This is an interesting post that I thought should go up on its own. From Garrett. As always, fascinating and right on:
Rulers:
Recently I was on Dave Ramsey's web site to use his investment/mortgage calculators. While there, I got distracted like usual (oh look..a chicken!)...and starting reading what some fans had posted. I noticed some things that permeate investor’s thoughts. And they just aren't true. They're more lies that have been fed to us by the Financial Services Industry.
Here's the dialog among 4 individuals responding to something Dave had apparently said on his radio show. I copied and pasted it. See if you can find the myth or at least some distortion of the truth...it's tricky because we've been brainwashed so much.
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Jordanwilliamleahy:
You said on the radio that 50,000 at 12 percent for forty years would be 6 million. Why would you tell a listener they could receive 12 percent for forty years straight? Last time that happened it was called Bernie M and a ponzi scheme. You sure are smart. 12 percent!?!
thisisfutile:
Stock Market has averaged 12% since inception...that's including the Great Depression. Why is this confusing?
pennywise:
12% AVERAGE. Some years you are up 28% some years you lose money, but the average over 10 years or more is what he's talking about. Go look up the Royce Heritage fund and look at its 15 year average rate of return. How about the Yacktman Fund over 10 years? Or the Delafield Fund?
Daniel_7916:
Thats the average rate of return in the stock market. 12% Has been for 100 years. AVERAGE is the key word here. Some years it's lower, some years it's higher. Look in to it. Its real.
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Ok...What's the deal and why am I bringing this up?
The Financial Services Industry will tell you that since 1929 the stock market has averaged 12%. This is accompanied by a nice fat sum of money at the end of 30 years as long as you give your money to them.
It goes like this. We start with nothing, throw a bunch of money into a 401K every month and keep doing that until we can't work anymore. WoW! We're GOING TO BE Rich!
Let's say those projections show us with $2,996,000 in 30 years with a 12% annual ROI. After all, we've already been shown that the market has averaged 12% since 1929. Seems reasonable right?
Nope. Not even close to reality.
Let's say that in the 10th year, we're doing great and when our little monthly statement shows we've got $310,600 towards our retirement next egg. But...in the 11th year, we actually get a 12% loss.
That means at the end of the year, we only have $273,300. What does that do to our 30 year projection?
Well, instead of having $2,996,000 we now only have $2,354,000. That's $642,000 less! Did your Financial Planner show you that chart?
And let's get realistic. In 30 years is your employer's mutual fund going to give you a 12% ROI? Of course not. It's a lie.
In fact, it would take a 42.5% ROR the next year (then back to 12% for the remaining years) to make up for that ONE -12% loss.
Do you think that's going to happen? No way.
I wish I had some original thoughts. The above is from a book published 4 years ago by G. Gunderson, "Killing Sacred Cows - Overcoming the Financial Myths that are Destroying your Prosperity"
So, Please Dave Ramsey, if you're going to start telling people to Save for the Long Haul, Invest for the long term, eat Top-Ramen noodles and live in Scarcity, make sure you give them the above example and while you're at it, show them how much a 16 Trillion defict is going to effect their savings when inflation and taxes take their toll and what the new reserve currency will do to the US Dollar and their lifestyle.
Suze Orman, Dave Ramsey, David Bach...all good folks I'm sure. But they're still just selling a financial plan to poverty. I just wish they taught people how to create wealth the way they did it...by being an entrepreneur, creating licensing agreeements, investing in real estate and collecting royalties.
I don't believe any of them made it as a stock market investor. I could be wrong and please educate me if I am.
Oh...and just how large (or small) would that nest egg look if you invested in the S&P 500 from 1974 to 2003? In twenty years, you'd have about $500,000, you'd have peaked at about 1.5 mil in 1999 and finished in 2003 with about 1.25 mil. Hmmm...not quite the dream we were sold 30 years ago!
To Your Wealth!
Garrett
