Comments on: The mythical stock market guarantee … http://7million7years.com/2009/05/09/the-mythical-stock-market-guarantee/ How to make 7 million in 7 years ... Thu, 24 May 2012 09:20:05 +0000 hourly 1 http://wordpress.org/?v=3.3.2 By: DRDOLLAZ http://7million7years.com/2009/05/09/the-mythical-stock-market-guarantee/comment-page-1/#comment-2785 DRDOLLAZ Sat, 09 May 2009 12:39:40 +0000 http://7million7years.com/?p=2233#comment-2785 traineeinvestor - very good point on the average vs compounded rate. Even if the stock market did average 8.5% over a 30 year period, VERY few investors would actually see those returns between buying and selling when they were supposed to hold, management expenses, taxes, fees, and the trick playing the mutual fund companies do with publishing what investors earned, etc... If you look at the Dalbar study, even though the market had averaged 12.98% from 1984 - 2004 (when the report was published), the average investor earned only 3.51%. Imagaine what those numbers would look like if the report ran to 2009!!! The other argument to this is that for MOST people, it is very hard to just let money sit for 30 years without touching it (ie. something else comes up, 'life' happens, another opportunity arises, etc...). traineeinvestor – very good point on the average vs compounded rate. Even if the stock market did average 8.5% over a 30 year period, VERY few investors would actually see those returns between buying and selling when they were supposed to hold, management expenses, taxes, fees, and the trick playing the mutual fund companies do with publishing what investors earned, etc… If you look at the Dalbar study, even though the market had averaged 12.98% from 1984 – 2004 (when the report was published), the average investor earned only 3.51%. Imagaine what those numbers would look like if the report ran to 2009!!!

The other argument to this is that for MOST people, it is very hard to just let money sit for 30 years without touching it (ie. something else comes up, ‘life’ happens, another opportunity arises, etc…).

]]> By: traineeinvestor http://7million7years.com/2009/05/09/the-mythical-stock-market-guarantee/comment-page-1/#comment-2784 traineeinvestor Sat, 09 May 2009 09:11:15 +0000 http://7million7years.com/?p=2233#comment-2784 Points 1 and 2 are pretty critical. Having the patience to stand aside when things get overheated and to resist the lure of the latest hot fad is a must if you want to avoid under performing. A couple of points about the "average return": (i) an average return of 8.5% pa is not the same as an annual compound return of 8.5% pa. A lot of sales literature for investment products confuses the two (whether deliberately or out of ignorance is a matter of debate); (ii) for retires who rely on draw down of principal to fund their living expenses it has to be remembered that even if the projected average return is acheived over the balance of your expected retirement, an average is made up of a series of returns some of which will be greater than the average and some of which will be less. If you get stuck with the below average returns in the early years, then the retirement plan is likely to fail because the withdrawl of principal means that higher later returns on a smaller amount of principal are needed (and become progressively more unlikely as time goes by). Points 1 and 2 are pretty critical. Having the patience to stand aside when things get overheated and to resist the lure of the latest hot fad is a must if you want to avoid under performing.

A couple of points about the “average return”:

(i) an average return of 8.5% pa is not the same as an annual compound return of 8.5% pa. A lot of sales literature for investment products confuses the two (whether deliberately or out of ignorance is a matter of debate);

(ii) for retires who rely on draw down of principal to fund their living expenses it has to be remembered that even if the projected average return is acheived over the balance of your expected retirement, an average is made up of a series of returns some of which will be greater than the average and some of which will be less. If you get stuck with the below average returns in the early years, then the retirement plan is likely to fail because the withdrawl of principal means that higher later returns on a smaller amount of principal are needed (and become progressively more unlikely as time goes by).

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