10. Why Should You Invest? Flashcards
(19 cards)
What significant change did Otto von Bismarck implement in 1889?
He designed the world’s first government-sponsored retirement program, allowing those over age 70 to receive government income.
Bismarck’s program inspired retirement systems globally, including in the U.S.
What was the initial retirement age set by Bismarck’s program?
70 years old, later lowered to 65 in 1916.
Why did the idea of retirement gain popularity?
Because people started to live longer, with survival rates to age 70 increasing from 25% in 1851 to over 90% today.
What are the three primary reasons to invest?
- To save for your future self
- To preserve your money against inflation
- To replace your human capital with financial capital
How does thinking about your future self impact investment behavior?
It improves investment behavior, as evidenced by individuals allocating more to retirement after seeing age-progressed renderings of themselves.
What financial goal was most associated with improved savings behavior?
Saving for retirement.
True or False: Saving for a vacation is more effective than saving for retirement in improving savings behavior.
False.
What is inflation?
The general increase in prices over time, acting as an invisible tax on currency holders.
What happens to purchasing power at a 2% annual inflation rate over 35 years?
It is cut in half.
How can investing help combat inflation?
By owning assets that preserve or grow their purchasing power over time.
What would $1 invested in long-term U.S. Treasury bonds in 1926 be worth by 2020?
$200.
What would $1 invested in a broad basket of U.S. stocks in 1926 be worth by 2020?
$10,937.
What is human capital?
The value of your skills, knowledge, and time.
What is present value?
The amount of money that a future payment stream is worth today.
If you expect to earn $50,000 a year for 40 years, what is the present value of your future earnings at a 3% discount rate?
$1.2 million.
How can financial capital replace human capital?
By investing to create a stream of income that replicates future earnings.
What happens to the present value of your human capital as you age?
It decreases each year as you work.
Why is it crucial for professional athletes to convert human capital to financial capital?
They often earn the bulk of their income in a short period and need to sustain their lifestyle afterward.
Fill in the blank: Holding cash is almost always a bad bet in the long run due to _______.
inflation.
