Quotealex

No, this is no hype and I'm not selling anything to anyone.

flashfire

million bucks in 25 years wont be anything to write home about

Quotealex

Than continue investing that $350 per month for an extra 5 years and it will increase to more than $2,400,000 with the magic of compound interest

rowan

The idea is sound but IMHO it's impractical. You say the $350/mo claim is to make it appear more attractive to people, but as you gather in a larger interested crowd the chances that each will be able to consistently sustain a 15% average return diminishes remarkably.

I'm enjoying the power of compounding, but from the opposite end: we can freely deposit and withdraw extra funds to our home loan without penalty, so parking $50k cash in there for 2 years will make a significant difference to the loan term and overall interest paid, and after those 2 years we still have that cash available (which we wouldn't if it had just been absorbed as a larger deposit into the buy contract). The extra funds also mean that it's a discount on the interest charged rather than interest income, so it is also not taxed. The effective savings of about 7% p/a are roughly equivalent to a before-tax return of about 13% p/a.

Quotealex

Interesting strategy. Personally, I don't really consider a home an investment, and I seriously doubt "investing" in a home will yield a higher return in the long term than investing monthly in stocks. Retirement saving account are also tax free.

warlock5

15%, yeah, if you can average 10% over 25 years you did damn well.

Lets run these numbers, including taxes:
http://www.dinkytown.net/java/InvestmentReturn.html

Save $4,200 a year, 15% ROI, 15% tax rate (yeah right on that one too.) Now you are at $708,000 Which is actually $330,000 after a 3% inflation adjustment.

So thats assuming a fucking low tax rate, and that you get 15% ROI. Lets be more realistic, 8% ROI, 30% tax rate. Ah yes, $230,000. Again, before inflation. Far fucking cry from a million dollars -- and thats assuming you never were tempted to dip into that to pay for an extra vacation or family emergency.

Solution -- save more money. You should be saving more than $350 a day, not a month. Unfortunately the calculator is a prick so I can only input 100k a year, that brings me to $5.4 million, $2.5 million after inflation -- thats pretty fucking modest for 25 years.

Saving money is fucking hard. Just when you think you are living far below your means tax time comes around and you realise that its actually the "upper 1%" who are getting assraped, not the lazy poor who collect government money to pay for cable TV instead of buying their kids healthy food.

Snake Doctor

No they're not, they're tax deferred. You WILL pay taxes on the money eventually, and in alot of cases you'll pay a higher tax rate than if you had invested money in a non-retirement account and simply paid capital gains taxes on the earnings, which is a lower rate for alot of people than the income tax rates they'll have to pay when they withdraw later.

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nico-t

sounds like a lame and long ass plan...

Nicky

Invest them in intoxicating your liver instead, like me

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blackout

I'm getting 33% return/month... :-) But my sites don't make shit. lol

Forest

55 = old and grey

Quotealex

Don't you guys have a retirement plan, like 401K in the USA or RRSP in Canada that allow you to not pay any taxes on your investment until the day you retire?

GatorB

In the US you can have a Roth IRA where you don't pay ANY taxes when you retire.

GigoloMason

ahem the return on stocks doesn't 'compound'. :rolleyes:

but whatever floats your boat

PS: what on earth gave you the idea that 15 percent is the average long term ROI on small caps

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GatorB

If getting 15% consistantly was oh so easy everyone would do it. When it comes to your retirement I feel taking a more realistic assesment is wise and if you happen to make 15% then that's even better. Personaly I think you be an idiot to only invest $350 a month in hopes of getting 15% every year.

Quotealex

GigoloMason

Oh so now we're not talking about small caps anymore, but specifically 1 index of small cap value stocks. That's one specific index with fairly narrow focus. The average stock investor isn't dealing with indexes but funds or individual stocks. You also have to figure in much higher liquidity risk, even assuming for the moment that the market is actually over time really going to generate a 15% return if you hold long enough. What if you have a fiscal emergency when the market happens to be down? Small caps expose you a LOT more to market volitility, which you can't necessarilly afford with your savings.

In any event nothing you've said changes the fact that the average investor cannot realisticially replicate 15% per annum returns.

It also doesn't change the fact that the principal of compounding has nothing whatsoever with stock appreciation so I don't know why exactly you keep bringing it up. Debt compounds, not assets.

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Quotealex

You lost me here! Isn't an index a basket of stocks!

As I stated earlier, this is a long term investment (i.e. 30 years), and you'll need to continue investing that $350 every month like you do with your car payment or rent.

And IMO, the average investor is in better position to pick quality small caps than a pro.

rowan

I wouldn't say our home is necessarily an investment (although its market value has increased by a fairly healthy 20% over 2 years), but as a family man I want the security of "owning", so I may as well make a bit of money out of it by saving on interest in the meantime. Obviously, this only works when you can't pay for the property with cash - the bank isn't going to start paying you interest if your loan balance goes positive...

free4porn

25 years is too long to wait

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CabanaBoy

Simplicity is a matter of perspective. Let's think about the reality of this:

Buying $350 of any sort of stock/index fund/etc will incur a commission on the purchase so you lose that right off the top.

