Gold is the Worst Investment in History

Looks like 21 of the stocks remained as of 2014. I also wonder about the survivor bias for these types of funds.

Interesting note, this fund tracks pretty well the s&p 500 over the time period from 1969 on, which is not all that surprising. This fund puts to rest the argument that people could not buy an investment vehicle with similar returns to the full market, at least from 1931 on, as well as the effects of total loss and index re-balancing on return over that period.

 

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beef1020 said: ↑ "This fund puts to rest the argument that people could not buy an investment vehicle with similar returns to the full market, at least from 1931 on, as well as the effects of total loss and index re-balancing on return over that period."

Pick a fund, any fund. Pick a year, any year. "Voya Corporate Leaders Trust Fund (the “Trust”) was created in 1935 with the objective of seeking long term capital growth and income through investment generally in an equal number of shares of the common stocks of a fixed list of American blue chip corporations." This particular share scheme was sold door-to-door from 1930 on. Survivorship bias is huge. Lots of losers, swept into the dustbin of history. Don't count those! Better to make-believe you invested in Berkshire Hathaway back in 1955, with no brokerage cost or taxes lol. In the first six years (when stocks were cheap!) ~15% of these investment trust schemes failed completely. It would be interesting to know how many failed by 1940, or in the first ten years of the funds' existence. Who here would accept that kind of risk, total loss, today?

Oh ya, best for last. Typical load? 10%! Who here would pay that for a unit trust? These funds were intentionally marketed and sold to poor people who didn't know better, apparently. Front load, initial fee, secondary load (deductions from dividends, etc.) service fees, management fee, and a raft of other charges, taxes, etc. The average total load among installment investment plans was 16.58%. (Corporate Leaders Trust Fund Certificates A was 14.07% on $1,200. in 1936.) Insurance premiums bumped that avg up to 23.77%. Still sound like a good deal to you?

Investor performance MUST factor all fees &costs: this "performance" obviously did NOT. If it isn't already clear, NO the fund's real return WAS NOT equivalent to "the full market" or even an index fund after 1974. And that's why this fund was - according the owners! - "dead in the water" by the mid 1980s. "Voya" was NOT even competitive with the crummiest index fund, and for decades, by the owner's own admission.

>>The fund has made a comeback since 1988, when it was reorganized by Lexington Management in Saddle Brook, New Jersey. Former Lexington executive Lawrence Kantor said high fees tied to its outdated trust structure kept it from getting any flows, and changing to a unit investment trust made it competitive with modern funds. The fund "was dead in the water for like 20 years" because "it had such an outdated structure that it wasn't saleable," Kantor said. Told the fund now has $1.7 billion, Kantor, 67, said "That’s incredible, because when we reopened the fund I think it had $60 million in assets."

"It would be interesting to know how many of the people who actually put their money into (the fund) actually know what it is," said Rob Brown, chief investment strategist at United Capital Management, an investment advisory firm. "In a lot of cases, I bet they don't."<<

Sheeze-Louise. $1 bln or more in dumb money, or Got Lucky?

 

More likely, M&A and firms going private reduced more numbers.

Bankruptcies are rare among large diversified indices like the DJIA and S&P 500.

 

If you read his post, you saw that it shows what happened to the actual Trust. There is no survivorship bias because that implies losses are hidden from results. Losses are not hidden:

http://www.reuters.com/article/2015/02/27/voya-longterm-funds-idUSL5N0VY58B20150227

Actually, the fees were low on an annual basis. So the structure was designed to attract buy-and-hold investors. Total management fees were quite reasonable over the long haul.

I purchased my first mutual funds in the 1980's and the loads were often 8.25%.

You're right, it was BETTER. Check the chart below.

Jack Bogle, the Dean of Low-Cost Investing, has endorsed the fund.

That's not what the managers said. Reading comprehension is obviously not your strong point.

The reason the fund's fee structure was a problem was because most mutual funds went to an A-B-C structure. While high-upfront "A" fees like Voya (and my 1st mutual fund) could offer lower OVERALL fees over the long-haul, fidicuaries sometimes feared they would get in trouble if they sold the funds that paid the most upfront to them via commissions.

