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S & P 500/Dow Jones Etc - am i missing something?

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RichieG

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Anytime you look for figures it will be something like S&P averages 8% over last 10 years.

So $100,000 invested in 2009 will be worth ( in theory ) approx $221,000 in 2019

What about if you invested $100,000 in 2008.

It fell 50% at the end of the year. Now worth $50,000.
Then from 2009 - 2019 you get the reported 10% growth for 10 years.
Your investment is now worth $110,000

So from 2008 to 2019 you have made 10% but the report states 10% return per year for the last 10 years!

Then if there is another 40% drop in 2020 your investment goes to $55,000 again?? Am i missing something??

If i'm right how do they get away with this and does DCA help?
 

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Kak

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You are thinking through it correctly. You are seeing that it isn’t as easy as buying and trusting for a long period of time.

Being able to read the markets a little better than the dumb money will tremendously help you to be able to make proper adjustments over time concerning the market.

But yes, they will selectively tout a time frame that supports their claims. You just have to be smarter than that, which you are.

I am also someone that thinks buying a handful of specific stocks, with sound investment reasoning, is as safe if not safer, than buying the market as a whole. The phrase “single stock exposure” has made sheep of investors that will get into a sector ETF instead of the company they actually believe in. They diversify away potential upside, pile in like sardines, and when people get spooked it Isn’t pretty.

There is a good quote from Ray Dalio on this it went something like “To invest effectIvely you have to bet against the consensus and be right. The consensus is built into the price.”

The consensus is currently horrified of single stock exposure. I am horrified stocks driven by nothing, but indices.

Be smarter than dumb money DCA.
 
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RichieG

RichieG

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You are thinking through it correctly. You are seeing that it isn’t as easy as buying and trusting for a long period of time.

Being able to read the markets a little better than the dumb money will tremendously help you to be able to make proper adjustments over time concerning the market.

But yes, they will selectively tout a time frame that supports their claims. You just have to be smarter than that, which you are.

I am also someone that thinks buying a handful of specific stocks, with sound investment reasoning, is as safe if not safer, than buying the market as a whole. The phrase “single stock exposure” has made sheep of investors that will get into a sector ETF instead of the company they actually believe in. They diversify away potential upside, pile in like sardines, and when people get spooked it Isn’t pretty.

There is a good quote from Ray Dalio on this it went something like “To invest effectIvely you have to bet against the consensus and be right. The consensus is built into the price.”

The consensus is currently horrified of single stock exposure. I am horrified stocks driven by nothing, but indices.

Be smarter than dumb money DCA.
Thanks Kak. Was it you that suggested The Intelligent Investor?

It's amazing. The general consensus from experts is forget single stocks go with a basket. I guess that is the dumbing down and the apparent safety in numbers.

Would you agree with the purchase of index funds if the specific market drops by 40%? ( buy for the short term and then sell - just a thought )
 

MTEE1985

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The general consensus from experts is forget single stocks go with a basket.
As a whole it is not bad advice. However, it is the consensus for one reason: Disclipline. The average investor lacks it. They buy high amidst the frenzy and sell low amidst the angst.

Indexing is better than pulling the trigger every time Cramer yells “buy buy buy” and selling when you’re neighbor tells you to. It is not better than taking the time to do the research and understand the sectors, the underlying companies and finding the quality, undervalued picks among them.
 

Kak

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You will suffer losses sometimes, it is the nature of the beast. It will go a long way towards you doing better than most people if you have a good understanding of what’s moves the markets.

I like to keep things simple. If there’s is a company that is making great management decisions, they are in a good cash flow position, have no major threats, and I see them making good decisions for the future.... why not buy them? That makes the most sense to me. Let’s never forget, you are buying a small piece of a company. If you know business and finance, you know what smells right and what doesn’t.
 

Kak

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Thanks Kak. Was it you that suggested The Intelligent Investor?

It's amazing. The general consensus from experts is forget single stocks go with a basket. I guess that is the dumbing down and the apparent safety in numbers.

Would you agree with the purchase of index funds if the specific market drops by 40%? ( buy for the short term and then sell - just a thought )
Yes I suggested it and yes I agree.

We will see new all time highs many many times before we die. Buy it when YOU feel like it is a good deal. Don’t throw out discipline and say “it dropped 40 so I’m buying.” You need to have a reasonable explanation for why you think it’s about to turn around.
 
