July 22, 2016

Stocks are safer than cash or gold in the long-run

As Dr. Hermann J. Stern said in the previous video, "stock investing is like a boxing match". He got injured in his weekly boxing match today. In sports, there is always a risk of injury, but the rewards are usually worth this risk.

The same is true when investing in stocks. The rewards are well worth the risks, especially when you look at the numbers below.

If you want to play it safe, keep your money in the bank or under your mattress. This way, $100 saved today will be worth about $100 thirty years from now. If you want a "safe investment", like government bonds, you will get a similar return: a return of zero.

If you invest $100 in stocks today, it will be worth around $1,000 in 30 years, assuming a typical stock market return rate of 8%. For example, if you invested $100 in the large US stock index, S&P 500, thirty years ago in 1985, you would have $1,200 today.

If you invested EUR 100 in the large Germany stock index, DAX 30, thirty years ago, you would also have around EUR 1,200 today. If you made a similar investment in Switzerland, you would have 1,100 Swiss francs from an investment of 100 Swiss francs in 1985. Looking at these numbers, an 8% annual return from stock investments looks like a good, conservative assumption.

This means by keeping your savings in cash, you would lose more than 90% of your wealth compared to investing it in stocks in the US or Europe.

Investing in stocks yields so much more than keeping your money in the bank that all the ups and downs of the stock markets are still worth the risk. Along the way, you may have less than your original investment of $100. Sometimes, when your wealth is growing on the way to eventually reach $1,000, you may even lose as much as $100 in a single year. Regardless of the wins and losses on paper along the way, you are likely to end up with $1,000 by the time you retire. At the of your retirement, the stock market would have to crash and lose 90% of its value to equal your return if you kept your money under your mattress. That’s safety. Cash isn’t safe. It’s a sure loss.

Should you invest in gold? $100 grew to $400 between 1985 to 2015. EUR 100 will have grown to EUR 200 and 100 Swiss francs will have grown to 150 Swiss francs after thirty years. Not a convincing performance compared to stock returns.

Gold can’t give you good returns for the simple reason that gold doesn’t work to make a living. Only companies work. That’s why only company stocks can give you returns for your investments.

1985 to 2015 returns in summary (including the major crashes in 1987, 2000 and 2008):

- (In USD) Gold: quadrupled - S&P 500: 12 times (you lose 11 times your investment if you stay in USD cash)

- (In EUR) Gold: doubled - DAX 30: 12 times (same 11 times loss for euro cash investors)

- (In Swiss francs) Gold: 1.5 times - SMI: 11 times; cash investors lose 10 times their Swiss franc investment

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