We’re currently organizing and fine-tuning the chapters.

We appreciate your patience.

Best regards,

Stuart Crickmer

We rearranged the cards below. Find your card.

We’ll do this one more time. We’ve shuffled the cards again. Find your card.

Amazingly, the card you freely chose has disappeared.

Magic? Not quite. You know it’s a trick and may have immediately figured out the sleight of hand we employed.

If not, scroll back up and see if you can figure it out.

If not, don’t worry.

Here’s the trick: none of the cards in the final image are in the first two images; we just assume the remaining cards are the same because they are similar.

How Does This Relate to Investing?

Many things you see about investing seem too good to be true, and that’s often a red flag.

The unbelievable way money can grow definitely seems too good to be true, but it isn’t. And that may be one reason investors don’t pay enough attention to it.

As it turns out, Compounding is the most important concept that people need to understand.

It’s actually the Secret to Investing.

If you’re a regular reader of these posts, you’ll know that we frequently cover Compounding.

It’s not really magic, it just seems that way.

Taking full advantage of Compounding can result in significantly higher future portfolio values.

Best regards,

Stuart & Sharon

We’ll look at annualized returns, percentile returns, and the value of a one-time investment of $10,000 over 1-year, 3-year, 5-year, 10-year, 15-year, 20-year, 30-year, and 40-year periods.

To get the percentiles, we rank all the returns from best to worst (since 1926) for each timeframe and see how far down the return falls on the list. If it’s in the exact middle, it would be the 50th percentile. If it’s three-quarters of the way down, it’s the 25th percentile. If it’s in the 90th percentile, it’s really humming along and getting close to the best return ever for that time period.

The value of $10,000 lets you know how much you’d have if you made a one-time investment and left it alone. This is where the power of compounding shows up.

Before you look at the numbers, we’d like you to think about what to expect.

Here are some questions to consider.

What do you guess the return was for the one-year period ending September 2025 and where would you guess it ranked from a percentile standpoint?

Which timeframe (1-, 5-, 10-, 15-, 20-, 30-, or 40-year) would you guess had the highest annualized return?

If we tell you the 40-year annualized return is 11.91%, what would you guess the value of the one-time investment of $10,000—made at the end of September 1985 would be at the end of September 2025?

Of the different timeframes, which do you think is least important for the long-term investor?

Alright, let’s take a look at the numbers and make a few comments.

Long-term Annualized Return

At the very bottom of the chart, notice that the long-term annualized return is 10.52%. We normally round this to 10% when we talk about the long-term annualized return of stocks. Technically, this would now round to 11%, but we’ll continue to use 10% to be a bit on the conservative side.

1-Year Return

The stock market return for the one-year period ending September 2025 was 17.25%, which is in the 61st percentile historically.

It’s unlikely you heard the 1-year return reported. You more likely heard the year-to-date return, which was 14.83%.

Arguably—or obviously if you’re a regular reader of our posts—the 1-year return is the least important to the long-term investor. These short-term returns can be quite volatile but tend to even out over time.

3-Year Return

The 3-year return was 26.02%, which is in the 92nd percentile, reflecting the recent strong returns in the stock market.

5-Year, 10-Year, and 15-Year Returns

The 5-year, 10-year, and 15-year returns were all above average with rankings of 81st percentile, 79th percentile, and 78th percentile, respectively.

20-Year Return

In our view, the 20-year return provides the best gauge of whether the stock market is overvalued, undervalued, or at more average levels. There is a high correlation between the 20-year return and how the stock market performs over the subsequent 15 years.

The 20-year return was 11.11%, which is in the 51st percentile. It’s about as average as you can get.

By contrast, the 20-year return as of December 1999—just before the dot com bubble burst—was 17.89% which was the 100th percentile, the highest ever 20-year return.

This all suggests that stock market returns over the next 15 years are more likely to be average, but could really be anywhere within the historical range of 20-year returns (roughly 2% to 18%).

30-Year and 40-Year Returns

The 30-year was below average, and the 40-year return was above average. Note that the value of a one-time investment of $10,000 would have grown to $203,694 and $901,226, respectively. Pretty impressive!

If you have been investing for this long, you should be very pleased with the growth of your portfolio (assuming your actual investments kept up with the market and your portfolio asset allocation wasn’t unduly conservative).

Summary

The goal of this post was to let you know that what you’re hearing about the stock market—primarily just reporting the short-term returns—doesn’t tell the whole story. In fact, it tells the wrong story.

You should always look at returns that match your investment timeframe.

Best regards,

Stuart & Sharon

Unfortunately, that’s not the message you get from daily market commentary, which tends to focus on the short-term ups and downs in the markets.

These are suited more to financial thrill-seekers than to long-term investors.

Every once in a while, however, you will see an article that properly focuses on long-term investing and calls out the perils of frequent trading.

One such article, written by Jason Zweig of the Wall Street Journal, is worth a read.

Let’s look at a few excerpts.

The peak of a bull market and the bottom of a bear market have one thing in common: Buy-and-hold investing starts to feel like a waste of time.

Just look at how many investors seem unsatisfied that stocks are merely setting record highs day after day. They want more and more, faster and faster.

This reminds us of a line from the Queen song, I Want It All.

It’s a great song, but terrible as investment advice.

The article points out how a number of members of Congress trade stocks excessively—or direct their financial planners to do so on their behalf.

But check out what [congressman] Bresnahan said when asked if he would tell his financial planner to stop trading his assets so often.

“And then do what with it?” he said. “Just leave it all in the accounts and just leave it there and lose money and go broke?”

It’s alarming to think that any member of Congress could have made this statement.

So, what do clients of financial advisers want?

You should hire financial advisers to provide financial advice. Instead, clients often want them to perform a magic show: the illusion of being able to beat the market.

One of the greatest challenges financial advisors face is educating their clients, especially promoting patience and a long-term approach, given the number of “pseudo-experts” claiming they have the secret to beating the market.

Investing can be an enterprise, or it can be an entertainment.

Investing as an enterprise is a lifelong endeavor to build wealth with patience and prudence; your long-term odds of making money are close to 100%.

Investing for entertainment is a roller-coaster ride of trading ups and downs. It’s sure to give you thrills in the short run but likely to leave you shaken in the end; your long-term odds of making money are close to zero. That’s why fast money should be, at most, only a tiny slice of your portfolio.

