Compound interest. Simply starting early in some boring find/investment and not obsessing over daily stock prices will do wonders for one’s health and finances
As of now, a 10y US treasury bill will pay less than 2%, and 2% compounded is still not much ("your $1000 saved today will become $1999 if you don't touch it for 35 years!").
Learning to save in general is probably the more fundamental information, imho.
EDIT: obviously investing in stocks-based funds comes with extra risks, and extra profit. If anything learning that risk and profit are connected is an even more important insight.
I am not sure what other choices Americans have ...
For example, I look at one of the richest bank accounts balances of a company I work for and the savings account become a net loss after each year.
The way to get some money is for people itself perform in a kind of lottery we call a "natillera" where people put together money and try to create some profits running events from it.
This demoralize me a lot, because if with all that money in an account you lost anyway, what chance get the rest of us?
https://www.youtube.com/watch?v=kZA9Hnp3aV4
(Exponential Growth Arithmetic, Population and Energy, Dr. Albert A. Bartlett)
Not all stocks pay dividends. Most actually do not. And betting on a general YoY rise in stock prices into retirement is not the same thing as compound interest.
Investing in 100 shares of company XYZ that does not pay a dividend, or investing in a company that does pay a dividend but isn’t being reinvested, is not compound interest in the classic sense at all.
Compounded interest is reliable, even boring. You know exactly what you'll have at any moment in time.
Your ten-year index returns are reasonably reliable, historically. But your 2007-2009 returns aren't your 2016-2018 returns, at all.
They're different concepts and deserve to be conceptualized differently, especially in the modern era, where interest rates on Treasure are lower than inflation.
On average, S&P performance over 40 years is very good. However, if you look at every possible 40-year period so far, some are really good and some are lousy. If you instead ask "What performance would I have gotten in 90% of those cases?" the performance is not as high.
Performance over 30 years is naturally worse than over 40 years, and so on.
Due to volatility, you generally score better (in terms of percentage of x-year periods) if you do 70/30 stocks/bonds rather than 100% in stocks. Meaning, you can leverage it to either aim for the same performance with less volatility, or same volatility with greater return.
Finally, people tend to put more money in the market when times are good at stocks are high, and less when times are bad and stocks are low. This has a dragging effect on what performance a person can expect.
For example, I keep pretty good records and have a list of every date/amount of each retirement contribution I've made. I'm able to simulate what my current balance would be if I have immediately put each sum into S&P (by using the adjusted close for that period). It's not as good as the reported S&P average over that period.
What is "high" for you?
I basically did what you suggest (although stopped at 30 years instead of 40):
http://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-or-in...
On a 30 year horizon, even the worst 30 years (involving the Great Depression) gained money - equivalent of 4% per year after inflation for a lumped sum investment. For a periodic contribution, it was more like 2%.
Still, the average for the last 30 years is about 7%.
> Due to volatility, you generally score better (in terms of percentage of x-year periods) if you do 70/30 stocks/bonds rather than 100% in stocks. Meaning, you can leverage it to either aim for the same performance with less volatility, or same volatility with greater return.
Can you find me a 30 or 40 year period where 70/30 outperformed the 100/0 case?
If you're close to retirement, putting more money in bonds is beneficial due to the reduced volatility. It still has lower returns.
> For example, I keep pretty good records and have a list of every date/amount of each retirement contribution I've made. I'm able to simulate what my current balance would be if I have immediately put each sum into S&P (by using the adjusted close for that period). It's not as good as the reported S&P average over that period.
How long is that period? As the plots on my page show, you need to be well above 10 years to reduce the effect of volatility. I mean - a 10 year window has been as high as 22% per year and as low as -7%/year (i.e. lost money in the 10 year period). Contrast with a 30 year window: The swing is from 11% to 2% - much more stable. If you're looking at your simulated performance over just a few years, you are essentially looking at noise.
Yes, but the historical performance of, say, the S&P 500 has more to do with dividend reinvesting than the actual value of the shares appreciating. If they did not reinvest the dividends, the S&P 500 would not be as attractive as it is.
It's still not compound interest, but it is compounding.