Dear Liz: On several occasions you’ve referred to the possibility of getting 8% annual returns on investments. Pray tell us where you can get this much. The best I can find is about 5%.
Answer: That’s because you’re looking at relatively low-risk options such as certificates of deposit where the return is guaranteed. If you’re willing to take more risk, you should be able to attain 8% average annual returns over the long term by investing in a diversified mix of stocks, bonds and cash. Large-company stocks have averaged 10.4% annually for the last 80 years, according to research firm Ibbotson Associates, while small-company stocks have averaged 12.6% in the same period.
Obviously, investing in stocks means you risk significant losses in some years, but if your time horizon is 20 years or more, you should still come out ahead.