Amid headlines of turmoil in the stock market, heightened global trade tensions and political tumult, it may seem like the safest place to store your money is in a savings account. Many people worry about losing money and would prefer to keep their money “safe” and if you need to it quickly it may be the best option. But when it comes to your long-term goals, cash presents another kind of risk: inflation risk. That’s because the low returns you’re likely to get may very well be lower than the rate of inflation. In effect, you may be losing money—and limiting the opportunity to reach your goals.
Over time, inflation (the rise in prices over time) causes many of the goods and services you buy every day to become more expensive relative to the value of your cash.
Although you do earn interest on money deposited in a savings account at a bank, today, generally speaking, the amount is far too low to keep up with the negative impact of inflation. For example one of the largest banks in the U.S., Chase, pays .01%1 and inflation is currently at 1.8%2. This means your cost of buying things in the future is growing more quickly than the money you are making on the money in the bank. For example if it costs $1 to buy something today but $1.50 in 5 years and your $1 invested only grows to $1.25 over the same period, you in fact lost money as you need more money to buy the same goods.3
Clearly, some banks will pay more than .01% and some pay at or above the current inflation rate, if you shop around. My point here is investing in cash is not a riskless strategy. So, instead of looking at your bank account and thinking the number barely moves so you have not lost anything how about looking at inflation risk and what that decision may cost you by not investing – commonly referred to as opportunity cost. There is no getting away from the fact that the bank does offer guarantees that neither stocks or bonds can offer. Banks and credit union accounts are guaranteed and insured up to certain amounts while you can lose money in both the stock market and the bond market although with different degrees of risk.
Over the last 30 years prior to 2019 (1988-2018) the S&P 500 is up on average 9.47% per year and the Bloomberg Barclays U.S. Aggregate Bond Index is up almost 6.47% so a 50/50 portfolio (half stocks and half bonds) would have earned 7.97% per year.
Historically the stock market has gone up more than it has gone down and the average returns are more than banks are paying today. Every year that you keep money in the bank you are losing the opportunity to make additional monies by investing in in other asset classes such as stocks and bonds.
All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Past performance does not guarantee future results.
Securities: Not FDIC-Insured • No Bank Guarantee • May Lose Value
1 https://www.chase.com/personal/savings
2 The annual inflation rate for the United States is 1.8% for the 12 months ended October 2019 - https://www.usinflationcalculator.com
3 This is a hypothetical example for illustrative purpose only.
4 The indexes referenced are unmanaged and cannot be directly invested into. Market data sources: https://www.macrotrends.net/2526/sp-500-historical-annual-returns and https://www.thebalance.com/stocks-and-bonds-calendar-year-performance-1980-2013-417028
Jordan Kerner
Financial Advisor, Waddell & Reed, Inc.
Office: 475-619-2240 | Cell: 917-301-7274 | Fax: 203-557-6262
www.jordankerner.wrfa.com | jkerner@wradvisors.com
495 Post Rd E Ste 209| Westport, CT 06880