Wednesday, June 22, 2011

Why Investing in the Stock Market for Less Than 5 Years is Risky

This post provides justification for the adage that you should not put money into the stock market that you will need in less than 5 years. It is the 5-year version of earlier posts that discussed the distribution of 10 and 20-year stock market returns (see links below).

Some years back, a friend asked me to recommend a good stock investment for her daughter's college fund. Since withdrawals were to start in about three years, my recommendation was not to put the college fund in the stock market at all! Here's why.

What will a $20,000 Stock Market Investment be Worth in 5 Years?

variability & risk of short-term stock market investments

In previous posts, we have looked at the distribution of historical outcomes for typical (but hypothetical) investors investing in the stock market for 10 years and for 20 Years. For those holding periods, the investors virtually always made money -- though sometimes barely so. In approximately 100 sample 10-year periods since 1900, we saw only one instance where the investor's ending portfolio was worth less than his initial investment -- and no instances for 20-year periods.

The above graph (click to expand) is the 5-year version of the earlier charts. It shows the historical results of

Saturday, June 11, 2011

100-Year Housing Price Index History

This post illustrates the increase in U.S. housing prices since 1900. However, considering price alone is a misleading way to evaluate the performance of residential real estate. Investors who fail to do additional analysis are likely to overestimate the attractiveness of housing as an investment.

100-Year Housing Price Index Graph

100-year history of U.S. real estate/housing prices
U.S. Housing Price Index (1900 - 2012)

The above chart (click to expand) shows a 100-year history of residential real estate prices in the U.S. The graph is based on Robert Shiller's historical housing index, which I have summarized to yearly data. As he readily admits, his data is

Wednesday, June 1, 2011

May 2011 Stock Market Update

May, Quarter-To-Date, Year-To-Date & Recovery-To-Date Review

The month started off with a bang -- literally. On the evening of May 1, POTUS (as the White House Twitter account refers to him) announced that Osama bin Laden had been shot and killed. The relief rally was short-lived, and was soon overshadowed by the bursting of the bubble in commodities. Silver dropped more than 25%, down from its highest levels since the Hunts tried to corner the silver market back in the 80's. Other commodities suffered as well, though not quite as much.

By mid-month, U.S. debt had reached its $14.924 Trillion limit, and some congressmen were threatening not to support raising the debt limit without major spending cuts. This raised the possibility, admittedly slight, that the U.S. could actually default on its debt. Sovereign debt issues continued in Europe as well, with the restructuring of Greek debt appearing more and more to be a question of