The High Cost of Sitting on Cash
byAug 1st 2013 9:00AM
By Mandi Woodruff
In the latest financial security index by Bankrate.com, more than a quarter of Americans said they'd rather keep their savings in cold hard cash, even if they wouldn't need the money for more than 10 years down the line.
After cash, real estate garnered 23 percent of the vote, followed by gold and other precious metals with 16%. The stock market ranked the lowest of all, with just 4% of votes.
While no one can blame investors for shying away from the market after the volatile few years we just had, there's a lot wrong with this line of thinking. For starters, interest rates are so low these days, you might as well stuff that cash under your mattress and call it a day. The average money-market deposit account yields just 0.11 percent, according to Bankrate, and the average five-year CD currently yields just 0.78 percent.
Real estate and gold aren't exactly what one would call a secure investment either. How do you turn a house into a pile of cash when you need to make ends meet in retirement?
"Americans not saving enough is well-documented, but hunkering down in cash investments and settling for low returns will only magnify the problem of not having a sufficient nest egg to meet longer-range financial goals such as retirement," said Greg McBride, CFA, Bankrate.com's senior financial analyst. "Other choices may not do the trick either, as real estate is not only very cash-intensive, but often illiquid. And precious metals spit out zero cash flows, with gains solely dependent on price appreciation."
From the survey data, it looks like education and income play a big role in how much store investors set in cash. Poorer people with high school degrees or less were more likely to favor cash, while people who were college-educated and earned more than six figures more often favored stocks and real estate.
Hopefully, this chart reaches all investors, no matter how educated they are. It's from BlackRock, showing cash has an average annual return of just 0.5 percent after inflation (and sometimes less). This is based on data over more than 80 years and is no fluke. On the other hand, stocks have yielded between 9.8 percent and 4.5 percent after taxes and inflation.
What's a spooked investor to do?
Go easy on yourself. You don't have to open an E-Trade (ETFC) account and spend your lunch hour trying to beat the market (you won't, trust us). Just throw your savings into a low-cost index fund either through your employer-provided retirement plan or in your own IRA. Index funds have beaten the market and professional investors so often that it's a wonder anyone doubts how powerful a retirement tool they really are.