You have to invest today.

[vicarz]

I found a neat compilation of historic rates of return with sourced data:
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
On the other hand, most sites will simply give you an average rate of return, such as http://www.stockpickssystem.com/historical-rate-of-return/ showing stocks as 10%.
This is a good narrative of the issue, http://www.investopedia.com/walkthrough/corporate-finance/4/capital-markets/average-returns.aspx noting “the stock returned an average of 11.31% from 1928 through 2010, it returned an average of 3.54% from 2001 to 2010.”

This site does a good job (skip most of the charts if you’re new to this) of explaining market rates of return and a bit of why you need to beat the market average:
http://blog.petetheplanner.com/what-rate-of-return-should-you-expect-on-your-investments/#sthash.NDTkCGyx.dpbs
I particularly like that this author compared the 12% historic average rate of return to the actual varying rate of return, up and down, each year (finding 10k invested over 10 years was about 31k for average, but the varying rates that made up the average only made 29k). He or she also notes the average rate of return may be more like 10% today than the historic 12%.

The issue is trying to compare what equities do over time while ignoring temporary issues such as politics and panic. Confounding those sorts of things are the substantial changes over time, as in from agricultural to industrial, from industrial to service and technology, and the deregulation, re-regulation, and subsequent deregulation again of the banking industry; add in the new global economy on top of that and it’s fair to pose the question:
What do historic rates of return mean in today’s and tomorrow’s economy?

Whatever figures you use, investing sooner than later is unimaginably important. It’s hard for most to view life on a 10-20-50 year timespan, but most people will admit they expect to live another 50 years. It’s imperative to understand that your money loses value over time - slowly, quickly, but always. If you keep cash it will be worth less - ever heard an elderly person lamenting candy bars aren’t a quarter anymore? This works both for and against you
- if you sit on cash, it dwindles in value even as the number doesn’t change.
- if you invest (well), it grows and the “growth” also grows.

Here’s a quick real example: I recently pointed out to someone bragging they “doubled” their real estate investment selling it at 50k when they bought it for 25k. I noted they owned the thing for 20 years, and that if they put the same amount in investments, they would have made far more money. I even used a conservative rate of return, 8%, to show:
25k - I went into excel because I’m not actually an educated finance person, and made each cell equal to 1.08 times the prior cell...this is important...because if you invest 25k and get 8% return PLUS that return increases in value the way it does with interest (or reinvestment in the market).
So year one you make 25k + 8% of 25k ($2,000), so year 2 you compute interest of 8% on $27,000, which gives you $29,160, of which 8% of that now $29,160 is $31,492.80
and so on.
Year 10 shows you double your money to $49,975
Year 20 shows the compounding results in $107,892
So instead of “Yay, I doubled my money,” even with conservative estimates, we could also say “Darn, I lost half my possible money over time.” Again, that ignores the rent-not-paid, tax benefit (or cost), inflation and loss of dollar value over the same time...

Now I’m skipping some issues, such as the cost of investing (though when I use 8% as an expected return over 20 years, I’m being so conservative as to easily account for expenses), ignoring the low tax rate on profits in the market, and also ignoring savings such as rent on property owned - and avoiding issues like “if you rented, what amenities would you have gained or lost plus what value do they have?”

Why the fuck am I writing this? I sort of had it in my head. I sold a butt-ton of stocks this year having a major impact on taxes as my renovation/investment has exploded in a fit of not-making -money while I’m doing my taxes and facing the costs of cashing in on my profits made in the last 10-20 years in the stock market. Some time ago I ran the numbers on an expected rate of return of my rent-garnering real estate lifestyle compared to what I would have made in the theoretical stock market (and determining I would make more in the markets compared to renting 2 properties after I pay for this venture). It’s kind of stunning to me that these analyses are not things most people know. So, if anyone read this and didn’t know it already, here it is - possibly in plain English.

Input on whether this makes any sense to non-finance people would be appreciated.
Input from finance people on “Wow, you totally missed it,” would also be appreciated.

Comments

[wantedonvoyage.livejournal.com]

Ugh, thank you. I suck at this stuff. I am going to stare at this later when the coffee has kicked in. I'm being told my investment mix needs tweaking "Too much company stock! Off with his head!" and I'm trying to get past the idea that my employer might have an interest in telling me to sell.

[vicar.livejournal.com]

Commenting on myself - linked from fb too...

[curvemudgeon.livejournal.com]

...stock returned an average of 11.31% from 1928 through 2010, it returned an average of 3.54% from 2001 to 2010.

THANKS OBAMA!

Finally threw some money into some mutual funds Nov. of 2014. Paid taxes on returns. I have no idea how this works since I appear to have paid tax on money I don't actually have. Investment is hard.

[vicar.livejournal.com]

Ah, that does look odd doesn't it? What happens is you must have received a 1099 because a mutual fund buys and sells stock every so often (aka churn). This results in a combination of long-term profits and short-term profits most years, which is income that you have to pay taxes on.

However, the rate is around 15% or less, so you're actually making money on money you don't have in your hands, but the pile has grown.

[curvemudgeon.livejournal.com]

The question I had to ask myself was - is this (to me) hypothetical return worth the hassle of the extra tax complications? Now I've got a stack of 1099s an inch high covered with short term gains and long term gains and even a few bucks paid in foreign taxes - bah. The jury is out since one quarter really isn't sufficient experience. But it's annoying.

