Mail Bag: Return Assumptions in Your About.com Articles

I believe the reason your getting these questions is no one personally knows anyone who achieve these rates over long periods, the 5% number is actual average rate people get who are actively investing in stocks. And of course that means half are doing worse than 5% and a significant percentage are doing much worse than that. That is the personal experience of your audience, you can't ignore that.

So you certainly can accurately state that you can get 10% if you follow a specific formula, but you have to be honest and state the probability is remote you will actually be able to do it for any length of time. The reason being is that 1) many will not be able to resist and incorrectly respond to market movements/recessions 2)many will believe they are smarter then everyone else and start jumping into and out of specific stocks 3) many will fall for some sales pitch and buy high load mutual funds etc etc. This is the reality everyone experiences. It's like diets, they all work but almost everyone cannot maintain them year in year out.

That makes sense. That is exactly the point I made a year or two ago when I wrote this article. For that type of person, I don't think they should invest in stocks, at all. Or really, any asset that has a frequently quoted market value. They aren't psychologically equipped for it and recognizing that is important. I know an older person who, to my knowledge, hasn't bought a share of a public stock in her life but is sitting on a seven-figure portfolio. There are other paths, be they running a chain of ice cream stands or building your own rental houses and storage units.

My theory as to why people don't think others are getting these returns: It's this phenomenon. If I hadn't stumbled into a huge blog audience, I wouldn't let anyone know about my businesses or investment philosophy. Even if it came up at a dinner party or get together, I'd just stay quiet. No one wants to put a target on their back that says, "Ask me for a loan / gift / advice", which, unfortunately, tends to happen in some situations. Most success in America is hidden. Yesterday, I was running numbers on a local bank and tracked down the owner. His bank, conservatively, is worth $15 million or so, and he's earning $1.2 million after taxes, of which half if taken out in cash dividends per year. The tier 1 capital ratio is very good. You'd never know it. Old house. Old car. In the community for generations. Most people don't like being in the spotlight. He'd likely sit in silence as others talked about the dangers of the stock market or starting a business or something. They are so stealth, the bank doesn't even have a website. I'm not kidding.

The one great thing reading this blog is, it links me to numerous related reading materials that goes on and forms my mind... such as Anne Scheiber or Grace Groener.

How do you bump into topics and people like this? I don't seem to read about them on the web or newspapers. But when I read it from your blogs, I would go ahead and query them, and it really widens my circle of knowledge. But I will forget them names.... but I would remember their stories. I love stories.

I read a lot of obscure stuff; interviews, trade publications, old books. I talk to a lot of people - my family used to joke I was the only person they knew that we could go to a restaurant and the waitress would have told me her entire personal financial history by the time she came back with the drinks, including her secret struggle with credit card debt. I have no idea why. For some reason, I get people to tell me things. I think it's probably because 1.) I'm legitimately interested in what they have to say, and 2.) I'm knowledgable about the topic.

Sometimes, you see a little notice about a large, unexpected gift to a non-profit in the newspaper. Other times, I am browsing the FDIC records on the banks in a specific town and notice that some of the firms are privately held, then track down the owners out of curiosity to understand the history of the business.

If life were Scooby Doo, my personality is the male version of Velma Dinkley. While Shaggy and Scooby are binge eating and getting high, I'm at the town record hall getting to the bottom of the mystery. Like you, I enjoy things most when they are woven into an anecdote of actual people, in real life. Stories stick with me; stories are how I communicate.

I agree with the response that most people won't do this. They "know" not to buy high, sell low, but they still do it. Market psychology is very powerful and it's easy to say to "do this" or "do that" when it's not your money. Many sold in 2008-2009 and are now just getting back in.

I kept buying in the recession and have several trades I bought around 6,800 and have made over a 100% return since then. You have to be unemotional and know the market will come back. If you have more than 10 years to retire, keep investing. You will probabably live 20 years past retirment. Being too conservative will hurt you.

I disagree, to a certain extent. 401Ks put people on auto-pilot, so they aren't dipping in and out much. buying low, selling high. In fact, so many people and their 401ks are on auto-pilot and buying low cost index funds you have to wonder how this will impact the market long-term and whether models that were applicable from 1926 to 2000whatever can capture this.
i do know that my 401K, that i started putting into in 1998, with an emphais on S&P 500, has done nowhere near 10%, but then again, it has only been 15 years. the model requires you to sit tight for 40.
of course, the big dream is a matching 401K. i've never had one of those.

My mother was sitting on $400K when the market crashed...I begged her to plop $150K into the market after it went down 40-50%, but she refused...too risky she said! i said, you're nuts, it will bounce back at least half way in a couple of years...instead she's getting 1.2% on CDs or something. Depression era mentality.

If you had ten minutes to talk to someone that: (1) lived in the inner city, (2) had limited formal education, (3) was raising two children, (4) had a lot of debt, (5) a low paying job, and (6) was miserable about life and desperately wanted to improve it, what would you say?

1. If the traditional doors are shut to you, figure out how to sell something by dipping into someone else's inventory (e.g., a luxury car salesman), create something out of thin air (e.g., books, videos, advertising jingles), or thinking unconventionally, such as becoming a janitor at a college to get a free or reduced education that will let you sell your time for more money. The last option may not be on the table if you have no one to watch your children; it depends on the family situation (e.g., two spouse, grandparents).

2. If you can't get out of debt within several years, consider cutting your losses and declaring bankruptcy.

3. In some cases, move. Start over somewhere else. Find a community of people you like, in a climate you enjoy.

Alternatively:

1. Decide not to play the game. Declare bankruptcy, move to an island, do something like tend bar on a beach, and spend the rest of your life with your kids around campfires near the ocean, living on very little money. Cash is only a tool. It is not the only tool. If you don't desire certain things, sometimes pursuing it is a mistake; a waste of time and life.

Alternatively II:

1. Go to work for McDonald's. This is not a joke. I know of no other company that can help someone go from absolute nothing to a member of the 1% within a 15-20 year period based solely on work ethic and results with no regard to education. Throw yourself into the business, become an assistant manager, then a manager, go to trade shows, randomly meet with other franchisees and tell them your dream is to one day own a franchise, and build a network of people who have done it. A guy worth $25 million won't answer his door for you, but he will answer the door, most likely, for an up-and-coming-want-to-be-franchisor who already works for the system. Once you qualify, and you have the down payment, getting the bank loan is easier than any other form of capital raising due to the power of the McDonald's name. A good operator can get very rich. A few months ago, I was being given a tour of a neighborhood in a major American city and one of the biggest houses in the area, among doctors and hedge fund managers, was the local McDonald's franchisor who owned most of the restaurants in the county. The story repeats itself over and over again.

