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• Friday, August 17, 2007 06:00 PM

  Those averages

  aynatt wrote:

  Historically, the stock market (which has been in place for well over a century now) has paid investors an average of about 10% a year. That is, if you put your money there and LEAVE it there

  That's one of the biggest canards going. There is, in truth, no such thing as this 'average investor' earning 10% a year such that this can be applied to any given REAL investor. The reason is because all the hundreds of dips and corrections are averaged out, and one may have to pull out (e.g. to retire) when a dip makes a huge impact.

  In terms of REAL individual investors, hardly any will earn this mythical 10%, and certainly not after taxes, expenses etc. T. Rowe Price did a study in 2003 for an investor cashing into his IRAs starting in 1995 and another in 2001. The latter over his life was found to have nearly $180k less than the former. The difference? When each decided to retire. (And bear in mind this decision may be out of one's hands, as when a company lets a worker go or ealry retires her for age-related reasons)

  The moral of the story is to look at the 10% as kind of an aggregate statistical average. In reality, when the inevitable dips and corrections are factored in, this becomes 6% and maybe even less. Check out the WSJ article from Nov. 2003, 'A Harsh Fact - Most of Your Investments Won't Earn Much over A Lifetime'

  —droogoy Read droogoy's other letters
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