ericastewart
New member
There is one investing statistic that I see more than any other. I’ll be innocently browsing Twitter or in the comment section of Reddit or blog post and someone will inevitably throw out this stat. It’s typically used in one of two ways:
The statistic I’m referring to is some derivative of the following:
X% of the time you make money investing in Y over Z time period
Actually, more often than not it is the following version of the above that is cited:
99% (or 100%) of the time you make money investing in the S&P 500 with a 20-year investment horizon
Now, there is nothing intrinsically wrong with this statistic or using this statistic per se. It is correct. It is a fact. What riles me up a bit is the way it’s used and what most people are saying implicitly when they use it.
They make it sound like the result of a fucking scientific experiment. Like the boyz at the lab ran the test once – ok, we made money, cool – then ran it again – positive again, nice – and again and again and again until they arrived at the conclusion that you basically never lose money investing in this way.
But this isn’t even close to reality. Firstly, the underlying mechanism is waaaay more complex and the observations more difficult to interpret than typical experiments. Secondly, the outcomes of this “experiment” are not iid outcomes. The observations are not individual, separate events. When people use this stat they make it sound like (implicitly, to be fair) it’s not the case that overlapping observational periods are a thing.
But they are; it’s usually based on 20-year windows moved forward by 1 month to create a new window. A “new” observation. I understand the rationale behind using a month as the time increase for a new period (most people invest monthly, I guess) but might the results be different if a different time period was used?
Using increasingly partitioned periods lends increasing weight to frequency of outcomes and masks significant downturns. And size is as important as frequency, particularly in investing in which the distribution is fat tailed, dominated by large moves rather than regular monthly moves.
What also makes me somewhat uncomfortable is the fact that this stat is only concerned with 1 index of 1 country in 1 particular period of history. A period in which the US was the most dominant economic force in the world, (nearly) entirely uninterrupted by economically-crippling events like wars, viruses, famine, currency collapse, defaulting on debt, mass emigration, brain drain, etc. etc. etc. Business has been, truly, booming.
But what about other countries in other time periods? One might see this statistic, infer that the stock market, any stock market, essentially doesn’t go down over 20-year periods, and swiftly invest the entirety of one’s life savings into the stock market. Or do something similar. This can go horribly, disastrously, painfully wrong.
Ok, the above is technically correct, but not a valid excuse for abusing this statistic without sufficient caveating. Induction is difficult. We see this stat and think that history will repeat itself. We may pile everything into our domestic stock market, or a global tracker, or the US market thinking we can’t lose. The probability is 0. We are certain.
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Is this just a me thing? Has anyone else had these feelings before?
- Hey you, look at this statistic. It’s amazing. How can you not invest? You’re an idiot.
- Hey you, look at this statistic. Your argument is invalid. You’re an idiot.
The statistic I’m referring to is some derivative of the following:
X% of the time you make money investing in Y over Z time period
Actually, more often than not it is the following version of the above that is cited:
99% (or 100%) of the time you make money investing in the S&P 500 with a 20-year investment horizon
Now, there is nothing intrinsically wrong with this statistic or using this statistic per se. It is correct. It is a fact. What riles me up a bit is the way it’s used and what most people are saying implicitly when they use it.
They make it sound like the result of a fucking scientific experiment. Like the boyz at the lab ran the test once – ok, we made money, cool – then ran it again – positive again, nice – and again and again and again until they arrived at the conclusion that you basically never lose money investing in this way.
But this isn’t even close to reality. Firstly, the underlying mechanism is waaaay more complex and the observations more difficult to interpret than typical experiments. Secondly, the outcomes of this “experiment” are not iid outcomes. The observations are not individual, separate events. When people use this stat they make it sound like (implicitly, to be fair) it’s not the case that overlapping observational periods are a thing.
But they are; it’s usually based on 20-year windows moved forward by 1 month to create a new window. A “new” observation. I understand the rationale behind using a month as the time increase for a new period (most people invest monthly, I guess) but might the results be different if a different time period was used?
Using increasingly partitioned periods lends increasing weight to frequency of outcomes and masks significant downturns. And size is as important as frequency, particularly in investing in which the distribution is fat tailed, dominated by large moves rather than regular monthly moves.
What also makes me somewhat uncomfortable is the fact that this stat is only concerned with 1 index of 1 country in 1 particular period of history. A period in which the US was the most dominant economic force in the world, (nearly) entirely uninterrupted by economically-crippling events like wars, viruses, famine, currency collapse, defaulting on debt, mass emigration, brain drain, etc. etc. etc. Business has been, truly, booming.
But what about other countries in other time periods? One might see this statistic, infer that the stock market, any stock market, essentially doesn’t go down over 20-year periods, and swiftly invest the entirety of one’s life savings into the stock market. Or do something similar. This can go horribly, disastrously, painfully wrong.
Ok, the above is technically correct, but not a valid excuse for abusing this statistic without sufficient caveating. Induction is difficult. We see this stat and think that history will repeat itself. We may pile everything into our domestic stock market, or a global tracker, or the US market thinking we can’t lose. The probability is 0. We are certain.
-----
Is this just a me thing? Has anyone else had these feelings before?