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Person A saves $1000 from each paycheck. She invests it in index funds, and nets ~8% returns over a 30 year period. Person B saves $2000 from each paycheck. Sh

by whack 9y ago

Person A saves $1000 from each paycheck. She invests it in index funds, and nets ~8% returns over a 30 year period. Person B saves $2000 from each paycheck. She behaves like the average investor, and nets ~2.5% returns over a 30 year period. Who do you think is going to wind up with more money? Person-A by a long shot. The amount of money you save every month is undoubtedly important, but it's only half the story, and it's somewhat common knowledge. The way you invest your money is the other half of the story, and this is where most people seem to trip up. Personally, my parents saved a ton of money because it's common sense that it will lead to future prosperity. However, their investment strategy and track records are abysmal. They buy near the peak, sell during the recession, and sit out of the markets entirely during the recovery. They could have easily ended up with a retirement portfolio that's 2-4x larger than what they ended up with. I've tried telling them numerous times to approach investing differently, but they still refuse to listen. If there's anything people need to be educated on, it's on investment strategy. https://www.forbes.com/sites/advisor/2014/04/24/why-the-average-investors-investment-return-is-so-low/#6bf14d79111a https://www.forbes.com/sites/advisor/2014/04/24/why-the-aver... https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp https://www.investopedia.com/ask/answers/042415/what-average... http://www.bankrate.com/calculators/retirement/investment-goal-calculator.aspx http://www.bankrate.com/calculators/retirement/investment-go...

bungie4 9y ago
You left out the part where the market 'corrects' every 7-10 years and you lost 10-30% of your portfolio. It'll likely take you several years to recoup your lost investment at 8%. You had a 100K invested, you lost 30K of it, leaving you 70K. At 8% interest it'll take you 5 years to just get back to where you were. Thats a full 20% of your investment life span. Count on this happening to you at least every 10 years. Ya ya, I know. But it's happened to me personally at least 3 times in my adult life. Just how much risk is a person is willing to take is a personal question. If your shooting for an 8% avg return. You're a stuntman in real life.
- whack 9y ago
  The 8-10% returns are the long term average, after all crashes are accounted for. You don't have to be a stuntman to attain those numbers. Literally all you have to do is put your money into an index fund and sit on it for 20+ years
- sokoloff 9y ago
  8% CAGR is a fairly conservative CAGR for a broad-based stock investments (with dividends reinvested). It is not the typical growth in an "up year". It is the cumulative annual growth rate of up and down years. Said more clearly, you don't make up the down 10-30% at 8% per year; you make them up at up 10-20% per year during bull markets. If you're shooting for a 8% CAGR over a 7+ year period, no need to play stuntman, just buy a low-fee broad-based stock fund (VTSAX, VFIAX, etc) and resist the urge to panic and pull the money out during down markets.
- gomox 9y ago
  The usual 7% long term figure for the S&P500 includes crashes and inflation in that number. You don't crash at 30% and then grow back at 7%. You grow at 7% on average at all times. The only difference is volatility. If you need to cash out after the 30% crash, you lost a lot of money. Most long term portfolios reposition themselves towards less profitable but less volatile assets towards the end of their expected lifetime. For an example you can look at the Vanguard "target retirement $DATE" indexes.
- BeetleB 9y ago
  >If your shooting for an 8% avg return. You're a stuntman in real life. Over a period of 30 years, a 7% inflation adjusted gain is "easy" (as in "do no work"). Without adjusting for inflation, I'm sure that exceeds 8%. http://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-or-invest/ http://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-or-in...
- internetman55 9y ago
  Yeah, my parents got in trouble with this cause they had to sell their investments at a loss to live on. This is why I plan on keeping a significant amount of cash on hand (don't want to ever have to sell at a loss).
heedlessly2 9y ago
Index funds overall returns are closer to 6 or 7%. The small difference does make a big difference long term.

by whack 9y ago

bungie4 9y ago

You left out the part where the market 'corrects' every 7-10 years and you lost 10-30% of your portfolio. It'll likely take you several years to recoup your lost investment at 8%. You had a 100K invested, you lost 30K of it, leaving you 70K. At 8% interest it'll take you 5 years to just get back to where you were. Thats a full 20% of your investment life span. Count on this happening to you at least every 10 years. Ya ya, I know. But it's happened to me personally at least 3 times in my adult life. Just how much risk is a person is willing to take is a personal question. If your shooting for an 8% avg return. You're a stuntman in real life.

whack 9y ago
The 8-10% returns are the long term average, after all crashes are accounted for. You don't have to be a stuntman to attain those numbers. Literally all you have to do is put your money into an index fund and sit on it for 20+ years
sokoloff 9y ago
8% CAGR is a fairly conservative CAGR for a broad-based stock investments (with dividends reinvested). It is not the typical growth in an "up year". It is the cumulative annual growth rate of up and down years. Said more clearly, you don't make up the down 10-30% at 8% per year; you make them up at up 10-20% per year during bull markets. If you're shooting for a 8% CAGR over a 7+ year period, no need to play stuntman, just buy a low-fee broad-based stock fund (VTSAX, VFIAX, etc) and resist the urge to panic and pull the money out during down markets.
gomox 9y ago
The usual 7% long term figure for the S&P500 includes crashes and inflation in that number. You don't crash at 30% and then grow back at 7%. You grow at 7% on average at all times. The only difference is volatility. If you need to cash out after the 30% crash, you lost a lot of money. Most long term portfolios reposition themselves towards less profitable but less volatile assets towards the end of their expected lifetime. For an example you can look at the Vanguard "target retirement $DATE" indexes.
BeetleB 9y ago
>If your shooting for an 8% avg return. You're a stuntman in real life. Over a period of 30 years, a 7% inflation adjusted gain is "easy" (as in "do no work"). Without adjusting for inflation, I'm sure that exceeds 8%. http://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-or-invest/ http://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-or-in...
internetman55 9y ago
Yeah, my parents got in trouble with this cause they had to sell their investments at a loss to live on. This is why I plan on keeping a significant amount of cash on hand (don't want to ever have to sell at a loss).

heedlessly2 9y ago

Index funds overall returns are closer to 6 or 7%. The small difference does make a big difference long term.