I downloaded the historic S&P 500 data going back 41 years. I dumped everything in Google Sheets and modeled three different portfolios named after three fictional friends Tiffany, Brittany and Sarah. All three saved $200 of their income per month for 41 years for a total of $99,000 each. But after 41 years they all ended up with different amounts based on their investment strategies.
Buy and Hold
Tiffany, Brittany and Sarah all knew the value of buying and holding. And they all invested in the same thing: an S&P 500 index fund. Once they bought, they never sold and always reinvested dividends. But they had different strategies about when to jump into the market.
Two Market Timers
Tiffany and Brittany were aware that the stock market could be very volatile and they wanted to avoid market crashes. It turns out they were right as there were five significant market crashes during the last 41 years as shown here:
US Stock Market Crashes 1979-2020
| Dates of Crash | Duration (Days) | Percent Drop | Event |
| 8/25/1987-12/4/1987 | 101 | 33.4% | Black Monday |
| 7/16/1990-10/11/1990 | 87 | 19.7% | Kuwait War |
| 9/1/2000-10/9/2002 | 768 | 49.0% | Dotcom Crash |
| 10/12/2007-3/9/2009 | 514 | 56.5% | Financial Crisis |
| 2/19/2020-3/23/2020 | 33 | 34.1% | COVID Crash |
Tiffany Top invests at the top of the market
Tiffany, it turns out, has the world’s worst market timing. She saved her $200/month in a savings account getting 3% interest until the worst possible times. She started by saving for 8 years only to put her money in at the absolute market peak in 1987, right before Black Monday and the resulting 33% crash. But she never sold, and instead started saving her cash again, only to do the same at the next five market peaks. Each time she invested the full amount of her saved cash only to watch the market crash immediately after. Most recently she put all her money in the day before the 2020 COVID crash, only to see it immediately drop 34%. She’s been saving cash ever since waiting for the next market peak.
With this perfectly bad market timing, Tiffany still didn’t do too bad. Her $99,000 she saved and invested over the last 41 years is now worth $773,358. Even though she invested only at each market peak, her big nest egg is thanks to the power of buying and holding. Since she never sold, her investment always recovered and flourished as the market inevitably recovered far surpassing her original entry points.
Brittany Bottom invests at the bottom of the market
Brittany, in stark contrast to Tiffany, was omniscient. She also saved her money in a savings account earning 3% interest, but she correctly predicted the exact bottom of each of the five crashes and invested all of her saved cash on those days. Once invested, she also held her index fund while saving up for the next market crash. It can’t be overstated, how hard it is to predict the bottom of a market. In 1990 with war breaking out in the Middle East, Brittany decided to dump all her cash in when the market was only down 19%. But in 2007, the market dropped 19% and she didn’t jump in until it fell all the way down to a 56% drop, again perfectly predicting the exact moment it had no further to fall and dumped in all of her cash just in time for the recovery. Just this year in 2020, Brittany wisely waited until March 23rd to dump her savings into the market, buying at a steep 34% discount.
For this impossibly perfect market timing, Brittany Bottom was rewarded. Her $99,000 of savings has grown to $1,123,573 today. It’s certainly an improvement, but interesting to note that when comparing the absolute worst market timing versus the absolute best, the difference is only a 45% gain. Both Brittany and Tiffany have the vast majority of their growth thanks to buying and holding a low cost index fund.
Sarah Steady auto-invests every month
Sarah was different from her friends. She didn’t try to time market peaks or valleys. She didn’t watch stock prices or listen to doomsday predictions. In fact, she only did one thing. On the day she opened her account in 1979, she set up a $200 per month auto investment in an S&P 500 index fund. Then she never looked at her account again.
Each month her account would automatically invest $200 more in her index fund at whatever the current price happened to be. She invested at every market peak and every market bottom. She invested the first month and the last month and every month in between. But her money never sat in a savings account earning 3% interest.
When Sarah Steady was ready to retire, she signed up for online access to her account (since the internet had been invented since she last looked at it). She was pleasantly surprised with what she found. Her slow and steady approach had grown her nest egg to $1,620,708. Even though she didn’t have Brittany’s perfect ability to know the bottom of the market, Sarah’s investment crushed Brittany’s by about $500,000.
