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December 28 - December 30, 2017
For instance, the S&P 500 returned an average of 10.28% a year from 1985 to 2015. At this rate, your money doubles every seven years. Thanks to the power of compounding, you’d have made a killing just by owning an index fund that tracked the S&P 500 over those 30 years. Let’s say you’d invested $50,000 in 1985. How much would it have been worth by 2015? The answer: $941,613.61. That’s right. Almost a million bucks!
In reality, the number you should really aim for is 20 times your income.
Pay yourself first by taking a percentage of your income and having it deducted automatically
from your paycheck or bank account. This will build your Freedom Fund: the source of lifetime income that will allow you to never have to work again. My guess is you’re already doing this. But maybe it’s time to give yourself a raise: increase what you save from 10% of your income to 15%, or from 15% to 20%.
There’s a proven method called “Save More Tomorrow,” which I describe in detail in Chapter 1.3 of Money: Master the Game. You start by saving just 3% and gradually raise this to 15% or 20% over time.
Freedom Fact 1: On Average, Corrections Have Occurred About Once a Year Since 1900
corrections are just a routine part of the game.
average correction has lasted only 54 days
Freedom Fact 2: Less Than 20% of All Corrections Turn Into a Bear Market
the US market ended up with a positive return in 27 of the last 36 years.
Freedom Fact 5: Historically, Bear Markets Have Happened Every Three to Five Years
varied widely in duration, from a month and a half (45 days) to nearly 2 years (694 days). On average, they lasted about a year. When you’re in the midst of a bear market, you’ll notice that most of the people around you become consumed with pessimism.
every single bear market in US history has been followed by a bull market, without exception.
Thanks to inflation, the price of almost everything is at an all-time high almost all the time.
Freedom Fact 7: The Greatest Danger Is Being out of the Market
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. Can you believe it? Your returns would have been cut almost in half just by missing the 10 best trading days in 20 years! It gets worse! 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! Meanwhile, a study by JPMorgan found that 6 of the 10 best
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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.
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!”
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.
Every time a fund trades in or out of a stock, a brokerage firm charges a commission to execute the transaction.
Wait, it gets worse! If your stock goes up, you’ll also have to pay taxes on your profits when you sell the stock. For investors in an actively managed fund, this combination of hefty transaction costs and taxes is a silent killer, quietly eating away at the fund’s returns! To add value after taxes and fees, the fund manager has to win by a really big margin.
Index funds
studied all 203 actively managed mutual funds with at least $100 million in assets, tracking their 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!
If you insist on buying an actively managed fund, what you’re really betting on is your ability to pick one of the 4 percent that outperformed the market.
“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.” The fancy term for this process is “reversion to the mean”: a polite way of saying that most highfliers will eventually fall, reverting back to mediocrity.
nearly all of the big-name providers routinely accept payments from the mutual funds they offer in 401(k) plans. This legal but grubby arrangement is called revenue sharing, or “pay to play.”
Because index funds aren’t sufficiently lucrative for the provider. So they prefer to exclude them from the menu, if they can get away with it.
As I write this, at least ten major providers have been sued by their employees for charging excessive fees in their own 401(k) plans!
America’s Best 401k (ABk).
90% of the roughly 310,000 financial advisors in America are actually just brokers. In other words, they’re paid to sell financial products to customers like you and me in return for a fee.
all financial advisors fall into just one of three categories.
HOW TO FIND THE BEST ADVISOR FOR YOUR NEEDS
SEVEN KEY QUESTIONS TO ASK ANY ADVISOR
CORE PRINCIPLE 1: DON’T LOSE
never forget about their downside risk, and they protect themselves by investing in different types of assets, some of which will rise while others fall.
CORE PRINCIPLE 2: ASYMMETRIC RISK/REWARD
seek to risk as little as possible to make as much as possible.
invest in undervalued assets during times of mass pessimism and gloom.
CORE PRINCIPLE 3: TAX EFFICIENCY
if you hold most investments for a year or more, you’ll pay long-term capital gains tax when you sell. The current rate is 20%, which is way lower than the rate you pay on your ordinary income.
it’s not what they earn that counts. It’s what they keep.
Roth IRAs,
if you’re not maximizing your contributions, now is the time to do it!
CORE PRINCIPLE 4: DIVERSIFICATION
four important ways to diversify effectively:
investors can diversify by owning low-cost index funds that invest in six “really important” asset classes: US stocks, international stocks, emerging-market stocks, real estate investment trusts (REITs), long-term US Treasuries, and Treasury inflation-protected securities (TIPS).
by owning 15 uncorrelated investments, you can reduce your overall risk “by about 80%,” and “you’ll increase the return-to-risk ratio by a factor of five. So, your return is five times greater by reducing that risk.”
Historically, the stock market has returned an average of 9% to 10% a year over more than a century. But these figures are deceptive because stocks can be wildly volatile along the way. It’s not unusual for the market to fall 20% to 50% every few years. On average, the market is down about one in every four years.
market has made money three out of every four years.
When you lend money to the federal government, it’s called a Treasury bond. When you lend money to a city, state, or county, it’s a municipal bond. When you lend money to a company such as Microsoft, it’s a corporate bond. And when you lend money to a less dependable company, it’s called a high-yield bond or a junk bond.
