Bad Investments

This is not your ordinary coding-related post, so bear with me.  My daughter received a monetary gift many years ago.  It was invested in a bank in Ohio and she wasn’t allowed to touch it until she turned 18.  It wasn’t a huge sum, but it wasn’t $10 either.  Here’s what happened.  Let’s use a starting point of $1000 as an example.  After 11 years in the bank, a very safe place to put your money, it was worth $1170.  That’s a tidy increase of $170.

Not so fast, though.  The S&P 500 went up around 2.7% over that time.  If the money had gone in there, she’d have $1341 now.  What about a balanced mutual fund?  The Fidelity Puritan Fund went up an average of 5.2% per year, which would have given her $1747 now.

It gets even better when you add inflation.  The cumulative rate of inflation over the same period was 34%.  If you had invested in the S&P 500 over that time (it was a rocky up and down time) you’d still be even with inflation.  In the Puritan Fund, you’d still be ahead.  In the bank, you’d actually have lost money.

So, why am I giving you this little lecture?  Because I used to work with a group of developers who were afraid of the stock market.  They kept their money in the bank in safe investments.  And they were going to lose a lot of money due to inflation, which is the hard part to detect.  Interest rates in bank savings accounts are less than 1% right now and CDs aren’t much better.  Meanwhile the stock market has been on a tear since the recession has eased.

Your best strategy for retirement is a mix of investments in stocks, bonds, commodities, etc. and thinking for the long haul.  Try investing in one of the newer “retirement date” funds that some firms have now.  You pick a year for your retirement and they adjust the mix of stocks and bonds for you.  It couldn’t be simpler.  And you might actually retire with something to live on.