Ignore the Hype. Brian Perry
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Название: Ignore the Hype
Автор: Brian Perry
Издательство: John Wiley & Sons Limited
Жанр: Личные финансы
isbn: 9781119691273
isbn:
| In 10 years, $10,000 grows to $25,937 |
| In 15 years, $10,000 grows to $41,772 |
| In 20 years, $10,000 grows to $67,274 |
| In 30 years, $10,000 grows to $174,494 |
| In 50 years, $10,000 grows to $1,173,908 |
Figure 2.4 Growth of $10,000 with 10% Annual Returns
SOURCE: Analysis by Brian Perry.
For instance, using the initial $10,000 investment from the preceding example and assuming 10% annual returns, Figure 2.4 shows what your growth would look like.
As you can see, while the percentage returns remain consistent, wealth accumulates exponentially. That ability to convert small initial investments into vast sums reflects the power of compound interest.
That power in turn leads to a couple of important truths when it comes to organizing your finances.
First of all, time is your friend. The sooner you begin investing, the more likely you are to build wealth. In the earlier example, someone who had invested $10,000 shortly after graduating college would have accumulated more than $1,000,000 by their early 70s.
The second important takeaway is that compounding works in both directions. That same power that can build your wealth can also destroy it, if you allow yourself to become saddled with too much debt. The compounding effect of credit card, student loan, and other consumer debt can make it virtually impossible for some people to dig their way out.
The final takeaway is that, given that financial markets tend to go up more often than they decline, staying invested is vitally important. In other words, an investor needs to remain invested in order for compound interest to work its magic.
As we'll discuss in the remainder of this chapter, staying invested is something many individuals struggle to do. But for those who succeed, the rewards can be vast.
Why Are Las Vegas Casinos So Nice?
I need to be careful here in this section, because for many people, the idea that financial markets are similar to casino gambling strikes too close to home. So just to be clear in advance, I am not suggesting in any way, shape, or form that investing is akin to gambling. Speculating, short-term trading, and wading into markets you're unfamiliar with may very well represent a form of gambling. But long-term investing, when armed with knowledge and the intestinal fortitude to stay the course, represents a systematic endeavor with a high likelihood of success, which by definition is the exact opposite of gambling.
So, no, long-term investing isn't gambling. However, there is an important similarity between investing and gambling – namely, the importance of understanding probabilities.
Why are the casinos in Las Vegas and other large gambling centers so nice? Why do they have dancing fountains, rollercoasters, elaborate Egyptian or Parisian themes, or painted ceilings reminiscent of the Sistine Chapel?
The answer of course is that the reason casinos are so nice is that they can afford to splurge on decorations because they make a heck of a lot of money. Plus, the nicer or more elaborate the casino, the more likely people are to visit. And casinos, above and beyond all else, want to generate foot traffic to their location.
And why is that?
Well, it's because visitors might gamble, and gamblers, in the long run, always lose money. And when the gamblers lose money, the casino wins.
Yes, I realize that your Aunt Milly may have won $500 on a penny slot machine last week, and you may have had a good run at the blackjack tables last visit and gone home with an extra five grand in your pocket. Heck, sometimes casinos even get taken to the proverbial cleaners. Not that long ago, a group of high-stakes players went on a roll, and Wynn Casino in Macau lost $10 million! The loss was so large that Wynn was forced to disclose it publicly, because it had a material impact on their quarterly earnings.
But you know what? Despite the loss, Wynn opened its doors the very next day (or to be more accurate, the doors probably never closed in the first place). And Wynn would have been more than happy to invite those very same gamblers back at any point and give them another shot at winning big.
Why? Because while the probabilities don't mean that the casino is going to win every game, or every day, or even every month or year, they do mean that, in the long run, the casino is absolutely, 100%, guaranteed to win. There simply cannot be any other outcome.
After all, gamblers have the following odds on casino games:
Roulette: 45%
Slot machines: 35% (depending on the casino and game)
Blackjack: 48%
Of course, that means that the house has the following odds on casino games:
Roulette: 55%
Slot machines: 65%
Blackjack: 52%
So, if you're the casino, you stay open 24 hours a day, 365 days a year, come rain or snow or sun. Because the more you're open, the more people play, and the more you win.
The True Cost of Sitting on the Sidelines
The same principal applies in the stock market. Historically, stocks have risen on approximately 53% of trading days. The stock market has declined on approximately 47% of trading days. Of course, no one knows in advance which days stocks will rise, and nearly half the time they fall in value. Yet despite that fact, it still makes sense to stay invested, because over time, the odds are in your favor.
In a perfect world, an investor would participate in the market's upside while avoiding the downside. In this state of nirvana, the investor would perfectly time their moves in and out of the markets, thereby capturing the long-term upside while avoiding ulcer-inducing declines. The blissful investor would thereby meet their financial goals in a stress- and worry-free manner.
And that is precisely the goal of market timing, whose fundamental precept is to invest when markets are rising and then move to the sidelines prior to sharp declines.
Unfortunately, successfully timing the markets is an exceptionally difficult thing to do. After all, when markets are falling, how do you know if the decline will continue for six more months or if the rebound will start tomorrow? Similarly, although selling when markets seem overvalued might make sense on the surface, overvalued markets often continue higher for months or even years on end. And when the market does eventually decline, there is no guarantee that prices will fall below the level at which you sold in the first place.
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