Emergency fund


As you might imagine, I talk to a lot of people about what they’re doing with their investments.  One of the things I hear a lot is, “I’d like to start investing, but before I do that, I need to build up my emergency fund.”  That sounds pretty prudent.  You don’t want to get caught in the lurch when life throws a curve ball at you.  Yet, I actually think this is a really bad move.  I freely admit that the Fox family does not have an emergency fund.  We have investments, and if the unforeseen happens that’s what we’ll use.


How likely is an emergency?

What are the types of things that you’d use an emergency fund for?  Almost by definition, an emergency is something that is unpredictable and somewhat rare.  If your 12-year-old Honda Civic is starting to die and you know in the next couple years you need to get a new one, that isn’t really an emergency as much as something you need to budget for (that was the exact circumstance of the Fox family two years ago).  If you’re having an “emergency” every year, either you’re the unluckiest of people, or probably  more likely you just have a lifestyle that needs to be budgeted a little differently.

When I think of things that you’d spend an emergency fund on it’s stuff like: your hot water heater gives out, you’re 7-year car gets totaled and insurance only gives you $6000 to get a new one, your son goes into the NICU for four days because of croup and your portion of the bill is $4000 (as happened with Lil’ Fox last year), or you are fired from your job.

As I was writing this post, I asked Foxy Lady if she could remember any emergencies that we have faced since we were married 5 years ago.  The hospital thing with Lil’ Fox was the only one we came up with.  There were smaller things like when we had to replace the dishwasher ($500) or fix the clothes dryer ($400), or fly back to Michigan for a funeral ($400), but the hospital thing was the only major one (I’m defining “major” as more than $1000).  So that means we have averaged one emergency every five years.  Once every five years—I don’t know if we’re more or less prone to emergencies than the general population, but that seems about right.

So let’s use that as an average—you have about a 20% chance in any given year of needing to tap into your emergency fund.  We’ll use that in a second.


How likely is it you’ll make money in the stock market?

Obviously we put a huge caveat on this, but we can look at historical performance to get a sense for how likely it is that you’ll make money or lose money if you invest your emergency fund in stocks.  Actually, we kind of did this in a post a while back.

Remember that historically, if you have a one-year investment time horizon, you make money with stocks about 70% of the time.  That is actually pretty good odds that investing your emergency fund in stocks would have you come out ahead, just looking at it for one year.  In fact, we can do the math, and the chances of you having an emergency in a given year and losing money in the market are about 6% (20% chance you’ll have an emergency x 30% chance you’ll lose money in the market that year).

But remember, emergencies don’t happen every year—they tend to be much less frequent than that.  For the Fox family, they happen on average once every five years.  Just for the fun of it I put a table together that estimated the chances of having an emergency if you assume in any given years there’s a 20% chance of having one.  Also, I looked at the historic data to see the probability that you would have lost money in the market over different time horizons.

Time horizon Chance of an emergency Chance of losing money in stock market* Chance of emergency and losing money
1 year 20% 28% 6%
2 years 36% 24% 9%
3 years 49% 18% 9%
5 years 67% 13% 9%
10 years 89% 3% 3%


As we mentioned above, there’s a 6% chance that in any given year you would need to tap your emergency fund when the market was down.  Looking at other time frames you get similar results.  Pretty much any time frame has a less than 10% chance of you needing that emergency money at a time that you would have lost money in the market*.  You need to decide if you’re willing to take that risk, but to me that seems like a no-brainer.  If I have a 90%+ chance of coming out ahead on something, I’m doing it.

You can see where I’m going with this.  First, emergencies don’t happen all that often (if they do, you probably need to come up with another name for them other than “emergency”).  Second, if you give yourself a few years in the stock market, the probability of losing money goes down a lot (of course, it never goes to zero).  That seems like a perfect combination for investing your emergency fund the same way you invest any of your other money.  $10,000 invested in stocks with an average return of 6% would give you about $13,300 after five years; keeping that same amount if your savings account at today’s interest rates would give you about $10,050.  Seriously, that’s ridiculous.

