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Simply put, stocks have treated the long-term investor significantly better than bonds, money market funds, stable value accounts, or any of the other choices available for saving for retirement. Overall, since 1926 stocks have returned an average of about 11% per year, and over the last 50 years have done even a bit better -- returning 13.6% per year as measured by the Standard & Poor's 500 Index. Had you put $1 into stocks in 1900, you would have more than $10,000 today.

With numbers like these on your side, we think that if you have four, three, two, one, or even half a decade to invest before your retirement, the stock market is the place for your retirement dollars to be fruitful and multiply. But numbers are interesting to read, whereas a picture tells a thousand words. And since these lessons are only supposed to run about a thousand words, let's double the value you've received tonight by tossing in a thousand-word value picture for free.

Source: John Bogle on Investing: The First 50 Years

This picture illustrates what a $10,000 investment in stocks looks like versus a $10,000 investment in bonds.

Fair enough. The long-term rewards of realizing the actual returns of the stock market are remarkable. But how does an investor get those returns? Is it enough to buy a bunch of different mutual funds, realizing that some will be good, and some not so good, and that if you buy enough of them, you'll probably average things out? Actually, no -- that strategy is extremely unlikely to get you close to the average returns of the stock market.

Active or Passive Management?
Active investing is what most people mean when they talk about investing in stocks of individual companies. Whether you do it, your broker does it, or a mutual fund manager does it for you, the money is managed "actively" -- though not usually very well if your full-service broker is involved.

If you're using mutual funds for your retirement savings, we recommend passive management: index mutual funds. The hardest part about making the case for passive investing is simply convincing people that active investing is typically not what it is cracked up to be. According to Lipper Analytical Services, over the ten years ended in June 2000, more than 80% of "general equity" mutual funds, meaning garden variety stock funds, underperformed the Standard and Poor's 500 Index -- the major benchmark for stock mutual funds. And that's a typical decade.

In fact, on average, actively managed stock mutual funds have underperformed the market by about 1.8% per year over the last 50 years. The stock market's average return has been around 13.6% per year, and the average actively managed mutual fund holder has pocketed only 11.8% per year. Does that 1.8% mean a lot? Just check out the graph of what a difference that small percentage can make over the long term.

Source: John Bogle on Investing: The First 50 Years

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