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January 25, 2008

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The denominator for your 13% figure is your prior net worth. So assuming that you save at least some money, and index your investments, you'll always outperform the S&P.

A better benchmark that the S&P would be constructed as follows:
-- take your gross annual income as a percentage of your beginning of year net worth. Multiply by your previous year's savings rate.
-- add the S&P 500 return.

This way, you only beat your benchmark by either having your investments outperform the S&P, by getting a raise, or by saving a higher percentage of your income than you did the previous year. If you get zero raise, save the same % of your income, and invest 100% of your net worth in the S&P 500, you break even with benchmark.

What do you think?

Jake --

Not bad. Is that what you use?

Or maybe I should use the average net worth gains since I've been tracking them as my benchmark. This will incorporate both investment and savings gains over a long period of time. That said, it's getting harder and harder to make big % increases because the base is getting so big -- os maybe the prior year thing is a better measure.

I clicked through to "What I Might Do with My Old House When I Buy a New House," and there you said:

> I plan to keep taking $5,000 out per month (yes, a $5k hit to my net worth each month) until the house's value hits $100,000. More on why I'm doing this later.

I may have missed it, but why are you devaluing your house in your net worth records?

Good work on the net worth in what was certainly a challenging year. Post idea: I also have a lot of cash saved for a house, but what to do with it? Interest rates are falling like a rock and treasuries are overpriced. What can we do with the cash to capture an adequate return these days?

FMF,

Well done. You are well on your way to practice what you preach!

BC

I'm glad to hear that you are reducing the value of your house and are even questioning buying a new place at this time.

Denial about the housing market still runs rampant: I can remember the National Association of Realtors telling everyone to "buy now or be priced out forever!" and "real estate only goes up!" These statements have obviously been proven wrong. Even Treasury Secretary Hank Paulson, along with Ben Bernanke, were stating up to a few months ago that "subprime is contained" and there will be a "soft landing" for the economy. Again, it shows how much denial there is out there about the current situation.

The economic problems were caused by house prices getting too high above incomes, pure and simple. This was accomplished by poor monetary policy, lax lending standards, and rampant speculation ("flipping").

In a few years, when house prices in areas like California and Florida have fallen 50% from their 2005 highs, it will be a good time to buy. Right now, it isn't a buyers market, it is a fools market. Good job on sitting tight and not capitulating to Realtors' (R) demands! The best is yet to come!

John --

See point #4 on the page you clicked through to.

Bronco --

I wish I knew! Right now, my house money is in a money market. There aren't a lot of good options for earning decent returns with cash at the moment.

FMF --

Right now I just use a targetted % of gross income contributed to savings. I am still very young (early/mid 20s), and my investment income is inconsequential compared to my annual contributions to savings, as I've only been working for a couple of years. Additionally, since my investments are exclusively in 401(k), my investment choices basically dictate that I should be a passive 100% equity index fund investor, so my investment performance cannot vary from index level.

After a couple more years of savings, that is the system I plan to use. No point in using a benchmark unless it is tough to beat!

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