My rant about compounding
I wanted this post to be concise and elegant, it did not work
out that way, you will have to endure a lot of thinking out loud.
If you want the punchline, skip down to the bottom of the next
post for a summary of my strategy.
***
Here is the point I wanted to make about the phony Mutual Fund
pitch:
They always show a graph that shows how you can invest
your IRA contribution of $2000 each year, and by the magic of
compounding for thirty or forty years at 11% you end up with a
huge sum of money. Yes 11% returns do give you half a million
in 30 years, and if you let it cook for another seven years you're
up to a million.
There is nothing wrong with the math, unless I screwed up
somewhere, but you get the point...you can play out lots
of phony scenarios in your spreadsheet--do it, and if you're
like me, the answer finally comes: The compounding is not
the point of the exercise--establishing a decent grubsteak
which then compounds over the last several years of the term
is the magic.
For instance, lets cook up some more interesting numbers--not
the absurd eternal 11%. Unless you loaded up on thirty year
bonds at the height of the 1970's inflation era, you are not
going to get a nice steady 11%. If you think an extended bear
market will never come within the next thirty years, or that
there wont be a war, or a plague, a fall in the greenback etc,
well then, by all means buy your mutual fund.
Yes your fund may cook nicely for twenty years, but I dare you
to stay fully invested as you get closer to your goal, can't be
done, most people will lose their nerve and reduce their exposure
to equities--as they should, why blow it after 25 years?
That isn't to say that folks haven't made their million by
being in funds in the past--there are people retiring this year
who's grubsteak accumulated through the 70s and 80s. But they
got the final growth in the fantastic bull market of the last
eight years. Think that will happen in the next thirty years?
I Doubt it. If that sort of wealth generation does occur the country
will be so awash in money that the classes will be so far apart you
are likely to see anarchy--remember what the newsclips looked like
in Indonesia, don't think it could not happen here, drive through
Detroit or Brooklyn or East L.A on a hot day, then think about
15% unemployment, it wont happen tommorrow, but it will happen in
my lifetime.
Anyway, any sort of shock, 1970's style inflation, or a depression
could erase a lot of paper gains, I say get in, make your money,
and get out. Time is not on your side.
Next post--the numbers, and strategy part2 |
