Investing

Americans prefer cash to stocks for long-term investing: That thinking can 'erode your wealth,' expert warns

"The stock market has proven to be an effective wealth generator over longer periods of time."

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Stocks are falling out of favor with investors — a shift experts warn doesn't bode well for your long-term wealth-building prospects.

A new survey from Bankrate asked more than 1,000 Americans what they consider the best way to invest money they won't need for 10 or more years. For the first time since 2017, investing in the stock market came in a distant third, chosen by only 16% of respondents.

That's a huge departure from last year's survey results, says Greg McBride, chief financial analyst at Bankrate. In the 2020 survey, investing in the stock market came in first place, with 28% of respondents choosing it as the best way to invest over the long term.

This year, the top spot went to real estate, with 28% of people citing it as their preferred vehicle. Cash investments, such as savings accounts or CDs, were a close second, chosen by 25% of survey participants. It's the most interest people have had in cash investments since 2014.

That's concerning, says McBride, especially given the current low interest rate environment and the recent rise in inflation. "Hunkering down in cash for long periods of time actually erodes your wealth, it doesn't build it," he explains.

Here's why saving in cash isn't a great wealth-building strategy, and how experts recommend investing for the long term.

Inflation 'erodes' the wealth you keep in cash

As many people were reminded during the pandemic, it's smart to both save and invest. An emergency savings account is an important financial backstop, and saving for short-term goals helps ensure you aren't at risk to lose that cash in a market rough patch.

But the more money you have sitting idle in a savings account, the more money you're not using to build wealth, Ben Carlson, a CFA and the director of institutional asset management at Ritholtz Wealth Management, recently told Grow. "That money isn't growing, especially since interest rates are so low."

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The average interest rate on a traditional savings account is 0.06%, according to June Bankrate data. That's far lower than the current rate of inflation, meaning that the value of any money you save in a savings account will decrease over time. Even CDs and high-yield savings accounts offer only a paltry return for your money right now, with APYs of 0.95% and 0.73%, respectively, according to DepositAccounts.com.

In contrast, from 2001 through the end of last year, the S&P 500 returned an annualized 7.5%. In other words, putting your money in the stock market helps you grow your wealth at a rate that outpaces inflation.

Check out Grow's compound interest calculator to see how your money could grow over time.

The stock market is an 'effective wealth generator'

The shift away from the stock market was "surprising to see this year," says McBride. "We've seen that in years past, but it usually follows a sharp market decline. To see that drop off after a year of strong [stock market] performance is a bit of a head scratcher."

Although the market saw its most precipitous drop ever last year at the start of the pandemic, in the end, 2020 was a banner year for stocks. The tech-heavy Nasdaq Composite gained nearly 44%, posting its best one-year performance since 2009. The S&P 500 closed 2020 with a gain of more than 16%, while the Dow rose by more than 7%.

Cash investments do not pay off over long time periods.
Greg McBride
Bankrate

Part of the shift away from stocks might be a perception problem, says McBride. When Bankrate asked 2,500 Americans whether they believe the market is "rigged against individual investors" in March, more than half of all people surveyed agreed. Many respondents attributed that belief to a lack of knowledge about the stock market.

However, "volatility aside, the stock market has proven to be an effective wealth generator over longer periods of time, but you have to be willing to hang in there through thick and thin," says McBride.

Diversification of your investments is key

For young people in particular, "the stock market is really going to be the backbone of their retirement savings strategy, and in the primary way they're going to build wealth throughout the decades of their working career," says McBride.

If worries about the stock market's volatility are keeping you on the sidelines, diversification can help protect your assets and provide some peace of mind, says Erika Safran, a certified financial planner and the principal at Safran Wealth Advisors in New York City. 

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"An investor with a longer-term view has exposure to multiple asset classes: domestic and foreign stocks, as well as bonds to temper volatility," Safran says.

Putting your money in index funds and ETFs will do that work for you. Both investment vehicles are low cost and offer an easy way to spread out your investments and your risk.

Both Safran and McBride say that in order to use the stock market as a wealth generator, you must stay invested for the long haul.

"To see sentiment for the stock market swing so wildly from one year to the next, it undermines that long-term perspective, the patience and discipline that's necessary to really reap the rewards of the stock market over time," McBride says.

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