Recap
- Amount Saved/Invested: $99,000 each
- Investment: Buy and hold an S&P 500 index fund
- Tiffany (worst timing in the world): $773,358
- Brittany (best timing in the world): $1,123,573
- Sarah (auto invests monthly): $1,620,708
Tiffany, Brittany and Sarah aren’t real. No one can perfectly predict market tops or bottoms. But these numbers are real, based on the exact returns of an S&P 500 index fund and a 3% interest savings account over the last 41 years.
Here is the spreadsheet I used to generate these results.
If you’re worried the market is too high and we’re due for a crash. Or you want to wait for the inevitable drop before you put your money in. Think about whether you’re so good at predicting the market you can do it better than Brittany who knew when to invest down to the exact day. And even if you are that good, realize that it’s still a losing strategy to the early and often approach that Sarah executed so flawlessly.
P.S. This is an update from
a similar post I made a year ago. That's why it's the odd 41 years instead of 40. I thought since we've experienced another market crash since then it was due for an update with the most recent market data included.
The whole thing came up recently during some discussions I had about why people use the dollar for international trade and what would happen if the major economies of the world just stopped using the Dollar. What is the Impact of BRICS. Why US has so many wars in the middle east and they are supposedly for oil but they never really take over any oil. How US is so rich to have 800 military bases around the world with a defence budget larger than the rest of the world combined. About why countries still hold US dollar reserves when US is in trillions of dollars of debt and being in so much debt, how is US economy still afloat? So I thought of putting it together here for myself and anyone else who may want to learn about this. Now, this is what I have gleaned from my reading on the matter. I am no economist so if anyone wants to correct me on anything, I would be welcome to accept the criticism with reference material substantiating your point.
in 1944, all the countries entered into the Bretton Woods Agreement which basically said that all of the world’s currrecies would be backed by the US Dollar and the US dollar would be backed by gold and any country could convert their currency into US dollars and then redeem US gold in exchange for that at the rate of 35 dollars per ounce of gold. Since US had the largest gold reserves at the time (75% of the entire world's gold), everyone agreed. This also allowed US treasury to fix exchange rates of dollar into different currencies and set the interest rates for interbanking transactions etc. However, the multiple wars of the US during the ’60s caused domestic inflation in the US and the value of Dollar to fall. This caused panic in all the countries and they started redeeming gold from US treasury. The US gold fell from 20,000 tonnes to 8100 tonnes very quickly. Thus, in 1971, Nixon closed the gold window i.e. he suspended the ability of any nation to redeem US gold against dollars and took the gold backing off of the US Dollar. While that allowed US to retain its gold reserves, it made the need of the US dollar among other countries non existent. So everyone started to move away from the Dollar. After that, US economy started to spiral and the price of gold became 135 dollars per ounce. On top of that, the Arab world hiked the oil prices. Now, the US desperately needed to stabilize the spiral. So they brokered a deal with the Saudis that the oil producers would not only trade oil in nothing but US Dollars and convince the OPEC (the middle eastern, north African and other oil producing countries) to do the same but also invest their (OPEC’s) oil profits in US treasury by buying US Treasury bonds. This basically means that they (OPEC) are buying out US debt. Not only this, US is printing Dollars against the amount of Foreign investments in the US treasury which is made by Oil producing nations which are their oil profits. So basically, profits from every barrel sold by OPEC make way to the US treasury and become the value against which dollars is printed. Ultimately, more the profits in oil, stronger the dollar and lesser the profits in oil, weaker the dollar. Thus US gets a double benefit out of every barrel of oil in a way. In exchange the US would sell them (Saudis) advance weapons and all the gold they demanded. (So basically weapons and gold sale in exchange for trading oil in dollars props up US dollar. Gold is still propping up US dollar indirectly by forcing the oil producers to trade in dollars). Thus the petrodollar was born. This caused the world to need US dollar again. If you wanted to buy oil, you needed US dollar by either converting your currency or by selling stuff to the US. The latter is more preferred as it is cheaper than exchanging your currency and also grows your economy. So once again, US became the benchmark of international trade since no country can hope to grow its economy without using energy aka oil and you can’t have oil without US dollars. As long as all these countries need oil, US can just print Dollars out of thin air and balance it against oil barrels (as explained above) without actually even owning a single drop of oil. (Other countries need to own the gold that they balance their currency against). US does not need to control oil, they just need to control the currency it is traded in to keep their economy afloat. (more on that later in US foreign policy). Similarly, US bokered a deal with the Latin American countries to not only trade in the US Dollar but also to give precedence to US, EU and Japanese products in trade. So if more and more countries decide to shun the dollar and trade in other currencies, this would eventually cause OPEC to switch as well and Dollar could collapse.
