phil5185
Junior Associate
Joined: Dec 26, 2010 15:45:49 GMT -5
Posts: 6,410
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Post by phil5185 on May 19, 2011 13:11:51 GMT -5
29 & 30, both engineers in a HCOLA. I think we've done well to save our money and not fritter it away on stuff (or hookers), however I don't think the way we've saved has been all that smart. Part of it is that I got scared by the market tanking a few years back. Don't feel bad, that fear is there for every generation. I was a fresh out engineer in 1963, started buying stocks - then we had the Great 16-year Flat Spot from 1964 to 1980. If you look at a log plot of the Dow you'll see that as the longest flat spot in history, the Dow sat at about 1000. And 16 yrs feels like an eternity for an ambitious 24 yr old. Each generation does the diligence, looks at the history, sees the 11%/yr 30-yr blocks that have been there forever, and asks "but what if it doesn't happen for MY 30-yr-block?" We had Viet Nam, JFK assassination, Jimmy Carter, yada. And now we have globalization, Obama, Boomers, 3 wars, yada. All appear awesome/insurmountable when you are in them - and their economic effects appear trivial a decade later as you recall them. Consider 3 risk levels - a generic market index (SP500, Total Index) carries the risk of the global economy. Has a std dev of about 15%/yr and a mean of about 11%/yr. Next, a market sector - it carries the same risk as an Index, plus the volatility/risk of that sector - ie, an industry shift away from a commodity (slide rules, buggy whips) - the expected return is still about 11% but the risk and std dev are higher. Third, individual stocks - they carry the same risks as the first two, plus the risk of a specific company failure such as the GM bk. Again, about an 11%/yr return (individual stock are picked from the same SP500 population that averages 11%), but an even higher risk. Those are uncompensated risks, the worst kind - you need risk, risk and return are directly proportional, but you want to be compensated for it. The winners of the past bought index funds and added to them incrementally, no selling/moving to avoid crashes, no market timing for 30 yrs. They out-performed 85% of the professional fund managers - and the reason is obvious, they earned the market's 11%/yr with almost no costs, the managers had to earn about 14% to cover Overhead & Salaries - and it is darn hard to earn 14%/yr in an 11%/yr market, few can do it, and even fewer can do it for 30 years. Try a few 30-yr blocks and see what you get. politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html
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