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Today in America, the majority of our retirement savings is held in investments in the stock market where the principal and earnings can go up or down. And many others invest in the stock market outside of their retirement savings. But is investing in the stock market really the best strategy?
Let's look at how the financial services industry represents returns in these investments.
The common practice is to put money into the stock market and leave it there. Why? Because, as the saying goes, if the market goes down, it always comes back, and the average return for the past 100 years is over 7%.
In fact, the Dow Jones Industrial Average (DJIA) for the past 100 years is 7.26%. Not bad, you say?
Let's see if that fairly represents the situation. If you were to put $1,000 into the DJIA in 1909, what would you have in 2008.... 100 years later?
You can follow along with this example with your financial calculator. Enter $1,000 as your Present Value (PV), 7.26 as your interest rate (INT), 100 years as your term, and solve for Future Value (FV) compounded annually.
Using this calculation, the value of your account in 2008 should be $1,106,061. (If you get $1,391,484, you compounded monthly.)
However, had you actually invested $1,000 in the DJIA in 1909, your ACTUAL account balance would be only $142,954.
WHAT HAPPENED? That is $963,107 less than it should be!