Why Invest Forever? (Part 4)

Key Points

  • Although the worst-case outcomes for the investing in the S&P 500® Index seem uninviting, the index has provided reasonable returns the vast majority of the time.
  • The worst-case 5-year holding period for the index produced an annualized real return of -13.233%; however, over 80% of the time the 5-year holding period produced a positive real (inflation-adjusted) return.
  • Further, the worst-case 45-year holding period for the index produced an annualized real return of only about 3.5%; however, 90% of the time the 45-year holding period produced a solid annualized real return of close to 5% or better.

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Why Invest Forever? (Part 3)

Key Points

  • Since 1973 the S&P 500® Index has posted considerable gains—over this period the index has averaged over 10% per year in gains after reinvesting dividends, before taxes and fees.
  • However, investigating other 45-year periods (going as far back as 1871) leads to a more useful picture of the index’s performance across differing economic environments.
  • According to history, it’s better to invest in the index over longer periods in order to increase the likelihood of providing favorable returns and decrease the likelihood of losing money.

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Risk Management 101 (Part 3)

Key Points

  • A histogram can be used to visually interrogate the distribution of a security’s returns.
  • These returns typically resemble a bell-shaped curve when viewed as a histogram.
  • A random variable that follows this type of bell-shaped distribution is said to follow a normal distribution.
  • There are certain characteristics of a normal distribution that can be helpful when investigating the returns of stocks, given an understanding of the assumptions involved in such analysis.
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Risk Management 101 (Part 2)

Key Points

  • Volatility measures the dispersion of returns of a security, which can be estimated by calculating the standard deviation of historical returns.
  • Based upon this standard deviation measure, and an understanding of a stock’s average historical return we can estimate a stock’s range of expected returns.
  • This information can be useful in determining whether a particular stock lies within one’s risk tolerance when making investment decisions.
  • However, there are many assumptions associated with this analysis, which must be taken into consideration.

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