[vicar.livejournal.com]

One way of answering the question would be to do the paperwork and record how long it takes you, keep an eye on the amount of profits received after taxes are paid, then compare the hours you expended on paperwork to an hourly figure of your paid time.

Most educated or long-term-employed adults in this area will make about $25 to $125 / hr (50k to 250k anum). If it takes you 4 hours each quarter, you're not losing more than 4x4x$125 or $2,000 at the very, very most. If your profits are in the tens of thousands after taxes, even if we say "my free time is important to me," It seems a no-brainer.

I'm assuming if you have pages and pages ("stacks of 1099s an inch high") then you almost have to have 100s of k profit because no such portfolio would likely include figures of 2k or less per unit. In fact, if we low-ball your "inches" statement, we could say 50 pages with 1 stock per page at a minimum 2k per stock, that alone indicates 100,000 in assets - with a potential average rate of return of 10% that would be 10k per year---MINIMUM with very conservative estimates.

So, while I know you were likely speaking in hyperbole, even undercounting the potential profits compared to the highly overstated time investment, it seems hard to imagine a scenario where the answer would be "Nah, cash out this 100k to 14 mil because I don't like the paperwork :D

[curvemudgeon.livejournal.com]

To be fair it's not a 1" stack of just mutual fund returns; it's also not a compressed stack. And it is somewhat hyperbole due to my bank deciding to send me a unique 1099 statement for each of my laddered CDs instead of the single summary 1099 sent in years past. Plus employer retirement paying stock dividends as distributions for multiple accounts. And other 1099s for checking/savings accounts. Then on top of that were a few more for the mutuals but those are significantly more complex for me to deal with than the -INTs I'd come to know and love. Oh, and three rollover distributions.

It was an abnormally paperful year for $REASONS.

They're also inflated in altitude because my filing/processing style involves me leaving them in envelopes in part so I can make notations about things such as, "did I enter this one yet?"

But ultimately yes, I recognize the manifestation of "cutting off my nose to spite my bitchface", will buy the expensive tax prep software that proclaims to handle this stuff correctly, then try to work backwards from its results to see if I can understand how the original numbers did the tax-dance sexytime to make the other number.

[vicar.livejournal.com]

Ugh see now I think of the tax-prep software as proof that yes, our tax code needs to be restarted AT GREAT EXPENSE. Granted, I'm a spoiled little bitch who used spreadsheets to manually make versions of the tax forms I use which are easily do my taxes each year, and as each stage gets harder, it's merely adding on a new box of cells and references to keep it all smooth.

I am, for the first time this year, involving an accountant to double check my figures. Once I get my alleged rental properties up and running I'll ditch the double-checking.

Your year does sounds remarkably annoying in terms of paperwork. I can't believe you got a 1099 for each CD...ugh...but listing them would make them manageable at least. Still ugh.

[mai-neh.livejournal.com]

Unfortunately, the way mutual funds work, when you buy into a fund you are buying a share of the underlying built-in gains on previous investments made by the fund. If the fund has done well in the recent past, it may have a lot of built-in gains. When the fund sells one of these stocks, you are on the hook for taxes on the gain, whether you personally benefitted from the gain or not, no matter how long you've owned your share of the fund.

[mai-neh.livejournal.com]

Lots of stuff here!

A few observations:

Yes, in the world of paper/electronic currency, your money will generally lose value over time if you don't invest it profitably, because central banks currently have a slight bias toward inflation. This 1-2% loss of value per year to inflation adds up over time.

So, yes, if you want to save for the future (for retirement, for example) it makes sense to start early and to find a rate of return that is greater than zero, and preferably greater than expected inflation.

There's a big problem with assuming that historical rates of return on equities will continue into the future. Homo Sapiens has been around for 200,000 years, but we've only had publicly traded equities for 500 years. Most cited calculations of the historical rates of return look only at the US, and only for time periods of less than a century. Countries that have lost wars, such as Germany or Japan, have seen their equity markets wiped out. Countries that have undergone a communist revolution, such as Russia or China, have also seen their equity markets wiped out. So, social forces outside of your control could wipe out your equity investments 100%.

Also, future rates of return depend on whether you are buying today at a bargain price or a bubble price. Although timing the market is difficult, compared to historical price/earnings or price/book ratios stocks are fairly expensive today and will probably offer lower rates of return over the next 10 years than has been the average.

[vicar.livejournal.com]

Nice observations about the bias in predicting future gains based n isolated history and geography! I feel 10% better now about my investments in property. However by the time equities (and/or property) is wiped out I may have larger issues than finance will be able to control, making this type of calculation still comparatively useful.

Bubbles are a good point too...

[mai-neh.livejournal.com]

Sure, if you are living in wartime Germany, or Communist China, you'll have bigger problems than your retirement balance to worry about ;-)

People who lived during those times will tell stories about how they survived the starvation period because they had family gold or jewelry hidden away that they could trade for food when there wasn't enough to go around. Or, they (or their family members) held positions of power in government or industry.

The US has been fairly lucky, but that's because we are an Exceptional Nation Under God :-)