Published on August 5, 2007
Successful Investing Strategy
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SUCCESSFUL INVESTING is all about common sense…….
Simple arithmetic suggests, and history confirms, that the winning strategy is to own all of the nation's publicly held businesses at very low cost
The best way to implement this strategy is indeed simple : Buying a fund that holds this market portfolio, and holding it forever. Such a fund is called an index fund .
The relentless rules of humble arithmetic As investors, all of us as a group earn the stock market's return
The relentless rules of humble arithmetic As a group we are average!
The relentless rules of humble arithmetic Each extra return that one of us earns means that another of our fellow investors suffers a return shortfall of precisely the same dimension.
Before the deduction of the costs of investing, beating the stock market is a zero-sum game
The costs of playing the investment game both reduce the gains of the winners and increases the losses of the losers
So who wins?
You know who wins…..
The man in the middle (actually, the men and women in the middle, the brokers, the investment bankers, the money managers, the marketers, the lawyers) is the only sure winner in the game of investing.
Our financial croupiers always win……
After the deduction of the costs of investing, beating the stock market is a loser's game
“ The investment business is a giant scam . Most people think they can find managers who can outperform, but most people are wrong. I will say that 85 to 90 percent of managers fail to match their benchmarks. Because managers have fees and incur transaction costs, you know that in the value.” Jack R. Meyer, former president of Harvard Management Company, the remarkably successful wizard who tripled the Harvard endowment fund from $8 billion to $27 billion .
All investors as a group must necessarily earn precisely the market return, but only before the costs of investing are deducted
In a market that returns 10 percent, we investors together earn a gross return of 10 percent. But after we pay our financial intermediaries, we pocket only what remains. (And we pay them whether our returns are positive or negative!)
Let's assume the stock market generates a total return averaging 8 percent per year over a half century
Now let's assume that the costs of the average mutual fund continue at their present rate of at least 2.5 percent per year . Result: a net annual return of just 5.5 percent for the average fund.
$ 100,000,- $ 100,000,- Invested for 50 years 8 % per year 5,5 % per year Annual gain (5,5% 8 % – 2,5 %; 2,5 % = the costs of the average mutual fund ) = = ? ?
The value of the $100,000 investment in 50 years Annual Gain 8 % Annual Gain 5,5% $ 4,690,000,- $ 1,450,400,-
Where did that $ 3,230,600 go? $ 4,690,000 - $ 1,450,400 = $ 3,230,600
What you see here is that over the long term, the miracle of compounding returns is overwhelmed by the tyranny of compounding costs
Where returns are concerned, time is your friend. But where costs are concerned, time is your enemy .
So what to do now?
You know the answer
Source of Reference: John Bogle , Little Book of Common Sense Investing , John Wiley & Sons
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