Any time you sell a stock and move to another one, you'll owe capital gains tax. That hurts.

15% over 25 years is very, very aggressive. Unless you've got a large sum of money, you will never achieve that. If you know something I don't, I'll gladly put $30M into something that'll yield me 15% annualized over the next 25 years. In fact, I'll borrow every cent I can find to put into that investment.

You'll pay significant taxes when you cash out to use the money.

Any long term return has to factor in inflation. Places like Aflac like to "forget" little details like that.

If you look at all those considerations, you'll find that you will never reach $1M in 25 years with only $350/mo. Off the top of my head I'd say that in today's dollars you might end up with $200,000 to spend.

That said, making the decision to invest $350/mo each and every month is much smarter than blowing the $350 on crap. In 25 years you'd have some money vs some distant memories of a few moments of fun.

edgeprod

Snake Doctor

Actually the principle does apply. You may wish to call it something else but it's the same principle.

If you have $100 in stock and it goes up 10% the first year, then the 2nd year you have $110 worth of stock. If it goes up 10% then you made $11 in profit and the next year you have $121.
No different than a savings account where you reinvest the interest payments and the money "compounds".

Increases in share price and cash dividend distributions work exactly the same as interest for purposes of growing your money.

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IllTestYourGirls

just prop for a poker room and you will make way more that 15% on your money, that is if you are good 10% then 30% than 45% for me in the last three quarters.

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travs

ouch...you nailed it

GigoloMason

The effect of compounding in stocks is destroyed by the cyclical hits and losses. I really don't see why you people have having such a hard time understanding this. The problem is that an average return of 15% over the course of the years actually means it went up 20% one year down 5% the next etc etc etc.

In case it hasn't got through YET the principal of compounding can only truely be applied when you're dealing with a -truely- fixed rate of appreciation that won't fluxuate.

Now since you clearly don't seem to understand why this is different lemme see if I can borrow an example that might finially get through:

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GigoloMason

The effects of compounding can only truly be applied when dealing with a -truely- fixed rate of appreciation, which stocks do not have. I really don't know how much more I can simplify this.

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CabanaBoy

Ah, now I see where you are getting your 15% number.

The site you reference is, in turn, referencing the work of Kenneth French. I've read a lot of his papers/research. He's a hardcore numbers guy and really smart. He looked at the data from literally thousands of small-cap value companies. There is no fund which has had equal shares of all those companies, hence there is no one place you could drop your money to have received that 15.1% return. To emulate this you'd have to buy shares in a couple thousand companies, and you'd have to sell shares when the company was no longer considered a small, value stock (i.e. their BtM went down, or their market cap climbed and pushed them into the large category). Likewise, you'd have to continue to buy whenever a company made an appearance in the small value category. This buying/selling would kill you with capital gains, and you'd also lose in some cases because a particular stock might be down quite a bit when it made it's move to blended or growth (hence it's lower BtM). Value stocks are called value stocks for a reason: at the time, they have good numbers. That can change in a heartbeat. The 15.1% return quoted doesn't take into account any company that falls out of the value category, so the numbers are artificially inflated.

Snake Doctor

You can try to simplify it all you want but you're still wrong.

If you invest $1000 today into the stock market and earn an average of 15% per year over the next 25 years you'll have EXACTLY the same amount of money that you would if you invested $1000 in bonds/cd's/t-bills or any other financial instrument that paid a 15% yearly interest rate.

A 15% return is a 15% return, regardless of whether that return is interest paid or capital appreciation.

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GigoloMason

The fact that you can't wrap your head around a basic finance principal doesn't make me wrong, hate to break the news.

If you can't understand the difference between a consistant 10% return and an average rate of return of 10% when dealing with the idea of compounding you've got more problems than I can solve.

It has nothing to do with with what we're 'calling the returns'.

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pornguy

I have a mutual find that last quarter, returned me 27%

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Snake Doctor

Ok so explain to me how a 15% stock return is different than a 15% interest return.

Also while you're at it I'd like for you to tell me where you can get a double digit "consistent risk free" return like you used in your example.
The only way you're going to get a double digit return on a fixed income investment is if we have double digit inflation, in which case your return still isn't all that great.

Also in your example the difference between the two portfolios was a fractional one, so you basically made my case for me with that example.

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djscrib

Wow there are some fucking retards in this thread.

Here's a little finance concept for you called Annualized Return.

Let's Do two examples.

Example 1: Lenny Invests $1000 in small cap stocks.

Year 1: Lennys's stock investment kicks ass and soars 100%.
Year 2: Lenny's stock investment get it's ass kicked and loses 50%.

How much money does Lenny have? He started with $1000, doubled up to $2000, then got stomped down to $1000 again. Annualized Return 0%. What was his average return?

100% + -50% divided by 2 = 25%.

Wow, Lenny had a 25% average return. That guy rules.

Example 2:

Lenny invests $1000/year in small cap stocks.

