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Saving & Investing: Investing (12th Blog Post)

  • Writer: Aiden Harpel
    Aiden Harpel
  • Sep 29, 2022
  • 7 min read

Updated: Feb 9


Financial experts tend to agree that investing is one of the best ways to grow your money over the long-term and achieve your personal financial goals. When you take your savings and invest it, you give yourself the opportunity to grow your savings and over the long-term to “compound your money” -- i.e., earn a return on the returns you generate on your investment. As we described in our 11th blog post (“Saving & Investing: Where to Put One’s Savings”), when you invest you give yourself an opportunity over the long-term to earn a return on the actual amount of money you invest. Through the power of compounding, however, you additionally give yourself an opportunity to earn a return on the returns you earn on the amount of money you invested. And, in doing so, the actual effect of compounding increases the longer you remain invested. Please refer to our 11th blog post (“Saving & Investing: Where to Put One’s Savings”) for examples of how the math of compounding your money works. But consider the following additional examples:


  • If you invest $1,000 of your savings, earn a 7.0% compound annual return[1] over 40 years on that $1,000, and do not withdraw any of the principal invested (i.e., the $1,000) nor any of the gains generated on that principal, at the end of that 40 years your $1,000 investment would grow to approximately $15,000.


  • If you invest $5,000 of your savings, earn a 7.0% compound annual return over 40 years on that $5,000, and do not withdraw any of the principal invested (i.e., the $5,000) nor any of the gains generated on that principal, at the end of that 40 years your $5,000 investment would grow to approximately $75,000.


  • If you invest $10,000 of your savings, earn a 7.0% compound annual return over 40 years on that $10,000, and do not withdraw any of the principal invested (i.e., the $10,000) nor any of the gains generated on that principal, at the end of that 40 years your $10,000 investment would grow to approximately $150,000.


Yes, each of these additional examples illustrate how the math could potentially work to grow one’s savings, in this case, by a factor of 15x. And if you are wondering how reasonable a 7.0% return assumption is to throw out in a set of examples, consider the following: over each of the last approximately 90 years and the last 50 years, through the year 2021, US stocks generated average annual returns of approximately 12%. Over these same two time periods, US government bonds generated average annual returns of approximately 5% and 7%, respectively, and US corporate bonds generated average annual returns of approximately 7% and 9%, respectively.[2] Of course, very importantly, please note that past performance is no guarantee of future performance.


It also is critically important to recognize that the gains that one earns on one’s investments are a separate and potentially additional source of income than the income one will generate through one’s job.


The money that one can earn when one invests one’s savings can come in the forms of interest income, dividend income, and/or what are called “capital gains”.



With the help of interest income, dividend income, and/or capital gains that one can potentially earn through investing, one not only can put oneself in a better position to be able to fund the larger purchases that one may want to make in one’s life (such as buying a home, buying a car, helping to support a family, going away on vacations, helping fund a college education, starting a business, etc.), but one can increase one’s chances of ultimately achieving greater financial independence and financial stability in one’s life (including through retirement). So let’s briefly review each of these types of additional income streams.


Interest income is money you can earn when you put your earnings or savings in a savings account at a bank. You also can earn interest income, though, by investing, specifically by investing in financial assets such as US government bonds, US municipal bonds, US corporate bonds, non-US government and corporate bonds, fixed income exchange-traded funds (ETFs), and fixed income mutual funds. Bonds are a type of financial asset and those who invest in them receive interest income on their investment because bonds are basically a type of loan. The borrower is a government, such as the US government, or a company, like a Nike or an Apple for example. Both exchange-traded funds (ETFs) and mutual funds are types of financial vehicles that pool together money from many different people and invest that money on their behalf. Fixed income exchange-traded funds (ETFs) and fixed income mutual funds themselves invest in bonds, so a very easy way for someone like you and me to earn some interest income is to invest in bonds through exchange-traded funds (ETFs) or mutual funds which happen to be professionally managed.


Dividend income is money you can earn when you invest in other types of financial assets like stocks, stock exchange-traded funds (ETFs), and stock mutual funds. Stocks are ownership interests in a company. Stocks of public companies are mostly bought and sold on what are called “stock exchanges”. There are many public companies, across all types of industries, that pay cash distributions to the owners of their shares. Those cash distributions are called “dividends”. Again, Nike and Apple are examples of public companies that pay dividends to those people that own their stock. Stock exchange-traded funds (ETFs) and stock mutual funds themselves invest in stocks, so again, a very easy way for someone like you and me to earn some dividend income is to invest in stocks through these types of professionally managed funds.


