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Murphy’s Law: What can go wrong will go wrong.
O’Toole’s commentary: Murphy was an optimist.
From Last Week
1. Risk ≈ Return
5. Diversify
Diversification works will over the years and decades but poorly over the weeks and months. Market prices are volatile in the short run.
The “lost” decade 2000-20009
• 33% Fixed Income Vanguard Total Bond Market Index VBMFX
• 27% US Stock Vanguard Index Trust Total Stock Market VTSMX
• 14% Developed Foreign Markets Vanguard Developed Markets Index VDMIX
• 14% Emerging Markets Vanguard Emerging Markets Stock VEIEX
• 12% Real Estate Investment Trust Vanguard REIT Index VGSIX
The “lost” decade 2000-20009
10. The four most expensive words in the English language are “This time it’s different.”
Sir John Templeton
For five year holding periods:
• gains of 1 to 25% 90% of the periods • losses of 1 to 12% in 10% of the period.
For 30 year holding periods:
• a gain every single time of 8% or more.
9. The past is past; future returns will be different.
Gordon’s Equation:
Expected Returns = Dividend Yield +
Dividend Growth Rate
S&P 500 Expected Average return
= 2.5% + 1.32% ≈ 4%
[Real] In the LONG run…
“I can calculate the motions of heavenly bodies, but not the madness of people.”
--Isaac Newton, after losing money in the South Seas bubble
Advantages of home ownership
• Rent is not deductible, but mortgage interest and property taxes are
• Realized gains in home sale is tax exempt
• A mortgage forces you to save
• Liquidity
Home sweet homeMortgage Advantages Disadvant-
ages Risks/
Remarks
Stand. 30 yr Fixed Payments
Stand. 15 yr Lower rate than 30 yr
ARMs* Low initial rate Rate rises fast If you can’t refinance!
Interest Only*
Lower payments Never paid off Special use
Payment Option*
FLEXIBLE Increasing debt Courting disaster!
“Reverse” Very special use
More Theory Next Week
• Chapter 3 pages 38-65• Watch for:• “Good” companies are often “bad” stocks and
“bad” companies as a group are “good” stocks.• Expected returns for asset classes are
proportional to the risk they pose.• Pascal’s Wager.• You can’t time the market. You can’t pick
stocks or fund managers.• Index funds versus mutual funds…