Bad investments happen all the time. But when you think about bad investments, your mind likely goes right to the stock market where a lousy stock pick can lead an investment value to $0. Investments come in all forms, including a savings account or other cash-based asset class. But this is a big mistake! In an era where savings accounts offer poor returns, you may need to put a little more risk in your portfolio to avoid a bad investment. Follow along to learn why cash is a bad long-term investment, who is the worst offender, and what you can do to turn things around.
When cash joins the bad investments category
Cash is the most stable and secure option to store your assets, so what makes it a bad investment? With cash, the value of your holdings does not grow at a rapid rate. While your cash may grow when stashed in a bank account, the interest rates are terrible compared to other investments. As of this writing, just a few savings accounts offer over 2% annually, according to Bankrate. That is $20 for every $1,000 you have saved. But while the number of dollars in your accounts grows, the value of your account shrinks!
For July 2018, the annualized inflation rate was 2.9%. If you were earning 2% interest in savings, your account would lose just under 1% per year at this rate. For example, let’s say you have $1,000 saved at 2%. At the end of the year with simple interest, you would have $1,020. But the value of that slowly decreases over the year. Due to inflation, even with the $20 interest, your money would be worth $990 at the end of the year in terms of the dollars you started out with.
Because of the increase in the cost of groceries, movies, gas, and everything else across the economy as measured by the Consumer Price Index (CPI), you have less money than you started with if you invest in a savings account.
Who is investing the most in cash?
In the July 2018 Financial Security Report from Bankrate, 30% of Millennials said they think cash is the best place to invest funds they won’t need for ten or more years. This is entirely wrong, for the reasons explained above. Over time, Millennials and everyone else who put too much of their funds in cash will end up losing.
Of course, some cash makes sense. You should keep a cash emergency fund and any short-term savings, like a car fund or home down payment, in cash. But if you won’t need the cash for at least ten years, you can confidently invest in better performing assets knowing you have years ahead to recover if the markets take a turn for the worst.
Most Americans understand this vital concept. 32% responded that the stock market is the best place for a 10+ year investment. Fortunately, most recognize the risks of cryptocurrencies, and only 2% suggested that’s the best long-term investment. But cash came in second place with 24%, and the favorite for Millennials. Gen X, Baby Boomers, and the Silent Generation all knew better saying the stock market is the best place to invest long-term.
Best alternatives to cash investments
Millennials follow the trend of all Americans with poor savings rates. A 2016 Federal Reserve study found the average Millennials held just $2,600 in median savings. While that is more than you need for a $400 emergency, it is far from financial security. To help boost savings overall, make sure to participate in an employer-sponsored investment plan like a 401(k) if you have access.
For the self-employed, look to automatic deposits in an IRA or another self-employed investment vehicle. While Social Security appears to be safe and stable today, it is essential to save and invest on your own just in case those dollars shrink or dry up before you hit your target retirement age.
Most investment advisors suggest saving at least 10% to 15% of your gross income for retirement to ensure you maintain the same standard of living when you reach your golden years.
Focus on long-term goals for investment success
If you worry too much about little swings in the stock market, you could lose out on well over a million dollars in investment gains over the course of your career. While coming into careers during the Great Recession put the fear of investment losses in real estate and stocks into many Millennials, completely avoiding lucrative investments is the wrong choice.
Learn about how important investment classes work and structure your portfolio to follow along. In the worst case, pour your investments into a professionally managed target date retirement fund so you know your money is handled with your best interests in mind. But don’t put it all in cash. That is an expensive mistake every Millennial should avoid.