If I had been born on a farm and had to escape or something, I would have found my way to the most successful McDonald's franchises in the country, tracked down the owner, told them I wanted to someday do what they did, and I wanted to work for them so I could study it. I can talk my way into anywhere, with anyone. I'd get a job and then work nonstop for years so that the people higher up the hierarchy were rooting for me. Life is a lot easier if you get people to want to help you.

How about joining the military? Granted, most people can't hack it but it gave me several opportunities and a discounted education

Great point; I definitely should have had that on my list. That is how my brother built his financial foundation and covered his school expenses.

Leave the kids, move to a warm climate. Learn a skill. Libraries are free. How bad do you want to improve "your" life. You don't need a formal education to be out of debt and get a better job.

Joshua,
While I agree with your math with regards to historical nominal retures, what is mis leading is this line "
The answer isn’t difficult. Were you to start this course of action at 25 years old and maintain it until you were 65, at a 10% compound annual rate of return, you would retire with over $4,337,000 in your 401k. That’s not a joke, nor is it a typo."
By definition a "Nominal Return" is a return that is Pre Tax/Fees/ any expense that is tied to that investment. So while the deposits and the growth in the accounts may have made up 10% the investor did not recieve that number. Just the fees in the 401k can chew dozens of basis points off your net return.

That is a very good point. The internal assumption I made was that you were dealing almost entirely with a very good 401(k) plan that offered an extremely low cost index menu, such as those provided by Vanguard. If the average index fund under such a scenario ran rock-bottom expenses of 20 basis points, you'd be looking at $4,130,000 or so, which is roughly $200,000 less.

The only way to get around it based on the historical data would be to shift a higher proportion of the assets to smaller capitalization holdings, dragging up the overall return, but most people aren't going to do that or even know what that means. Even if they wanted to do so, many 401(k) plan sponsors don't give the option - I've seen some fairly horrific fund listings for retirement plans in my lifetime.

Excellent catch! I definitely should have been clearer in the explanation, and depth, of the inputs and outputs! For example, if I were going to stick with a traditional 401(k), a breakdown of the inflation-adjusted tax credits received over a lifetime of contributions would have been appropriate (e.g., you had shoved them in a side brokerage account), or I could have stripped those out entirely and used a Roth 401(k) as the model, instead, so that the net result focused on the actual cash liquidation value upon retirement, which would have provided more utility.

You've made my day! What a perfect criticism. It makes me want to re-write it and post a much expanded update but I don't have any time at least until after tax season is complete.

Yes Tax season is crushing, I am a financial planner very new to the business, and very much enjoy reading your articles! continue to enlighten and educate!
Seth

20% savings rate on $40K is highly optimistic though when state/local taxes are going to chew-up 30-40% of that paycheck. so, unless you're living in mom's basement....
of course, $8K when one is 45, and you hope making more than $40K (at least getting raises in line with inflation)...more realistic i guess.
i don't have room in my budget for $8K on a six figure salary with the mortgage, childcare, etc.

It's an absurd expectation. Historical returns, unless they are done by a maestro do not produce results on that level at all. Even the stock returns of the 1980s and 1990s were a mirage produced by a gimmick that was unanticipated. It was driven by a change in the law that permitted pension funds, which had accrued tremendously by the end of the 1970s, to be invested in the U.S. stock markets, which had up until that time been prohibited. Unless future investment returns are to be driven by another gimmick such as the extraneous printing of dollars in the 2000s that was done to offset 2 wars, a financial panic and subsequent crisis, that expectation of Future Value is highly, highly improbable, especially over the long haul. Realistic returns, unless they entail substantial risk such as with some form of venture capital or hedge funds, such as Renaissance Technologies, which are predicated on sophisticated mathematics to eschew monies from other investments through arbitrage, are historically in the 3-4 % range.

I know that you are selling something and have to make this contention to promote your service. But you are also seriously misleading people into a false sense of expectation.

Reading your comment reminded me of a famous investor who once said, "We should endow chairs at universities to teach this kind of foolishness - think how much richer we'd get if everyone else believed it wasn't even worth trying to acquire productive investments at fair prices."

If you actually think, despite the irrefutable long-term academic record, that stocks return 3% to 4% over the long-term, then don't own them.

Seriously, why not sell them all? I would love for that kind of thinking to take on the standard dogma because it would drive asset prices down, earnings yield up, and make it even easier for me to get richer. Personally, I have been hoping that people panic over quantitative easing being ended because nothing would make me happier than buying Clorox or McDonald's at below 10x earnings.

(P.S. I don't sell anything. I don't manage outside money. I don't get commissions on financial products. It makes no difference to me one way or the other what you want to believe as I have no dog in the fight. I just prefer to use real data instead of making it up. It's a thing; call me weird.)

Josh, excellent response and article. Any way you could share who is credited with that quote? I want to share that!

It was a group of people dubbed the "Graham Group" that used to go have an annual dinner with him in retirement. It included people like Buffett, Munger, and a host of other multi-millionaires and billionaires that made fortunes using his valuation system. They'd joke about it in writings a few decades ago when efficient market theory was all the rage. The most famous example is Buffett, whom I believe put it in one of Berkshire Hathaway's shareholder letters (which, I think, was probably a jab at the fact that one of the biggest and oldest stockholders teaching this was a professor at the University of Chicago who, despite telling his students the market was efficient and they should index, kept pouring his own cash into Berkshire and making millions off the seemingly impossible thing he said couldn't happen).

Over 19 years of investing my 401K average annual return is 9.3% after fees. Of course if I weight that relative to account balance, it's 7.7% because we had a pretty bad decade - who didn't do better in the 1990's?. But that includes many years of far from optimal returns as I learned the ropes. I'm mostly indexed and well-diversified. If I had used a consistent approach that included rebalancing for the entire time, I would likely have earned from a half percent to a full percent more, putting me right at that 10%. That seems a lot more realistic to me than 5 or 6% unless you are trying to calculate real returns (i.e. reduced for inflation). As noted elsewhere, you need a good 401k, not something where you pay 1% to EJ and 3% to American Funds before you get a dime in returns... if you have a lousy 401K then just get the match and use Vanguard for all your other investing.

