Author Archives: Rob McClelland

Rob McClelland

About Rob McClelland

Vice President, Co-Branch Owner, Senior Financial Planning Advisor

AWealthOfCommonSense.com:

“In his book The Ages of the InvestorWilliam Bernstein describes a mythical employer named Uncle Fred who offers investors a retirement savings scheme determined by the flip of the coin. One side of the coin results in a +30% annual gain while the other side gives you a -10% loss in a given year.

Since the coin toss gives you a 50/50 shot at each outcome, this would give investors a compounded annual return stream of around 8.2% with a 20% standard deviation, not too far from the actual long-term results in the stock market.

Now let’s say you decide to contribute $1,000 each year for the next 40 years into Uncle Fred’s scheme. And let’s further assume the coin flip works out to give you 20 positive return years in a row followed by 20 negative return years in a row. In this scenario, you would end up with a little more than $100,000. Not bad, but you barely kept up with the long-term inflation numbers. ”

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AWealthOfCommonSense.com:

“One of the reasons it’s so difficult to outperform the market is because so many individual stocks themselves underperform the market. It’s not a symmetrical distribution where half the stocks outperform and half underperform.

A few years ago Michael Cembalest at JP Morgan performed an extensive study on the Russell 3000 Index, which is a good proxy for the overall U.S. stock market. He found:

  • The excess return on the median stock since its inception versus an investment in the Russell 3000 Index was negative 54%.
  • Two-thirds of all stocks underperformed versus the Russell 3000 Index from the time they were added to the index. And 40% of all stocks had negative absolute returns, suffering a permanent 70% or more decline from their peak value.
  • The percentage of extreme winners in the index was in the single digits, meaning a very small percentage of stocks carried most of the weight for the remaining underperforming stocks.”

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