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You have to invest today.
Mar. 4th, 2015 08:13 amI 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.
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.
