Some good reads from around the web.
When people discover my interest in investing, they usually express mock horror, and ask me why the past few years of turmoil hasn’t caused me to find a new hobby and/or stash my cash under the mattress.
Partly because the last few years has been a great time to make money in the stock market, I reply.
That usually gives them pause.
Am I special? Not really. According to Morningstar, an investor in the FTSE All-Share index reinvesting dividends via this HSBC tracker would have enjoyed an annualised return of 13% over the past three years. That’s good enough to turn £1,000 into £1,444.
Of course, not all periods in the stock market are so fruitful. Over five years the annual return from the tracker is a big fat zero. Over ten years it improves to 5.47% per year, thanks to dividends.
But the past 3-4 years are definitely not a reason for concern.
What’s more, whereas some friends are horrified when they learn I’ve been regularly putting money into a market they believe has gone nowhere for a decade, I’m more horrified that they’re haven’t.
What is an average year, anyway?
Of course, I understand why they’re worried about my sanity. The financial news and the mainstream media are synonymous nowadays, with even the humblest BBC update not shy of mentioning a sharp fall in the indices.
I hear Robert Peston is so aggrieved, he’ll no longer get out of bed for less than 5% off the Dow.
Yet the volatility of recent years is not unusual – a point well made by Canadian Couch Potato this week:
You may be shocked to learn that a portfolio with equal amounts of Canadian, US and international stocks would have posted returns between 6% and 11% exactly five times in the last 42 years.
Think about that: in any given year, the chance that stock returns will be within this “normal” range was less than one in eight.
Now let’s consider the probability of more “abnormal” outcomes. If the average long-term return for stocks is 8.5%, let’s look at years where returns were a full 10 percentage points more or less than that.
It turns out that there were 11 years with losses of at least –1.5%, and 17 others with gains of at least 18.5%. In other words, the probability of a significant loss or a huge gain was 67%, or two years out of every three.
I don’t have the UK statistics to hand, but I am certain they are very similar.
Everyone who wants to succeed as an investor needs to get used to them.
From the money blogs
- Profiting from income safely – iii blog
- King for just one day – Mr Money Mustache
- Index hero Charles Ellis – Rick Ferri
- Do value investors beat the market? – Musings on Markets
- Is tax avoidance immoral? – Sterling Effort
- Iceland the ex-hedge fund is beginning to thaw out – Investing Caffeine
- Can software beat penny-flippers? – The Psy-fi blog
- A graphical warning against buying into top-ranked funds – My Money Blog
- The financial benefits of getting married – Totally Money
- Howard Marks’ latest memo [PDF] – Oaktree Capital
- Fundamental management’s letter to Barclays chair – The Munro Fund
Mini-section about retirement
- What is human capital? – Oblivious Investor
- The riskiest day of your life – Larry Swedroe
- Why the 4% rule is too simplistic for retirement planning – Wade Pfau
- Convince yourself to up your pension saving – Consumerism Commentary
Buy of the week: Bored of bankers? Then set-up your own bank with your very own ATM machine. It’s designed to help you save money rather than spend it. That’s more than you can say for a modern bank.
Mainstream media money
- BoE boss Mervyn King blasts ‘shoddy’, ‘deceitful’ bankers – This is Money
- London: On a high – The Economist
- Why everyone still wants to work on Wall Street – Business Insider
- William Bernstein interview: The purpose of fixed income – Morningstar
- Jeremy Grantham on investing today – CNN Money
- Dividends key in a sideways market – FT
- Buy with care, BTL landlords warned – FT
- Exploring cash deposit accounts for SIPP investors – FT
- What does the LIBOR scandal mean for you? – Telegraph
- Homeowners pay off record amount of debt – Telegraph
- Mortgages: How parents can help – The Guardian
- What people really do when they work from home – Slate
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