There are insider trading laws to deal with that.HongKonger wrote:I disagree with "I cannot know something that would affect the price that everyone else does not know."
I have held press conferences whereby the news I have delivered has pushed a stock price up in a single day by close to 10%.
What is the single most important investing belief?
Re: What is the single most important investing belief?
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Re: What is the single most important investing belief?
I didn't say I did anything about the knowledge I had in advance.blevine wrote:There are insider trading laws to deal with that.HongKonger wrote:I disagree with "I cannot know something that would affect the price that everyone else does not know."
I have held press conferences whereby the news I have delivered has pushed a stock price up in a single day by close to 10%.
Re: What is the single most important investing belief?
10% is nowhere near enough. But most people in the US save more than that in the form of Social Security. In many countries, people save more than that in the form of taxes that will pay for their future government provided old age pensions.Brody wrote:Everything that I can think of pales in comparison to:
"What matters most is the amount of money that is put away."
In my experience, regardless of the specifics, the following is usually true:
1)People who put away 10% of their income do fine.
2)People who put away 20% of their income thrive.
3)People who put away 30% of their income become relatively wealthy.
So your general point is right, but the percentages are too low.
Re: What is the single most important investing belief?
Consider the choices you may have.snyder66 wrote:I thing saving should be first above everything else. A million dollars cash is still a million dollars when compared with someone who didn't save as much. Pick any number to plug in...I think that overall expenses of investment vehicle is second. Followed by return and all of the rest.
For example, you may have a choice to spend $1000 on something you want now, or save (and invest) it for later. Not always an easy choice. You need some balance.
Also if you have a $100 not you have a choice to burn it or not burn it. Seems like an easy choice. But that is the form of choice you have with investing expenses. The magnitude of the decision may not be as large as the save-or-spend decision, but it is a much easier decision to make. So you certainly need to consider expenses. It's something you can control.
What to invest in can have the biggest effect of all. (Your stock investments could quadruple you savings. Or quarter them.) But while the magnitude is huge, it is unpredictable and out of your control. You have to do prudent things like diversify.
I don't see how you can rank these things. They're very different.
Re: What is the single most important investing belief?
+1. Darn it, that's what I was trying to say with my (in retrospect) long-winded post...Rick Ferri wrote:Maintaining discipline through thick and thin is the key to investment success.
Rick Ferri
You only live once...
Re: What is the single most important investing belief?
I was taught to pay yourself first out of all earnings, and stay clear of debt.
Even educators need education. And some can be hard headed to the point of needing time out.
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Re: What is the single most important investing belief?
Educate yourself before investing your money. A lot of mistakes can be avoided if you invest in some basic financial education.
"The wants of mortals are containers that can never be filled." (Socrates)
Re: What is the single most important investing belief?
I believe one should buy assets which are on sale. Like stocks were undervalued in 2008-2009, gold was in 90's and real estate for last few years. I like Warren Buffet's principle " Be fearful when others are greedy, and be greedy when others are fearful." Bill Bernstein has written about this in his book" The Investor's Manifesto".
- Taylor Larimore
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Re: What is the single most important investing belief?
Hi Dadarkar:Dadarkar wrote:I believe one should buy assets which are on sale. Like stocks were undervalued in 2008-2009, gold was in 90's and real estate for last few years. I like Warren Buffet's principle " Be fearful when others are greedy, and be greedy when others are fearful." Bill Bernstein has written about this in his book" The Investor's Manifesto".
If your single most important investment belief did not help you in last year's Boglehead Contest, why not try staying-the-course with a long-term asset allocation plan.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Re: What is the single most important investing belief?
Taylor;
I agree 100%. Although I agree market timing is a dangerous game. I am a follower of "staying the course"philosophy. However, I also believe in buying more assets - mainly index stock funds in your simple 3 fund portfolio. when valuation is attractive.
I agree 100%. Although I agree market timing is a dangerous game. I am a follower of "staying the course"philosophy. However, I also believe in buying more assets - mainly index stock funds in your simple 3 fund portfolio. when valuation is attractive.
