What will pay more yearly, a 5% money market account or an index fund ETF?

Question

Lets say I start out with a $20,000 principal amount and will be depositing $1,000 monthly. I know index funds QQQQ, DIA, SPY pay about around 10%, but the Money Market Account pays 5% compounded...Does the compounding actually make the return more than 5%?

Answer 1

Everything Thin said is correct. Just to clarify something you said, King--yes, index funds or ETFs (SPY, etc.) will probably "pay" 10% ON AVERAGE, OVER THE LONG HAUL. But from year to year the return could be anywhere from 30% to MINUS -30%. That's why, as Thin said, if this will be a shorter term investment, it's better to go with the money market account.

BTW, if you see "APY 5.0% for the money market account, that is already taking compounding into account (for the year). Anytime you see "yield" instead of "rate," that means it's taking into account compounding. Also, stocks, funds & ETFs are compounding from year to year too. If a fund goes up 10% one year, then goes up 10% the next year, you've made more money in the second year because you had more money to start with. That is compounding.

Answer 2

No.

But the 5% is more-or-less guaranteed, and is predictable. The ETF will certainly provide you a much, much higher rate of return over the "long run". If you might need to take this money out in less than 5 years, you should put it in the money market; if you don't need it for 15, 20 or even 30 years, it belongs in the ETF.

You should also ALWAYS put regular contributions into something volatile if you think about it: that way you are buying more when the price is low, and less when it is high!

Answer 3

You are mixing up interest (5% paid yearly) from a money market vs. Total return (10%) from an ETF. The average yearly total return (share price gains + dividends + realized capital gains) of index mutual funds/etfs is 10% annually (when averaged over many years) which you do not get until you sell your ETF. The yearly "pay" or dividends from such ETFs is only around one half of one percent.

Answer 4

money Markets are sturdy for jiffy period fee mark downs or an emergency fund. i like forefront money marketplace suitable. With expenses taking position money markets will commence to pass down right away because their frequent funding length is often about 40 days. So on a daily basis larger investments mature and are replaced by potential of decrease investments. So keep a watch on jiffy period CDs and in the adventure that they are more effective powerful positioned some into them. money markets and CDs are not to any extent further truly sturdy for making an investment or turning out to be a retirement nestegg. they're secure yet somewhat keep %. with inflation. For lengthy time period boom you want to take some possibility - meaning stocks/inventory money. Your 401k is a blinding position to make investments-even extremely savy investors might want to judge a target date retirement fund of their 401k. outdoors the 401k you do not pick to generate taxes so index inventory money might want to be maximum perfect. forefront entire inventory marketplace index, entire internation index money are sturdy alternatives. keep the bond money on your 401k. i don't love paying for suggestion both - a cost in uncomplicated words finacial planner might want to be a sturdy determination for a one time evaluation - he/she might want to receives a fee by potential of your value no longer by potential of the products he recommends. in case you pick to pass it on my own you want to commence interpreting and not in any respect in accordance with suggestion from me or the following. The bogleheads website (see link)is a sturdy one to study suggestion or maybe pose a question - they have extremely sturdy suggestion, a interpreting record and can want to even contact upon your questions. sturdy success

Answer 5

ETFs.