Check out the odds of making money: 100% if you view investing as an enterprise and 0% if you view investing as entertainment.

Summary

It’s a bit unusual, but every once in a while you see a well-crafted investment article that focuses on the benefits of long-term investing.

Crazy bets may be thrilling, but they are definitely crazy.

Best regards,

Stuart & Sharon

Nigel: What we do is if we need that extra push over the cliff, know what we do?

Marty: Put it up to 11.

Nigel: Exactly. One louder.

Marty: Why don’t you just make 10 louder and make 10 be the top number and make that a little louder?

Nigel: These go to 11.

So, what does this have to do with the stock market?

If you’ve read our previous posts, you’ll recall that we’ve said the long-term compounding rate on Stocks is about 10%.

That’s certainly true if we measure returns beginning in 1926 (as far back as we have reliable data on the S&P 500).

Of course, this includes returns from the 1930s—the Great Depression.

You can make an argument that that’s exactly what we should do—the more data, the better.

You could just as easily argue that we should ignore the 1930s.

Why? Because the stock market in the 1930s was nothing at all like the stock market today. It was the Wild, Wild West for stock investors, and the lack of any type of oversight was partly responsible for the wild swings in the market.

The volatility in the stock market in the 1930s was twice that of any other decade since.

The Securities and Exchange Commission, or SEC for short, was not created until 1934, in the aftermath of the Wall Street crash of 1929. This, along with a number of other securities acts, has put in place some guardrails for the markets that have limited the insane volatility we saw in the 30s.

If we make the case that we’re not likely to experience the 1930s again and calculate stock market returns beginning in 1940 instead of 1926, the long-term annualized return on stocks (the S&P 500) is a bit over 11%.

What do we get if we crank the stock market return from 10% to 11%?

It seems like a small difference but, due to the power of Compounding, it adds up to a lot of money.

If you made a one-time investment of $10,000 in the stock market and earned 10% over 40 years, your investment would grow to $453,000.

Crank it to 11%, however, and the amount would be $650,000.

Keep in mind that when we refer to the long-term compounding rate on Stocks to be 10%, we are doing so, in part, to be a bit conservative.

There’s reason to believe that your real-life experience might be a bit better.

Oh, and by the way, we caught an early showing of Spinal Tap II, and it was fantastic.

Best regards,

Stuart & Sharon

We thought this would be a good time to share a simple analogy between football plays and which investments you can expect to produce the best returns.

You may recall from our post Compounding: the 3 - 5 - 10 Rule that the three major investment asset classes are Stocks, Bonds, and Cash.

The long-term annualized return on Cash is around 3%, Bonds around 5%, and Stocks around 10%.

It would be nice if we could match the average yards per play to these return numbers, but it doesn’t quite work (the average yards per pass play in the NFL last year was just over 8 yards, and the long-term annualized return on Stocks is around 10%).

Still, we can use the relative order of average yards and returns to make a point.

Cash = Quarterback Sneak

A quarterback sneak is designed to gain enough yards in a short-yardage situation to make a first down and keep the drive going. It’s rare to lose yardage, and you don’t expect—or need—big gains.

In a similar fashion, Cash investments are designed to not lose money at the cost of having the lowest expected return.

Bonds = Running Plays

Regular running plays are designed to gain more yards, on average, than a quarterback sneak. Sometimes you can break off big plays, but it’s also possible to be tackled for a loss or fumble the ball.

Bonds, historically, have had higher returns than Cash and are generally used as the asset to help transition from your long-term portfolio (mostly Stocks) to your short-term portfolio (mostly Cash).

Stocks = Passing Plays

Stocks can be compared to passing plays. They have the highest average yards per play, but on a single play, they could have more negative results, like an incompletion, sack, or interception.

But you’re probably not going to win a game if passing plays aren’t a meaningful part of your game plan. Passing the ball gives you the best chance of winning.

In a similar fashion, Stocks give you the best chance of achieving your long-term investing goals. You just have to accept that every once in a while, things won’t go your way.

Summary

Again, this isn’t a perfect analogy, but we thought it was a fun way to put the relative return expectations of the major asset classes in perspective.

Best regards,

Stuart & Sharon

Two roads diverged in a yellow wood,

And sorry I could not travel both.

When it comes to investing and other big life decisions, choosing one path—e.g., your Asset Allocation—precludes another path.

This brings us to one of the most challenging aspects of investing: human nature.

The “Safe Path” isn’t Always the Safe Path

What we’re particularly concerned about is your investment strategy—your Asset Allocation—when you’re further away from retirement.

While conservative investments are the least risky in the short run, they are the most risky in the long run because of their poor compounding rate—i.e., they are the least likely to help you achieve your long-term financial goals.

Sticking to the “conservative” path is one of the primary reasons investors don’t reach their long-term financial goals.

But taking a long-term perspective can be challenging. It means you have to try to ignore all the negative commentary about the short-term ups and downs of the stock market—they don’t matter to the long-term investor.

How to Ignore The Noise

In order to ignore financial noise, it helps to know why you see so much of it.

We would contend that the better you understand investing, the more confident you’ll be in the process and the less stressed you’ll be than if you don’t understand it.

Investment education is a key part of achieving Financial Mastery—i.e., the ability to make smart financial decisions automatically.

So, why all the confusing commentary?

Let’s take a look at the motivation for short-term market forecasts.

Superforecasting

The following excerpt is from the book Superforecasting by Philip E. Tetlock and Dan Gardner.

Open any newspaper, watch any TV news show, and you find experts who forecast what’s coming. With few exceptions, they are not in front of the cameras because they possess any proven skill at forecasting. Accuracy is seldom even mentioned.

Old forecasts are like old news—soon forgotten—and pundits are almost never asked to reconcile what they said with what actually happened.

The one undeniable talent the talking heads have is their skill at telling a compelling story with conviction, and that is enough.

Many have become wealthy peddling forecasting of untested value to corporate executives, government officials, and ordinary people who would never think of swallowing medicine of unknown efficacy and safety but who routinely pay for forecasts that are as dubious as elixirs sold from the back of a wagon.

