The long term returns of the stock market, with all its ups and downs, have almost always beaten inflation and taxes over 20 years. However, within those long periods there have been shorter periods when the stock market was a horror show. One such period was beginning around March of 2020 owing to the Coronavirus.

Through the first few months of the year, it was down by 20 percent. Then, just as many were dumping stocks, the stock market made an incredible recovery and was up for the year about 15 percent. So what started out as a bearish year turned into a bullish one. The people who got out when things looked bleak, who locked in their losses, must have felt like fools.

They should have remembered that there is always the possibility that some unexpected event can temporarily waylaid your plans to achieve financial independence. This means that the MoneySense investor must be a person who is calm, analytical and, above all, patient. He or she agrees with an ancient philosopher who said that “he who has patience can have anything.”

So this kind of person believes that the surest, safest way to financial independence is achieved slowly. One becomes rich by each week or month putting money into good investments—ones with low costs and proven long-term records of good index funds such as Vanguard S&P 500 Index Trust, among others—on a regular basis and having the right mix of investments.

The right mix is what is called asset allocation. For instance, say you invested solely in long-term government bonds over 85 years between 1926 and 2011, your rate of return was 5.7 percent a year. However, say you had a
portfolio that was half stocks and bonds over the same period. Your rate of return was almost 50 percent better at 8.3 percent. The numbers are from Ibbotson Associates, a Morningstar Company at Ibbotson.com.

This right mix means a combination of stocks, bonds, some cash and possibly a little bit of alternative investments such as gold or real estate. (Alternative investments, such as gold and other metals, are the ones that tend to perform very differently than the stock market. Their performance has little or no correlation with the stock market. A little of them in a portfolio can be a good thing).

What’s the Formula?

The asset allocation formula can vary from person to person and can also vary based on a person’s age as well as goals. One follows this formula for years. Investing, as many people learned in the market meltdown of 2008, can be dangerous in the short term. That’s a lesson we were re-learning in 2020. That is why one is much more likely to do well by staying the course for long periods than by trying to make “an overnight killing” or by jumping in and jumping out of the stock market. This is based on the spurious idea that you can always pick market lows or highs.

But that also means that one must approach investing with realistic expectations. The stock market, based on historic returns, doesn’t provide 20 percent returns every year. Some years it can be a horror show. Indeed, based on its long-term history, one year out of three, it tends to go down. However, its long-term return is about nine percent and change a year. That might not sound fabulous. And, in the short term, it isn’t.

Still, getting a little more than nine percent a year, say over 20 years, could be remarkable. It could build a fortune for almost anyone willing to sock away a few hundred dollars a month over a few decades. Say you put $500 a month, or $6,000 a year, into an investment that earns nine percent a year over twenty years. You’ve invested $120,000 over the period. What do you have, not deducting for taxes? You have $336,448.

And if you started ten years earlier and invested $180,000, you would have a more; a lot more. You would have $922,237! Mon Dieu, shake a leg, will ya!

So the MoneySense investor doesn’t expect to make millions of dollars over night. He or she is patient; a long-term investor unlike the investor who is jumping in and out of investments.

That kind of make a fortune overnight person, the MoneySense person knows, is a sucker. And the “I might make a million” overnight investor is perpetually playing lotteries. He or she expects that someone is going to suddenly give him millions of dollars. He or she thinks the Publishers’ Clearinghouse people will be knocking at the door any day now.

Is it impossible for this person to get rich?

No, it’s not impossible. But it’s highly unlikely. The chances are so stacked against him or her that this person is unlikely to ever achieve financial independence. Remember, although one person does win the grand lottery prize, governments that run these Three Card Monte schemes never talk about the millions of people who play these games year after year and never win a substantial prize. By engaging in these self-destructive games of chance they are wasting the opportunity to achieve financial independence.

The Sensible Investor

The MoneySense person, with a long-term plan of consistent investing in good stocks, bonds and mutual funds, backed by sensible spending polices, is much more likely to accumulate a huge stash. And that ultimately ensures that the investor’s buying power—the ability to command goods and services that maintain his or her lifestyle over multiple decades—is protected. That means the value of his or her money was able to outpace taxes and inflation.

How important is that?

Very important. More on that soon.

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Gregory Bresiger
Gregory Bresiger

Gregory Bresiger is an independent financial journalist from Queens, New York. His articles have appeared in publications such as Financial Planner Magazine and The New York Post. The eBook version of his latest book "MoneySense" is available now for Free Download by clicking HERE

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