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More than a fourth of Americans think the best long-term investment is money in the
bank.
This is the rather discouraging result of a July survey by Bankrate. One of its questions
was, "For money you wouldn't need for more than 10 years, which one of the following
do you think would be the best way to invest the money?"
Cash was the top choice at 26%, followed by real estate at 23%. Sixteen percent of the
respondents chose precious metals such as gold. Only 14% would put their long-term investment
into the stock market, and just 8% thought bonds were the best choice.
That thumping sound you hear is me banging my head on my desk.
I assume those who opted for cash did so because keeping money in the bank seemed to be the
safest choice. For long-term investing, however, that safety is an illusion. The best and safest
place to put your nest egg for the future is not in the bank, but in a well-diversified
portfolio with a variety of asset classes. Here's why:
Savings accounts and CDs are safe places to store relatively small amounts of cash that
you expect to need within the next few months or years. The funds are protected by insurance.
You know exactly where your money is, and you can get your hands on it any time you
want.
This short-term safety does not make the bank a good place for money you will need for retirement
or other needs ten years or so into the future. It may seem like safe investing because the
amount in your account never goes down. You're always earning interest. Yet, over time, that
interest isn't enough to keep pace with inflation. The purchasing power of your money decreases,
which means you're actually losing money. It just doesn't feel like a loss because you
don't see the loss in value.
In contrast, the stock market fluctuates. The media reports constantly that "the DOW
is up" or "NASDAQ is down," as if those day-to-day numbers matter. This fosters a perception
that investing in the stock market is risky. Combine that with the scarcity of education
about finances and economics, and it's no wonder that so many people are afraid of the
stock market and view investing almost as a form of gambling.
Wise long-term investing in the stock market is anything but gambling. Instead of trying
to buy and sell a few stocks as their prices go up and down, wise investors neutralize
the impact of market fluctuations by owning a vast assortment of assets.
This is accomplished with a two-part strategy. The first is to invest in mutual funds rather
than individual stocks. With just one mutual fund that invests in an index of stocks, you
might own thousands of different companies. Your hard-earned fortune isn't dependent on
the fortunes of just a few companies.
The second component is asset class diversification. An asset class is a type of investment, such
as U. S. and International stocks, U. S. and International bonds, real estate investment
trusts, commodities, market neutral funds, Treasury Inflation-Protected Securities, and
junk bonds. Ideally, a diversified portfolio should include nine or more asset classes.
By holding small amounts of a great many different companies and asset classes, you spread your
risk so broadly that the inevitable fluctuations are small ripples rather than steep gains
or losses. As some types of investments decline in value, other types will be gaining value.
Over the long term, the entire portfolio grows.
In the long term, investing in this way is usually safer than money in the bank.