Is It Really That Important to Invest?
It is actually very important to invest, particularly for individuals who aren't going to need that money for a long time. In reality, not investing is highly irresponsible to both your future self and those who are going to be dependent on you. This is because your savings really needs that growth to get it up to where you want it to be for retirement.
Let's consider two hypothetical situations. You have $10,000 you want to save and you won't need that money for 40 years. Where do you save that money?
One version of you invests that money in a mix of mutual funds, and the other version of you locks it away in a safe under your bed to protect all of your hard-earned money. In 40 years, cautious you has $10,000 securely stashed away to help with retirement. On the other hand, investor you earns the S&P 500 90-year historical rate of just over 10 percent per year, and winds up with over $450,000 at the end of those 40 years. In essence, cautious you has lost out on $440,000 that you could have earned simply by investing that money, ignoring any taxes and fees.
OK, so cash is starting to sound pretty bad, but what about bonds? They're still very safe and they definitely return a whole lot more than cash does, right? Well let's take a look at that.
Five-year treasury bonds have returned a bit over 5 percent per year for the last 90 years. If bond investor you puts $10,000 in those bonds for 40 years at that rate of return, you will end up just over $74,000 at the end of 40 years, again ignoring taxes and fees. While that is certainly a whole lot more than cash, when compared to the $450,000 that stock investor you finished with, the difference is still night and day.
When you have a long period like that, you really almost have an obligation to yourself and your loved ones to invest in a manner that is going to best be able to take care of you all in the future. While putting your savings entirely into stocks isn't the right answer for everyone at every stage of life, most young people really should be invested heavily in stocks to take advantage of that huge growth potential that there is for your money, one that is very hard to find anywhere else.
Josh Marbert is a CPA and a Financial Advisor at Richard Young Associates. Want to learn more about him and our other advisors? Find out more here.
Through 2016, the 90-year annualized return for 5-Year Treasury Bonds was 5.14% and for the S&P 500 was 10.02%. An investment of $10,000 compounded annually at those rates results in $74,254 and $455,896, respectively.