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NuclearPuma

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If you invest every paycheck, your paycheck from 2008 didn't do so well, but all of your pay checks from 2009 until today did stellar. By investing each month you are diversifying your entry point. Some entry points perform poorly, some perform well.

The majority of the entry points over the last 100 years perform well. I've looked at all the data and the average 30 year compounded returns have been 8-9%....I found there was one period that was 5%, and one that was 11%, but most of the 30 year periods were 7-10%.

This is the argument in favor of investing each month, so that you diversify your entry points. Of course some years will be bad, but 2/3 are good and make it worth weathering the downturns under the assumption that the ups and downs cannot be reliably predicted.
 
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RichieG

RichieG

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If you invest every paycheck, your paycheck from 2008 didn't do so well, but all of your pay checks from 2009 until today did stellar. By investing each month you are diversifying your entry point. Some entry points perform poorly, some perform well.

The majority of the entry points over the last 100 years perform well. I've looked at all the data and the average 30 year compounded returns have been 8-9%....I found there was one period that was 5%, and one that was 11%, but most of the 30 year periods were 7-10%.

This is the argument in favor of investing each month, so that you diversify your entry points. Of course some years will be bad, but 2/3 are good and make it worth weathering the downturns under the assumption that the ups and downs cannot be reliably predicted.
Look at the numbers. You can have 10 great years a 40% downfall and it takes 10 years to rebuild to where you were. What happens if there is another 40% fall.

It's one big circular con.........
 

Kak

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Look at the numbers. You can have 10 great years a 40% downfall and it takes 10 years to rebuild to where you were. What happens if there is another 40% fall.

It's one big circular con.........
You sound like you should look at some real estate. No one can convince you it isn’t a con.

You just need to know exactly what it is. It is a super liquid, instantaneous, capitalist marketplace for units of ownership in companies, saturated by at least 80 percent dumb or lazy money.

The lazy money are the ones being conned.
 
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NuclearPuma

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Thanks for the insights. I'd be lying if I said I didn't occasionally look back at my old life wistfully.

As far as consulting, I started with the Coursera class and then took some Udemy courses on reinforcement learning and got my first set of gigs. From there I just use the methods I outline in my other post on learning hard stuff.

If I were starting today, I'd start with Fast.ai - it's a free online open course that uses a top down approach. They give you models to play with, get results, and then go into detail on how it all works.

If you're curious, perhaps play around with it and see if it's up your alley. Demand is quite high, and there's a shortage of good people.
Look at the numbers. You can have 10 great years a 40% downfall and it takes 10 years to rebuild to where you were. What happens if there is another 40% fall.

It's one big circular con.........
I analyzed the raw day myself and you are wrong. Yeah one year in a lifetime, 2008, was down 30-40%... but then by 2010 it was back.... and from 2010 to 2018 the return on the S&P were like 16% compounded. Some individual sectors were 20% yoy compounding over a 7 year period. So when you take any 30 year period like I stated, even when one year is -38%, the average is still 8-9% with the worst performing 30 year period being just below 5% (which is why the 4% rule is set at 4%) and the best performing 30 year period being almost 12%.
 

InspireHD

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I didn't run through all of your numbers to see if they were correct, but while you are thinking about it correctly, I feel like you're also missing something. From my understanding of what you're saying, you're saying it's 10% per year gained, but then "what if it drops 40 or 50%?"

The thing you're missing is that the 10% per year is an average. It could go up 30% in one year and down 10% the next year and while you're averaging 10%, you're still up 20% overall.

So it's not that it goes up 10%, but down 50%. It's that it goes up AND down in a range so that the average over a long period of time is that the S&P 500 goes up 10%.

Taking dividends into account, here is the last 10 years of returns for the S&P 500:

2008: -37.00%
2009: 26.46%
2010: 15.06%
2011: 2.11%
2012: 16.00%
2013: 32.39%
2014: 13.69%
2015: 1.38%
2016: 11.96%
2017: 21.83%

AVERAGE: 10.39%

As you can see, the last 9 years have been a pretty strong bull market. If you held on through 2008, you would have made all of your money back, plus more. The problem is that people freaked out and sold at the bottom of 2008 and then stayed out all the way back up.

It's important that in individual companies that you're trying to buy with a margin of safety (Intelligent Investor term) at a reasonable price. In the S&P 500, it's more important to be in the market for a long period of time collecting returns plus dividends to leverage those returns.

"Time in the market is better than timing the market."