And then there are “capital gains”, which are the profits you earn when you buy an asset and sell it at a higher price than you bought it for. If you take a portion of your earnings or savings and buy something that proceeds to increase in value (such as a financial asset like a stock, bond, exchange-traded fund or mutual fund; a rare baseball card; an autographed basketball; a piece of gold or silver jewelry; real estate like your home; a piece of art; etc.), you can then resell it at a profit. That profit is capital gains income. As an example, a 1948 Jackie Robinson baseball card sold for nearly $400,000 in 2021. Back in 1948, the cost of a pack of baseball cards, much less a single baseball card, was likely pennies. The difference between the cost of that baseball card and its resale value represents capital gains income. As another example, let’s say you purchase an exchange-traded fund (ETF), a mutual fund, or an individual stock and the price per share of that fund or stock rises 15%, and then you sell your investment. The amount of profit you just generated on buying and reselling that fund or stock represents capital gains income. As a third example, let’s say you buy a piece of gold jewelry, the price per ounce of gold after your jewelry purchase rises 30%, and you resell the piece for 30% more than you bought it because the price of gold went up. Again, the amount of profit you just generated on buying and reselling that piece of jewelry represents capital gains income.


If you eventually decide that you would like to invest any savings you may have specifically in financial assets like stocks, bonds, exchange-traded funds (ETFs) or mutual funds, you can directly make those investments yourself or, alternatively, hire a professional investment management firm to make those investments for you.



If you decide that you wish to directly invest in individual stocks, bonds and exchange-traded funds (ETFs), you will need to open a brokerage account. One can open a brokerage account with an online broker or, alternatively, a traditional full-service brokerage firm. Examples of established and well-known online brokers include TD Ameritrade, Charles Schwab, Interactive Brokers, Fidelity Investments, and E*TRADE. Examples of established and well-known traditional full-service brokerage firms include Merrill Lynch, Morgan Stanley, and J.P. Morgan. With traditional full-service brokerage firms, you can receive investment advice from human beings (“financial advisors”) employed at these firms. With the online brokers, you do not receive investment advice from financial advisors and therefore it is more DIY, or “do-it-yourself”, investing. That said, the online brokers offer tons of free educational and research tools to help their clients with their investment decisions. Traditional full-service brokerage firms tend to charge their customers higher fees than the online brokerage firms and may have higher investment minimums (i.e., the minimum amount of money you as a customer must invest in order to open an account with the firm). To learn more about investing in general and what is involved in setting up a brokerage account, the costs, the risks and the benefits, you can visit the websites of any of these firms (as well as those of their many competitors). Here are their website links in case you wish to further explore:




If you decide that you wish to directly invest in individual mutual funds, of which there are literally thousands to choose from, you can do so through a brokerage account (regardless of whether the account is with an online brokerage or a traditional full-service brokerage) OR you can open accounts directly with the mutual fund companies whose funds you are interested in investing. To learn more about mutual funds in general as well as individual mutual funds (including their investment strategies, risks, past performance, industry rankings, investment minimums, and fees and expenses), you can visit the websites of individual mutual fund managers. Some of the largest and most well-known mutual fund managers who individually manage many different funds include, for example, Vanguard Group, BlackRock, State Street Global Advisors, Fidelity Investments, T. Rowe Price, and Capital Group. Here are their website links in case you wish to further explore:



Both US News & World Report and Fidelity Investments also offer especially valuable free industry resources for researching mutual fund offerings. US News & World Report’s information on mutual funds can be found at https://money.usnews.com/funds/mutual-funds, while Fidelity Investments’ information on its own and competitors’ mutual funds can be found at https://fundresearch.fidelity.com/fund-screener/. While Fidelity has its own mutual funds, its website also allows one to research the mutual funds of other investment managers.


To be very clear, investing carries with it risks including the risk of losing money. We will discuss this critically important topic in our next blog post.


I would love to hear from you. Any ideas, experiences, thoughts, comments and questions….please do share.




[1] A compound annual return represents the rate of return of an investment over a certain period of time, expressed in annual percentage terms. [2] Last ~90 years (i.e., 1928-2021) and 50 years (i.e., 1972-2021); Aswath Damodaran, NYU Business School Professor, January 2022.




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