According to research on American investment habits, we have too much cash. That’s not to say that our pockets are overflowing in bills, but a large percentage of us keep our money in a savings account versus investments in stocks.
A Cash-Heavy Portfolio Provides Slim Returns
On average, Americans have about $30,000 in the bank. Savings accounts offer dismal interest rates — you are lucky to find a bank that pays over one percent — and certificates of deposit only pay about three percent for a five-year term.
Stock investments historically provide higher returns. The average performance of equity investments is around nine percent. That’s a lot more than your bank will ever pay.
Stocks Can Double Your Money in a Decade
If you take that $30,000 and keep it in the bank, in ten years, you will have $36,000. Invest the same amount in stocks and, assuming seven percent (a little more conservative than the historic nine percent) your balance would jump to $59,000.
So why don’t more American’s invest in stocks? Fear of the unknown plays a significant role. When you put your money in a bank savings account, you have a clear idea of how much interest you can earn. Rates may vary from time to time, but the changes don’t happen overnight.
Stocks Do Carry Risks
Stock prices can tank. Overall, stocks are a good investment, but if you put your eggs in the wrong basket or fail to diversify, you can end up in a worse financial position. The key to turning savers into investors is to educate people about safer investment choices. Index funds perform well and are popular with many investors.
Ultimately, putting all of your cash in the bank is only slightly better than sticking it in your mattress or stuffing it in your pockets. Invest safely with a trusted advisor who knows your goals, and you’ll see your nest egg grow.