What Do Adults Do With Their Money?

What Do Adults Do With Their Money?

It all started with a question.

After spending a year working two part-time jobs, graduating from college, and spending another year working three part-time jobs, I was now in grad school over 400 miles away from home.

I had just spent a year in grad school on a slim stipend that put me around the federal poverty line, and I added up all my expenses. To my surprise, I found that I was actually making money in grad school! Not much, but hey, a surplus is a surplus! I did get an extra couple thousand dollars from summer employment, so I was actually doing okay. Not great, but okay.

But I had proven to myself that I could live—and pay all my own bills—on a $12,500 annual salary. Not that I had a very high standard of living, but at least I could do it!

After toting up the numbers, I came out 'in the black,' as they say. I never expected grad school to actually be profitable!

I wasn't only looking back at the past year; I was also looking ahead. In just a couple short years, I'd be earning an actual salary. For the first time in my life, I wouldn't be a student, or a grad student, or a young person balancing multiple part-time jobs while looking to further his education.

I'd have an actual, full-time job. With commensurate salary and benefits.

And I wanted to know what to do with my money before I got there.

Here I am in 2014, living on less than my $12,500 a year. In a couple years, my salary should roughly quadruple (and in retrospect, that's almost exactly what happened). Though I already knew my lifestyle might double once I was a real adult, it definitely wouldn't quadruple.

So...what do adults actually do with all that extra money?

Battle of the Investments: Stocks, Bonds, and Real Estate

Battle of the Investments: Stocks, Bonds, and Real Estate

Stocks, bonds, and real estate—oh, my! 

These are the three main classes of investments. 

You may notice the absence of gold and Bitcoin. Gold actually has poor inflation-adjusted returns over time, and cryptocurrencies are too new to have established a track record across different types of market conditions. 

Plus, one thing that gold and Bitcoin have in common is that they’re unproductive assets. You buy them and they just...sit there.

Stocks, however, represent partial ownership in a business. That business is [presumably] a productive enterprise that generates money by selling a product or service that people will pay for. 

Bonds are loans to businesses and governments. The business or government entity uses the money to make improvements, which is [presumably] an efficient—and value-generating—use of that money. 

Real estate provides installments of cash on a regular basis, because people need space to live, work, and store stuff. They will therefore make periodic payments to accommodate that need. 

You’ll notice that stocks, bonds, and real estate are alike in that they actually do something to provide value to people.

Gold has some industrial uses, but its main uses have always been as 1) a store of value, and 2) a way to show off one’s wealth. Bitcoin has many aspects, but it’s best thought of as an experiment in deregulated currency. 

You probably wouldn’t trade your money for a bunch of rupees, expecting it to rocket upward in value relative to the U.S. dollar. And India is an actual country with well over a billion people, people who live and work and buy stuff. And pay taxes. And have a military. 

So why would you trade your money for a bunch of Bitcoin, expecting it to rocket upward in value relative to the U.S. dollar? Especially when it’s not guaranteed by a government, or tax revenue, or military force? Or supported by actual useful work? 

Due to that reasoning, I’ve deliberately excluded nonproductive assets like precious metals (gold, silver, platinum) or cryptocurrency (Bitcoin, Ethereum, Ripple) from this analysis.

Remember also that a wise investor is concerned not only with rate of return, but also with preservation of one’s principal. 

So let’s get started.

The Best-Performing Asset Classes

 The Best-Performing Asset Classes

If you’re like me, you’re wondering what the best investments are.

It’s easy to find a lot of opinion, but not a whole lot of hard facts.

Articles abound on websites like Forbes, CNBC, and even Morningstar—but they ended up confusing me. They compare only a couple asset classes, and they frequently refer to different timeframes. For example, they look at the past 10 years for the S&P 500, the past 7 years for value stocks, and the past 13 years for growth stocks.

How am I supposed to make sense of that gibberish? I’m not looking for a load of blather; I want facts! Comparable, unbiased, non-cherry-picked facts. Is that really so hard?

Apparently, it is!...

I’ve had to do a lot of research to find some reliable numbers that can be compared. I got a great start with Paul Merriman’s excellent website, especially this set of charts [PDF].

While Merriman’s data was very helpful, I wanted data on more asset classes than the ones provided on that set of charts. I want all the asset classes!

How else are you supposed to make an informed decision?...

Blinded By Greed

Blinded By Greed?

Lately, I’ve been doing some research on the astounding returns of various investment classes over the decades.

• The S&P 500: How does a 9.92% annual return since 1928 sound?

• REITs: 9.77% per year since 1972.

• Large-cap value: Even better, at 11.13% annually since 1928!

• Small-cap value: An astonishing 13.15% annual return since 1928!!!

An extra 3% per year results in twice as much money at the end of 25 years! So keep that in mind when you compare the long-term returns of the various asset classes.

But these are long-term averages across some very different market and regulatory conditions. The fly in the ointment is that these conditions may very well be changed in the future, and returns might be lower than they have been in the past.