You Will Be Amazed By Which Is The Worst Over The Long Haul
What is the best type of beginner investing? Where you can put your money for safety?
Isn’t that what we’d all like to know?
Obviously the answer depends on your goals and your temperament but for the average person the most probable answer is stocks. The results alone demonstrate it and I’ll show them to you before we’re done.
Of course, you might expect me to say this because this is what I have been involved in for the past fifty-five years. But let me share with you what the Federal Reserve database in St. Louis says. Their figures start in 1928 when stocks rose an extraordinary 43.81% – just before the start of The Great Depression – to December 31, 2008.
The Fed data records profitability of three-month treasury bills, 10-year treasury bonds and the stock market. In all cases, the only capital invested was $100 80 years ago. The treasury bills were renewed every 90 days. The 10-year bonds include capital appreciation and stocks assume dividends are reinvested.
T-Bills and bank interest much the same
I speak of T-Bills because their return over time is a matter of public record; bank interest varies fractionally from one bank to another. T-Bills typically pay a slightly higher rate of interest than a bank savings account so they will serve as a proxy as I try to show you why your savings should not be in a bank.
Any knowledgeable adviser will warn of the danger of investing in bank savings accounts for more than a few months and then only with capital saved for a specific short-term purpose. Treasury bills and money market mutual funds are not much different in their results – terrible!
Some recommend putting aside three months’ income to protect against layoff or an emergency. Find the best rate you can get for this money but make sure you can get it easily if you need it quickly.
Ten thousand dollars invested in T-Bills over time would yield average annual interest of just $380. Not startling but a far cry from rates today.
When interest rates improve again (and they will because of impending inflation) banks will then think they have something to brag about regarding their interest rates. They will then give just a small part of the truth in their advertisements.
Oops! They forgot to mention…
They forget to tell us that federal tax people on average will claim $95 as their due. And then there are local taxes averaging $36.86. But the granddaddy is inflation which, over the same 80-year period, has averaged 3.4%. Say goodbye to another $340 of your $380 advertised income!
As a reward for lending the bank $10,000 which it then lends to others at much greater rates of interest your purchasing power declined by $91.86. That’s for one average year. Calculate that over any number of years and you will fully understand why banks and similar vehicles are dangerous places to put investment capital.
Safety is not about protecting dollars; it is about protecting buying power. For your generosity in lending banks your cash from which they can make more cash you should be able to purchase more of the things you need in future years, not fewer.
To keep these articles reasonably brief I’ll continue with rewards from bonds and stocks next time. Find out where the real money is made over the long term! You’ll be amazed by what $100 grows into even after The Great Depression and all the bear markets and recessions after that.