Invest in Mutual Funds

Table 1 shows the average Rate of Return (ROR) between October 2009 and October 2014, for four major investments. These were exceptional years for stocks but calculating RORs back to when many of us were not even born yet makes little sense for modern investors. Over the last 5 years it appears that investing in stock market equities far outstripped investing in buying a house, and even precious metals like gold and silver.

Investment Average Annual ROR
US Housing 3.1%
DOW 9.4%
Gold 3.5%
Silver 5.1%

Table 1: Where to invest?

In more detail, using an investment of $100,000 in cash over the same 5 year period during which inflation averaged 1.9%, Table 2 shows what would have happened to that investment.

Investment Average Annual ROR FV @ 5 Years Amount Gained % Gain Adjusted for Inflation
US Housing 3.1% 116491 16491 16% 6%
DOW 9.4% 156706 56706 57% 43%
Gold 3.5% 118769 18769 19% 8%
Silver 5.1% 128237 28237 28% 17%
Cash -1.9% 90808 (9192) -9% -18%

Table 2: What is made on investments?

So if the numbers never lie then buy a house only as a place to live; but never as an investment because gold and silver are better and stocks in the DOW are better still. And always adjust for inflation because as the cash value of your home increases, then the purchasing power of the money it is worth decreases as shown in the Adjusted for Inflation column in Table 2. $100,000 in cash stuffed under the mattress adjusted for an average rate of inflation of 1.9% over 5 years shows that I lose almost $10,000 buying power on my bundle of notes.

There are other factors to consider as well when buying a house and why it should not be an investment, including mortgage rates and payments, property taxes, maintenance on the property, and perhaps minor tax deductions. Would it actually be cheaper to rent you ask? Yes it might but rents fluctuate with property prices, interest rates (mortgage costs) and availability; unpredictability in business and investing predictable is plannable and budgetable! And do you mind living in an apartment on top of other people? And after decades of owning a house you might have a sizable nest egg and for many who live paycheck to paycheck, paying off a mortgage on a house is one of the only ways that middle class people can force themselves to save money consistently over the long term.

What about gold and silver? Yes and no but especially yes if you think the world is going to end and the Zombie Apocalypse is about to start. Otherwise, looking back over the last few hundred years, historically gold should be at about $500 an ounce before it goes up again. There is also some suspicion that the price of silver being is forcibly maintained at low levels by paper trading institutions – but silver might be pushed up by demand in the future. The truth is that investing in silver and gold is a little risky for those who don’t know what they’re doing, as with any form of investing. So don’t invest in precious metals unless you can predict major market changes, such as buying low and selling high, or also unless you are a great believer in luck (you might need lots of it). The average middle class investor cannot begin to compete with every gold and silver investment expert in the world who spend their lives immersed in the field – they know what they are doing – buy lottery tickets instead.

What about the DOW and investing in equities? Again this is the realm of the expert trader and those who live and breathe the markets, and high frequency trading computers. DON’T! Just don’t. Mutual funds? Yes! Mutual funds can be the investment tool for people without direct stock market access and for those who have no idea about investing and have no time to learn. There are many good mutual funds within the reach of average investors, particularly inside 401Ks and IRAs – and the people who run mutual funds do know what they are doing (they can have specific restrictions such as being an index driven fund). Also, individual stock investments and the advent of high frequency trading means a computer in some unnamed building across the Hudson can muscle in on a purchase of 100 shares of Apple stock at say $400 a share, and it only fills 50 shares at $400, and the high frequency trader buys and sells the other 50 shares around that trade and makes 50 cents. This same process is repeated many thousands of times a day and the high frequency trading computer is making a bundle – and everyone else is not. High frequency trading could be banned, controlled or at least taxed a little but that is another story as Wall Street’s Bad Rap!

Invest in Mutual Funds! And even though 2009 through 2014 was a good run for stocks, you will find that the numbers won’t change much if you expand them over a 100+ year period say from 1900 to 2015, largely because the value of money decreases over time and the value of fixed assets such as housing does not keep pace over long periods of time.