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The Best Way to Grow Net WorthBy Larry FerstenouBased on You CAN Retire Young
You can read a multitude of books and magazine articles on investing and come up with the same general conclusion: Over the past 10, 25, 50, or 100 years, one couldn’t do better than the stock market for return on investment and significantly beating inflation. As risky as some believe it is (and it can be on a short-term basis), the long-term payoff has been compelling.
The following table presents average annual total return performance figures for the three major asset classes—cash, bonds, and stocks—from 1926 through year-end 2001; the returns are also adjusted for inflation, which averaged 3.1 percent over that same period. (Figures courtesy of The Vanguard Group.)
To put those figures into hard numbers so you can see the impact of such differences on investment return over time, assume $1,000 was placed into each of three tax-deferred investments in 1926: cash (like T-Bills or CDs), long-term corporate bonds, and stocks (in this case the S&P 500). What was the value of each account at year-end 2001?
The difference in the inflation-adjusted returns over the past 76 years of these asset classes is nothing short of startling. Of course, the key to earning that return in stocks is that you must have had your money invested over the entire time period so that you could ride out the short-term losses and take advantage of the longer upward trend.
One must always be aware that past performance is no guarantee of future success. But if you believe history repeats itself, then the stock market has been the only place you could exceed inflation by a wide margin and grow your money sufficiently to meet your long-term goals. At the same time, not everyone should be totally invested in the stock market so it is important that you have a diversified portfolio appropriate to your needs.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Larry Ferstenou retired over ten years ago at age 42 and is the author of You CAN Retire Young: How to Retire in Your 40s or 50s Without Being Rich (American Book Business Press, 2002). More information can be found at www.youcanretireyoung.com. Copyright © Larry A. Ferstenou, 2002–2003.
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