A Picture of Growth

Growth of $1

For the eighty years from 1926 to 2008, the compound annual growth rate of return was 10.95% for the Small Cap Index, 9.62% for the Large Cap Index, 5.71% for the Long-Term Government Bonds Index, 3.70% for Treasury Bills, and 3.02% for Inflation (CPI). Small Cap Index is the CRSP 6-10 Index; Large Cap Index is the S&P 500 Index®; Long-Term Government Bonds Index is 20-year US government bonds; Treasury Bills are One-Month US Treasury Bills; Inflation is the Consumer Price Index. CRSP data provided by the Center for Research in Security Prices, University of Chicago. The S&P data are provided by Standard & Poor's Index Services Group. Bonds, T-bills, and inflation data© Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).

Indexes are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

Traditional managers strive to beat the market by taking advantage of pricing "mistakes" and attempting to predict the future. Too often, this proves costly and futile. Predictions go awry and managers miss the strong returns that markets provide by holding the wrong stocks at the wrong time. Meanwhile, capital economies thrive—not because markets fail but because they succeed.

The futility of speculation is good news for the investor. It means that prices for public securities are fair and that persistent differences in average portfolio returns are explained by differences in average risk. It is certainly possible to outperform markets, but not without accepting increased risk.

Investing 101

In our Financial Foundations client seminar we identify five important concepts (below) to understand before you invest.  From these basic concepts you can develop deeper levels of investing theory, but the good news is that if you understand just these concepts you will be ahead of the vast majority of investors.  Knowing investing lingo is nice if you are hanging around the water cooler at work, but we think you may be more interested in hanging around a bigger body of water, when you retire.

Invest in what you know or can understand.  Individuals, at least 99.99% of them, don't need elaborate investments to achieve goals.  People caught up in Ponzi-type schemes typically felt the need to have an exotic investment, or felt it was okay because other well-known people (or friends) are investing in this.  Isn't this how we got in the mess of the last couple of years?  How many people knew what a Credit Default Swap then or even now?  Apparently not many, according to the investment houses, which is why investment houses have paid millions in bonuses to unwind them! 

The Basic Concepts

Time  

Determine how much time you have to achieve your goals.

Risk

Investing assumes taking some risk, but should give you a proportional reward -  don't give up sleep, know your Risk Tolerance and Invest accordingly.

Return

Return on your investment AND savings are needed to achieve your goals.   

Expenses

Expenses impact return.  Expenses are a fact, but get value for what you pay.  Considering ALL of your expenses,  are you receiving commensurate value?  

Emotion

Emotion does not belong in investment decisions.  What you think you know can hurt, if you let your emotion or pride get in the way.  Please click here for an excellent review of Investors Behavioral Biases that impact emotional investing.