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Step 9: History

Problems Investors Focus On Short-Term Data The first problem investors face is that the long-term history of stock market returns is rarely provided to them. Secondly, investors are not aware that long-term data has more value to them than short-term data. When presented with 86 years of data, many investors deem the data irrelevant, because they do not have 86 years to live. This perspective overlooks the value of a large sample size. Investors who make decisions based on short-term data often regret it. When describing the risk and return of an index, significant errors are likely to occur when using a subset of the available data. For example, in the five year period from 2009 to 2013, the S&P 500 Index had an annualized return of 17.94%88. Based on that return, many investors would conclude that the S&P 500 was a “shoot out the lights� investment. However, for the 20-year period ending 2013, the annualized return was 9.22%, more in line with the annualized return of 9.8% for the 86-year period, and 9.96% for the 50-year period, both ending 2013. The S&P 500 consists of 500 of the most economically important U.S. companies, and it comprises between 70% and 80% of the total market capitalization of the U.S. equity market. Therefore, an S&P index fund is an important building block for a diversified index portfolio. When gathering information to identify the risk and return characteristics of the many asset class indexes that belong in a diversified portfolio, the more quality long-term data you have, the more accurate and probable are your expectations about future outcomes.

Index Funds: The 12-Step Recovery Program for Active Investors  

This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...

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