You are wrong. I have invested regularly in the stock and bond market since 1967, and kept accurate records of my ROI. In those 46 years, I have averaged 9.8% ROI. I started out the first 35 years with an all stock portfolio of 4 and 5 star managed funds, and for the last 10 years have a balanced portfolio of 50% mostly large-cap stock funds and 50% high-yield and general intermediate bond funds. I always buy high-rated managed funds (not index funds) with experienced managers, reasonable fees, and a great track record for 1, 3, 5 and 10 years, and select those that not only do well in a bull market but also keep most of their value in a bear market. Every year I dump 3 or 4 funds out of 20-25 funds I own that have not been doing well, and select new ones. I pay attention to macro-economic trends in the US and the world, which influences my mix of stocks vs bonds and US vs internationalIy funds. I do not buy speculative aggressive growth or specialty funds, Finally, I do not sell in the panic bear markets but stand my ground. In short, I invest in the long-term using mostly a buy-and-hold strategy. This technique of selecting the "best of the best" managed funds (as determined by their track record, experience of fund manager, and recommendations by fund analysts (i.e., Morningstar, Kiplinger, Fidelity, Motley Fool, etc) has enabled me to beat the S&P and balanced indexes by 2 to 3% per year in the last 20 years, and yes, you can safely get approximately 10% return on your investments.

Yet the majority of fund managers do no better than a comparable index. So unless the investor is lucky enough to usually pick the great ones at the right time (rather than just chasing past performance as reflected by fund analysts), many folks are not going to get 10% with a diversified portfolio. And timing still has a lot to do with it. People tend to accumulate most of their assets in just a few decades. Lots of room for variance in market performance between one set of decades and another. Of course, that doesn't mean it's not worth investing what you can, as some seem to suggest.

A person can make up a majority of their returns investing in the down times.

Past returns are no indication of future returns. I just stick to 4-6 index funds that are diversified. Very few people have the time to beat the market.

3-4%? Waaaaay too low. Sure right now it might be 3-4%, but historically and later on it will not be. Also when you reinvest on a regular basis, you would have been putting money in when the DOW was just below 7,000, and now doubled your money in 5 years on that money. You don't understand the concept here.

Did you factor in inflation? If you take the 10% annual return, wouldn't you subtract 3% annual inflation rate? Your real return would be closer to 7% wouldn't it?

I prefer to use the higher rate of inflation that the United States experienced, on average, for the past century, which is 4% according to Ibbotson & Associates research (the yearbook of returns is one of the gold standards in historical data). To me, 3% is too optimistic these days.

The reason is that investors have historically been willing to accept a 6% real increase in purchasing power (net of inflation) over periods of 25 years or longer. In the short-term, the stock market can do crazy things. If inflation were to permanently increase to, say, 7%, I imagine that stock market nominal returns would slowly rise to 13%, but you'd still be getting the same purchasing power increase due to human nature. That is the point at which people tend to be willing to part with capital for very long periods.

This particular post didn't deal with inflation but I've repeated ad nauseum elsewhere on the blog that everything should be measured in real purchasing power so your thinking is definitely correct.

Ok. So what is rate of return for stock for last 10 years, 20 years, and 30 years?
What's rate of return for last 30 years after adjusted for inflation?

As of the close of Friday, 30 years with dividends reinvested = 10.598%. It's slightly higher with dollar cost averaging, which, again, was the premise of the return assumption.

We talk a lot about real purchasing power gains being the real important figure, so it's good you are focused on that. That is exactly what you should be thinking about because, in the end, that is all that matters. Over the period you asked about - 30 years - the inflation rate was understated in my opinion, providing real gains in purchasing power of 7.428% according to the official CPI figures. That is an actual realized inflation rate of 3.17%.

I always prefer to use the higher 4.00% in my return assumptions since that covers the entire past 100+ years and builds more conservatism into the projections.

That is, I think that based on the 100+ year record, someone following the dollar cost averaging, dividend reinvesting path should never count on a real purchasing power increase of more than 6.00% per annum when looking at 25+ year time horizons.

(The 7.428% purchasing power increase was, in my opinion, partly a fluke driven by the record high interest rates declining to record low interest rates. Provided the stock-market-to-GNP ratio is below 100% at the initial purchase date, I would never bet on a greater than 6.00% real increase in purchasing power from a diversified basket of large capitalization stocks. A lot of this has been touched on elsewhere in the blog so I won't rehash it here. Anything above that figure is, I think, foolish speculation.)

Edit: The 10-year figure is 7.832% with dividends reinvested, but would have hit near 10% with your dollar cost averaging plan, and the 20-year figure is 8.524% with dividends reinvested which, again, would have exceeded 10% with dollar cost averaging. That is why the entire premise is based on "dollar cost averaging + reinvested dividends + tax sheltered account". Remove any one of those three variables and you are talking about a different assertion. It's called "reversion to the mean". In the long-run the market is rational relative to earnings. In the short-run, it's wildly volatile and doesn't always make sense.

When I run actual S&P figures from 1927--do 40-year rolling periods--ending date 03/31/13--initial $197.00 and then monthly $197.00 the actual results are far short of the $4.3 million cited. Median is 11.18% annualized and ending value is $1,547,118--lowest is 9.65% or a smidge more than a $1 million annualized ('34-'74), and best is 1959-1999 at 13.46% annualized and a value of almost $3 million. I suspect some of you might be making the mistake of assuming every investment of $197 earns 10%--sorry--it doesn't work that way. There is no straight line 10% on every investment every month. You might have averaged 13.46% between 1959 and 1999, but you sure did not earn 13.46% on every dollar every month. Using real world actual monthly investments with the index at no cost--no expenses--dividends reinvested shows real results.
Remember Scott Burns taking apart Peter Lynch who said if you did 10% annualized you could withdraw 7% annually and live the life of Riley. Scott Burns made quick hash of that. Run the real world figures to get real world results.

"I suspect some of you might be making the mistake of assuming every investment of $197 earns 10%--sorry--it doesn't work that way. "

I think you hit the nail on the head. That is the vibe I started to get after the first few dozen messages about it. (It's probably my fault for not stating this explicitly but it seems perfectly evident that the low returns of stocks bought at the high of 2000 were more than made up for by the rock-bottom valuations of stocks bought in the 2001 recession, for example, and that, in the aggregate, they work together to generate the long-term mean but apparently this is not obvious to a lot of people. They take it to mean that any time you write a check to buy shares, you're going to make 10%, which is, of course, nonsense.)

Good post.

