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Non-intuitive Examples of Compounding Returns

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Re: Non-intuitive Examples of Compounding Returns

#11

Post by jasonkester »

Two9A wrote: post #10
jasonkester wrote: post #8

I give this same advice a lot, and it's always telling to watch people's reaction. Human nature is all about defending what you're currently doing, against all evidence that there's a better way. So, yeah, it's impossible to get 5%? Are you sure about that? Over a 40-50 year period? You'd have to look pretty hard at old stock charts to find a spot where you could get overall returns that low. And yes, inflation exist…

Yeah, I've tried the whole stock market thing twice now. Put $1,000 in as a tracker against the market index, expected a decent return; of course, I put it in on Sep 10, 2001. Never got that money back. Thought I'd try again a couple of years ago, so I bought shares in Lloyds Group. On the eve of Lehman going south. Never got that money back, either. I think I'll stick to 3% savings accounts, thanks.

As a quick test, you might want to go back and see where that disaster investment would be today if you'd left it in? Check again in 2041 and see if it beats 3%/year. You might be surprised.

And a quick word to the wise: Never "invest" in individual stocks. That's speculation, and chances are most of the time you do it you'll lose. "Invest" in a fund that tracks the S&P 500, and don't even think about taking the money back out until you retire.

Re: Non-intuitive Examples of Compounding Returns

#12

Post by nandemo »

thematt wrote: post #3
WildUtah wrote: post #2

Of course, nobody can reliably get 5.04% after tax and after inflation compounding returns. (And nobody was able to over the long term in the Twentieth Century in passive investments.) If you put your money in the stock market over the past decade, for example, your return would be zero. And this is one of the best times to be cashing out. Most of the last decade would have produced negative returns. Less risky inves…

If you put your money in the stock market over the past decade, it's vastly over-simplified to say that your return would be zero. It's highly dependent upon what you invested in. I know many people (myself included) who have fantastic returns over a rolling ten year period.

Of course "it depends upon what you invested in" but your parent comment is referring to the market average or equivalently the return of an index fund. That's the only way it makes sense to compare the returns of different time periods. After all, in any period there are stocks that offer large returns but that of course doesn't make the stock market a sure bet since we only know the good stocks in hindsight.

Re: Non-intuitive Examples of Compounding Returns

#15

Post by PaulHoule »

ceslami wrote: post #4
WildUtah wrote: post #2

Of course, nobody can reliably get 5.04% after tax and after inflation compounding returns. (And nobody was able to over the long term in the Twentieth Century in passive investments.) If you put your money in the stock market over the past decade, for example, your return would be zero. And this is one of the best times to be cashing out. Most of the last decade would have produced negative returns. Less risky inves…

The point of the article is sound nonetheless: it is better to save early and consistently. This simple lesson alone could help many young people avoid financial issues later in life.

No, the "compound interest" meme is one of the most dangerous ideas that's going. Fundamentally, exponential growth destroys itself.

My model for economic progress is that there are two variables: the ability for a civilization to solve problems and the ability for a civilization to create problems. The benefits of growth are more immediately visible than the drawbacks, and because they differentially accrue to certain people, those people gain political power that is used to suppress the political response that would solve the problems created by growth. As a result, problems eventually grow faster than solutions.

When the ability of a civilization to create problems exceeds the ability to solve problems, we get an economic crisis such as the Great Depression, the stagflation of the 1970's or the situation that we're working through now. One way or another, the system needs a decade or so of low performance in order to slow down and sort out the problems that growth has created.

These crises seem to come every 40 years or so, so you're certain to have one, maybe even two, in the course of a career and subsequent retirement. And it just takes the aftermath of one to destroy your savings and possibly your career.

And, as the previous commenter says, if Wall Street has really turned into a system that captures all economic gains for a few people at the top, all you're doing is making them rich when you put money in a 401k or IRA. Personally, if I was President, the first thing I'd do is dismantle the 401k and IRA systems and let people withdraw all the money they have in them.

I'm convinced that tax-deferred savings have created a 'lost generation' of small businesses. It used to be people stacked up money in a bank and had it available when they wanted to start a business. If all of your savings are in a tax-deferred savings plan, you deprive yourself of that option.

Re: Non-intuitive Examples of Compounding Returns

#16

Post by mhb »

Two9A wrote: post #10
jasonkester wrote: post #8

I give this same advice a lot, and it's always telling to watch people's reaction. Human nature is all about defending what you're currently doing, against all evidence that there's a better way. So, yeah, it's impossible to get 5%? Are you sure about that? Over a 40-50 year period? You'd have to look pretty hard at old stock charts to find a spot where you could get overall returns that low. And yes, inflation exist…

Yeah, I've tried the whole stock market thing twice now. Put $1,000 in as a tracker against the market index, expected a decent return; of course, I put it in on Sep 10, 2001. Never got that money back. Thought I'd try again a couple of years ago, so I bought shares in Lloyds Group. On the eve of Lehman going south. Never got that money back, either. I think I'll stick to 3% savings accounts, thanks.

Where's a 3% savings account?

Re: Non-intuitive Examples of Compounding Returns

#17

Post by streety »

mhb wrote: post #16
Two9A wrote: post #10

Earlier quoted context omitted.

Yeah, I've tried the whole stock market thing twice now. Put $1,000 in as a tracker against the market index, expected a decent return; of course, I put it in on Sep 10, 2001. Never got that money back. Thought I'd try again a couple of years ago, so I bought shares in Lloyds Group. On the eve of Lehman going south. Never got that money back, either. I think I'll stick to 3% savings accounts, thanks.

Where's a 3% savings account?

From the mention of Lloyds I'll assume that Two9A is in the UK. The best instant access savings I know about is 2.9% from the post office [1] with better rates available for 1 year bonds or longer [2].

[1] http://www.postoffice.co.uk/portal/po/content1?catId=1930023... [2] http://www.lovemoney.com/savings/term-bond-accounts.aspx

Re: Non-intuitive Examples of Compounding Returns

#19

Post by orangecat »

WildUtah wrote: post #2

Of course, nobody can reliably get 5.04% after tax and after inflation compounding returns. (And nobody was able to over the long term in the Twentieth Century in passive investments.) If you put your money in the stock market over the past decade, for example, your return would be zero. And this is one of the best times to be cashing out. Most of the last decade would have produced negative returns. Less risky inves…

If you put your money in the stock market over the past decade, for example, your return would be zero.

Not using dollar cost averaging.

Re: Non-intuitive Examples of Compounding Returns

#20

Post by semanticist »

Two9A wrote: post #10
jasonkester wrote: post #8

I give this same advice a lot, and it's always telling to watch people's reaction. Human nature is all about defending what you're currently doing, against all evidence that there's a better way. So, yeah, it's impossible to get 5%? Are you sure about that? Over a 40-50 year period? You'd have to look pretty hard at old stock charts to find a spot where you could get overall returns that low. And yes, inflation exist…

Yeah, I've tried the whole stock market thing twice now. Put $1,000 in as a tracker against the market index, expected a decent return; of course, I put it in on Sep 10, 2001. Never got that money back. Thought I'd try again a couple of years ago, so I bought shares in Lloyds Group. On the eve of Lehman going south. Never got that money back, either. I think I'll stick to 3% savings accounts, thanks.

Lloyds Banking Group shares have dropped like a rock recently, but over the longer term they'll do well as the economy strengthens. The LTSB/HBOS merger has left them in a pretty dominant position for retail banking/financial services.

If you're only holding onto the shares for a short time and selling them when they fall, then you're not really doing it right.

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