Suppose the year is 1928, at the height of the 20s boom, and Great-Grandpa is considering how to save a spare $100 for his future great-grandchild (that’s you). If he deposited it into a savings account at 4 percent interest, it was worth somewhere around $1,920 at the end of 2002 – but that’s barely keeping pace with inflation.
The Power of the Stock Market
On the other hand, if he had put the same $100 into stocks mirroring the performance of the Standard & Poor’s 500 Index, it would have been worth more than $81,000 at the end of 2002 (and that’s without considering dividends!). That’s no typo – just a great example of how investing in the stock market can work over a period of many years.
Of course, to get from A to B Great-Grandpa needed to weather the entire Great Depression, and several other major "corrections," without needing to liquidate his investment to pay for the groceries. And he also needed to do it without panicking, without losing faith in his long-term strategy.
Note: This hypothetical illustration represents past performance and is not a guarantee of future results. Investment experience will vary with stock selection and changing market conditions
That’s often easier said than done since investment results cannot be predicted, particularly in the short-term. Experts try and try to divine where the market is headed in the next week, month or year, but they almost always come up short. And there’s no guarantee about what returns the stock market will provide tomorrow, let alone the next decade. Nor is there any crystal ball that will tell you how much (or how little) of that return will be nibbled away by that hungry ogre called inflation.
A Market History Lesson
But when you consider the overall history of the stock market, it’s clear that the market generally moves higher and higher, despite the occasional bumps in the road. By keeping that simple truth in mind, you can be prepared for the eventual market downswings, even when they seem to hit you hard, right where it hurts. Eventually, the market will return and forge ahead. The stock market is famous for being both volatile in the short run and rewarding in the long run.
The Power of the IRA
Great-Grandpa also didn’t have the benefit of using that terrific retirement planning tool, the IRA. For those who have 10 or 20 or even 40 years until retirement, it’s hard to beat the IRA for its enormous potential to build wealth over the long-term. Over long periods of time, you have the potential of coming out much further ahead by investing in the stock market than if you invest solely in bonds or leave your money in the bank to collect interest. You can bet that in 10 or 20 years, the S&P 500 will be much higher than it is today.
In the end, the value of your IRA in the year 2025 (or 2045) also depends on how well you pick investments today. There’s no guarantee that you’ll have the same results as Great-Grandpa, but the lessons are clear: make a plan, stick to it, and don’t forget the big picture when investing in the stock market.