Question: Is it Foolish to Have $77,000 in Cash Instead of Investing It?
In a lively discussion on Reddit, a young user posed a question about the possibility of retiring at the age of 50, given their solid income, current investment habits, and debt-free status. This intriguing query sparked a wealth of advice and insights, with one key theme emerging: the power of long-term investing.
The Reddit user's investment portfolio includes a diverse range of Vanguard ETFs, such as the Dividend Appreciation ETF (VIG), which boasts a 15-year average annual return of 12.77%. Other ETFs in their portfolio include the Value ETF (VTV) with a return of 12.06%, the Total World Stock ETF (VT) with a return of 10.41%, and the Information Technology ETF (VGT) with an impressive 19.59% return.
While the user's cash reserves amount to $77,000, it can sustain them for 22 months. However, financial experts advise against hoarding cash for too long, as it typically earns very low returns, especially after inflation. Inflation, which averages close to 3% annually, erodes the purchasing power of cash, meaning savings buy less in the future.
Instead, experts suggest investing in index funds for a simple portfolio management approach. For instance, the Vanguard S&P 500 Growth ETF (VOOG) has a 15-year average annual return of 15.44%, while the Vanguard Total Stock Market ETF (VTI) offers a return of 12.59%. These returns, if compounded over time, can significantly grow one's wealth.
For example, $7,500 invested annually at an 8% return could grow to $47,519 in 5 years, $95,039 in 10 years, and so on. This underscores the importance of investing over cash hoarding, as emphasized by Motley Fool's services, which advocate for long-term investing in quality stocks.
Moreover, if the user were to marry and have two incomes, their savings potential would increase, bringing them closer to their financial goals.
It's worth noting that stocks have historically provided higher returns compared to other asset classes for long-term wealth building. However, holding cash can offer liquidity and safety during volatile markets or economic downturns, as well as the flexibility to capitalise on new investment opportunities or emergencies.
In conclusion, the young Redditor's question sparked a fascinating discussion about the power of long-term investing and the importance of a diversified portfolio. With careful planning and disciplined investment strategies, retiring at 50 might indeed be within reach.
After a lively discussion on Reddit, the user learned about various index funds, such as Vanguard S&P 500 Growth ETF (VOOG) and Vanguard Total Stock Market ETF (VTI), known for their impressive returns. As the user considers their retirement at 50, personal-finance experts suggest investing $7,500 annually into these index funds, instead of hoarding cash, to potentially grow wealth significantly. For instance, if invested at an 8% return, $7,500 could grow to $47,519 in 5 years, highlighting the power of investing over cash hoarding. Moreover, combining their income with a potential spouse's could increase their savings potential, bringing them closer to their financial goals.
