As safe as money in the bank
By Spectrum IFA
This article is published on: 24th July 2014
More than a fifth of UK citizens think that the best long-term investment is putting their money in the bank. This is the rather discouraging result of a July survey by Bankrate.
One of its questions was, “For money you wouldn’t need for more than 5 years, which one of the following do you think would be the best way to invest your money?”
- 26% – cash
- 23% – real estate
- 16% – precious metals
- 14% – stock market
- 8% – bonds
That thumping sound you hear is me banging my head on my desk!!
I assume those who opted for cash did so because keeping money in the bank seemed to be the safest choice.
However, for long-term investing, that safety is an illusion. The best and safest place to put your nest egg for the future is not in the bank, but in a well-diversified portfolio with a variety of asset classes. And here’s why:
Savings accounts and CDs are safe places to store relatively small amounts of cash that you expect to need within the next few months. The funds are protected by insurance. You know exactly where your money is, and you can get your hands on it anytime you want.
This short-term safety does not make the bank a good place for the money you will need for retirement or for other needs five years or so into the future. It may seem like safe investing because the amount in your account never goes down. You’re always earning interest. Yet, over time, that interest isn’t enough to keep pace with inflation.
The purchasing power of your money decreases, which means you’re actually losing money. It just doesn’t feel like a loss because you don’t see the loss in its value.
In contrast, the stock market fluctuates. The media constantly reports that it is “up” or “down” as if those day-to-day numbers actually matter. This fosters a perception that investing in the stock market is risky.
Combine that with the scarcity of education about finances and economics, and it’s no wonder that so many people are actually afraid of the stock market and view investing almost as a form of gambling.
Wise long-term investing in the stock market is anything but gambling. Instead of trying to buy and sell a few stocks as their prices go up and down, wise investors neutralize the impact of market fluctuations by owning a vast assortment of assets.
This is accomplished with a two-part strategy.
The first is to invest in mutual funds rather than individual stocks.
The second component is asset class diversification. The mutual funds you invest in will comprise all of the asset classes in proportions or percentages falling in line with your appetite for risk (conservative, moderately conservative, moderate/balanced, fairly aggressive, high risk). Ideally, a diversified portfolio should include at least four asset classes.
By holding small amounts of a great many different companies and asset classes, you spread your risk so broadly that the inevitable fluctuations are small ripples rather than steep gains or losses. As some types of investments decline in value, other types will be gaining value. Over the long term, the entire portfolio grows.
In the long term, investing in this way is usually safer than money in the bank.
Perhaps you are holding too much capital in bank accounts and are beginning to realize you will see no “real growth” thereon. Why not give me a call to arrange a mutually convenient time for us to get together to investigate better ways of having your money grow for you? It does no harm in checking and, who knows, you may come away pleasantly surprised.
“With money in your pocket, you are wise, and you are handsome, and you sing well too.”