Money-Weighted Rate of Return

Finance allah shmoop what are time and risk waited rates

of return a dollar today is worth more than a

dollar tomorrow Like that's the central prayer of the financial

force Here's the gist You've double your money in an

investment Is that good Bad ugly mon We need a

whole lot more information here Tto answer Did you buy

thirty eight million and two dollars worth of lottery tickets

and that last two dollar ticket got you seventy six

million in winnings Was that like a good investment Or

how about this You took thirty six years to double

your money Was that good I answer to both No

not at all The lottery ticket example is a risk

waited return The lottery famously takes advantage of ignorant people

spending their hard earned money on tickets representing dreams but

which have horrible odds of any kind of decent pay

back But the lottery makes go into a vegas casino

look like actually a good deal so you may win

but it's a bad risk no matter how you look

at it And hey somebody has to pay those teacher

pension bill So why shouldn't it be people who didn't

graduate high school Right Well the time waiting is a

big deal to in a world where the stock market

broadly speaking doubles on its own About every eight nine

ten twelve years Something like that This calculation is done

over very long periods of time and it's held true

for about a century and change in america So if

he took thirty six years to double your money well

it implies you only made two percent a year as

your rate of return Remember that rule of seventy two

thing Yeah that right there Seventy two divided by thirty

six and you get a whopping two percent return Well

in that same period of time the market might have

doubled in four times So the ten grand that double

to be twenty grand in thirty six freakin years under

your watch we'll have you just put it into an

index fund of the s and p five hundred over

that same time period Well it would have doubled once

along the timeline here to be twenty grand then doubled

again here to be forty grand and then doubled again

here to be a tigre rine and then ah forthe

doubling right here after thirty six years maybe one hundred

sixty grand And that's just an index fund Nothing fancy

Not warren buffett Just a basic vanilla index fund that

anyone with two hundred fifty bucks in their pocket can

buy And it's worth noting dividends which often get ignored

in the financial press actually matter a ton when it

comes to the calculation of long term investment results Generally

speaking that continued payment of dividends is a low risk

adventure Very few companies ever cut or fully do away

with their dividends And if they do well it means

a pretty much everything is rotten in denmark so you

can count on dividends The bolster overall returns that historically

dividends have had a wide range of somewhere between two

and seven or eight percent for the mid range of

the s and p five hundred But if you pegged

them around and three ish percent today and changed to

reflect the modern era well then the overall market need

only compounded about five percent To deliver that five plus

three percent and change eight ish percent total returns That

will allow the stock market to double about every nine

years or so right so we're ignoring taxes here but

we're ignoring the use of dividends proceeds to buy more

shares every quarter as well when those dividends air paid

So when you think about time and risk think about

them like they're a kind of financial stone soup which

when mixed together with the right spices of tax hedges

leverage and a bull market well make a really nice

retirement meal and you don't even need your teeth on 00:03:22.773 --> [endTime] a bonus