Will we get rich off index funds ?

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InvestorNewb
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Will we get rich off index funds ?

Post by InvestorNewb » Wed Jun 05, 2013 8:26 pm

Hello,

Is it realistic to think that index funds will double every 10 years going forward?

I read an article today on Forbes that said this:
The Vanguard target fund will not make you rich, but it will probably leave you capable of paying for bait.
The quote is in reference to Vanguard's Target Retirement 2040 fund, which is 90% stocks. Given that my main holdings mimic this fund, I want to be sure that I am positioning myself for a good retirement.

The article goes on to say:
Its performance over the past five years averages to 4.8% a year. That’s not far from what I would expect it to earn, on average, between now and 2040.
Source: http://www.forbes.com/sites/baldwin/201 ... get-funds/

Can we expect a higher return than 4.8% per year going forward? This seems on the low side. I know it's only the author's opinion, but what can we reasonably expect going forward?

Thx.
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Re: Will we get rich off index funds ?

Post by dbr » Wed Jun 05, 2013 8:35 pm

InvestorNewb wrote:
Its performance over the past five years averages to 4.8% a year. That’s not far from what I would expect it to earn, on average, between now and 2040.
Source: http://www.forbes.com/sites/baldwin/201 ... get-funds/

Can we expect a higher return than 4.8% per year going forward? This seems on the low side. I know it's only the author's opinion, but what can we reasonably expect going forward?

Thx.
Precise answers to questions like that don't exist. It is certainly possible to look up any variety of estimates for yourself.

You can try this one and average out the various components to predict the total:

http://www.portfoliosolutions.com/the-p ... -for-2012/

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Re: Will we get rich off index funds ?

Post by nisiprius » Wed Jun 05, 2013 8:37 pm

Siegel's constant? Check.
Eugene Fama website data? Check.
Gordon equation... Check.
Buoyant icosahedronal analog computer? Inverted.
Computing... Computing... Computing...

Image
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Re: Will we get rich off index funds ?

Post by BuckyBadger » Wed Jun 05, 2013 8:38 pm

I might not have enough seniority to be able to say this, and I absolutely don't mean this in a negative way, but I think you should stop listening to the noise.

I'd stop reading Forbes if I were you. 8-)
Last edited by BuckyBadger on Wed Jun 05, 2013 8:39 pm, edited 1 time in total.

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Re: Will we get rich off index funds ?

Post by Johm221122 » Wed Jun 05, 2013 8:39 pm

5 year performance is meaningless in determining future performance
John

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Re: Will we get rich off index funds ?

Post by bottlecap » Wed Jun 05, 2013 8:41 pm

No matter what it returns, the author has no idea of what might return better.

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Re: Will we get rich off index funds ?

Post by Tycoon » Wed Jun 05, 2013 8:48 pm

I did!
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Re: Will we get rich off index funds ?

Post by Chris M » Wed Jun 05, 2013 8:48 pm

Five years takes you back to 2008, and the worst bear market since the 1929 Crash. All fund returns going back 5 years will look bad for that reason. Don't worry about it, and don't go back to Forbes website.

Cheers,
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Re: Will we get rich off index funds ?

Post by John3754 » Wed Jun 05, 2013 8:50 pm


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Re: Will we get rich off index funds ?

Post by Iorek » Wed Jun 05, 2013 8:59 pm

Chris M wrote:Five years takes you back to 2008, and the worst bear market since the 1929 Crash. All fund returns going back 5 years will look bad for that reason. Don't worry about it, and don't go back to Forbes website.

Cheers,
Chris
+1. If it makes you feel better you can look at the 3 yr returns of 13.45%.

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Re: Will we get rich off index funds ?

Post by gerrym51 » Wed Jun 05, 2013 9:02 pm

I guess you'll have to define rich. I'm still looking for a 4 percent cd :mrgreen:

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Re: Will we get rich off index funds ?

Post by livesoft » Wed Jun 05, 2013 9:05 pm

nisiprius wrote:...
Buoyant icosahedronal analog computer? Inverted.
:) :)
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Re: Will we get rich off index funds ?

Post by pkcrafter » Wed Jun 05, 2013 9:21 pm

Is it realistic to think that index funds will double every 10 years going forward?
No.

Here is what William Coaker, CFP, CIMA, says you will encounter in your investment journey: "Investment professionals often tell clients, “I think the S&P 500 will be up 10 percent next year,” and clients like to hear that. But it almost never happens. From 1926 to 2004, the S&P 500 rose between 8 percent and 14 percent in only six years, an 8 percent occurrence. In fact, just 25 times in 79 years the S&P 500 returned between 0 percent and 20 percent, which is only 32 percent of the time. That means the index has been more than twice as likely to lose money or gain more than 20 percent than to experience returns between 0 percent and 20 percent."

