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If You Only Know 5 Things About Investing, Make It These
Posted on 5/24/13 at 9:54 pm
Posted on 5/24/13 at 9:54 pm
LINK
1. Compound interest is what will make you rich. And it takes time.
Most people don't start saving in meaningful amounts until a decade or two before retirement, which severely limits the power of compounding. That's unfortunate, and there's no way to fix it retroactively. It's a good reminder of how important it is to teach young people to start saving as soon as possible.
2. The single largest variable that affects returns is valuations -- and you have no idea what they'll do
Future market returns will equal the dividend yield + earnings growth +/- change in the earnings multiple (valuations). That's really all there is to it. The dividend yield we know: It's currently 2%. A reasonable guess of future earnings growth is 5% per year. What about the change in earnings multiples? That's totally unknowable.
If someone said, "I think most people will be in a 10% better mood in the year 2023," we'd call them delusional. When someone does the same thing by projecting 10-year market returns, we call them analysts.
3. Simple is usually better than smart
Someone who bought a low-cost S&P 500 index fund in 2003 earned a 97% return by the end of 2012. That's great! And they didn't need to know a thing about portfolio management, technical analysis, or suffer through a single segment of "The Lighting Round."
Meanwhile, the average equity market neutral fancy-pants hedge fund lost 4.7% of its value over the same period, according to data from Dow Jones Credit Suisse Hedge Fund Indices. The average long-short equity hedge fund produced a 96% total return -- still short of an index fund. Investing is not like a computer: Simple and basic can be more powerful than complex and cutting-edge. And it's not like golf: The spectators have a pretty good chance of humbling the pros.
4. The odds of the stock market experiencing high volatility are 100%
Most investors understand that stocks produce superior long-term returns, but at the cost of higher volatility.
Yet every time -- every single time -- there's even a hint of volatility, the same cry is heard from the investing public: "What is going on?!"
Nine times out of ten, the correct answer is the same: Nothing is going on. This is just what stocks do.
Someone once asked J.P. Morgan what the market will do. "It will fluctuate," he allegedly said. Truer words have never been spoken.
5. The industry is dominated by cranks, charlatans, and salesman.
Here's a tip on how to spot them: The louder and more excited they are, the weaker they are.
1. Compound interest is what will make you rich. And it takes time.
Most people don't start saving in meaningful amounts until a decade or two before retirement, which severely limits the power of compounding. That's unfortunate, and there's no way to fix it retroactively. It's a good reminder of how important it is to teach young people to start saving as soon as possible.
2. The single largest variable that affects returns is valuations -- and you have no idea what they'll do
Future market returns will equal the dividend yield + earnings growth +/- change in the earnings multiple (valuations). That's really all there is to it. The dividend yield we know: It's currently 2%. A reasonable guess of future earnings growth is 5% per year. What about the change in earnings multiples? That's totally unknowable.
If someone said, "I think most people will be in a 10% better mood in the year 2023," we'd call them delusional. When someone does the same thing by projecting 10-year market returns, we call them analysts.
3. Simple is usually better than smart
Someone who bought a low-cost S&P 500 index fund in 2003 earned a 97% return by the end of 2012. That's great! And they didn't need to know a thing about portfolio management, technical analysis, or suffer through a single segment of "The Lighting Round."
Meanwhile, the average equity market neutral fancy-pants hedge fund lost 4.7% of its value over the same period, according to data from Dow Jones Credit Suisse Hedge Fund Indices. The average long-short equity hedge fund produced a 96% total return -- still short of an index fund. Investing is not like a computer: Simple and basic can be more powerful than complex and cutting-edge. And it's not like golf: The spectators have a pretty good chance of humbling the pros.
4. The odds of the stock market experiencing high volatility are 100%
Most investors understand that stocks produce superior long-term returns, but at the cost of higher volatility.
Yet every time -- every single time -- there's even a hint of volatility, the same cry is heard from the investing public: "What is going on?!"
Nine times out of ten, the correct answer is the same: Nothing is going on. This is just what stocks do.
Someone once asked J.P. Morgan what the market will do. "It will fluctuate," he allegedly said. Truer words have never been spoken.
5. The industry is dominated by cranks, charlatans, and salesman.
Here's a tip on how to spot them: The louder and more excited they are, the weaker they are.
This post was edited on 5/24/13 at 10:50 pm
8
Posted on 5/24/13 at 10:08 pm to Vols&Shaft83
Posted on 5/24/13 at 10:33 pm to Vols&Shaft83
quote:
The louder and more exited they are, the weaker they are.
I see what you did there.
Posted on 5/25/13 at 12:19 am to Vols&Shaft83
Read this before you posted. This means the market is truly inefficient. I guess I'll go buy a few stocks based on PEG ratios. THANKS VOLS!
10% of the time it works every time...
10% of the time it works every time...
Posted on 5/25/13 at 8:26 pm to Cmlsu5618
quote:
few stocks based on PEG ratios. THANKS VOLS!
What are peg ratios?
Posted on 5/26/13 at 8:44 am to Vols&Shaft83
Agree with #5 100%. The reason I got involved in trading/investing is because the guy running our 401k plan at MorganKeegan gave our small company investment advice on planning for the end times. He was recommending guys 2-5 years from retirement put money heavily into gold and bear funds in 2009.
Posted on 5/26/13 at 9:56 am to Vols&Shaft83
quote:
Most people don't start saving in meaningful amounts until a decade or two before retirement
Sadly, this is a little generous IMO.
But
for the OP, great postPosted on 5/26/13 at 3:29 pm to Vols&Shaft83
So im 42
is too late to start investing in the stock market?
is too late to start investing in the stock market?
Posted on 5/26/13 at 3:31 pm to MoreOrLes
quote:
So im 42
is too late to start investing in the stock market?
Absolutely not. No time like the present
Posted on 5/27/13 at 11:22 am to MoreOrLes
quote:
So im 42
is too late to start investing in the stock market?
nope. get after it. invest for 30 years of work with earned income til you are 72.
Posted on 5/27/13 at 11:58 am to MoreOrLes
quote:
So im 42
is too late to start investing in the stock market?
No way man. But the longer you wait, the more the window closes. The longer you invest in the stock market, the larger your returns. It's not timing the Market, it's Time IN the Market.
Posted on 5/27/13 at 9:49 pm to Vols&Shaft83
What investments earn compounded interest? Stocks and bonds don't, correct? Is it just annuities?
Posted on 5/27/13 at 9:52 pm to Jake88
quote:
What investments earn compounded interest? Stocks and bonds don't, correct?
They earn compound rates of return.
Posted on 5/27/13 at 10:15 pm to Vols&Shaft83
quote:
They earn compound rates of return.
Meaning what for stocks or mutual funds? Is that the dividends that I get and reinvest?
Posted on 5/27/13 at 10:45 pm to Vols&Shaft83
I didn't see anything there about bitcoins. 
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