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February 21, 2008


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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.

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.

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.

Check out the concept of value averaging where you are systematically investing more during down markets and less during up markets.

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...

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.

Kyle --

You beat me to it. Good comment.

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.

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?

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.

We'll see.

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.

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.

He may be right, he may be wrong. But index funds will do better than most other investments no matter what happens.

I think he was wrong dude. Just a little bit wrong.

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