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“the purpose of business is to produce happiness, not to pile up money.”
So never forget about these two ferocious foes of stock market success: fear and fees.
invest in index funds.
By buying low-cost, broad-market index funds (and holding them “forever”), you can guarantee that you will receive your fair share of whatever returns the financial markets provide over the long term.
You know we’re living in strange times when even the greatest financial minds admit to being confused.
96% of mutual funds failed to beat the market over a 15-year period.
hedge fund is a private fund available only to high-net-worth investors.
A mutual fund is a public fund available to anyone. In most cases, they are actively managed by a team
An index fund is also a public fund but requires no “active” managers.
index funds charge minuscule fees, saving you a fortune over the long run.
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.
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!
When any market falls by at least 10% from its peak, it’s called a correction—a peculiarly bland and neutral term for an experience that most people relish about as much as dental surgery! When a market falls by at least 20% from its peak, it’s called a bear market.
Freedom Fact 1: On Average, Corrections Have Occurred About Once a Year Since 1900
Historically, the average correction has lasted only 54 days—less than two months!
Freedom Fact 2: Less Than 20% of All Corrections Turn Into a Bear Market
Freedom Fact 3: Nobody Can Predict Consistently Whether the Market Will Rise or Fall
Freedom Fact 4: The Stock Market Rises over Time Despite Many Short-Term Setbacks
one big advantage of owning an index fund that tracks a basket of stocks such as the S&P 500 is that the weaker companies intermittently get culled and replaced by stronger ones.
Freedom Fact 5: Historically, Bear Markets Have Happened Every Three to Five Years
the S&P 500 has dropped by an average of 33% during bear markets.
They 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.
But remember: winter never lasts! Spring always follows.
A Look Back at Bear Markets
Freedom Fact 6: Bear Markets Become Bull Markets, and Pessimism Becomes Optimism
From Bear to Bull
The stock market is a device for transferring money from the impatient to the patient. —WARREN BUFFETT
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!
one of the most fundamental rules for achieving long-term financial success is that you need to get in the market and stay in it, so you can capture all of its gains.
7 out of 10 people are entirely unaware that they’re even being charged a fee!
When you own an index fund, you’re also protected against all the downright dumb, mildly misguided, or merely unlucky decisions that active fund managers are liable to make.
researchers Richard Bauer and Julie Dahlquist examined more than a million market-timing sequences from 1926 to 1999. Their conclusion: just holding the market (via an index fund) outperformed more than 80% of market-timing strategies.
The mutual fund industry is now the world’s largest skimming operation, a $7 trillion trough from which fund managers, brokers, and other insiders are steadily siphoning off an excessive slice of the nation’s household, college, and retirement savings.
“The Real Cost of Owning a Mutual Fund,” Forbes, April 4, 2011
Here’s another way to put this in perspective: an actively managed fund that charges you 3% a year is 60 times more expensive than an index fund that charges you 0.05%! Imagine going to Starbucks with a friend. She orders a venti caffé latte and pays $4.15. But you decide that you’re happy to pay 60 times more. Your price: $249!
Only 8 of these 203 funds actually beat the S&P 500 index.
“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.”
Buffett says he’s left instructions that, after his death, the money he leaves in trust for his wife should be invested in low-cost index funds.
As Tom told me, the 401(k) business is “the largest dark pool of assets where nobody really knows how or whose hands are getting greased.”
It is difficult to get a man to understand something when his salary depends on his not understanding it.
In reality, all financial advisors fall into just one of three categories. What you really need to know is whether your advisor is: • a broker, • an independent advisor, or • a dually registered advisor.
about 90% of all financial advisors in America are brokers, regardless of the title on their business card.
your best bet is to hire an independent advisor who’s a true fiduciary.
the Journal of Financial Planning found that 46% of advisors had no retirement plan of their own!
SEVEN KEY QUESTIONS TO ASK ANY ADVISOR
CORE PRINCIPLE 1: DON’T LOSE
“Rule number one: never lose money. Rule number two: never forget rule number one.”
CORE PRINCIPLE 2: ASYMMETRIC RISK/REWARD
“I’m risking one dollar in the expectation that I’ll make five,”
