How do stocks compare with savings accounts?
November 03, 2016
Q: How do you rate the pros and cons of stocks compared to savings accounts?
A: It's a bit like comparing apples and oranges. But looking at the contrasts between stocks and savings accounts is a good way to highlight the strengths and weaknesses of each.
Listed below are three key characteristics you might use to evaluate possible investments, along with some comments on how stocks and savings accounts stack up in these categories.
Do you want to be sure you won't lose money? Then stocks are not for you. The stock market goes up and down every day, and can have sustained declines where it might lose more than 20 percent in one year. Individual stocks are generally even more volatile than the market as a whole.
In contrast, savings accounts are designed never to lose value. In addition, U.S. bank savings accounts are backed by FDIC insurance up to a limit of $250,000 per depositor at any one institution (i.e., you can get more money insured if you spread your deposits out among multiple institutions).
This is a question of how readily available your money will be. As noted above, stocks are subject to ups and downs, so you can't be sure exactly how much money will be available at any given time. Also, the process of selling stocks may cause slight delays in accessing your money. This may result in a reduced value due to taxes, commissions and market fluctuations.
Here again, savings accounts are quite the opposite, as one of their key attributes is that your money is available at any time. The one restriction is that you are limited to six withdrawals per month. As such, you should not use a savings account for frequent transactions the way you would a checking account.
Stocks represent ongoing business ventures and thus have considerable growth potential, though it is far from a sure thing. Unfortunately though, so far in the 21st century earnings on U.S. stocks have increased at an average rate of just 3.32 percent a year, so you would not exactly be tapping into a high-growth phase of the stock market.
Still, even 3.32 percent looks robust compared to the 0.06 percent average interest rate on savings accounts these days. You can get a much better yield (up in the 1.0 percent territory) if you shop around for the best savings accounts. However, stocks definitely have the advantage when it comes to growth potential. Just remember that potential is not a sure thing.
Clearly, these investments are designed to do very different things, so the starting point for this type of decision is to figure out the purpose of the money you are trying to invest. Is it something you need to be sure of in the near future, or are you looking for long-term results?
Both stocks and savings accounts have very worthwhile purposes. This is why people with well-developed investment programs tend to have a mix of both types of assets, as well as bonds.
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