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The Crushingly Expensive Mistake Killing Your Retirement
Fascinating - but not a mathematician. Heck, I can't even chew gum and add at same time:-)
Compounding works in many different ways. How about this one? John/Jane Doe has a 401K worth 100k invested in a conservative mix of funds which is yielding about 7% annually. He/she takes 20% of that money (20k) and speculates by investing in a risky, but badly beaten up, sector (in this case the bonds issued by Bongo Bongo Island) The sector rebounds in a year, netting John or Jane a 35% gain on the initial 20K outlay (that's $7,000).
John/Jane sells out of the speculative position at this point and plows the initial $20,000 plus the $7,000 quick gain back into the portfolio which continues to grow and compound at 7%. Wonder how much just that one successful "dalliance" outside their normal risk/comfort zone will add to their savings 20, 25, or 30 years out?
Reply to @hank: I think it's reasonable. I believe Ted calls these two approaches his capital preservation pool and capital appreciation pool. If one were to hold 80% in a moderate allocation fund such as VWELX (low cost, well managed) long term and than opportunisticly invest the remaining 20% in special situations (your best ideas) I believe it coud be meaningful to your retirement bottom line.
The same old indexing argument. How many logical fallacies can you spot in the arguments of this type?
1. Most funds don't beat the index after all fees. 2. So, your fund won't beat the index. 3. Since your fund won't beat the index, it will trail the index by the amount of the fee each year. 4. This exact fee amount that it will lose year over year will compound and kill your retirement.
It is like the global warming deniers trying to argue with math or science.
Comments
Compounding works in many different ways. How about this one? John/Jane Doe has a 401K worth 100k invested in a conservative mix of funds which is yielding about 7% annually. He/she takes 20% of that money (20k) and speculates by investing in a risky, but badly beaten up, sector (in this case the bonds issued by Bongo Bongo Island) The sector rebounds in a year, netting John or Jane a 35% gain on the initial 20K outlay (that's $7,000).
John/Jane sells out of the speculative position at this point and plows the initial $20,000 plus the $7,000 quick gain back into the portfolio which continues to grow and compound at 7%. Wonder how much just that one successful "dalliance" outside their normal risk/comfort zone will add to their savings 20, 25, or 30 years out?
How many logical fallacies can you spot in the arguments of this type?
1. Most funds don't beat the index after all fees.
2. So, your fund won't beat the index.
3. Since your fund won't beat the index, it will trail the index by the amount of the fee each year.
4. This exact fee amount that it will lose year over year will compound and kill your retirement.
It is like the global warming deniers trying to argue with math or science.
A Penny Saved