The biggest reason I am nuts about equities is, quite simply, their long term return potential. While rates vary dependent upon a wide range of factors, the average debt instrument out there (such as a bond, for example) is going to pay you somewhere in the range of 4-7% annually in the current marketplace. The long term rate of return of equity instruments (such as stocks), on the other hand, is somewhere around 10-12% annually.

Note the key phrase in the above paragraph is ‘long term’. By long term, I mean at least 10 years. Yes, I know that in any given year, the stock market may do better than the 12% I mentioned above, but, as Damon Runyon, the great sports writer once said, “that is not the way to bet”. If you are going to be investing for the long term (and you should be), why not go after the best long term rate of return?

By using the rule of 72, we can see that the difference to us over time:

Money that receives an average rate of return of 6% (like you can expect from bonds, for example) a year will double every 12 years. However, money invested at an average rate of 12% (like the average rate of return from a stock account) will double every 6 years. In other words, in the example above, if you start with $10,000 dollars, by the end of 12 years you will have $20,000 in your bond account or $40,000 in the stock account. Exactly twice as much money.

Which would you rather have?