Once you’ve got your debts paid off and you start shopping around for an investment, one thing you’ll have to consider is investing returns.
All investments carry some degree of risk. You might lose your money you invested, inflation can eat away at your savings, or your real estate could lose money. All investments also imply a degree of effort and hassle to manage them well. Stocks require review of quarterly documentation, effectively managing a bond portfolio means keeping an eye on interest rates and owning real estate implies that you need to fork over money and time to manage repairs and facilitate buying and selling. So, if you are going to run the risk, and are going to deal with the hassle, you’ll want to be sure you’re maximizing your return.
Since 1971, the CPI adjusted asset class returns were (in percents):
- Fixed Income, 1.0%
- Intermediate Term Bond, 3.3%
- Long Term Bond 4.9%
- High Yield Bonds 6.2%
- International Govt Bonds 5.3%
- Commodities 4.7%
- Large Cap Equity 6.2%
- Mid Cap Equity 8.7%
- Small Cap Equity 10.5%
- International Equity 5.3%
- Emerging Market Equity 12.9%
- REITs 9.2%
While these figures contain some fudging they should be pretty good. They are roughly comparable to those published by Morningstar’s Ibbotson® SBBI® Classic Yearbook – an industry standard. An additional point to consider is that investing returns matter a LOT over time. Let’s say you invest $10,000 in bonds at 5% percent. After 25 years, you’ll get $33,863. However, if you invested your money in stocks at 10%. For a comparable time, you’ll have $108,347 – a big difference. So, your bottom line is that for all the hassle and risk you take investing your money, stocks are probably your best long term bet, followed by bonds, and then fixed income.
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