That being said, if people saved 30%-40% of their income from day 1 they wouldn’t need to invest for return, as the savings alone would tide them even with the most conservative (dividend-yielding) investments.

Most people should count on having to SAVE the money they need later and not rely on investment returns to get them there.

For the 11% compounded annually for a year I used the following values:
PV = 0
FV = blank
Number of payments = 12
Payment amount = -10
Interest rate per payment = 11%/12 = .91667%
Payment at end

Then click on FV and you get $126.24.

Then using interest rate per payment of 7%/12 = .58333 you get $123.93.

Your advice suggests that compound interest is unimportant, so I have to reply that you are TOTALLY wrong about demanding that all debts are paid before investing. Yes, the longer one has debts, the worse they are, and they should be paid as quickly as possible. However, compound interest gains over a long period of investing provides many times the benefit over carrying debts for a few years while starting to invest. At the very least, everyone should invest in tax-deferred plans that have matching funds BEFORE even worrying about any debt repayment. Slow and steady wins the race, but you’ve got to get started moving first for that to be true.

As an I.T. consultant, I develop custom software solutions. What I do seems exceedingly easy to me. It may be quite indecipherable to you. I always fear that if the clients ever realized how easy it is, I’d be out of work. However, the clients never do and I don’t know why…

Just to be a competent (not necessarily successful) investor in stocks, bonds, funds is wholly indecipherable to me. “Buy low, sell high” may be good advice, but it sort of glosses over the “investing” education that is required to leverage that advice.

I have a 401k and lack the slightest idea how to judge the available funds. I had to apportion where my contributions go, so I picked 5 funds that spanned the range of risks that were listed. My contribution is split evenly among those 5 funds (20% each). Somehow, I still sloooooowly bleed money over time. The only reason the balance rises is because I auto-contribute more than it loses… and that chaps my behind.

All I’m saying is that when clueless investors like myself read articles like yours, it can be a bit frustrating. I did get a chuckle with your investor’s dilemma of having to choose between two different positive rates of return. From my perspective, it’s been a complete crap-shoot and the overwhelming fear is choosing which negative rate of return (from the gazillions of funds available) will do the least amount of damage. If only my 401k would allow me to put my money in an ING “Orange Savings” acount. My daughter’s savings account with ING does better than my (ahem) “professionally managed” 401k account with BB&T.

I think the problem for me is information overload from all the differing funds to those worthless “prospectus” pamphlets that would tax the comprehension abilities of a New York lawyer (spit!).

Bleh… It wears you down after awhile.

Yes, stocks pay more over the long run. But if you’re just starting to try to get in the habit of saving– then watching your savings *loose* money might spook you right back into spending what you have, so you at least get something for it. At best it would be incredibly discouraging.

Once someone has gotten in the habit of putting money away every month, and as learned the joy of *earning* interest (however minuscule) rather than *paying* it every month, then they can ease into more aggressive investments for their long term money.

The risk of getting spooked, discouraged, or intimidated is greater to a newcomer than an underperforming “too-safe” investment is, methinks..

What I did when I was chicken was to think how much money I could lose without missing it. I decided the answer was $60/month. So I contributed, I think, $75/month to my 403(b), which was $60 after taxes. I figured no matter what happened, it would be okay.

Later I decided that although you actually can lose all your money if you are invested in a single stock or, perhaps, even in a single industry, you are not likely to ever lose more than half your money if you are well diversified.

And then I realized that a lot of people who were whining about their tech stocks getting cut in half had first watched them double many times. So if your money doubles three times and then–horrors!–gets cut in half, you’re still fabulously ahead. And those kinds of big drops are most likely to happen in very volatile stocks.

I totally agree about the benefits of starting small and perhaps learning a few things the hard way on small sums of money so that by the time it really starts mattering, you’re pretty confident in your choices. Once you live through a big market drop (for you: the next one), you’ll have a better idea of how well you tolerate “risk” compared to how well you hope you will tolerate it, and then you can make better decisions.

I am extremely risk averse, but I still invest in stocks (to reduce inflation risk). I recommend as much diversification as you can think up. Yes, yes, stocks and bonds. Domestic and foreign. Small-cap and large-cap. Regular and inflation-indexed. Across all industries. But also (later) look into REITs, paying off a house, building job skills, etc.

Track the S&P since then and you have the answer – I’m more like -20% today. So far, my t-bill accounts are getting larger by the month though. You pay your money and you take your chances – but the people who hesitate are not necessarily being left behind.

But the “worst” situation you presented isn’t worst. Even if the stock market gains 9% in 2009, you can lose up to 100% in 2009, depending on what you buy. There are companies that fail every year, and no one can predict which one. Remember Enron?

I assume you are trying to say it doesn’t matter very much if someone invest in a Vanguard Total Market Fund or a Balanced Fund, but

Investing choice does make a difference.

Starting amount: $100,000

Time period: 20 years

Final savings for 7% per year increase: $387,000

Final savings for 9% per year increase: $560,000

I.e., 45% better return for the 9% figure. Percentage points matter over the long term, hence the arguments re: Social Security’s future revolve around 1 or 2% increase in returns.

But if I’m aiming for an 8% return in the stock market long-term, should I calculate that return on an monthly or annual basis? Does it really matter?

I’m thinking that the monthly compounding would result in a higher “yield” on paper, making the annual compounding a more conservative calculation.