Re: What is the single most important investing belief?
This thread now reminds me of Ric Edelman's 2000 book, "Ordinary People", Extraordinary Wealth". In it, he has 8 lessons learned from a survey of 5,000 successful investors. I plan to read it again tonight, and will post my synopsis tomorrow.
Thank you, all, for your contributions. This has been most interesting.
Keith
Thank you, all, for your contributions. This has been most interesting.
Keith
Déjà Vu is not a prediction
Re: What is the single most important investing belief?
It's got to be staying the course with your investment plan. The Dalbar study and morningstar investment returns clearly show that investor behavior, performance chasing and panicking are far more important than belief in EMH, diversification, etc. An investor's eventual results are going to depend much more on their discipline, than on whether they choose active vs index, whether they go TSM vs slice and dice, etc.
Obviously, without saving you can't invest, but I consider that as more of a prerequisite to investing, not an actual belief. One must have the ability to delay gratification by saving rather than spending to become an investor. I wouldn't really consider that an investing belief, but I suppose in a very broad sense it is, and is certainly the main determinant of eventual wealth.
PS..."Cage it up!" :lol
Obviously, without saving you can't invest, but I consider that as more of a prerequisite to investing, not an actual belief. One must have the ability to delay gratification by saving rather than spending to become an investor. I wouldn't really consider that an investing belief, but I suppose in a very broad sense it is, and is certainly the main determinant of eventual wealth.
PS..."Cage it up!" :lol
Re: What is the single most important investing belief?
fundtalkfundtalk wrote:It's got to be staying the course with your investment plan. The Dalbar study and morningstar investment returns clearly show that investor behavior, performance chasing and panicking are far more important than belief in EMH, diversification, etc.
I'm going to bring up the chicken and the egg, or the "Why? Why? Why? Why? Why?" method advocated by some process change gurus.
Which came first? Discipline or belief? Why do you have discipline?
For me, its the efficient market hypothesis. I think it's easy to see how a belief in EMH leads to a philosophy of diversification. I think it also leads to the understanding on things like market timing that reinforces your discipline.
In my original post, I missed a couple of precepts. You must save. And you must seek education and understanding.
It is only if you have a deep belief and understanding (self-confidence) that you will develop the discipline.
Keith
Déjà Vu is not a prediction
Re: What is the single most important investing belief?
Learn, then earn.
"..the cavalry ain't comin' kid, you're on your own..."
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Re: What is the single most important investing belief?
Brody wrote:Everything that I can think of pales in comparison to: "What matters most is the amount of money that is put away."(snip)
bob90245 wrote:Savings rate is more important than earning a high rate on what's been saved. (snip)
+10! The Richest Man in Babylon puts it this way: "A part of all you earn is yours to keep."NAVigator wrote:Living below your means. (snip) From this simple practice, all subsequent investing beliefs are just refinements.
If you spend every penny you earn, you won't have anything to invest, and if you have no investments, your beliefs on the topic don't make a particle of difference.
Last edited by kyounge1956 on Sat Jan 07, 2012 8:12 pm, edited 1 time in total.
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Re: What is the single most important investing belief?
To me it's this: shovel as much money as you possibly can into tax-advantaged accounts. I'd rather oversave and retire early than deal with the alternative. In terms of what to invest in, I use low-cost index funds simply because I know what to expect: the market return for a particular asset class. Was I bummed out that TISM underperformed TSM last year? No, not at all. It is what it is.
- ruralavalon
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Re: What is the single most important investing belief?
Broad diversification with low costs wins.
Is that 2 most important things?
Is that 2 most important things?
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy
Re: What is the single most important investing belief?
Save, save,save! Need to save at least 10% and more if possible. Spending money won't buy happiness.
DIY-don't support a financial advisor! Use the wiki and good advice found here.
Use any tax advantaged account available.
DIY-don't support a financial advisor! Use the wiki and good advice found here.
