New Investor News
New Investor News on Today's Investment Environment
The Problem: One-time Investments
If you have been investing over the last ten years you know that the returns on your investment are not what they used to be. The following chart highlights the value of investing $10,000 on the first investment day of the year into an S&P 500 mutual fund.
How to read this chart: If $10,000 was invested in a mutual fund indexed to the S&P 500 on January 1 of the year specified on the x-axis then the value of that investment 10 years later is read on the y-Axis. For example, the last line on this chart represents a $10,000 investment made into a mutual fund indexed to the S&P 500 on January 1, 2000. The resulting value of that investment on January 1, 2010 would be $7,598 which is $2,402 less than the amount invested.
An urban myth has developed with investors that any investment in a good mutual fund would result in a gain 10 years later. This definitely was not the case foader investments made since October 1998.
The Problem: a Series of Monthly Investments
Most people saving for retirement do not make large one time investments. They make a series of payments into an IRA at the beginning of each month. The following chart shows the average value of this series of investments made into an S&P mutual fund for 10 years. The total amount invested is $30,000. Between October 1998 through July 2000 this series of $250 investments per month for 10 years would have been worth less than the $30,000 invested. Ten years of monthly investments started in April or May 2000 would be worth slightly more than the total invested. However, if inflation is considered, the purchasing power of these investment is still less than the amount invested.
How to read this chart: The last line on the chart is for investments starting July 2000. If a series of $250/month investments were started in July 2000 buying a S&P mutual fund, after 10 years a total of $30,000 would have been invested. The value of that investment on July 1, 2010 would have been $26,955 which is $3,045 less than the total amount invested.
Bewteen October 1998 and July 2000 it would have been better to take your monthly investments and put them under your mattress rather than invest them in a mutual fund indexed to the S&P 500.
New Investor News on Tomorrow's Investment Environment
The Problem: Future Investments
For an investor, knowing how we got here is important but knowing what comes next is critical. Two of the most successful investors of our time, Warren Buffett and Bob Rodriguez, have gloomy ten year outlooks for investors.
Warren Buffett
I have no idea what the stock market's going to do tomorrow or next week, or next month or next year. But over a ten-year period you will do considerably better owning equities than you will owning Treasuries. In fighting the economic war, we've taken action that sows the seeds of substantial inflation down the road. Not in the next six months or year, but ten years from now the dollar will buy a lot less than it buys today.
http://www.kiplinger.com/magazine/archives/2009/11/great-investors.html
Bob Rodriguez
... in the 20 years from 1989 through the early part of 2009, the Japanese stock market had 11 rallies of 20% or more and three of 50% or more, yet the Nikkei index set a new 26-year low this year. Essentially, the Japanese market experienced a lot of false starts. I expect similar false starts in the U.S. stock market.
We see it (the U.S. economy) as a caterpillar economy, one that goes up, then comes down, then goes up, comes down and so on. The end result is that the economy doesn't go forward very fast.
Over the next five to seven years, we'll have to pay the piper for our deficits. Should present trends continue, we see inflation likely rising to about 5%. Should U.S. finances get even more unbalanced, inflation could be even higher.
http://www.kiplinger.com/magazine/archives/2009/11/bob-rodriguez.html?kipad_id=6
The Solution: Market Timing
The experts expect a slow growth economy with moderate to high inflation within five to ten years. The best investors in the world paint a gloomy picture. A buy and hold strategy is not going to work like it did in the past. Can an individual investor make money in these tumultuous times? Yes, by using market timing. Expert investors expect the trend over multiple years to be slow growth but for there to be large variations in the sort term. These market variations will occur based on investors' fears and euphoria. Market timing uses market averages to determine when the market is high (investor euphoria) and when the market is low (investor fear). An investor using market timing will buy when the market is low and sell when the market is high. It sounds easy but in reality it is extremely hard to do. Why? Because investors are herd animals. (Read more about this here). However, if you can be analytical and put aside your emotions then market timing can work for you.
Want to know more? Read more about market timing in the New Investor News article section of our website. Then try our new free market timing charts!