Monday, 28 August 2017

How to (almost) double your money in 10 years doing it the old fashion way -by earning it

Chart of S&P 500 

Remember the famous phrase ‘Do As I Say and Not As I Do.’ This is easier said than done, especially in the personal investment world.  I am always tempted to chase the next Facebook stock, or try to catch a falling knife like a J.C. Penney stock thinking that there is  value in bottom fishing. The only way to save myself in this case is that I always have some 'play money' allocated for such purpose, say no more than 2% of my portfolio. 98% of my portfolio is locked in ETFs or low cost mutual fund offered through the company. And as always the case, it tends to end up being a losing proposition. Cost of doing business, I guess. Overall, my net return is reduced by less than 1% a year.  I always advise my clients not to do what I am doing.  Well, some people like fast cars. I prefer the adrenaline of testing my knowledge and chase after stocks. If I found a winner, then I consider myself smart. If I lost money, I blame it on bad luck. 


I keep doing this despite countless empirical studies by academicians and advice by great investors such as Warren Buffet and Jack Bogle (founder of the Vanguard low cost investment funds) that have proven the path to successful investing is by purchasing low cost index funds on a regular basis. You just can't beat the market. Systematic risk (or market risk) cannot be diversified. Buying individual stock,however, is more risky. Being a Finance professional with an MBA, CFP and a CMA, I still think I can beat the market. 

Discipline yourself by staying the course during bad times and good times. Stop chasing last year’s winners. Do not try the impossible by trying to figure out what is value investing. No one can time the market successfully. If you had pulled out all your money when the stock market tanked 30% in 2008 and stayed in cash, you would have lost the opportunity of one of the greatest comebacks in stock market history. Nine years later, in 2017, the market is still achieving new highs. Many Financial Indolence (FI) success stories have also been achieved during this period.

Assuming you have $100,000 at the peak of the market in 2008, and your investment dropped 30%. Also assume that you continue to put $20,000 in the market at the end of each year using a 70% equity and 30% bond allocation.  

You would have still almost doubled your money in 10 years. If the starting year 2008 was not such as down year, I am almost certain you would have doubled your money. A total investment of $280,000 over 10 years returned almost $200,000 for a grand total of $485,000. Average return over the 10-year period was 7.7% using a 70% equity/30% bond allocation.

Instead of constructing the table and researching for information which took me almost 45 minutes, I used my trusty HP 10b Financial Calculator to verify the results in less than 1 minute.

$100,000 PV, $20,000 PMT each year for n=10 years, i=7.7%. FV (or future Value) = $495,000 .Darn close!!!





Total Returns
Ending Balance

Year-end
Contribution
Equity
Bond
Equity
Bond
Total
Principal
2007



70,000
30,000
100,000

2008
20,000
-36.6%
20.1%
44,415
36,030
80,445
100,000
2009
20,000
25.9%
-11.1%
73,568
37,356
110,924
120,000
2010
20000
14.8%
8.5%
100,545
47,024
147,570
140,000
2011
20,000
2.1%
16.0%
116,951
61,529
178,480
160,000
2012
20,000
15.9%
3.0%
151,759
69,535
221,294
180,000
2013
20,000
32.2%
-9.1%
219,050
68,661
287,712
200,000
2014
20,000
13.5%
10.8%
264,559
82,687
347,246
220,000
2015
20,000
1.4%
1.3%
282,403
89,823
372,225
240,000
2016
20,000
11.7%
0.7%
331,201
96,484
427,684
260,000
2017

10.0%
3.0%
379,721
105,558
485,279
280,000
Average

9.1%
4.3%


7.7%

Notes:
Total Returns on Equity based on S&P 500 ; includes dividends
Returns on bonds based on U.S. 10-year Treasuries
Information on 2017 based on projection
Assume no contribution at end of year 2017 - achieved Retirement Goal !!!!!

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