Use any tax advantaged account available.
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Re: What is the single most important investing belief?
May want to think about mandatory withdrawals. Some folks will have more TI and owe more tax in retirement than when they were working. As others have suggested, it may make better sense to contribute to 401k's up to any employer match and then do a Roth IRA.AgnosticInvestor wrote:To me it's this: shovel as much money as you possibly can into tax-advantaged accounts. I'd rather oversave and retire early than deal with the alternative. In terms of what to invest in, I use low-cost index funds simply because I know what to expect: the market return for a particular asset class. Was I bummed out that TISM underperformed TSM last year? No, not at all. It is what it is.
Investing and taxes are too complicated. If you follow general principles, you may actually be hurting yourself.
"The wants of mortals are containers that can never be filled." (Socrates)
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Re: What is the single most important investing belief?
It has to be that the future will give you a return.
Why would you ever invest in stocks, bonds, real-estate, if you thought the market would go to zero?
Thanks
SP-diceman
Why would you ever invest in stocks, bonds, real-estate, if you thought the market would go to zero?
Thanks
SP-diceman
Re: What is the single most important investing belief?
I don't think there's any basis for this belief. There's no logical reason to base it on what "the market" has done in the past, and we all know that "past performance does not indicate future results".Cloud wrote:That the market will continue to rise in the long run.
Re: What is the single most important investing belief?
There's no evidence that it's possible to tell when assets are on sale. You can't go by what Warren Buffet says for two reasons -Dadarkar wrote:I believe one should buy assets which are on sale. Like stocks were undervalued in 2008-2009, gold was in 90's and real estate for last few years. I like Warren Buffet's principle " Be fearful when others are greedy, and be greedy when others are fearful." Bill Bernstein has written about this in his book" The Investor's Manifesto".
1. we don't know what his algorithm is so there's no basis for assuming you can do whatever he did
2. Most of his success came from buying companies, not just a few shares of stock like us.
Re: What is the single most important investing belief?
Of course the market will give you a "return" - the return might be negative or break even. But any assumption that the market will go up (or for that matter, go to zero) has no logical basis. The market will do whatever it does but there no empirical evidence that there's any way to predict what that will be.SP-diceman wrote:It has to be that the future will give you a return.
Why would you ever invest in stocks, bonds, real-estate, if you thought the market would go to zero?
Thanks
SP-diceman
Re: What is the single most important investing belief?
Yes,plnelson wrote:I don't think there's any basis for this belief. There's no logical reason to base it on what "the market" has done in the past, and we all know that "past performance does not indicate future results".Cloud wrote:That the market will continue to rise in the long run.
There is a basis for this belief. It is that investors are taking a risk, and that they will be rewarded with positive market returns for taking that risk. It is a fundamental theory, not an extrapolation of history.
Looking at the history helps you to understand how the market has valued investment risk in the past. It is not a prediction.
By the way, that's what my tagline means
Keith
Last edited by umfundi on Sat Jan 07, 2012 8:52 pm, edited 1 time in total.
Déjà Vu is not a prediction
Re: What is the single most important investing belief?
For me, as for some of you, it has been the efficient markets idea, which I encountered first, I think, around 1980. I don't think it was much discussed in the popular financial press at that time. I was not really interested in the details of investing, and what the EMH meant to me was that I didn't have to find out about it, so long as I bought market securities. I wouldn't be cheated, because what I bought would be worth the price charged. Dazzlingly simple and elegant.
Of course, to invest, you have to save something back from your income, and the more you save the more you can invest, but that's pretty obvious. The EMH was not at all obvious to me.
Of course, to invest, you have to save something back from your income, and the more you save the more you can invest, but that's pretty obvious. The EMH was not at all obvious to me.
Greg, retired 8/10.
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Re: What is the single most important investing belief?
Great thread!
Re: What is the single most important investing belief?
Greg,
Which leads me to a parallel theory of consumption.
Buy as few things as possible (vs. save as much as possible). But then, shop at Costco.
