One of the fundamental ideas I try to promote here at Get Rich Slowly is your savings ought to be invested for long-term growth. You ought to 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.
But why do so many people favor the stock market? How much does the stock market actually return? Is it really better than investing in real estate? Or Bitcoin? Let's take a look.
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.) Yes, you can make money with real estate investing, but it's far more complicated than just buying a home and expecting its value to soar. (It's important to note that returns on real estate are a contentious subject. This recent academic paper analyzing the rate of return on “almost everything” found that housing actually outperforms the stock market by a slight margin.)
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…]