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Strategy

  • Assuming an annual return of 7% per year, if you invest $10,000 per year from age 30 to age 40 ($100,000 invested), you would have $809,844 at age 65. If you invest $10,000 per year from 40 years old to 65 years old ($250,000 invested), you would have $690,564 at 65 years old. This is 15% less!

Diversification and rebalancing are key

  • If you have two investments, one with annual returns of 0%, 5% and 15% (20.8% over 3 years) and the second one with annual returns of 30%, -30%, and 30% (18.3% over 3 years), an annual 60%/40% combination of the two investments will have a 3-year return of 23.3%, better than each of the two investments standing alone.
  • From 1929 to 1949 (20 years) and from 1968 to 2009 (41 years), $1 invested in bonds was a better investment than in stocks.
Past Market Performance
  • Between 1983 and 2003, the US stock market return was 13% but the average investor had a 7.9% return which was 5.1% less. The average equity fund return was 10.3%. This highlights why you need a good financial advisor.
  • $1 invested in small cap stocks in 1926 would have become $9,550 in 2008 vs. $2,045 in large caps, $99 in bonds, $41 in gold and $20 left in cash.
  • $1 invested in French bonds in 1900 would have become $0.8 in 2008 vs. $30 in French Equities (adjusted for inflation).
  • The last two occurrences US large-cap stocks total return was negative over a 10-year period was in 1938 and 2008.
  • From 1985 to 2008, the probability of a negative return for the S&P 500 over any 1-year period was 20%.
  • A dollar invested in the hypothetical Ibbotson Associates long-term bond portfolio (at the yield peak in 1981) grew, in real terms, to $11.54 by July 2012 – an annual real return of 8.16%. The real return on the S&P 500 was 8% compounded annually over the same period.
  • A dollar invested in the same Ibbotson portfolio in 1941 (when interest rates reached their lowest point until the current decade) shrank to $0.33 in real terms, with coupon income included, by September 1981.

Economy

  • US unemployment rate in 1895 was approximately 18% and 25% in the 1930’s (vs. 10% expected peak in 2009-2010). In June 2009, the U-6 unemployment rate (headline unemployed around 9.4% plus marginally employed) is above 15%.
  • The top marginal US tax rate was 93% in the 1950’s - 1960’s. It was 70% in the 1970’s, 50% in early 1980’s and 35% from 2003 to 2009.
  • The US savings rate was between 8% and 12% from 1960 to 1980. It was below 2% in 2007.
  • In 2007, the median household income was around $50,000. The top 10% had income above $140,000.
  • In 2007, the median household net worth was around $120,000. The top 10% had a net worth above $900,000.
  • The 2008-2009 recession is very different from the Great Depression. During 1929-1933, the real GDP contraction was -29% (vs. -4% in 2009), unemployment rate was 25% (vs. 10% in 2009), consumer prices went down 25% (vs. down 2.8% in 2008), money supply was down 33% (vs. up 12% in 2009) and the budget deficit was 2.6% vs. 10.1%.

Quotes

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

“Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.”

“Risk comes from not knowing what you're doing.”

“What's needed is a sound intellectual framework for decisions and the ability to keep emotions from corroding that framework."
Warren Buffet

“Our greatest glory is not in never failing, but in rising every time we fall.”

“A man who does not plan long ahead will find trouble at his door.”
Confucius

“The investor’s chief problem – and even his worst enemy – is likely to be himself.”
Benjamin Graham

Pay attention to what people do… Not what they say…

“Who the hell wants to hear actors talk?”
H.M. Warner, Warner Bros., 1927

“I think there is a world market for maybe 5 computers.”
Thomas Watson, Chairman of IBM, 1935

“TV won’t be able to hold on to any market. People will soon get tired of staring at a plywood box every night.“
Darry Zanuck, 20th Century Fox, 1946

“No one will need more than 637kb of memory, 640 kb ought to be enough for anybody.”
Bill Gates, Microsoft, 1981

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