2007 was a once in a century downturn
That's just not correct, and the 2007 crash wasn't even the worst. Let's use NASDAQ as an example. Here's a
historical chart:
Even if the market takes a downturn your market index fund will recover pretty soon.
Really? Look at the chart. If you bought in the 2006 to 2007 range, you didn't break even until around 2010. If you bought in the 1999 to 2000 range, you still haven't recovered your money ten years later. How is this "soon?"
the golden rule "hold and wait".
You're advocating long term holds...so, let's say you bought in 98. By 1999-2000, you'd have doubled your money. But you're "long term holding" so you don't sell. Market crashes, and by 2001 you're back to where you started. 2002-2003 comes along and you've lost money. But...you're still "long term holding" and sure enough, by 2004 you've caught back up to where you started with your original investment six years ago. Feeling confidant...you keep "long term holding" and sure enough, from 2005-2007 you've made money again. And then the 2007 crash comes long, and you've lost money again, and it's not until 2009-2010 until you break even again. And...sure enough...since you're "long term holding" you keep waiting, and by 2011-2012 you're ahead of your initial investment again.
How do you look at this and conclude that long term holding is the best strategy? Wouldn't it make more sense to sell when you're ahead?
the market index funds are back to their 2007 peak this month.
Meaning...if we use your example instead of mine...if you invested $10,000 in 2007, this month...today, finally after five years...you now have $10,000.
Forgive me if that doesn't excite me.
-A good rate of return (8.34% avg since 1993)
Yes. If you happened to invest in 1993. What if you happened to invest in, say...1999? Or 2000? Go ahead and recompute your rate of return starting from those years and let us know what it is. I'll give you a hint: it's a negative number. And without actually doing the math, just from casually glancing at the chart I would guess that if you bought any time from 1997 to 2000, or 2006 to 2008...your return on investment today would probably also be less than 8.34% annually.
All stock market trades are gambling. Daytrading is gambling. Managed funds are gambling. Composites are gambling. Mutual funds are gambling. Choose your vehicle, call it what you will and whether it's you or someone else managing it, or a market-wide index with no human input...it's all gambling. It's just a matter of choosing risk vs reward, and deciding whether you want to have a personal hand in the results. You say you wouldn't play poker with a professional poker player...and I understand that completely. But the fact that you acknowledge that there
are professional poker players tells me that you believe it's possible to play and win. If you don't want to play, if you're unwilling to accept the risks, if you're unwilling to take the time to learn to be a professional poker player yourself...that's fine. Don't play. I'm not advocating that everyone should go rushing out and start daytrading. Andrew425 asked about it, and it happens to be something I've done, so I shared information on the topic. Like I pointed out a couple posts ago...I myself
don't do it anymore. So please don't misunderstand and think I'm saying that it's some kind of magic money-making genie. You're correct when you say most people "underperform the market." I'll even be more blunt and say that most
lose money. And if you press ctrl-f and do a search for the text "lose" you'll see that I've pointed out several times that you can lose money doing it.
But what's the alternative you're offering?
Let's take your own numbers and see what they do for us:
A good rate of return (8.34% avg since 1993)
Ok. Let's pretend that crashes don't happen and you're guaranteed your 8.34% in a world of absolute perfect safety. Here's a compound interest calculator:
http://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php#.UF0K5Y1lTQsLet's say you invest $100/month, every month, for ten years at 8.34%. Plug in the numbers, and this is what you get:
$19000 after ten years by investing $100/month. So...is that good? Well, I guess it's not bad. But if you invested $100/month for ten years...that's $12,000 you invested. Your total profit is $7000 over ten years.
That's not very exciting.
But...maybe that's not fair. We said you'd need about $10,000 to daytrade. So let's start investing your way with $10,000. And your 8.34% figure is based on a starting point in 1993. That was 19 years ago. So, let's say you invested $10,000 in 1993, and let's double our monthly investment, so we're putting in $200 every month...for 19 years.
This is what you get:
After 19 years you've roughly quadrupled your money. $160,000 minus your total investment of $45,000 means that after twenty years you've made $115,000 profit.
...is that...exciting? Because I'm not really feeling it. 115k over 20 years just doesn't seem very good to me. And, look at the chart at the top of this post and think about the fact that if instead of buying in in 1993 you'd bought in during 1999 or 2000, you would have
not made that 8.34%, you've would have
lost about a third of your money.. 2 years out of 19...and since we don't have the benefit of being able to magically know which years to buy in and which years to avoid...anyone over the past 19 years hearing the advice of buying into an index fund and "holding for the long term" would have about a 10% chance to have bought during those bad years, and would therefore have lost money today following your strategy.
10% to lose money over the long term. 90% for 8.34% profit.
I simplify. If you'd started during some of those 17 other years you'd have made more money, and some others you'd have made less. Either way...do you see how it's still gambling?
All stock trading is gambling. Indexes and mutual funds might be "more" safe. But they are not "safe." Like I said previously, the stock market is a game of last man out loses. No money is created. The source of rising stock values is the fact of people putting more money in. "Put your money in and keep it there" only works if other people also put their money in and keep it there. Maybe they will. But I have to question whether anyone who advocates this strategy really understands what the stock market is.
remember that at its heart the market is basically one big game of last man out loses. The primary moving force in stock markets is the action itself of buying and selling. If you put money into the market, you're increasing the value of something. If you pull money out, you're decreasing the value of something. There are millions of people doing this. And, the money everyone's investing is only actually usable after they've pulled it out. There's a very basic, fundamental concept here that really needs to be understood. The stock market is not a magic money-making genie. It's a form of gambling based on perceived value. If you buy stock and it goes up, very frequently that change doesn't reflect any change in actual value of the stock. It simply means that more people want to buy it. Yes, sure...if a company performs well it's possible they might pay out greater dividends. But the value change in the stock is not really a reflection of that. More likely, people see that the company is performing well and therefore perceive it as being more valuable...leading them to buy its stock which creates a relative scarcity between buyers and sellers. More people want to buy it, fewer people want to sell it, so the price goes up. This is the primary force at work here. Perception. So long as you understand that, and you're willing to take the risks that come with playing what's basically a game...then sure, go for it. If you buy into the market, somebody is guaranteed to make money as a result. Just make sure it's you.
Understand the risks, and make informed choices.