I get that many people look at that and say, “the whole point of an emergency fund is you never know when you’ll need it, so don’t put the money somewhere where you might lose it.”  That’s a very understandable concern, but it’s also where a lot of people are leaving a ton of money on the table.  Over the past 150 years, investing in stocks has a really good track record, and the more time you give it, the better that track record becomes.  You’ll never eliminate all the risk from investing, whether it’s your 401k or US bonds or the cash in your checking account, there will always be some type of risk.

It’s the successful investors who understand that risk and understand how to decrease the risk (expanding that time horizon to five years cuts in half the likelihood of losing money), that are able to get the most bang for their buck.  This is definitely one of those areas where you can get a 1% coupon.


The Fox family eats on our cooking on this one.  We don’t have an emergency fund.  When emergencies do happen like with Lil’ Fox, we pay for it out of our investments, absolutely believing that over our lifetimes there may be one or two instances where we lose money but there will be many, many more where we come out ahead.


Let me know what you think.  Do you have an emergency fund?  Do you think I’m crazy not to have one?

*I used the same methodology for this table that I did for my post “Will you lose money with stocks?”

International perspective–Russia

Stocky Fox is thrilled to be joined by his colleague from business school, Tanya Golubeva, who writes the blog about day-to-day life in Russia, www.understandrussia.com.


Stocky Fox: Tanya, thank you so much for chatting with us.

Understand Russia:  My pleasure.

SF:  Most of my posts are very American-centric, so I know my readers and I appreciate the opportunity to learn how investing works in other parts of the world.

UR:  I’m glad to do it.  Investing is done very differently in Russia than how you describe it in your blog, so it’s interesting to see those differences.

SF:  Obviously I’m obsessed with personal finance, investing, and saving for retirement, but I’m not alone.  Saving for retirement is one of the most important issues that people in the US think about.  How does that compare to Russia?

UR:  It’s very different in Russia.  For a bunch of reasons, Russians don’t save a lot.  Even the fairly successful ones who are making higher salaries, really aren’t saving much.  Certainly nothing like the numbers you talk about in your blog.

SF:  Why do you think that is?

UR:  One of the main reasons is Russians don’t have a lot of faith in the financial system.  It has been so   unstable for so long that no one really trusts it.  I’ll give you an example with my grandparents.  They were frugal and saved for their whole lives.  When they retired they had enough to have a comfortable retirement—they could buy several good cars (Volgas were the best), help their kids and grandchildren, all the stuff you talk about in your blog.

SF:  That sounds exactly like what we do in the US.  So what happened?

UR:  In 1991 there was a crazy financial meltdown.  Old bank notes were replaced with new bank notes.  50 and 100 Ruble notes issued after 1961 became invalid. People could only exchange their old bank notes during a 3 day window, but no more than 1000 Rubles per person.  It was a horrible time and tens of millions lost nearly all their money.  So overnight my grandparents lost 90% of their savings.  They went from being extremely comfortable to having a very, very modest savings.  That all happened literally over the course of a week or so, it was that fast.  And that’s just one example.

In my lifetime there’s probably been four or five crises like that which just destroys people’s savings.  So Russians just don’t trust that their savings will be worth anything in the future.

SF:  That’s crazy.  So if people don’t save their money, what do they do with it?

UR:  Russians, especially those in the upper class and upper-middle class, just spend a lot of money.  We’re always buying gadgets—I’m the only one of my friends who still has an iPhone 5, everyone else has an iPhone 6.  People also eat out a lot, and depending where you are that can get really pricy.  Moscow and St Peterburg are really expensive cities, and it wouldn’t be unusual to spend $200 per person at a nice restaurant.  And we go on vacations a lot because so much of the year it’s dark, and when we go it always tends to be first class. When you are not sure about the security of your savings or investments, it makes sense to use the cash you have here and now.

SF:  That sounds like a pretty sweet lifestyle for the wealthier Russians . . .

UR:  It’s not just the wealthy Russians.  Certainly they have more money to spend than others, but that really applies to all Russians.  Any Russian who takes a vacation is going to probably spend more, a lot more, than an average American or European.  They’re spending it on nicer hotels, going out to dinner at nicer restaurants—they just want to go first class. “We live once” is the phrase that many people adhere to.

SF:  So if Russians are spending so much and not saving, what do they plan to do when they get older and can’t work anymore?

UR:  That’s a curious quality of Russians.  There is a duality about us in so many things and money is certainly one of them.  On one hand we know we need a “rainy day” fund and need to save for that, but we also want to live for today.  That’s an internal conflict with most Russians, and typically living for today wins out.