Why it’s OK—Actually Healthy—to Ignore Daily Market Commentary

What this comes down to is that what you’re constantly hearing about investing has little to do with helping you make good investment decisions. It’s to get your attention, like commentary on so many other subjects.

The reality is that investing should be boring. If financial commentators were to focus on Compounding and long-term investing, they’d have little new to say on a daily basis.

This makes investing seem more complicated and confusing than it really is.

It doesn’t mean that you should ignore your investments. You should review your strategy with a financial advisor periodically if you’re not comfortable doing it yourself.

You don’t, however, need to get caught up in the daily ups and downs of the markets. All that does is to create unnecessary financial stress.

Your Company Match is More than Free Money

One way to deal with the financial noise, especially all the negative market commentary, is to realize you have a way to combat it—your discretionary company matching contribution.

A company match is often described as “free money,” but it’s much more than that.

Let’s say you contribute 6% to your 401(k) plan, and you receive a 4% company match.

Even if the stock market goes down significantly, you’ll still have all the money you put in (and will be better off than if you hadn’t made a contribution).

The match acts as a cushion against market declines.

And it gets even better.

Recall the power of Compounding we covered in Week 1.

Your company match doesn’t just sit there. It begins to compound just like your contributions, meaning it can grow exponentially over time.

So the next time you hear about the market going down, remind yourself that—thanks to the company match—it is very unlikely that you’ve lost any of the money you put in.

Summary

One of the hardest things about investing is the stress you might feel when the market goes down.

The overwhelming, often conflicting commentary about the markets only makes this worse.

It helps to understand that this commentary is largely there to grab your attention, not to help you make smarter investment decisions.

One way to mentally combat this is to realize your company matching contributions serve as a cushion against losing any of “your money,” and that these matching contributions benefit from compounding over time.

Best regards,

Stuart & Sharon

The notion that certain things take time to mature—wine, trees, children, etc.—is something we readily accept. The amount of time required to reach maturity varies depending on what we’re talking about.

You wouldn’t expect a 10-year single malt scotch to be ready to drink after one year.

It may help you to apply the notion of maturity to investing in the stock market.

Stocks are volatile in the short run, and if you judge your stock performance after only one day—or even one year—you may be in for an unpleasant experience.

Worse still, you may conclude that stocks are always “risky.”

In previous posts, we’ve introduced Investment Return Wheels as a way to visualize the range of returns you can expect (based on nearly 100 years of stock market history) for various time frames. The returns for periods greater than one year are annualized.

A spin of the wheel would result in landing on a green space (you make money) or a red space (you lose money).

Viewing these side-by-side clearly illustrates how the chance of losing money decreases for longer investment time periods—i.e., as you allow your stock investments to mature.

Some Quick Takeaways

1 Day - If you invest in stocks for only one day, there’s a very good chance you’ll see the value go down (although it is still more likely to go up). And, you’ll hear about it.

Stock market “experts” spend an extraordinary amount of time focusing on one-day returns. It’s no wonder stocks seem so risky. Imagine putting a new batch of wine in a cask and tasting it the next day.

The results would not be good, but then you haven’t given it time to mature.

1 Year - Give it a full year, and the odds of losing money have fallen dramatically. Still, at 24%, the chance of losing money is high enough that you should be very cautious about investing your short-term portfolio in stocks.

On the plus side, if you avoid putting stocks in your short-term portfolio, there’s no need to stress about the daily ups and downs in the market.

5 Year - You can make a solid case for including at least some allocation to stocks when investing for a 5 year time period. Losing money over 5 years is historically low at 11%.

10 Year - At 10 years, stock investments have had time to mature. It is rare to have a negative return, and even then, the historically worst 10-year periods have only been around -1%.

20 Year - Imagine if financial “experts” spent more time talking about 20-year returns instead of 1-day returns. Your conclusions about how risky stocks are would be completely different. You would have never heard of a negative 20-year period (or a negative 15-year period, for that matter).

Your confidence in investing in the stock market would be significantly higher. This long-term view would likely result in making more money (by not overreacting to short-term market declines), and would dramatically reduce the level of stress you feel when talking about the markets. More money; less stress.

What Can You Do?

Long-term investors should focus on long-term risk and return. Expecting financial commentators to focus on the long-term isn’t going to happen, though.

This will never work for someone whose job it is to make daily comments on the markets.

They’re trying to make the stock market seem interesting and newsworthy. The reality is that investing in stocks should be boring—it plays out over long time periods.

The simple thing you can do is to only pay attention to stock market commentary that matches your investment timeframe (and even if you’re 65, at least some of your investments still have a longer-term focus).

When listening to a daily market recap, you might say to yourself, “This doesn’t apply to me because I’m a long-term investor and stocks take a longer time to mature.”

Best regards,

Stuart & Sharon

Since the Top 10 stocks typically make up over 30% of the Index, we thought it would be interesting to see which stocks were driving the Index over different periods of time.

S&P 500 - beginning of 1930

As we entered The Great Depression, the Index was dominated by heavy industry and utility companies (notice there were no tech or finance companies). This period was the Wild Wild West for the stock market. The monthly volatility was twice that of any decade since.

The SEC wasn’t created until the passage of the Securities Exchange Act of 1934. Its primary purpose is to enforce laws against market manipulation.

We’ve mentioned that the long-term annualized return on stocks (since 1926) is around 10%. If we exclude the 1930s—which probably makes sense—the annualized return is a bit over 11%. When compounding over a long time period, this extra 1% makes a huge difference.

Here’s the Top 10 at the time:

S&P 500 - beginning of 1940

By the start of the 1940s, the US was beginning to recover from The Great Depression, and entered World War II in December 1941 after the attack on Pearl Harbor.

Sears and Eastman Kodak replaced Westinghouse and Bethlehem Steel in the Top 10.

S&P 500 - beginning of 1950

At the beginning of 1950, the US economy was transitioning from wartime to peacetime and entering a period of significant industrial expansion. Texaco entered the Top 10, replacing Eastman Kodak.

The 1950s were the best historical decade for stocks.

S&P 500 - beginning of 1960

At the beginning of 1960, the economy was booming, and industrial, automotive, energy, and telecommunications companies dominated the Index.

