Dearest readers, I am still learning and I am not any sort of investment expert, but what I can tell you is that I am (reluctantly) getting tired of the bubble talk. Yes, I know that in North America we are in both a housing bubble (worse in Canada than USA) and a stock market and crypto bubble (worse in USA than in Canada). Bubbles burst and they cause some people to lose so much money that their lives are ruined forever. My heart goes out to them. However, with irrational exuberance of the markets comes the irrational fear of investing that also causes tremendous loss in missed opportunities. A healthy dose of fear is a good thing when you go and invest. In a bubble, it makes you invest without using leverage. Unhealthy intensity of market bubble fear makes you not invest altogether, and this is a bad thing. What I would like to do here is go over some very interesting numbers when it comes to investing via RRSP or something like a 401K. I am not a fan of either, but they are examples of a key investment category to try and secure your future and the future of anyone you want to inherit what you ultimately leave behind. I will run you through a scenario based off of investing in a diversified portfolio that reflects solely the S&P 500 with a start date in the 80's and two different end dates- March 2007 and March 2009 because this two year period saw a horrifying S&P 500 decline. I will compare that to just putting money away, so in the end we will have three different final amounts. For the two final investment amounts (2007 and 2009) I will deduct management fees but not taxes. The results may surprise you.
This is nothing special and is easy to do, so it is scary that it took me this long to look this up or create a similar scenario. Yikes! Let us begin though.
I wanted to take a longer time period leading up to 2007 and 2009, so in this scenario I am starting in March 1987 with $1,000 and $500 monthly contributions, no adjustments for inflation. I am using the calculator available here. I assume that the calculator takes into account dividend reinvestment as well. In scenario ending in March 2007, after management but before taxes you would end up with $369,009.99. Not bad eh? However, take a look at the following. If you invested until March 2009, going through those two horrible years of S&P 500 carnage, you would have $214,716.54! That is a drop of $154,293.45!! Pretty scary, is it not? There are many parts of USA and Canada where, even today, you can live well enough for years off of that amount, and a decade in other parts of the world that are quite decent too.
Now, before you take this as a case against long term investing, let me give you the numbers if you just put after tax money on the side at zero interest. By March 2007, you would have saved $121,000. By March 2009, you would have saved $133,000. So, at least to the extent I was able to do this correctly, you are better off long term investing into a diversified portfolio through a tax deferral product such as RRSP. It should not be the only way to invest if you can spare more money than that, but it does seem to be necessary and it seems to give you more even if you retire right after a market crash. Now, not all market crashes are the same but if you take the 2007-2009 period as a market crash baseline, you still end up ahead versus simply stuffing money away or collecting a smaller return on it through other investment options out there.
One last thing. I have been learning about both long term investing and trading and shared the steps in my journey of discovery on my blog here. What I have been noticing more and more is that it cannot be true or clear in any way that long term holding beats trading in every scenario. Consider this. If you had to visually represent long term holding and short(er) term trading with simple drawings, how would you do it? The first thing that comes to my mind is to draw long term holding as a single (trend)line going up at an angle, and trading as waves going through it. If you feel like it, let me know why you think that is.
That is it for today. As I am a (cute) amateur at this, I am looking forward to some feedback, ideas and informed opinions. Until next time :)
This is nothing special and is easy to do, so it is scary that it took me this long to look this up or create a similar scenario. Yikes! Let us begin though.
I wanted to take a longer time period leading up to 2007 and 2009, so in this scenario I am starting in March 1987 with $1,000 and $500 monthly contributions, no adjustments for inflation. I am using the calculator available here. I assume that the calculator takes into account dividend reinvestment as well. In scenario ending in March 2007, after management but before taxes you would end up with $369,009.99. Not bad eh? However, take a look at the following. If you invested until March 2009, going through those two horrible years of S&P 500 carnage, you would have $214,716.54! That is a drop of $154,293.45!! Pretty scary, is it not? There are many parts of USA and Canada where, even today, you can live well enough for years off of that amount, and a decade in other parts of the world that are quite decent too.
Now, before you take this as a case against long term investing, let me give you the numbers if you just put after tax money on the side at zero interest. By March 2007, you would have saved $121,000. By March 2009, you would have saved $133,000. So, at least to the extent I was able to do this correctly, you are better off long term investing into a diversified portfolio through a tax deferral product such as RRSP. It should not be the only way to invest if you can spare more money than that, but it does seem to be necessary and it seems to give you more even if you retire right after a market crash. Now, not all market crashes are the same but if you take the 2007-2009 period as a market crash baseline, you still end up ahead versus simply stuffing money away or collecting a smaller return on it through other investment options out there.
One last thing. I have been learning about both long term investing and trading and shared the steps in my journey of discovery on my blog here. What I have been noticing more and more is that it cannot be true or clear in any way that long term holding beats trading in every scenario. Consider this. If you had to visually represent long term holding and short(er) term trading with simple drawings, how would you do it? The first thing that comes to my mind is to draw long term holding as a single (trend)line going up at an angle, and trading as waves going through it. If you feel like it, let me know why you think that is.
That is it for today. As I am a (cute) amateur at this, I am looking forward to some feedback, ideas and informed opinions. Until next time :)