To perform this calculation, they must state the rate-of-return they expect to achieve using bonds, stocks, or savngs accounts. This requires an understanding of the historical rate of return of various investments, and an idea of the volatility of stocks. Below are some suggestions.
(1) This website provides great information about the historical rate-of-return of stocks, bonds, and cash investments (savings, CD's, and money market accounts). The user can even create a portfolio of stocks, bonds, and cash, and the calculator will show the average rate-of-return for that portfolio. What I like best is that the user can check "Adjust For Inflation" and it shows the real rate-of-return. Students should adjust the time period over which they wish investments to be evaluated, and since all we desire is a rate-of-return for stocks, bonds, and money market accounts, the amount of money invested doesn't matter. I encourage students to also check "Adjust growth for MER's", as that accounts for the fees you must pay financial advisors to purchase the investments for you.
(2) Students who are not familiar with certain financial terms can utilize the Forbes Financial Glossary.
(3) For an understanding of the riskiness of stocks, students can study this article by The Economist magazine. I particularly like the statement, "As a result, saving seems like pouring money into a black hole (see article). Any American who has diligently put $100 a month into a domestic equity mutual fund for the past ten years will find his pot worth less than he put into it; a European who did the same has lost a quarter of his money."
(4) The Wall Street Journal published an interesting article regarding the performance of stocks during the last 200 years. Within this discussion is information on the performance of stocks relative to safer investments, like bonds. Highlighs are: "As of June 30, U.S. stocks have underperformed long-term Treasury bonds for the past five, 10, 15, 20 and 25 years," and "Ever since Thomas Jefferson was in the White House, stocks have generated a "remarkably constant" average return of nearly 7% a year after inflation."
(5) The last table of the paper at this link provides an informative description of how the real rate-of-return for stocks can vary across different time periods in recent U.S. history.
