It’s embarrassing to admit, but I used to think skydivers float in the air — after they jump from the plane. I thought the cool air up there kept them afloat. All the videos seemed to support me. I wanted to float too. I was in my 20’s until I knew the truth. Nothing beats gravity. Investing also has parallel realities that are only clear in hindsight.
The lovely round numbers presented in marketing brochures aren’t your take-home numbers. The financial jargon for this is ‘gross’ and ‘net’. The net number is the cash that lands in your bank account. How many people achieve the fabled 10% S&P 500 Index Fund average growth rate? Zero will be the correct answer.
Why, you ask? It’s because gross and net numbers are not the same thing. It seems obvious, like skydiving, but many fail to see the difference. If I were sceptical, I would say it’s not in the best interest of financial experts to make it plain.
Here are three realities you should know about stock market returns.
S&P 500 doesn’t grow by 10% each year
10% is an average of 20 years of data points. In those 20 years, the stock market went up, down and sideways.
If I was to ask you how long is your commute to work, you might reply 30 minutes. Everyone knows this is an average. Some days take 15 minutes and others 60 minutes, depending on weather, traffic and accidents etc. The same is true for the stock market, 10% is an average, some days have 20% drops and others 12% increases.
The path from ‘sucking’ to ‘not sucking’ in the photo above is not directly up — you have to navigate the peaks and troughs. If you expect a nice 10% each year, you are in for a rude awakening.
You will be scared out of stock market investing. It would be best if you prepare for sharp drops. And, to avoid growing frustration, you must accept your nets will always be lower than the gross.
Your buy-in price matters
Using Smith’s photo above, imagine John buys into the stock market at all peaks and Mel buys in at all the troughs. Both will grow their money handsomely, yet their growth rates will different — Mel will have more money than John. You can’t just apply the same growth rates to both.
I’m not promoting attempting to time the market. That’s impossible. Yet, you can still use the reality of peaks and troughs to increase your growth rates. Whenever there is a deep in the market, you invest more, knowing it will return to the mean after a while.
If you expect a steady 10% return, you will never alter your behaviour to take advantage of the market’s dips. Imagine if you had bought more stocks when the market tanked in March 2020.
Everyone wants a piece of your pie
If you want honest investment advice, listen to the below excerpt from Matthew McConaughey’s character in the movie ‘The Wolf of Wall street’. He lays out the cold truth — people are out to take your money. That’s why you have gross and net numbers.
Mark Hanna: So if you got a client who brought stock at eight, and it now sits at sixteen, and he’s all happy, he wants to cash it and liquidate and take his money and run home. You don’t let him do that.
Jordan Belfort: Okay.
Mark Hanna: No, what do you do? You get another brilliant idea, a special idea. Another situation, another stock to reinvest his earnings and then some. And he will, every single time. Cause they’re addicted. And then you just keep doing this, again, and again, and again. Meanwhile, he thinks he’s getting rich, which he is, on paper. But you and me, the brokers?
Jordan Belfort: Right.
Mark Hanna: We’re taking home cold hard cash via commission.
Other parties get rich by subtracting from your money. I received my 2020 pension fund statement last month. The pension fund lost money in a year where the S&P 500 returned 16%. Yet, they still subtracted their fees. If my portfolio is up, they get paid. If it’s down, they get paid. It doesn’t seem fair, but that’s investing reality.
Instead of being impressed by the 10% rate, you need to look for third parties that charge lower fees. It would be best if you keep the difference between gross and net as small as possible.
All this is before taxes kick in — yes, even the Government is out to take your money. I don’t mean to scare you out of investing in the stock market. Quite the opposite, it’s meant to prepare you mentally to ride the rough with the smooth. As Mark Twain said:
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
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