How? Well, US is basically just printing enormous amounts of money out of thin air. This money is being used domestically and to a much larger extent, globally. If international oil trade in dollar stops, people stop needing the dollar and use their own currency. So all the internationally circulating dollars would come back to US. Now that is just too many dollars against very little amount in the treasury and that would cause hyperinflation and economic spiral. However, the logical next step would be to just destroy the excess dollars coming in from abroad and that would keep the country’s economy afloat. While that is okay but remember, what is the dollar being printed against? The foreign investments in the treasury which are the profits from the oil trade in dollars. That would go away as well essentially leaving nothing in the treasury against which the dollar is valued. Hence dollar will literally not be worth the money it is printed on.
Second, since US currency is basically a petrodollar, its power depends on the control of oil. So right now, whoever controls middle east has major power. Today, Saudi Arabia controls Middle East and US controls Saudi Arabia. US-Saudi brotherhood sort of makes it impossible for other countries to have an influence over this. Russia has tried for decades to establish a strong foothold in the middle east but has been unsuccessful. It has also dictated the US foreign policy far the last 5 decades. Like I said, US needs to control not the oil reserves but the currency oil is traded in. Hence all the wars we hear that were for oil, were not actually for oil per se but intimidation tactics against countries that announced that they would no longer accept dollar as a currency in international oil trade. Egs When the Ayatollah of Iran announced their intention to denounce dollars in oil trade and use their own currency instead, US backed Iraq to go to war with Iran and even provided the Weapons of mass destruction to use on Iran that they later used as an excuse to invade Iraq and prosecuted Saddam Hussein for. When Iraq invaded Kuwait ( a major producer of oil) to be able to pay their loans to Kuwait and then later asked for Euro to be used for oil trade rather than Petrodollar, US invaded Iraq. When Gaddafi asked gold based Dinar instead of US dollars for oil trade, US invaded Libya. When Chavez did the same, Us staged a coup in Venezuela. However, starting a non-petro currency would break this link and oil and Middle east would become less relevant for Economic power and only be of interest for energy concerns. It is still important but less so than a economic and geopolitical chessboard of US that it is today. It may actually be a solution to achieving peace in the middle east.
However, another thing that happens is Middle East controls prices of oil which is tied to the Dollar. Recently, the Middle East (OPEC or basically Saudi Arabia) has decided to drop the international prices for their own economic reasons. Now, the countries that have oil production as a major source of revenue and trade in dollars eg many N African countries, Venezuela have seen their economy completely stabilise and destroyed. These countries are sick of US and Saudi controlling the markets in a way that affects other countries adversely. Hence, for these countries, switching to the international trading system of a gold based currency will cause their economies to stabilise.
The international reserves of EU etc, on the other hand have seen increased holdings by the OPEC countries and have been worried of increasing power of these countries in the international banking system. They would be only to glad to get rid of these holdings.
Now, non Dollar currency would cause a fall in the US dollar value. In lieu of that, here is another thing that needs to be considered. A lot of the developing countries have international trade deficits. Now these trade deficits can be in the currency of the country to whom the debt is owed or any other internationally accepted currency eg. the Dollar. If the debt is in dollars, the conversions and interest rates of borrowing are determined according to the rules of the US treasury. Again, the rates in the US treasury are linked to the value of dollar. Most countries giving out loans prefer to do so in dollars as historically the Dollar is strong and trusted not to collapse and hence the money they owe is safe. The countries taking loans also convert their debts to dollars as it is easier and the country to whom the debt is owed cannot just up and change the value of the debt owed by manipulating their currency as dollar has determined the conversion into other currencies at fixed rates, so it is safe for everyone. However, there is a slight problem with this. If you owe a debt of 1 dollar to someone, when you pay the debt, it will depend on the value of dollar to your currency at that particular instant. So if dollar has gotten stronger wrt to your currency, you shall have to pay more money and if the dollar has gotten weaker, you will owe less money in your currency. Hence the fall of the dollar would be beneficial for the countries who owe debt in dollars and bad for the countries who have loaned out debt in dollars.
