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February 13, 2005
Both sides exaggerate
When talking about Social Security, you don't see much detailed example analysis in the blogosphere because it is pretty labor intensive. From the left, you get a lot of cries of ENRON! (can we retire that already?) and a lot of misinformed comment about the inability to purchase the "average stock." I saw one blogger say that it was unrealistic to look at the return of the Dow Jones Industrial Average because the stocks that make it up aren't the same as the ones that were in it last year or ten years ago or in 1960, or whatever.
Most people that know anything about investing know that there are market vehicles like mutual funds or index funds that track broad baskets of stocks, in the case of index funds they will track the exact stocks that make up the Dow, S&P 500, Nasdaq, whatever you want, and the funds rebalance when the index rebalances. So if you bought a fund that tracked the S&P 500 in 1980, you'd start out with those 500 stocks but today you'd have the same 500 stocks that are currently in the index and you wouldn't have to do anything save pay a small fee each year for a manager to buy and sell accordingly.
In fact, one thing that should be reinforced is that the existence of the stock market is a good thing, and on a whole if you understand the risks involved and invest wisely it has been and should continue to be a good creator of wealth.
The misinformation from the right is worse than the "scare tactics" of the left, because the people on the right really should know better, since many of them fancy themselves economists. One thing you'll commonly hear is an average rate of return being used. Be wary. In December 2003, the 50 year average return of the S&P 500 was 7.9%. But the average 30 year return that same month was 8.4%. How could they be different? Well, timing is important. In September 2002, the average 50 year return was only 7.2%, the average 30 year return was 6.9%.
Be wary of people that promise you certainty when a quick tallying of numbers will show that no such certainty exists. The market is fluid, and so are rates of returns.
Posted by Chris at February 13, 2005 03:53 PM
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