banks
The Stock Market for Beginners: What Is The Safest Type Of Investment? – Part 1
You’ll Be Amazed By Which Is The Most Dangerous Over The Long Term
The stock market for beginners? Is there something else that is safer that stocks yet still profitable? What about a bank savings account in these troubled times?
Sydney Tremayne
Obviously the answer depends on your objectives and your temperament but for the average person the hands-down answer is corporate shares. The numbers alone prove it.
Of course, you’d expect me to say this; this is what I have been doing for the past 55 years. But let me share with you what the Federal Reserve database in St. Louis says. Their records begin from the start of 1928 when stocks rose a lofty 43.81% – just before the beginning of The Great Depression – to December 31, 2008.
The Fed data records returns on three-month treasury bills, ten-year treasury bonds and the stock market. In all cases, total capital invested was $100 80 years ago. The treasury bills were rolled over every three months. The ten-year bonds include capital appreciation and stocks assume dividends are reinvested.
Banks: the most dangerous investment of all
Any knowledgeable adviser will warn of the danger of investing in bank savings accounts for more than three to six months and then only with cash saved for a specific short-term purpose. Treasury bills and money market mutual funds are not much different in their results – dismal!
$10,000 saved in treasury bills over time has yielded average annual interest of just $380. Not terrific but a long way from today’s low rates. When interest rates improve once more (after all, inflation is just around the corner and will be caused by the falling dollar) banks will offer higher savings rates and think they have something to boast about. They will give just a small part of the real story in their advertisements.
They fail to mention that the IRS on average will deduct $95 as their right. On top of this there are local taxes averaging $36.86. But the biggie is inflation which, over the same 80-year period, has averaged 3.4%. There goes another $340 of your $380 of oh-so-generous income!
A guaranteed loss
For the benefit of lending the bank $10,000 so it can lend it to others at far greater rates of interest, your purchasing power declined by $91.86. That’s for one average year. Calculate that over any number of years and you will fully understand why banks and similar vehicles are dangerous places for investment capital.
Safety is not about preserving dollars; it is about protecting purchasing power. For your generosity in lending banks your cash from which they can make more cash you should be able to buy more goods in future years, not less.
In an effort to keep these articles reasonably brief I’ll continue with returns on bonds and stocks in another article. Find out where wealth is gained over the long term! You’ll be shocked by what $100 becomes even after The Great Depression and all the market plunges and recessions after it.
In the stock market for beginners, keep an eye of who’s making money off your back.