I’ll be honest that I am not fully convinced as to what investment style works, and I am alright with that since my response is to have a little bit of everything. I have an actively managed dividend portfolio, a 401(k) made up mostly of actively managed mutual funds, a whole life insurance policy, and will eventually own a passive index account. But I think there is a mistake that most investors make, this mistake can cost them thousands if not hundreds of thousands and possibly years of retirement.
The mistake that they make can be seen in a great exchange between Sam and a blogger I never really read before but has some good stuff, Jon from FreeMoneyWisdom on Sam’s post on whether Sam should sell everything this May since he has already made 10% in the market year to date.
The mistake/misunderstanding is this idea that the market is guaranteed to make 8%/year, year in and year out. The Market Does Not Guarantee Anything. I think Sam takes a sarcastic response to Jon that I am pretty sure went over his head lol.
Market Returns Vary
I will ignore the initial problem of where Jon pulls 8% out of considering that he is holding everything from “REITs to Large/small caps” and just focus on the return of the S&P500 since that is the often quoted number. We will assume (a huge assumption) that the S&P returns between 8% and 10% per year. Why is it a huge assumption? because that number includes reinvested dividends, not selling when the market drops 37% like in 2007, you own just the S&P, etc. etc.
Info taken from a cool site that even lets you calculate different time frames, MoneyChimp.
2010 14.32
2009 27.11
2008 -37.22
2007 5.46
2006 15.74
2005 4.79
2004 10.82
2003 28.72
2002 -22.27
2001 -11.98
2000 -9.11
1999 21.11
1998 28.73
1997 33.67
1996 23.06
1995 38.02
1994 1.19
1993 10.17
1992 7.60
1991 30.95
1990 -3.42
1989 32.00
1988 16.64
1987 5.69
1986 19.06
1985 32.24
1984 5.96
1983 23.13
1982 21.22
1981 -5.33
1980 32.76
1979 18.69
1978 6.41
1977 -7.78
1976 24.20
1975 38.46
1974 -26.95
1973 -15.03
1972 19.15
1971 14.54
1970 3.60
1969 -8.63
1968 11.03
1967 24.45
1966 -10.36
1965 12.45
1964 16.59
1963 23.04
1962 -9.20
1961 28.51
1960 -0.74
1959 11.59
1958 43.40
1957 -9.30
1956 6.38
1955 28.22
1954 55.99
1953 -0.80
1952 18.35
1951 23.10
1950 34.28
1949 15.96
1948 9.51
1947 2.56
1946 -12.05
1945 39.35
1944 19.67
1943 23.60
1942 21.74
1941 -9.09
1940 -8.91
1939 2.98
1938 17.50
1937 -32.11
1936 32.55
1935 54.93
1934 -8.01
1933 56.79
1932 -5.81
1931 -44.20
1930 -22.72
1929 -9.46
1928 47.57
1927 37.10
1926 11.51
1925 25.83
1924 27.10
1923 5.45
1922 29.07
1921 10.15
1920 -13.95
1919 19.67
1918 18.21
1917 -18.62
1916 8.12
1915 31.20
1914 -5.39
1913 -4.73
1912 7.18
1911 3.52
1910 -3.39
1909 16.15
1908 39.47
1907 -24.21
1906 0.64
1905 21.29
1904 32.16
1903 -17.09
1902 8.28
1901 19.45
1900 20.84
1899 3.66
1898 29.32
1897 20.37
1896 3.25
1895 5.01
1894 3.63
1893 -18.79
1892 6.14
1891 18.88
1890 -6.16
1889 7.09
1888 3.34
1887 -0.64
1886 11.98
1885 30.06
1884 -12.32
1883 -5.49
1882 3.61
1881 0.27
1880 26.63
1879 49.37
1878 16.29
1877 -1.06
1876 -14.15
1875 5.44
1874 4.72
1873 -2.49
1872 11.16
1871 15.64
You have to go all the way back to 1902 to find an 8% positive return in the S&P and 10% only happened a few times in the 100+ history of the S&P. So please don’t just assume because you invest in a diversified portfolio, or even a passive index fund on Jan 1 that on Dec 31 you’ll have 8% more money.
I can’t speak for Jon, but I think what he meant was annualized returns. From 1990 (randomly picked up a year!) to 2010 S&P grew at the rate of 8.5% annualized.
Correct but if you threw money into the investment from 98 till 2002 and tried to retire in 2002 you’d be dead in the water (with an average return of 1%).
I get that the longer you are in the market the better, but imagine if you missed 2008? Just got out because you got out in 2007 up 15%?
I think index fund are great if you keep dollar cost averaging into it over 15-20 years. Once the contribution become insignificant in relation to the total value of the portfolio, then it’s time to change strategy a bit.
I agree with Jon (Free Money Wisdom), but for different reasons. The market over time has a return of 8-10%. The issue is how long is the time? I believe it is 35-40 years. In any particular year or sometimes a number of years the market will be above and below that average. Since I am a very bad market timer, I stick with my asset allocation and dollar cost average into the market. I look at my portfolio annually to re-balance. I am pleased with my results, but I may have completely different objectives and goals. Some people invest for immediate income, growth, capital preservation, and a combination of any of these goals. Investment philosophy is personal for your needs.
Not sure if it is an agree or disagree thing. Jon was correct, but I think that a lot of investors forget that it might actually take 10 or 20 years before you see 8% rather than just 1 or 2
I was up 11% when I sold Evan. Come on now, 100bps makes a difference!
Again, I’ve never heard of anybody lose money in the markets. We are all rich!
At least my post has a time stamp and a 1,370 SP500 and 12,850 Dow mark. I definitely do plan to re asset allocate, I just am happy to take profits.
Finally, I suck at picking stocks. I just know what returns I’m comfortable with.
Thx
You have to make sure you update that post when you get back into the market!
You definitely have a great point. I always hate it when ppl say “Assume I get a 5% return annually…” That’s a HUGE assumption over sumthing you have little to no control over
All depends on when we start and finish, doesn’t it? I have a friend who on the cusp of retirement, sold everything and shifted into cash and bonds… in late 2007. Nice timing.
I always cringe when I talk to older individuals who are on the cusp of retirement and they are sticking with 90% equities…
No simple view of the markets is accurate. Trying to time them proves to be a bad practice for most all investors. Playing that game a bit around the edges can make sense. But you can be burned quite a bit.
Hmm, I took it a different way. The anonymity of the internet gives way to people who lie about pretty much everything. Active investing is a lot like telling fishing stories…
At any rate, I’m no Boglehead, and don’t plan to be one any time soon. Passive investing, in my view, limits the advantage that the small investor has in illiquid markets. Small investors have plenty of advantages, but everyone tells them they don’t, so they falsely believe it to be true.