Investment Newsletter for the end of June, 2013
The following are portions of a speech I will be presenting tonight at Toastmasters.
The Tortoise Wins the Investment Race
Daniel Dollinger Certified Financial Planner
In the famous story as mutilated by me, the tortoise raced the hare to some finish line. The hare got greedy and self destructed. The tortoise plodded along without stopping and won the race. I am talking today about investing your retirement accounts, your precious savings, the safety of your family. I am giving you today a prescription for success. But you will not get rich. Trying to get rich on the stock market is a fool’s dream, a fake mirage in desert. My central point is that short term investing builds failure and long term investing builds wealth.
The market is risky, duh. Risk is made up of two components. A part that can be eliminated with your investment choices by diversifying and a part that can not be. The part that can be eliminated is the weird things that happen to an individual company. The BP oil platform blowup for example. If you owned only that stock, your total changed value as the BP stock price changed. If instead, you owned a big basket of different stocks, BP would only be a small piece. The basket would be about the same price. We will call this basket a mutual fund. The other part of the risk, the part you can not eliminate, is the general up and down of the market.
The price of a stock is based on many tens of thousands of buyers and sellers constantly bidding against other for a slight advantage. Many of these participants are experts, with software that reacts to new information to the fraction of a second. Any company information is released to everyone at the same time. There is little advantage reading the research reports, watching the TV analysts, etc. Before the talking head on TV speaks, it is long old news. Already in the price of the stock.
Buying individual stocks is gambling as to future unknown information. You are exposed to both market risk and individual company risk. There is no insight worth having that is not already in the stock price. You can generate a lot of commissions quickly, however, by listening to your stock broker’s insights.
A broad mutual fund is a bet on the entire economy, not just one company. Over long periods of time, the stock market returns will match the growth of the economy. Expansions, recessions, political who knows what – the trend has been up. Over the last 25 years, the Dow Total Market Index has been up over 10% per year. Your money would have grown 11 times. The Russell 2000 value index is up over 11% per year. Your money would have grown 13.5 times. Many bad years. Sick to my stomach with fear, yelled at by my wife, upset clients, minus 30% in one year. Many good years. Up 30% in one year. It is not the individual years that matter. It is the long term trend.
Consistency is the magic weapon of the tortoise in my story. When our son was born, we set up a custodial account in his name. We started putting in $100 per month. Sometimes we had to skip months or even a year. Then we raised it to $200 per month. At the very top, we were putting in $300 per month. Every time, someone gave him a little money for a birthday present, Chanukah present, bar mitzvah present, high school graduation present, it went into that account. We stopped putting our own money in when he was 15 and the most I ever put in was $300 in a month. Every penny was invested right away, good market or bad. Broad mutual funds. No trying to time when to get in or out. But did it work? Did 18 years of small amounts every month add up to anything? When he entered the university, his account was over $112,000. Not bad for a tortoise. And I sure the hare would be jealous.
In summary, investing wealth is built slowly – not by chasing the latest story. Buy index mutual funds to reduce risk. Your broker will not be very happy. Consistently add the same amount of money no matter what the market is doing. Put in the same amount whether you are feeling terrified or greedy. Wait 25 years. Be one with the tortoise.
Albert Einstein said “compound interest is the 8th wonder of the world.” I say consistency is the 9th wonder. Thank-you very much.