In this article, we discuss why we believe investing in the stock market offers us individual investors the best potential for compounding our wealth over the long term. We disclose our findings from researching the return of the S&P 500 index vs US Corporate Bonds vs Real Estate (US housing) vs Gold over the past 50 years (1973 to 2023).
Principles of Creating Wealth
In previous discussions, we covered “How to Create Wealth” and what principles we follow to maximise our probability of success:
- Spend less than you earn
- Invest the rest
- Invest in compounding assets only
- Invest for the long-term
So now that we know we want to invest in compounding assets for the long-term, the big question is where to invest, and as you can probably guess, we believe the best place individuals such as ourselves can invest our money is the stock market.
Why We Invest in the Stock Market
We’ll let the following graph answer that for us:
For those who don’t like graphs, what the above is saying is that if you had invested $1000 each in the S&P 500, Corporate Bonds, Gold and Real Estate (US Housing) in 1973 and never withdrawn your money, after 50 years your $1000 would be worth the following:
Clearly, investing passively in the US stock market over the last 50 years would have resulted in superior growth of your money vs the other 3 asset classes.
Sure, there are other asset classes you could invest in, but many don’t offer liquid markets, are not easy for individual investors to access or require expertise to understand; hence, why we are comparing these common types of investments vs the stock market.
But perhaps you are still not convinced that the stock market offers you the best opportunity. Maybe you are sceptical because who will keep their investments untouched for 50 years?
Well let’s say we didn’t have the foresight to invest 50 years ago. So, how would our money have performed had we invested for shorter periods:
The above table clearly shows that the US stock market significantly outperformed the other 3 asset classes regardless if you had started investing 50 years ago, 40 years ago, 30, 20 or even 10.
Still not convinced? Perhaps the previous 10 years have been an outlier in the stock market, boosting performance?
Above, we get even more thorough showing the annualised return per decade for the past 5 decades.
While the S&P 500 didn’t always produce the best return for each of the past 5 decades, it did give the best return 3 out of 5 decades and the second best 2 out of 5 decades, while gold offered the best return 2 out of 5 decades but also the worst return for 2 of the past 5 decades. Real Estate and Corporate bonds never outperformed the S&P 500.
You don’t need to be a maths whizz to see that the odds are significantly more in our favour if we invest in the stock market instead of the other 3 asset classes.
Hopefully, we have done enough to convince you that as individual investors looking to grow our wealth over the long term, the best place to put our money is in the stock exchange – Not bonds, not our houses and not even gold.
What we found incredibly interesting in our research is that if you invested in the stock market at any time for a minimum of 10 years since 1973 (50 years), there would have been only two instances in which you would have lost money: 1998 to 2008 and 1999 to 2009. Over 95% of the time, you would have made money and, on average, earned an annualised return of 11.6% in USD terms. That is outstanding!