Dollar cost averaging (DCA) can help if you don't feel comfortable putting all of your money in all at once. I felt that way in 2014 when I started DCA into the S&P 500 in my Roth IRA thinking the market was getting a little pricey. As you can see, it kept going up! My initial investment is up 44.7%. It would have been better to just put in a larger amount the first time. Again, "time in the market is better than timing the market." I'm pretty sure there are studies out there that say "lump-sum" investing is better.

I hope that answers your question.
 

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RichieG

RichieG

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I didn't run through all of your numbers to see if they were correct, but while you are thinking about it correctly, I feel like you're also missing something. From my understanding of what you're saying, you're saying it's 10% per year gained, but then "what if it drops 40 or 50%?"

The thing you're missing is that the 10% per year is an average. It could go up 30% in one year and down 10% the next year and while you're averaging 10%, you're still up 20% overall.

So it's not that it goes up 10%, but down 50%. It's that it goes up AND down in a range so that the average over a long period of time is that the S&P 500 goes up 10%.

Taking dividends into account, here is the last 10 years of returns for the S&P 500:

2008: -37.00%
2009: 26.46%
2010: 15.06%
2011: 2.11%
2012: 16.00%
2013: 32.39%
2014: 13.69%
2015: 1.38%
2016: 11.96%
2017: 21.83%

AVERAGE: 10.39%

As you can see, the last 9 years have been a pretty strong bull market. If you held on through 2008, you would have made all of your money back, plus more. The problem is that people freaked out and sold at the bottom of 2008 and then stayed out all the way back up.

It's important that in individual companies that you're trying to buy with a margin of safety (Intelligent Investor term) at a reasonable price. In the S&P 500, it's more important to be in the market for a long period of time collecting returns plus dividends to leverage those returns.

"Time in the market is better than timing the market."

Dollar cost averaging (DCA) can help if you don't feel comfortable putting all of your money in all at once. I felt that way in 2014 when I started DCA into the S&P 500 in my Roth IRA thinking the market was getting a little pricey. As you can see, it kept going up! My initial investment is up 44.7%. It would have been better to just put in a larger amount the first time. Again, "time in the market is better than timing the market." I'm pretty sure there are studies out there that say "lump-sum" investing is better.

I hope that answers your question.
So on those figures you invest $100 dollars in 2008

At the end of 2017 9 years later it’s worth approx $222 with no significant downturn

Say next year it’s just a 20% correction

Your money is worth $177

That’s a long time .

Good Luck with that plan

Ps numbers are approx
 

garyfritz

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For most people -- and I definitely include myself, in spite of years as an amateur and professional professional futures trader -- the stock market is a mystery. They don't understand how to beat the market. Which is not surprising, considering most pro fund managers can't beat the market either. Hell with two short exceptions, even Warren Freaking Buffett hasn't beat the market for the last 18 years or so.

So there is a HUGE component of luck involved. Follow the advice to invest every month, and your results could vary wildly depending on when you started. If you have crap luck like I do -- like dropping a big chunk into the market in late 2007 -- then your returns will suck. Like mine do. Start out when blood is running in the streets, like in 1982 or 2009, and everything is rosy.

My "crap luck" is definitely mostly because I've never really understood the market dynamics, in spite of a lot of study over the years. There are a hundred different ways of looking at the market, and the ones I try never seem to work. If you have a different way of analyzing the market you might have much better results. But most people just have no idea how to do anything intelligent in the market.

And DCA, "buy and hold," etc only work when the market is going up. That's worked a lot in the last century, but there are plenty of times when it didn't. Like 2000-2009, or 1965-1982, or 1929-1948. We are long overdue for a major reckoning in the markets, the global economic picture is not good, and as a result the expected future value at these levels is veeery low.

That's why I have almost nothing in the stock market. When I invest in the stock market, I lose, almost without fail. So I've put most of my money in real estate. So far that's worked better...
 

NuclearPuma

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I didn't run through all of your numbers to see if they were correct, but while you are thinking about it correctly, I feel like you're also missing something. From my understanding of what you're saying, you're saying it's 10% per year gained, but then "what if it drops 40 or 50%?"

The thing you're missing is that the 10% per year is an average. It could go up 30% in one year and down 10% the next year and while you're averaging 10%, you're still up 20% overall.

So it's not that it goes up 10%, but down 50%. It's that it goes up AND down in a range so that the average over a long period of time is that the S&P 500 goes up 10%.