Keith
Which leads me to a parallel theory of consumption.
Buy as few things as possible (vs. save as much as possible). But then, shop at Costco.
Not particularly Costco, but it is a great convenience to me to believe that I can walk into any one of a number of my local stores and get a competitive price for virtually any item. In 1980, that was not the case.I wouldn't be cheated, because what I bought would be worth the price charged. Dazzlingly simple and elegant.
Keith
Déjà Vu is not a prediction
Re: What is the single most important investing belief?
Yes, and in the same vein, I can feel free to invest in actively managed mutual funds, these days, because I can assume that those whose management fees were not justified by higher returns will have been driven out of business through the competition of passively managed index funds.umfundi wrote:Not particularly Costco, but it is a great convenience to me to believe that I can walk into any one of a number of my local stores and get a competitive price for virtually any item. In 1980, that was not the case.
Greg, retired 8/10.
Re: What is the single most important investing belief?
Compounding interest.
Re: What is the single most important investing belief?
Earn then learn would probably work out better.peppers wrote:Learn, then earn.
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Re: What is the single most important investing belief?
Compounding returns.Tuxx wrote:Compounding interest.
Re: What is the single most important investing belief?
It's a good point. It's amazing how powerful that is. And how some "sellers" try to circumvent that in any way possible. For example services (plumbing, etc.) don't seem at all competitive to me. Massive ripoff potential. And there are all those MLM scams, Amway, Mary Kay etc. I always want to ask them why they don't sell their products in stores (answer: because then the massive ripoff potential would evaporate).umfundi wrote:Greg,
Which leads me to a parallel theory of consumption.
Buy as few things as possible (vs. save as much as possible). But then, shop at Costco.Not particularly Costco, but it is a great convenience to me to believe that I can walk into any one of a number of my local stores and get a competitive price for virtually any item. In 1980, that was not the case.I wouldn't be cheated, because what I bought would be worth the price charged. Dazzlingly simple and elegant.
Keith
cheers,
RIP Mr. Bogle.
Re: What is the single most important investing belief?
Paper gains is a recipe for misery.relentless wrote:Compounding returns.Tuxx wrote:Compounding interest.
Re: What is the single most important investing belief?
The basis for the belief is that Capitalism, while imperfect, is better than all the other economic systems that have been tried.plnelson wrote:I don't think there's any basis for this belief. There's no logical reason to base it on what "the market" has done in the past, and we all know that "past performance does not indicate future results".Cloud wrote:That the market will continue to rise in the long run.
Investing also works better if you are well diversified. That way if you happen to live in 1989 Japan (or similar bubble top elsewhere), you won't end up with all your investment nest eggs in just one country market basket that happens to go "pop".
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
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Re: What is the single most important investing belief?
I don't understand your point. You don't believe in investing in equities at all?Tuxx wrote:Paper gains is a recipe for misery.relentless wrote:Compounding returns.Tuxx wrote:Compounding interest.
I would add that with rebalancing, you convert equity gains into bonds/cash which is a winning strategy.
Re: What is the single most important investing belief?
grok,grok87 wrote:It's a good point. It's amazing how powerful that is. And how some "sellers" try to circumvent that in any way possible. For example services (plumbing, etc.) don't seem at all competitive to me. Massive ripoff potential. And there are all those MLM scams, Amway, Mary Kay etc. I always want to ask them why they don't sell their products in stores (answer: because then the massive ripoff potential would evaporate).umfundi wrote:Greg,
Which leads me to a parallel theory of consumption.
Buy as few things as possible (vs. save as much as possible). But then, shop at Costco.Not particularly Costco, but it is a great convenience to me to believe that I can walk into any one of a number of my local stores and get a competitive price for virtually any item. In 1980, that was not the case.I wouldn't be cheated, because what I bought would be worth the price charged. Dazzlingly simple and elegant.
