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Generally speaking index funds are good investment vehicles, but IMO you should not blindly use them. We still see references to the "lost decade", which usually refers to the returns from the broad U.S. indexes starting with year 2000. Even with nearly 16 years passing now, the S&P 500 is only modestly outpacing inflation and is still trailing an investment in Treasuries.
It was not hard to detect the madness at the time (2000). Many of the large companies which dominate the cap-weighted indexes were trading at silly levels. GE was north of 50x earnings, Cisco was north of 100x, just as a couple of examples. It's one thing for a tiny company to trade at a "rich" p/e... most will turn out to be bad investments but there are some that will grow fast enough to justify those multiples. But the largest companies simply cannot grow enough to justify these elevated p/e levels.
That would be like saying owning 1 piece of income producing real estate = gambling.
Owning 100 pieces of income producing real estate = investing.
Using this logic any small business owners or business owners of any size are gamblers as they clearly aren't diversified and according to this logic diversification is what makes it investing.
you just take on 2 layers of risk with individual issues instead of 1 with funds .
you have not only market risk but individual company risk . unless you bought enough of them but then in effect you created your own fund if you did .
I don't disagree with that, but that doesn't make it gambling by itself. If you work 1 job instead of 2 jobs you are in the same boat. You have an extra level of risk because you lose all of your income if you are let go.
That's a discussion about risk associated with non-diversification, not the difference between gambling investing.
Generally speaking index funds are good investment vehicles, but IMO you should not blindly use them. We still see references to the "lost decade", which usually refers to the returns from the broad U.S. indexes starting with year 2000. Even with nearly 16 years passing now, the S&P 500 is only modestly outpacing inflation and is still trailing an investment in Treasuries.
It was not hard to detect the madness at the time (2000). Many of the large companies which dominate the cap-weighted indexes were trading at silly levels. GE was north of 50x earnings, Cisco was north of 100x, just as a couple of examples. It's one thing for a tiny company to trade at a "rich" p/e... most will turn out to be bad investments but there are some that will grow fast enough to justify those multiples. But the largest companies simply cannot grow enough to justify these elevated p/e levels.
The "lost decade" is just semantics. It refers to an individual who bought at the peak in 2000, and then looks to the next 13 years for that value to be met again.
In reality, most people are putting money into the fund monthly, not just dumping their life savings in on day 1. Yes, the portions invested during the absolute peak had poor performance for quite some time. But the portions that went in just a few months before and a few months after the peak have had, by comparison, astronomical returns. Just look at the portions that were purchased a few months after each crash- their returns can have three digits rather than two.
Simply investing a portion of your salary every month into a low-fee, broad market index fund is the safest (and most would argue, smartest) way to invest.
wrong . any money invested up to that point regardless when you started as long as it was prior to 2000 saw s almost no growth in real return in the s&p 500 over the following 15 years . it is around 1.80% per year cagr .
whatever average returns you expected starting from 2000 on ,never materialized for older money . . if you looked at your balance in 2000 and fell asleep for 15 years you would be like wtf ???????????????
Last edited by mathjak107; 11-18-2015 at 04:29 PM..
In reality, most people are putting money into the fund monthly, not just dumping their life savings in on day 1. Yes, the portions invested during the absolute peak had poor performance for quite some time. But the portions that went in just a few months before and a few months after the peak have had, by comparison, astronomical returns.
Yes, most people start out with little or nothing at a young age, and gradually build up their worth over the years. That's reality for most of us, and there's little we can do about it.
There is an important sequence of returns issue that most people probably do not appreciate. Basically, the investment returns later in life are far, far more important than the returns early in life. The problem is not the month-to-month randomness of market returns, or even the year-to-year randomness. The real issue is that we can have long periods, like 10-15 years, with either very good or very poor returns. If you get one of those long periods of poor returns when you're older, your account will not be nearly as big as you had hoped by age 60-70.
So here we are at the end of 2015, looking back at 16 years where the market returned about 4% annualized. Certainly there were a few good buying points during that time, and the compounded returns on those individual contributions are quite good. But for someone who was 45-55 in year 2000, with lots of assets already invested, those few good buys are of little consequence today. The 20-30 years of saving leading up to that have not been working very hard for some time now... that is mathjak's point.
Rather than looking at the compounding of a lump sum over 30 years, we should all be looking at our own internal rates of return (IRR). You might be dollar averaging over three or four decades during which the compounded return is 10%, for example. But your IRR can be notably bigger or smaller than this, dependent on the sequence of returns.
One can gamble with stocks as much as he wants, and even if a thousand individuals with small money will do it, the market doesn't not notice. It's a myth that people move the prices, there are intstitutions and large funds who have the most influence. Bet these guys don't gamble, because their fund managers know what to do. But if you learn from the greatest investors, like Buffet Lynch or Templeton, you will know they couldn't predict the short-term price movements too. And in the long run they have made real money by sticking to fundamentals and learning everything about the asset, nit just reading few newspapers to determine what is the real price of the stock.
17 greatest investors of all times; The Top 17 Investing Quotes of All Time
I think I'm doing pretty good. I'm a newbie trader, I just started in late-July, but I have more than doubled my bank account already. I trade in very volatile stocks and catch the swings, high risk sure but more often than not they are calculated risks.
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