1. Murphy’s Law: What can go wrong will go wrong. O’Toole’s commentary: Murphy was an optimist.

2. From Last Week 1. Risk ≈ Return

3. 5. Diversify Diversification works will over the years and decades but poorly over the weeks and months. Market prices are volatile in the short run.

4. The “lost” decade 2000-20009 33% Fixed Income Vanguard Total Bond Market Index VBMFXVBMFX 27% US Stock Vanguard Index Trust Total Stock Market VTSMX 14% Developed Foreign Markets Vanguard Developed Markets Index VDMIXVDMIX 14% Emerging Markets Vanguard Emerging Markets Stock VEIEXVEIEX 12% Real Estate Investment Trust Vanguard REIT Index VGSIXVGSIX

5. The “lost” decade 2000-20009

6. 10. The four most expensive words in the English language are “This time it’s different.” Sir John Templeton

7. For five year holding periods: gains of 1 to 25% 90% of the periods losses of 1 to 12% in 10% of the period. For 30 year holding periods: a gain every single time of 8% or more.

8. 9. The past is past; future returns will be different.

9. Gordon’s Equation: Expected Returns = Dividend Yield + Dividend Growth Rate S&P 500 Expected Average return = 2.5% + 1.32% ≈ 4% [Real] In the LONG run…

10. “I can calculate the motions of heavenly bodies, but not the madness of people.” --Isaac Newton, after losing money in the South Seas bubble

11. Advantages of home ownership Rent is not deductible, but mortgage interest and property taxes are Realized gains in home sale is tax exempt A mortgage forces you to save Liquidity

12. Home sweet home MortgageAdvantagesDisadvant- ages Risks/ Remarks Stand. 30 yr Fixed Payments Stand. 15 yr Lower rate than 30 yr ARMs* Low initial rateRate rises fastIf you can’t refinance! Interest Only* Lower paymentsNever paid offSpecial use Payment Option* FLEXIBLEIncreasing debtCourting disaster! “Reverse” Very special use

13. More Theory Next Week Chapter 3 pages 38-65 Watch for: “Good” companies are often “bad” stocks and “bad” companies as a group are “good” stocks. Expected returns for asset classes are proportional to the risk they pose. Pascal’s Wager. You can’t time the market. You can’t pick stocks or fund managers. Index funds versus mutual funds…