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Ignore Donald Trump's terrible investment advice

In a recent interview on Fox Business, Donald Trump said that ordinary Americans should not put their retirement savings into the stock market:

"I don't like a lot of things that I see," he said. Trump said that he had personally gotten his money out of the stock market and urged ordinary Americans not to put their 401(k) funds into stocks.

Put simply, this is terrible advice. If you’re under 50 — and have another couple of decades before retirement age — you should put around 80 percent of your retirement savings in the stock market. (Read the Vox guide to retirement for all the details on how to do it.) If you don’t, you’re likely to wind up with a much smaller nest egg when you reach retirement age.

Stock market volatility matters less for long-term investors

Public attitudes toward the stock market soured in 2008, when the market plunged by 37 percent. A lot of people concluded that the stock market was too risky for ordinary people to invest in.

But the stock market doesn’t look so scary if you take a longer-term perspective. Here’s a chart of the average return of the S&P 500, an index of 500 large American stocks, over 20-year periods for the past century:

Average 20-year stock returns
Chart shows 20-year returns for the S&P 500, adjusted for inflation, ending on the date shown.
Based on data from Robert Shiller, courtesy of Moneychimp.

For example, if you invested in the stock market between 1994 and 2013, your average rate of return would have been 6.6 percent. The thing to notice about this chart is that there has never been a 20-year period when stock market investors lost money. The worst period, between 1962 and 1981, produced an average return of a little less than 1 percent. The best period, between 1980 and 1999, produced an average return of more than 13 percent — after adjusting for inflation.

If you had the bad fortune to buy stocks in January 1929 — on the eve of the Great Depression — you would have earned your money back and then some by the end of 1948. And that was followed by a massive stock market boom in the 1950s.

Stocks have outperformed other investments around the world

Of course, past performance is no guarantee of future results. And the United States has had an unusually successful economy over the past century. But the data shows that stocks in most developed countries have produced positive returns — and returns significantly higher than you could get from government bonds — over the long run. The exceptions are countries that have experienced communist revolutions (Russia and China) or lost major wars (Austria and Germany).

Not every country has seen its stock market rise as quickly or as steadily as the United States over the past century. And there have been a few cases (like Japan between 1990 and 2010) when countries have seen negative returns over multiple decades. But these cases are relatively rare. Around the world, people who invested in stocks over the long run have usually come out ahead of those who invested in bonds or — even worse — invested in gold or put their money under a mattress.

And that's not a coincidence. Some people think the main way to make money in the stock market is to buy stock when it's undervalued and then resell it when the price rises. And it's true that in the short run, stock price fluctuations account for most of the gains investors enjoy.

But these fluctuations don't matter as much for long-term stock returns. Stocks produce positive returns because companies earn profits that they give to their shareholders, either by paying dividends or by buying shares back from shareholders (which itself pushes up stock prices). This steady flow of cash to shareholders helps ensure that stocks produce positive returns over the long run whether stock prices go up or down. Historically, that has produced an average return of 6 to 7 percent per year.

When you buy a broad portfolio of US stocks, you're essentially buying a stake in the long-term success of the American economy. Of course, there's no guarantee that the American economy will continue to prosper — a major war, revolution, asteroid strike, or other calamity could destroy the American economy and with it the value of American companies. But as long as the American economy continues to grow, companies will continue earning profits and patient investors will enjoy a healthy rate of return.

Why you shouldn’t worry about low interest rates

Trump’s most plausible argument against investing in the stock market is that stock prices are propped up by low interest rates.

"If interest rates every seek a natural level, which obviously would be much higher than it is right now, you have some very scary scenarios out there," he said. "The only reason the stock market is where it is is you get offered free money."

Trump is right — sort of. Falling interest rates do tend to push up the value of all assets, including stocks. If interest rates start to rise, it could cause stock prices to decline.

But this issue isn’t specific to the stock market — it applies to almost everything you might invest in. If rising interest rates push down stock prices, they’ll also push down the value of bonds, real estate, or any other income-generating assets. So unless you want to put your money under a mattress — a strategy that’s guaranteed to underperform stocks and bonds over the long run — there’s no way to avoid the risk that higher interest rates could lead to lower asset prices.

But you also shouldn’t worry about this too much. While interest rate hikes could push down stock prices in the short run, they’re associated with higher rates of return over the long run. So if you’re able to hold on to your stocks for a couple of decades, you’re likely to come out well ahead.

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