So in answer to your question, no one really thinks about it.  When I talk to my friends we discuss all sorts of things—fashion, politics, jobs, relationships—but we never talk about money.  It’s a taboo subject.  In Russia you can never ask a woman how old she is and you can never ask about money issues.

SF:  Shoot.  I guess I can’t ask my next question (just kidding).  There are very similar taboos in the US.  However, it seems that Americans are more open to talking about money if you look at the number of blogs, articles, and television shows about money and investing.  So what do people do when they get older?

UR:  Most people from my parents’ generation have kids who help them.  They may still live together, but more often kids buy their own apartments if they can afford that, but help the parents financially.   That said, many elderly are extremely poor (average pension for elderly is about $200 per month), which is very sad.  For my generation, getting help from your kids will be a challenge because the birthrate has decreased so much.  So definitely something will need to be done, but I don’t think anyone really knows what that will be.

Also, there is a government run pension similar to Social Security, but no one really thinks that’s very reliable.  In the past few months, the government has started using funds from that to help finance all the things it is doing in Ukraine and Crimea.  I personally don’t think I’ll ever get a kopeck from that.  It’s like a lottery, but no one ever wins.

SF:  A lot of people say the same thing about Social Security.  I don’t know if my generation will get anything from that.

UR:  As bad as your Social Security might be, I guarantee you it’s nowhere as bad as the Russian pension system.

SF:  But some Russians must save money.  What do they do?

UR:  First off, there isn’t anything like a 401k in Russia.  I know you talk about those in your blog a lot as one of the main ways people save money and invest in stocks.  That just doesn’t exist in Russia.

If they do save, the most common way is to deposit money in a commercial bank.  Deposits in rubles have high interest rates (in double digits). But the exchange rate went from 34Rub/$ last June to 60 Rub/$ recently, so you ended up losing quite a bit (in terms of dollars) because of that. You can also save money in US dollars and get interest rates between 5-8%, so that’s a really good deal.  The government will insure your money up to a certain amount (equivalent to about $20,000), so it’s pretty safe.  It’s not uncommon for upper-middle class people to have multiple accounts like this in several different banks.

SF:  Holy cow!!!  8% interest on a savings account.  That’s what you can get investing in stocks, but you don’t have the ups and downs of the stock market.  Can the Fox family give you some money to invest for us?

UR:  Sure, just send me the money and I will make sure I invest it in banks that are covered by the State Insurance. No problem, happy to help a friend. In Russia we never “do deals” with friends. I will spend my own time to invest your money and will do all the necessary research and will not charge you any commission or interest rate for that because we are friends. That is how it works here.

SF:  In my blog I spend a lot of time talking about how investors should buys stocks (or mutual funds made up of stocks).  Do Russians invest in stocks?

UR:  Most people do not.  Some people do, but these are very few people. First, financial literacy in Russia isn’t anywhere near what it is in the US, even among highly educated Russians.  Second, why would we invest in stocks if we can get 8% interest from a bank [Stocky Fox nodding in agreement]?  Third, most wouldn’t even know how to invest in stocks.  Honestly, I wouldn’t know where to go to open a brokerage account.  I would be afraid anywhere I went would probably be a scam, and I’d be right more often than not.  So no one really invests in stocks.

SF:  You mentioned financial literacy.  Why do you think Russians aren’t that financially literate?

UR:  You have to understand that culturally stocks just aren’t that visible in Russia.  In the US, they’re everywhere; you can’t go anywhere without seeing a company that has a stock that people talk about.  I bet for every one Russian company that is publicly traded you have 50 American companies—McDonalds, Microsoft (my former employer), Apple, Coca-Cola.  Because of that, Americans probably understand these companies more and therefore understand their stocks.  You just don’t have that in Russia.  But I think that could be a huge market opportunity.

SF:  Market opportunity?  What do you mean?

UR:  Just look at our conversation.  There are many Russians who are educated, making good incomes, and probably know that they need to save for the future (even if they don’t admit it right away).  But where would they go to do that?  You have places like Vanguard and Fidelity in the US that make it really easy.  We don’t have any of those places. Literally, Fidelity and Vanguard are not available in Russia.

