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How to Write a Personal Loan Agreement
403b vs. 401k: What’s the Difference?
I know that you were losing sleep because I had not written a post yet that outlines the differences between a 403(b) vs. 401(k). Oh waitâ¦.you werenât? I thought everybody was a retirement tax code freak like me. ð Either way, you or someone you know may have the option to fund a 403(b) and […]
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9 Ways to Save on Your Grocery Bill
From the Mint team: Mint may be compensated if you click on the links to our issuer partnersâ offers that appear in this article, including Chase. Our partners do not endorse, review or approve the content. Any links to Mint Partners were added after the creation of the posting. Mint Partners had no influence on
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What’s the best long-term investment?
What’s the best long-term investment? Because you’re a money nerd (and a GRS reader), I hope your answer to this question was, “Stocks!” If the future is anything like the past, that’s the correct answer. History has shown that stocks are the best long-term investment — and by a wide margin.
Unfortunately, most Americans believe otherwise.
As a part of its annual Economy and Personal Finance survey (conducted during the first two weeks of April), Gallup News asked 1017 American adults, “Which of the following do you think is the best long-term investment: bonds, real estate, savings accounts or CDs, stocks or mutual funds, or gold?”
Here’s how people answered:
- 35% of respondents said that real estate is the best-long term investment
- 21% said that stocks or mutual funds are the best long-term investment
- 17% said that savings accounts or certificates of deposit are the best long-term investment
- 16% said gold is the best long-term investment
- 8% said bonds are the best long-term investment
While acknowledging that past results are no guarantee of future performance — let’s take a look at why I think Americans haven’t got a clue when it comes to figuring out the best long-term investment strategy.
The Rate of Return on Everything
The August 2019 issue of The Quarterly Journal of Economics included a paper entitled “The Rate of Return on Everything, 1870-2015”. Over an astounding 74 pages of discussion, the authors attempt to analyze the long-term (145-year) rate of return on a variety of assets around the world.
The paper examines four popular investment vehicles:
- Bills, by which the authors mean Treasury bills, are short-term government bonds. At present, these are a good proxy for the rates you can earn with a high-yield savings account. (I don’t think this is always the case, though.)
- Bonds, which in this case refers to ten-year government bonds (such as a 10-year Treasury note).
- Equity, which is another way to describe common stock. Here, the authors are measuring overall stock market performance.
- Housing, including rental properties.
We’ll look at each of these in greater detail in a moment (and we’ll look at gold too), but for now let’s look at this paper’s overall findings. While the authors looked at data for many countries, I’m only going to share results for the U.S. The following table shows the rates of return for these different asset classes over three different time periods. (Remember that, for our purposes, Bills are a stand-in for savings accounts.)
From this table, it’s clear that equities (i.e., stocks) have been the highest return investments over long periods of time. Nothing else comes close. (Outside the U.S., this isn’t always true.)
Now, while stocks provide the best long-term returns, they also come with the greatest volatility. Here’s a a chart (Figure VII) from the paper that shows just how crazy the ride with stocks can be. (Also note how closely equities and real estate tracked each other until the Great Depression.)
It’s this volatility that scares so many people away from the stock market. They’re afraid that a sharp decline can come at any time. And that’s true. But what’s also true is that a prolonged bull market can occur at anytime, as we experienced from March 2009 to February 2020! If you’re a long-term investor, you don’t give a fig about short-term market movement.
Let’s dive deeper into the long-term investment returns provided by the asset classes in the Gallup poll: real estate, stocks, savings accounts, gold, and bonds.
A year-long spending moratorium
While walking the dog last weekend, Kim noted that I’ve been getting a lot of packages in the mail lately. “What’s up with that?” she asked.
I sighed.
“Remember how we shared that bottle of champagne on New Year’s Eve?” I said. “Well, that got me buzzed enough that I sat down at my computer and ordered a bunch of used books. Mystery novels and manga. So, those are starting to filter in.” That’s right. I got drunk on New Year’s Eve (because I no longer drink regularly, I’ve become a lightweight) and ordered old John le Carré paperbacks and Lone Wolf and Cub compilations from ABE Books. I lead an exciting life, my friends.
“Don’t you have enough books?” Kim asked.
“Honestly, I do,” I said. “And I haven’t read half of them. I haven’t watched half of the movies I’ve purchased. I haven’t read half of my graphic novels.”
“You only wear about half of the clothes in your closet,” Kim added. We stopped to let the dog dig in the ditch. Tally was certain she smelled a rodent and was desperate to find it.
“Right,” I said. “I know I’m not the only one who does this, but that doesn’t mean I like it. I feel as if I ought to take a break from buying new stuff and just work through the books and movies and clothes I already own.”
“I feel as if you ought to do that too,” Kim said, laughing. Then Tahlequah saw a deer in the neighbor’s field, and our conversation was forgotten in the ensuing excitement. Bark bark bark! Deers are evil.
FAFSA Opens on Oct 1st – What You Should Know
The Free Application for Federal Student Aid (FAFSA) is a form that current and future college students need to fill out each year. The FAFSA determines individual eligibility for student financial aid and unsubsidized federal loans, so itâs incredibly important for any student looking to reduce the price tag on their college education. This yearâs
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Should You Use Your 401(k) To Pay Off Student Loans? – Money Under 30
If you’ve been working for a while and contributing to your company’s 401(k), you might feel tempted to use some of that cash to wipe out your student loans – and I don’t blame you. Saving thousands on interest and allocating those funds toward things, like buying a house or beefing up your savings, sounds … [Read more…]
Should You Use Your 401(k) To Pay Off Student Loans? – Money Under 30
If you’ve been working for a while and contributing to your company’s 401(k), you might feel tempted to use some of that cash to wipe out your student loans – and I don’t blame you. Saving thousands on interest and allocating those funds toward things, like buying a house or beefing up your savings, sounds … [Read more…]
11 Basic Financial Tips to Get You Started
I get it. Some of you are here for the basics. My forays into niche topics don’t interest you. Stablecoins? Market psychology? Dividend stocks? Who cares?! So here are the 11 basic financial tips to get you started.