There are a whole bunch of numbers on the internet being thrown around and proclaimed as the long term return of the U.S. stock market. Anywhere from 7%-11% depending on who you believe. This number is the basis for a lot of folks' investment decisions and its accuracy is not something to be taken lightly... especially when a couple of little problems become apparent when you stop to think about the methodology most commonly used.
So I've decided to go into the historical data for the S&P 500 index and try to calculate it for myself.
When it comes to portfolio allocation, the conventional advice is to move more of your portfolio into bonds the closer you get to retirement. "Bonds are safer than stocks" goes the mantra. After all, what makes bonds "safe" is that you receive a guaranteed rate of interest and you get paid before stockholders do if the company goes belly-up. And for those that prefer bond mutual funds, they supposedly fluctuate less than equity (stock) funds. Bonds and bond funds are therefore supposed to cushion the risk of a stock market crash.
In this article, I will talk about how blindly following this advice can be dangerous to your portfolio.
Your mortgage rate is 3.75%. The stock market returns 7-11% on average (depending on who you ask). You'd have to be a fool to pay extra on your mortgage when you can make so much more in the stock market.
Do you subscribe to any of these beliefs?