Investing 101

If safety is your major concern, you may think your best bet is to invest in fixed-income securities, spreading your investment among several types of bonds or, if your most important goal is safety of principal, sticking with U.S. government securities. But after inflation is taken into account, this risk-free concept becomes questionable.

According to Chicago-based research firm Ibbotson Associates, over the long term, Treasury bills barely outperformed inflation, earning an annual 3.7 percent return while inflation increased at 3.1 percent per year. In fact, after taxes and inflation, many T-bill investors actually experienced a negative return.

Stocks, as represented by Standard & Poor's weighted index of 500 stocks (which provides an indicator of price movement), have clearly outpaced inflation-and the taxman-with an average pretax total return, including reinvested dividends, of 10.2 percent per year from 1926 to 1992, according to Ibbotson Associates.

There's no guarantee this trend will continue, but consider that the 66-year period between 1926 and 1992 includes times of war and peace, growth and decline, bull and bear markets, inflation and deflation. Common stocks clearly give you the potential to fulfill your objectives of building and preserving wealth.

This article was originally published in the January 1996 print edition of Entrepreneur with the headline: Investing 101.