Keith
cheers,
You mean the window replacement guy that knocked on my door this afternoon probably was not offering a good deal? Nor the tree trimming guy nor the roof replacement guy nor the chimney repair guy? Nor the Mormons and the Scientologists?
I am shocked!! http://www.youtube.com/watch?v=-Gf8NK1WAOc
So, let me ask: Why is the market for investment services seemingly so inefficient? All these active management leeches bleeding their clients when there are low-cost no-brainer Boglehead alternatives available?
Or, maybe I am wrong. Investment advice is an efficient market?
Keith
Déjà Vu is not a prediction
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Re: What is the single most important investing belief?
plnelson wrote: Of course the market will give you a "return"
But any assumption that the market will go up (or for that matter, go to zero) has no logical basis.
There’s all types of logic:
Companies will need to keep pace with inflation.
(otherwise they wont be around)
Where are the folks in emerging markets emerging to,
as the impoverished move into the middle class they will require more goods and services.
What are all the children born in the world going to do?
Birth rates create the need for food, housing, education, and the future support of families and their children.
Thanks
SP-diceman
- Taylor Larimore
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Most Important Belief? Mr. Bogle's answer.
We cannot let this fine thread end without learning from Jack Bogle who gave us his answer in Common Sense on Mutual Funds:
Taylor
Best wishes."Stay the course. No matter what happens, stick to your program. I've said 'Stay the course' a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you."
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: What is the single most important investing belief?
I do have a Roth IRA and some of my current 401(k) assets are Roth as well. By 'tax-advantaged' I meant after-tax as well. Tax-treatment diversification is something I learned here!retcaveman wrote:May want to think about mandatory withdrawals. Some folks will have more TI and owe more tax in retirement than when they were working. As others have suggested, it may make better sense to contribute to 401k's up to any employer match and then do a Roth IRA.AgnosticInvestor wrote:To me it's this: shovel as much money as you possibly can into tax-advantaged accounts. I'd rather oversave and retire early than deal with the alternative. In terms of what to invest in, I use low-cost index funds simply because I know what to expect: the market return for a particular asset class. Was I bummed out that TISM underperformed TSM last year? No, not at all. It is what it is.
Investing and taxes are too complicated. If you follow general principles, you may actually be hurting yourself.
Ric Edelman: 8 Secrets
In 2000, Ric Edelman published a book, "Ordinary People, Extraordinary Wealth". He surveyed 5,000 "successful" investors, and wrote about what he found. Here it is, in my own words.
Please remember, the book came out in the year 2000. That was two market crashes and one housing crash ago.
1. They carry a mortgage. People had a mortgage about half the value of their homes, and had no intention of paying the mortgage early, even though they could.
2. They maximize their 401(k) opportunity, and don't diversify. (His words) He discovered that the successful investors were buying a mix of US and International total stock market funds. Today, we'd say, invest in the total market.
3. Most of their wealth comes from their own (small) regular savings amounts over time. Inheritances and the lottery are not in the equation.
4. They are not active traders. (The issue of rebalancing investments does not seem to come up.)
5. They do not measure against indexes like the Dow or the S&P 500.
6. They spend less that three hours per month managing the totality of their personal finances. That includes paying bills. And, they never budget.
7. Money is a family affair, including the kids. Do you know about your parents' finances? And your kids? And, vice versa?
8. They pay little attention to financial advice in the popular media.
All in all, this seems like a pretty good list to me.
Keith
Please remember, the book came out in the year 2000. That was two market crashes and one housing crash ago.
1. They carry a mortgage. People had a mortgage about half the value of their homes, and had no intention of paying the mortgage early, even though they could.
2. They maximize their 401(k) opportunity, and don't diversify. (His words) He discovered that the successful investors were buying a mix of US and International total stock market funds. Today, we'd say, invest in the total market.
3. Most of their wealth comes from their own (small) regular savings amounts over time. Inheritances and the lottery are not in the equation.
4. They are not active traders. (The issue of rebalancing investments does not seem to come up.)
5. They do not measure against indexes like the Dow or the S&P 500.
6. They spend less that three hours per month managing the totality of their personal finances. That includes paying bills. And, they never budget.
