Morgan Housel at The Motley Fool recently published a list entitled 100 Startling Facts About the Economy.
It’s a fun piece, although it reads like a reporter’s crib-list of possible story ideas that simply grew too long to manage. So, it appears, he decided instead to just write them out, 1 to 100.
Five of them as investing facts really strike a chord for retirement-oriented investors, so here’s the shorter version, with our own observations:
1. As of January 2013, there are 16 people left in the world who were born in the 1800s, according to the Gerontology Research Group. With dividends reinvested, U.S. stocks have increased 28,000-fold during their lifetimes.
Yes, compounding is powerful. Albert Einstein almost certainly did not have anything to say about compound interest, but the essential truth is the same: It really is the force that moves everything else.
As the billionaire Warren Buffet did say, in his recent biography, “Life is like a snowball. The important thing is finding wet snow and a really long hill.”
Money begets money, the earlier the better. You will make far more money by investing early and reinvesting the dividends, interest and gains than you will by earning a paycheck — unless you are a movie star, pro athlete or heir to a major fortune.
4. According to the Deutsche Bank Long-Term Asset Return Study, the last time interest rates were near current levels, in the 1950s, Treasury bonds lost 40% of their inflation-adjusted value over the following three decades.
Bonds aside, inflation is a serious problem, one people drastically underestimate. Bonds are a strong and important part of just about any portfolio, but owning them blindly and without consideration of long-term return is ill-advised.
It’s important to own a variety of asset classes, some of which will outperform inflation and others that will help you keep pace at less risk, depending on your investment time horizon and your own risk aversion.
Balance is the key, as is rebalancing so that the gains you do realize are taken in a timely fashion and reinvested well. (See “compounding,” above.)
32. Fortune magazine published an article titled “10 Stocks To Last the Decade” in August, 2000. By December 2012, the portfolio had lost 74.3% of its value, according to analyst Barry Ritholtz.
Don’t pick stocks. Pick asset classes and own them in a diversified way. For most people, this means owning index funds and exchange-traded funds that efficiently track the broadest, most liquid markets.
This point really comes home when you consider how many investors were beholden to the performance of just one stock, Apple, over the past few years.
71. According to a survey by Paola Sapienza and Luigi Zingales, effectively all economists agreed that stock prices are hard to predict. Only 59% of average Americans felt the same way.
Economists aren’t necessarily great investors. Nor, apparently, are they the most honest of people. But they do know enough about probability to understand that stock picking is a costly illusion.
Many investors go through a “stock picking” phase in hopes of being the outlying genius who rises above the dull idiocy of the crowd. Yet even the best of the best investors in history recognize that there are markets that they cannot master now or ever.
94. According to The Economist, “Over the past ten years, hedge-fund managers have underperformed not just the stock market, but inflation as well.”
Economists may be only moderately talented investors. Nevertheless, economists who buy index funds have managed to beat the pants off the professionals who think they know better.
At the risk of preaching to the choir, here’s the takeaway for retirement investors at any stage of the game: Low-cost, risk-adjusted market returns should be your primary investment goal.
You might enjoy picking stocks. It can be a great hobby, but it’s a hobby, plain and simple. You might like following company news and talking about investments. Nothing wrong with that at all.
But if your aim is to retire on time and with enough money to last well into your golden years, investing is a hobby you should seriously reconsider.