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The craziest statistic about personal finance

It is hard to shock me these days. However, one of Warren Buffett’s stories he told on CNBC really made me stand up and take notice.

In 1941, the world was in a gloomy place. We think that we are living in unprecedented times today, but back then was much more extraordinary.

Hitler was winning the war, which was the second world war in a generation. Large parts of Europe and the world were in disarray.

The U.S. didn’t even come into the war until the Japanese attacked Pearl Harbor on December 7, 1941:

The future looked bleak. The future looked almost as bleak during times like the Cuban Missile Crisis almost 20 years later.

Yet $10,000 invested in the S&P500 in 1941 would be worth over $50m today. — warren buffett $10,000 invested in S&P 500 in 1941.

Now sure you have to account for

  1. Inflation. The nominal 10% yearly returns are cut to 6.7% adjusted for that
  2. The returns have varied. So of the years and decades after 1941 have been bad for stocks, like 65–82 and 2000–2010. Some years, like the 1990s and 2009–2020, have been much better
  3. You need to reinvest the dividends to get those returns
  4. Only people who created generational wealth would have gotten those returns.

Nevertheless, it shows the power of investing for decades, and not caring about what happens in the middle.

It also shows that we have always lived in extraordinary times in some ways, so it is best to ignore short-term news like market crashes, virus, elections and so on.

Other incredible facts are

  • The average investor’s returns are about 40% of what the index produces. This is often precisely because they assume “this time is different” every time an event like a virus, a 9/11 or crash happens. They sell out basically.
  • During the crash of 2020, 35% of people over 65 were estimated to have panic sold between March and May.
  • The dead outperform the living in investing. Those who forget about their investment accounts do the best amongst the living! They can’t panic by definition……
  • The average British and American person only has about 10,000 invested for retirement and most don’t have a workable alternative like a passive income-generating business.
  • 80%-90% of many leading stock markets is now controlled by institutional investors and wealthier people. There has never been a strong correlation between the stock market and the economy, but these days, the correlation is even weaker. Stocks can do well during recessions, or badly during good economic times
  • In fact, about 80% of the stock market is now automated
  • On average a stock market correction happens every two years. So, falls of 10%-20% or above are very normal. There have been countless 35%-50% corrections since 1941!
  • The Nasdaq has beaten all other markets in the last 30 years, going up by about 12% per annum. Yet it decreased by 70% after 2000, and another 50% during 2008. It took about 14 years to recover from 2000. That didn’t stop the long-term investor from doing well, though, if they were patient enough.
  • The Chinese Stock Market has halved in value since 2006. During the same time, the S&P500 has gone up by 200% and the Nasdaq about 500%. This once again shows that growth and markets aren’t always linked.
  • The S&P500 has historically gone up in about 70% of years. It has never been down over a 25- to 30-year period.

The stock market rose from 1918–1920, despite a pandemic and world war. They have also risen during most government shutdowns as per the graph below. So, this “trend” of markets not being predictable isn’t really anything new.

Thanks for Reading

Image source Google

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