Also, taking debt in dollars becomes cheaper if the value of dollar falls since the US treasury interest rates are directly tied to dollars, hence it becomes cheaper to borrow in dollars. Also, as I said, if it grows weaker still, yo will owe less money.
One more thing to consider regarding fall of the Dollar is this. Uptil now, the oil producers have been buying US treasury bonds due to the Bretton Woods deal. Other countries and US and other corporations do so too. Now, the US treasury gives a fixed rate of interest to those investing in the treasury. This rate, in turn is linked to the value of the dollar. Stronger the dollar, more the interest on US Treasury bonds and more the foreign countries invest in it. Now this means that these foreign countries would much rather invest their money in US Treasury at an assured fixed rate of interest than invest it in 3rd world countries and take a risk of maybe losing it. However, if the value of dollar were to fall, the countries would much rather draw out of the US treasury and invest more in the startups in different countries, domestically etc.
The other side of the same coin would be the countries dependent on US investment. Should the value of the dollar fall, the investment being received from the US would be of a lesser value.
On the other hand, there is one more thinh. Like I said, investments in dollars are governed by the US treasury rules. Now, basically, US banks have cut the taxes on money transfer and conversion, artificially keeping them very low to fuel the domestic and world trade etc . If the dollar were to collapse, people wouldn’t trade in dollars. They would trade in other currencies. The inetrbanking across the world would be then governed by the rules of the currency you trade in, for eg, BRICS nations will follow the tariffs etc of the Shanghai Bank where most of the reserves are held. So that effect would then depend on the rules of the bank you deal with and that can be detrimental or beneficial depending on the bank’s policies compared to the dollar.
Also, countries having holdings in the US treasury would lose the entire value of their foreign reserves. On the other hand coountries like BRICS who have their reserves in other international banks would retain the value of their foreign reserves in those banks.
What does this mean?
Indian Currency would also fall with the fall of the dollar in its current state. Now, we usually run around with the perception that Indian currency is backed by gold, That’s not true. The truth is 99% of today’s currencies US Dollar, Euro, Indian rupee, all of them are fiat currencies i.e. their value is not determined by the gold they hold but by the economic strength of the government. Only an average of 4–7% of any country’s currency is today, backed by gold. US Dollar - 4.5%, Indian rupee - 5%. The rest is held in the terms of foreign reserves in other countries like in the form of US Dollar (around 70%) in US treasury bonds, in world bank or IMF, in other currencies (around 25%) in BRICS and other foreign reserves etc. Currently if you have rs 1000 , only rs 50 is gold, around 670 is held in the form of US dollars and Rs 280 in other currencies. You might ask why is that? Well, remember the Bretton Woods agreement. At that time US had 75% of the world’s gold which backed dollar and dollar backed other currencies so most of the currency of any country was backed directly or indirectly through dollar by gold. Now, it is difficult to keep gold in your country so it was convenient for other countries to just hold foreign reserves in dollars especially with the fixed exchange rates they provided. Hence more and more portion of their currency was being held in dollars. However, after Nixon shock of 1971, dollar removed its gold backing. So, automatically all other currencies that were backed by dollar (99% of the world currencies) also became fiat currencies as a result. However, the dollar was still good and trusted so no one thought much of it, especially since dollars were being printed out of thin air. However, now with the prospect of the trust in dollar fading, this as started to worry some experts. Because of the senseless printing of dollars and in exchange all the fiat currencies, the total amount of currency can nowhere near be compensated by the gold reserves even if all the gold in the world was put together. It would form not more than 10% of the currency in the world. Now, putting this disturbing detail aside, if Dollar were to collapse, 670 rupees of your 1000 would become worthless, too. So, it isn’t wise to hold US dollars, is it? No its, not and many countries have woken up to that fact.
