For most of us, the answer, everything else being equal, would probably be the first option, a low-risk 5% annual gain on our hard earned money. At various times, such a result has been available from Treasuries, Certificates of Deposit, or short-term no load domestic bond mutual funds. I believe one can still obtain relatively low risk 5% or greater yearly returns through insurance company annuities or charitable gift annuities.

Option two, when averaged out over a long period, probably would mean gains of roughly 10% a year, though with great volatility. And once these returns are corrected for inflation, taxes, and fees, the probably real increase to one's nest egg may be only in the neighborhood of 6.5% of compound annual return.

Those second choice gains are probably more typical of the results obtainable from a reasonably well managed no load stock mutual fund. I too am put off by that volatility aspect, especially after a period such as we have just gone through, between 9/08 and 3/09!

Meanwhile his more risk tolerant neighbor who invests $10,000 at age 36 in good no load stock mutual funds may typically end up, after inflation and all costs, with $66,144.

While the figures are just for illustration, one can see that for someone with a longer time horizon and able to weather such financial storms as periodically affect the markets, the second choice goes a lot further toward one's retirement needs. Multiply that $10,000 by 10-20 over the course of a work career and begin even earlier, and the nest egg could, even with real annual gains averaging just 6-7%, grow into a substantial cushion (in the millions) against retirement expenses, in addition to one's Social Security and any employer benefits.

Folks deal with that kind of risk in various ways. Often they allocate funds to a mix of different type assets, for example real estate, stocks, bonds, and cash equivalent assets. This is a tried and true approach that reduces risk but also marketdly drops the average return, and even this approach suffered substantially in the meltdown of 2008, when bonds, stocks, and real estate all fell in value, and the real return of cash equivalents fell to below zero.

I cannot guarantee the results, but so far the experience with companies bought and sold in this way has been much superior to the usual low risk cash equivalent or short-term bond returns and yet with much lower losses during bear markets than for the average stock. Often the average portfolio stock yield alone is better than one could get from a 10-year government bond. In addition, there is a good possibility of stock price appreciation over time.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)