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October 13, 2010


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There's one little fly in the ointment regarding this article and that is the assumption of a 10% annual rate of return.

Annual Rate of Return from 12/29/00 to 10/12/10
Total Stock Market ..... 0.06%
S&P500 ..................... -1.23%
Dow Industrials ............ 0.22%
Nasdaq 100 ............... -1.39%
Nasdaq composite .... -0.22%
NYSE Composite ........ 0.77%

If you think that you need do nothing else but park your money in some low fee index funds and just get on with your life you may be in for some disappointment upon retirement.
These days it's very tough indeed to make 10% year after year, after year.
I was lucky, I hit the Internet Bubble at just the right time in my life and combined with being a very active investor that used fund selection and market timing I was able to make 32.3% that decade. For the current decade shown above and one in which I have been invested very conservatively since 2007 it has dropped to 7.9%. Now after being retired for 18 years I am very satisfied to earn just 5%/annum from a variety of CDs, municipal bonds, and taxable and tax exempt bond funds.
Don't kid yourself, it takes a lot of skill, tools, and data, and countless hours of hard work and research to do well in the stock and bond markets, especially now.

Apart from that, the advice in the article to start saving as early as possible is a no-brainer. I still remember back in 1956 when I had just turned 22 and we first arrived on these shores from England, we would sit down at our little dinette set in our 1Br apartment to budget our income every month and we would always write a check for deposit to our Credit Union savings along with all of the other bills. Unfortunately IRAs and 401Ks hadn't been invented in those early days or we would no doubt be considerably wealthier than we are. I can also remember our very first investment in the market. It was from a door to door mutual fund salesman from a company called Waddell & Reed. I bought shares in their United Science fund and they went nowhere in several years and I eventually sold them for a small loss - that was my first learning experience.

Smart Dad!

I've made consistent 10% annual returns since 2000 by market timing the S&P 500 index fund back and forth from a high-yielding fixed income fund. However, I've never made more than 15% in any calendar year since 2000, nor have I made less than 8%. Right now, I up 9.15% for the year, but I'm sitting on 100% fixed income watching the market go up today. If I don't do any more trading for the rest of the year, I should still be above 8% YTD, although my rolling 12-month return is much better.

Still, no amount of asset allocation or market timing can beat an extra 10-20 years of compounding (Rule of 72's). The earlier you save and the more you save early on, combined with frugal living, the easier your task to get rich.

Yeah, I need to force myself to get that 10% pushed over automatically. If everything goes right this pay period (wife and I are both paid bimonthly on the same days), I should be able to start it. Just gotta get us both to forget about that cash sitting there.

Since high yield (i.e Junk) bond funds tend to go up in strong markets but down in weak markets because they hold non investment grade corporate debt I wouldn't think that they would make a great trading pair with a fund that emulates the S&P500 index. In fact in 2008 they were both in steep downtrends
I used to have a lot of success just timing some good junk bond funds with an exponential moving average. Two junk bond funds I successfully used a lot were NTHEX and an average of 19, and BJBHX and an average of 43. I just took a look at them, they are both trending up and BJBHX is in a particularly smooth uptrend.
When I would get a Sell signal I used to just move into a money market but with rates so low money markets pay practically nothing so I would use one of PIMCO's or MetroWest's least volatile bond funds rather than a money market fund.

@Old Limey: My fixed income fund is made up of synthetic guaranteed investment contracts with major life insurance companies, of which about 20% is insurance agency mortgage, some corporate & municipal bonds, money market, & insurance agency debt. Returns are about 4-5% without any junk bonds I'm aware of. It is not open to the public.

@Todd: I have a no-load institutional fixed income fund that has done well this year. It is open to the public but it has a $250K minimum purchase. If you only consider the monthly dividend it pays 5.6% but for just the current year it is also showing a capital gain that makes the total gain 20.56% as of today. Fortunately I have it in my IRA so year end distributions are not an issue and even if market conditions induced me to sell it then there would still be no tax consequences because it's in an IRA. Interest rates cannot continue to drop next year as they have this year but as long as it stays in its nice low volatility uptrend I'm happy keeping it until I come across something better - currently it's #1 in my personalized rankings for the 1,964 bond mutual funds available to me with its APR of 26.85% and a worst possible drawdown all year of only -1.43%.

Pay yourself first, save early in life, save as much as you can, and invest wisely. All combine to make a good overall strategy. Hard to argue with that.

Most people do the reverse, and pay bills until deciding how much they are able to save.

I totally agree, I've always thought that saving your money and being sensible with it is just as important as earning it in the first place as if you go and waste most of your earnings, what's the point in working hard to get it in the first place?!

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