Year 1 his investment gains 200%. Years 2-9 it gains nothing.

At the end of the 10 years Lenny is sitting on $12,000.

What's his average return? 200 divided by 10 = 20%.

What's his annualized return ? 4%. (the amount of money he actually gets).

If he had gotten a 20% annualized return, he'd be sitting on about $26,000, not $12,000.


Geez so why the hell does all the stock literature quote Average Return when that's not what I actually get in my pocket? Because it's always a higher number, and they want your fucking money.

The stock market is just as likely to gain 15% in a given year as it is to lose 15%. Unlike a CD where you always get X%.

There are 20 year periods of time where you could have invested money in the market and wound up with LESS money after 20 years than you started with. E.G. Look at the market between around 1954 through 1974.


Here's the thing to remember.

Average annual return sells mutual funds.
Annualized return pays your mortgage.
Annualized return is always lower than average return.

Anyone that guarantees you're going to make 15% on a stock investment over the next 20 years is so full of shit it's not even funny. Could it happen? Yes. Is it likely? No. Stocks are streaky, if you have the bad years at the start of your 20 years, and the good years towards the end you could do very good. An example would be someone who started in 1980, and pulled their money out in 2000.

However someone 25 years younger who started in 1955, and stopped in 1975 is probably living in a fucking box.


So while i agree that small cap value stocks are a good investment, and you should save money monthly, 15% is a fucktard number. Go out and buy the book The 4 pillars of Investing on Amazon and read up on Asset Allocation.

djscrib

One more note

For its last 10 years Enron stock returned an average annual return of something like 17%. And that's including its plunge to zero at the end.

Choronzon

you guys are fucking fucked. Usury and interest are the tools of the devil, just like guilt and fear.

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zibril

I'm not sure about that....

GigoloMason

I wasn't aware it was my job to teach remedial finance to GFY

If you'd read anything I've posted that's what I have been saying the whole time. You can read right? The average investor will not usually be able to replicate those returns like I've been saying all thread. The example given was something I hotlinked to make a point.

P(0) = 1000
-10% = 900
-10% = 810
-10% = 729
-10% = 656.1
-10% = 590.49
+20% = 708.588
+20% = 850.3056
+20% = 1020.36672
+20% = 1224.440064
+20% = 1469.328077

P(0) = 1000
+10% = 1100
+10% = 1210
+10% = 1331
+10% = 1464.1
+10% = 1610.51
+10% = 1771.561
+10% = 1948.7171
+10% = 2143.58881
+10% = 2357.947691
+10% = 2593.74246


Both examples demonstrate an average market appreciation of 10% over ten years. You're right there's no difference at all. Granted real life doesn't deal in such black and white examples, but I guess with some people you have to hit even the simplest of points with a sledgehammer to make it sink in.

Scrib did a great job as well demonstrating why playing with %'s is a terrible was to look at asymetrically appreciating assets as you get deceptive preformance results. Seriously there are so many better tools to analize assest appreciation.

Oh well I guess if nothing else you've managed to demonstrate why so many peoples finances are in shambles.

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GigoloMason

Or more accuratly misapplying deceptive %'s, rather than using information that is actually relevant.

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Basic_man

15% !?!? That's way too high!

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djscrib

Please show me the corrected math with the non misapplied percentages Gigolo.

While you're at it how about explaining why sites like Morningstar.com and other financial review sites quote past performance in Annualized Return and not Average Return.

E.G. Oh look, a report on the Russell 2000 index ETF fund that quotes in term of Annualized return.

http://quicktake.morningstar.com/etf...fdtab=ret urn


Dumbass

GigoloMason

You do realize I was agreeing with you yes? Seriously reading comprehension 101

I was simply trying to clarify as my post was poorly phrased, and the edit time was up on my first post.

Dumbass.

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Sly

If I remember right, Mason don't you have a degree in finance? Or maybe a broker?

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cutievids

$1M in 25 years will be sweet nothing... kinda like it's not even that glorious to only have 1 these days.

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spooky181

You have zero chance of doing 15% over a period of 25 years. During a 25 year period you are going to see some lengthy bear markets, several major corrections etc. Sure if you look at the last 5 years 15% would have been very easy but it aint going to last.

Ramster

Start earlier like the Wealthy Barber says and invest for 40 years. It's only $200 a month and you only need a 10% return.

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Snake Doctor

My bad, I was confusing average return with annualized return. Obviously if I made 100% in one year and then zero for the next nine I wouldn't consider that a 10% annual return.

I also agree with your statement about the stock market from 1954 to 74, during that period fixed income investments like CD's were paying much more generous rates though, and were obviously the place to put your money.

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GigoloMason

Oh so now it makes sense.

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Quotealex

Tell that to allthe people that invest in http://en.wikipedia.org/wiki/Berkshire_Hathaway during the past 25 years

Quotealex

Nah man, 15% is 15% in a tax-free account (i.e. retirement account). There are no taxes or capital gain when you sell the stocks while the investment is that account, and commission fees are tax deductible too.