Cash or stocks – hoard or invest?<\/p>\n
This discussion comes up so often that an analysis post was due.<\/p>\n
While I don’t necessarily consider a 100% stock portfolio to be the best investing approach, it will definitely prove a point about assets outperforming cash over the long-term.<\/p>\n
Without further ado, let’s break down a case.<\/p>\n
What we’ll analyze is a person’s net-worth if it’s allocated in one of two different asset classes: cash and stocks.<\/p>\n
For the purposes of this post, we’ll assume that the person has access to $10k, tax free, and he has no plans of spending them in near future. The goal is to see which strategy will help him maintain his wealth better and maybe even increase it in the process.<\/p>\n
So, let’s say you had $10k available 30 years ago.<\/p>\n
Keeping them in your bank account would mean that today you’d have $10k. Great job on not losing them. Here’s a chart to visualize the performance of your portfolio<\/em> over the years:<\/p>\n
<\/p>\n
No surprises there.<\/p>\n
However, the value of the piece of paper we call a bill is not absolute. It’s determined by what it can actually buy.<\/p>\n
And whatever meant $10k 30 years ago doesn’t mean $10k today. In other words: the purchasing power of $10k is much lower today than it was 30 years ago. To put it into perspective by going a few decades back, an average house in the US costed around $17k in 1963.<\/p>\n
In what we learned to call “a healthy economy”, the inflation<\/a> rate is 2-3% per year. I’ll use 2% as a less extreme example:<\/p>\n
Not cool. And the red line is not a coincidence.<\/p>\n
I used\u00a0The Inflation Calculator at westegg.com<\/a>, and this is the result I got for a 30 year period:<\/p>\n
Seems like I was actually quite optimistic with my Excel charts.<\/p>\n
Long story short: keeping your wealth in cash will reduce your purchasing power because of inflation<\/a>.<\/p>\n
Now okay, n00bs can “hedge” against inflation by using their bank’s savings account. Thirty years ago it might’ve made sense, but the rates offered nowadays hardly match the devaluation of the currency<\/a>. Nevertheless, I’ll just assume that somehow you beat inflation and conserved the purchasing power of your money. So I’ll use $10k for the cash, although that amount can buy less than half of what it could 30 years ago.<\/p>\n
<\/span>Stock Market Performance in 30 Years<\/span><\/h2>\n
For this example, we will use the S&P 500 index as a benchmark and will assume a lump-sum of $10k for 30 years.<\/p>\n
Vanguard<\/a> introduced the first fund to track the S&P 500 in 1976, so individual investors had the option to “buy the market<\/a>” conveniently.<\/p>\n
Let’s see the actual performance of $10k if we were to dump them in the stock market:<\/p>\n
Boom, there are those compounded 10% annual returns!<\/p>\n
Your $10k\u00a0would be worth $177k after 30 years.<\/strong><\/p>\n
The chart was created by downloading a CSV using the DQYDJ DCA Calculator<\/a>\u00a0with a lump-sum of $10k and 0$ in further ongoing contributions. And\u00a0it includes dividends paid, dividend taxes, capital gains taxes, management fees, and inflation<\/a>.<\/p>\n
<\/span>Conclusion<\/span><\/h2>\n
Is a picture worth thousand words?<\/p>\n
Here’s the comparison of the two approaches:<\/p>\n
<\/p>\n
And remember that we’re comparing an\u00a0inflation adjusted stock portfolio <\/strong>vs a straight line that somehow beat inflation and kept its value over the years.<\/p>\n
TLDR: Stocks beat cash in the long-term.<\/strong><\/p>\n
\nBtw, the time period is not cherry-picked. I’ve actually excluded the stellar performance of the stock market in more recent years.<\/p>\n
Nevertheless, you’d come to the same conclusion even if you start measuring right before any recession.<\/p>\n
Long-term returns always overshadow any short-term losses.<\/p>\n
<\/span>Afterword<\/span><\/h2>\n
There is no 30 year period in which cash outperformed the total stock market.<\/p>\n
If anyone is worried about entering the market right before a recession, he should learn about DCAing<\/a>. But more importantly, if anyone is worried about losing money, he should learn how they’re created<\/a>.<\/p>\n
Continue learning, DYOR, and build long-term wealth the smart way.<\/p>\n
\nFor a comprehensive, beginner-friendly, and free resource<\/strong> on stock market investing, visit:\u00a0<\/em><\/p>\n
How to Start Investing: A Complete Beginner Series<\/strong><\/em><\/a><\/p>\n