My favorite definition of faith is from the old Book of Wisdom — the Bible: “Now faith is confidence in what we hope for and assurance about what we do not see” (Hebrews 11:1, NIV).
To me, faith is accepting that there are forces at work in our world and in our lives, related to creation, that are constant. Faith is making decisions about a future that can’t be proven. For example, I have faith that the sun will rise tomorrow. I can’t prove it, but I’m not worried about it. I know it will happen.
Most of us can go days, weeks, years and decades without thinking about the force of gravity. It’s calculated that our world spins at about 1,000 miles an hour, but because of gravity, we don’t notice. We don’t see it. But it’s constantly moving. This is an awe-inspiring reality.
Also awe-inspiring are the Seven Wonders of the World: the Taj Mahal in India, the Colosseum in Italy, the ancient Mayan city of Chichen Itza in Mexico, the ancient Incan city of Machu Picchu in Peru, the Christ the Redeemer statue in Brazil, the ancient city of Petra in Jordan and the Great Wall of China.
The unofficial “eighth wonder of the world,” according to Albert Einstein, is the wonder of compound interest. It has nothing to do with architecture or building civilization, but it is an incredibly important concept related to helping your money grow over time.
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” —Albert Einstein
The earlier you begin to invest money, and the longer you leave it invested, the more your money may grow. For this reason, it is important to understand how compound interest works.
When you make an investment, you are placing your faith in something. Unfortunately, many people are wary about investing in stocks and bonds because they’ve heard about people who lost a lot of money during downturns. So, to avoid losses like that, they place their money in banks. They have faith that their money will be safe there because their principal contributions are protected — up to $250,000 per depositor at an FDIC-insured bank. Their balance won’t shrink unless they withdraw money.
Yes, their money is likely to be safe in a bank, but it’s not going to grow much.
The rates of return are considerably less than what you may earn by investing. I often tell clients, “If you leave your money in a bank, the bankers are the only ones making money on your money.”
About U.S. Treasury Bonds
As for U.S. Treasury bonds, the 10-year Treasury is the benchmark used to decide mortgage rates across the United States, and it is the most liquid and widely traded bond in the world. The US government uses these 90-day instruments to fund itself. When you own a 10-year treasury bond, you earn a small amount of interest in exchange for lending your money to the government for the decade. The interest is paid every six months or annually.
“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” —Warren Buffett
Those who study finance will know that the 10-year Treasury bond is referred to as the “risk-free rate.” It’s the rate of interest that you can earn without any risk, based on the assumption that the U.S. government will be in existence 10 years from now to repay your money.
However, these bonds are not entirely risk-free when you factor in another force of nature: inflation. It’s the risk-free rate only to the extent that the interest earned on the 10-year Treasury note is actually higher than the rate of inflation.
Stated another way, it’s a risk-free rate only to the extent that it is a real return greater than inflation. If inflation is greater than the return of interest on the 10-year Treasury note, you’re actually losing purchasing power. And if that’s the case, your purchasing power is only a façade. So, in reality, there is no such thing as a truly risk-free rate.
The S&P 500 has performed well historically
Historically, investors have faith in companies that are successful enough to become publicly traded. The Standard & Poor’s 500 index, or S&P 500, is a collection of about 500 of the largest publicly traded companies in the United States. It includes companies across all 11 sectors of the economy.
It is easy to put your faith into these often-well-performing companies because, over long periods of time, the index has returned investors reasonable gains. Historically, they’re going to yield a much better outcome than any savings account can.
Another possible benefit of investing in companies is dividends. To collect dividends, you just need to own shares in a company through a brokerage account or a retirement plan such as an IRA. When the dividends are paid, the cash will automatically be deposited into your account. You can reinvest those dividends, essentially compounding your investment to buy more shares.
The more you take advantage of long-term investing, the better your outcome may be.
Keep the faith — Stay the course during market downturns
Investing your money in companies, in the hopes that your money will be worth more in the future, requires faith. You are making an investment today based on what the companies might do in the future. Yet when the markets turn downward, it can be hard to hold on to that faith.
Yet research consistently shows that, during market downturns, your best bet is to stay the course. Too many investors react emotionally when they see their investments losing value, so they sell during their downturns. By the time they feel it’s safe to get back into the markets, they’ve lost money.
Place your faith in the companies that create solutions
The companies that make it to the S&P 500 are those that provide solutions to the 8 billion people on Planet Earth. Whether they enable people to have clean water, food and shelter or they create high-tech solutions for big corporations, these high-performing companies are meeting people’s needs. History shows that when companies meet people’s needs, they often do well themselves.
My advice is, if you’re not doing so already, place your faith in the companies that are making our world a better place — investing in the stock market. When you do so, you are highly likely to enjoy the fruits of your returns that come from having faith in 500 or more companies that are reaching the needs of more than 8 billion people on the planet.
Any opinions are those of Tyson Ray and not necessarily those of Raymond James. The information contained in t his blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government.
Dividends are not guaranteed and must be authorized by the company’s board of directors.