I recently had a friend email me and ask what I thought the stock market would do in 2008. I thought you all might enjoy my response:
- I believe in the long-term (10+ years) that the market will be up.
- During this time it will be up an average of 8% to 10%
- In any given year, it could be way down or way up (I have no idea what will happen this year, next year, or any year). That said, it will average 8% to 10% over the long haul.
- I have a long-term investment horizon. I won't need money I'm putting in the market today for another 20 years or so (unless something dramatically changes).
- Because I don't have the time or expertise to pick winning stocks one at a time, I invest in low-cost index funds. (By the way, after expenses, most actively traded mutual fund managers don't out-perform index funds, so I guess I'm not alone in my lack of expertise.) ;-)
- In the current market environment where it's dropped/dropping, I'm investing MORE as it's lowering the average cost of my shares. Besides, even if the market is off several percent each year for the next few years, it's going to be way up in some years to hit that 8% to 10% return -- at that point I'll make out like a bandit.
Any thoughts on this?
I absolutely agree with you 100%. I think regular, disciplined investing in low-cost index funds for the long term just like you are doing is exactly what individual investors should be doing.
Posted by: Dave | February 21, 2008 at 11:25 AM
I agree, this is great advice for any novice investor.
One thing that's not obvious from your description is that is 8-10% per year. So after 10 years of 8-10% gains, the market will be up around 250% overall.
Posted by: CT | February 21, 2008 at 11:34 AM
I think 10 years is too short a period to assume the market will be up on average 8-10% per year. Returns over the next decade will almost certainly be lower than the previous 2 or 3 decades. By how much I can't say, but risk premiums have been far too small throughout the last bull market. Persistent mispricing of risk rarely ends well.
Posted by: Kyle | February 21, 2008 at 11:55 AM
Check out the concept of value averaging where you are systematically investing more during down markets and less during up markets.
Posted by: Ryan | February 21, 2008 at 01:30 PM
Here's what I generally tell people:
If you invest in a low-fee total stock market index fund, you lock in average returns. The year and date of your retirement becomes just a function of your ability and willingness to save money. In other words, a function of how good you are at your job, and how good you are at living below your means. It's in your hands.
If you invest in mutual funds instead, the year and date of your retirement is a function of how good you are at your job and at LYBM, but it's also a function of how good the random fund manager is at his job. Not in your hands.
If you invest in individual stocks instead, the year and date of your retirement is a function of how good you are at your job and at LYBM, how, how good the management and directors of the companies you hold do their jobs, and depends on unintential risks you've exposed yourself to, such as sector weightings etc...
If you try to time the market, the year and date of your retirement is a function of how good you are at your job and at LYBM, but also a function of chance.
Bottom line, I'd rather have my retirement depend on ME, not Bill Gross or Bill Gates or the dice...
Posted by: Jake | February 21, 2008 at 01:30 PM
Jake, good points except you got one little thing wrong: investing in an index fund will lock in above-average returns over the long run, not merely average returns. It's counter-intuitive at first that the average return can be above-average but when you take expenses and transaction costs into account, it's evident that index funds must mathematically have above-average returns.
Posted by: Kyle | February 21, 2008 at 01:33 PM
Kyle --
You beat me to it. Good comment.
Posted by: FMF | February 21, 2008 at 01:35 PM
Great, standard Boglehead advice.
The basic advice of academia, with names such as Jack Bogle, Burton Malkiel, Peter Lynch and others.
Don't try to beat/time the market. You're competing against around 9,000+ hedge funds that have a lot of smart people doing this for a living and even if there's some inefficiency they probably know more than you do.
Posted by: Finance Monk | February 21, 2008 at 02:14 PM
That's a pretty bold statement because if you bought the peak of the Nasdaq in 1998, you'd still be down 10 years later today in 2008. Factor inflation in and you're at a really big loss but indexes always return 10% per year right?
Posted by: Trask | February 21, 2008 at 08:17 PM
The Nasdaq is not a broad representation of the market. I think averaging into the total stock market index, a surrogate of the Wilshire 5000 is the way to go. Also a mix of total international index, real estate and bonds depending on your stage in life.
Posted by: aaktx | February 22, 2008 at 12:09 AM
We'll see.
Posted by: mbhunter | February 22, 2008 at 03:30 AM
Trask --
1. I do not invest in the NASDAQ index, but the broader market (as aaktx notes.)
2. I have a 20 year time horizon, so I'm not really concerned what happens in 10 years.
3. Did I say the market always returns 10% per year? No, I said that based on history it AVERAGES 8% to 10%.
4. I can pick a specific 10-year time period that shows the market returns will be much higher than 10%. Point is, if you pick a smaller index (like NASDAQ) and a select time period (like you did), you can prove almost anything numerically.
Posted by: FMF | February 22, 2008 at 08:07 AM
What do all you indexers think of Warren Buffet's recent comment as part of his annual stockholder report that he thinks there's little chance that the US markets will continue at 8%-10% average? Here's the exact quote:
" . . . Buffet says that 10% returns on equity compounded for the century will see about 24,000,000 on the Dow by 2100. He adds that, “- If your adviser talks to you about double digit returns from equities, explain this math to him – not that it will faze him. Many helpers are apparently direct descendants of the queen in Alice in Wonderland, who said: ‘Why, sometimes I’ve believed as many as six impossible things before breakfast.’"
Just curious. I'm also a big proponent of buying index funds but I think I agree with Buffet's assessment.
Posted by: MonkeyMonk | March 04, 2008 at 10:19 AM
He may be right, he may be wrong. But index funds will do better than most other investments no matter what happens.
Posted by: FMF | March 04, 2008 at 10:30 AM
I think he was wrong dude. Just a little bit wrong.
Posted by: Johhny Donuts | October 10, 2008 at 08:05 PM