We live in the golden age of information. We all know this but we rarely stop to think about what this means. Well my dear reader, what the Handy Millennial means is that: 1. we are easily able to access all previously created information, 2. information is created at lightning speed, and 3. everyone an expert.
That last part is pretty important, because as information became ubiquitous, it also became cheaper. Thus to make money from information, the source (usually a person), needed more and more credibility. Therefore everyone who sources information is an expert. And there is no shortage of ways to become an expert.
Now before I get to the point of this article, I must define expert and information so that you understand the obvious cheekiness of the title. Information is simply thought content such as the news, your favorite soap, twitter, Facebook, conversations, etc. that exists for you to consume with you own brain. An expert, is someone who has an experience that is orthogonal to yours that leads you to trust him/her.
Now one of the easiest ways for experts to get your attention with information is to scare you. And in the case of this article, what I really mean, is to scare you that you are going to lose your shirt.
You see in addition to living in the golden age of information, we also live at the peak of the current bull market. And any day now the bear market (-20%) is going to kick your butt and you all of your life savings… for sure.
And to prove it, the experts come up with daily predictions. The S&P will be flat in a year at 2540, 2435, 2440, 2560, 2600, etc. etc. Just putting these numbers into this post makes me laugh and look forward to the day these will seem quaint and the S&P is sitting at 5000.
Another favorite of the experts is to tell you that the annual return on the market will be 2-5% after inflation for DECADES!!! Are you scared yet? Well good because the Handy Millennial is here to tell you to get a grip.
Why? Because the annual return of the market doesn’t matter! Got that? The annualized rate of return of the market is something that only exists in 30-5o year periods. Any shorter and its anyone’s guess what the market is going to do.
Well not quite, we are reasonably certain that over a 15 year period, after inflation you will not lose money. That means that in the last 100 years, the worst possible cumulative annual return of the market over 15 years has been right around 0%. Pretty much as if you dug a big hole in the group and dumped all your money there, only to come back and dig it up in 15 years.
So why doesn’t this matter? Well simply put, because you are not a prince, a trust fund baby, or an independently wealthy old person. If you were, why would you be wasting your time reading this blog? You already know how the game goes, pass go Collect $200 and enjoy life.
For the rest of us, we simply don’t invest money in the stock market and let it ride for 15+ years. You see what these numbers mean is that $1 invested today, is expected to compound at an annual rate of 0% for, if you listen to them, possibly decades.
But the problem is that you did not/are not going to invest all the money you invest all at once…right now. Instead you are going to slowly invest in little bits for the next 10, 20, 30 or more years. And this will greatly improve your market returns, because the market isn’t going to smoothly climb at 2-4% per year, but rather gyrate wildly!
Lets take an example. Lets choose a particularly unlucky set of years: 2000-2010. In those years, the market return was pretty much 0%. In fact, I still remember the story that stated this in the New York Times, that’s right! the New York Times!
Now lets say we took $13,000 and we put it to work in the S&P 500, for this example the Vanguard S&P 500 fund. We can use one my favorite tools, Portfolio Visualizer, and see what that $13,000 would have done in the market.
So basically nothing, we end up where we started. Worse, if we factor in inflation, we have actually lost money!
But here is the thing, do you have $13,000 you can just leave parked for 10 year? No, I didn’t think so. But can you find a way to cut $100 from your budget each month? Probably, how about cutting out that big phone bill or cable?
No if you had instead started with $1000 invested, and then diligently added $100 per month, you would have ended up in a very different place. In fact, you would have ended up with almost $20,000. This is healthy 4.4% rise on your total investment.
Even after inflation, you would have had around $15,000. This is a rise of 1.4% on your money after inflation.
So you see, the headline number of what the market did, really doesn’t matter to you at all, does it? What matters is that your money is working, and that every day you are earning a bit extra while you sleep.