S&P 500 - beginning of 1970

At the beginning of 1970, the US was entering a period of high inflation, the Vietnam War, and a looming oil crisis. A recession in 1973 and 1974 was partly responsible for a below-average stock market return of 5.86% for the decade.

S&P 500 - beginning of 1980

At the beginning of 1980, the U.S. was emerging from a turbulent decade marked by stagflation, an energy crisis, and high interest rates. Microsoft and Apple were now public companies, but neither was near the Top 10 . . . yet.

S&P 500 - beginning of 1990

At the beginning of 1990, the U.S. stock market was transitioning from the industrial dominance of earlier decades into the early stages of the technology and financial revolution that would define the 1990s.

S&P 500 - beginning of 2000

At the beginning of 2000, the dot-com bubble was near its peak, and the top of the S&P 500 was dominated by technology and telecom companies, many trading at extremely high valuations. The stock market was nowhere near as volatile as it was in the 1930s, but the return for the decade was worse.

S&P 500 - beginning of 2010

At the beginning of 2010, the U.S. stock market was recovering from the 2008–09 global financial crisis. The S&P 500's top 10 companies reflected a transitional moment — legacy giants like ExxonMobil and GE still held sway, but tech leaders like Apple and Microsoft were rising fast.

S&P 500 - beginning of 2020

At the beginning of 2020, the S&P 500 was dominated by Big Tech, a trend that had grown steadily throughout the 2010s. The top 10 companies by market capitalization reflected the rise of the so-called “FAAMG” stocks (Facebook, Apple, Amazon, Microsoft, Google), which together accounted for a historically large share of the index.

S&P 500 - July 2025

As of the time of this post, eight of the top 10 stocks are part of the “Magnificent Seven” tech/AI heavyweights: NVIDIA, Microsoft, Apple, Amazon, Meta, Alphabet, and Tesla.

Riding the Winners

As you can see, the largest and best-performing companies rise to the top of the Index, reflecting what is driving the economy at the time. This is what we call “Riding the Winners.” It’s why the market-cap weighted S&P 500 Index is so hard to beat—even for professional managers.

It’s also why if you were invested in the Index in 2001, you got in early—automatically—on a little-known company Nvidia, and benefited from its rise to become the largest publicly-owned company in the world.

Best regards,

Stuart & Sharon

Novi. Hello Professor.

Professor. Hello Novi.

Novi. Did I hear that Stuart and Sharon are going to start publishing to Substack every other week?

Professor. Yes.

Novi. That’s a bummer. I like reading something new every week. That Knight puzzle was pretty interesting.

Professor. Apparently, they want to focus more time on writing their book.

Novi. You mean the one we’re in?

Professor. That’s the one.

Novi. Well, that’s alright then. So, what are we covering this time?

Professor. The secret to investing.

As Novi and the Professor have noted, we’ve decided to publish to Substack every other week for a while so we can devote more time to writing The Practice of Investing.

We’ll be back with new Substack content next week.

Best regards,

Stuart & Sharon

Maximum Number of Knights?

Now, what is the maximum number of knights that can be placed on a chessboard so that no knight can capture another?

Take a moment to think about the answer before reading on.

Don’t scroll further until you have your answer.

The Answer

If the answer came to you immediately, congratulations.

If it took a while, or you couldn’t figure it out, that’s fine too.

To find the answer, the first step is to realize that the knight always moves to a different colored square. This means you could place a knight on every dark square or every light square and none of them would be able to capture another. There are 32 dark and 32 white squares on the board, so the answer is 32.

The point of this puzzle wasn’t so much to test your puzzle-solving skills, but to make the point that something that seems complicated can seem easy once you know the trick.

Investing is a lot like this. It seems complicated, but it’s really not once you understand a few basics. Covering these basics is a large part of what we’re doing with these posts.

The most important concept to understand—what we call the Secret of Investing—is Compounding.

We’ve covered this before, but while we have the chessboard out, let’s look at a mind-blowing example of compounding.

This all starts with one of the stories of the origins of chess. As the story goes, the inventor presented the game to the Emperor, who was so impressed that he asked the inventor to name a reward.

The inventor asked that a grain of rice be placed on the top left square of the gameboard, and each day, an amount be placed that is double the amount on the previous square.

After four days, the first four squares of the board would look like this.

If you keep doubling the number of grains of rice, how many grains would be in the final square of the top row?

That’s fairly easy, it goes 1, 2, 4, 8, 16, 32, 64, 128.

At this point, the Emperor thought he’d gotten the best end of the bargain.

But did he?

End of Row 2

Take a guess at the number of grains of rice in the last square on the second row.

You don’t need to calculate it—unless you want to—you can just guess.

The answer, 32,768, may surprise you. It certainly surprised the Emperor and he was beginning to get worried.

With good reason.

End of Rows 3, 4, and 8

Let’s wrap this up by asking you to guess the values for the final square on rows 3 and 4, and then we’ll skip down to the final square on the board.

The answers are as follows:

Row 3: 8.3 million grains of rice

Row 4: 2.1 billion grains

Row 8: 9.2 quintillion grains

If you’re not familiar with the term quintillion, we’ll spell it out for you:

9,223,372,036,854,780,000 grains of rice.

The Emperor was devastated. That was more grains of rice than the Kingdom could produce.

The point of this was to just let you feel the extraordinary power of Compounding.

This power is available to you when you’re investing.

Like our chess example, the magic doesn’t happen right away.

You need to give it time.

Of course, you’re not going to double your money every year, but you would likely be similarly impressed by compounding your money at 10%—a conservative estimate of the long-term annualized return on Stocks.

If you want to see some examples of investment compounding, check out our post, Compounding: the 3 - 5 - 10 Rule.

Best regards,

Stuart & Sharon

If you’re not an expert yourself, these likely sound plausible—perhaps even intelligent.

But are they?

More importantly, are they useful in helping you make investment decisions?

If you’re a regular reader of these posts, you know where we stand. These conflicting and contradictory opinions are more stressful than helpful.

Not to mention irrelevant if you’re a long-term investor.

And they can be costly if they lead you to overreacting to short-term market swings.

In this post, we thought we’d share with you the perspectives of some individuals we admire, with a few quotes from their books.