This was especially true of 401(k) plans. No plan sponsor would risk bad publicity if they used someone charging 8.25%.

Right, because retirement and retail flows drive the sector. You are implying they were ripping people off with the old fee structure -- they were NOT.

The performance of the Voya Trust was FINE from 1935-1974, inclusive of fees.

Whose fault is that ?

No, people who can read can understand what is in it. Just because you can't understand it doesn't mean the rest of us can't.

 

Sorry for replying to such an old thread, but I've been away for a bit.

Can you prove you point? I can prove mine.

You said that an investment of $1, earning 7% interest for 200 years would grow to $755,000. Mathematically that is true. One can use the formula A=P(1+r/n)^nt or just plop the numbers into a spreadsheet for a brute force calculation of the interest. Both methods yield roughly $755,000.

However, if you start with $1, and you end with $755,000, then you have not factored inflation into the result. That is a fact, plain and simple. Both numbers are measured in the same year's value, either from 200 years ago, or from today. Given that the value of $1 worth of gold was adjusted for inflation, then we are not comparing apples to apples.

If you disagree, perhaps you can demonstrate how inflation was factored into the calculation. Good luck!

 

Compounded annually, I get $752,293.62.

Inflation would have been a NON-EVENT for a good part of that 200 years as the general price level was UNCHANGED through the early-1900's.

A rough GUESTIMATE is that while the financial investment went up 752,000x the price level only went up about 20-fold. Remember, from 1815-1914 the price level was generally the same.

When doing long time-series comparisions, you need to make 2 adjustments:

• Use rolling periods to come up with average or median results, which eliminates beginning and end-period bias.
• Remember that major changes maybe have permanently changed the landscape (i.e., creation of Fed in 1914, end of gold standard 1971, end of fixed exchange rates 1973, prohibition/legalization of gold,etc.).

 

If we go with 20-fold inflation, then a simple estimate of the value of the $1 stock investment in today's dollars would be $37,600. Of course that still ignores trading fees and poor choices before mutual and index funds became available.

 

I understand you have a point to prove, but I think you need to go back and read what I said, and what the author of the linked article said.

The 7% return on stocks was an after inflation return. It already took into consideration the effects of inflation. The article states:

"In his seminal book "Stocks for the Long Run," renowned economics professor Jeremy Siegel looked at the long-term performance of various asset classes in terms of purchasing power -- their monetary wealth adjusted for the effect of inflation.

With a $1 investment each in stocks, bonds, T-bills and gold, beginning in 1802 and ending in 2006, Siegel calculated what those assets would then be worth.

Stocks were the big winners, growing the initial dollar investment into $755,163. Bonds and T-bills trailed dramatically, returning only $1,083 and $301 respectively. But the big surprise was in how badly gold fared during that time, only growing to $1.95."

Both the return to stock and the return to gold were adjusted for inflation in this analysis. It's an apples to apples comparison. Feel free to take issue with some other aspect of the analysis, I am sure there are counter-points to make, but how the inflation adjustment was done is doubtfully one of them.

 

You really can't do stock comparisons until the late-1880's and really the "modern" era begins about 1926 or so.

Buying stock before 1900 meant buying individually from the proprietor. You might buy a railroad stock in a railroad that didn't exist (in a STATE that didn't yet exist !). Only people in and around major cities and telegraphs could buy and sell with any reasonable certitude.

Also, the $1 stock investment is $752K in today's dollars...it might be $37,000 in 1815 dollars. There were so few trading stocks if any before 1870 that I think anything before then is a waste of time. Until the Industrial Revolution, everything was agrarian and GDP grew about 1% a year.

It wasn't until the steam engine that Great Britain was able to quadruple GDP growth per annum (4% GDP growth per year). That made equities a better investment than bonds.

 

If he's claiming stocks have averaged 7% after adjusting for inflation, then I have to seriously question his sources and methods for calculating that rate of return. 7% before adjusting for inflation is reasonably believable, and that's still before taking trading fees into consideration.