Al, I think you are on to something else... the $4.3M calculation does seem too high, no matter whether you employ a Monte-Carlo approach or just flat line it at 10%. I swagged it in a couple minutes at about half that, around $2.1M. Joshua, Compound Interest is pretty awesome, but do you need to check the calculation?

The $197 was per pay period, not per month. In the United States pay periods are typically every 2 weeks, or 26 per year. I think - judging by the reference to "monthly" - you are calculating half the contribution, thus getting half the return. If that doesn't check out, please let me know.

John, it might well work now that we are doing "pay period" if we assume that means twice per month, thus $400 monthly. The major issue here is assuming that any %, like 10% annualized, will give you a legitimate real world amount. I ran the real world S&P 500, but without expenses, and did rolling 40-year periods. Biggest joke out there is telling folks if you do "X" dollars a month or pay period for "XY" years you will have close to this amount. Doesn't work in the real world!

Are you forgetting the partial match from your employer as well as re-investment of dividends? shouldn't make up the $3 million difference, but some of it.
anyway, numbers are interesting...one would think a straight line 10% wouldn't be much lower than a variable average of 11%+, but i guess that's what you're saying.

There a lot of people who use this kind of blind assumption that if high returns happened over a time period in the past it is the best assumption for what will happen moving forward. But those of us who started work this millenium know that we live in a different era than our parents. Compare historical CD rates (http://www.bankrate.com/finance/cd-rates-history-0112.aspx) and you immediately see how foolish it is to assume that future returns will match past returns. We'll be lucky if the after inflation returns on our retirement investments are better than 4%.

This is the same "this time is different" fallacy that happens every decade, like clockwork. Based on current market levels? Yes, I would imagine a block of stocks bought today in a lump sum would return only 4% after inflation based on present multiple valuation. But a program that included dollar cost averaging + reinvested dividends + a tax shelter of some sort - which is the entire premise of the assumption - would be likely to revert to the mean. It takes only one crash like the 2008-2009 debacle to juice returns as the new purchases drag down the average cost basis of the shares or index fund acquired.

If you think otherwise, you shouldn't own stocks. Consider finding an attractive piece of cash generating real estate or something.

Actually, it is the '10% forever' crowd who is arguing against history that this time is different. What was the average return on capital for the 2000 years from 1AD to 2000AD? If you got 7% real return on 1 dollar over 2000 years you would own a sphere of gold that reaches beyond the nearest star. The last 200 years in the US have been an anomaly in financial history. A small provincial group was able to essentially eliminate the native population and expand out into a vast new land at the same time that the industrial revolution was enabling new economic possibilities. This group grew to become the dominant super-power of the globe by the 1990s. And you are arguing that this growth will continue indefinitely? What cold war like victory is going to raise the status of US stocks from where it currently is? The only possibility I have heard of is singularity type thinking...in which case it will be your computer that actually owns and controls the $4 million dollars.

One other thing. You place a little too much faith in dollar cost averaging. It doesn't really give you a higher return on average over investing a large chunk at a single time. Try it out. Run a computer simulation over many iterations of a random process (or use actual stock values). Investing either with dollar cost averaging or in a lump sum produces the same average value. It is just the variance that is decreased by dollar cost averaging. (Which is a big advantage, so you should definitely dollar cost average at some level, but it doesn't provide extra return on average.) The underlying reason is that the chance of you investing the lump sum in a downturn is the same as the number of dollar cost averaging purchases you make during that downturn.

This suffers from the fallacy that economic growth is necessary to generate positive returns from business (including stock) ownership. It is not. Business ownership is not a zero sum game. The asset itself is a productive one that generates surplus resources every year by virtue of being in operation.

If the United States stopped growing immediately - no new people, no new jobs, no new immigrants - stocks would return, in the aggregate, the sum total of their base earnings yield + per share increases due to productivity improvements (e.g., computer automation) + per share increases due to outstanding share count reduction through buy backs +/- per share increases or decreases due to market share gains or losses to competitors. The base earnings yield would be influenced indirectly by the level of interest rates as it would raise or lower the cost of funding, which would change the cost structure of acquiring a company (and thus, the profits).

In other words, it's all about the profits relative to cost. Growth is merely one variable in the equation. You can make plenty of money with a 0% growth business - or in some cases, if the price is low enough, even a negative growth business.

As a simplified example: Imagine we live in such a world. There is zero economic growth. A local pizza shop makes $100,000 a year in profit after taxes. If it wants to expand, it is going to have to take market share from something else, something management thinks will be too difficult. You buy the business for $1,000,000. In year one, your returns is 10%. However, as you increase prices to keep up with inflation (which is really just another form of taxation), and come up with productivity improvements, your return will end up in the 12%+ range nominally.

Rational investors make economic decisions by looking at individual assets, in this case a company, and deciding how much money it is going to produce relative to the initial cash outlay. If the economy as a whole had lower economic earnings in the aggregate, it would still be perfectly rational to buy Coca-Cola at 12x earnings and expect a 10% long term rate of return.

TL;DR: Even if you are correct about the past economic growth drivers of the United States, it has no long-term influence on the returns generated by equities or private businesses as the initial cash outlay will simply adjust to reflect the lower growth expectations given that the overall market as a whole tends to revert to a rational mean relative to earnings and that the rate of growth is merely one variable in the valuation formula.

Good luck with your dream of 10% returns in an economy without economic growth.

Serious question:

If you sold me a lemonade stand for $10,000 that generated $1,000 per year in profit, what's my return going to be?

Where does that $1,000 go at the end of the year? Do fairies and gnomes come out of the garden and steal it? If there is no economic growth, does my $1,000 spend any differently? Does it turn into a pumpkin at midnight?

If you can't answer that, and don't understand that growth is but one variable in the valuation formula when discounting cash flows for the acquisition of productive assets, please don't manage your own money. Better yet, consider sticking it in something you can wrap your head around like productive farm land. Otherwise, you're going to be sucker at the poker table everyone is ripping off.

Sure investments have dividend return. But you haven't internalized what an economy with much lower growth will look like. There will be a whole lot of capital seeking ways to get return. That is going to drive your price for a stock with $1000 return up to much much more than $10000. And you end up with much smaller return on investment. Check the yield on US stocks. THe SP500 currently has 4.50% earnings yield and less than 2.0% dividend yield. How does that translate into 10% return? The rest is capital gains justified by the anticipated future earnings stream that will be larger because of growth. If you are promising people between 2 and 5% return before inflation, then you could be grounded in possible realities for a low growth economy.

