This is one situation where short-term rationality does not equate to long-term rationality. The $100 put into a savings account will earn a very low interest rate, and over time, it will likely lose value to inflation; a real loss in purchasing power is almost inevitable.
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The $100 invested into the stock market may have up days and down days, but the lesson from history is that stocks outperform virtually everything else over a period of several decades. (Caveat: Needless to say, we are not talking about putting all your money in high-risk penny stocks or similarly risky investment vehicles.). Suppose, for example, that a 30-year-old individual has $5,000 invested in equities earning 8% a year, which is a little below historical averages.
At the end of the first year, the investor's portfolio earned $400 in interest ($5,000 x 1.08). If the investor re-invests the interest, the same 8% growth will yield $432 in year two ($5,400 x 1.08). Year three will generate $466.56, year four generates $503.88 and so on. At age 35, the re-invested portfolio is worth $7,346.64, all without any additional non-interest contributions by the investor. Research by Dr. Jeremy Siegel and John Bogle, the founder of Vanguard, looked back over a period of 196 years and compared the real returns for stocks, bonds and gold. They found that if an investor had started around the year 1810 (the New York Stock Exchange was actually founded in 1817) and put $10,000 in gold, his inflation-adjusted portfolio would be worth just $26,000.
The same investment in bonds would have grown to $8 million. However, had the investor picked stocks in 1810, he would have turned his $10,000 in $5.6 billion. Stocks are still the big winner if you select a more realistic time frame; most investors have a 30- to 40-year horizon, not 200 years. Between January 1980 and January 2010, the average annualized growth rate of the S&P 500 was 8.15%. The Dow Jones averaged 8.81% over the same period, while the NASDAQ jumped 9.51% per year. Bond returns averaged less than 3% between 1980 and 2010. Inflation robbed cash of 62.2% of its purchasing power over those 30 years, meaning that $1,000 in a savings account in 1980 would only have a real value of $378 in 2010.
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Here's a common problem: You want to start investing but you’re faced with tens, hundreds, or even thousands of options. Between mutual funds, exchange-traded funds (ETFs), and individual stocks, there seem to be as many choices as stars in the sky.
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