7. Money is a family affair, including the kids. Do you know about your parents' finances? And your kids? And, vice versa?
8. They pay little attention to financial advice in the popular media.
All in all, this seems like a pretty good list to me.
Keith
Déjà Vu is not a prediction
Re: Ric Edelman: 8 Secrets
On the whole, I would agree. But then again, anyone who could fog a mirror could have been a successful investor riding two strong decades of stock returns ending in 2000.umfundi wrote:In 2000, Ric Edelman published a book, "Ordinary People, Extraordinary Wealth". He surveyed 5,000 "successful" investors, and wrote about what he found. Here it is, in my own words.
<snip>
All in all, this seems like a pretty good list to me.
I wonder if there is a follow-up to see if these 5000 successful investors kept their magic touch considering your disclaimer:
umfundi wrote:Please remember, the book came out in the year 2000. That was two market crashes and one housing crash ago.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
- StealthWealth
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Re: What is the single most important investing belief?
Surely the most important investing belief is that overtime it will increase in relative value. If someone does not believe that, why would they ever invest?
Re: What is the single most important investing belief?
Believe that the market is extremely risky and then plan accordingly.
Never in the history of market day-traders’ has the obsession with so much massive, sophisticated, & powerful statistical machinery used by the brightest people on earth with such useless results.
Re: What is the single most important investing belief?
That's not a theory; it's just an assertion. There's no theoretical basis to assume that taking a risk will result in a reward in the future because that assumes the future of markets is predictable and there's no empirical evidence that they are. If markets were predictable then managed funds would do a lot better than they do, i.e, they would do better than random chance.umfundi wrote:Yes,plnelson wrote:I don't think there's any basis for this belief. There's no logical reason to base it on what "the market" has done in the past, and we all know that "past performance does not indicate future results".Cloud wrote:That the market will continue to rise in the long run.
There is a basis for this belief. It is that investors are taking a risk, and that they will be rewarded with positive market returns for taking that risk. It is a fundamental theory, not an extrapolation of history.
Re: What is the single most important investing belief?
Capitalism may work better than other systems but there's nothing about that which makes markets predictable. And saying that "the markets will go up" is a prediction. Look: if markets could be predicted (to go up, down, or sideways, or whatever) then managed funds would work better than a random walk. They empirically do not.bob90245 wrote:The basis for the belief is that Capitalism, while imperfect, is better than all the other economic systems that have been tried.plnelson wrote:I don't think there's any basis for this belief. There's no logical reason to base it on what "the market" has done in the past, and we all know that "past performance does not indicate future results".Cloud wrote:That the market will continue to rise in the long run.
Investing also works better if you are well diversified. That way if you happen to live in 1989 Japan (or similar bubble top elsewhere), you won't end up with all your investment nest eggs in just one country market basket that happens to go "pop".
If you believe the future is predictable then why are you on a Bogleheads forum?
Re: What is the single most important investing belief?
So, our beliefs do not coincide. Which is fine with me.plnelson wrote:That's not a theory; it's just an assertion. There's no theoretical basis to assume that taking a risk will result in a reward in the future because that assumes the future of markets is predictable and there's no empirical evidence that they are. If markets were predictable then managed funds would do a lot better than they do, i.e, they would do better than random chance.umfundi wrote:Yes,plnelson wrote:I don't think there's any basis for this belief. There's no logical reason to base it on what "the market" has done in the past, and we all know that "past performance does not indicate future results".Cloud wrote:That the market will continue to rise in the long run.
There is a basis for this belief. It is that investors are taking a risk, and that they will be rewarded with positive market returns for taking that risk. It is a fundamental theory, not an extrapolation of history.
But, from my belief in the efficient market hypothesis, it is not a great step for me to believe that investment risk will be rewarded.
Keith
Déjà Vu is not a prediction
Re: What is the single most important investing belief?
