One of the fundamental principles of the Money Boss philosophy is that your profit or savings, if you prefer ought to be invested for long-term growth. You should use the magic of compounding to create a wealth snowball. Naturally, you want put your money into an investment that offers a reasonable return and acceptable risk. But which investment is best?
In Stocks for the Long Run , Jeremy Siegel analyzed the historical performance of several types of investments. My own calculations — and those of Consumer Reports magazine — show that real estate does worse than gold over the long term. I come up with a real return of just under one percent. Siegel found that stocks have been returning a long-term average of about seven percent for years.
In fact, every book on investing shows the same thing. This makes a lot of people — including me — tense. Over the past years, stocks have outperformed every other kind of investment. But before you rush out and sink your savings into the stock market, you need to understand a couple of things.
In the short term, investment returns fluctuate. Bond prices fluctuate too, albeit more slowly. And yes, even the returns you earn on your savings account change with time.
Just a few years ago, high-interest savings accounts yielded five percent annually in the U. Recent history is typical. But only two years — and — generated stock market returns close to the average for that time span. This fifteen-year period has one of the lowest rates of return on record.
And over thirty years, stocks almost always win. The best way to build your wealth snowball is to invest in the stock market. Doing so is likely to offer you the highest rate of return on your money. And the best way to approach stock-market investing is to take the long view. Forget about what the market does today or tomorrow. Focus on the future. It turns out that the longer you hold your stocks, the more you can reduce the risk you assume from investing in common stocks.
The chart below makes the point convincingly. From through , common stocks provided investors with an average annual return of a bit more than 10 percent…. Even during the worst year period you would have earned a rate of return of almost 8 percent — a quite generous return and one that was larger than the long-run average return from relatively safe bonds. Each bar represents the year annualized real return on U. Investing is a game of years, not months. Stick to your long-term plan.
Sign up today and I'll also send you the ten-week Money Boss crash course, including my one-page guide to financial freedom. And his method is this: Now, saving for a beach house somewhere warm could potentially go in either an index fund or a money market account.
If you have the idea that you may want a vacation beach house one day, perhaps a decade or more from now, then an index fund would be a good option. Great to see someone really pounding on the virtue of buying and holding. Whenever people equate the stock market to gambling, I cringe. In reality, the inverse it true: I think your real estate comment is a bit of a half-answer.
Although it does not appreciate much beyond inflation, it does have potential to earn income if analyzed well. Any value realized from work should be divided over the hours spent doing it. This is a good summary about stock market investing.
I agree with you that you need to buy and patiently hold stocks for decades, without fear, in order to reap the full benefits of compounding. This is the right to live in a home. It would be nice to know if you looked at the price of the home, or whether you looked at the total returns of home ownership over time.
The other comment I want to add is that the US stock market data prior to is spotty at best according to many sources out there. So you need to take return numbers from — this with a large dose of grain of salt. And last but not least, some argue that historical stock market returns are rosy because they are overly US centric. There have been active stock markets in the 19th or early 20th century, which destroyed shareholder wealth.
So unfortunately, nothing is guaranteed on a go forward basis. Your email address will not be published. Want to master your money — and your life? Subscribe to Money Boss today. Click Here to Subscribe. Like What You've read? Join the 4, money bosses who already receive free weekly updates.
Next Article Cost of Living: Real estate is no more a lucrative investment in the US. Hi MoneyBoss, This is a good summary about stock market investing. I do have a few comments however. That being said, I do believe the US will deliver decent returns over the next 30 or so years.
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