I’ll be honest that I am not fully convinced as to what investment style works, and I am alright with that since my response is to have a little bit of everything. I have an actively managed dividend portfolio, a 401(k) made up mostly of actively managed mutual funds, a whole life insurance policy, and will eventually own a passive index account.   But I think there is a mistake that most investors make, this mistake can cost them thousands if not hundreds of thousands and possibly years of retirement.

The mistake that they make can be seen in a great exchange between Sam and a blogger I never really read before but has some good stuff, Jon from FreeMoneyWisdom on Sam’s post on whether Sam should sell everything this May since he has already made 10% in the market year to date.

Sell In May And Go Away

The mistake/misunderstanding is this idea that the market is guaranteed to make 8%/year, year in and year out.  The Market Does Not Guarantee Anything. I think Sam takes a sarcastic response to Jon that I am pretty sure went over his head lol.

Market Returns Vary

I will ignore the initial problem of where Jon pulls 8% out of considering that he is holding everything from “REITs to Large/small caps” and just focus on the return of the S&P500 since that is the often quoted number.  We will assume (a huge assumption) that the S&P returns between 8% and 10% per year.  Why is it a huge assumption?  because that number includes reinvested dividends, not selling when the market drops 37% like in 2007, you own just the S&P, etc. etc.

Info taken from a cool site that even lets you calculate different time frames, MoneyChimp.

2010     14.32
2009     27.11
2008    -37.22
2007      5.46
2006     15.74
2005      4.79
2004     10.82
2003     28.72
2002    -22.27
2001    -11.98
2000     -9.11
1999     21.11
1998     28.73
1997     33.67
1996     23.06
1995     38.02
1994      1.19
1993     10.17
1992      7.60
1991     30.95
1990     -3.42
1989     32.00
1988     16.64
1987      5.69
1986     19.06
1985     32.24
1984      5.96
1983     23.13
1982     21.22
1981     -5.33
1980     32.76
1979     18.69
1978      6.41
1977     -7.78
1976     24.20
1975     38.46
1974    -26.95
1973    -15.03
1972     19.15
1971     14.54
1970      3.60
1969     -8.63
1968     11.03
1967     24.45
1966    -10.36
1965     12.45
1964     16.59
1963     23.04
1962     -9.20
1961     28.51
1960     -0.74
1959     11.59
1958     43.40
1957     -9.30
1956      6.38
1955     28.22
1954     55.99
1953     -0.80
1952     18.35
1951     23.10
1950     34.28
1949     15.96
1948      9.51
1947      2.56
1946    -12.05
1945     39.35
1944     19.67
1943     23.60
1942     21.74
1941     -9.09
1940     -8.91
1939      2.98
1938     17.50
1937    -32.11
1936     32.55
1935     54.93
1934     -8.01
1933     56.79
1932     -5.81
1931    -44.20
1930    -22.72
1929     -9.46
1928     47.57
1927     37.10
1926     11.51
1925     25.83
1924     27.10
1923      5.45
1922     29.07
1921     10.15
1920    -13.95
1919     19.67
1918     18.21
1917    -18.62
1916      8.12
1915     31.20
1914     -5.39
1913     -4.73
1912      7.18
1911      3.52
1910     -3.39
1909     16.15
1908     39.47
1907    -24.21
1906      0.64
1905     21.29
1904     32.16
1903    -17.09
1902      8.28
1901     19.45
1900     20.84
1899      3.66
1898     29.32
1897     20.37
1896      3.25
1895      5.01
1894      3.63
1893    -18.79
1892      6.14
1891     18.88
1890     -6.16
1889      7.09
1888      3.34
1887     -0.64
1886     11.98
1885     30.06
1884    -12.32
1883     -5.49
1882      3.61
1881      0.27
1880     26.63
1879     49.37
1878     16.29
1877     -1.06
1876    -14.15
1875      5.44
1874      4.72
1873     -2.49
1872     11.16
1871     15.64

You have to go all the way back to 1902 to find an 8% positive return in the S&P and 10% only happened a few times in the 100+ history of the S&P.  So please don’t just assume because you invest in a diversified portfolio, or even a passive index fund on Jan 1 that on Dec 31 you’ll have 8% more money.