Noah Smith has seen some finance experts encouraging millenials to stop stressing about the stock market and start investing. Smith does not argue that returns, over the long term, are not worth the investment. But he sees a better investment strategy: pay off student loans. From Bloomberg View:
The interest rates on much of this debt are surprisingly high. The rate on the cheapest kind of federal student loan, Direct Subsidized Loans for undergraduates, is now 4.66 percent. The most expensive, Direct PLUS loans, will cost you 7.21 percent. That doesn’t sound like a lot compared with a credit card, but remember that we’re in an environment where the yield on 30-year Treasury bonds is only about 3 percent.
Paying down student debt is an investment. It’s the same kind of activity as investing in stocks or bonds. If you pay down $1,000 of student debt that was costing you 7 percent interest, you just effectively achieved a 7 percent return!
How does this stack up against stocks? The historical annualized return of the Standard & Poor's 500 Index, going back as far as we can go, is 9.07 percent (all the returns in this article are in nominal terms). That is more than 7.21 percent, and significantly better than 4.66 percent. The annualized return over the last 30 years has been even better, at 11.14 percent. But the annualized return over the last 10 years has only been 7.36 percent. And measures such as the Robert Shiller's cyclically adjusted price-earnings ratio (CAPE), or alternatives, predict relatively modest returns from the stock market over the next few decades - perhaps only 2 percent to 5 percent.
Read the full article here.