Every year, you’re losing money to inflation.
Inflation is like a leak: you sometimes hear the “tip tap” as water drops in the sink, but usually, they’re so small and happen so infrequently that you barely notice them. At the end of the year, you’re astonished to find that your water bill has almost doubled. If you don’t fix that leak, the drops fall more frequently and your bill increases every year. With inflation, that bill comes in the form of a budget retirement. Over the years, your bank account is leaking and you’re the one paying the price.
With inflation at around 2% in the US, the best way to beat inflation is to invest in the stock market. In this article, we’ll cover a few reasons why.
No other investment class has performed as well as the stock market over time. When compared to gold, cryptocurrencies, property and fine art, the stock market is an investment that has continuously delivered, decade after decade.
That’s because the stock market is not the lottery. When you buy shares in the stock market, you are essentially owning a small section of a business with real, human employees. As countries and economies grow, people become more productive, businesses make more money and the stock market grows. When you buy a stock, you are betting on the entire world economy.
But let’s look at the numbers: if we look at the years 1980 to 2015, the stock market was positive for 27 of the 36 years. That’s 75% of the time.
But what if you invested right before a correction? A Schwab study compared five different investors who invested in the S&P 500 index fund at different times throughout 20 years. The result? Even Rosie, who invested every year at the peak of the market, earned 50% more than she would have if she hadn’t invested in the market at all. Larry Linger, who didn’t put any money into the stock market, was left with the lowest amount after 20 years.
You only lose your money when you sell. If you keep your money in the stock market, compound interest does its magic and your investments grow exponentially. There is no other investment that does this consistently.
In order to beat inflation, you want to be making at least 2% every year. There are a few ways to do this: start a business, invest in property, start Forex trading, invest in startups and so on.
All these activities require time, energy and expertise. Property management is not passive at first and requires a lot of upfront capital. Cryptocurrencies and Forex trading require a lot of knowledge and constant updates on the market. Investing in startups and building businesses are probably the most time- and energy-intensive of them all. But stock market investing? You can set it and forget it. You can set up monthly contributions and never look at the market again. You don’t need upfront capital, you don’t need specialised knowledge, and, with a Unifimoney account, you soon won’t even need a brokerage account.
Why can you set it and forget it with the stock market? This is thanks to passive index funds. An index fund is a “basket of stocks” that holds the same amount of shares in the same companies as an index such as the S&P 500 and the NASDAQ. This means that index funds make the same return as the index — not more, not less. Since these indexes have the top companies in them, you’ll get a pretty good return: 10% per year with the S&P 500. If a company goes bust or decreases in value, the index will simply replace it with another company.
Index funds are managed by algorithms which is why they are “passive” and don’t require any active management. Isn’t it better if a highly experienced fund manager handled my money? Not really. In fact, passive index funds offer higher returns than actively managed funds. According to a study by SPIVA, 96% of US mutual funds failed to beat the market over a 15-year lifetime. Even a stock market expert who has spent years analysing the markets and companies can’t beat the market.
The other large difference is the fees: with active fund managers, you could be paying over 1% every year (and not even beat the stock market!). With a passive index fund, you could be paying as little as 0.22%. It’s kind of a no-brainer.
Just look at the table below to see the numbers in action. In his book, Andrew Hallam outlines three different portfolios with different fees across various timelines.
These numbers do not include annual contributions. The longer you keep your money in the market, the more it will grow. And if you’re paying over 3% in fees… well, you can see the numbers yourself…
The good news is that with the stock market, you’re not just beating inflation: your money is actually growing exponentially!
As we said previously, the stock market is the single most reliable money-making engine. No matter when you try to invest, you’ll be making more money than if you left it all in cash. That’s because three out of every four years, the stock market makes money.
Let’s take a real-life example:
Lucy is 20 and puts away $100 per month into a low-cost index fund. That’s $1,200 that she invests every single year. At the age of 60 and using a stock market return of 7%, Amy has a nest egg of $264,012.48. If she hadn’t invested at all she would have just $48,000 in cash.
Matt starts a little later at 30, but he’s also putting $100 per month away. He reaches the age of 60 with a nest egg of $122,708.75. If he hadn’t invested he would have $36,000 in cash. He still got a pretty good return on his investments.
What’s intriguing is that Matt only invested $12,000 less than Lucy — he invested a total of $36,000 in cash and Lucy a total of $48,000. But his nest egg at the age of 60 is $130,208.98 lower than Lucy’s one!
Just by investing 10 years later, Matt’s nest egg is a lot smaller. That’s what a difference compound interest makes. By not just beating inflation and actually making a high return on your money, you can rest assured you have enough money for retirement, for a house deposit, and for the next generation.
The stock market is the best place to beat inflation. It’s the most reliable engine of growth, it’s easy to set up and it will help build your nest egg for retirement. And thanks to low-cost index funds and an all-in-one bank account, high earners can get a good return on their investments without paying an arm and a leg in fees!
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