The overall level of capital in the economy would not increase. Why would a zero growth economy automatically lead to an increase in the money supply? Upon what have you predicated that assumption?

It is pretty basic economics that leads to the expectation of lower returns with lower growth. Investments are made in order to obtain future income. Lower growth means less future income will be available than if growth is larger. So if overall level of capital is constant and that capital is all trying to claim a smaller future income stream, then the return will be lower. A starting guess for return in a zero growth economy almost has to lie in between current earnings yields and dividend yields (4.5% and 2.0%) in my previous message. Beyond that you can argue about what role inflation will play and whether our economic system will even be stable with low growth.

The details are hard to work out because we don't have much data on what low growth advanced economies will look like. And we don't know what future growth will look like. But it seems pretty foolish to plan on the assumption that future US growth will match the past century when the US went from an upstart to the global superpower and largest economy.

This will probably be my last response because there are so many errors in your first paragraph, this probably isn't fixable. I'm going to skip to the bottom line and lay it out. I normally would have stopped responding awhile ago, but you actually seem like you are trying to understand this but for some reason, can't understand how the individual variables, working together, can produce a counter-intuitive result.

1. In macroeconomics, yes. In microeconomics, no. I am not interested nor talking about the country as a whole. I am talking about individual people who want to acquire investments. Yes, the county as a whole would have less money if the growth were lowered. That is not now, nor has it ever been, what we are discussing.

2. The return on investment of a specific asset, such as a hotel, is a function of the price paid relative to the net discounted cash flows received. The growth of those cash flows is only one, out of several, variables that are put in the discounted cash flow equation.

3. If the growth of an entire economy were lowered, and future earnings were to decline, returns would not fall for the long-term investor who was a net purchaser of assets because asset prices as a whole would decline to reflect the new reality. Stocks may trade at 10x earnings instead of 15x earnings as "the new normal". While there would be a decline during the adjustment, a relatively young person who was continuously buying ownership, reinvesting his profits, and adding new money, could still earn entirely satisfactory returns. All new investments, and reinvestment of past profit, would buy more earnings due to a higher base earnings yield and more dividend income due to a higher base dividend yield as asset prices fell.

4. There is no rational mathematical basis for your presumption that a zero growth economy would be based on current earnings yields and dividend yields. Again, asset prices would decline to provide a rational return on new purchases; otherwise people wouldn't part with their money.

If you still cannot work out the mathematical relationships on a micro-level, and understand why it would still provide perfectly satisfactory returns to an average young investor, please, I am imploring you, put your money in something you understand, like profitable real estate, or pick another area of study. You're going to do enormous damage to your own finances if you can't get the basics like this.

Thanks for the discussion. It seems at the root of it that you think you can separate your individual economic performance from the performance of the economy as a whole. Maybe a few Warren Buffet types can do that, but the average investor is going to get what the economy as a whole gets--minus whatever investment fees they pay. And presumably investment advice columns are aimed at the average investor and not Warren Buffet. If a microeconomic model predicts a result for the average investor that violates foundational principles of macroeconomics when summed over all investors, then you know for sure that you have your microeconomics wrong.

Really? Just look at MSFT. It makes nearly the same EPS every year for the last 10+ years, and the stock has gone nowhere. And I would consider Microsoft and extremely productive company. What you say makes sense, but not in the investing world. At least not anymore. Too much old school thinking here.

But this time it really is different. The government debt is beyond repair, unlike ever before. Normal market returns of 8-10% per year are gone forever now. Just look at the last 15 years. What is the market up like 10% total? And that's just because it had a decent run recently. Times have changed. It will never go back to the way it was before. This is the age of massive government debt that will, and already is, leading to austerity. You can earn 6-7% consistently I believe, but not 10% anymore.

Clearly Josh is not assuming a realistic approach, if his assumptions were realistic I would have a net worth of 1.7mm more, I followed his formula it does not work, in reality. Yes mathematically, his assumptions work. You have hit the timing perfectly.

Have you done this consistently for 40 years?

Debt as a percentage of GDP is precisely what it was following World War II. We've been here before. This is not unprecedented.

Including state and local debt and pension obligations? Those are going to be the real killers...not everyone can move to Arkansas either. paying for all these ancient boomers is going to drag the economy down for decades.
of course, that may have no impact of stock market returns...we'll probably have massive inflation, so the 10% will be easily realized. net of inlflation won't be so great though.

You just committed my absolute favorite beginner mistake (I mean that seriously, I love when people say that because it dovetails beautifully into a discussion of valuation multiples and capitalization values that determine asset returns).

I've written about the Microsoft situation several times because it is such a wonderful case study. You couldn't ask for a better contrast between earnings growth and valuation multiple collapse.

Approximately 16 years ago, investors became so insanely deluded about the positive prospects for the future world during the dot-com boom that for every $1 in profit that Microsoft earned, they were willing to pay $85.71 in market value for an earnings yield of 1.1% at a time when "real" inflation was running 3% to 4% and the Treasury bond was yielding 6.61%. In other words, you could have bought Microsoft and earned 1.1% on your money plus growth, or you could have gotten a fixed 6.61% from a long-term Treasury bond.

That valuation for Microsoft was insanity, especially given that it was already the largest software company on the planet. There is no possible way that anyone who bought at that price could have possibly done well. Failure was all but guaranteed. When some of the best business professors in the country tried to point this out, they were shouted down. A famous example is Dr. Jeremy Siegel at Wharton getting death threats when he wrote an op-ed that explained how valuation multiples had reached such bizarre levels that we had become detached from reality. No one wanted to hear it.

Now, Microsoft has earnings per share that are 3.35x higher than they were - a massive improvement - yet the stock price barely budged as a result of the fact that people have finally begun to pay attention to the underlying earnings and are willing to pay a much more rational $16.40 for every $1.00 in profit. As a result, Microsoft now offers an earnings yield of 6.1%, which is perfectly rational by historical standards and provides a satisfactory of cushion relative to inflation and risk. Meanwhile, the long-term Treasury is offering 3.08%.

Back then, Microsoft paid you 1/6th of the Treasury rate. Today, it pays you 2x the Treasury rate. On a relative basis, it is 8x cheaper than it was.

In other words, while earnings per share jumped 335%, the multiple which investors were willing to pay for every dollar in profits collapsed 80.87%.

The problem is not with Microsoft. It is that 13 years ago, a group of very foolish speculators with no sense of reality drove the stock price up to non-sustainable heights and got exactly what they deserved.

