Sauros could advise your Grand Ma

A former colleague of mine in the Rat Race, ("Hey man keep on running, I'm sure if you work hard enough they'll give you a billion bonus"), a CFA, speaks like in the personal finance books and use "standard" arguments when it comes to investments and savings. Every time we happened to discuss about these, I felt like I spoke with the financial advisor of my grand ma. One of his commonly shared arguments to buy stock is that "in a 10-year period, stocks are ALWAYS profitable"... Of course, as good "Back Traders", we know that's not true, I did the maths quickly this morning : if you invested 100% of your capital on Jan 1st 2000 on the S&P 500 (SPX), you'd have lost almost a quarter of it on Jan 1st 2010 (or today as the stocks are today almost flat for the year) or if you "pound cost averaged" and invested 10% of your equity every year on the SPX you would be today roughly at a 5% loss. Not really convincing ...

Now, interestingly enough, if you invested on Jan 1st 2000 but you managed to stay out of the market the worst year of the decade (2008), your profit would be of +23% (2% per year), if you managed to avoid the worst 2 years (2008 and 2002), you would have returned +61% (5% per year). Nothing amazing there but still better.

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Sauros wrote:

A former colleague of mine in the Rat Race, ("Hey man keep on running, I'm sure if you work hard enough they'll give you a billion bonus"), a CFA, speaks like in the personal finance books and use "standard" arguments when it comes to investments and savings. Every time we happened to discuss about these, I felt like I spoke with the financial advisor of my grand ma. One of his commonly shared arguments to buy stock is that "in a 10-year period, stocks are ALWAYS profitable"... Of course, as good "Back Traders", we know that's not true, I did the maths quickly this morning : if you invested 100% of your capital on Jan 1st 2000 on the S&P 500 (SPX), you'd have lost almost a quarter of it on Jan 1st 2010 (or today as the stocks are today almost flat for the year) or if you "pound cost averaged" and invested 10% of your equity every year on the SPX you would be today roughly at a 5% loss. Not really convincing ...

Now, interestingly enough, if you invested on Jan 1st 2000 but you managed to stay out of the market the worst year of the decade (2008), your profit would be of +23% (2% per year), if you managed to avoid the worst 2 years (2008 and 2002), you would have returned +61% (5% per year). Nothing amazing there but still better.

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Nice solid post, this is some true investing stuff here. Good to see your insights on how you manage some of your portfolio. I look forward to more post like these!