Probably a very simple investing principle but....

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Coolstavi
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Probably a very simple investing principle but....

Post by Coolstavi »

I need some help understanding how it all works. I hear people say that if you get a lump sum to just put it in the stock market. Time in is more important than timing. What I don't get is how you make money long term.

Example: Buy a stock for $100. It goes up to $110. Yay. Then have a big crash and the stock price is $50. Uh oh. After 5 years, stock price is now back to the original buy of $100. Am I right where I started off 5 years later or is there something else going on and I may be up more than my original investment?
ridebikeseveryday
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Re: Probably a very simple investing principle but....

Post by ridebikeseveryday »

Coolstavi wrote: Mon Oct 09, 2017 5:35 pm I need some help understanding how it all works. I hear people say that if you get a lump sum to just put it in the stock market. Time in is more important than timing. What I don't get is how you make money long term.

Example: Buy a stock for $100. It goes up to $110. Yay. Then have a big crash and the stock price is $50. Uh oh. After 5 years, stock price is now back to the original buy of $100. Am I right where I started off 5 years later or is there something else going on and I may be up more than my original investment?
Yes, if the stock pays dividends. For example, if you got a $1 dividend/quarter the whole time, you'd have 5 * 4 = $20 extra dollars, because each quarter of those five years there was $1 dividend paid.

If your dividends are configured to reinvest (perhaps you have 100 shares, each giving $1 a share, so each quarter you buy 2 shares at $50), then you may end up with lots more money than you started with.
david
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Re: Probably a very simple investing principle but....

Post by david »

Coolstavi wrote: Mon Oct 09, 2017 5:35 pm I need some help understanding how it all works. I hear people say that if you get a lump sum to just put it in the stock market. Time in is more important than timing. What I don't get is how you make money long term.

Example: Buy a stock for $100. It goes up to $110. Yay. Then have a big crash and the stock price is $50. Uh oh. After 5 years, stock price is now back to the original buy of $100. Am I right where I started off 5 years later or is there something else going on and I may be up more than my original investment?
Assuming no dividends, then no you are exactly where you were (and e.g., would have made more money with a savings account).

But, remember, "'time in' is more important than 'timing'" because over time the stock market is expected to increase in value. You don't know what your investment or the market is going to be valued at any specific point in time in the future (i.e., timing the market doesn't help), but it is expected that in the future valuations will likely be higher. Therefore, the earlier you get your money in, the lower it is (on average) and the more time it has to grow. Clearly, if you had a a way to look into the future timing the market would be a far better strategy. But, since most of us do not have access to future prices we have to pick a different strategy (one that does not rely on knowing the future). Which is why "time in" is the strategy--i.e., buy early and often.
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David Jay
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Re: Probably a very simple investing principle but....

Post by David Jay »

Two points:

1. Few here would recommend a 100% stock portfolio for a new investor with a lump sum.

2. There has never been a 55% year-to-year drop in the history of the stock market (see 100% in the attached). https://www.vanguard.com/us/insights/sa ... llocations
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Re: Probably a very simple investing principle but....

Post by FIREchief »

Coolstavi wrote: Mon Oct 09, 2017 5:35 pm IExample: Buy a stock for $100. It goes up to $110. Yay. Then have a big crash and the stock price is $50. Uh oh. After 5 years, stock price is now back to the original buy of $100. Am I right where I started off 5 years later or is there something else going on and I may be up more than my original investment?
Let's assume that your investment horizon is longer than 5 years. If it were 20 years, your example would have no historical basis, as I don't believe stocks have ever failed to make money over 20 years. It could happen, but that's the risk you would be taking in exchange for the expected reward. Somebody who is more knowledgeable and less lazy than me may throw out some more precise numbers.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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Re: Probably a very simple investing principle but....

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Coolstavi wrote: Mon Oct 09, 2017 5:35 pm I need some help understanding how it all works. I hear people say that if you get a lump sum to just put it in the stock market. Time in is more important than timing. What I don't get is how you make money long term.

Example: Buy a stock for $100. It goes up to $110. Yay. Then have a big crash and the stock price is $50. Uh oh. After 5 years, stock price is now back to the original buy of $100. Am I right where I started off 5 years later or is there something else going on and I may be up more than my original investment?
It is a simple principle:

It works because we expect equity markets to go up over the long term, if this weren't the case we shouldn't invest in them. We recognize that there is a risk they might not and in the short time they are volatile, but it is a risk we are comfortable with for the expected return - again, if we aren't comfortable with that amount of risk we shouldn't be investing in stocks at all (lump sum, dca doesn't matter - that is irrelevant).
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Re: Probably a very simple investing principle but....