What happened with Microsoft is exactly what is supposed to happen in a financial market that is rational long-term. Short-term speculators can detach a security from its intrinsic value, but ultimately, all that matters is the price you pay relative to the underlying earnings and assets. Far from being the proof you think it is, Microsoft confirms the very premise you think false.

If you think any other outcome was possible for Microsoft shares based on their valuation in the past, you do not understand finance or the time value of money. You must understand this concept if you expect to do well. It is the foundation of everything else. (That's why I love talking about it so much.)

What is the rate adjusted for inflation? It is meaningless without that information especially if we are talking about a lifetime of investments. Also, will enough young people and immigrants just entering the economy be feeding the valuations for the old people so they can get a fat return? In other words, will the economy grow at rates similar to those propelled by one time technological and demographic jumps? The answer is no. Look at Japan.

Both of these questions have already been addressed in the comments thread.

No one get's 10% anymore. Unless a 10% loss counts

Of course not, that's why my returns have exceeded 10% in only 3 of the past 4 years, as did the S&P. & 5 of the past 9. You didn't see anything.....

Exactly. I've done a solid 10%+ the last 3 or 4 years after my 401K lost 40%

A little knowledge is a dangerous thing, and when it comes to investing we all can be accused of having 'a little knowledge', emphasis on little. Historically, the U.S. has always been at risk of collapse, torn by internal dissent, struggling through economic armageddon. There has not been a 20 year period in our history that was not subject to massive social or economic upheaval (or both.) That's just the gig, man.

"The Dude abides. I don't know about you but I take comfort in that. It's good knowin' he's out there. The Dude. Takin' 'er easy for all us
sinners."

I have been investing since 1999 and started with bascially nothing. I have DCA and we have maxed out our 401Ks when possible. I have several trades that are over 100% returns since 2008. The market can/will yeild a 10% over the long term, but you can't jump in and out of the market. The down was up about 16% last year. It has been up 35% and 25%. If I can believe my information in quicken, my portfolio has a 25% return as of last week.

I'm 25 years old, self-employed making $45k a year after taxes. The 401k advice here wouldn't apply to me. I have $0 in debt but $0 in investments. I'm intermediate as far as risk aversion, but am fine with more risk when looking at something for the long term. What should I do with my money starting right now?

I can't tell you what to do, but if it were me in that position, my focus would be on a Roth IRA for myself and, if you are married, for the spouse. That would let you set aside up to $5,500 per year each, or $11,000 per year total, in a tax shelter that will compound without any of the money going to the government.

Beyond that, I'd focus on getting cash generators, not minimizing taxes. I'd want assets that increased my household income. I'd be looking at blue chip stocks with 3% to 5%+ dividend yields, real estate, or expanding the business that generates the income to begin with if the underlying economics are good.

(Side note: Once you got up to $100,000+, I'd seriously look into something like a SEP-IRA. When you grow your business, and begin making a lot of money, if you don't have many employees, you can sometimes shelter almost $100,000 per year for a married couple, get huge tax write-offs, and let the money grow tax-deferred for decades. It may not work depending on the type of company you own, but it is certainly worthy of consideration.)

Actually, as a Self-Employed person, you might want to think about Solo 401K plans, which would allow you to shelter much more than a SEP. A Sep will allow you do put something like ~20% of net income, while solo 401K will do the annual limit plus ~20% of net income. Of course the solo 401K is more paperwork relative to the Sep, but it might be well worth it.

Man, this response to your article makes you sound like a total a-hole.

Wasn't the intent; it's just mathematics, which I strongly believe should be treated coldly, logically, without emotion. Either the numbers are accurate, or they are not, which should be a function of the best data available. There is no human component here, nor should feelings be involved at all.

Joshua, for what it's worth, I like it when you speak in blunt language, and I hope that does not change. I know you have to censor yourself a lot for privacy reasons, but I appreciate the fact that what you do choose to share comes through unfiltered. It makes you a "trusting voice" (in my opinion), and sometimes, we need strong language. I know if I'm having a bad day, I need to read your post about how great it is in America these days, and how I'm literally living in the best time in world history, in the best country ever, and so on. A lot of times, "coddling language" leads to inaction, and I like that you don't fall for that trap.

Some people have no idea how to properly read articles. They try to find a sentence they can technically dispute, something to get offended at, or whatever it may be. I try to read your material through the lens of "What's this writer saying, and can I incorporate any of it into my own life?" In your case, I answer the second question "yes" quite frequently.

My point is, obviously, people like your voice as shown by your loyal following and crazy growth without much of any advertisement. I hope you don't let the "squeaky wheels" get all the attention and modify your behavior. That would be a shame.

I thought it was a new article because it popped up as a link on the CNN "from around the web" thingie. I think 10% a year on average is probably still a reasonable expectation (although investment companies are famous for saying just because it has been that way in the past doesn't guarantee it will be that way in the future).
The problem I have is with the "on average." Just because returns average out to 10% doesn't mean the nest egg will grow to the ending value implied by 10% every year.
Say you start with $100 and earn -25% in year 1 (now you have $75), -33% year 2 (now you have $50), and 88% in year 3. Your average return is 10%, but you have $6 less than what you started with!

The "average" return used in calculations by academic sources such as Ibbotson & Associates is not the average you are using (e.g., (-25 + -33 +88 / 3 = 10% average).

They calculate the ending value of the money, the actual increase in dollars, and then do a calculation known as CAGR, which involves taking the inverse of the years compounded and raising it to the x-root. You can read how to do the math yourself here.

When they say 10%, they mean 10% actual increase in dollars, not the sum of the annual returns in isolation divided by the total compounding periods.

Going with a 3 year period, for example, like you did, they wouldn't have said the markets returned 10% unless you had accumulated $133 at the end of the period (e.g., [(1.10^3)-1]/.10 = 3.31 x $100 starting investment = $133).

That way, they never run into the problem you describe. The "average" returns I am using, referring their work, is actually the CAGR based on historical performance since 1926.

It's a very understandable mistake. I should have used the term CAGR to avoid such a misunderstanding.

Does an entry point of February 2000 with Dow and Nasdaq index accounts count? That was 13 years ago. At retirement. That's me so far. Broker took what I had and bought index funds. Staying the course!

Starting later in the year would have been better.
I bought QQQ (Nasdaq 100) when Nasdaq was around 1200 after 9/11. Wish I had plowed every cent I had into that right then. I wound up making a nice 100%+ profit when I sold in 2006 and it was around 2500-2700?

