I think that the real lesson here is that recent history might not help us much when predicting what happens in the future. We generally use a year after 1929 to begin most analyses of stock returns, because the data is available and accurate. But if you think about it, this is a very short time period. Think about the value of a hypothetical European business that dates back to 1000 AD, for example. Imagine how real world events would have impacted that business: invasions, diseases, dictatorships, etc. In fact, there’s a good reason that very few businesses have survived since then.
Professional investment managers construct portfolios based on how asset classes correlate with each other. First they determine the appropriate level of risk, and then try to capture the maximum expected return based on the asset classes available to them. For example, for a given level of risk, the best asset allocation might be 50% US Equity, 20% International Equity, 20% Bonds and 10% Real Estate. This is the concept of diversification. But the premise here is that the asset classes will behave “as expected”. This means that the amount they move in relation to each other is stable. And when the economy is “normal”, it’s proven that the correlations do not change significantly over time. However, if you were to measure these correlations recently, you’d get some very different results. There is no guarantee that these correlations will be stable, because the relationships are deterministic, even though we sometimes operate under the assumption that they’re stochastic.
Finally, another important concept to consider regarding indexes: selection bias. The S&P 500 contains the largest 500 US public companies. Companies that lose sales and market share and become smaller over time fall out of index. These are replaced by growing, successful companies. Thus, the index isn’t a good measure of general stock return. If you buy the stock of a company in the S&P 500 that eventually goes bankrupt, you will lose all your money. But the company’s failure won’t impact the index commensurately, because it would have already been booted out of the index well before bankruptcy.
I know that my dad had stocks [seen the bank deposits] giving him a dividend interst of about what I make in a year.
Are you all talking about buying and selling stocks to make your money, or buying stocks and holding onto them and living off of and reinvesting the dividends?
I have been considering taking some of the inheritence I will be getting from his estate [say $2500 at the most] and buying some ‘penny’ stocks and holding onto them, and playing with the dividends …
Am I insane in thinking that I could end up with a small but reasonable income from dividends, or is the market so bound and determined that you have to SELL stocks to make any money out of them … [what ever happened to investing in a company and keeping stocks?]
FYI, the primary reason I started this thread is to convince my (younger) coworkers that they should keep their retirement money in the stock market regardless of how bad the present situation. I am assuming the historical data supports my position?
I am talking about buying an index fund and holding onto it. I can’t speak for anyone else, but the dividends I get are virtually nothing. I hear (and I have been investing less than 2 years so take my advice for what you paid for it) that dividends were higher in the past (ie several percent of the value of the stock). This past year I have had anywhere from 10k to 20k invested and have got maybe 50 bucks in dividends. But I am in a target retirement fund and that includes bonds (that typically pay a larger dividend) so my stock’s dividends are basically meaningless. I certainly couldn’t live off of dividends until I had several tens of millions. Maybe he used dividends to refer to actual dividends + return for a given year. IDK.
I think you have some misconceptions:
Virtually no one makes decent money in penny stocks
Constant trading forces you to count the income as a short term capital gain (in other words it’s taxed at your marginal tax rate). If you hold a stock for at least a year it’s taxed at the long term capital gain rate (15% if you are in the 25% tax bracket or higher, 5% otherwise (tax bracket numbers may not be correct, but the idea still stands)) Thus by constantly trading you have to be markedly better than a buy and hold strategy.
Dividends are paid out by a company I believe quarterly. They are always taxed at your marginal income tax rate (in other words >= than your long term capital gain rate of 15%). So you certainly don’t want to have to make your money with dividends alone. I believe you are confusing dividends with the return on an investment. If you invest $10 and at the end of the year you have $15 and a $0.10 dividend and decide to sell you pay 15% of $5 ($5 is your capital gain) and (your tax bracket)*0.10.
Now if you decided not to sell after the first year then you only pay the tax on the dividend (not on the capital gain). You only pay the capital gain tax when you sell and you always pay taxes on the dividends annually.
But if you decided to sell the stock after 6 months you are paying short term capital gain taxes (your tax bracket) on the capital gain, too.
Thus you can see you have to be better at short term trading to make up for the taxes you incur.
After Enron I think people would have to be crazy to invest in A company. It’s just too risky. IMO, virtually everyone should be in passively managed index funds that they plan to hold long term.
These people are much smarter than me and can give much better advice if you want it: Bogleheads.org - Index page
You can see a large variation in the short term for very short holding periods. But the more to the right you go (longer holding period) it smooths out to a pretty good 9%. So they likely will if history is any indication. But there are no guarantees.
Let me ask you something and correct me if my math or assumptions are wrong. Let’s say you make $40,000 per year which is the average yearly income rounded down to a nice even number. I assume that bank deposit you saw was from last year so I’m gonna guess a dividend yield of 4% (just guessing the average of high yielding dividend stocks from last year off the top of my head). That would mean your dad had about 1 million dollars worth of stocks. When you say you want to risk ‘some’ buying penny stocks you give a amount of $2500. Did you only get $10000 ~ $20000 from the inheritance? Did he get wiped out by this bear market or something? The first thing I noticed about your post was it sounded like you didn’t inherit very much at all compared to the amount he had.
BTW penny stocks don’t pay dividends. Generally only large companies not expecting much future growth pay dividends. If you don’t know much about stocks you would be better off buying index funds like the above poster recommends.
