USA Today is reporting the results of a new study this morning. The question posed to 1,000 investors: “What is the best investment for your long term goal?”
The answer? It will never get them there.
More than a quarter — 26% — of those asked said they favor cash as the best long-term investment. Other favorites, in descending order:
• Real estate, 23%
• Gold, 16%
• Stocks, 14%
• Bonds, 8%
Cash is great to have in your emergency fund, or in your bank account to pay bills, or even a small percentage in your portfolio so you can be ready to buy when the opportunity arises.
But cash is a terrible long term investment.
The rest of the article is found here: http://www.usatoday.com/story/money/personalfinance/2013/07/30/cash-best-long-term-investment/2600495/
(Emphasis added is mine)
“Just 14% chose stocks, a sign of how deeply scarred the 2007-2009 bear market left investors. “It highlights how risk-averse investors continue to be five years after the financial crisis,” says Greg McBride, senior financial analyst for Bankrate.com.
The survey also shows investors’ continuing fondness for real estate, despite the real estate collapse. “Real estate is cash-intensive, illiquid, and nearly impossible for the average person to diversify,” McBride says. “Memories of the real estate bubble deflating seem to have dissipated very quickly.’
The average bank money market deposit account pays 0.11% — so a 10-year, $10,000 investment would gain only $110.
Investors’ positive impression of gold is equally puzzling, since gold has fallen nearly 43% since its 2011 high of $1,895 per ounce. “It’s an asset class that doesn’t produce any income or dividends,” McBride says. Despite its downturn, however, gold has soared 224% the past 10 years, according to Morningstar.
Stocks are typically better at producing good long-term returns. Large-company stocks have produced average annual gains of 9.9% since 1926, according to Morningstar, and bonds have gained 5.3%. Cash, in contrast, has averaged a 3.5% return. (Inflation-adjusted returns over the same time period: 6.8% for stocks, 2.3% for bonds, and 0.5% for cash.)
The survey also has more dire implications, McBride says. “If you combine the anemic rate at which people save and low returns from cash investments, it threatens to leave millions well short of where they need to be for long-term goals, such as retirement and college education.”
The Bankrate survey covered 1,005 adults in the U.S., and has a margin of error of plus or minus 3.6 percentage points. The survey was conducted July 3-7.”
Consider $100,000 saved for 30 years in cash:
At a minus 0.5% interest rate after taxes and inflation you would have a whopping:
$86,038.42
A loss of $14,000 in buying power.
How on earth can 26% of Americans think that a minus 0.5% return is their best long term savings option?
For those still decades away from retirement, holding cash (besides a little in an emergency fund to cover a few months expenses) is a losing proposition. In order to see your money grow you have to put it to work somehow. Saving for a comfortable retirement means saving a large percentage of your income, and letting compounding interest work for you. That is the recipe for a successful long term savings plan.
Cash will not get you there.