China has been secretly amassing large amounts of gold. OPEC countries have started removing their capital from US treasury. See, these oil producers have been receiving US gold in exchange for trading oil in US dollars and have accumulated holdings in other countries’ treasuries. Now with all the crazy gold they have received they have bought material assets like real estate etc even in other countries. Now, they can simply sell out their US treasury bonds and buy more assets such as gold and real estate from it, which they have been doing in the recent years. Now, this will start depleting the treasury and cause the fall in the value of the dollar in turn causing other countries to withdraw and invest elsewhere. That, coupled with Russia and China doing trade in Roubles and Yuan, India and Iraq trading oil outside of dollar, Germany and China trading outside of Dollar, the strenghtening of BRICS bank etc, Dollar has been showing a steady decline. So India should also wisen up and start replenishing its treasury with gold and sell off holdings in dollars and euros and invest in other currencies on the rise. This is one reason BRICS could be very important for India and other countries in BRICS whether we like it or not.
Another thing that using another currency would do, it would take away the power of the US to slap economic sanctions on whichever country they choose. This is one of the major reasons Putin has teamed up with China - in order to bypass US sanctions.
[Edit: The thing that worries most nations is this - having international trade and foreign reserves in dollars gives US a single handed say on their economies. Just like Nixon's unilateral decision changed the fate of all currencies, other decisions by it can also change their economies. US can dictate their rules and if you don't follow them - sanctions. So the countries want to take back the power of making decisions in their own hands. Next, the petrodollar is based on a commodity that is being depleted. Oil reserves are declining and the world is moving towards other sources - gree energy, nuclear energy etc. So the petrodollar decline is destined. However, what would US do next? They could shift to backing their currency with nuclear reserves or some new crazy idea out of someone's hat. That will, inevitably affect all other countries and they want to and should have a say in it.] On the other hand, China's attempt to start a gold backed currency may not pan out because like I said all the gold in the world is not sufficient to back all the currencies in the world. Also, since most currencies still have a large amount of dollar backing, fall of the dollar would make that percent of the currency valueless and therefore even having a reserve in another foreign currency could still cause a fall in Indian currency though it might be a little mitigated. On the other hand, fiat currencies are run by the investors' trust in the currency. So even if the dollar falls, a fiat currency with foreign reserves in the dollar may not fall because the confidence in that currency is still high. Sadly, such a currency would be Chinese Yuan. So, the policy to fix this? I am still trying to work on that solution. This is a post in evolution. My thoughts on this are still in evolution and I would really like some economists to come and hold a serious, well informed and sane discussion on this.
I will add more when other points occur to me or are brought forward to me in any online or offline discussions.
Edit 2 : Also read some interesting discussions I had regarding this :
- Discussion with u/noob_finger2 on a few doubts and list of some sources for the material
- Discussion with u/abyssDweller1700 on the same post I put up in another subreddit regarding whether Bitcoin could play any role,if any
- a 1972 book - Limits to Growth by Donella H. Meadows, Dennis L. Meadows, Jørgen Randers and William W. Behrens III which discusses Energy, economics growth and limitations. Quite ineteresting
- Also some other informative links to stuff some users posted -
i.
https://www.youtube.com/watch?v=DyV0OfU3-FU&list=PLE88E9ICdipidHkTehs1VbFzgwrq1jkUJ - by
u/weeping_peacock which is a crash course by Mike Maloney that explains the problems of fiat currency pretty well
ii. animated documentary explaining relation between debt, interest, oil and EROEI
https://www.youtube.com/watch?v=VOMWzjrRiBg bu
u/weeping_peacock iii. recent article by Tim Morgan (ECoE, Energy Cost of Energy)
https://surplusenergyeconomics.wordpress.com/2017/09/05/104-why-mr-trump-cant-raise-american-prosperity/ again, by
u/weeping_peacock iv.
https://www.youtube.com/watch?v=djwPqAJ_3GY by
u/mangomafia which basically reaffirms what all I have said in the post
I am yet to check out the links by some other users and I shall update the post with the links when I do.
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