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? I believe — as do most financial experts — that you’re most likely to achieve high returns by investing in the stock market.
How Much Does the Stock Market Return?
In Stocks for the Long Run, Jeremy Siegel analyzed the historical performance of several types of investments. Siegel’s research showed that for the period between 1926 and 2006 (when he wrote the book):
- Stocks produced an average real return of 6.8%. “Real return” means return after inflation. Before factoring inflation, stocks returned about 10% annually.
- Long-term government bonds yielded an average real return of 2.4%. Before adjusting for inflation, they had a return of about 5%.
- Gold had a real return of 1.2%. “In the long run, gold offers investors protection against inflation,” writes Siegel, “but little else.”
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 200 years. If
you’d purchased one dollar of stocks in 1802, it would have grown to more than $750,000 in 2006. If you’d instead put a dollar into bonds, you’d have just $1,083. And if you’d put that money in gold? Well, it’d be worth almost two bucks — after inflation. [Read more…]