If someone started a company that could help Russians understand how saving and investing works (similar to what you do on your blog—the power of compounding), and then allow them to invest with someone who they could trust wouldn’t steal their money, that would probably be hugely popular. I think that a lot of companies tried to do that, but the fact that I cannot name one company I would trust my money makes me think they were not very successful

SF:  Hmmmm.  I wonder if there could be a Russo-American partnership.

UR:  Maybe.  I’m telling you, who ever could figure that out would have tons of customers.

SF:  On that positive note, I really want to thank you on behalf of all my readers for giving us some insight into how investing and savings works in Russia.  It’s definitely a completely different world from what I’m used to here in the US.

UR:  I was happy to do it.  Thank you for having me.  And for all your readers, please visit me at www.understandrussia.com.

SF:  I know I will.  Thank you, Tanya.


For all my international readers, I plan on doing more of these types of posts that tell us how investing works in different parts of the world.  If you would be interested in sharing how it is done in your country, please contact me and we can set something up.

Balancing risk and reward

“Nothing ventured, nothing gained”—Benjamin Franklin



That Benjamin Franklin guy was pretty smart.  This is the second time one of his quotes have landed on this blog.  Now that you’ve entered the world of investing, you need to figure out how you balance the two fundamental, opposing forces of investing: risk and reward.  At its simplest, investments compensate investors who take on greater risk with higher returns.

Think of the least risky investment you could make—a savings account.  You could invest your money and know that your investment won’t lose money.  You could take out the money in a week, a month, or a year; and you would get your original money plus a very small amount of interest.  In the US, the risk of you losing money on this investment is 0%.  Unfortunately, because there’s no risk, the “reward”, the interest you make, is extremely low: less than 1% currently.

Let’s take a small step up the risk scale—short term government bonds.  The chances of you losing money investing in a 1-5 year treasury bond (let’s assume you invest in a short-term bond mutual fund like VSGBX), are extremely low, but it isn’t 0%.  There is a chance, albeit small, that changes in the market (interest rates) could decrease the value of your investment.  You’re taking on a little bit of risk (since 1988 there has never been a year where VSGBX has lost money), and to compensate for that risk these investments historically tend to return about 1-2%.  So you’re being paid a larger return than your savings account because you’re taking on more risk.

Take another step up the risk scale and you get to long-term government bonds and corporate debt (using a mutual fund like VBMFX).  These are riskier because there is some chance that you won’t get paid back; this is true for corporate, foreign, or municipal debt.  These are also riskier because like their less-risky cousins, the short-term bonds we just mentioned, long-term bonds can change in value due to changes in things like interest rates.  The difference with long-term bonds is that the effects are magnified; so if interest rates go up, that would cause the value of your short-term bonds to go down a little, but the prices on your long-term bonds would go down much more.  As you would expect, since long-term bonds are a little riskier (since 1988 VBMFX has lost money in 2 years), they tend to return a little more, historically in the 3-5% range.

Now, take a big leap up the risk curve and you get to stocks.  Stocks are extremely volatile, especially over the short-term.  Since 1930, there have been 24 years (about one-third of the time) where US stocks have decreased in value.  It’s definitely a rollercoaster ride.  Yet, by bearing the risk that in any given year your investment might go down in value, sometimes down a lot like in 2008 when stocks went down 37%, you get a significantly higher return.  Since 1930, stocks have returned on average about 8%.


As you can clearly see in the chart, when you invest in assets with higher average returns (like stocks) you have a lot more volatility in those returns from one year to the next.  When you invest in assets with lower average returns (like bonds, especially short terms bonds or even cash), you enjoy much more stability in the value of your investments.


What’s your appetite for risk?

As an investor you need to determine what your appetite for risk is.  How will you balance the yin of high returns with the yang of higher risk?  At the end of the day, you need to have an investing strategy that allows you to sleep at night.  There’s no amount of money that’s worth freaking out every time the market takes a down turn, and it is certain that the market will take down turns.  Sometimes it will be a free fall like in 2008 when stocks cratered 37% or it might be a long-term grind like from 1973 to 1978 where stocks fell 23% over the course of 5 years.

