The Heat

by Harry Jones

(July 29, 1999) -- The heat has not relented. The lawnmower sits unused. The barn is sweating off its last red paint. The house is sweating its new light green hue. When the heat is on, it's high pressure. Things melt. You want to melt. You want to toss aside good judgment and react. You want to deviate from the usual beneficial mode of planning your life, and your farm, for the long term. It's when you most want to melt under this heat that you absolutely must resolve to stay your course.

The Foolishness of Index Funds

by Tom Gardner (TomGardner)

[Please note, this column is an out-take from the 13 Steps to Investing Foolishly.]

Dear Fools, allow us to set the market standard for you once and for all. Over the past sixty years, the S&P 500, an index of five hundred of the largest and most profitable companies in the United States, has risen 10.5% annually.

That means, if you could've invested $10,000 into the S&P 500 sixty years back, today you'd be able to call up your discount broker, sell your position for $3.99 million, pay down your taxes of $1.12 million (unless you wanted to hire a tax accountant to find ways to weasel around those debits), and you'd end up with $2.87 million.

That's what long-term investing does to your capital; that's how the family savings plan of today turns into a pleasant retirement, college money for the kids, and your own Turbo Galactic Humvee XL42 in which to buzz around Venus in 2055. Those are the positives, but let's throw in a few of the hurdles in life. We're all hit by any number of extraordinary circumstances, and when they strike, by God, you'll want to be cash-flow positive, with no debt, if you want to avail yourself of ALL the options.

Now, let's return to those numbers above for a second. Assume that the very first year that you put the $10,000 into the Vanguard Index Fund, the market climbed its exact average of 10.5%. Before taxes, you made a cool $1050... which may or may not have thrilled you. Congratulations, though, because if you had put that money into a different equity fund, the chances are good that you made less than $1000.

OK, that's what year one does.

Now let's look back at the numbers you ended up with... that $3.99 million sixty years later. For the Foolishness of it, let's assume year number sixty-one was another exactly average year, up 10.5%. Instead of the $1,050 you made to start, now in average years you're making $401,000.

And if you let that money sit through year number seventy, instead of cashing out at year sixty, and you were treated to another (ho-hum) average decade of 10.5% per year, lookie there, you now have $10.8 million, or $7.8 million after taxes.

The more time you can give to your investments, the greater the profits you'll reap. Day traders want you to think about tomorrow's market open. Too many full-service brokers want you to review your options every month -- and they'd love it if you'd day trade! Commissions, commissions... bravo, bravo! And 75% of all mutual funds each year are desperately counting on your not having read Step #3 of the Fool's 13 Steps: Setting Expectations, Tracking Results. All of which has us wondering just where the word "service" fits into their business model.

With Vanguard or S&P 500 depositary receipts, you essentially get the S&P 500 returns, minus minimal expenses. And those of you who have been investing for three, five or ten years should look at these figures below and compare them to the returns on your own investment portfolio. Here goes:

1-Yr 3-Yr 5-Yr 10-Yr Vanguard Fund* 37.45% 15.18% 16.41% 14.58% S&P 500 37.58% 15.34% 16.59% 14.86%

*equivalent to the SPY shares that Harry uses

A Fool reminds you that the only reason to move beyond the Vanguard Index Trust 500 Portfolio is if you believe you can beat its performance, AFTER all of your investment costs have been deducted: research reports, fax newsletters, financial newspapers, business magazines, the Fool online. If you can't beat it, you'd better just join it... and keep adding savings to it each year. In the decades ahead, you'll be happy you did.

 Recent Harry Jones Portfolio Headlines
  08/26/99  Is it a Nifty 500? Part II
  08/19/99  Is it a Nifty 500? Part I
  08/12/99  Illuminating Index Funds, Part Two
  08/05/99  Illuminating Index Funds
  07/29/99  The Foolishness of Index Funds
Harry Jones Portfolio Archives »  

07/29/99 Close

Stock Change Close SPY -1 29/32 134.41
Day Month Year History HARRY -1.16% -1.66% 5.56% 5.56% S&P: -1.78% -2.31% 9.67% 9.67% NASDAQ: -2.43% -1.70% 20.40% 20.40% Rec'd # Security In At Now Change 1/4/99 16 S&P Depos 127.63 134.41 5.31% Rec'd # Security In At Value Change 1/4/99 16 S&P Depos 2042.00 2150.50 $108.50 CASH $5.12 TOTAL $2155.62 Yesterday Today Change S&P Depos 136.31 134.41 -1 29/32


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