Silly Question About What To Do With Money

[Entol]

I've seen several people, when discussing how they are planning to pay off loans from med school, say that they expect to make ~10% interest on any money through investments, so they will beat the interest rate. Others have said that 10% is a pretty conservative estimate.

I'm curious what do people do to earn such huge returns? I mean, I know about CDs, but even a 5 yr CD at a decent percentage is around 5% in my area, and you can't touch your money without paying a penalty. Is there a safe place you can invest your money where you don't have to worry about it constantly and have it amass big returns?

-Entol

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[spinestudent]

I've seen several people, when discussing how they are planning to pay off loans from med school, say that they expect to make ~10% interest on any money through investments, so they will beat the interest rate. Others have said that 10% is a pretty conservative estimate.

I'm curious what do people do to earn such huge returns? I mean, I know about CDs, but even a 5 yr CD at a decent percentage is around 5% in my area, and you can't touch your money without paying a penalty. Is there a safe place you can invest your money where you don't have to worry about it constantly and have it amass big returns?

-Entol

If investment conditions stay the same, most people won't be making 10% on their investments. I don't know what to say about those estimates except that they are overly optimistic(based on the current investing climate)

Also, I didn't know cd's were at 5% now. I thought it was more like 3-4% at the most.

 

[ms. a]

I believe that, over the long term, the average return on investments in the stock market is 8%. Counting on a 10% return, especially in just 4 years, would be pretty risky.

 

[Entol]

Good point about the CDs. I know I got a special deal on a CD for a very high return-- ~6.25% for 5 yrs at a bank that was just opening up. I assumed they would be a few percent lower than that, but I imagine 3-4% wouldn't be a bad guess.

My question is if you are earning 3-4% on CDs and inflation is taking place, then how are people making such high estimates on the amount they will earn?

If investment conditions stay the same, most people

Also, I didn't know cd's were at 5% now. I thought it was more like 3-4% at the most.

 

[WatchingWaiting]

Good point about the CDs. I know I got a special deal on a CD for a very high return-- ~6.25% for 5 yrs at a bank that was just opening up. I assumed they would be a few percent lower than that, but I imagine 3-4% wouldn't be a bad guess.

My question is if you are earning 3-4% on CDs and inflation is taking place, then how are people making such high estimates on the amount they will earn?

The estimates are based on the long-term return of the stock market being about 10.9%. Or, at least, that's what most of the studies in the late 90s showed. After the recent downturn, that return is maybe down to 10% or so over a thirty or fourty year period. It is NOT at all a reasonable assumption to make for assets only held for three or four years. There are certainly other ways to get a 10% a year return, like bonds in companies with low credit ratings ("junk bonds"), but none that are risk-free.

 

[spinestudent]

Good point about the CDs. I know I got a special deal on a CD for a very high return-- ~6.25% for 5 yrs at a bank that was just opening up. I assumed they would be a few percent lower than that, but I imagine 3-4% wouldn't be a bad guess.

My question is if you are earning 3-4% on CDs and inflation is taking place, then how are people making such high estimates on the amount they will earn?

I'm not a financial guru, but I think there is usually relationship between loan interest rates and cd/bond rates. If you are only earning 3% on cd's then I don't think inflation will be extremely high. During the late 70's/early 80's when inflation was very high, cd rates were also really high.

But speaking for the stock market in general, assuming some kind of 10% gain regardless of past trends isn't realistic. Some mutual funds are going to do 20%. Some are going to do -5%. And it all depends on when you select a beginning point for the analysis. If in 2007 we analyze average 6 year returns in the stock market going back to 2001, the results wouldn't be very good at all.

 

[Entol]

These replies make a lot of sense, and I am definitely not a financial guru either I am curious how laymen learn about which stocks to invest their money in or if just going into a mutual fund is a pretty safe way to make money?