Paul
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Re: Will we get rich off index funds ?

Post by letsgobobby » Wed Jun 05, 2013 9:21 pm

Rich enough. And richer than 80-90% of the hoi polloi over a lifetime.

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Re: Will we get rich off index funds ?

Post by momar » Wed Jun 05, 2013 9:39 pm

Your day job, inheritance, or winnings will make you rich.
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Re: Will we get rich off index funds ?

Post by alpenglow » Wed Jun 05, 2013 9:56 pm

I wouldn't put a lot of faith in this guy, as he has a couple of facts wrong. First, index fund admiral shares are available starting with a $10,000 investment, not $100k as the article states. Second, he says you can save by breaking out your target fund into individual admiral shares. That would be nice, but as far as I know, admiral shares aren't available in 401k and 403b accounts.

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Re: Will we get rich off index funds ?

Post by john94549 » Wed Jun 05, 2013 10:11 pm

It's all a matter of timing and patience. If you catch Mr. Market in a period just before a protracted bull (aka a cyclical bull), with 15 - 20 years to run, then you will do well. This is what many early Boomers (as my wife and I) experienced in the period from 1982 - 2000. Classic cyclical bull market. Make money with a dart-board, and all that.

Then, if you get all nervous and jerky (as I did) and re-balance after a weird run-up (as I did) and buy a healthy dollop of fixed-income with your ill-gotten gains (as I did), you will, indeed, find yourself, if not "rich", at least "OK".

Then, if you get even more nervous and jerky (as I did) after what was left in your equity position finally snaps back a tad after a swoon, and you go to age-in-bonds (gradually), you will feel even "richer".

Then, if you didn't totally collapse in the collapse of 2008, and actually "bought" stuff while it was on sale (assuming your wife still was employed and had a 401K with an employer match, even though you were retired), so much the better. All those cheap shares are worth so much more now.

Timing and patience.

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Re: Will we get rich off index funds ?

Post by Watty » Wed Jun 05, 2013 10:18 pm

Its performance over the past five years averages to 4.8% a year. That’s not far from what I would expect it to earn, on average, between now and 2040.

It wasn't clear but if he is talking about a 4.8% real (inflation adjusted) return then that sounds like it probably a reasonable guess. You need to remember that it talking about a 2040 target date fund so by 2039 it will likely be 60% or so in bonds so in the later years you would not expect a high return.

One of the main points that the article made was that many 401K plans have target dated funds with high fees so it is better if possible to use index funds or ETF's to make your own simple three or four stock portfolio.

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Re: Will we get rich off index funds ?

Post by zaboomafoozarg » Wed Jun 05, 2013 10:42 pm

epimedium wrote:That would be nice, but as far as I know, admiral shares aren't available in 401k and 403b accounts.
Signal and institutional shares are available in some 401k accounts (like mine), and their ERs are equal to or lower than admiral shares.

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Re: Will we get rich off index funds ?

Post by SpaceCommander » Wed Jun 05, 2013 10:54 pm

If you stick it out with the 2040 fund, you're bound to achieve returns that are superior to the average active investor. Index funds aren't designed to hit home runs (i.e. "get rich"), but over time, that's what tends to happen anyway.
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Re: Will we get rich off index funds ?

Post by Default User BR » Thu Jun 06, 2013 12:27 am

If you have enough of them.[1]


1. Thanks, Groucho.

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Re: Will we get rich off index funds ?

Post by stemikger » Thu Jun 06, 2013 1:50 am

BuckyBadger wrote:I might not have enough seniority to be able to say this, and I absolutely don't mean this in a negative way, but I think you should stop listening to the noise.

I'd stop reading Forbes if I were you. 8-)
What makes you think you need authority. Don't let others make you feel you need to be a genuis to express your opnion here. If that was the case they would have booted me out a long time ago. However, the nice folks here put up with me and I do appreciate it. There are some here that need to flex their intellect even when answering the simpliest of question. But there are others who are extremely helpful and are fantastic mentors. My favoriate is Taylor Larimore. IMHO he is the closest thing you can find to John Bogle answering your question himself.

Sorry for the ramble and going off topic.
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Re: Will we get rich off index funds ?

Post by IlliniDave » Thu Jun 06, 2013 5:45 am

InvestorNewb wrote:Hello,

Is it realistic to think that index funds will double every 10 years going forward?

