Read Online Millionaire Teacher by Andrew Hallam - Free Book Online
Authors: Andrew Hallam
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As investors, you really donât have to watch the stock market to see if itâs going up or down. In fact, if you bought a market index fund for 25 years, with an equal dollar amount going into that fund each month (called âdollar-cost averagingâ) and if that fund averaged 10 percent annually, you would have averaged 10 percent or more. Why more? If you put a regular $100 a month into a fund, that $100 would have bought fewer unit shares of that fund when prices were high, but it would have bought more unit shares of that fund when prices were lower.
Most investors donât do thatâthey exhibit nutty behavior
Combine the crazy behavior of the average investor with the fees associated with actively managed mutual funds, and the average investor ends up with a comparatively puny portfolio compared with the disciplined investor who puts in the same amount of money every month into index funds. Table 4.1 categorizes investors who will be workingâand adding to their investmentsâfor at least the next five years.
Table 2.1 The Average Investor Compared with the Evolved Investor
The Average Investor
The Evolved Investor
Buys actively managed mutual funds.
Buys index funds.
Feels good about his or her fund when the price increases, so they buy more of it.
Buys equal dollar amounts of the indexes and knows, happily, that this buys fewer units as the stock market rises.
Feels badly about his or her fund when the price decreases, so the person limits purchases or sells the fund.
Loves to see the stock index fall in value. If he or she has the money, the person increases their purchases.
Iâm not going to suggest that all indexed investors are evolved enough to ignore the marketâs fearful roller coaster, while shunning the self-sabotaging caused by fear and greed. But if you can learn to invest regularly in indexes and remain calm when the markets fly upward or downward, youâll grow far wealthier. In Table 4.2 , you can see examples based on actual U.S. returns between 1980 and 2005.
Table 4.2 Historical Differences Between the Average Investor and the Evolved Investor
Note: Although the U.S. stock market has averaged about 10 percent annually over the past 100 years, there are periods where it performs better and there are periods where it performs worse. From 1980 to 2005, the U.S. stock market averaged slightly more than 12.3 percent a year. 2
The Average Investor
The Evolved Investor
$100 a month invested from 1980 to 2005 in the average U.S. mutual fund (roughly $3.33 a day). 10% annual average
$100 a month invested from 1980 to 2005 in the U.S. stock market index (roughly $3.33 a day). 12.3% annual average
Minus 2.7% annually for the average investorâs self-sabotaging behavior.
No deficit for silly behavior.
25-year average annual return for investors: 7.3%
25-year average annual return for investors: 12.3%
Portfolio value after 25 years = $84,909.01
Portfolio value after 25 years = $198,181.90
The figure on the left side ($84,909.01) is probably a little generous. The 10 percent annual return for the average actively managed fund has been historically overstated because it doesnât include sales fees, adviser wrap fees, or the added liability of taxes in a taxable account.
Disciplined index investors who donât self-sabotage their accounts can end up with a portfolio thatâs easily twice as large as that of the average investor over a 25-year period.
Small details like these can allow people with middle-class incomes to amass wealth more effectively than their high-salaried neighborsâespecially if the middle-class earners think twice about spending more than they can afford. Even if your neighbors invest twice as much as you each month, if they are average, they will buy actively managed mutual funds, and they will either chase hot-performing funds or fail to keep a regular commitment to their investments when the markets fall. Theyâll feel
As investors, you really donât have to watch the stock market to see if itâs going up or down. In fact, if you bought a market index fund for 25 years, with an equal dollar amount going into that fund each month (called âdollar-cost averagingâ) and if that fund averaged 10 percent annually, you would have averaged 10 percent or more. Why more? If you put a regular $100 a month into a fund, that $100 would have bought fewer unit shares of that fund when prices were high, but it would have bought more unit shares of that fund when prices were lower.
Most investors donât do thatâthey exhibit nutty behavior
Combine the crazy behavior of the average investor with the fees associated with actively managed mutual funds, and the average investor ends up with a comparatively puny portfolio compared with the disciplined investor who puts in the same amount of money every month into index funds. Table 4.1 categorizes investors who will be workingâand adding to their investmentsâfor at least the next five years.
Table 2.1 The Average Investor Compared with the Evolved Investor
The Average Investor
The Evolved Investor
Buys actively managed mutual funds.
Buys index funds.
Feels good about his or her fund when the price increases, so they buy more of it.
Buys equal dollar amounts of the indexes and knows, happily, that this buys fewer units as the stock market rises.
Feels badly about his or her fund when the price decreases, so the person limits purchases or sells the fund.
Loves to see the stock index fall in value. If he or she has the money, the person increases their purchases.
Iâm not going to suggest that all indexed investors are evolved enough to ignore the marketâs fearful roller coaster, while shunning the self-sabotaging caused by fear and greed. But if you can learn to invest regularly in indexes and remain calm when the markets fly upward or downward, youâll grow far wealthier. In Table 4.2 , you can see examples based on actual U.S. returns between 1980 and 2005.
Table 4.2 Historical Differences Between the Average Investor and the Evolved Investor
Note: Although the U.S. stock market has averaged about 10 percent annually over the past 100 years, there are periods where it performs better and there are periods where it performs worse. From 1980 to 2005, the U.S. stock market averaged slightly more than 12.3 percent a year. 2
The Average Investor
The Evolved Investor
$100 a month invested from 1980 to 2005 in the average U.S. mutual fund (roughly $3.33 a day). 10% annual average
$100 a month invested from 1980 to 2005 in the U.S. stock market index (roughly $3.33 a day). 12.3% annual average
Minus 2.7% annually for the average investorâs self-sabotaging behavior.
No deficit for silly behavior.
25-year average annual return for investors: 7.3%
25-year average annual return for investors: 12.3%
Portfolio value after 25 years = $84,909.01
Portfolio value after 25 years = $198,181.90
The figure on the left side ($84,909.01) is probably a little generous. The 10 percent annual return for the average actively managed fund has been historically overstated because it doesnât include sales fees, adviser wrap fees, or the added liability of taxes in a taxable account.
Disciplined index investors who donât self-sabotage their accounts can end up with a portfolio thatâs easily twice as large as that of the average investor over a 25-year period.
Small details like these can allow people with middle-class incomes to amass wealth more effectively than their high-salaried neighborsâespecially if the middle-class earners think twice about spending more than they can afford. Even if your neighbors invest twice as much as you each month, if they are average, they will buy actively managed mutual funds, and they will either chase hot-performing funds or fail to keep a regular commitment to their investments when the markets fall. Theyâll feel
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