How Much Formula For A 1 1 2 Month Old The Stock Market – The Second Biggest Financial Scam of the Twentieth Century, Part 2 of 2

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The Stock Market – The Second Biggest Financial Scam of the Twentieth Century, Part 2 of 2

Step into the stock market, promising higher returns than old bonds, and money market accounts; thus, the stock market became a target for retirement savings, and Wall Street responded by increasing supply to retail consumers through mutual funds. Before 2000, it was not uncommon to hear that the S&P returned 16% over the previous 10 years. Looking at the returns of one of the most well-known index mutual funds, the Vanguard 500, returns since its inception in 1976 have been 11.75%, impressive until you look at the 1-year return, -2.41%, the 5-year return, 11.89%, and the 10-year yield 5.06%. These are average returns, not actual returns. As an example, let’s look at $1 growth in the mythical High Fly Fund. High Fly brings 50% profit in one year and your dollar grows to $1.50. The next year it will post a 25% loss, now your investment is worth $1.125. High Fly has an average return of 12.5% ​​as reported by the mutual company, but that is not your actual return. The real return or compound annual growth rate (CAGR) is about 6% per year worse if inflation is taken into account.

Is 6% acceptable considering the risk investors take when investing in the stock market? David F. Swenson, CIO of the Yale Endowment, explains investor risk in his book Unconventional Success when he states, “Because shareholders receive payment after companies have satisfied all other claimants, equity ownership represents a residual interest. Because such shareholders are in a riskier position than, say, corporate lenders , who have a superior position in the company’s capital structure.” He continues: “The 5.0 percentage point difference between stock and bond returns represents the historical risk premium, defined as the return to shareholders for accepting risk that exceeds the level inherent in bond investments.” Swenson’s comments and risk premium calculations were based on the stock market’s 10.4% annual return compared to 5% for bonds. 10.4–5% corresponds to a risk premium of 5.4%. Unfortunately, I have yet to find a CAGR (compound annual growth rate) calculation that matches Mr. Swenson’s calculation. I found many examples of average returns corresponding to 10.4% average growth but no CAGR. The reason this is important is that all other economy cars are quoted at CAGR. Your savings, bond and money market accounts are quoted based on CAGR or equivalent annual percentage rate of return (APY). To determine where to allocate your funds, you need to compare apples to apples, not apples to oranges. As you might expect, the CAGR of the stock market is lower.

A quick look at the stock market CAGR calculator at moneychimp.com shows that the average return from January 1, 1975 to December 31, 2007 is 9.71%. You only realized that return if you invested in the market all the time. What if you started investing in 1980? The numbers look about the same. If you started in 1985, your returns will look a little better. By 1990, the CAGR drops to 8.21 percent. If you started in 1995, your CAGR jumps to 9.32%. If you started investing in 2000, your CAGR drops to minus 0.06%! If you eliminate the results of the last 7 years from the performance of the S&P and track the performance between January 1, 1975 and December 31, 1999, the CAGR was 13.03%. When the stock market is good, it’s great, when it’s bad, it’s pretty miserable. As I recall, there has only been one nine-year period from January 1, 1950 to December 31, 2007, when the S&P averaged a return of 16.14% and a CAGR of 15.32%: the period from January 1, 1990 to December 31. , 1999.

It should be clear from these numbers that your returns depend not only on how long you have been investing in the market, but also on when you started investing. In fact, the solid old bond investor has outperformed the stock investor over the past 7 years.

An investor from the 1990s has a very different view of how markets work than an investor from the 21st century.

Mr. Swenson’s book is a must read for anyone investing in mutual funds. He makes a compelling case and explains why actively managed mutual funds are usually a money-losing proposition for investors and why a balanced portfolio based on six fixed asset classes is a winning combination. for investors.

How can I call the stock market the second biggest financial scam of the 20th century if I cite numbers that seem to be pretty good? For four reasons:

1), as the actual CAGR up to 1950 is a much lower 7.47%. It will take the average American worker 25 years and a month to save $10,000 a year to accumulate a million dollar fortune as long as the market achieves a 9.71% CAGR, and 29 years and 2 months if they are forced to accept the market’s longer-term returns. . These numbers leave very little margin for error for the average American worker. Retirement forecasts are mainly based on returns that have only existed at one point in the history of the stock market since 1950.

2) because the same laws that make it easy for individual investors to transfer their money to the stock market also dictate that it be withdrawn at a certain time, which corresponds to what all financial experts have called a money-losing strategy, the Market Timing strategy. In other words, the laws governing deferred savings mandate that withdrawals begin no later than age 70 and a half, forcing retirees to time the market to decide on their retirement.

3) the time horizon to get meaningful benefits from the market is really long, at least 30 years. To quote Mr. Swenson: “The returns on bonds and cash can exceed the returns on stocks for years on end. From the market peak in October 1929, for example, it took stock investors fully twenty-one years and three months to match the returns generated by bond investors.”

Charles Farrell, an advisor at Northstar Investment Advisors in Denver, used data from Morningstar’s Ibbotson and Associates to analyze 52 rolling 30-year periods, starting with 1926-1955 and ending with 1977-2006. almost always have come in the last 10 years. Farrell calculates that you would average 8% of your final wealth after the first decade and 32% after the second, or 68% of the total accumulated over the past 10 years.” (Wall Street Journal, Jonathan Clements, November 21, 2007)

4) because the current marketing strategies of financial researchers, gurus and Wall Street consider investing in the stock market as money, the money-out proposition masks the real risks of investing and the real time horizon needed to accumulate wealth. In other words, the money needed for retirement must be invested for a longer period of time, about 30 years. It cannot be borrowed against. You can’t buy an apartment, a car, pay for university or a child’s wedding with it.

It can only be used for retirement after 30 years. All other needs must be paid for from sources other than pension savings. Most people don’t have the financial education to understand this and blindly chase market returns hoping for a big return.

Fortunately, there is a simple solution, but like most simple solutions, this requires job and financial education. I’ll cover this simple solution in Part 3 of this series.

Disclaimer: This is a thought-provoking article based on real-life examples, articles, books and websites that are readily available to the public. This article is not intended to provide investment advice. All actions you take in the market should be the result of your own financial training and consultation with a licensed professional. Financial calculations were performed using the savings goal calculator found at Bankrate.com unless otherwise noted.

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