Currently, we find ourselves in an economic quagmire with many investors ferreting opportunities to grow individual wealth. Unlike Baby Boomers, the need to search for personal wealth opportunities are particularly important for young investors, as we need to ensure that enough money is put into retirement “piggy bank.” If you consider the general economic trend, young adults have to work longer into retirement years than previous generations in order to sustain a standard of living they were accustomed to in their working years. Consequently, young investors need strong investment returns that exceed the rate of inflation in order to avoid working in later years.
In lieu of our insatiable appetite for moderate to high rates of return, young investors know that traditional bonds won’t meet our needs, as they normally return 5% per year. Consider that inflation is normally 3%, which leaves us with a real rate of return of only 2%. To be exact, it’s slightly less than 2% based on the Fisher hypothesis, a theory where interest rate is independent of monetary measures, particularly the nominal interest rate. Hence, a real rate of return of a paltry 2% won’t afford a 20-something the desired monetary growth for their long-term personal investment portfolio.
If bonds don’t give young investors a high rate of return, many economists would suggest investing in stocks. The basic theory of stocks is that the greater the financial risk, the greater the reward. Most young investors know about those who have made a great sum of money in the stock market. We often overhear our friends and colleagues discuss how they made thousands of dollars in the market over a short amount of time.