I read an article today on Forbes that said this:
The Vanguard target fund will not make you rich, but it will probably leave you capable of paying for bait.
The quote is in reference to Vanguard's Target Retirement 2040 fund, which is 90% stocks. Given that my main holdings mimic this fund, I want to be sure that I am positioning myself for a good retirement.

The article goes on to say:
Its performance over the past five years averages to 4.8% a year. That’s not far from what I would expect it to earn, on average, between now and 2040.
Source: http://www.forbes.com/sites/baldwin/201 ... get-funds/

Can we expect a higher return than 4.8% per year going forward? This seems on the low side. I know it's only the author's opinion, but what can we reasonably expect going forward?

Thx.
There's two sides to the equation. How much you you'll able to accumulate, and how much you'll need to be content. In my mind if the former is greater than the latter, a person is wealthy. Rich? Depends on how you define it.

You didn't say how old you are, but I believe anyone who saves aggressively over a lifetime will probably have a lot of money in the end, plus they'll have adjusted to a lifestyle that's comfortable for them but not excessive. A pretty good recipe.

The thing about index funds is that when utilized intelligently (which is fairly simple to do), if they won't make you "rich", it's unlikely any alternate financial investment will (barring some staggering win-the-lottery streak of luck).

No way to know what things will look like going forward. I tend to use fairly conservative numbers when projecting ahead, these days I typically look at average real returns from 2-5% on a 70/30 mix. I don't expect anything, I just examine the results at different levels and see what it might mean to me down the road.
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Re: Will we get rich off index funds ?

Post by KyleAAA » Thu Jun 06, 2013 8:15 am

Doubling every 10 years requires a 7.2% annual return. I'd say that's a very reasonable return for a reasonably stock-heavy portfolio over a long period of time. You may not end up getting it, but that doesn't mean it isn't reasonable.
Last edited by KyleAAA on Thu Jun 06, 2013 8:22 am, edited 3 times in total.

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Re: Will we get rich off index funds ?

Post by baw703916 » Thu Jun 06, 2013 8:20 am

livesoft wrote:
nisiprius wrote:...
Buoyant icosahedronal analog computer? Inverted.
:) :)
Nah, it looks like it does calculations in "octal".
Most of my posts assume no behavioral errors.

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Re: Will we get rich off index funds ?

Post by NightOwl » Thu Jun 06, 2013 12:58 pm

InvestorNewb wrote:Given that my main holdings mimic this fund, I want to be sure that I am positioning myself for a good retirement.
Hi InvestorNewb,
Nothing related to investing is ever "sure" or "certain," and the sooner an investor come to terms with that, the better. Pardon me for resurrecting a comment of yours from an old thread, but I planned to reply at the time and didn't get around to it:
InvestorNewb wrote:I'm 30 y.o. with a long investment horizon, so I'm prepared to take on more risk if it means a higher reward.
More risk never "means" a higher reward -- sometimes the risk shows up, even over very long periods of time.

From your posts, I'd say that you are spending too much time looking for certainty and definitive truths (REITS are good, REITS are bad), and also looking at your results far too frequently (up a few K in REITS, then fretting over losing all your gains). It's important to think long term, but it's also important to recognize that even the long term is no guarantee of success.

But what's the alternative? As John Bogle says, "Invest you must." Brute-force saving enough to retire at a reasonable withdrawal rate while accounting for inflation by saving even more is certainly possible, but it's difficult.

*Edited for diction.

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Re: Will we get rich off index funds ?

Post by protagonist » Thu Jun 06, 2013 1:11 pm

InvestorNewb wrote:Hello,

Is it realistic to think that index funds will double every 10 years going forward?.....

what can we reasonably expect going forward?

Thx.
It's unrealistic to predict anything going ten years forward. If you can find a copy of "The Book of Predictions", published around 1980, which was a collection of predictions by "experts" at the time , do. It will be an eye-opener. And a good laugh, too.
That said, in an uncertain world, little sells better than predictions.
Do what makes most sense to you today, without unrealistic expectations, and maybe you will be lucky.

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Re: Will we get rich off index funds ?

Post by The Wizard » Thu Jun 06, 2013 1:19 pm

KyleAAA wrote:Doubling every 10 years requires a 7.2% annual return. I'd say that's a very reasonable return for a reasonably stock-heavy portfolio over a long period of time. You may not end up getting it, but that doesn't mean it isn't reasonable.
Right.
But the point isn't to just put $10K in that index fund at age 22 and let all those doublings do the heavy lifting for you.
Point is to put 30% of your gross income into investments each year.
And yes, you'll be rich after a few decades of this sort of thing...
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Re: Will we get rich off index funds ?