Joshua, good article to get the point of dollar cost averaging investing across to people who are doing nothing to save for retirement, so I applaud you on that effort. However, as a Registered Investment Advisor and doing this for a living (retirement planning and distribution for clients) the flaw with the 10% is that averages are not constant...ie: we could have a 37% stock market meltdown (which is exactly what the S&P did for calendar year 2008), and then a run up the next year. However, for that investor just to get back to break even on their money the next year, the S&P would need to return nearly 59% as a gain. This doesn't always happen. That would destroy any 'averaging'. For an example, for the actual 10 year rolling period from calendar year 1998 thru 2008, the average annual return of the S&P 500 was approximately negative 1.5% per year. Unfortunately we can't base our future returns on an 'averaging' assumption. Hope this helps your analysis. - Mark Kennedy, Registered Investment Advisor, www.kennedywealthmgmt.com

Welcome to the site! Good points; the figure I called "average" wasn't actually average - it was the compound annual growth rate (CAGR) provided by Ibbotson & Associations, which factors in the mathematics you describe. It also includes the 1998-2008 time period in that long-term return calculation.

The interesting thing is that the stock market in the aggregate did very well over the past 10-15 years. The S&P 500 overvaluation was driven by a handful of megacapitalization stocks that represented a relatively small portion of the overall market capitalization of the entire U.S. stock market. The problems seen in the late 1990's were as much to do with the index methodology as they were excessive speculation in large enterprises.

Thanks Joshua, please keep me in your thread for future posts. - Mark

The problem with the assumption of an "average" rate of return is that the market moves in long term bull and bear secular cycles of 15-20 years. If you happen to near or enter retirement in a secular bear (like we had in the year 2000) you will likely make a much lower average ROR than the 10%. We are coming close to another secular bull but most 30 somethings will see a secular bear as they approach retirement.

Nice article and supplement. I'm enjoying the bantering on the dialogue. I've wondered if the patterns in the market and the American psyche are the same as after 1929. While others have been concerned or panicking, I've been wondering where to get additional capital to invest. Having said that, I've cost averaged over the past 10 years and my returns are very nice to great.
Folks are still understandably nervous. But it's very interesting what is happening. Sure, we've ran up debt to ourselves (because the majority of money borrowed is from Americans, not the Chinese -- who have been selling off their U.S. treasuries). Also, while folks are worried about "The Chinese," what is really interesting and should be a notice to other investors, is that Chinese with money are buying American. Also, during my travels to China, I've spoke with Chinese nationals who said China can't keep up because of being constrained by their government.
Long story short, in spite of the conspiracy theorists and gloom and doom types, I'm dumping my cash in to the markets. The DOW is higher than in 2008, yet the overall mood is low (but improving). I'm buying like crazy so that when folks start believing in the recovery, I'll benefit. I'm figuring that if we have a complete failure of the market, we're all screwed (And I'm not a prepper; and I'll bet there were "preppers" after the crash of 29.).

Ten percent might be low.

You chose to use the rolling 25 year averages. That is the return for each 25 year period - not investing a set amount every period.

There are 48 "40 year" periods between 1926 and 2012. Investing in the S&P 500 at the start of each for 40 years year gives a median return of 11.78%, average of 11.89% and minimum of 10.63% (1939-1978) and max of 13.83% (1960-1999).

I think where people are getting confused is that the inflation adjusted returns are in the 6-7% range.

I do take issue with dollar cost averaging. It might be a semantics issue though. DCA is, by definition, taking a lump sum and averaging into stock over time. If you mean automatic investing - investing a set amount periodically as you can afford it, then you are kosher. Institutional funds used to "dollar cost average" to avoid leaving a footprint in the market and to better track their benchmarks. The retail brokers co-opted and abused the term to cajole folks into parting with their money a little at a time so it was less painful. It has been co-opted again - this time changing the definition - to mean automatic investing. (Automatic investing really is "lump" sum investing on a smaller scale.)

Unrelated, I suggest reading Seth Klarmin's book "Margin of Safety" if you haven't read it yet.

So, to summarize, you are telling us that the past 87 years of historical market returns can be used to predict what is going to happen in the market over the next 40 years.

Not exactly. I think the better summation of my position would be: "Absent a compelling reason to the contrary based upon reasonably interpreted, conclusive data, the safest course of action is presume a reversion to the mean as demonstrated by past conditions, which covered multiple global wars, inflation, deflation, countless tax systems, and substantial societal change."

Best case scenario, you would have to stick with your plan NO MATTER what happen, getting 10% every year and doing so for decades is impossible. You are probably too young to believe it but most of us have lived it and are still here to tell you that you are wrong.

I'm a rationalist so I rely on cold, hard, provable, verifiable facts that have been audited and verified. It has nothing to do with youth. I don't believe it because I want to believe it, I believe it because that is what the evidence shows. If you can provide superior evidence, I will change my position immediately.

Joshua,

Thanks for a great original article and follow up. A couple of years ago I was telling my nephews about how they could become millionaires through the power of compounding by starting to save early in their careers. For a simple example, save about $95/mo from age 20-65, but if you wait until age 35, you'd have to save about $450/mo. When I mentioned that is based on a 10% return, my sister-in-law jumped all over me saying it wasn't realistic. What I tried to tell her and my nephews was that it really doesn't matter (sigh, ok, if aliens invade and normal economics no longer apply ...).

The point is to start saving early and often! All the commenters focused on the return and the assumptions it is based on, but the most important point is the power of saving combined with compounding. So what if you're wrong and the return is only 5%? $2 million is still a heck of a lot better than what most people will end up with at retirement, especially the ones who wait to save until they're a few years from retirement. That is a great message and hopefully an attention-getter for new college grads: Here's how you can become a millionaire. And if you disagree with the rate of return, then simply adjust your savings rate accordingly!

Alternatively, you could just only buy stocks that pay at least a 10% dividend. Bingo!

A better question is name me a few companies that match 4.5% of savings. 3% is hard to find these days.

Once you adjust for inflation, the Dow Jones has returned exactly .99% (yes, LESS than ONE PERCENT) over the last 80 years. Which starting and ending year you pick has an enormous impact. If we compared 1966 to 1995, after inflation the return is ZERO. I could easily pick several 20 year periods where the returns exceeded 20%.

Moral of the story, the vast majority of the returns seen this century came from inflation. That said, going forward, inflation will probably account for less AND the non-inflation returns will be MORE. At the same time that it will probably be less than 10%! No contradictions here.

