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How confident can I be of this? Why are banks struggling to get even 2% return on their investment if I can just go on and get 7% on average?

by azatris 10y ago

forgetsusername 10y ago
>if I can just go on and get 7% on average? I didn't mention any numbers. If economic growth is low, and inflation is non-existent, you will not approach 7%. >Why are banks struggling to get even 2% return on their investment Where do you get that information?
lorenzhs 10y ago
There's no guarantee at all. In a really bad year (2008?) you might get -50% or worse. Then you might get some really nice returns in the years after (or not!). If you average over several decades, historically, the returns have been around 7 or 8 per cent per year, but the standard deviation is enormous. Just look at a long-term chart of e.g. the S&P 500 at https://finance.yahoo.com/chart/%5EGSPC https://finance.yahoo.com/chart/%5EGSPC - click "Max" and "Settings" -> "Logarithmic" (you'll want a logarithmic axis so that equal percent changes are equal distance on the plot). You'll see that on average it went up over the decades, but between June '07 and February '09, it lost over 50%, and tripled since then. I encourage you to read up on this, but someone else with more knowledge should recommend some books.
- hudibras 10y ago
  All of this is correct, but the standard S&P 500 index doesn't include dividends, so your typical index fund will (should) do 1-4% better each year than the S&P 500. The S&P 500 does have a lesser-known version that includes the total returns: https://www.google.com/finance?q=INDEXSP%3ASP500TR&ei=WWJNWKiPPImv0ASYibfABg https://www.google.com/finance?q=INDEXSP%3ASP500TR&ei=WWJNWK...
  - smileysteve 10y ago
    Index funds such as SPY do include the dividends. VGO (specifically) also has a 1.94% yield.
rbcgerard 10y ago
Banks operate on a completely different model so it's not a useful comparison, but the answer is that they are borrowing at ~0% and lending 2%+ so they view the world differently
mxschumacher 10y ago
banks are heavily regulated and cannot just put deposits (the money you put into a bank constitute a loan to the bank) into stocks. They have to invest more conservatively, e.g give money to solid companies or hold low risk bonds. See Basel-rules to learn more about risk weighted assets (RWA): https://en.wikipedia.org/wiki/Basel_III https://en.wikipedia.org/wiki/Basel_III
xapata 10y ago
risk --> reward.

How confident can I be of this? Why are banks struggling to get even 2% return on their investment if I can just go on and get 7% on average?

by azatris 10y ago

How confident can I be of this? Why are banks struggling to get even 2% return on their investment if I can just go on and get 7% on average?

forgetsusername 10y ago

>if I can just go on and get 7% on average? I didn't mention any numbers. If economic growth is low, and inflation is non-existent, you will not approach 7%. >Why are banks struggling to get even 2% return on their investment Where do you get that information?

lorenzhs 10y ago

There's no guarantee at all. In a really bad year (2008?) you might get -50% or worse. Then you might get some really nice returns in the years after (or not!). If you average over several decades, historically, the returns have been around 7 or 8 per cent per year, but the standard deviation is enormous. Just look at a long-term chart of e.g. the S&P 500 at https://finance.yahoo.com/chart/%5EGSPC https://finance.yahoo.com/chart/%5EGSPC - click "Max" and "Settings" -> "Logarithmic" (you'll want a logarithmic axis so that equal percent changes are equal distance on the plot). You'll see that on average it went up over the decades, but between June '07 and February '09, it lost over 50%, and tripled since then. I encourage you to read up on this, but someone else with more knowledge should recommend some books.

hudibras 10y ago
All of this is correct, but the standard S&P 500 index doesn't include dividends, so your typical index fund will (should) do 1-4% better each year than the S&P 500. The S&P 500 does have a lesser-known version that includes the total returns: https://www.google.com/finance?q=INDEXSP%3ASP500TR&ei=WWJNWKiPPImv0ASYibfABg https://www.google.com/finance?q=INDEXSP%3ASP500TR&ei=WWJNWK...
- smileysteve 10y ago
  Index funds such as SPY do include the dividends. VGO (specifically) also has a 1.94% yield.

rbcgerard 10y ago

Banks operate on a completely different model so it's not a useful comparison, but the answer is that they are borrowing at ~0% and lending 2%+ so they view the world differently

mxschumacher 10y ago

banks are heavily regulated and cannot just put deposits (the money you put into a bank constitute a loan to the bank) into stocks. They have to invest more conservatively, e.g give money to solid companies or hold low risk bonds. See Basel-rules to learn more about risk weighted assets (RWA): https://en.wikipedia.org/wiki/Basel_III https://en.wikipedia.org/wiki/Basel_III

xapata 10y ago

risk --> reward.