That said, a long time horizon is your best friend when dealing with a volatile stock market.  While any given year might be crazy, over time there tends to be more good years than bad.  Take 2008: in 2008 stocks fell by 37%, and if you needed your money at the end of that year you were hurting.  On the other hand, if you had a longer-term investing horizon and were able to stay in the market, all your money would be made back by 2012.  In fact, while about 33% of the years have been down years for stocks since 1930, over that same period of there was only one decade, the 1930s, when stocks were down.

So how do you invest?  Well, you need to figure out your risk tolerance.  Here’s a good way to do that.  Imagine yourself as an investor at the end of 2008.  You’re in the depths of the financial crisis, stocks are down 37%, and pundits are saying we may be on the brink of financial collapse.  What do you do?

Some people like Warren Buffett and Stocky Fox (for important statements I revert to the third person) looked at that as an opportunity to continue to invest in stocks, just now we were buying them at a substantial discount compared to 2007’s prices.  In the end our faith was rewarded and we made a killing.  However, there were some times when the news just kept getting bad and Pepto-Bismol came in extremely handy.

Others felt burned by the 2008 investing bloodbath and pulled their money out of the stock market to put it in safer investments like bonds or cash.  They did so knowing their actions limited their potential for higher returns, but many were willing to accept that if it meant not having to risk their money continuing to disappear into the black hole of the financial crisis.

There’s no right or wrong answer.  You just need to figure out where you’re comfortable and invest accordingly.  If you’re willing to weather the storms then you should probably invest more in stocks.  If you’re more risk averse, then you should probably invest a larger portion of your portfolio in bonds.

Just remember, there’s no such thing as a free lunch.  With higher returns come higher risk.  If you want safer investments, you have to be willing to give up higher returns.

2015-Q1 in review

We just got through the first quarter of 2015.  And as it turned out, it was a pretty good quarter to be an investor, especially if you had diversified your portfolio to include international stocks.  Pacific stocks led the way up 8%, followed by Emerging stocks up 6%, European stocks up 4%, and US stocks up 2%.  Just for comparison, a bond mutual fund (VBMFX) was up about 1%.  So all things considered, that was pretty good.  What do these past three months tell us?

quarterly performance


Things tend to balance themselves out:

Over these past three months, the markets have swung wildly up and down, but those swings tend to cancel each other out and you end up not that far from where you started.  Let’s look at the US markets here—it was up about 2% for the quarter.  During that time there were 63 trading days, and the Dow Jones Industrial Average was either up 100 points or down 100 points an astounding 36 times; that’s 57% of the time.  Think of all those times when the market was down 100 points and everyone was talking about how terrible things were becoming.  Think of all those times when the market was up 100 points and everyone was talking about how good things were.  All those balanced out and the US market finished about 2% above where it started, despite those crazy swings.


Tragedies tend to not impact stock markets:

Very sadly, we’ve seen several tragedies in these three months.  Terrorist attacks in France, Nigeria, Kenya, and other countries killed thousands.  Wars in Yemen, Syria, and Ukraine have displaced millions and ground national economies to a halt.  A demented pilot intentionally crashed an airplane, murdering 149 innocent passengers.  Plus the “usual” natural disasters which killed people and destroyed property as always happens.

All these things capture the headlines for days at a time, yet they don’t really have a noticeable impact on the global economy.  Cars and phone and t-shirts continue to be made.  Oil and gold and wheat and cucumbers continue to be plucked from the earth.  Lawyers continue to appear in court and doctors continue to treat patients.  Those tragedies impact us emotionally but it doesn’t change how much we produce and how much we consume.  In that way life goes on as usual.  Of course, there are tragedies that have a major economic impact (World War II is probably the best example), but those aren’t very common; certainly none this quarter qualify.


Headlines have a short shelf-life:

In the 63 trading days this quarter, there’s probably been let’s say 100 major headlines.  How many can you name?  Sure, some of those tragedies might come to mind, but what about on some random day like Wednesday, January 21?  The biggest national story of that day was the measles outbreak at Disneyland.  Two months later, does that even matter?  The aftermath provoked a nation-wide debate about immunization, but even the energy around that has died down as the nation’s attention moved on about 40 more times.


The Fed will change its mind a million times:

It seems every week there’s some event involving the US Federal Reserve.  Either some report is coming out, Janet Yellen is making comments somewhere, minutes from some previous meeting is be released, or something else.  The global financial industry hangs on every word trying to divine if that word means interest rates will rise or if that comment means they’ll stay flat.

