FIN 101: Long Term Returns Stock Market and Real Estate
September 05, 2008
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Gettin´ robbed
Gettin´ stoned
Gettin´ beat up
Broken boned
Gettin´ had
Gettin´ took
I tell you folks
It´s harder than it looks
It´s a long way to the top if you wanna rock ´n´ roll
It´s a long way to the top if you wanna rock ´n´ roll
AC/DC
There is some wisdom from AC/DC. AC/DC knows it is a long way to the top. Many Americans do not appreciate how long it takes to build wealth or to become a successful investor. Many people have delusional ideas about the expected returns on their stock and real estate portfolios. Warren Buffett recently wagered $300k no hedge fund could outperform an index fund over a ten year period. Buffett was announcing to the World, Hedge Funds are not worth their fees, all 4000+ hedge funds SUX! He is called the Oracle for a reason.
Most people you hear talking about gambling, stocks or real estate or gambling talk about winning. It make them feel smart, they want to be on TV, the story sells better, and attracts new money trying to win. People like to feel good, winning makes people feel good.
The fact MOST people loose at casinos, the odds are against players in all games and it is usually just a matter of time for any casino GAMBLER donates his money to the Casino. Las Vegas is built on losers, people keep showing up to play and the game keeps going. I recall the average rate of return per bet is MINUS -1 to -8% depending on the game. Most gamblers sitting at the table have their strategy, but cannot tell you the Rate of Return per bet aka “investment”
What is the average rate of Return for Real Estate or for Stocks?
If you do not know, it is my recommendation; you do not buy individual stocks. Just buy index funds and focus on your career and business. Warren Buffett recommends the same.
MAD MONEY, FAST MONEY, NAR, INFOMERCIALS, CNBC constantly call you to invest/gamble in Real Estate or stocks without telling you the expected Rate of Return. I would guess most stock and real estate buyers and fools do not know the average rate of return for either.
WSJ, By E.S. BROWNING wrote Lost Decade for Stocks on March 26, 2008, which provides some good data:
“The stock market is trading right where it was nine years ago. Stocks, long touted as the best investment for the long term, have been one of the worst investments over the nine-year period, trounced even by lowly Treasury bonds….
Over the past nine years, the S&P 500 is the worst-performing of nine different investment vehicles tracked by Morningstar, including commodities, real-estate investment trusts, gold and foreign stocks. Big U.S. stocks were outrun even by Treasury bonds, which historically perform much less well than stocks. Adjusted for inflation, Treasurys are up 4.7% a year over the past nine years, and up 5.8% a year since the March 2000 stock peak. An index of commodities has shown about twice the annual gains of bonds, as have real-estate investment trusts.
Historically, stocks rise about two years out of every three, for an average gain of 7% a year when controlled for inflation, according to Prof. Siegel. Stocks have shown gains for almost every 10-year period since 1925 -- 98.6% of the time, according to Ned Davis Research.
The Dow Jones Industrial Average, which had fewer technology stocks than the S&P 500 and suffered less in the bear market from 2000 to 2002, has held up better, but not a lot better. It has risen less than 1% a year since January 2000.
The Big Picture has Prof Shiller talking about real estate WATCH THE VIDEO:
Shiller: House Price Decline Could Be Worse than Depression Posted by Barry Ritholtz Sept 05, 08
Shiller's main points:
“home prices in 1990 corrected for inflation are the same as they were in 1890”
“housing is a manufactured good they depreciate, if they do go up in price, they will make more of them”
“most people think they will appreciate in value [they are wrong]”
“• Home price declines are already approaching those in the Great Depression, when they plunged 30% during the 1930s. With prices already down almost 20%, it's not a stretch to think we might exceed that drop this time around.
• There are about 10 million homeowners whose debt is higher than their home value, which has broad implications for how Americans feel about their wealth and spending habits (read: more pressure on consumer spending).
• The current hopeful consensus -- that house prices will bottom soon and then begin to recover -- is most likely a dream. Housing markets don't usually have "V-shaped" recoveries. And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.”
WATCH THE 6 minute video here:
U.S. House Price Decline Could Be Worse than Great Depression, Economist Shiller Says
Henry Blodget
Yahoo Tech Ticker, Sep 04, 2008 01:36pm EDT
http://finance.yahoo.com/tech-ticker/article/53094/U.S.-House-Price-Decline-Could-Be-Worse-th
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