- buying a conservative dividend-paying stock index fund – go to Vanguard.com and start an account to buy some units of the VFINX fund, or if you have a brokerage account you can buy SPY shares.
- last resort: just putting the money into a cash account that pays the highest level of interest you can find – Vanguard’s Prime Money Market fund or ING Direct’s Orange Savings Account.
VFINX is a -0.76% for 5 years
ING Orange is currently at 0.80%
How can you assume 5% after inflation? That is no different that assuming that home prices will go up by 2-3% a year. It sounds reasonable but there is no way of knowing exactly how that will play out.
Because historically, that's what you've been able to get. You can't look at a 5 year timeline (and, obviously, cherry-picking the 5 year time period where stocks dropped by half isn't exactly fair). You should be looking at a 30 or more year timeline.
Even on a 30 year timeline, you can find runs where the average return is less than 8% (just as you can find periods where the return is greater). That doesn't mean it's not a reasonable forecast of what you can expect.
"Historically" home prices went up in the US until 2006 for well over 30 years.
It is interesting that you bring up cherry picking because that is exactly how mutual fund companies work. They have a lot of funds, the funds that do well stay around and the funds that do not do well are canceled. This fund that I mentioned is only 8 years old. Knowing which mutual funds are going to produce over 30 years is like knowing what stocks are going to produce over 30 years. You can 'cherry pick' examples for 8% or -8%, but it is crazy to assume that the fund you pick is going to get 5% over inflation over 30 years.
...and home prices will continue to go up for another 30 years (and the 30 years after that). Of course there will be recessions (and likely even depressions) during those times. What's your point?
I think you're missing something here. Nobody is talking about picking actively managed mutual funds (which you're right, are a total gamble/ripoff). The Vanguard fund mentioned above is an index fund. It's not at all crazy to assume that by picking the world's biggest index fund, you are going to get 5% over inflation over 30 years.
There is a reasonable line of thinking that the Internet and modern computer modeling and retail investing have had the effect of pricing in the future growth in equities, and so traditional growth will not continue.
I don't think it's ever been feasible; most countries won't let you open a bank account unless you have an address in the country, unless you're in some kind of special situation, like a "high net-worth individual" interested in private banking services.
I should have explained myself better. I'm assuming he's in the US. The savings rate comes into play when you consider that it is determined by looking at the prime lending rate between banks, which is currently at or near 0% in the US.0
But it's all about risk. If you want 0 risk to your principal, you are going to get 0% interest rate. If you put your money in the bank where it is (hopefully) FDIC insured, you get a bit of risk but not a lot, so you get a bit of interest. Since risk and reward (your interest) are correlated, the higher your return (8% compounded before inflation) the higher risk bracket you are in.
If US interest rates go up, the bank savings rate will go up as well, making it easier to get to 8% annual compounding rate with little risk. That means any other type of investing (equities, etc) will become less risky at the 8% level (but not without some risk).
you can spend an infinite amount of time talking about investing, but yeah it's stocks, counting on diversity for risk management. And it's more about dividends than stock price http://www.mrmoneymustache.com/2012/01/02/guest-posting-the-... . The goal is to get a steady stream of cash now, not have assets that you plan on selling when you get to 70.