Post by Sandtrap »

Another way to look at it, albeit simplistically, is to think of stock funds and bond funds as a variety of fruit bearing trees. It matters not how much the price of the trees varies over the years because you are more concerned with harvesting the fruit. Dividends. Interest. And, with diversity, more types of fruit bearing trees. Some yield more fruit (dividends, interest) in some years, and others in other years.
This is just one way of looking at things that may be useful to maybe very few.
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Re: Probably a very simple investing principle but....

Post by bertilak »

Coolstavi wrote: Mon Oct 09, 2017 5:35 pm I hear people say that if you get a lump sum to just put it in the stock market.
Nobody should say that. The SHOULD say to
  • FIRST Establish your desired Asset Allocation, generally consisting of some ratio of stocks to bonds with potential subdivisions of stocks (US, International. Small Cap, etc.) and possible subdivisions of bonds (tax free or not, TIPS vs nominal, US vs international.

    This can take a considerable amount of thought, education and advice. The education and advice are available here at Bogleheads. Provide your own thought!

    NEXT Invest it all at the AA you have decided on. That's "lump sum" but no one says the entire "lump" needs to be in stocks.
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Re: Probably a very simple investing principle but....

Post by bottlecap »

If your time horizon is 5 years, don’t invest in stocks.

Otherwise, there are dividends, stock splits, and the general upward tend of the market in periods longer than 5-8 years.

JT
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Re: Probably a very simple investing principle but....

Post by avalpert »

Sandtrap wrote: Mon Oct 09, 2017 6:41 pm Another way to look at it, albeit simplistically, is to think of stock funds and bond funds as a variety of fruit bearing trees. It matters not how much the price of the trees varies over the years because you are more concerned with harvesting the fruit. Dividends. Interest. And, with diversity, more types of fruit bearing trees. Some yield more fruit (dividends, interest) in some years, and others in other years.
This is just one way of looking at things that may be useful to maybe very few.
Boglehead orchard farming.
Stay the course.
Except that is a bad way to look at it that derives from the 'magical dividend' camp and should be avoided. Focus on total returns, withdrawing what you need when you need it - not because of coincidental distributions from some of your particular holdings.
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Coolstavi
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Re: Probably a very simple investing principle but....

Post by Coolstavi »

A lot of helpful responses.

I forgot about dividends. All of my current investments are tax-advantaged accounts and are set to re-invest the dividends so I don't really think of them as being there.

I'm just trying to think ahead in the future if I am to come into a large-ish lump sum of cash, how I should view it. I would have a long horizon (5+ years...) while also drawing on it for everyday expenses. But this would be a topic for another sub forum.
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Re: Probably a very simple investing principle but....

Post by arcticpineapplecorp. »

have you done a search on bogleheads for lump sum vs. DCA? If not, you could start here:

viewtopic.php?t=101965

https://www.bogleheads.org/wiki/Dollar_cost_averaging

let us know what you think about those links.
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Coolstavi
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Re: Probably a very simple investing principle but....

Post by Coolstavi »

arcticpineapplecorp. wrote: Mon Oct 09, 2017 7:22 pm have you done a search on bogleheads for lump sum vs. DCA? If not, you could start here:

viewtopic.php?t=101965

https://www.bogleheads.org/wiki/Dollar_cost_averaging

let us know what you think about those links.
Thanks for the links. I have reviewed many threads discussing the DCA vs lump sum argument. I just wanted some more clarification on my original question before setting myself in one direction.
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Re: Probably a very simple investing principle but....

Post by Phineas J. Whoopee »

Coolstavi wrote: Mon Oct 09, 2017 5:35 pm...
Example: Buy a stock for $100. It goes up to $110. Yay. Then have a big crash and the stock price is $50. Uh oh. After 5 years, stock price is now back to the original buy of $100. Am I right where I started off 5 years later or is there something else going on and I may be up more than my original investment?
I can make up a worse story: Buy a stock for $100. It goes up to $110. Yay. Then the public learns it was lying in its officially-reported accounting, it's actually worth less than zero, it enters bankruptcy, the court auctions off its remaining assets and the proceeds aren't enough to pay creditors. Shareholders lose their entire investment.

Anybody can make up a bad story.

Oh, and several early-2000s stories were just as bad, but not made up.

Most of us here advocate buying very broadly-based index funds, especially for equities, so one or a few bad corporations don't sink you, but yes, stocks are risky. If you're not prepared for them to fluctuate wildly, and create an emotional roller-coaster the media and all your friends and relations tell you is nuts, then you should further prepare yourself before buying them. They might go down and never recover during your lifetime.

That's what stocks do.

