In the sphere of finance, it is said that “there is no free lunch
- In the sphere of finance, it is said that “there is no free lunch”. The meaning of this expression is that higher return must be paid for by accepting higher risk.
- In prior discussions, we have examined the behavioral concepts of loss aversion, savings as a loss, inertia, present self versus future self – these are some of the behavioral traits that discourage saving for the future.
- But suppose we overcome all these behavioral barriers to savings, we then need to decide what to invest in. Now, return varies with the category of investment – see below:
Average rate of return
Bank account 2%
Government bond 3.5%
Corporate bond 5.5%
REIT (real estate) 8%
S&P 500 10%
Nasdaq 100 15%
- The plot below gives the outcome of investing $200/month ($2,400 per year) for 40 years in the respective index fund:
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