Superforecasting by Philip E. Tetlock and Dan Gardner

Tetlock and Gardner provide numerous examples of what they call “superforecasters,” noting that “superforecasting demands thinking that is open-minded, careful, curious, and—above all—self-critical.”

In doing so, they call out those pundits who fall short of this standard, perhaps with ulterior motives:

It’s worth acknowledging that many of the financial commentators you hear from on a daily basis hardly have the time for thoughtful, in-depth analysis. They are under pressure to get something out there.

And, as Tetlock and Gardner note, they are almost never asked to reconcile what they said with what actually happened.

If you’re interested in The Art and Science of Prediction—as the book is subtitled—we highly recommend you check this book out.

The Pleasure of Finding Things Out by Richard Feynman

Richard Feynman is one of our heroes, and he had his own take on pseudo-experts:

Again, Feynman isn’t suggesting that there aren’t legitimate experts in various fields; he’s just cautioning that there are quite a few pseudo-experts who are taking some questionable shortcuts.

If you’ve never read anything by Feynman, The Pleasure of Finding Things Out is a good place to start.

Four Thousand Weeks: Time Management for Mortals by Oliver Burkeman

It’s fair to say that—partly due to limitations of time—nearly all the daily financial commentary we hear is pseudo-science. Yet we continue to listen, and continue to feel stress and indecision as a result.

What if we could stop?

That brings us to an interesting take by Oliver Burkeman:

The parallel here is that trying to make short-term market predictions is every bit as futile as trying to have complete mastery over your time. If you accept that it’s impossible, you no longer have to berate yourself for not being able to do it (or for not finding someone else who can do it).

There’s no need to stress about short-term market movements. As long as you’ve made smart investment decisions, for example, not putting Stocks in your Short-term Portfolio and featuring stocks in your Long-term Portfolio, you can be confident that things will work out in the long run.

Best regards,

Stuart & Sharon

To help with this, we’ll sometimes create simple rules.

The rule we’re introducing in this post is the 3 - 5 - 10 Rule, and it relates to Compounding.

Compounding—as you’ll recall—is the secret to investing.

It seems too good to be true. But it isn’t!

If you need a refresher, look at our post, The Most Important Number to Know About Your Portfolio.

The critical part of that post was the difference in how much you can make depending on the Compounding Rate.

We compared the growth of a one-time investment over 40-year and 50-year time periods using 3%, 5%, and 10% Compounding Rates.

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What we didn’t cover was which investments can achieve these rates, and we didn’t cover the fact that your actual experience could be higher or lower than these long-term averages.

So, let’s look at the major asset classes (Stocks, Bonds, and Cash) and see what you can expect.

Compounding at 3% with Cash (Short-term Investments)

Since 1926, the long-term compounding rate on Cash (Short-term Investments) has been just over 3% (based on 3-month Constant Maturity US Treasuries).

Over that same time period, the long-term compounding rate on Inflation (CPI-U) has been just under 3%.

Short-term investments are great at protecting your principal while keeping up with inflation.

They are an ideal fit for your Short-term Portfolio (3 to 5 years), but won’t help you grow long-term wealth.

They are the least risky investment in the short run, but the most risky investment in the long run.

Compounding at 5% with Bonds

The long-term compounding rate for bonds (based on 10-year Constant Maturity US Treasuries) is between 4% and 5%. If you invest in a bond index fund that includes bonds other than Treasuries, we’re going to assume you can do a bit better, so we’re rounding this up to 5%.

In the long term, Bonds should be expected to beat Cash and Inflation, but are nowhere near as powerful as Stocks in terms of growing wealth.

Bonds are best suited to your Intermediate-term Portfolio, primarily as a way to reduce intermediate-term portfolio volatility.

Compounding at 10% with Stocks

When it comes to growing long-term wealth, Stocks are where it’s at.

The long-term compounding rate on Stocks (we’re using the S&P 500) is a bit over 10%.

As we discovered in our last post, the difference between compounding at 10% versus 5% is enormous—in fact, it’s life-changing.

And 10% is probably a bit conservative. If we exclude the 1930s—the Wild West for stocks with very few guardrails—the long-term compounding rate is a bit over 11%.

How much could 1% matter? Scroll back up and look at the chart!

A Rule to Help Put Long-term Decisions in Perspective

Keep in mind that we’re using round numbers here as an easy-to-remember Rule to help with Decisions.

The general gist is this:

Short-term investments (Cash) are a great way to protect your principal while keeping up with inflation.

Bonds should earn more than Cash over time and can help reduce volatility in your Intermediate-term Portfolio, but are no match for Stocks in terms of long-term earnings potential.

Stocks are the path to long-term wealth and financial security, but are not suitable for your Short-term Portfolio due to short-term volatility.

Compounding 3 - 5 - 10

Ultimately, Compounding 3 - 5 - 10 is just a simple Rule to help you put the roles of the major asset classes in perspective.

Best regards,

Stuart & Sharon

When we return, we’re going to pick up where we left off with our latest post, The Most Important Number to Know About Your Portfolio.

In that post, we talked about the importance of knowing the long-term Compounding Rate of your portfolio, which is determined by how you set your asset allocation.

We also showed the stunning difference between compounding at 3%, 5%, and 10%.

What we didn’t tell you is which investments have historically compounded at these rates.

Can you guess what they are?

We’ll answer the question when we return, and we’ll explain why what you think is the safest investment is actually the most risky investment, most of the time.

Best regards,

Stuart & Sharon

It’s what happens when you put your money to work and tell it to go make you some more money.

It’s exponential growth.

It’s your money going viral.

And it works for you even when you’re sleeping.

For all that, it’s likely you don’t hear investors or “experts” talk much about Compounding?

Why?

Because it takes Time. (Time, by the way, is the most important factor in investing.)

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If you scanned the articles in any edition of the Wall Street Journal (or any other financial information provider), you’d find little coverage of Compounding.

Do you remember the last time you spoke to your financial advisor? Did you talk about Compounding?

Probably not, but you should.

Why Does it Matter?

Still, you’ve probably at least heard about Compounding and know—if only vaguely—that it’s important.

A simple example might help to clarify.

Let’s say you made a one-time investment of $10,000 that grows by 3% every year. We want to know what it would be worth at the end of 40 years.

