Holding onto too much cash could hurt you in the long run. Read on to learn more. [[{“value”:”
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What does 2024 have in store for the stock market? In the absence of a crystal ball, it’s pretty much impossible to know.
However, because the stock market has the potential to be volatile at any time, it’s fair to assume that 2024 will bring about some shake-ups. That doesn’t necessarily mean that investors will be looking at losses by the end of the year. But investors should gear up for some market swings, since that’s just how the stock market tends to roll.
Meanwhile, a lot of people are opting to keep money in cash right now since interest rates are pretty generous. In fact, 55% of Americans are keeping more money in savings accounts or money market accounts due to today’s higher interest rates, according to Allianz data. And 61% say they would rather have their money sit in cash than endure market swings.
That may be a reasonable approach for right now, to some degree. But in the long run, it’s a strategy that might sorely backfire on you.
The importance of taking some risk with stocks
Given that many savings accounts and CDs are paying upward of 4% these days, it’s not a terrible idea to park extra money in cash. After all, as long as you’re banking at an FDIC-insured institution and aren’t depositing more than $250,000, your cash is protected — so you might as well snag what could be called a risk-free return of 4% or higher.
But the whole reason banks are paying so generously these days is that interest rates are up following a series of rate hikes from the Federal Reserve. If inflation continues to cool in 2024, the central bank will likely opt to cut rates.
Once that happens, banks are apt to start paying less interest. From there, it will likely make sense for a lot of people to move their money out of cash and into investments like stocks. Of course, doing so could mean having to endure market volatility. But that’s a risk worth taking.
Over the past 50 years, the stock market has delivered an average annual return of 10%. You won’t find anything close to that in a savings account or certificate of deposit. And you certainly won’t get close to 10% on your money in the bank once rates start to fall. So even though stocks can be risky, if you’re investing over a long window of time, they may be a much more lucrative bet than keeping money in cash.
If you shy away from stocks, you’ll run a different risk: not accumulating enough wealth to meet your long-term goals. Let’s say you have $50,000 to your name, and you decide to keep it in a savings account over the next 20 years earning a 2% annual return on your money. All told, you’ll grow your money to about $74,000.
Meanwhile, let’s say you put that $50,000 into the stock market over the next 20 years. And let’s also say the market doesn’t quite give you a 10% yearly return on your money, but rather, 8%. Even so, you’re looking at growing your $50,000 into $233,000. That’s more than three times the balance you’ll end up with compared to sticking to cash.
Pay attention to interest rates
Interest rates could start to fall as early as late winter or spring. So pay attention to what the Fed does on the interest rate front, and see how it impacts the cash you have in the bank.
It’s natural to fall back on savings accounts and CDs when rates are attractive. But even if today’s rates somehow were to magically hold steady over the next few decades, it would still make sense to invest your money in stocks if you’re working toward a long-term goal like retirement.
Sticking to cash could ultimately stunt your money’s growth a lot. And while you might think you’re doing the right thing by minimizing your risk of losses, you might end up hurting yourself financially instead.
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