THE MIRACLE OF CAPITALISM
Right now, the world's economy is growing about 4% per year. This is phenomenal,
with consequences that reach beyond us for centuries. It's part of the
miracle of capitalism: compound growth, sometimes 4% and sometimes less,
almost every year. In the long history of the human race, and in the longer
history of this planet IT IS UNPRECENDENTED. It's been going on for only
300 years. How long can it continue? No one knows, although environmental
limits will impose themselves perhaps within our lifetimes. That will be
a new game indeed!!!
Right now, as an individual, how can you take part in this miracle?
One way is by becoming a (little) capitalist yourself. This means saving
money and investing . Here are some examples of investments:
Two key questions will help you decide among all these interesting choices:
when do you think you'll spend (need to spend) the savings (paying for
college, buying a car, buying a house, providing retirement), and how much
risk can you take and still sleep good at night? Health is invaluable and
damaging your peace of mind and health with worry about investments is
a BAD idea. So, learn for yourself what your comfort level is. Basically,
if you don't need the money for a long time and you can take gut-wrenching
drops in the market, you're better off with the riskier investments (growth
stocks, technology stocks, mainland Chinese stocks, Mexican stocks, etc.).
Savings accounts in banks: not much interest is earned but your savings
are very safe and available whenever you need cash
Money market accounts: not quite as safe as bank accounts, but still very
safe. Your money earns more interest than with bank accounts, but the rate
is still pretty low. The money is available when you need it.
U.S. Savings Bonds: these are much like the first two suggestions, but
are intended to be held for 5 or 6 years (although you can cash them at
any time). The interest rates are better than the first two.
Longer-term U.S. government bonds: 6 months, 12 months, 5 years, 10 years,
30 years, etc. These may be difficult to buy directly (they require larger
sums of money), but can be bought indirectly by purchasing shares in a
mutual fund that invests in these types of bonds. There are many such mutual
funds; check out the Vanguard bond funds, for example. The mutual funds
may require an initial investment of a few thousand dollars. These pay
better rates of interest than the first two suggestions above, and are
just as safe IF YOU HOLD THE BONDS TO THE END OF THEIR DUE DATE (when you
get your investment back). If you buy a 5 year bond and have to redeem
it early, you may get more or less than your initial investment depending
on how interest rates have changed since you purchased the bond. The bond
mutual funds have to deal with this "early redemption" aspect all the time,
as customers buy and sell shares in the mutual fund.
Non-U.S. government bonds: foreign governments, state governments, etc.
Some are very safe, some are incredily risky. State bonds have tax advantages.
Private bonds (from corporations): a range of risk; generally, the higher
the risk, the more interest you earn for taking on that risk.
Stocks: shares in a corporation. The corporation may, or may not, pay dividends
(which is similar in tax effects to interest on a corporate bond). Generally,
most money is won or lost on the change in the price of the stock. Over
long periods of time, investments in stocks provide the highest return.
Over short times, you can lose badly. Definitely, for people with guts
and the people willing to stay in there through thick and thin.
Real estate: With so many people all over the whole world becoming richer
over time, but with the size of the earth not changing appreciably, land
and real estate will participate in the miracle of capitalism by becoming
more valuable. However, location is everything and your river-front house
which has just been flooded won't be worth much unless some government
takes pity on you.
What's the reward?
The table below shows the rewards for patient investing. It shows what,
at various interest rates, investing one dollar per month will produce
starting at three ages (25, 35, 45) and ending at age 70. The table assumes
that the annual (nominal) interest rate is I and that interest is compounded
monthly; the formula for the total savings (with interest) is
N is the number of months; x=(1+I)/12; total savings = x*(1-xN)/(1-x)
If you want "real dollars", discounted for inflation, subtract an estimate
for the inflation rate (J) from I (so use I-J instead). If your investments
involve interest, dividends, or frequent buying and selling, you need to
reduce I-J further to account for all the taxes you pay on your investment
The Boring Art of Investing Regularly
|I as a decimal
||$1 monthly, Age 25 to 70
||$1 monthly, Age 35 to 70
||$1 monthly, Age 45 to 70