Here goes. After 1 year, your investment will have grown by $300 (3% x $10,000) to $10,300.

Not too exciting.

In year 2, however, you earn $309 (3% x $10,300).

Because your balance was higher, you earned more—an additional $9—for year 2, and your investment is now worth $10,609.

Still nothing to write home about.

If you’re told Compounding is so wonderful, you can start to see why you’re a bit skeptical after 2 years.

If we skip forward to year 10, however, your investment is now worth about $13,000 (from here on out, we’re going to round to the nearest thousandth).

After 20 years, it’s worth $18,000.

After 30 years, it’s worth $24,000.

Finally, after 40 years, it’s worth $33,000.

You’ve more than tripled your money, but let’s face it, it took a long time, and it hardly seems magical.

What’s the Problem?

So, what’s the problem? Investing at 3% hardly made you rich. It may have helped you keep up with inflation, but that’s about it.

What could you do differently?

Maybe the 3% rate was too low. What if you grew your investment at 5% per year?

Before we look at the numbers, what’s your guess of the value at the end of 40 years?

Remember, it was $33,000 when growing at 3%.

Perhaps you might think that since we increased the rate from 3% to 5%—a 66.7% increase—that the value would be $54,000 (which is 66.7% higher).

Let’s see.

1 Yr: $10,500

10 Yrs: $16,000

20 Yrs: $27,000

30 Yrs: $43,000

40 Yrs: $70,000

Something weird—but good—is going on.

We didn’t double the rate, but we more than doubled the value at the end of 40 years.

This is exponential growth, i.e., Compounding, in action, and things are starting to get a bit more interesting.

But still not quite life-changing.

Let’s Crank it Up to 10!

What if we increased the rate to 10%?

Here are the numbers:

1 Yr: $11,000

10 Yrs: $26,000

20 Yrs: $67,000

30 Yrs: $174,000

40 Yrs: $453,000

This is significant. A one-time investment of $10,000 grows to around $453,000 in 40 years.

And if, in a nod to Spinal Tap, we took it to 11, the value would be $650,000!

Every 1% increase in the Compounding Rate makes an incredible difference.

Ten More Years

We used 40 years because it’s the typical amount of time someone might work and invest for retirement.

But you don’t stop investing when you reach retirement, so how do the numbers look if we compound for 50 years (still using a one-time investment of $10,000)?

3% for 50 years: $44,000

5% for 50 years: $115,000

10% for 50 years: $1.2 million

11% for 50 years: $1.8 million

These numbers with the higher compounding rates are beginning to get mind-boggling.

Compounding even impressed Albert Einstein, who is often attributed with calling it the Eighth Wonder of the World.

What We Didn’t Cover (Yet)

Compounding is the secret to investing, but it takes two things in order for the magic to work: Time and a sufficiently high Compounding Rate.

The obvious next question is: Which investments can generate these types of compounding rates?

What happens when you make regular investments over time (like in your 401(k) plan) instead of a one-time investment?

And what about volatility?

We’ll cover these in next week’s post.

We’ll leave you with this: Do you know the long-term Compounding Rate of your portfolio?

Best regards,

Stuart & Sharon

As a background, you might want to read or revisit our posts: Decisions, Decisions (Core Post No 1) and Why Context Matters (Core Post No 2).

This delayed gratification, as it’s called, is one of the greatest mental challenges for the long-term investor.

It helps if you can imagine your future self thanking you for making smart decisions when you were younger.

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Your School Years

As challenging as this is, it helps to know that you’ve already had at least one down-the-road moment. And you can learn from that experience.

When you walked through the door at your middle school for the first time, you were not likely thinking about life after high school. That was way too far in the future.

Yet, your six-year journey to that point will have largely determined the options available to you for your next chapter in life.

Were you going to go to college? To trade school? The military? Immediately enter the workforce? And so on.

When you’re in school, your “job” is school. There are at least three different ways you can approach it:

• Don’t take it seriously.

• Put in effort to get the best grades possible (Achievement).

• Work to understand what you’re being taught (Accomplishment).

If you don’t take school seriously, you face the consequences of fewer options when you conclude your high school career.

As for the difference between Achievement and Accomplishment, we cover those in our post: Start Here: The Payoff for Reading this Substack.

Sure, getting good grades will keep many options open, but this can only get you so far. On the other hand, understanding (Accomplishment) leads to knowledge, which can help you throughout your life.

And school isn’t just about grades. Your choices for extracurricular activities can affect the options available to you as well.

So, looking back, would you have done anything differently?

What has this taught you about making future down-the-road decisions?

Long-term Investing—The Payoff

We’ve talked many times about how the Secret to Investing is Compounding and the Most Important Factor in Investing is Time.

Because of Compounding, even small regular investments (like you make in a 401(k) plan) can grow to a meaningful nest egg, given enough Time.

In order to trust the process, however, you need sufficient knowledge about how investing works. It’s what we call Financial Mastery—the ability to make smart financial decisions automatically.

One of the more common regrets we hear from people approaching or in retirement is that they never learned about the power of compounding and put off the start of their investment journey because the payoff seemed too far in the future.

If there’s a message you can take away from your school years, it’s that the journey to get wherever you’re going constantly opens—or shuts—doors based on decisions you make in the moment. Once you understand and trust the process, there is an immediate payoff for knowing the decisions you’re making now will reward you down the road.

Your future self will thank you.

Best regards,

Stuart & Sharon

If you consider yourself a football expert, you could choose the teams yourself. If not, there are plenty of football “gurus” talking on TV or posting their predictions of the best teams. Or, you could pay an "expert" to pick the teams for you.

The Division Winners Index

There's one final option—the Division Winners Index that automatically ends up with the combined wins of the 8 division winners.

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Do you go with the Index, or do you try to "beat it?"

Beating the Index is possible, because sometimes a team wins their division with fewer wins than a 2nd place team in another division. For example, in 2022, the Tampa Bay Buccaneers won the NFC South with 8 wins while the Dallas Cowboys finished 2nd in the NFL East with 12 wins.

So, it's possible to beat the Index, but not likely.

Now, what's your choice?

If you're wondering, the 2024 Index had 99 wins (or $99), which is a 7.6% return (or about 15.8% on an annualized basis) on a $92 initial investment.