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Coolstavi
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Re: Probably a very simple investing principle but....

Post by Coolstavi »

Ok, maybe my example of it going from 110 to 60 wasn't the best. 110 to 80, 90, etc....doesn't change what my overall question was. This was not meant to be a what if doom and gloom kind of question.

Thanks to the previous posters for answering my general question.
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Re: Probably a very simple investing principle but....

Post by Sandtrap »

avalpert wrote: Mon Oct 09, 2017 6:57 pm
Sandtrap wrote: Mon Oct 09, 2017 6:41 pm Another way to look at it, albeit simplistically, is to think of stock funds and bond funds as a variety of fruit bearing trees. It matters not how much the price of the trees varies over the years because you are more concerned with harvesting the fruit. Dividends. Interest. And, with diversity, more types of fruit bearing trees. Some yield more fruit (dividends, interest) in some years, and others in other years.
This is just one way of looking at things that may be useful to maybe very few.
Boglehead orchard farming.
Stay the course.
Except that is a bad way to look at it that derives from the 'magical dividend' camp and should be avoided. Focus on total returns, withdrawing what you need when you need it - not because of coincidental distributions from some of your particular holdings.
Yes. Often "simplistic" is incorrect as are metaphors.
You are absolutely correct "alvapert".
Thanks once again for your expert help.
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Re: Probably a very simple investing principle but....

Post by pkcrafter »

Information on the market ride.

Here's a link to a post that provides lots of historical information. Take a look with the long term view in mind. While we cannot predict the future and stocks ARE risky, the risk premium makes the ride worth the risk for some portion of your portfolio.

viewtopic.php?f=10&t=228732

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nedsaid
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Re: Probably a very simple investing principle but....

Post by nedsaid »

Coolstavi wrote: Mon Oct 09, 2017 5:35 pm I need some help understanding how it all works. I hear people say that if you get a lump sum to just put it in the stock market. Time in is more important than timing. What I don't get is how you make money long term.

Example: Buy a stock for $100. It goes up to $110. Yay. Then have a big crash and the stock price is $50. Uh oh. After 5 years, stock price is now back to the original buy of $100. Am I right where I started off 5 years later or is there something else going on and I may be up more than my original investment?
The stock market goes up about 60% of the time on a daily basis, two out of every three years, and over a long history has gone up on average between 9% to 11% a year depending upon when you peek. So the long term trend is your friend.

The US Stock Market has had extended periods of time where it is essentially flat, we call these secular bear markets. These are obvious in hindsight but when going through one, you won't know it has ended until years afterward. 1929 through maybe 1948 was one such secular bear, there was another one from about 1968 until about 1984 or 1985. The last one lasted from early 2000 until about 2012. So if you get stuck in a secular bear, you might experience disappointment with the results of your portfolio. What happens is that you get a crash and it takes the markets some time to get back to new all-time highs. During the 2000-2012 secular bear, you had 50% down markets in 2000-2002 and again in 2008-2009.

A big cause of secular bears is market euphoria where markets get far above economic reality. Think of the roaring twenties and the 1929 crash. That secular bear was caused not only by late 1920's euphoria but also by the Great Depression that followed. The 1960's were known as the go-go era and people talked about the Nifty Fifty stocks which ran up to stratospheric valuations and the market peaked in 1968. The economy chugged along but inflation started to climb. The oil shocks in 1973 caused stagflation and a 50% down bear market that lasted into 1974. The coupe de grace was Paul Volker and his campaign to kill inflation by throwing the economy into recession. The late 1990's were the internet and high tech euphoria, the market crashed in 2000 but the real economy continued to chug along. 2008 was the peak of the Real Estate bubble and turned out to be the worst of all worlds: crashing stocks, crashing Real Estate, a freeze in the credit markets, and the Great Recession. Some bonds did not fare well either.

So a little bit of market history and that should help answer your question.
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Re: Probably a very simple investing principle but....

Post by Sandtrap »

nedsaid wrote: Mon Oct 09, 2017 10:13 pm
The stock market goes up about 60% of the time on a daily basis, two out of every three years, and over a long history has gone up on average between 9% to 11% a year depending upon when you peek. So the long term trend is your friend.

The US Stock Market has had extended periods of time where it is essentially flat, we call these secular bear markets. These are obvious in hindsight but when going through one, you won't know it has ended until years afterward. 1929 through maybe 1948 was one such secular bear, there was another one from about 1968 until about 1984 or 1985. The last one lasted from early 2000 until about 2012. So if you get stuck in a secular bear, you might experience disappointment with the results of your portfolio. What happens is that you get a crash and it takes the markets some time to get back to new all-time highs. During the 2000-2012 secular bear, you had 50% down markets in 2000-2002 and again in 2008-2009.

