GMR 97: Rules of Investing Part 2

Episode 97
The world of investing is shrouded in mystery, full of difficult to understand words and rules. No wonder so many people feel lost, and so few dare to invest. In this episode of GMR, we demystify the rules of investing to give you the foundational knowledge you need to be confident and bold in your investing.

SHOW NOTES

 

Bull Market vs Bear Market

 

Bull

  • Bull markets are characterized by optimism.

  • There is no specific and universal metric used to identify a bull market. 

  • The most common definition of a bull market is a situation in which stock prices rise by 20%, usually after a drop of 20% and before a second 20% decline. 

 

Bear

  • Typically shrouded in pessimism.

  • Stock prices fall by 20% from their peak.

 

The market moves in cycles, things will be high for quite some time, followed by fear entering the market and a downtrend into a bear market, then followed by a general recovery of the market and back into a bull market.

 

Analysts can typically only recognize this phenomenon after it has happened.

 

The Current Market

  • The current bull market that started in March 2009 is the longest bull market in history. (as of today 127 months).

  • It's topped the bull market of the 1990s that lasted 113 months.

  • However, the current bull market, which has seen the S&P 500 rise 330% in its 10+ years, is still second to the 90s bull run, which returned 417%.

 

Where Did These Terms Come From?

  • BEAR - Etymologists point to a proverb warning that it is not wise "to sell the bear's skin before one has caught the bear." By the eighteenth century, the term bearskin was being used in the phrase "to sell (or buy) the bearskin" and in the name "bearskin jobber," referring to one selling the "bearskin." Bearskin was quickly shortened to bear, which was applied to stock that was being sold by a speculator and the speculator selling the stock.

  • BULL - Ancient sacrifices signifying the anticipation of a good harvest or plentiful increase. You don’t sacrifice a Bull unless you trust good things are coming, or you’re trying to come out of something bad. So the idea is that good times are ahead.

  • Other etymology: Early London stock exchange, when traders would fill a bulletin board with “bulls” (that is, bulletins) during times of volatile trading, while in slow markets the board would be bare.

  • Other etymology: Some people say the terms refer to the ways the animals attack their prey: Bears swipe downward with their paws while bulls thrust upwards with their horns. 

 

4% Rule 

  • The four percent rule is a rule of thumb used to determine the amount of funds to withdraw from a retirement account each year. 

  • This rule is used to calculate a steady stream of income to the retiree from their investment, while also keeping an account balance that allows funds to be withdrawn for a number of years. 

  • The 4% rate is considered a "safe" rate, with the withdrawals consisting primarily of interest and dividends meaning, you won’t lose the balance of your investment, because you’re only taking out the amount it’s growing each year.

  • The four percent rule was created using historical data on stock and bond returns over the 50-year period from 1926 to 1976. 

  • Prior to the early 1990s, 5% was generally considered a safe amount for retirees to withdraw each year. 

  • William Bengen (financial advisor) - skeptical of whether this amount was sufficient, in 1994, conducted an exhaustive study of historical returns, focusing heavily on the severe market downturns of the 1930s and early 1970s. 

  • He concluded that even during weak markets, no historical case existed in which a 4% annual withdrawal exhausted a retirement portfolio in less than 33 years.

  • What does that look like in actual income?

  • To have at $75,000 yearly income you’ll need to have saved  $1.875 million.

    • However, that’s assuming you add no additional income from Social Security or from working.

    • If you earn $30,000 from other sources, and take the other $45,000 from your retirement account, at 4% you would only need $1,100,000 in the account.

 

Market | Limit | Stop 

 

Market

  • Executes the trade immediately and at the best available price

 Limit

  • Buy or sell at a specific price

  • Can be seen by the market place

 Stop

  • Invisible to the market until a specific price is reached, then places the order.

 

RESOURCES

Budgeting and Debt Elimination Tools
Jesus on Money by David Thompson - stewardshippastors.com

Leo SaboComment