What I Have Learned in 30 Years of Investing

John Rekenthaler's first fund investment has gone up 700% in 30 years, but will future returns on equities be so impressive?

John Rekenthaler 11 January, 2019 | 10:05AM
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My 30-year Morningstar anniversary has arrived. It sparked reflection. Had I a time machine, what investment advice would I give my younger self?

Buying Apple (AAPL) stock in 1996 and shorting collateralised mortgage obligations in 2008 would have been useful tips. I will offer counsel that is more realistic: live during a stock bull market.

Bonds sometimes post high after-inflation gains. Even, on occasion, does cash. But among the major financial assets, only stocks have the potential to deliver performance that does more than preserve and modestly extend wealth. Stocks can create fortunes. Investing in equities, through a stock bull market, is an investment experience like no other.

My first mutual fund serves as a real-life example. In March 1988, I placed $1,000 in my first mutual fund. Since that time, I have left the fund untouched, to accumulate. And accumulate it has. Today, that $1,000 is worth $14,834. Had I bought a small-company index fund, which did not exist at the time, that account would likely be larger.

If stocks return 10% annually and inflation is 3%, it's difficult to go wrong with equities. High costs, mistimed trades, poor manager selection … the mistakes wash away. To be sure, such decisions matter. Best to get them right and maximise one's profits. Nonetheless, the critical decision was to hold stocks. Better to be dumb with equity than smart with bonds.

The stock market's performance continually amazes me. I have never lost my sense of awe at how equity shares increase in value, without their owner's involvement. To get paid, one must work … right? But my first fund has paid me handsomely for standing by. 

The fund hasn't yet had time to create a fortune, all by its lonesome, but if it continues on the same path, it will.

Here is the analysis. To start, that 15-fold gain should be adjusted for inflation, which has been a cumulative 113% since 1988. Thus, the fund's real gain has been about 700%. Had I defined a fortune in 1988 as consisting of $1 million in that day's money, then I would have needed to invest $140,000 – a handsome amount for the times. Building a large fortune by making a single investment at the beginning of my career was possible, but only by starting with a small fortune.

How to Reach $1 Million

Assuming that my health holds up, and that I have no immediate need to spend the money, my first investment could have an effective life span of another 20 years, roughly speaking.

If so, and if the fund were to perform as it has in the past, then that 700% after-inflation increase would become 2,500%. Now we're talking. Reaching that hypothetical goal of $1 million, as defined by 1988 dollars, would have required a $40,000 initial outlay. Beyond my means at the time, but not an inconceivable sum for somebody in his late 20s.

Of course, this exercise only involves one purchase, with no further activity. In real life, the stock market mathematics are far easier, because people typically invest on an ongoing basis. If they do so with equities, stay the course for several decades, and stocks perform anything like they have during my working career, today's young workers will fare well.

In 1988, I bought stocks because I landed a position at an investment research company. Had that accident not occurred, I would not have purchased equities that year, and probably not for many years to come. The blind squirrel stumbled upon the nut.

Will the next generation be similarly fortunate? I have assumed that that future real returns on equities will resemble those of the past. That was what I believed in 1988, and it turned out to be correct. Will 2019's novice investors find that same nut?

The answers to those questions are beyond anybody's pay grade. We do not, and cannot, know if the soundest investment advice that the next generation can ever receive is what I would instruct my younger self: buy stocks early, and buy them often. However, the subject bears discussion. As I have realised while thinking through my 30-year Morningstar anniversary, the level of stock market returns dominates all else. It is, as the saying goes, the elephant in the room.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Apple Inc189.98 USD1.66Rating

About Author

John Rekenthaler

John Rekenthaler  John Rekenthaler is vice president of research for Morningstar.

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