What if you knew before you went to bed tonight that, when you woke up tomorrow, you were going to find the world as you know it in complete turmoil? The market hit an all-time high at the close of the day, but you know the next day holds a shockwave that will rock the financial world to its very core. The resolve of everyone you know will be tested. One of the leading global financial firms will close its doors. Other financial institutions are going to falter -- so much so, that the federal government will have to step in to rescue them. Unemployment is going to soar to 10%. The economy will sink into the deepest recession ever since the Great Depression. The federal debt is going to exceed 100% of the gross domestic product (GDP), and we are going to have substantial annual deficits. All of these horrible scenarios are about to unfold in less than 24 hours, and you have the chance to invest your money in one of five different areas. Choose carefully, because that is where your money will ride out the storm for the next 10 years.
Those areas are:
Real Estate
Gold
Bonds
Stocks
Cash
Which would you choose? Think about it for a minute. Where are you going to invest?
Now fast forward to today. Those exact series of developments are what led us into the Great Recession. Just over 10 years ago, these exact events took place. October 9, 2007, saw the market peak to a new all-time high. The very next day, it all came tumbling down, and a whirlwind of financial crises began.
We are now seeing similar market increases, with record highs begin recorded every few days. The economy is in a much better place with our quarterly GDP growth recently revised to 3.1%. With that in mind, let’s look at the five areas above and what they would have done with your money over the past 10 years.
According to a survey conducted by Bankrate.com, 28% of those asked where they would invest money for the next 10 years if they did not need it, chose real estate. That was followed by 23% storing money away in cash investments. The third choice was the stock market, with 17% feeling safest there. Another 15% chose gold, placing it fourth. Then, last but not least, bonds took fifth place at just 4%.
Now, I am going to lay this out there for you mathematically and hope you can grasp everything wrong with this scenario. Honestly, the economy is soaring, hitting all-time highs, and people are really choosing real estate as their investment of choice.
A recent column from Brian Wesbury, chief economist at First Trust Advisors, looked back over the 10-year period beginning on October 9, 2007. Wesbury noted, “The S&P 500 has generated a total return (capital gains plus reinvested dividends) of 7.2% per year, essentially doubling in value in 10 years. Gold did well, but lagged stocks, increasing 5.7% per year. A 10-year Treasury Note purchased that night (now coming due), would have generated a yield of 4.7%. Oil was a laggard, down 4.3% per year. Home prices increased about 1% per year, on average, and 'cash' averaged 0.4%, both trailing the 1.6% average gain in the consumer price index.”
So, both the number one and number two answers to the Bankrate survey -- real estate and cash -- notably underperformed the consumer price index.
Not only that, but from 1980 to 2005, the S&P 500 trampled real estate, increasing by more than 1,000%. America’s favorite investment, real estate, jumped by 247% over that same period. Digging even a further, we find that from 1928 to 2016 the stock market returned an annual average of 11.4%. However, the results of over 100 years show that real estate has only increased an inflation-adjusted 0.1% per year, according to blog Observation and Notes. Yet, we still choose real estate.
Truth be told, the roller coaster effect of the stock market on that day in 2007 was not for the faint of heart. Nevertheless, if stocks were your investment of choice, you would have doubled the value of your investment. Sure, interest rates from the Treasury may have helped you sleep better at night. Moreover, a 4.7% return is not bad. However, it is not the same as a 7.2%.
To put all of this into perspective for you, let’s say your 401(k) on the October 9th, 2007 was worth $100,000. Here we are, roughly 10 years later, and the stock market has been earning, on average, 7.2% each year. For the purpose of this scenario, we will say it was holding a constant (which isn’t necessarily the case, but for our example, we will say it was). That value would now be over $200,000. You would have more than doubled your investment.
At the exact same time, let’s look at how the number five choice -- bonds -- would have performed. Those would have taken you from $100,000 to just over $158,000. That is barely more than half of the growth you would achieve if you chose stocks.
If you are like most other Americans and said real estate at the beginning of this article, then you would have gained $10,462 over the last 10 years. Additionally, if you chose cash thinking it is the safest, you might be right on safe, but certainly not the return. It performed the most abysmal of all -- earning you a mere $4,072.
This all means that the number three and five choices beat out the top two picks from the Bankrate survey. Certainly, stocks are volatile -- that is just the nature of the beast. However, if you had looked at the numbers and you kept the faith and stayed in stocks, you would be twice as wealthy as you were before The Great Recession.