A big cause of secular bears is market euphoria where markets get far above economic reality. Think of the roaring twenties and the 1929 crash. That secular bear was caused not only by late 1920's euphoria but also by the Great Depression that followed. The 1960's were known as the go-go era and people talked about the Nifty Fifty stocks which ran up to stratospheric valuations and the market peaked in 1968. The economy chugged along but inflation started to climb. The oil shocks in 1973 caused stagflation and a 50% down bear market that lasted into 1974. The coupe de grace was Paul Volker and his campaign to kill inflation by throwing the economy into recession. The late 1990's were the internet and high tech euphoria, the market crashed in 2000 but the real economy continued to chug along. 2008 was the peak of the Real Estate bubble and turned out to be the worst of all worlds: crashing stocks, crashing Real Estate, a freeze in the credit markets, and the Great Recession. Some bonds did not fare well either.
. . . . .
Outstanding overview as always, "nedsaid".
Thanks.
Any idea where we are now in respect to that overview?
j
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Re: Probably a very simple investing principle but....

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Sandtrap, if I knew for sure I would have my private jet taking me to my 3rd Vacation home.

My sense is that we are out of the 2000-2012 secular bear. This bull market has run strong since March 2009, my sense is that we have a ways to go. I still see a lot of doom and gloom in the financial press so there still is a wall of worry for the market to climb. We still have enough pessimists out there who can become optimists and potential new buyers in the stock market. Bull Markets end when the last pessimist throws in the towel and throws every bit of his cash hoard into the market. I am troubled by increasing optimism in the investor surveys but we certainly are nowhere near the late 1990's euphoria. What I will say is that the current level of the market is a great opportunity to rebalance your portfolio if you haven't already.
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Re: Probably a very simple investing principle but....

Post by Sandtrap »

nedsaid wrote: Mon Oct 09, 2017 10:41 pm Sandtrap, if I knew for sure I would have my private jet taking me to my 3rd Vacation home.

My sense is that we are out of the 2000-2012 secular bear. This bull market has run strong since March 2009, my sense is that we have a ways to go. I still see a lot of doom and gloom in the financial press so there still is a wall of worry for the market to climb. We still have enough pessimists out there who can become optimists and potential new buyers in the stock market. Bull Markets end when the last pessimist throws in the towel and throws every bit of his cash hoard into the market. I am troubled by increasing optimism in the investor surveys but we certainly are nowhere near the late 1990's euphoria. What I will say is that the current level of the market is a great opportunity to rebalance your portfolio if you haven't already.
Thanks, "nedsaid". Appreciate it.
I've passed on your wonderful overview to my sons who are also on the forum.
Thanks again. :D
j
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Re: Probably a very simple investing principle but....

Post by dbr »

Coolstavi wrote: Mon Oct 09, 2017 9:06 pm Ok, maybe my example of it going from 110 to 60 wasn't the best. 110 to 80, 90, etc....doesn't change what my overall question was. This was not meant to be a what if doom and gloom kind of question.

Thanks to the previous posters for answering my general question.
To get a better perspective on what has happened in real history open up www.firecalc.com and put in a retirement with no withdrawals, a timeline of how many years you want to see, and a portfolio of all stocks and look at the output for what portfolio growth looks like in a large number of actual instances.
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Re: Probably a very simple investing principle but....

Post by nedsaid »

Sandtrap wrote: Tue Oct 10, 2017 12:14 am
nedsaid wrote: Mon Oct 09, 2017 10:41 pm Sandtrap, if I knew for sure I would have my private jet taking me to my 3rd Vacation home.

My sense is that we are out of the 2000-2012 secular bear. This bull market has run strong since March 2009, my sense is that we have a ways to go. I still see a lot of doom and gloom in the financial press so there still is a wall of worry for the market to climb. We still have enough pessimists out there who can become optimists and potential new buyers in the stock market. Bull Markets end when the last pessimist throws in the towel and throws every bit of his cash hoard into the market. I am troubled by increasing optimism in the investor surveys but we certainly are nowhere near the late 1990's euphoria. What I will say is that the current level of the market is a great opportunity to rebalance your portfolio if you haven't already.
Thanks, "nedsaid". Appreciate it.
I've passed on your wonderful overview to my sons who are also on the forum.
Thanks again. :D
j
I'll be the first to say that about anything that happens in the markets are a surprise to me. I have
been expecting interest rates to rise for years now but except for the short term rates, interest rates have hardly budged at all. The Fed has not been able to affect anything but at the short end of the rate curve. I have however kept my bonds in the Intermediate range.
A fool and his money are good for business.
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