Seeking Real Investing Info

There’s real investing information, and there’s “investing” information. “Investing” information (with quotes) is the stuff that much of Wall Street, Big Insurance, and far too much of the mass money media provides to millions of people who need real investment knowledge, but don’t know where to look.

From Jim Cramer telling us the 5 stocks to buy for a diversified portfolio to the recent essays by New York Times senior economics correspondent, Neil Irwin about investment timing, bad (or even dangerous) investing education abounds.

To suggest that you can obtain diversification with just five stocks is ludicrous. To truly reduce the risk of individual security loss, a real investor needs 5,000 stocks.

To even imply that one can invest at the right time is irresponsible. Sure, hindsight is crystal clear. Foresight simply doesn’t exist.

Most people want to actually invest (not speculate) but learning how is far too difficult due the perpetuation of these bad market myths by much of the “investing” industry and those who cover it.

Take a look at these two articles by Mr. Irwin, “Why a Soaring Stock Market Is Wasted on the Young” and his almost immediate followup piece (because the first one was so weak), “In Investing, 'When' Matters Just as Much as ‘What’.” He pontificates about the dangers of buying stocks during a rising market using carefully culled data that supports his thesis that investment timing is a critical factor. However, a more realistic analysis of two extreme periods leads to a far different conclusion:

Assume a disciplined investor started putting $10,000 per year, in the S&P 500, at the beginning of the bull market of 1926 and kept doing so for 30 years. Despite the suffering a huge setback in 1929 and throughout the Great Depression, this investor would have retired in 1956 with $2.5 million. Assuming the investor took 5% of the portfolio value each year as income (starting at $125,000), by 1966 the portfolio would have been worth over $4 million, generating over $200,000 in annual income.

Twenty years after retirement (and just one year after the horrible bear market of 73-74) this portfolio would still be worth about $3.5 million with cumulative withdrawals of another 3.5 million. Not bad for a $300,000 initial investment (just one year later and the portfolio would have recovered to over $4 million).

This portfolio should also put to rest the myth that it took 25 to 30 years for “the market” to recover from the Crash of 1929 (which was thoroughly debunked by Mark Hulbert in his New York Times piece “25 Years to Bounce Back? Try 4½”)

In his second article of the day, Mr. Irwin argued that the preeminent “worst-case” timing scenario would have involved someone investing $10,000 in the S&P 500, starting in 1951. By 1981, this portfolio would have worth a mere $532,000. However, Mr. Irwin failed to consider the possibility that this well disciplined investor might have remained invested, even in retirement. Again, assuming a 5% annual withdrawal rate, by 1981 this S&P 500 portfolio would have more than doubled to almost $1.2 million.

By 2001, this, once pitiful, portfolio had soared to $3.6 million, generating over $180,000 in annual income. The twenty-year income total for this investor would have exceeded $1.5 million.

It’s no coincidence that the 1926 investor and the 1951 investor both neared the end of their lives with similar amounts of money. They patiently invested, no matter what was going on around them and allowed the economy to do what’s it’s done since we started counting money; grow. That is the try meaning of investing.

Apparently it doesn’t matter when you’re born. They keys to real investing are:

  • Patience
  • Discipline
  • Diversification
  • Low fees
  • Time

The rest is just noise.

Read "Why a Soaring Stock Market Is Wasted on the Young"

Read “In Investing, 'When' Matters Just as Much as ‘What’”