By comparison, the 2023 Index had 90 wins, a -2.2% loss (-4.4% annualized).

The S&P 500

It's not a perfect analogy, but beating our fictional Division Winners Index is a bit like trying to choose a portfolio of stocks with the hopes of having a higher return than the S&P 500 Index.

Sure, it's possible, but it's difficult.

Why?

Because the Index cheats!

OK, it's not exactly cheating. It's a byproduct of how the Index is created.

The S&P 500 is a market-cap-weighted index, meaning that the largest companies by market cap (stock price times outstanding shares) make up a greater portion of the index.

As of May 15, 2015, the Top 10 stocks in the S&P 500 Index were:

These 10 companies make up a whopping 38% of the Index.

The top 20 companies make up 47% of the Index—nearly half.

Some view this as a disadvantage, arguing that the Index, by being concentrated in a small number of stocks, is not sufficiently diversified.

We would argue that many investors are too diversified (Warren Buffett certainly isn’t).

To use our football analogy, it would be the equivalent of owning all the teams instead of the 8 division winners.

Riding the Winners

Basically, what happens is that the companies that prove their ability to find ways to consistently make money over time grow in market value and rise toward the top.

This doesn't imply that these companies are perfect, but they tend to find ways to adapt to the current environment.

Companies that fail to be successful become progressively smaller and are a smaller drag on the Index performance.

In the same way that a younger, rising star may take the place of an older player with declining skills, a company that proves more successful in adapting to the current environment can surpass a company struggling to do so.

Most importantly, this happens automatically.

You may not have thought of Nvidia as a rising star back in 2001 when it was added to the S&P 500 Index, but it briefly became the largest company in the Index and is currently number 3 behind Microsoft and Apple.

The important point is, if you owned the S&P 500 at the time, you were in on Nvidia from the beginning. Other companies competing in the same space didn’t make it. You didn’t have to guess.

With a market-cap-weighted index, you automatically “ride the winners.”

How Have the Pros Fared?

Given the unfair advantage built into the Index, it’s fair to ask how the pros have fared when trying to beat it.

Would you expect the experts to be able to win consistently?

To find out, we looked at data published by S&P on a semi-annual basis showing the percentage of large-cap mutual funds that beat the index for various time periods.

Here are the results as of December 31, 2024:

1 year: 35% of All Large-Cap funds beat the S&P 500 Index.

3 years: 15% beat the Index.

5 years: 24% beat the Index.

10 years: 16% beat the Index.

15 years: 11% beat the Index.

Looking at these numbers, it makes you wonder why anyone—expert or not—would try to beat an Index with such an unfair advantage.

Fortunately, you can now easily invest in the S&P 500 or any other market-cap-weighted index, through index funds or exchange-traded funds. Some of these options are almost certainly in your 401(k) account.

Of course, if you enjoy the process of building a portfolio of individual stocks, you can certainly do so. The point is, you don’t need to if all you care about is growing wealth over time.

Best regards,

Stuart & Sharon

For years, these efforts have failed to move the needle.

Lack of Focus

We could make the case that financial education is as important as any other subject students are taught in school. After all, regardless of career path, everyone needs a sound foundation in how to deal with money.

Yet, even when mandated, financial education rarely receives the same level of focus as core subjects.

And, to the extent financial education is taught, it is often done so with a hodge-podge of materials taught by teachers who aren’t comfortable with the topics themselves.

It seems like the quality of content and instruction isn’t as important as “ticking a box” to claim the task was done.

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Financial Mastery

We suggest the goal of financial education should be Financial Mastery.

We’re not suggesting we turn students into financial “gurus,” but rather educate them to the point that they can make smart financial decisions automatically.

Compare it to your somewhat scary experience of learning to drive a car, compared to how, after sufficient experience, you can get from A to B without really thinking about it. It’s become automatic.

Content

To achieve Financial Mastery, we need good content and good experiences.

If you’re an educator or sponsor involved in financial education, have you carefully examined the content? Or did you, perhaps, assume it must be OK because it was provided by someone who seemed like an expert?

Have you considered whether the content is designed to earn the trust of the students (and of the teachers)?

Students—especially from underprivileged backgrounds—will not trust the idea that using a bank or buying stock is “safe.” If given a choice of accepting $100 or a share of stock trading at 3 times that value, they’d likely take the cash.

It’s important to provide educational content that can be easily understood. But that’s not enough.

The core concepts—the theory—should be supplemented by experience, including simulated experience. This allows students to “discover” that the core concepts actually work—that they can be trusted.

This requires a far more thoughtful approach to content development than simply grabbing what’s currently out there.

Investment Education

Consider the following questions:

What aspect of financial education has the potential for the greatest impact on students’ long-term financial well-being?

What aspect of financial education are teachers the least comfortable with teaching?

The answer to both questions is: investing.

That’s not to say that other aspects of financial education are not important—they are.

They are easier to teach and master, but lack the life-changing potential of understanding investing.

Understanding investing is important for everyone, but the payoff for teaching investment education for underprivileged students may offer the greatest impact because it is the key to ending generational poverty.

The Wrong Experience

While content and experience are necessary to achieve Financial Mastery, the wrong experience can be dangerously counterproductive.

Investing is a long-term endeavor. Compounding—the ability to grow money exponentially over time—is the secret to investing.

Stocks have the highest long-term compounding rate of the major asset classes and, therefore, are the least risky asset for long-term investors.

Yet Stocks, due to their short-term volatility, are the most risky asset in the short term.

Directing students to read short-term market commentary or play short-term investment trading games, focuses students on the wrong message—potentially costing them hundreds of thousands of dollars over their lifetime.

This is only one example of why getting the content and experience right is critically important.

Where to Go From Here

It’s time we quit accepting poor financial content and experiences and focus on developing curricula that work for students and teachers (and, ultimately, society).

We have been developing engaging content and experiences that teach the right things for over two decades.

Over the next school year, we will be working toward organizing these into a comprehensive investment education curriculum.

We are currently looking for schools and sponsors interested in getting on board as we test and validate our programs.

If you’re interested in helping take investment education to the next level, please get in touch.

Best regards,

Stuart and Sharon

We can learn something from this—at least when it comes to investing and the stock market.

