Originally Posted by Susanann
There is no question about the coming doomsday. It is the most inevitable and predictable economic collapse in world history.
… the debt will very soon be too much for any country to lend us, and when the USA goes bankrupt and the world economy collapses,… .
It has everything to do with it.
A $200,000.00 nest egg during an economic collapse, can not only be a lifesaver, but it can also be seed money to get rich by buying post collapse assets for a penny on the dollar. On the other hand, I seriously doubt there was anybody in the previous Great Depression who regretting owning their own home with no mortgage and no debt.
Admittedly US stocks, in hindsight, on the average, were a pretty good investment from 1935 to 2000. The Good Lord knows I did absolutely amazing!!! in my personal stock market investments in the 20th century, and so did lots of other people .
But comparing U.S. stocks of the 20th century to today’s “global/foreign” companies is comparing apples and oranges. It is not history that is the concern, but rather, the future.
One could argue that** “U.S. stocks” **, as good as they were for the last 65 years of the 20th century, no longer exist. In the great stock market boom that began in 1935, the huge gains made by American companies, companies with American factories, companies with American workers, companies that had its offices and its manufacturing facilities in a politically stable safe free country called the United States, which had very little debt and the best and most stable currency in the world.
At best, the companies/stocks that people are currently investing in today, are global companies, with plants, factories, and workers from foreign countries, countries with a history of unstability, nationalization, dictatorships, corruption, foreign and civil wars, revolutions, countries that violate patents and copyrights, countries that have, or could quickly have, extreme trade and regulation barriers, countries that are up to their ears in humongous debt either as borrowers or lenders, etc.
You cant compare the safety, stability, sound legal system, and trademark protection that IBM, Boeing, Disney, etc enjoyed in the United States back during the 1940’s, 1950’s, 1960’s…with a global company today putting up a factory in Communist china, Vietnam, Mexico, etc .
I don’t think anybody will disagree with you on this point. However, how are you going to get at your $200K, to use as seed money to get rich, if it’s all in your house? (Granted, at this point, you’re probably just happy to have a house; if so, why mention getting rich at all?) I think at least splitting up between home equity and investments of your risk tolerance (can even be “safe” investments like CDs, TIPS, etc.) gives you the most flexibility.
Using the $200,000.00 as seed money, is 1 of 2 alternatives. Having a paid up house is the alternative to $200,000.00 put elsewhere.
In 1933, it turned out that it would have been better to have paid off the house instead of buying stock in a car company that would soon go bankrupt and whose stock would become worthless.
“Survivorship bias is the logical error of concentrating on the people or things that “survived” some process and inadvertently overlooking those that didn’t because of their lack of visibility. This can lead to false conclusions in several different ways.”
Sorry, I’m having trouble following you, and I’m not trying to be obtuse, but I really don’t understand what that has to do with anything we’re talking about. You do realize that we’re not talking about individual stocks, right?
*"In finance, survivorship bias is the tendency for failed companies to be excluded from performance studies because they no longer exist. It often causes the results of studies to skew higher because only companies which were successful enough to survive until the end of the period are included.
For example, a mutual fund company’s selection of funds today will include only those that are successful now. Many losing funds are closed and merged into other funds to hide poor performance. In theory, 90% of extant funds could truthfully claim to have performance in the first quartile of their peers if the peer group includes funds that have closed."*
*"In finance, survivorship bias is the tendency for failed companies to be excluded from performance studies because they no longer exist. It often causes the results of studies to skew higher because only companies which were successful enough to survive until the end of the period are included.
For example, a mutual fund company’s selection of funds today will include only those that are successful now. Many losing funds are closed and merged into other funds to hide poor performance. In theory, 90% of extant funds could truthfully claim to have performance in the first quartile of their peers if the peer group includes funds that have closed."*
I’ve been talking about broad-market ETFs, like the S&P500 or the Russel 2000 or whatever. These ETFs are formed by having a basket of stocks that reflects the broad market’s make-up. So, if a company goes bankrupt or is dropped off the S&P500, it gets dropped from the ETF and replaced by whatever company in whatever weight fills its place. An ETF should follow a broad index’s numbers very very closely.