Of course I take issue with other parts of his analysis and I noted some of them in my earlier posts. All of them are evidence of what is an extremely biased article at best, and if the author is that biased in his writing, it would be reasonable to believe that he was equally biased in his calculations as well.

 

No, 7% AFTER-INFLATION is the correct long-run return as documented over many time-series. 8% is probably the actual figure, though corporate profits have also grown at 7% after-inflation since 1960.

Trading fees are irrelevant, poor market-timing would be a bigger problem (the difference between time-weighted and asset-weighted returns).

Which article, what bias ?

Let me end the debate here: the best long-run returns are from stocks. Bonds are counter-cyclical and a diversified portfolio will return about 3% after-inflation (mostly thanks to the last 30 years of returns). T-Bills are 1% after inflation, and gold is somewhere between bills and bonds, depending on when you measure from.

This chart is irrefutable, going back to 1871. Rolling periods eliminates any timing bias.

 

Agreed, stocks have historically been the best investment in the US. However, keep in mind that we have not experienced any sort of major economic collapse as many other countries have in the past 200 years. Unfortunately, we do not live in history, we live in the present and the future.

Disagreed that trading fees are irrelevant as it is simply not possible to buy and hold stocks that were available 200 years ago and realize the gains the author has claimed. There would have had to have been reinvestments of funds at many points in time. Each one of these reinvestments would not only have resulted in trading fees, but also very likely taxes. Precious metals are virtually unique in this regard. It is possible to hold precious metals for 200 years without any related expenses. Yes, it's prudent to have a SDB, or at least a safe, but neither are actually required.

Bias in the article was noted in my previous posts, but they include comparing an individual commodity against asset classes. Why compare gold against all stocks on average? If one wants to compare specific holdings, why not pick one stock at random that was available 200 years ago and compare it to gold? Odds are very good that the stock certificate might be a collectors item, but the actual share of stock in what is 99% likely to be a long since bankrupt company would have no value.

If one is to say that gold is the worst possible investment in history, then that means if I can find any single investment (not investment class average) that did worse, it would disprove the author's assertion. Since there are countless examples of companies that have gone bankrupt and shareholders received $0.00 in return for their shares, then the author's statement is completely false.

He mentions the government "confiscation" of gold, but of course the owners of physical gold in 1933 were compensated for their gold. It isn't as though the gold was simply seized. However, there are numerous examples of government seizures of assets owned by corporations, without compensation to shareholders, and yet the author doesn't mention this. Seizure without compensation should be much more of a concern to an investor than seizure with compensation.

I didn't mention it in my previous post, but he criticizes the various gold ETF's by saying the shareholder does not own physical gold, but rather shares that are backed by physical gold. One could similarly criticize any stock. One does not own a physical company, but rather shares in a company whose value is not necessarily backed by any physical assets whatsoever. There is also no redemption rights for shareholders in a corporation. i.e. - A shareholder cannot simply demand to exchange their share for a physical piece of the corporation. If I own $10,000 worth of stock in Intel, I cannot walk into an Intel office and say I'm going to exchange my stock for $10,000 worth of physical property and walk out the door with it. Why would he criticize the gold ETF's on this point when the same, but to an even greater extent, is true of all stocks?

He also mentions the ETF's are not required to be insured against loss, damage, theft, or fraud. Are publicly traded companies required to carry any such insurance? Were the shareholders of Enron compensated by such an insurance policy for their losses?

So the question is, how do you not see the bias in this article?

 

True, wars do wipe out equity returns close to zero (Japan and Germany after WW II).

However, if you are saying an investment strategy should be built upon a military defeat of the United States and the occupation of our soil, I think that is highly unlikely.

You can use the last 5, 10, 15, 20, or 30 years.

It's easy to employ a buy-and-hold strategy using a diversified mutual fund, ETF, or Index Fund. While trading costs and fees will impact the result and might knock it down a bit, it WILL NOT impeach the final results (final numbers a bit lower, yes).