In the past three months there have been no less than 10 days where markets moved up or down over 1%, largely driven by reactions to the Fed.  Think about that though—it swings up or down almost weekly, but add them all up and you end up almost where you started.


You’ve probably noticed a trend, and this is really the point of me doing these weekly and quarterly reviews.  For all the news that we’re constantly barraged with, most of it really doesn’t matter when it comes to investing.  If you were Rip Van Winkle and were asleep for the past three months, you’d wake up and see your investments were up 2% in the US and more in international markets.  From an investing perspective, would it have mattered that you missed those 100 headlines?  Probably not.

I say all this as a reminder that investing is a long-term proposition.  Everyday there will be plenty of “action” that gives talking heads and reporters fodder and makes the market “wiggle” but those effects only last until the next headline.  Wise investors look past this and benefit from keeping their eye on the horizon.

On that note, have a very happy Easter tomorrow.  Lil’ Fox has been talking incessantly about the Easter Bunny coming and bringing “candy eggs” all week.

Week in review (3-Apr-2015)

This was a pretty tame week (it was also shortened, with no trading due to Good Friday), with the major markets in a pretty tight range: plus/minus 0.5%.  US and European markets were up 0.5%, Pacific markets were down 0.5%, and Emerging was right in the middle.  That said, if you look at things day by day, it was a little bit of a roller coaster with a big up day on Monday and then a big pull back on Tuesday.  So what caused all the excitement?



Economic projections in US looking good:

The National Association for Business Economists (how do I get to be a part of this group?) expects good news across the board in the coming years—lower unemployment, real GDP growth in the 3% range, and inflation less than 2%.  That’s about as good as it gets, right?  Certainly, the jaded investor might look at those projections with a jaundiced eye (I’ll believe it when I see it), but I’ve got to say they seem to ring true.

A major energy revolution is underway where the US is now the biggest oil producer in the world (who would have thought that would be the case ever again?).  That’s creating a lot of jobs, potentially giving the US energy exports, and keeping a lid on inflation.  Beyond that, there is a ton of amazing innovation out there that seems to be providing great opportunities to keep things moving forward.  Of course, these things are impossible to predict, but hearing such a positive endorsement does help.  The markets felt the same way, as they all rose on Monday over 1%.


Indiana’s “religious freedom” draws ire:

The news cycle was dominated by the passage of a law in Indiana which has been interpreted as allowing businesses to “refuse to serve” people who go against their religious convictions (i.e., gay people).  There’s been a ton of controversy on this one, and rightfully so.  Mike Pence, governor of Indiana, has been tracking and backtracking on what the law actually means and allows people to do.  Regardless, the business community has come down on the Hoosier state like a ton of bricks.

Many organizations threatened to relocate their conventions away from Indianapolis.  Angie’s List put expansion plans in Indiana on hold; Salesforce.com was assisting its employees in moving away from Indiana.  Obviously there are moral issues at play here and you may fall on either side of the debate, but from an economic perspective, this is unambiguously bad.  Certainly it’s bad for Indiana and its economy, but also for the rest of us.  Indiana is home to some great companies (Eli Lilly, DePuy, Zimmer, Johnson Outboard Motors, Weaver Popcorn to name a very few).  If consumers forego using their great products because of a reaction to the recent law, that hurts consumers as well.  Everyone loses.

Yesterday they passed a “fix” to the law which reserves a lot of the most controversial elements of the original measure, but the perception damage was done.  I imagine that the budding Indiana “embargo” and “boycott” will fade away, but this was definitely a bit of a negative for the investing community.


Iran nuclear deal:

The international community seems to have arrived at a nuclear deal with Iran which limits their ability to develop nuclear weapons and in return eases economic sanctions.  On the surface this is an unambiguously positive development.  The Iranian market will start to open up to the world so you’ll have 80 million customers buying clothes and food and energy and gadgets and all sorts of other stuff that they couldn’t buy before.  Also, it opens up the world to Iran exports, specifically oil which should continue to put downward pressure on energy prices.

