Monday, November 24, 2014

Borrowing Too Much and Saving Too Little is the Wrong Plan ... Investing in Stocks for the Long Haul is Simple, Easy and the Financially Savvy Thing to Do

Too many Americans don't save and invest for the future. They spend and borrow instead.

If we simply make the effort to consistently save and invest a portion of our income from the outset of our work lives, we will complete our journey down the road with plenty of time and money to spend on whatever we choose. But if we spend and borrow from the outset instead of saving and investing for the future, we'll never be able to escape the pile of debt and deep hole that we'll dig for ourselves.

With that simple truism in mind, let's examine what consistent savings coupled with the investment of those savings for the long term in stocks will do for us. It's the tried and true and too seldom traveled common sense road to financial freedom.

All that's required is that from the beginning we take into account our future needs and not indulge ourselves completely in the financially unhealthy pursuit of today's pleasures. In other words, balancing the interests of our present and future selves is the 'trick.'

And if that balance of today's and tomorrow's needs is the path we take, we'll emerge as financially secure winners. Following such a common sense approach to individual investing for the long haul can be both simple and easy, and 8 lessons from 80 years of market history tells us how:

"What do you think is the most important thing that investors do?

Keep their expenses low? Hire a superstar manager? Avoid taxes? Have perfect timing? They’re all significant, but arguably the very most important decision is choosing what kinds of things to invest in. Asset class selection is the fancy name for this.

(Actually, setting aside some money to invest in the first place is the absolute most essential step. But if you don't do that, then you're not even an investor.) . . . more than 90% of your ultimate investment return depends on your choices of asset classes. (This assumes that you invest money and leave it invested. If you move in and out of your investments, then your results are totally unpredictable.) . . .


The following are 10-year annualized percentage returns for the S&P 500 Index, U.S. Large Cap Value, U.S. Small Cap and U.S. Small Cap Value. Returns are in %s.
 Asset Class: 30-39 40-49 50-59 60-69 70-79 80-89 90-99 00-09 1930-2013
S&P 500  Index -.
Large-Cap Value  -5.712.718.49.412.920.616.84.111.2
Small-Cap 2.314.919.
Small-Cap Value   -2.619.819.614.414.420.116.212.814.4
Includes reinvestment of dividends. Source: Dimensional Fund Advisors. . . .
  • It is obvious that, when measured in 10-year increments, the market was up most of the time. The table shows 32 10-year returns; 28 of them were positive, and only four were negative (and three of those four occurred way back in the 1930s).
  • The market can have many successful decades in a row. Most investors remember that the 1990s produced very high returns for equities, but this table shows even better returns in the 1980s.
  • Leading and lagging asset classes sometimes change places. This makes it hard to pick just one and be confident it will always be on top. . . .
  • The first 10 years of this century has been regarded as a “lost” decade for stock investors, largely because of large-cap growth stocks and a couple of serious bear markets. But in that decade, a portfolio that was divided equally among these four asset classes wound up being a moneymaker, with an average gain of 6.7%. . . .
Because of the third lesson (above), it's impossible to know which asset class will do best next week, next month, next year or even next decade. But there's magic in combining all four of these in one portfolio. Over 84 years from 1930 through 2013, this Group of Four boosted the annual return from 9.7% to 12%.

If you think that's not a big deal, here's the math: A $1,000 investment in 1930 (equivalent to $14,084 in today's dollars) grew to $2.4 million at 9.7% -- or to $13.6 million at 12%."

Summing Up

Most of us borrow too much and save too little during our adult lives.

And of that amount which we do save, we often squander the opportunity to achieve real financial security and independence by not investing in the long term "safety" of the stock market. We do that because we mistakenly believe stock market investing to be too risky. The truth is just the opposite. 

So let's all wise up, face facts, and adopt a winning long term savings and investment program by taking the time to learn, earn, save and invest in a diversified basket of stocks.

For the long haul, that's the winning financial formula.

That's my take.

Thanks. Bob.

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