Especially in times of heightened stock market volatility, I frequently get asked by first-time investors if they should have their wealth (or at least a good portion of it) in a savings account instead. After all, a savings account can appear safer and less risky, while still offering a rate of return on your wealth through interest rates.
However, if you’re considering investing, and have also asked if you should have your wealth in a savings account, here are some crucial points to consider before making the decision:
Interest rates on savings accounts
While savings accounts do offer interest rates, they typically offer very small rates. According to the FDIC, the average interest rate on savings accounts is .06% (annually). If you’re pondering whether you should have your wealth in a savings account, you should consider the returns you could earn through investing instead.
According to historical records, the average annual return for the S&P 500 since its inception in 1928 through 2014 is approximately 10%. Although you investments may not exactly mirror the S&P 500, benchmarks like these illustrate how your returns are likely to be much larger than those available with a savings account.
Another important thing to consider when asking if you should have your wealth in a savings account is inflation. While a savings account may seem like a safe place to store your money, there is still the ever-present risk of losing the purchasing power of your wealth due to inflation.
For instance, in the US, the 10-year historical average rate of inflation is about 2.1%. What that means is that every dollar of yours is essentially losing around 2 percent of its value (purchasing power) year after year.
When comparing this rate of inflation to the interest rates of savings accounts, it’s clear that the average savings account does little to protect against inflation. While your money may be physically safe, there is a very real risk of its value constantly shrinking.
Want to learn more about investing?
Failing to invest in the markets can be a bigger risk than investing, so when it comes to what you should do with your savings: invest!
At LexION Capital we believe that there is no such thing as a “one-size-fits all” investment strategy, which is why we work with our clients individually to create unique investment strategies that will help them reach their goals and needs.
If you’re interesting in learning more about investing, don’t hesitate to reach out to a LexION Capital fiduciary advisor today.