Many people include TDAs to avoid taxes.

Again, taxes lower the final numbers but DO NOT impeach the final results/rankings.

But PM's and gold do not pay interest and are not participating in the GROWTH of the economy, which is why you have dividends, reinvestment, and taxes with equities (and bonds).

Because even going back to 1871 let alone 1815 doesn't make sense. What is relevant is what is available to invest in NOW and the choices, reduction of fees, tax minimization, and ease of trading and liquidity have never been better for an individual investor.

You are aware it is alot easier for a farmer in Ohio to buy/sell stocks today than when John Rockefeller was moving oil through Ohio in the 1880's, right ?

I never said that gold is the worst possible investment, but as an ASSET CLASS it clearly lags stocks and bonds over most time horizons.

If you want to start from 1970 and measure to 2011, then the numbers may look more favorable. Again, rolling periods eliminates this bias.

Right after the government seized the gold, it was revalued upward by over 50%. That's a confiscation in my book !

Because nobody who buys SHARES in a company expects to own THE COMPANY.

But someone who buys a gold ETF can actually buy the same quantity of gold (unless they're buying a few tons).

It's not the same thing.

You're comparing problems with an individual stock -- which should NEVER be the only or largest holding in a portfolio -- with an asset class.

It does appear the author has some bias but I think his general thrust is on-target. That said, I do like holding gold...I think periodic investing in gold makes sense....I would buy more gold at lower prices....and gold is a good 'disaster insurance' -- or so I hope.

But in an economy where money flows at the speed of light, the safety value of gold is not what is was in the 1920's, the 1950's, or even the 1970's. The Dollar and U.S. Treasury bonds are where scared money goes to hide out during Ruff Times.

 

I'm saying that a good financial strategy should include that (and other disasters) as a possibility. Of course it should not be the foundation of an investment strategy. That would be silly.

 

It's a 10 or 20-sigma standard deviation event. I don't think it's investable or hedgeable. It's like worrying about asteroid insurance.

200 or 160 or 100 or 50-75, the results pretty much line-up.

The author may have used 200 years as an attention-grabber.

 

Assuming of course that you are invested in the market as a whole, which wasn't realistic until the advent of mutual and index funds.

Wait, what?

Perhaps you were exaggerating, or being sarcastic, it's hard to tell reading posts on the Interwebs, but you do realize that if each day has a possibility of an event happening, a ten sigma event would occur about once every 1 trillion years.

I think it's quite arrogant to believe that what has happened to virtually every other country on this planet in the last 200 years is even a 3 sigma event for the US.

 

If you had a diversified portfolio of 10-20 stocks, your probably approached those figures.

You are focusing on non-events going forward for stocks, while ignoring the 1-time events (1971 Gold Window closed, 1973 floating exchange rates, 1970's inflation) that helped propel gold upward.

The precise mathematics aside, the odds of that happening are so infinitesimally small that it's not something to worry about.

Do you think Bubonic Plauge should be something we worry about ?

Why are you linking totalitarian, non-democratic regimes downfalls to a modern democracy ? Do you honestly think the U.S. is going to suffer the same fate as Nazi Germany or Tojo's Japan ?

 

OK, and who was able to do that 200 years ago? Perhaps .01% of the population.

What would have been the expenses associated with doing so? Keep in mind that buying stock in a company in 1815 pretty much meant travelling to the company headquarters and buying stock in person.

Who was able to own gold? Perhaps 99.99% of the population and it wasn't an ordeal to obtain.

Not at all. I'm simply being realistic in that there is a decent possibility that the US will suffer some sort of major economic collapse or go bankrupt sometime in my lifetime, or perhaps my childrens'. I do not believe the odds are "infinitesimally small". If no such event happens, that's great! The only money I might "lose" are the investment returns I could realize by investing that money elsewhere. It's not quite like buying asteroid insurance.

Why are you going off the deep end on me? Is Greece a "totalitarian, non-democratic regime"?

