Filed under: Investing Basics, Mutual Funds, Index Funds, Stocks, Investing
A Jewish girl’s bat mitzvah typically takes place when she’s 12, and signifies she’s old enough to have certain adult rights and responsibilities. Depending on the family, the gift money that a girl receives while celebrating her transition to spiritual adulthood can easily run into the thousands of dollars.
It’s common for girls to spend, donate or save their bat mitzvah money — or do some combination of the three. Eight years ago, then-12-year-old Becky Rudin made a fourth choice: She invested hers in the stock market.
To Becky’s best friend, that move felt “reckless.” She put her bat mitzvah money straight into a savings account.
Becky’s friend is certainly not alone in her view of stocks. According to a recent UBS Investor Watch, millennials hold 52 percent of their assets in cash, with just 28 percent in equities. But saving money in a bank account earning less than 1 percent can actually ruin your financial future.
So How Did They Fare?
I described Becky’s investing experience in my book, “Every Woman Should Know Her Options.” She couldn’t remember the precise date she first invested her money, so we picked one that was in the ballpark to do our calculations: Feb. 27, 2006. Around that time, she invested $5,000 in a low-fee mutual fund that mirrored the S&P 500 (^GPSC). Despite being in the market during a period that included the worst stock market crash since the Great Depression, Becky came out ahead of the friend who was proud to be a good saver.
Even after the losses of the 2008 crash, Becky achieved an 18 percent gain, while her friend achieved about a 7 percent gain. That might not seem too bad, in principle — a smaller return in exchange for safety. But actually Becky’s friend lost money, because the interest she earned each year was less than the rate of inflation. According to a Bureau of Labor Statistics inflation calculator, one would need $5,777 in 2013 to equal the buying power of $5,000 in 2006. After the 15 percent or so that six years of inflation subtracted from her gains, Becky still had around a 3 percent profit, rather than an 8 percent loss.
You can see from the chart that Becky’s investment in SPY (SPY), an exchange-traded fund that tracks the performance of the S&P 500 index, was during a particularly volatile period. Market corrections are a regular occurrence in stock investing, but the 2008 plunge was one of the deepest since the Great Depression. Had Becky needed to pull cash from her investment account in 2008 or 2009, she would have indeed suffered a large loss on her principal while her friend would have achieved a small nominal gain. But she didn’t — which reflects the point that the stock market is particularly well suited to long-term investors, especially millennials.
In 2013, Becky decided to cash out of her mutual fund. But not to put her money in the bank — she’d been growing as an investor, and decided she was ready to build her own portfolio by investing in individual stocks. Becky has a long time horizon. If she keeps up her forward-thinking financial choices, she’s likely to one day enjoy a comfortable lifestyle in retirement. And her friend, who’s still losing ground every year that bank interest rates don’t keep up with inflation? That future doesn’t look nearly so promising.
Let’s hope that sometime soon, that young woman stands up in front of her finances, and declares, “Today, I am an investor.”
Laurie Itkin is founder of The Options Lady, a financial adviser with Coastwise Capital Group and author of “Every Woman Should Know Her Options: Invest Your Way to Financial Empowerment.”
The information contained herein is strictly for educational and illustrative purposes, providing commentary, analysis, opinions, and recommendations and should not be considered investment advice for any specific subscriber or portfolio or an offer to sell or a solicitation to buy any security.
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Source: Investing
