Today’s bits: The Mathematics of Getting Rich by Investing in Stocks

The Mathematics of Getting Rich by Investing in Stocks

What is the number one reason why people don’t succeed as investors? Themselves! People can’t help but it, they live in the moment and they react to sensationalist comments in the media.

Consider an extreme example: Imagine it is March 13th, 1986. The typical new car retailed for around $10,000 that year. But instead of buying said car, you decide to purchase a block of shares in a new company called Microsoft. Today, you’d be sitting on $5,526,749, of which $4,532,922 came in the form of stock sitting in your bank vault and $993,827 came from cash dividend checks you’ve deposited over the years.

source: The Balance

Yes, of course, you need to have money available to buy a car, so in some regard it’s not a fair comparison — buy Microsoft or buy car — but you get the point. People place a greater bit of emphasis on what they need today instead of what they can have tomorrow. In hindsight, it’s easy to say, “OF COURSE I’d rather have the Microsoft stock rather than the car — a depreciating asset.”

It’s easy to make these types of comments after the fact when you know how well Microsoft has done over the years, but for every Microsoft, there’s a VisiCorp, a TopView, and a GEM. Never heard of them? They’re failed competitors to the Windows operating system from the 1980’s and 90’s. Some companies strike it big, others fail. It’s not just tech software companies. How about the failures of Pets.com, Webvan.com, are DrKoop.com? These seemingly sure-thing companies crashed and burned.

Microsoft was a success, but here’s the problem:

Many academic studies on individual investor behavior has shown that most people wouldn’t have held their Microsoft for those nearly three decades, nor would they have been likely to have added Microsoft in the first place as opposed to one of the other IPOs that year, all of which did far worse.  A doubling or tripling of their money and they’d have bailed.

How do you know which ones to pick? It’s hard. Few success, many fail. Take the easy approach, invest in index funds. The rest of the article goes on to discuss how successful investors become millionaires; people who are successful investors and remain humble and fly under the radar. The reality is the reason most of these secret millionaires, many of whom are only discovered to have been successful investors following their death tended to be buy-and-hold investors, rather than stock traders.

Read the rest of the article here. It’s a great read.

How to retire successfully: ‘You need to ask what you want out of life’

“I firmly believe that the most important way to have a happy retirement is to have a plan before you do it,” she says. “You have to ask yourself: what do you want out of life? What do you enjoy and what new opportunities are out there to help? How will you fill the gap in contact with people?” (The Guardian)

How to Retire Happily on Less Than $1 Million

The amount that is the oft-cited amount which people say you’ll need to retire comfortably is $1 million. The theory behind that goes something like this: A $1 million nest egg can generate around $40,000 per year in inflation adjusted income. That combined with the typical retiree’s Social Security payment of $1,360 per month brings that retiree’s income to around $56,320 per year, which is right around the median household income. With that median income comes the ability to live a typical middle-class lifestyle.

While that theory might seem reasonable on paper, in practice, it leaves a lot to be desired. For one thing, the typical net worth of a household approaching retirement is only around $174,000, well below that $1 million level, yet we don’t hear of massive hordes of starving American retirees. (TMF)

How to determine whether it’s best to prepay the mortgage or build up cash reserves

For many Americans who don’t earn enough to pay their monthly expenses, have problems budgeting, run up credit card debt, or are derailed by a medical emergency, getting a better handle on their finances will be crucial to reducing financial stress. One good way to take back control of your finances is to prepay your mortgage.

If you’re a baby boomer (born 1946 to 1964), you are going into your golden years with an enormous amount of debt, very little equity, and very little retirement savings. (Post)

What to look for in your fund investments, beyond low fees

Fees are the first thing that investors should consider when looking at a fund investment, and the financial industry has been tripping over itself to cut expenses ever lower. But expenses are hardly the only thing to consider. (Washington Post)

Four lessons learned from a year of extreme frugality

A few months ago, Michelle McGagh wrapped up her “year of no spending.” The London-based personal finance journalist made a radical decision on Black Friday 2015 not to spend any money on superfluities for 12 months. She would only pay bills and mortgage, and buy groceries for homemade vegetarian meals. No money for bus fares meant she rode her bike everywhere, and no budget for going out forced her to come up with alternative ways to socialize with friends. (TreeHugger)

Chart of the Day

Infographic: The Flight of the Migrant Millionaires | Statista You will find more statistics at Statista

 

 

Sources:

Image credit: brookecagle

 

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