The power of compounding and 2% difference in investment returns

[tobe]

apologies if that video link discussed return volitility bias, I didnt watch it....

 

[TingTong]

You don't want to get to the end having failing health and no more bickies in the bin

If you live in Oz this won't be a problem. Plan B is to go on the pension if you eat into all your capital. The best thing about Oz is you won't go hungry or without shelter. Enjoy your money and don't die with $1 million in the bank.

 

[The Fence]

You don't want to get to the end having failing health and no more bickies in the bin

No teeth, no use for bickies.

Spend it all, cant take it with you.

 

[Deltaberry]

Why are all these retirement calculators based on average returns? Sure average returns are interesting, but actual returns are whats important.

Volitility in returns has a huge effect on total returns, far in excess of 2%.

Now this isnt an argument to pay higher fees, its an argument not to trust average return BS peddled about as gospel.

Average return over 10 years might be 10%
It could be 10% each year to average 10%, nice and simple. Or it could be 5% for 5 years and 20% for 5 years the total return on these scenarios are massively diferent.

Now try for a bit of volitility, lets say 15% for 3 years, 5% for 3 years, and 10% for 2 years and 50% loss for 2 years. the average still looks great, but if the last 2 years were those years when the losses occurred, the total return is pretty ordinary.


My favourite primary school maths problem is getting a 10 year old to work out a 50% loss on a dollar, and then a 50% gain. They all answer a dollar, but its actually 75%. the financial commentary after the GFC is the same, pretty graphs showing asset prices approaching previous highs. Very few individuals portfolio performed the same, cause they fled or were forced out of the market at the low, and either didnt buy back in, or bought back in at a higher price than they sold for.

Well actually if when index the graph returns to its previous high and you haven't sold out, it's not 75% but 100%.

 

[lizzie]

Interesting when you think that over the years, the buy and sell costs I've attracted with trading, could probably have paid for two properties outright.

So - even getting away from shares and back to property - although I made good money with reno's and trading ... in hindsight I would have been better off just buying good stock as I could afford it and holding.

 

[oracle]

When Is $30K Worth $90K? When You Save It In Your 20s

Building on the original post about power of compounding. Read a very good article today about the importance of saving early to benefit from the magic of compounding over longer period.

Someone who saves for retirement during their 20s and completely stops a decade later will have more at age 62 than someone who starts saving in their 30s and spends the rest of his or her adult life trying to catch up. Yes, 10 years of savings can be worth more than 30 years of savings. This may be the only time when something that sounds too good to be true really is true.

If you know someone who's recently graduated or started a first job, sit them down and show them what personal finance advisers call "The Parable of the Twins."

One twin puts aside $3,000 every year in a Roth IRA starting at age 22, and stops at 32. She never adds another penny. Her brother starts saving $3,000 annually at 32, and continues until age 62. Who has a larger retirement kitty?

Assuming an average 8 percent return annually, the twin sister wins rather handily. She has $437,320, compared to her brother's $339,850, even though she contributed two-thirds less of her own money than her brother ($30,000 vs. $90,000).

Thanks to compounding returns, every $1,000 that someone in their 20s doesn't save costs them more than $10,000 at retirement.

Read full article here

Very interesting...

It's amazing how we have a multi-billion dollar financial planning industry advising people on how to retire comfortably whereas just following couple of simple rules that can easily be taught as school

1) Spend less than you earn
2) Invest the savings in a low cost index fund of your working lives (30year+)

You would end up with a very decent nest egg by the time you retire.

Cheers,
Oracle.

 

[tobe]

Well actually if when index the graph returns to its previous high and you haven't sold out, it's not 75% but 100%.

What proportion of investors do you think actually held since the previous highs?

Even the large super funds changed their allocations post GFC. "the new normal"

It was a tremendous change in asset ownership for everyone involved in the market.

Perhaps Argo, perhaps AFI held, and didnt change their allocation, perhaps Berkshire hathaway, but by far the majority of investors did their dough.

 

[santaslayer]

Building on the original post about power of compounding. Read a very good article today about the importance of saving early to benefit from the magic of compounding over longer period.

Very interesting...

It's amazing how we have a multi-billion dollar financial planning industry advising people on how to retire comfortably whereas just following couple of simple rules that can easily be taught as school

1) Spend less than you earn
2) Invest the savings in a low cost index fund of your working lives (30year+)

You would end up with a very decent nest egg by the time you retire.

Cheers,
Oracle.

Yep, same idea on MMM but in lay person's terms: http://www.mrmoneymustache.com/2012/01/30/your-money-can-work-harder-than-you-can/


So remember that when you’re making seemingly small money decisions as a young person. You can put that $100 bill into your pipe and smoke it, or you can roll it up and stick it to the cashball that you’ve started pushing along. Don’t be discouraged by the deceptively small size of the ball right now. The time from the first dollar bill until the time it starts out-working you is tiny, compared to your lifespan. You can roll it up now and then have it push you along nicely for your whole life, or you can take baby steps of saving for your whole life, and then have the helpful cashball appear just in time for your old age – if you are lucky.

 

[Deltaberry]

What proportion of investors do you think actually held since the previous highs?

Even the large super funds changed their allocations post GFC. "the new normal"

It was a tremendous change in asset ownership for everyone involved in the market.

Perhaps Argo, perhaps AFI held, and didnt change their allocation, perhaps Berkshire hathaway, but by far the majority of investors did their dough.

