Do you invest in stocks and other things? Why? - Posted by HR
Posted by HR on December 01, 1998 at 16:29:40:
I just met with the 403(b) Valik representative for the corporation I work for. He informs me that I can sock away as much as 20% of my income into tax deferred savings accounts. Valik supports many mutual funds, with no capital gains when I move around in the plan from fund to fund, no tax till I retire, etc etc etc. Typical 403(b)plan. It all sounds good until I start running the numbers.
For instance, I considered socking away $500/month. That would decrease my taxable W2 income $6000/yr, and, assuming a GOOD market return of 20%, my $6000 will return $2400 by years end. Over the course of 10 years, assuming 20% compounded yearly returns (how’s that for generous assumptions?), I have $192,902.
Now let’s look at investing the money into re. My $500/month is worth $4320 at year’s end (6K X .28 tax bracket). Even with $4320, at a BARE minimum, I can do one rehab and make at least 10K. The $500 will serve as my carrying cost money (borrow $50K from my home equity, loan currently is 10%, 10% loan is 1% monthly repayment, 1% of 50k = $500/month). Let’s assume a worst case scenario and I don’t sell it in 6 months, but, God forbid, it takes a year. At the end of the year, I’m still 10K in profit as opposed to $2400 for similar dollars in pretax mutual funds with 20% returns. I’ve been overly generious with the mfunds and undergenerous with myself and the numbers STILL don’t work against re.
Question: why would I want to invest in the stock market? I’m not trying to be disrespectful; I really don’t get it. Can someone help me out?
A more realistic scenario is to consider 10% compounded returns on a 6K annual contribution. That works out to $111, 187 after ten years. Again, giving the benefit of the doubt, let’s tax that at 15% and I’m left with $94,508.95. Over ten years, I can take $43200 (500/month X 12 = 6k/annually x .28 =4320/yr X 10 years) and turn it into more than $95k. I even think I can turn $4K annually (plus annual profits) into more than $164K after 10 years (6K/yr X 20% compounded yearly X 10years = $192,902 X .15 tax bracket = $164K).
I don’t understand why a real estate investor would bother with the market. I don’t have to worry about market swings (and thus have fewer ulcers). I maintain complete control. I trust myself and not some nebulous salesman dressed as a broker. What am I missing?
I recognize that some astute investors hit a rising star stock and make a fortune. Let’s be real: that ain’t going to be me. If the stock market pros can’t beat a long term average of 12%, I don’t expect I will either. I also am not on the in on any companys. I also don’t have a lot of cash, so 10% won’t compound to much before 20 years (I’m 33 years old).
RE is called a get rich slow scheme; not compared to the market! The market is a scheme unlikely to generate any great returns. Why would I want to do this, if I can do better in re? Do you diversify? Why would you if you can get these consistent re returns?
Thanks for any advice!