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Pastimes : Generation Xers--saving and investing strategy -- Ignore unavailable to you. Want to Upgrade?

To: Mike McFarland who wrote (58)	5/26/1998 2:41:00 AM
From: Mike McFarland	Read Replies (1) \| Respond to of 100

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