Looking at recent events, it isn't too much of a stretch to say there are similarities between 21st century US and Nazi Germany or Tojo's Japan. However, going into the details isn't a good way to keep this thread open.

In the end, I think that we can agree on the fact that stocks have been the best investment vehicle for capital growth in the US in any long term period. I just disagree with the author of the book on the extent of the gap between gold and stocks, and how he reached his numbers. I also disagree with most if not all of the reasons the author of the article gives for not owning gold.

 

Forget 200 years ago...how about going back 6 years ago ? 15 years ago ? 35 or 45 years ago ?

And how many people prior to the 1950's could afford to hold gold ?

How many people had Double Eagles -- $20 -- held as a numismatic gold coin ? Less than 1% of the population....nobody could tie up $20 in the 1920's or 1930's.

Think about this: it took Greece, a 3rd-rate economy, 30 years to implode.

You think the U.S. -- the reserve currency nation -- will expire anytime soon ?

I'm not going off the deep-end, but you said wipe-outs. Greece's stock market was NOT wiped out the last 5 years. Only bankrupt, defeated countries suffer that sort of ignominy.

It isn't too much of a stretch ? I'd PAY to keep the thread open to hear how our economy is anything like theirs.

Are you talking about Stocks For The Long Run by Jeremy Siegel ?

You can quibble with his numbers, but his results are unimpeachable. You can NOT make the case for gold over stocks over any reasonable time frame. Not gonna happen !!!

If you want to say that the gap should be 100 bp. (1%) lower in gold's favor, I might grant you that. But the gap is too wide that even if you include taxes, fees, trading commissions, etc....esp. for the Modern Era....you can't make a case for anything but stocks.

Have you read his book ? Did you see the table I attached above ?

 

I think this is why we are still having this discussion. I am not trying to "make the case for gold over stocks...". I am saying that the degree of performance difference between the two noted by Jeremy Siegel is questionable at best and that the author of the article seems to be highly biased against gold.

I have read parts of his book. I don't care to read the entire book.

I did see the chart you posted that covers the past 144 years and as I noted previously, those returns are for the ENTIRE market. Owning a diversified portfolio of stocks 200 years ago was not possible for 99.99% of Americans, so I don't know why anyone would even consider it in such an analysis. I'd also like to see the raw data behind the chart, because it is my understanding that the average returns of the market as a whole have been closer to 8 or 9 percent, and that only small business stocks have averaged as high as 11 percent.

Unquestionably more than the number of people who could afford to own stock in 1814.

You keep saying "his results are unimpeachable". I have to wonder if you even understand the term:

Unimpeachable: Not able to be doubted, questioned, or criticized.

I doubt the validity of his research as his results are questionable, and I will criticize them all day long.

However, as I have acknowledged all along, US stocks have always performed better than precious metals in the long run. So I don't think his results are impeachable to the extent that he ranked them incorrectly.

How about this as an example:

One person makes an assertion that motorcycles use less fuel to transport people than SUV's. They base their numbers on transporting one person, but they don't expressly disclose that. As such, they make the claim that motorcycles are 400% more fuel efficient than SUV's.

Someone else comes along and questions those numbers. Maybe they know the average passenger count in an SUV is 2, and for motorcycles it's only 1. So they figure a calculation of fuel efficiency should take that into consideration, since the efficiency of transporting people is what is being measured. Their assertion is that motorcycles are only 200% more efficient than SUV's.

A third person may come along and note that SUV's can transport up to 8 people, and as such are actually more fuel efficient than motorcycles at transporting people.

Perhaps the first person is highly biased against SUV's. Perhaps he just wanted to compare the vehicles without regard to the number of people transported. The second person doesn't question the fact that motorcycles can indeed be more efficient than SUV's, but thinks the difference between 400% and 200% percent is significant and worth mentioning. The third person is being unreasonable because transporting 8 people in an SUV is by far the exception, not the norm.

The same is true with the case we've been discussing. Yes, fees and taxes are relevant. As is the fact that 99.99% of people couldn't afford to own stock 200 years ago, much less a diversified portfolio that would mirror the performance of the entire market.