Archive for portfolio

The Rule Of 72

The Rule Of 72

The Rule of 72 is just math, but it is an extremely useful rule of thumb for investing. The rule of 72 is a shortcut to estimate the number of years required to double your money. With the Rule of 72, you simply divide 72 by the percentage return you get on your investments and that’s the amount of time it takes to double your money. The rule is fairly accurate for interest rates between 6% & 10%. When dealing with rates outside this range, the rule can be adjusted by adding or subtracting 1 from 72 for every 3 points the interest rate diverges from 8%.

 

 

How long it takes
Annual Return-Years To Double
1%                           72
2%                           36
3%                           24
4%                           18
5%                           14.4
6%                           12
7%                           10.3
8%                            9
9%                            8
10%                          7.2

Investing options

Investing in S&P 500 Index

Stocks are one of many possible ways to invest your money. While future performance is never guaranteed, history suggests the long term average of the S&P 500 Index is 10% per year from 1928-2016. So if you were 100% invested in the S&P 500 Index you would have doubled your money every 7.2 years.

Fixed income

If you are sitting in all cash or low-yielding GIC/CD averaging 1%, your money will double in 72 years. You can invest in government bonds that yield 2-3%, which moves your doubling time from 72 years to 25-30 years.

Alternative Investing

Going up the risk scale is alternative investing, which includes things like real estate, REITs, private equity, etc. These alternative investments can often yield much higher returns with different risks and rewards. If you are extremely fortunate and make a return of 20% per year, you would double your money in 3.6 years. (Not Bad!!)

The impact of inflation

Another thing to consider is inflation. Inflation and bear markets are retiree’s worst enemy. Inflation averages about 2%-3% a year. A 3% inflation rate would mean your money will lose half its spending power in 24 years. This is certainly useful to know when planning your retirement! That means if you are using the 10% per year average of the S&P 500 with 2% inflation you need a return of approximately 12% per year, so that your money has double the purchasing power in 7.2 years than it has now.

Final Thoughts

Death and taxes, if you are investing outside your tax advantage accounts you will have to figure in the taxes along with inflation. The Rule of 72 assumes a set rate of return, but the stock market doesn’t offer stable returns. One year you might see 15%, the next only 4%, and some years are negative for the stock market. In real life, your returns very, even though you have annualized returns over time that tend to even out. I never use a 10% return in any calculations I run, usually I use a figure of a 4% return and hope I am pleasantly surprised in 20 years. I only use the rule of 72 as a quick tool to guestimate my portfolio performance and to project future net worth scenarios. Check out the Word of the Week Rule of 72.

Being Bearish Is Not Profitable

Being Bearish Is Not Profitable

It’s easier to find financial experts views that are extremely bearish than it is to read bullish views. Since 2009 it has not been profitable to be bearish, and yet these smart economist have been calling for a crash. A broken clock is right twice a day and when the next bear market happens all the economist that where bearish will be right.

There are soooo many reasons that the market shouldn’t be hitting new highs.
Valuations, all the crap in Europe/Japan/China, Trump, rising interest rates, tapering QE, natural disasters, Rocket Man blowing countries up, and that’s just a few.

If history repeats, we will eventually see a bear market and a recession. A recession is typically defined as a decline in GDP for two or more consecutive quarters.

 

US Recessions (1945 to Present )

Recessions/GDP Contraction/Length to next
                                                            Recession
Feb 1945-Oct 1945      -12.7%            3 years, 1 month
Nov 1948-Oct 1949     -1.7%              3 years, 9 months
July 1953-May 1954     -2.6%             3 years, 3 months
Aug 1957-Apr 1958      -3.7%             2 years, 0 months
April 1960-Feb 1961     -1.6%             8 years, 10 months
Dec 1969-Nov 1970      -0.6%             3 years, 0 months
Nov 1973-March 1975  -3.2%             4 years, 10 months
Jan 1980-July 1980        -2.2%            1 year, 0 months
July 1981-July 1982       -2.7%             7 years, 8 months
July 1990-March 1991   -1.4%            10 years,0 months
March 2001-Nov-2001  -0.3%              6 years,1 month
Dec 2007-Jun 2009        -5.1%              ???????????????

Average: 11 months   -3.2%    4 years, 8 months

 

My Portfolio

Since early 2017, I have been on the sidelines scratching my head as the equity markets have been going up. I have been holding more cash than I would normally. I haven’t sold anything I just haven’t purchased anything new and have been keeping my distributions in cash instead of reinvesting it. (Not smart).
I am obviously not very good at timing the markets. Not that I am really trying, I thought I would wait to see how the new Trump administration would do, and then it was summer and you know the saying “sell in May and go away.” The Fall usually is fairly volatile with big swings in the market.

I’m now looking at investing the cash we have in our portfolio when the market is hitting all time highs. We have a long time horizon and timing the market is absolutely pointless. What’s really important is saving regularly, diversifying, keeping cost low, and stay invested.

 

Don’t wait for retirement to enjoy life !!