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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.

Continue reading → Why Invest Forever? (Part 4)

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.

Continue reading → Why Invest Forever? (Part 3)

Passive is the New Aggressive (Part 5)

Key Points

  • The fee differential between active and passive mutual funds may not appear to be significant at first sight.
  • However, over long periods, the impact of higher fees associated with active investing through mutual funds can be considerable, as compared to passive alternatives.
  • As such, over an investment lifetime of 45 years, excessive fees could wipe out a large percentage of your potential wealth.
  • Therefore, going with a passive approach has the potential to mitigate this particular concern.

Continue reading → Passive is the New Aggressive (Part 5)

Passive is the New Aggressive (Part 1)

Key Points

  • According to theory, on a forward-looking basis, stocks are priced such that each stock should offer its investors with the same risk-adjusted return as any other stock, irrespective of past performance.
  • Based upon this line of reasoning, outperforming the market is exceedingly challenging.
  • Given this, passive investing aims to keep investment choices to a minimum with the goal of selecting an appropriate benchmark and aligning investments as closely as possible to said benchmark, with minimal fees and cost.
  • Alternatively, active investing involves making purposeful decisions regarding the selection and timing of investments, in an effort to nevertheless outperform the market.

Continue reading → Passive is the New Aggressive (Part 1)

Why invest in one thing over another? (Part 4)

Key Points

  • The Efficient Market Hypothesis has plenty of criticisms that are not only important to understand, but also have strong validity, and therefore should not be dismissed.
  • Boom and bust cycles provide strong evidence of pervasive market irrationality; nevertheless, this is not the same as knowing when irrationally exists and knowing when it will go away.
  • It is not enough to be able to spot irrationality because, “the markets can stay irrational longer than you can stay solvent”.
  • Rational and irrational investors may be unduly influenced by behavioral biases leading to the sustained, yet unpredictable mispricings of securities.

Continue reading → Why invest in one thing over another? (Part 4)