While inflation rates have fallen sharply from the peak levels of 1979-80, the dollar is still shrinking in value. A dollar squirreled away in a safe-deposit box in 1980 had only about 60 cents of buying power in 1993. Although every investment carries some risk, it may be even more hazardous not to invest. An investment's so-called real rate of return is measured in terms of purchasing power, which is the nominal rate of profit growth adjusted downward for inflation. Among the kinds of investments shown in Table 1, common stocks historically have provided the best gains in purchasing power over the long term, followed by corporate bonds.
Corporate bonds are long-term, with interest reinvested.
U.S. Treasury bills are three-month U.S. government debt, with interest reinvested. Inflation represents the Consumer Price Index. Standard deviation measures the risk, or volatility, of rates of return. The benefits of saving early in life are greatly magnified by compounding. In this process, the growth of an investment's value is computed on the sum of the original investment, including the assumption that dividends or interest are reinvested in the same asset.