Did you say 50 year investment horizon?
Yes – you need to think in terms of 50 years.
Thirty years accumulating, twenty years withdrawing = 50 years in the market!
This is a long term plan.
A 35 year old will invest for 30 years until age 65 at which point the accumulation phase ends and the withdrawal phase begins. S/he will continue to be invested (90%) in equity until s/he dies (at least 20 years later) and passes on the considerable estate to the heirs.
You MUST remain heavily invested in the market while retired. If you follow conventional wisdom, you would be 65% in bonds. That’s the equivalent of eating your seed corn.
50 years gives plenty of time for the market to go up and down. You can ride out the short term vagaries of the market, secure in the knowledge that you will come out ahead.
This concept is supported in the article “The High Cost of Investing” that appeared in the New York Times, September 12, 2016.
Index Fund Advisors introduces a concept they call Rolling Periods.
For a selected time period of 50 years, they look at every instance of 50 years since Jan 1, 1928 through April 30, 2017.
- There are 600 Rolling 50 year periods in that time frame. The first one starts on Jan 1, 1928 and ends on Dec 31, 1978.
- The second rolling period starts on Feb 1, 1928 and ends on Jan 1, 1978, etc.
Rolling Period Return Data: 89 years, 4 months (1/1/1928 – 4/30/2017)
- Investment Horizon in years: 50
- Number of 50 Year Rolling Periods 1928 – 2017: 90 x 12 = 1080
- Median Annualized Return (50th percentile): 11.02%
- Median Growth of $1: $185.99
Highest Rolling Period
- Highest Rolling Period Date: 5/42 – 4/92
- Highest Rolling Period Annualized Return: 15.81%
- Growth of $1 in highest period: $673.03
Lowest Rolling Period
- Lowest Rolling Period Date: 12/28 -11/78*
- Lowest Rolling Period Annualized Return: 9.41
- Growth of $1 in lowest period: 36.03
* Note that this period includes the worst market period in history, the great depression, 1929 – 1933.
This latest 5/1967 – 5/2017) 50 year period
- Rolling Period Annualized** Return: 12.47%
When You Start Makes A BIG Difference
The table below assumes an annual annualized rate of return of 7% per year, which is LOWER than the lowest 50 Year rolling return.
Note that the 25 year old invests only 2/3rds of what the 45 year old invests but has a final portfolio that is 1.67 times larger the 45 year old’s portfolio.
Beware of 5, 10 year comparisons.
Many who want you to buy their products (mutual funds) will show you how their fund has outperformed other funds. Typically they will use a 5 or 10 year comparison period. Because your investment horizon is 50 years, you should ignore all comparisons that are less than 20 years.
“Comparison Period Changes Everything” demonstrates how 5 and 10 year comparison periods do not reflect the comparative advantage of one fund over another. You will see that a fund (VTI as represented by DIA) that appears to be performing below the touted funds in the short run, is actually the best fund in the 20 year comparison.
** BTW… there is a BIG difference between “annualized” rate of return and “average” return. Annualized return is less than average return. To learn more about this click HERE
Read “The High Cost of Investing”
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