YMM Reading List

Monday, September 27, 2010

Your returns will not be linear

I have a serious beef with the financial calculators you find online. You plug in how much you have or how much you're saving each month, how long you'll save the money, and an interest rate, and the calculator tells you how much you'll be worth. Now, this works ok if you commit to an investment plan and stick to it. But, if you're like most people, you change your mind, follow the latest trend (like gold now or tech stocks 10 years ago), and turn your financial life into a roller-coaster ride.

Your net worth-growth will not be linear. You'll have lean years (2008) and rich years (2009), and your accounts will ebb and flow. If you've got a huge gainer, wait a bit and it'll return to lower price later. If you're familiar with dollar cost averaging, as you add money to your investment plan you add more shares when the prices are low and purchase fewer shares when the prices are high. Over a period of years if you stick with your plan you'll see rates of return in line with the market averages, and that's what all these financial plans are based on.

1 comment:

Hank said...

Your beef isn't with the financial calculators. It is with poor investors. Your beef is that people do not invest rationally and logically with tried and true methods like dollar cost averaging. Your beef is with people because we are human and prone to act irrational.