Taking dividends into account, here is the last 10 years of returns for the S&P 500:

2008: -37.00%
2009: 26.46%
2010: 15.06%
2011: 2.11%
2012: 16.00%
2013: 32.39%
2014: 13.69%
2015: 1.38%
2016: 11.96%
2017: 21.83%

AVERAGE: 10.39%

As you can see, the last 9 years have been a pretty strong bull market. If you held on through 2008, you would have made all of your money back, plus more. The problem is that people freaked out and sold at the bottom of 2008 and then stayed out all the way back up.

It's important that in individual companies that you're trying to buy with a margin of safety (Intelligent Investor term) at a reasonable price. In the S&P 500, it's more important to be in the market for a long period of time collecting returns plus dividends to leverage those returns.

"Time in the market is better than timing the market."

Dollar cost averaging (DCA) can help if you don't feel comfortable putting all of your money in all at once. I felt that way in 2014 when I started DCA into the S&P 500 in my Roth IRA thinking the market was getting a little pricey. As you can see, it kept going up! My initial investment is up 44.7%. It would have been better to just put in a larger amount the first time. Again, "time in the market is better than timing the market." I'm pretty sure there are studies out there that say "lump-sum" investing is better.

I hope that answers your question.
When I say average, I was looking at compounded annual growth rate (CAGR), not the arithmetic average.
 

JamItFast

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The problem is that people freaked out and sold at the bottom of 2008 and then stayed out all the way back up.
It's hard to weather the storm when you need your savings to eat and pay your mortgage.

People didn't "Freak Out". American's savings were in the stock market and real estate. When the economy crashed in 2008 Americans lost their jobs and relied on their savings.

As MJ argues in Unscripted, Dollar Cost Averaging works on paper. But there are few success stories in reality.

And it's not because people "Freak Out", it is because individuals need their savings in the exact times that the stock market crashes.
 

100k

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Buy indices/indexes. Come rain or shine, HODL for 30 years. You'll come out on top, EVERY, SINGLE, TIME.
 

NuclearPuma

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It's hard to weather the storm when you need your savings to eat and pay your mortgage.

People didn't "Freak Out". American's savings were in the stock market and real estate. When the economy crashed in 2008 Americans lost their jobs and relied on their savings.

As MJ argues in Unscripted, Dollar Cost Averaging works on paper. But there are few success stories in reality.

And it's not because people "Freak Out", it is because individuals need their savings in the exact times that the stock market crashes.
And this is compounded by the fact that many had to tap into their 401ks and pay insane taxes, where if they had kept it in a taxable brokerage they would have only needed to pay a lower long term capital gains tax.
401ks incentivize you to keep working longer and punish you if hard times force early withdrawal.
 
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RichieG

RichieG

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Yes I suggested it and yes I agree.

We will see new all time highs many many times before we die. Buy it when YOU feel like it is a good deal. Don’t throw out discipline and say “it dropped 40 so I’m buying.” You need to have a reasonable explanation for why you think it’s about to turn around.
Kak have you ( or anyone else ) read Peter Lynch. One Up On Wall Street? If so what are your thoughts on book and author?
 

biophase

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So on those figures you invest $100 dollars in 2008

At the end of 2017 9 years later it’s worth approx $222 with no significant downturn

Say next year it’s just a 20% correction

Your money is worth $177

That’s a long time .

Good Luck with that plan

Ps numbers are approx
The question is, if you don't like that type of risk, what would you have done with $100 in 2008?
 

GoGetter24

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And it's not because people "Freak Out", it is because individuals need their savings in the exact times that the stock market crashes.
That's why a big chunk of "the rich get richer" comes from the fact they were prepared and waiting for the next crash with a pile of cash and bonds.

The fascinating thing about money and business is that the more I study it, the more it just looks like basic hierarchy creation along the lines of human virtue.

For instance, it's not clear how alcohol should be related to your social rank. But the guy who spends $100 a week on "nights out", versus the guy who spends the same time operating a bar, are on opposite sides of "getting ahead".

Similar stories with following the crowd versus thinking for yourself. Being lazy versus being hardworking. Abdicating responsibility versus embracing it. Being quiet and cunning versus being a loudmouth and stupid.

In a way the social structure of society is created by long run, butterfly-effect style accumulation of virtue. This is what a lot of people deliberately skim over on the "you inherited that so you don't deserve it" BS. Yes they didn't, but someone up the generational chain did, so it's missing the point.
 

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