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In our post, Perspective - Choose Your Lens (Core Post No 3), we made the case that you should distinguish between your short-term and long-term investments.

Even within a single portfolio, like your retirement portfolio, you have—or eventually will have—both.

If you’re in or approaching retirement, the money you’ll be using in the next 3 to 5 years constitutes your Short-term Portfolio. The goal of your Short-term Portfolio is to protect principal and keep up with inflation.

You should not include Stocks in your Short-term Portfolio due to their short-term volatility. Stocks are the most risky of the three major asset classes (Stocks, Bonds, and Cash) in the short term.

Of course, you shouldn’t stop investing just because you reach retirement. You need to continue to grow your portfolio in order to have a sufficient amount of retirement income in later years.

Stocks give you the best chance of achieving your long-term financial goals (generally 10 to 15 years and longer). They are the least risky asset for your Long-term Portfolio due to their superior long-term compounding rate (compounding is the secret to investing).

Since investing in the stock market is tied to achieving your long-term financial goals, you should avoid focusing on the inevitable short-term ups and downs of the stock market. These will even out over time.

Hence the blinders.

If you can learn to ignore the overwhelming daily stock market commentary—especially in periods when the market is going down—you’ll ultimately end up with more money and less stress.

The Economy

It’s not quite the same when it comes to the economy.

While history teaches us that we can count on the stock market to eventually recover, issues like inflation, recession, etc., have an immediate impact on everyone.

The stock market is not the economy.

The imminent prospect of higher inflation (potentially higher than what we experienced during the pandemic) is a serious problem and difficult to ignore.

The increased likelihood of a recession is hard to ignore as well.

These are far more serious issues than the stock market, and blinders won’t work here.

Individuals and companies will face difficult choices.

Many of the best companies will discover ways to deal with this. These are the companies that will—eventually—lead the stock market back up.

If you invest in a market-cap-weighted index (like the S&P 500), you will automatically own these companies. You are, essentially, riding the winners.

Companies that fail to adapt will become an increasingly lower drag on the performance of the index.

Summary

Unfortunately, we can’t say, “Don’t worry about anything.” The impact of recent policy decisions on the economy will likely be difficult for many people.

We can, however, say that you don’t need to stress about the long-term impact on your investment portfolio.

Be patient and give it time.

There’s at least one less thing you need to worry about.

Best regards,

Stuart & Sharon

We recently bought a Freewrite Traveler, a portable drafting device for anyone who wants to write.

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The cost of the device was $499.00.

Two days after ordering the device, we received the following email:

Unfortunately, we can’t wait to let the trade war resolve itself, and that means adjusting prices to cover some of our new costs.

The new price is $549.90.

Freewrite is a small company located in Detroit, Michigan.

The 10% price increase is no doubt related to the 10% new tariffs levied on all countries (the 90-day pause in implementing higher tariffs did not eliminate these).

Freewrite will not be the only company in the face of great economic uncertainty to raise prices. Not all will raise prices by 10% to match the new tariffs (some may be higher), but this increase in prices exceeds the increase in inflation at the height of the pandemic.

Of course, who knows what will happen by the day you read this (and things may change the next day).

If the intention is to force all products to be made in America, that’s a problem. We’ve seen the estimates of the price of an iPhone in this scenario averaging around $3,500. Currently, 0% of an iPhone is manufactured in the US. You could always buy an older model.

“Liberation Day” Tariffs

On April 2, 2025 (aka “liberation day”) the US announced tariffs on all countries, using a formula where the Discounted Residual Tariff rate for each country was calculated by taking the trade deficit (exports - imports) divided by imports and then divided by two.

If you’re not familiar with trade deficits, consider the following. Over the years, each time you go to your local grocery store, you are creating a trade deficit with the store. You pay them money to buy stuff, and they don’t buy anything from you.

Trade deficits allow you to buy things you can’t produce or can’t produce as efficiently and cheaply as other countries.

That’s not to say there aren’t some problems with trade, but eliminating all trade deficits will significantly increase the price of many items we use every day—or make them completely unavailable.

The Tariff Formula

Upon the release of the new tariffs for each country, many financial experts commented that the tariffs were based on a simplistic formula using trade deficits.

The administration countered that the formula was more sophisticated and published a complex formula with lots of Greek symbols. It turns out, however, that the first two symbols in the denominator are constants with the values of 4 and 1/4 and, when multiplied, equal 1, so they cancel each other out. Since the x and m symbols stand for exports and imports, this formula reduces to (exports - imports) divided by imports, as suspected. The final Discounted Reciprocal Tariff simply divides this number by 2.

Stock and Bond Market Reactions to “Liberation Day”

So, how did the stock market react to the tariffs? On the two days following “Liberation Day,” the stock market fell nearly 11% (and continued to fall in subsequent days).

Far more alarming, there was a significant selloff in the bond market.

Normally, when some sort of panic results in a rapid selloff of stocks, the price of US bonds goes up. US bonds are—or were—considered a safe haven in times of uncertainty.

But not this time.

Investors appear to have lost some degree of confidence in US government securities. This is a serious problem and may have long-lasting effects.

Recession?

In addition to the likelihood of inflation going up, the chances of a recession have increased significantly.

Where Do We Go From Here?

So, will stocks ever recover?

In past financial crises, the stock market has recovered and gone on to set new record highs 100% of the time.

And we’ll recover from this self-inflicted crisis as well—eventually.

Companies will find ways to navigate the economic environment and make money.

It helps if you’re invested in a market-cap-weighted index because the companies that figure this out will rise toward the top of the index, and companies that fail to do so will become an increasingly smaller drag on the index.

Timing the Market?

Given all that has happened, should you move out of stocks into something “safer?”

The problem is that we don’t know how much further the stock market might decline and, crucially, when it will start to recover.

If you move out of stocks and don’t get back in in time, that may cost you more than being in the market cost you in the first place.

Regular readers of our posts know that we don’t recommend putting stocks into your short-term portfolio (money you’ll need in 3 to 5 years). This allows the markets time to recover from whatever crisis we’re facing.

Recognizing that risk depends on your timeframe (stocks are most risky in the short run, but least risky in the long run) helps you stay calm during market selloffs.

Best regards,

Stuart & Sharon