The 'rule of 72' is a quick and easy rule of thumb to determine how long an investment doubles, and improve how you think about compound interest. For example it takes approx. 10 years to double an investment at 7%, or 7 years at 10%.
> The S&P500 with dividends reinvested has averaged a real (post-inflation) return of 7% annually over the last 100 years or so.
TBH I don't think looking at the last hundred years is particularly valuable. Nobody invests over a hundred year timespan. Most importantly, look at a graph of interest rates over the past 40 years. There is a fundamental "new normal" of extremely low rates (or, rather, negative rates for much of the world), making it extremely difficult to earn that 7% without taking on a very large amount of risk.
That's fine if you are prepared to take on significant risk - it took six years for the index to recover after the 2007 financial crash. If anyone was looking to retire on their investment then they'd be screwed. At least with a bank your savings are guaranteed.
It may be true only for the people that have invested ALL their money as a lump sum right before the index crashed (at the worst possible time).
For anybody else, those that say invested in the previous few years into a passive index fund, and continued to invest in the next few years they would have broken even within two years then probably quadrupled their money by today.
Keeping the same amount in a bank would have turned it into 30% less - a decrease similar to what the "crash" would have caused.
The 2007-2008 period was actually the time to invest even more aggressively, if you could stomach it! Historically, those big drops rarely happen. And when they do, they rarely last for long. You have full recovery in a few years. My investments from that time, mostly Total Stock Index funds, like VTSAX, have tripled.
People need to be taught not to be afraid of investing. I know many smart folks, some who are engineers, who were scared of investing until they were in their mid 30's. My dad taught me about investing when I was a teenager. You do this right, you can retire in your 40's or 50's, never have to work again if you don't want to.
You might luck out, maybe hit it rich on startup stock options by joining the next FAANG company. This is unlikely to happen. Investing in the stock market, week after week, year after year, decade after decade... It's almost guaranteed.
> I know many smart folks, some who are engineers, who were scared of investing until they were in their mid 30's.
One of my biggest regrets, coming from a family/socioeconomic group where nobody invested, is not beginning to invest as soon as I had enough disposable income to safely do so (in my mid-20s) instead of in my mid-30s.
Yes! It's too bad none of this is really taught in schools, outside of the occasional "stock market club." It's foundational stuff and people should be educated on it.
That's why fund balance and risk tolerance is a thing. If you're 55+ and looking to retire that 2008 drop will force you to eat cat food. But if you're 50+ most of your money should be in bonds, holding wealth.
If you're 33 and working in IT, you should be holding stocks and hoarding that fantastic growth (and slowly, over time, scraping the gains off into bonds).
You bank savings are only guaranteed by FDIC to $300k. Chances are they are not giving you an interest rate that will keep up with inflation, either. At best it's not gaining value, and is in all likelihood losing value by tiny amounts as inflation eats away at it.
The only problem with that is we are living longer and longer, but wanting to retire earlier... it's really an individual thing, and you have to make sure that whatever you're invested in, you will have the principle + earnings to be able to cover your needs for however long you live.
Keep in mind that costs for elderly care have gone nowhere but sky-high in the past decade or so. It's not crazy to plan on paying 10-25,000/month once you reach your 80s or 90s (or more if inflation rises).
That's why you take on riskier investments early on and transition to "safer" ones as you reach retirement age (or whenever you're planning to access the money).
I always found this slightly wrong (for a non-outlier case). If you're young and you have some earning/saving power, why would you want that to be risky? Keeping it "safe" in an index fund means that it is compounding longer than the assets you'll get later in life!
The confusion is probably coming from your idea of “risk”. When people say stocks are risky they mean their prices have higher variance. But they also have higher long term growth rates. If you’re young, you have more years left until you will need to sell your investments in retirement. That means you should care less about the short term variance and more about the long term growth rate.
Guaranteed to loose value over time. Ever since central banks forced gov fiat currency on us all, we're stuck investing just to save for the future. Back in 1905, most people could save in gold, and very few invested, but now that dollars/euros/yuan saved loose value over time, we're all forced to use equity as a money-substitute for savings.
You are gaurenteeing a loss of purchasing power by putting your money in the bank. You are only risking a potential loss investing in the S&P, and you have a potential significant upside. It's a no brainer.
Risk depends on how long you have until you are going to start pulling on that money. The only people screwed investing wise from 2007 were the people who pulled out. If you can keep a level head, which might preclude some people, investing in stocks is hardly risky. Specifically using index funds, because there is a lot of risk in picking a few stocks.
That’s only if you need almost no risk. The whole US stock market is definitely risky (it could go down fifty percent or more in a year), but it has averaged significantly over 2%, even after inflation, even in the last few years.
This is also noted. Do you consider the downside risk higher than the potential upside over the next 12 months? I am currently viewing downside risk as a higher probability than the potential upside due to a number of macro issues. Plus Warren Buffet just went to a cash pile.
If your time frame is longer than seven years, then it just about always makes sense to leave your money in the market. Even if the market drops 20% in a crash, the market is up more than 20% now since people started majorly talking about fear of a recession a year ago, so it would’ve been better to put money in then than to avoid the market for fear of recession. There might be a recession in a year, but the market’s gains in that time might be bigger than the drop.
Warren Buffett recommends that the best way for the average person to build wealth is to invest in an S&P 500 index fund. Read some John Bogle and you'll get a good grasp on index investing and you'll learn that "time in the market, beats timing the market." Most people get timing completely wrong and end up selling at lows and buying at highs. You're better off dollar cost averaging and investing money consistently over time.
That's a pretty hefty fee when you compare relative to average annual returns. Plus the compounding nature of those costs is not insignificant. Jack Bogle (Vanguard) has a nice chapter demonstrating this in "The Little Book of Common Sense Investing".