First of all I assume it goes without saying that any discussion of increases or decreases in any asset value are in real, not nominal terms. If some stock went up 2% but inflation was 4% over the same period I count that as the stock falling, not going up. Why would any investor do otherwise?SP-diceman wrote:There’s all types of logic:plnelson wrote: Of course the market will give you a "return"
But any assumption that the market will go up (or for that matter, go to zero) has no logical basis.
Companies will need to keep pace with inflation.
(otherwise they wont be around)
Second, OK, so they won't be around. What's your point?
Sure, but there's no guarantee that this will happen, or even if it does that it will cause markets to rise (for example P/E's could fall) or that an increase in middle-class members in one place won't be matched by a decrease elsewhere.Where are the folks in emerging markets emerging to,
as the impoverished move into the middle class they will require more goods and services.
As I said above, if markets behaved in predictable ways then passive, broad-index investing would not be as successful as managed investing which used various research strategies to "beat the market". But there is no evidence that the market can be beat.
But that doesn't mean markets will go up in real terms. The US population has certainly increased in the last 11 or 12 years and the total number of cars and houses in the US has grown, and all sorts of other consumption has increased but the S&P 500 hasn't increased in that time.What are all the children born in the world going to do?
Birth rates create the need for food, housing, education, and the future support of families and their children.
No matter how many clever rationalizations one can think of why the markets "should" do something, markets are not predictable, else we wouldn't be on a Bogleheads forum.
Re: What is the single most important investing belief?
How does EMH imply that risk will be rewarded? EMH says that assets are already fairly priced - and that would include all asset classes. Thus any additional potential gain from a "higher risk" asset is already priced in.umfundi wrote: But, from my belief in the efficient market hypothesis, it is not a great step for me to believe that investment risk will be rewarded.
Keith
So say we're talking about bonds. Bonds with a higher risk of default have a higher yield, supposedly to compensate the investor for assuming that additional risk. But if yield went up more steeply than risk then a mutual fund could always "beat the system" by buying riskier bonds because the additional yield would more than make up for the higher default rate. The same with stocks. A mutual fund that invested in riskier stocks could always beat the market because the additional risk would be more than compensated for by the higher growth. EMH says that these results would cause demand for the riskier assets to increase until their price cancelled out any advantage. Thus an efficient market would not allow some assets or asset classes to offer better "deals" than others.
But empirically, no fund can beat the market with any consistency, which is why broad market indexed investing is the basis og the Boglehead philosophy.
Re: What is the single most important investing belief?
Over and out. Reference my New Year's resolution.plnelson wrote:How does EMH imply that risk will be rewarded? EMH says that assets are already fairly priced - and that would include all asset classes. Thus any additional potential gain from a "higher risk" asset is already priced in.umfundi wrote: But, from my belief in the efficient market hypothesis, it is not a great step for me to believe that investment risk will be rewarded.
Keith
So say we're talking about bonds. Bonds with a higher risk of default have a higher yield, supposedly to compensate the investor for assuming that additional risk. But if yield went up more steeply than risk then a mutual fund could always "beat the system" by buying riskier bonds because the additional yield would more than make up for the higher default rate. The same with stocks. A mutual fund that invested in riskier stocks could always beat the market because the additional risk would be more than compensated for by the higher growth. EMH says that these results would cause demand for the riskier assets to increase until their price cancelled out any advantage. Thus an efficient market would not allow some assets or asset classes to offer better "deals" than others.
But empirically, no fund can beat the market with any consistency, which is why broad market indexed investing is the basis og the Boglehead philosophy.
I have no idea how this rant is connected to my original comment. Og.
Keith
Déjà Vu is not a prediction
Re: What is the single most important investing belief?
Right. It's priced in by charging less for the asset than would be charged for a less risky asset. Your reward for taking the extra risk is the increase in the difference between your returns from the asset and the lower price you paid for it.plnelson wrote: Thus any additional potential gain from a "higher risk" asset is already priced in.
Greg, retired 8/10.