Tuesday, January 15, 2013

Felix Salmon on personal finance

Felix Salmon has beaten me to the punch here but I do think that this statement needs to be properly understood for what it means:

It surely comforts modern parents who have spent fortunes educating their children to know that these children are spending money on pork belly and not, for instance, cocaine. But what solace can it offer to realize that $300 a week put into an S. & P. 500 Index fund over the past five years would have provided an annual rate of return of 10.34 percent and grown to $100,354 today? Even saving $300 a week at a 6 percent rate of return would have yielded about $91,000, Mark X. Chemtob, a financial adviser at Ameriprise, said, adding that in both cases, the sums would qualify for a down payment on a starter apartment in New York.
So if a person invested for five years, and got a retern of 10.34 percent they would have a lot of money.  So have happened 5 years ago (2007)?  Here is wikipedia:

The Dow Jones Industrial Average, Nasdaq Composite and S&P 500 all experienced declines of greater than 20% from their peaks in late 2007. 
So if you had perfect market timing then you could have invested directly after a crash (as opposed to during it) taking advantage of the recent market crash.  Unless, of course, you were the 23 year old in the article who is likely in school and not making $300/week of investable income. 

The other side of this coin is that it is very hard to be 23 years old, just graduated from school, making real money for the first time in your life and not enjoy some of it.  After all, perpetual deferred gratification is never being able to enjoy the rewards of your career.  Nor is it clear that somebody in their first year out of college should be buying a Manhattan apartment (a highly leveraged investment) until they find out if they are going to be successful in New York. 

Nor can you drop the cost to zero.  I would find it hard to eat in New York city for less then $75/week.  Remember, we are taking a city where space is at a premium and everything bought in the city is expensive (including kitchen facilities).  So eating 21 meals at about $3 apiece is actually pretty tough, even if you have good skills for cooking from scratch.  And, even more interesting, the person in this example is taking on extra work to fund her leisure time (as opposed to, for example, debt). 

So I agree -- a very misleading example. 

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