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March 7 - March 9, 2019
Freedom Fact 7: The Greatest Danger Is Being out of the Market
it’s not possible to jump in and out of the market successfully. It’s just too difficult for regular mortals like you and me to predict the market’s movements.
sitting on the sidelines even for short periods of time may be the costliest mistake of all. I know this sounds counter-intuitive, but as you can see in the chart below, it has a devastating impact on your returns when you miss even a few of the market’s best trading days.
From 1996 through 2015, the S&P 500 returned an average of 8.2% a year. But if you missed out on the top 10 trading days during those 20 years, your returns dwindled to just 4.5% a year.
If you missed out on the top 20 trading days, your returns dropped from 8.2% a year to a paltry 2.1%. And if you missed out on the top 30 trading days? Your returns vanished into thin air, falling all the way to zero!
6 of the 10 best days in the market over the last 20 years occurred within two weeks of the 10 worst days.
The moral: if you got spooked and sold at the wrong time, you missed out on the fabulous days that followed, which is when patient inves...
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fear isn’t rewarded. Courage is.
If you stay in the market long enough, compounding works its magic, and you end up with a healthy return—even if your timing was hopelessly unlucky.
there’s no more powerful way to take control of your finances than to cut out these excessive—and often hidden—fees.
How will you benefit? You’ll save at least 10 years of income!
How Wall Street Fools You into Overpaying for Underperformance
71% of Americans believe that they pay no fees at all to have a 401(k) plan.
This is the equivalent of believing that fast food contains no calories.
92% admit that they have no idea how much they’re actually paying.
they’re blindly trusting the financial industry to look out for t...
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Ignorance is pain and poverty.
excessive fees can destroy two-thirds of your nest egg!
Jack Bogle spelled it out to me quite simply: “Let’s assume the stock market gives a 7% return over 50 years,” he began. At that rate, because of the power of compounding, “each dollar goes up to 30 dollars.” But the average fund charges you about 2% per year in costs, which drops your average annual return to 5%. At that rate, “you get 10 dollars. So 10 dollars versus 30 dollars. You put up 100% of the capital, you took 100% of the risk, and you got 33% of the return!”
By minimizing fees, you’ll save years—or, more likely, decades—of retirement income.
excessive taxes, like fees, are a destructive force that can overwhelm all the positive steps you’ve taken.
Wall Street has evolved into an ecosystem that exists first and foremost to make money for itself. It’s not an evil industry made up of evil individuals. It’s made up of corporations whose purpose is to maximize profits for their shareholders. That’s their job. Even the best-intentioned employees are working within the confines of this system. They’re under intense pressure to grow profits, and they’re rewarded for doing so. If you—the client—happen to do well, too, that’s great! But don’t kid yourself. You’re not the priority!
“Overwhelmingly, mutual funds extract enormous sums from investors in exchange for providing a shocking disservice.”
it turns out that the professionals aren’t really any better at predicting the future than the rest of us.
Every time a fund trades in or out of a stock, a brokerage firm charges a commission to execute the transaction. It’s a bit like gambling at a casino: the house gets paid no matter what.
Over time those tolls add up.
Like poker, investing is a zero-sum game: there are only so many chips on the table. When two people trade a stock, one must win and one must lose.
If the stock goes up after you buy it, you win. But you’ve got to win by a big enough margin to cover those transaction costs.
it gets worse! If your stock goes up, you’ll also have to pay taxes on your profits...
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To add value after taxes and fees, the fund manager has to win by a really big margin. And, as you’ll soon see, that ain’t easy.
the largest expense in your life is taxes, and paying more than you need to pay is insane—especially when it’s absolutely avoidable!
If you’re not careful, taxes can have a catastrophic impact on your returns.
Another common problem has to do with how long actively managed funds hold their investments. Most are trading constantly. They sell many of their investments in less than a year. That means you no longer benefit from the lower capital gains tax rate. So regardless of how long you hold the fund, you’ll be taxed at your higher ordinary income tax rate.
your profits could be slashed by 30% or more, unless you’re holding the fund inside a tax-deferred account such as an IRA (individual retirement account) or a 401(k) plan.
Index funds take a “passive” approach that eliminates almost all trading activity. Instead of trading in and out of the market, they simply buy and hold every stock in an index such as the S&P 500.
Index funds are almost entirely on autopilot: they make very few trades, so their transaction costs and tax bills are incredibly low.
They also save a fortune on other expenses. For one thing, they don’t have to pay enormous salaries to all those active fund managers and their teams of analysts
When you own an index fund, you’re also protected against all the downright dumb, mildly misguided, or merely unlucky decisions that ac...
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just holding the market (via an index fund) outperformed more than 80% of market-timing strategies.
“The Real Cost of Owning a Mutual Fund,” which revealed just how expensive funds can truly be. As the writer pointed out, you’re not only on the hook for the expense ratio, which the magazine estimated conservatively at just less than 1% (0.9%) a year. You’re also liable to pay through the nose for “transaction costs” (all those commissions your fund pays whenever it buys or sells stocks), which Forbes estimated at 1.44% a year. Then there’s the “cash drag,” which it estimated at 0.83% a year. And then there’s the “tax cost,” estimated at 1% a year if the fund is in a taxable account.
The grand total? If the fund is held in a nontaxable account like a 401(k), you’re looking at total costs of 3.17% a year! If it’s in a taxable account, the total costs amount to a staggering 4.17% a year!
You’ve got to look very carefully at the small print. I don’t like things that require small print, by the way. —JACK BOGLE
an actively managed fund that charges you 3% a year is 60 times more expensive than an index fund that charges you 0.05%!
returns for the 15 years from 1984 through 1998. And you know what he found? Only 8 of these 203 funds actually beat the S&P 500 index. That’s less than 4%!
To put it another way, 96% of these actively managed funds failed to add any value at all over 15 years!
there’s another problem that few anticipate: today’s winners are almost always tomorrow’s losers.
“Of the 248 mutual stock funds with five-star ratings at the start of the period, just four still kept that rank after 10 years.”
most highfliers will eventually fall, reverting back to mediocrity.
many people pick top-rated funds without realizing that they’re falling into the trap of buying what’s hot—usually right before it turns cold.
It’s extremely hard, but there are a few “unicorns” out there who have outperformed the market by a mile over several decades. These are superstars such as Warren Buffett, Ray Dalio, Carl Icahn, and Paul Tudor Jones, who not only are brilliantly clever but also have ideal temperaments, enabling them to remain calm and rational even when markets are imploding and most people are losing their minds.