How does “survivorship bias” play into this? When I invest in an ETF, I don’t care what companies are included or excluded from it, and the composition of my ETF 30 years from now is not going to be the same composition from my ETF as today. So what? That ETF is supposed to be tracking whatever index I want it to track–that’s all I care about.
Note also how bias itself is measured, in the Wikipedia article you conveniently quoted three times:
My S&P500 ETF will have 0% bias, because it’s measured against itself.
I, too, am not a fan of mutual funds. I’m not convinced any funds will outperform the indexes in the long run and they have maintenance fees. Give me a simple index tracking stock/ETF any day.
I should say “higher expense ratios,” to be precise. The ETF will also have fees associated with it. SPY (an S&P500 ETF), for example, is 0.09%. An S&P 500 mutual fund, like Vanguard’s (which is one of the cheapest in the business), is 0.18%. Meanwhile, the average actively managed mutual fund will be in the 1%+ range.
Becaause the broad market today does not inlcude any of the many companies that went totally bankrupt, or were bought out by other companies.
If you bought any of those companies as a part of your diversified portfolio, your percentage gain is not going to show as much profit as the Dow Jones, or the other market performance indicators, because they don’t have any defunct companies included. Now, of course, no one would buy such a company, right?
Snark.
I own stock in one. It’s worth 50 bucks, right now. It was worth a bit more when I bought it.
Yes, my portfolio is doing fine. The point is that the examples you have been using to claim the high likely rate of return all use the selection bias of exluding companies that become totally worthless.
How does an S&P500 tracking stock/index fund not return the S&P500 performance (minus any expense ratio)? It should be pretty damned close, shouldn’t it?
Because the S&P is an average of stocks that still exist. A mutual fund is ownership of actual stock, some of which no longer exists, and your return is less than the average return of the surviving stocks.
But when I hold an ETF or index fund, the underlying basket of stocks changes over time to track the S&P500. I don’t care what 500 stocks they are now vs what 500 stocks they are in 30 years, because as the S&P500 changes, so do my holdings to reflect what actually is in the S&P500 at any given time.
Then show me some numbers. What kind of difference are we talking? From my calculation, using Jan 1, 1996 to Dec 31, 2010 (most recent 15 year period–SPY started in 1993; it’s the oldest and biggest S&P500 ETF), SPY has a true CAGR (compound annual growth rate) of 6.46%, while the S&P comes in at 6.72%. Looks pretty damned close to me.
Ok, I didn’t have the patience to read all the posts, so forgive me if this has been covered. I am a financial planner and I counsel people on this question every day, or nearly so. I think this problem is largely being approached from the perspective of younger people without much wealth who come into possession of a windfall. In that case I agree that their return is likely to be better investing the funds over time. More importantly I would prefer that client keep their liquidity. If you lose your job or face a personal tragedy you may find it difficult or impossible to borrow the funds back from your home equity at a reasonable cost.
I think the problem changes when we think of someone with moderate wealth. Say a college professor who is 67 years old and has a $1 million portfolio of 50% equities and 40% bonds and 10% cash and short term instruments. In that case paying off a mortgage is going to make sense for many people. Interest rates are very low and bond returns are uncertain in a rising interest rate environment.
Given our theoretical windfall of $200,000 that person would likely rationally choose to pay off a mortgage at 5% and potentially adjust their holdings to weight equities slightly more heavily. Either way they are being offered a guaranteed return at a rate well above other short term instruments and they are unlikely to value liquidity as much as a younger, poorer person might.
This is why generalities and rules of thumb just fall apart. I could counsel anyone given a specific set of circumstances, but very few if any guidelines hold up under even moderate scrutiny across a wide range of people.
As others mention, many particulars will enter into the decision. But one of the most important factors has been emphasized only by pulykamell and a few others. I speak of the U.S. tax advantage of paying mortgage interest.
This tax subsidy is likely to dwarf any difference between, for example, the returns on index fund and hand-picked portfolio.
This confusion has been addressed in a very recent thread in this very forum (“Q about stock averages: Dow, S&P”).
This confusion has been addressed in a very recent thread in this very forum (“Q about stock averages: Dow, S&P”).