The Cost of Buying Too Soon…$1,000,000+

[no_such_reality]

That’s three million dollars short.

And Couple C, being renting regulars, decides to ride it out. They bank the $18,000 a year to start knowing rent goes up 5% a year or less over the long term.

In year ten, they buy the same house, still for $650,000 because inflation and incomes are starting to get back in line.

They take a 30 year loan at 6.5%, put down $150,000 from their savings, still having over $400,000 left. Kick back with their $3160 monthly payment knowing they’ve got it in the bank. Bank the extra $600 a month like Couple B.

Twenty years later, they get tired of hearing their friends couple A and couple B brag about almost being paid off, so they take $362,000 out of their investments now at $3,364,000 and pay off their house and realize they have three million left to retire and play with.

[qcomer]

gold_dredger,
If you want to apply taxes and inflation then apply it to all investments. Still, you will see that stocks beat gold, real estate, bonds, CDs, etc in the last 40 years (I accepted the convenient start window of 1966 that you chose when gold started to rally). Also, in those 40 years, the US economy has weathered an energy crisis or oil imbargo,rampant inflation,few blown up recessions, terrorist attacks, a fierce industrial competitor like Japan (similar to China now) and it wasn’t really the smooth ride that you paint it to be.

[powayseller]

qcomer, thanks for the correction, but it doesn’t change my mind about the low chances of beating the general market. That’s why I switched to index funds in the late 90’s. For example, These are the returns for your fund:
2006
2005 17.23%
2004 19.66%
2003 42.38%
2002 – 9.37%
2001 -12.99%
2000 -8.96%

With its heavy concentration in consumer goods and financials, 2007 is likely to be a year of losses again.

I don’t have tine to check all of AN’s funds, so I picked the highest returning, VGHCX. Again, it had some very good years, and some bad years. In 2001 and 2002 its return was -7%, and -11%. Then 3 years of good returns, 26%, 10%, 15%. What will it be next year? With 91% of holdings in health, the Democrats could put a serious dent in its earnings.

I am aware there are funds with extraordinary returns for one year, two years, or even 3 years. But two important points must be remembered:

1) no fund can consistently beat the general stock market (although Bill Miller came close with almost 2 decades), and

2) although each year, by definition of average, many funds beat the average, we *never know in advance* which funds they will be

[an]

PS, if you noticed, all the funds I listed average well over 10% for over 20 years. So, yes, there will be years where it went down, but there are also years where it went up. That’s why you take a average over a long period of time, like 20+ years. I don’t know what you’re trying to about it going down in 2000-2002 but so did the index funds and the index itself.

[qcomer]

Poway,

Nobody ever said anything about beating index funds and I don’t think indexing vs not indexing was ever a question. The original point you raised was that 10% average return over long term is not realistic in markets and actually 5-7% is more realistic. Most of the other posters here corrected you by pointing to 20-30 year performance of S&P500 and many other funds that have been able to return more than 10% annually. A balanced portoflio has returned 10% or more over 30 years and has beaten gold,commodities,bonds,etc during this time.

[powayseller]

I realize that some funds return over 10%, but the difficulty lies in picking it ahead of time. For example, can you name the funds which will return over 10% next year?

[powayseller]

I realize that some funds return over 10%, but the difficulty lies in picking it ahead of time. For example, can you name the funds which will return over 10% next year?

[an]

PS, why are you asking us to pick a fund that will perform in the short term now. Weren’t you emphasizing long term when you say funds can’t average more than 10%? Also, no one can tell the future. If we could, we wouldn’t be here. We’d be retired already. Of course past performance doesn’t not guaranty future’s earning. However, it give you a good idea of the possibility. Especially when they average over 10% for over 20 years. It’s not easy to average over 10% over 20 years. The whole point is long term, isn’t it. If you’re talking short term, then you’re talking about timing the market. No one can time the market consistently. If they could, the secret would leaked out and everyone else can too.

[powayseller]

I realize that some funds return over 10%, but the difficulty lies in picking it ahead of time. For example, can you name the funds which will return over 10% next year? And since no one can do so, we cannot assume that rate of return. We can only assume a rate of return that we ourselves are able to achieve, or what the market as a whole can achieve.

[privatebanker]

I think what everyone is saying here is that it is impossible to predict the future. The best you can do when determining a potential fund to invest in is to conduct extensive due diligence. Look at the tenure of the portfolio manager, what is the risk of the portfolio? i.e. standard deviation & beta vs. benchmark, what is the annualized rate of return vs. the appropriate benchmark? What are the internal fees and are they enough to outperform the fund’s benchmark? The idea is to invest in funds that have low correlation to one another so that you are capturing as much Alpha as possible to offset any underperforming asset classes. If you feel one asset class’ funds can never beat it’s benchmark than buy the index or employ a core/satellite strategy utilising index funds as your core holding and add high alpha active managers to beat the index. Make sure to conduct due diligence on any index funds as well. There are many issues with index funds for example, many funds have significant tracking error, many have high internal expenses and many do not report the trading costs within the funds.

[no_such_reality]

According to Duke University research, over the long term, the S&P 500 has a total return of 1%/month. With a CAGR of 12.7%.

Basically what is different now, from a historical perspective, is the incredibly low dividend rate. Before the 1990s, the Dow had a dividend rate that ranged from 3-18% a year.

The Duke Article

[La Jolla Renter]

The point of this post was simply to point out the opportunity loss of buying too soon.

I was surprised at some of the pessimistic comments knocking the use of a 10% return, which I think is very reasonable.

The history of real-estate cycles is okay to predict the future but the history of stock indexes (10%) is not???

Poway, I am 80% cash in my portfolio right now as well, but I do not use the 20 year average of CD rates to calculate FV.

I am sticking to 10%.

[sdrealtor]

I dont think 10% is unrealistic if you stay 100% invested in the stock market for 30 years. What I think is unrealistic is staying 100% invested in the stock market for 30 years. Most people will start diversifying toward more stable investments once they reach their mid-50’s.

[an]

So that mean if you start investing in your mid 20s, you can stay 100% invested in the stock market for 30 years and still be able to diversify when you hit your mid 50s. Starting to invest in your mid 20s is not that far fetched.

[sdrealtor]

Agreed but this thread was about mid-30’s couples buying a house in a non-bubble atmosphere which most people shouldnt do until they are well settled in a career and a community they want to live in for at least 10 years. Most homebuyers are 30 or older around here.

[Author]

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