I wrote a Guest Blog Entry re the new Returns-Sequence Reality Checker calculator that appears today at the Consumerism Commentary blog. It’s called The Good Side of Stocks’ Lost Decade.
Juicy Excerpt: The reason why I call the calculator “The Reality Checker” is that it throws doubt on one of our most fundamental beliefs about stock investing — that positive returns are good and that negative returns are bad. It’s not hard to understand why most of us think that. If your stock portfolio is valued at $100,000 at the beginning of the year and you see a 10 percent gain for the year, the portfolio is valued at $110,000 at the end of the year. If the gain is 20 percent, the ending value is $120,000. It’s obviously better to have $120,000 in your retirement account than it is to have $110,000 in your retirement account.
Except it’s not. Not really. Not when you look at what big, positive returns do to your portfolio balance in the long run.
The thing that fools us is that we think of ourselves as owners of stocks. In markets, the interests of the owners of the thing being offered for sale are opposed to the interests of the people considering buying the thing being offered for sale. Owners want high prices and buyers want low prices. To the extent that we really are owners of stocks, we are right to think of price gains as a good thing.
But we forget that we are not only owners of stocks. We are also buyers of stocks. Most of us are more buyers than we are owners. To the extent that we are buyers, we are rooting against our self interests to root for price gains.