Four different investments were analyzed: short term bonds, long term bonds, large cap stocks as measured by the S&P 500 index, and small cap stocks as measured by the Russell 2000 index. The question is which of these 4 gave the best return and how much would a $1,000 be worth that was invested on January 1, 1940, as based on data in the book titled Investments by Bodie, Kane, & Marcus?
Short term bonds had a value of $15,916. This investment grew roughly 16 times larger.
Long term bonds had a value of $29,572. This investment grew roughly 30 times larger.
Large cap stocks (S&P 500 Index) had a value of $1,385,213. This investment grew roughly 1,385 times larger.
Small cap stocks (Russell 2000 Index) had a value of $5,713,609. This investment grew roughly 5,714 times larger.
Over the long term the stocks out performed the bonds. Short term bonds only kept up with inflation and really was not a long term investment at all.
With the higher return came higher risk or higher volatility. The length of time that an investment is held is very important. More on the length of time later.
Start saving early and invest well.
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