The third installment of “As the Portfolio Turns”—in which Julie argues with Karl about the merits of investing in the stock market—sparked quite a debate about the stock market’s profitability:
How much can you expect to gain over the next 20-30 years: 4%, 7%, 10%? How much could you lose?
Ask your Magic 8 ball
We wish we had the magic formula. But no one does. No matter what rosy returns a stock, advisor or firm has delivered until yesterday, nobody knows what tomorrow will bring.
So, why invest at all, as Karl was arguing?
Historically the average return of the S&P 500 index over the last 30 yearswas 11.27%, according to Standard & Poor’s. (The S&P tracks 500 of the biggest U.S. companies, and is considered a U.S. market indicator.)
But during the so-called “lost decade” of 2000-2010—the S&P’s average return was –0.30%.
What does that mean? It means that putting your money in the market will always involve some risk (witness the drop this week!).
Yet even now, most experts believe that over the long-term, and by making smart choices—i.e. understanding your asset allocation, managing and rebalance your portfolio, minimizing the fees you pay—most investors will gain more than if they didn’t invest at all.
There are extremely conservative ways to invest, which minimize your exposure to the roller coaster of the stock market: e.g. bonds or bond funds, treasuries, and others. These are called fixed-income investments because they provide a steady return. A 10-year Treasury bond yields about 3%, and it’s backed by the U.S. government.