It's when you buy...

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Submitted by edna_mode on January 25, 2011 - 3:22am

...AND when you sell that you make your money. True of investing in general, not just RE. Nice graphic demonstrating how useless the "x% annual gains per year" model is. Monte Carlo forever!

http://www.nytimes.com/interactive/2011/...

Submitted by edna_mode on January 25, 2011 - 3:30am.

I forgot to give props for the link: mymoneyblog.com

They also linked to:

http://www.crestmontresearch.com/content...

Submitted by njtosd on January 25, 2011 - 6:34am.

Very easy to interpret quickly - great graphic.

Submitted by SD Transplant on January 25, 2011 - 6:39am.

pretty cool chart

Submitted by UCGal on January 25, 2011 - 8:45am.

How dare they factor in inflation, taxes, etc... That's not how we're supposed to look at things if you listen to Wall Street.

Thanks for the chart.

Submitted by harvey on January 25, 2011 - 9:05am.

The chart is interesting.

The interpretation is misguided:

But historical averages can vary widely depending on their starting and ending points.

In other words, you can prove anything with statistics if you pick and choose your data. Not exactly a revelation.

The interesting conclusion is that there is enough volatility that the "long term" is at least 20+ years.

So there really is not any such thing as "dependable" long-term returns, at least for one person's working lifetime.

But all investment outcomes are relative. What are the alternatives?

Submitted by sdduuuude on January 25, 2011 - 9:14am.

It is a cool chart, but nobody really invests all their money in one year, then brings it all out in another year.

Long-term appreciation averages are more meaningful when people invest a little each year, then take it out bit by bit for retirement.

This chart suggests that you can lower risks by dollar-cost average when entering and diversifying in investments that are not all correlated to the market.

Submitted by sdduuuude on January 25, 2011 - 9:23am.

What would be really interesting is to run some stats on the entry and exit points to see if there is an objective way to identify them. I'm thinking of Rich's old graph regarding P/E ratios.

If there isn't a way to identify the right entry and exit points, then it isn't much of an investment tool.

Submitted by no_such_reality on January 25, 2011 - 9:28am.

There's a lot of voodoo in that chart.

Inflation, fees, taxes...

I'd love to see the raw return number without the adjustment for inflation fees and taxes. And then just inflation adjust number...

Frankly, a 7% REAL return, which is what the bulk of that chart is, is GREAT! At a real 7%, you can put away a real $10,000 a year starting at 25 and at 55 have a real Million to withdraw which will provide a REAL $40,000 for the next 40 years.

More conservatively, that long term REAL 7% will allow the median household making $50,000 a year to bank 10%, $5000 a year from 25-65 and then be able to pull the same REAL $50,000 out until they're over 100.

Submitted by edna_mode on January 25, 2011 - 10:34am.

@nsr: the link I gave for the 3am comment wasn't right. This is the correct one, and may address some of your questions:

http://www.crestmontresearch.com/content...

That gives charts in nominal vs. real dollars; taxable vs. tax-exempt; and P/E ratios. There are numbers not just colours in each square. And make sure to check out the "Assumptions Graph".

Should have linked to this in the OP.

I believe they are re-investing dividends? But can't find that in the assumptions.

EDIT: Just looked closely at the legend on the graphs, and the third box down on the taxable real returns one says clearly that dividends are reinvested, in addition to how inflation, taxes, trading costs etc. are treated.

Submitted by no_such_reality on January 25, 2011 - 11:07am.

This is the same basic results that were made available back in 1998 when O'Shaugnessy wrote "What Works on Wall Street". The basic conclusion was the nominal returns are just sub 11% over the long haul.

Inflation eats 4% of that. Taxes take another 2% and transaction costs eat 1% for trading.

Ironically, that's the best performing short of building your own successful business.

It also still shows a 6% real return in tax protected accounts. Which given they're using integers isn't bad.

Great links BTW. I suspect you could build a return line for a dollar averaging buy-in.

When looking at this kind of historical data you need to keep in mind that the "Crash" and the Great Depression literally wiped out everything that went before the end of WW2.

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