Thanks for the answer, Rik, I appreciate it, even though I disagree with some points.
I don’t agree that the evidence is solid that the investment is safe, mainly because “Past performance does not guarantee future results”. For good or bad we live in interesting times, black swan events seem to happen more often and I don’t think the way the stock marked moved in the 1900s is indicative of how it will go in the 2000s.
Also there have been long periods where the stock market has been negative, for example Japan’s “Lost decade” (more like lost 30 years). If such a think happens you will not generate any interest and thus there will be no profit. How do you plan to cover operational costs if you have few consecutive years with no interest?
sure, my pleasure. I’ve posted here to convince people of the effectiveness of the donation system at Give For Good, so I appreciate the questions and feedback.
Re “Past performance does not guarantee future results”: I think it matters a lot which stocks you look to see if this statement is true. It is correctly used for trading in individual stocks or basket of carefully picked stocks. Also correct for when you look at holding broad index funds for a short amount of time. But when you are looking at holding index funds for a long period of time, I do not think this sentence makes sense, for 2 reasons:
The evidence is really good from the past that the longer you hold index funds, the more your interest moves towards the mean (around 9% uncorrected for inflation, 7% corrected).
Perhaps more importantly with regards to your question, there is a good theoretical reason for why stock index funds have a positive interest + a better interest than saving or bonds. We explain this here. In a nutshell: this is how our (capitalist) economy works. Economic theory dictates that in capitalism, you can earn ‘rewards’ (e.g., money) for two things: labor and capital. With labor the reward is a wage. With capital (eg by investing, loaning out money, renting out land or a house etc), the reward is profit/rent/interest etc. It is logical that lending out capital (which is what investing is) over long periods of time pays off on average. Otherwise, no one would lend out money or invest anylonger and the capitalist system would no longer work. It is also logical that this nets more rewards on average than saving at a bank or bonds, because those two carry less volitality in the short term. So you get a premium for the higher short-term volatility.
Hope that convinces you !
I’ve heard about the Japan argument before, but the same applies there as to all other markets that have seen a downturn, however short or long: A) if you increase the number of years of the analysis, the average interest becomes positive again and moves towards the mean, B) if you increase the geographical scope of the investment, the interest over the same time period also becomes positive. So the best strategy is to invest in world-level index funds for dozens of years. Which is what we do at Give For Good.
Re the operational costs: we buffer our income from investments. So instead of taking all operational revenue each year and using that to fund our expenses, we take what amounts to around 5% interest (so on purpose a bit below the historical average). Any money that is left over, we save for years with losses.
Thanks for the answer, Rik, I appreciate it, even though I disagree with some points.
I don’t agree that the evidence is solid that the investment is safe, mainly because “Past performance does not guarantee future results”. For good or bad we live in interesting times, black swan events seem to happen more often and I don’t think the way the stock marked moved in the 1900s is indicative of how it will go in the 2000s.
Also there have been long periods where the stock market has been negative, for example Japan’s “Lost decade” (more like lost 30 years). If such a think happens you will not generate any interest and thus there will be no profit. How do you plan to cover operational costs if you have few consecutive years with no interest?
hi,
sure, my pleasure. I’ve posted here to convince people of the effectiveness of the donation system at Give For Good, so I appreciate the questions and feedback.
Re “Past performance does not guarantee future results”: I think it matters a lot which stocks you look to see if this statement is true. It is correctly used for trading in individual stocks or basket of carefully picked stocks. Also correct for when you look at holding broad index funds for a short amount of time. But when you are looking at holding index funds for a long period of time, I do not think this sentence makes sense, for 2 reasons:
The evidence is really good from the past that the longer you hold index funds, the more your interest moves towards the mean (around 9% uncorrected for inflation, 7% corrected).
Perhaps more importantly with regards to your question, there is a good theoretical reason for why stock index funds have a positive interest + a better interest than saving or bonds. We explain this here. In a nutshell: this is how our (capitalist) economy works. Economic theory dictates that in capitalism, you can earn ‘rewards’ (e.g., money) for two things: labor and capital. With labor the reward is a wage. With capital (eg by investing, loaning out money, renting out land or a house etc), the reward is profit/rent/interest etc. It is logical that lending out capital (which is what investing is) over long periods of time pays off on average. Otherwise, no one would lend out money or invest anylonger and the capitalist system would no longer work. It is also logical that this nets more rewards on average than saving at a bank or bonds, because those two carry less volitality in the short term. So you get a premium for the higher short-term volatility.
Hope that convinces you !
I’ve heard about the Japan argument before, but the same applies there as to all other markets that have seen a downturn, however short or long: A) if you increase the number of years of the analysis, the average interest becomes positive again and moves towards the mean, B) if you increase the geographical scope of the investment, the interest over the same time period also becomes positive. So the best strategy is to invest in world-level index funds for dozens of years. Which is what we do at Give For Good.
Re the operational costs: we buffer our income from investments. So instead of taking all operational revenue each year and using that to fund our expenses, we take what amounts to around 5% interest (so on purpose a bit below the historical average). Any money that is left over, we save for years with losses.
Merry X-mas!