That seems like a win-win and I think the markets have reacted accordingly.  Of course, there is a risk, best stated by Israeli Prime Minister Benjamin Netanyahu that this deal makes the world a more dangerous place by potentially getting Iran closer to developing nuclear weapons.  Clearly, opinions differ among the world’s leading politicians on this one, but if you believe President Obama’s talk track that the protections are in place to prevent that from happening, this news is a nice early Easter present for the investing community.


So that is my take on this week in the markets.  For those of you who celebrate Easter, have a great holiday and you’ll see my next post on Monday.

Will you lose money with stocks?

This is probably the most common question you get from people who are considering starting to invest in stocks.  It’s pretty understandable; you work hard for your money and the idea of it disappearing into the black hole of an unpredictable and often times not-well-understood stock market is pretty hard to stomach.  Add on that scars from the 2008 Great Recession, 2001 Internet Bubble, Black Monday in 1987, Black Tuesday in 1929, and on and on and on.

So, what’s the answer to the question:  Who knows?  The stock market is unpredictable and no one knows what will happen in the future.  That’s not an especially satisfying answer, but it’s the truth.  If I could predict the stock market I would own my own island in the Caribbean next to Johnny Depp’s.

But I can hear you saying, “Come on, you’re Stocky Fox.  You can do better than that.”  You’re right.  I’m taking on the challenge and answering the question: Will you lose money with the stock market?


I won’t try to predict what will happen in the future, but I think you can look to how things have behaved in the past, and get a pretty good perspective.  Of course, there’s no certainty that the future will be like the past, but that’s the best we have to look at.

You can get somewhat decent data on the stock market going all the way back to 1871.  Back then, your great-great-great grandfather was getting The Stocky Fox as a newsletter delivered by the Pony Express.  Going that far back, you can calculate the percentage of the time that you would have lost money investing, historically.

So imagine starting in January 1871 and investing $10 every month in the US stock market.  By January 1872, you would have invested a total of $120 and your stocks would be worth $128; congratulations, you just made a profit.  You can do that for every 12-month period since 1871 (there are about 1700 such periods), and you come out ahead 71% of the time, which seems pretty good.  But the flip side is that you’d have lost money 29% of the time, and at least to me that is too high to be really comfortable.

Chart for losing money

However, remember that when investing stocks, time is on your side.  Do the same exercise but for five years; if you started in January 1871 after 5 years you would have invested a total of $600 which would be worth $679 in January 1876 (yeah, profit again!!!).  Do that for every five-year time period and you end up losing money only 13% of the time.  By adding another four years to your investing time horizon that decreased the chances that you would have lost money by 20%!!! That seems pretty amazing.

You can keep doing that for longer time periods, and as you could guess, the percentage of times you would have lost money keeps going down.  Astoundingly at the 20-year mark, you would have lost money only one time out of the nearly 1500 periods possible (the one month was June 1912 which, you guessed it, was 20 years before the Great Depression bottomed out).  At 30 years, there isn’t a single time period where consistent investing would have lost money!!!  That’s not a misprint.  Read that paragraph again.

There are no guarantees, but if you use history as a guide, it’s pretty much a sure thing that you’ll make money in the stock market.  Certainly it involves a lot of discipline, investing month after month no matter how bad things look (dollar cost averaging).  Also, it doesn’t necessarily mean you always make a lot of money, but the data seem pretty powerful.  Additionally, I didn’t take inflation into account so that would definitely skew the numbers downward (but you know how I feel about the integrity of the data on inflation, so there you go), but the message remains largely unchanged.

I must confess that I was a bit surprised by the data.  Actually, I spent about 30 minutes going through the spreadsheet to see if I made any mistakes; I’m pretty confident the analysis is sound.  As Dr Brown asked Marty in Back to the Future, “Do you know what this means?” (just don’t take what he says after that and apply it to my analysis).  If your time horizon is 20 years or more, at least based on history, there’s virtually no chance that you’ll lose money.  I figured it would be a pretty low chance, but zero chance?  I didn’t see that coming.  Even people who invested for 20 years then pulled out after the Great Recession in 2008 did fairly well (invested $240 which became worth $339).


So there you go.  My answer to the question posed at the top is still: No one knows what the future holds.  But the historic data confirms my personal belief that the stock market is a really great place to invest your money.  I lose no sleep worrying about the Fox family’s investments increasing in value.  I know over the long term they will.