You are making a common beginner-level finance error. You are looking solely at the stated value of a given index on two dates and then calculating the CAGR between the two because it implicitly ignores the value of reinvested cash. It would be the equivalent of looking at an apartment building in Los Angeles that was worth $1 million 25 years ago and $5 million today, concluding that the gain had only been $4 million. No, the gain is $4 million, plus all of the cash you have been sent over the years, and the value of that cash reinvested back into similar assets. That's how you evaluate an asset class.

The real return from stocks, which beat every other asset class after inflation and taxes, come from 1.) the dividends distributed to the owners, and 2.) the dividends reinvested back into the equities that paid them. Dr. Jeremy Siegel at the University of Pennsylvania Wharton has the best body of work in this field and even turned it into a couple of bestselling books based upon those academic studies.

The mistake you are making is the reason most people don't realize that a 25-year investor made 400% on his or her money owning Eastman Kodak, even though the stock went to $0 in bankruptcy. The cash (and in some cases, property or equity in other firms) you are sent in the mail matters. It matters a great deal. In fact, it is the sole driver of returns above the rate of inflation.

You are making a common beginner-level finance error. You are looking solely at the stated value of a given index on two dates and then calculating the CAGR between the two because it implicitly ignores the value of reinvested cash. It would be the equivalent of looking at an apartment building in Los Angeles that was worth $1 million 25 years ago and $5 million today, concluding that the gain had only been $4 million. No, the gain is $4 million, plus all of the cash you have been sent over the years, and the value of that cash reinvested back into similar assets. That's how you evaluate an asset class.

The real return from stocks, which beat every other asset class after inflation and taxes, come from 1.) the dividends distributed to the owners, and 2.) the dividends reinvested back into the equities that paid them. Dr. Jeremy Siegel at the University of Pennsylvania Wharton has the best body of work in this field and even turned it into a couple of bestselling books based upon those academic studies.

The mistake you are making is the reason most people don't realize that a 25-year investor made 400% on his or her money owning Eastman Kodak, even though the stock went to $0 in bankruptcy. The cash (and in some cases, property or equity in other firms) you are sent in the mail matters. It matters a great deal. In fact, it is the sole driver of returns above the rate of inflation.

In fact, with reinvested dividends, the beginning year is almost meaningless. Look at the 25-year rolling returns with dividends reinvested for the S&P 500. The average return comes to approximately 10% per annum, with inflation running just under 4% during this period. That's how academics and professionals arrive at the conclusion that investors in the United States have a long history of demanding real returns before taxes of around 6%.

Your mistake is an understandable one and demonstrates just how skewed the entire brokerage and financial reporting industry is. Stock charts don't reflect the actual experience of owning a stock - again, look up a long-term chart of General Mills and it won't look anything like what an investor experienced if he owned the shares in a bank vault. It's the same for the stock market as a whole.

TL;DR: Stocks are not appropriate for everyone, but the issue your point is factually inaccurate. The index value alone is merely one component of total return. Spin-offs are real. Dividend checks are real. The money actually does get deposited in the bank. You can make a withdrawal and stack it high in bricks of cash. It's not imaginary.

P.S. What is particularly interesting is that you almost never see people make this mistake for bonds. If you bought a $100,000 bond paying 12.5% 30 years ago, and it was redeemed for $100,000 today, you would realize that you had to include not only the par value being returned, but the $375,000 you were mailed over the years and the value of plowing that $375,000 back into other bonds. The same goes for real estate. Beginners, on the other hand, rarely seem to understand stocks. They have no idea what they are, or how they work, which is why the common sense seems to fly out the window when talking about return calculations.

Dude the market doesn't work on compounding. Volatility kills and so does your advice. This advice is actually harmful, you don't account for liquidity tax implications etc. Horrible. Generalist financial advice doesn't work.

Furthermore, you act like you get a tax savings. Its a deferral even though your account lists 10,000 you still owe the tax it doesn't go away. I'm not sure why that fact oft ignored.

I was able to realize over a 30% ROI btwn 2000 and 2007 in my 401k. Total contributions from me and my employer of $20k and ended up w/over $100k from making my own investments. I moved my investments into a money market October 16th, 2007 and didn't lose a dime. I'm not a financial wiz at all, not a day trader, etc... just studied and invested and ignored friends poo-pooing me for withdrawing from the market in 2007. I don't take the same risks now due to my age, so my ROI is down to about 8%, still good.

I earn a 23% cash on cash return with my real estate investments and have achieved approximately 300% cash on cash in my billboard business. Granted these are leveraged returns but returns are returns. Bought three strip centers with about $1 million down between me and my partner. Current cash flow is $225,000. I bought dramatically underperforming billboard business for $650,000 one year ago that had 27% occupancy and it's now 100% occupied and valued at $2.3 million. Cash flows well over $100,000 a year and I put down a whopping $23,000 for my part. Illiquid assets are much better for me. I am too prone to clicking my mouse and selling stocks. A bit trigger happy after too many losses over the years. Once we revalued the bank gave us a significant credit line we use to buy new assets with no more out of pocket. We actively seek out news ways to reinvest to cash flow since neither of us need it to live on. A lot more work but I'd rather bet on me than the stock market any day.

That's always been my approach*. The private businesses come first and generate far higher returns. I can control the cash, if the stock market crashes they arm me with fresh money to make purchases, and they can be expanded and grown much easier, faster, and more profitability.

Beyond that, the academic data is clear. For long-term compounding, stocks are the next best asset class. For cash-extraction (passive income you want to live on while maintaining inflation purchasing power but not much beyond that), real estate is the next best asset class.

Stocks are mostly a way to "inventory profits", to borrow a phrase, for those who have built a primary economic engine elsewhere and want to earn a good net of tax and inflation return on their surplus capital.

*Sans the leverage - I detest it. As of this afternoon, my household carries a small amount of debt fixed for 10 to 30 years with a net cost of negative 1.5% per annum, meaning I actually get paid to borrow the money once you factor in tax deductions and inflation. I'd pay it off in a heartbeat if it weren't for those terms. Instead, it makes more sense to put the cash to work in quality assets, including high yielding, conservatively financed oil stocks.

Its showing up in Disqus' Promoted Discovery 🙂 at the bottom of articles recently - that's how I ended up on it! http://help.disqus.com/customer/portal/articles/666278-introducing-promoted-discovery-and-f-a-q-