In 2013, we finished a banner year for the stock market.
I remember just 3 or 4 years ago though it would have been difficult to convince anyone that the stock market would ever make money again. In the investing lesson of Financial Peace University, Dave Ramsey talks about getting a 12% return. I remember that always being a controversial lesson for some as they insisted that while that may have been true in the past, we’d never see those kind of returns again. Well, depending on which measure you use, the markets were up nearly 30% or more for this past year.
Looking at the really long-term
Dr. Jeremy Siegel, a professor of finance at the University of Pennsylvania, has processed data going back to the beginning of the stock market in 1802. He looked at the returns for various types of investments adjusted for inflation in the years since.
- Had you invested $1 in Treasury Bills back in 1802, today you would have $282.
- $1 invested in long-term bonds would now be worth $1,632.
- $1 invested in gold in 1802, today would be worth about $4.50.
- $1 invested in the stock market, would today be worth $706,199!!!
- $1 saved in a “safe” place like your mattress, adjusting for inflation would only be worth about 5 cents today.
So what’s my point? That stocks are great and 30% returns are here to stay? No of course not. I don’t expect 30% returns to be the norm any more than I thought we were seeing the end of the financial world in 2008. I have no idea what will happen in 2014.
The point is the best way to make money in investments over a period of many years is through the stock market. This has been proven through the years. Through financial disasters and years of plenty. The world at war and the world at peace. Earthquakes, floods, famines, and hurricanes. Good times and bad. Some years it’s up and some years it will be down, but over the long haul the market will always out perform other investments.
Redefining safe investments
The fascinating thing to me in this study by Dr. Siegel is the striking difference we see between the stock market and seemingly “safe” investments.
One of the most highly hyped investments of the last few years has been gold. Those who were and remain convinced that we are heading for a crash pushed heavily that gold was the only safe place to put your money. But as Dr. Siegel’s research shows a dollar in gold would have only made $4.50 in the last 200 years. Gold is a very risky, and volatile investment and not at all a “safe” place for your money.
Many people, scared by the events of the last decade, have decided that the “safe” thing to do is to just not invest at all. The problem with this strategy is inflation. Doing nothing is not really safe either.
Conventional wisdom often promotes bonds as a “safe” place to put your money. But, Dr. Siegel’s numbers show that over time bonds make only a fraction of what stocks make. Bond values also have an inverse relationship to interest rates. As interest rates rise, bonds tend to lose value. With interest rates at historic lows, it isn’t hard to guess what’s going to happen to their value in the coming years.
The only real safe investment
Obviously, there is risk in investing in stocks. If you need your money in the short-term you shouldn’t be investing it. A savings account or perhaps a CD is the place to keep it. But if you are looking at the long-term and investing for your future, the reality is the “safe” place to put it is really investing in stocks. Sure there will be some 2008′s where everything tanks, but there will also be some 2013′s where everything is great, and there will be plenty of years in between. History has proven though that our economy produces far more good years than bad.