I bought AGO at $2.00 pre-GFC to $0.30 before selling out at $3.30 post GFC.

Obviously I'm relatively risk averse - the money wasn't that important to me nor did I need it or needed to pay interest.

 

[baby blue eyes]

Kept almost all share portfolio. Had some since 1995. I am a buy and hold investor in property and shares.

Own our shares outright, some are capital gain others are income, healthy portfolio. People who sold and I know a few, including those who converted to cash in super just crystallized their loss.

The dividend reinvestment I now get in westpac with franking credits is almost the amount I paid for the shares originally many moons ago

 

[Graemsay]

Invest the savings in a low cost index fund of your working lives (30year+)

This.

Most (80%+) managed funds will fail to match the stockmarket indices over the long term, and will charge you handsomely for the privilege.

In fact, there's a recent article on the New Statesman (left leaning current affairs magazine) about hedge funds and the like.

http://www.newstatesman.com/2013/06/zombies-mayfair

My favourite part of it is the suggestion for improving Mayfair's contribution to the British economy.

 

[oracle]

This.

Most (80%+) managed funds will fail to match the stockmarket indices over the long term, and will charge you handsomely for the privilege.

I have read several similar articles and seen various documentaries on this topic. All of them came to the same(above) conclusion. But one other thing they mentioned was most of the money managers invest their own money in low cost index funds themselves rather than the fund they run .

Cheers,
Oracle.

 

[redwing]

If one stock appreciates at 10% and the second at 12%, the Rule of 72 tells you that the first will take 7.2 years to double while the second will take only 6 years

 

[Rickardo]

This.

Most (80%+) managed funds will fail to match the stockmarket indices over the long term, and will charge you handsomely for the privilege.

In fact, there's a recent article on the New Statesman (left leaning current affairs magazine) about hedge funds and the like.

http://www.newstatesman.com/2013/06/zombies-mayfair

My favourite part of it is the suggestion for improving Mayfair's contribution to the British economy.

I am currently reading a book 'A random walk down Wall Street' by Burton Malkiel which discusses the ideas that both technical and fundental analysis will not beat the general market or an index fund long term (except for a few stellar performers such as Buffet). An interesting read for those who want more in depth coverage on the subject.

 

[OKFFW]

I am currently reading a book 'A random walk down Wall Street' by Burton Malkiel which discusses the ideas that both technical and fundental analysis will not beat the general market or an index fund long term (except for a few stellar performers such as Buffet). An interesting read for those who want more in depth coverage on the subject.

I recently read an interesting article on Buffet but can't remember where unfortunately. Anyway, it discussed the numbers on his investment returns along with the returns from his structures. I couldn't understand it all but what I did get from it is that the returns strictly from his investments were not any statistically significant amount more than the average over the long term.(eg: some years better, some years worse, over the long term about average) Where most of his returns apparently come from is from the structures he uses.

Anyway, it was an interesting article and if I can find it again I'll post a link.

 

[redwing]

I recently read an interesting article on Buffet but can't remember where unfortunately. Anyway, it discussed the numbers on his investment returns along with the returns from his structures. I couldn't understand it all but what I did get from it is that the returns strictly from his investments were not any statistically significant amount more than the average over the long term.(eg: some years better, some years worse, over the long term about average) Where most of his returns apparently come from is from the structures he uses.

Anyway, it was an interesting article and if I can find it again I'll post a link.

Did you find the article?

 

[OKFFW]

Did you find the article?

Sorry no.

 

[redwing]

I found this

Though In Aus you'd probably find the ATO would hit you with "unrealized gains"

1. His company Berkshire Hathaway never pays a dividend but instead retains all earnings. So the return on this investment is entirely in the form of capital gains. By not paying dividends, he saves his investors (including himself) from having to immediately pay income tax on this income.

2. Mr Buffett is a long-term investor, so he rarely sells and realizes a capital gain. His unrealized capital gains are untaxed.

3. He is giving away much of his wealth to charity. He gets a deduction at the full market value of the stock he donates, most of which is unrealized (and therefore untaxed) capital gains.

4. When he dies, his heirs will get a stepped-up basis. The income tax will never collect any revenue from the substantial unrealized capital gains he has been accumulating.

He has also been regularly contributing to his heirs charitable funds

 

[redwing]

Just finished reading an article about the true cost of fees and staying the course

Morningstar mentioned in an article that most investors chase performance (rising stars) but as a result underperform the very funds that they buy.

The articles said that over the last 10 years Fidelity's Balanced fund has been one of the industry?s best and averaged 8.04 percent per year. This beat Vanguard's Balanced Index which earned 7.45 percent.

The investors results showed Fidelity's investors averaged 5.3 percent. Possibly new investors jumped in and out of the funds when rising or falling.

Vanguard's investors actually outperformed their fund and averaged 7.81 percent. To do so, they would have bought more when the price was cheap, and less when it rose.

Fidelity's Balanced Fund Expense Ratio is 0.56% and Vanguards Balanced Index is 0.08%

So Fidelity beat Vanguard, But its investors didn't win.

 

[antistar]

The dividend reinvestment I now get in westpac with franking credits is almost the amount I paid for the shares originally many moons ago

Always so great to see this happen!

Was reading an article stating that 99% of Buffett's wealth was created after his 50th birthday. That is, he made over $62 billion of return compiling upon return after he turned 50. Sure the last 30 years have been unusually exceptional in the equities markets but it also shows the power compounding and the growth effect it can have the longer you let it roll.