Post by DiscoBunny1979 » Thu Jun 06, 2013 1:22 pm

IlliniDave wrote:
InvestorNewb wrote:
The thing about index funds is that when utilized intelligently (which is fairly simple to do), if they won't make you "rich", it's unlikely any alternate financial investment will (barring some staggering win-the-lottery streak of luck).
-----

I'm sorry, but this is just not true. There are a few Vanguard funds that are managed, such as Wellington, Windsor, or even STAR, that can provide over the long-run as good of a return as Index Investing because Managed funds can take profits, whereas Index funds can't. What one needs to do, no matter active or passive fund investing, is to choose low cost/fee, and participate by buying throughout the year and throughout the years so that one is buying not only at highs, but a all time lows. It's the time in the game that matters and savings rate. That can be done with just about any fund . . . but to suggest that success and financial wealth can only be had with Index investing is off the mark in my opinion.

IF what that OP is saying is that because Index investing is the market and therefore any other investment can't beat it and therefore no other alternate would work, I suggest that the law of exponential growth might stop an Index from forever going into hyper space . . . like the dow can't continually double in value from 15,000 to 30,000, to 60,000 to 120,000 . . . there are limits to everything. But an active managed fund can grow, take profits/gains and distribute them. Therefore an active managed fund does not have to continually double in NAV like and Index Fund.

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Re: Will we get rich off index funds ?

Post by FafnerMorell » Thu Jun 06, 2013 1:48 pm

I'd say it all depends on the definition of "rich". That, and the amount invested and the time period, etc. I suspect many Bogleheads feel that they've gotten rich because, by saving a moderate percentage of their income over a long period time (say, 30-40 years), they've seen their investments skyrocket in value.

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Re: Will we get rich off index funds ?

Post by MindBogler » Thu Jun 06, 2013 1:49 pm

DiscoBunny1979 wrote: IF what that OP is saying is that because Index investing is the market and therefore any other investment can't beat it and therefore no other alternate would work, I suggest that the law of exponential growth might stop an Index from forever going into hyper space . . . like the dow can't continually double in value from 15,000 to 30,000, to 60,000 to 120,000 . . . there are limits to everything. But an active managed fund can grow, take profits/gains and distribute them. Therefore an active managed fund does not have to continually double in NAV like and Index Fund.
On what theory do you base this information?

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Re: Will we get rich off index funds ?

Post by mephistophles » Thu Jun 06, 2013 1:53 pm

It all depends on the future.

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Re: Will we get rich off index funds ?

Post by IlliniDave » Thu Jun 06, 2013 2:02 pm

DiscoBunny1979 wrote:
IlliniDave wrote:
InvestorNewb wrote:
The thing about index funds is that when utilized intelligently (which is fairly simple to do), if they won't make you "rich", it's unlikely any alternate financial investment will (barring some staggering win-the-lottery streak of luck).
-----

I'm sorry, but this is just not true. There are a few Vanguard funds that are managed, such as Wellington, Windsor, or even STAR, that can provide over the long-run as good of a return as Index Investing because Managed funds can take profits, whereas Index funds can't. What one needs to do, no matter active or passive fund investing, is to choose low cost/fee, and participate by buying throughout the year and throughout the years so that one is buying not only at highs, but a all time lows. It's the time in the game that matters and savings rate. That can be done with just about any fund . . . but to suggest that success and financial wealth can only be had with Index investing is off the mark in my opinion.

IF what that OP is saying is that because Index investing is the market and therefore any other investment can't beat it and therefore no other alternate would work, I suggest that the law of exponential growth might stop an Index from forever going into hyper space . . . like the dow can't continually double in value from 15,000 to 30,000, to 60,000 to 120,000 . . . there are limits to everything. But an active managed fund can grow, take profits/gains and distribute them. Therefore an active managed fund does not have to continually double in NAV like and Index Fund.
I think either you misread or I wasn't clear. What I was saying was if markets do so badly you stay poor (or stay "not rich") with index funds, it's unlikely you're going to find managed funds that in that same environment will make you rich (unless you're right on the hypothetical line). You could find that 1-in-a-million fund that beats the pants off the market for an investing lifetime, but that's like winning the lottery.

Conversely, if markets are good enough that you get rich on index funds, you can probably do as well on some managed funds too. I didn't mean to make it sound like success was exclusively to be had in index funds. In other words, if the markets are generous enough it's possible to get rich, you'll be able to do it in well-chosen index funds (as well as high-quality managed funds).
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Re: Will we get rich off index funds ?

