5 Reasons to Invest the Money Sitting in your Bank Account
It may seem like a long time ago, but at one point an interest-bearing checking account may have paid 1.0% with a traditional savings account yielding as much as 3.0% annually. Investing in the stock market might seem attractive when a big jump in the Dow grabs headlines. But when the market drops significantly, some investors feel they are better off just leaving their money in a checking or savings account. Sure, a great of rule of thumb is to have 4-6 months of cash for emergencies. But stashing all your cash at the neighborhood Bank of America isn’t the optimal solution.
Here are 5 reasons to invest the money sitting in your bank account:
1. Adjusting for inflation, you’re actually losing money by leaving your money in a bank account.
Make your money work for you. Since World War II, the historical rate of inflation has been approximately 4.0%. Investors who worry about losses in the stock market forget about the inflation risk to their purchasing power. As an example, a $20,000 vehicle purchase in 2000 would require over $27,000 today. If your investments aren’t keeping you ahead of inflation, you’re actually losing purchasing power each year.
2. Today’s interest rate environment is challenging and provides limited upside.
According to bankrate.com, one of the best rates on an interest checking account is 0.10%. If you want the best rate on a money market, you may get just over 1.0%. Even a 5 year, $100,000 jumbo CD, will only get you a yield of just over 2.0%. The bottom line, only those with large deposit sums (i.e., millions) can derive meaningful benefit from today’s low interest rate environment.
3. Investing for the long term yields results.
Over the last 80 years, there have only been two decades that showed negative returns for the S&P 500. In those two decades, the negative annual return was a loss of less than 1.0%. However, over the entire timeframe, the S&P 500 has returned an average of just under 10.0% per year. In addition, in three different decades, returns have topped 17.0% annually.
4. Putting together a diversified portfolio of stocks is easier than you think.
Despite popular wisdom, an amateur investor could easily pick just five stocks, and get significant diversification. In fact, here is an example of how easy it is to buy five and get diversified.
- Microsoft (NASDAQ: MSFT) 2.8% yield – technology.
- Chevron (NYSE: CVX 4.5% yield – oil.
- General Electric (NYSE: GE) 3% yield – diversified manufacturer.
- Johnson & Johnson (NYSE: JNJ) 2.9% yield – pharmaceutical.
- Southern Company (NYSE: SO) 5% yield – utility.
You can buy all of these stocks on Instavest for only $3.49 a trade. Easy peasy.
5. Dividends are very important to total return, and can provide current income.
Investors gain a significant advantage when they buy stocks that pay dividends. They can elect to take dividends as current income. However, if they reinvest their dividends, their total return can be significantly increased. In the last 9 years, as much as 35% of the annual return of some of the Dow 30 stocks came from dividend reinvestment.
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