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Where to get an 8% annual return

Mar 09, 2010 | | Comments Comments Off

Dear Liz: You suggest that wealth can be accumulated by regular savings and earning an average rate of return of 8%. Where can a safe 8% return be found?

Answer: The same place leprechauns hide their gold.

There is no truly “safe” investment. Investments that have no risk of principal loss, such as federally-insured bank accounts, typically offer such low returns that they expose you to “inflation risk” — in other words, your deposit’s buying power is eroded over time.

If you want to stay ahead of inflation over the long run, you need some exposure to the stock market because that’s the only investment class that’s consistently outperformed inflation over time. According to Ibbotson Associates, the stock market has returned at least 8% on average annually in every 30-year period, starting in 1928. So even if you invested on the eve of the Great Depression, you could have knocked out an 8% return if you just hung on long enough.

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Categories : Investing, Q&A, The Basics