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 â€œshoot out the lightsâ€? 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.
Published on Jun 1, 2015
This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...