Are you a saver or an investor?

By iShares via qz.com   Article

The cost of being cautious

The term ‘savings account’ is sort of a misnomer. After inflation and taxes the money we deposit into savings will almost surely lose value, especially given the ultra low interest rate environment of the last few years. Over the long term, cash has averaged an annual tax- and inflation-adjusted return of -0.8%, while stocks have enjoyed an average annual return of 4.3%.

cash-is-notYet, Americans hold an average of 65% of their wealth in cash, according to a BlackRock study. Perhaps surprisingly, Baby Boomers are actually more diversified than most, with 60% of their assets in cash. Gen-X and Millennial investors are far more conservative, holding cash at rates of 68% and 70% respectively.

Investment theory tells us this is exactly backwards—younger people should take on more risk to grow their long-term portfolios, as they have more time to recoup market losses and can also take advantage of the positive effects of compounding. …

Dipping a toe in the water

Regardless of age, an innate human behavioral bias could also explain the preference for saving over investing. For many, the fear of losing money is stronger than the desire to grow it. As a result, loss-averse savers can end up making irrational long-term investment choices.

This needn’t be the case. Of course understanding risk is important. But by lengthening our investment time horizon, we can clearly see that stock markets have overcome even the biggest waves of volatility—including the most recent financial crisis.”

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