wealth distributed, and you rebalance to stay within those levels.
Suppose you have an asset allocation strategy that is 25% US stocks, 25% international stocks, 25% real estate (REITs), 25% commodities (I'm not suggesting you do this, but this was the allocation in Roger Gibson's famous multi-asset allocation strategy paper - google it). To implement this you would want to:
1. Choose 4 different funds to represent each of those classes (e.g. an S&P 500 index fund, an MSCI EAFE fund, etc.). You want to be sure to reinvest dividends.
2. On a specific time period (i.e. once a quarter) you rebalance your portfolio - if anything has gone above 25%, you sell it so that you can buy anything that has fallen below 25%.
Many investment platforms let you essentially do this automatically these days.
Not OP. They probably invest in more than one fund, and want to keep the ratio balanced. Eg: 60% MSCI World, 20% Emerging Markets, 10% Tbonds and 10% Gold.
Every few months they would check the ratio and “rebalance”
I started my tech career around the turn of the century, and made the mistake of putting a ton of money (at least for me, at the time) into Global Crossing. My thought was that while there were all these "fluffy" doomed dot coms at the time, Global Crossing had billions in real, physical infrastructure they built. Obviously I didn't quite understand debt at the time, never mind the actual fraud that Global Crossing committed (I remember thinking "Wow, stocks really can go to zero and never come back.")
Sure, you could argue I made every newbie investor mistake in the book, but the worse consequence for me was that it "spooked" me early in my investing career, such that I became very reticent to want to invest in things when I felt they were overvalued. E.g. I was one of those people who thought there was a giant tech bubble when Facebook bought Instagram for a billion dollars - in 2012...
So sure, you may think I'm an idiot, but I can quite guarantee I was far from alone. It was only at the point where I really, truly believed "I'm definitely not smarter than anyone else in the market" (and hardly anyone is) that I just put my money in index funds, did regular rebalancing, and otherwise forgot about it.
We may be in an AI bubble, we may not, but I've seen way too many "vastly overvalued" companies continue to be "vastly overvalued" for over a decade (and then only briefly coming down before shooting back up again) to think that Tim Bray has any special insight here.