Post by ogd » Thu Jun 06, 2013 2:28 pm

DiscoBunny1979 wrote:There are a few Vanguard funds that are managed, such as Wellington, Windsor, or even STAR, that can provide over the long-run as good of a return as Index Investing because Managed funds can take profits, whereas Index funds can't.
There's no evidence whatsoever that this profit taking adds to returns. It does add to taxes, though.

In the words of Seinfeld, "The important part is *making* the profits ... Anybody can *take* them [gestures wildly]" (http://www.youtube.com/watch?v=dSZYsyrP3Co if you're not an insider).
DiscoBunny1979 wrote:IF what that OP is saying is that because Index investing is the market and therefore any other investment can't beat it and therefore no other alternate would work, I suggest that the law of exponential growth might stop an Index from forever going into hyper space . . . like the dow can't continually double in value from 15,000 to 30,000, to 60,000 to 120,000 . . . there are limits to everything. But an active managed fund can grow, take profits/gains and distribute them. Therefore an active managed fund does not have to continually double in NAV like and Index Fund.
I'm sure it looked unlikely when the Dow was 1000 (in 1982) that we'd be where we are now. The natural state of the markets is exponential, driven mainly by increased productivity. We might of course reach our resource limits, but part of those productivity increases is learning to use natural resources better. I'm optimistic.

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Re: Will we get rich off index funds ?

Post by nisiprius » Thu Jun 06, 2013 4:21 pm

baw703916 wrote:
livesoft wrote:
nisiprius wrote:...
Buoyant icosahedronal analog computer? Inverted.
:) :)
Nah, it looks like it does calculations in "octal".
It's a Magic 10-Ball!
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Re: Will we get rich off index funds ?

Post by Abe » Thu Jun 06, 2013 4:49 pm

That's like asking will we get rich investing in real estate. Or will we get rich investing in gold. Or will we get rich investing in whatever. You can get rich investing in the lottery if you're lucky enough. The answer is: it depends. First we need to define rich which is a relative term. Different people have different definitions of rich. A better question might be: is it possible to get rich investing in index funds? I would say it is possible to get rich investing in index funds if your definition of rich is a reasonable amount; if you have enough time and if you have dicipline and invest regularly and don't eat your seed corn and so on. So, if your definition of rich is 2 million and if you can get say 7% return and if you invest roughly $21,000.00 per year for 30 years then I would say the answer is yes. That's all it is to it. Easy as pie. :happy
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Re: Will we get rich off index funds ?

Post by Clearly_Irrational » Thu Jun 06, 2013 4:59 pm

PE10 says 4.2% real over the next 10 years. TIP yields vs. Nominal yields imply 2.2% inflation over that period so you should "expect" 6.4% nominal returns in the stock market. Rule of 72 suggests that with 6.4% returns your money will double every 11.25 years. (assuming an all stock portfolio, past predicts future, no variance and a few other improbable things)

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Re: Will we get rich off index funds ?

Post by Default User BR » Thu Jun 06, 2013 5:59 pm

nisiprius wrote:It's a Magic 10-Ball!
Dis made me laff.


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Re: Will we get rich off index funds ?

Post by richard » Thu Jun 06, 2013 6:55 pm

NightOwl wrote:
InvestorNewb wrote:I'm 30 y.o. with a long investment horizon, so I'm prepared to take on more risk if it means a higher reward.
More risk never "means" a higher reward -- sometimes the risk shows up, even over very long periods of time.
Exactly. More risk means the hope of a higher reward, but if there were any assurances the reward would materialize, then we wouldn't really have more risk. Without the higher risk, why should we hope for a higher reward?

Risk means the very real chance of a lower reward or worse, perhaps much worse.

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Re: Will we get rich off index funds ?

Post by richard » Thu Jun 06, 2013 6:57 pm

Clearly_Irrational wrote:PE10 says 4.2% real over the next 10 years. TIP yields vs. Nominal yields imply 2.2% inflation over that period so you should "expect" 6.4% nominal returns in the stock market. Rule of 72 suggests that with 6.4% returns your money will double every 11.25 years. (assuming an all stock portfolio, past predicts future, no variance and a few other improbable things)
A few other improbable things indeed.

Vanguard says that historically P/E ratios have “explained” only about 40% of the time variation in net-of-inflation returns. That leaves a lot unexplained. (They use both normal p/e and Shiller's pe10). https://personal.vanguard.com/pdf/s338.pdf

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Re: Will we get rich off index funds ?

Post by richard » Thu Jun 06, 2013 6:57 pm

Default User BR wrote:
nisiprius wrote:It's a Magic 10-Ball!
Dis made me laff.
Me too

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