Unlike older generations of Americans, more millennials think cash is the best place to invest money they won't need for a decade or more, according to a new Bankrate report. A surprising 30% of millennials chose cash as their top long-term investment choice, compared with just 23% who said stocks were the best way to go.
Here's a rundown of the differing investment preferences between millennials and other Americans and why cash is such a mistake from a long-term perspective.
Americans' investment preferences
As a whole, when asked for their No. 1 long-term investment preference, here's how the data breaks down:
- 32% said the stock market is best.
- 24% said cash is the way to go.
- 22% chose real estate.
- 9% said gold or other precious metals.
- 8% chose bonds.
- 2% said bitcoin or other cryptocurrencies.
Having said that, there's a big discrepancy between millennials, which the report defines as the 18- to 37-year-old age group, and older generations of Americans.
Specifically, 37% of Americans age 38 or older say that stocks are the best way to invest for the long term, while just 23% of millennials say the same.
Why cash is such a terrible long-term investment
One big reason many people prefer cash investments is that they believe that it's a surefire way not to lose money. After all, $10,000 in cash today is still going to be $10,000 in cash tomorrow, right?
Well, not really.
The problem is that because of inflation, cash loses value over time. While inflation rates vary over time, U.S. inflation has historically averaged about 3% per year. In other words, if you have $10,000 in cash right now, you can assume that it will be "worth" about 3% less, or $9,700 in a year from now.
This can really add up. Based on that 3% inflation assumption, $10,000 would have just $7,370 in purchasing power in a decade. If you set aside $10,000 for 30 years as part of your retirement strategy, you can expect its purchasing power to decline to just over $4,000 by the time you need it.
So while the numerical amount of cash may remain the same, its purchasing power will decline over time. And over long periods of time, the decline can be significant.
To be clear, I'm not saying that the stock market is the only place you should put money you won't need for a decade or more. Far from it. I'm a big advocate of a well-balanced investment portfolio of stocks and bonds, and as a real estate investor myself, I'd put investment real estate right up there with stocks in terms of long-term return potential. Even gold is a better choice, as it's more likely to maintain its purchasing power over time. Aside from bitcoin, which few people chose, any other option on the list is a better choice than cash for long periods of time.
Millennials should be the most pro-stock market generation
In fairness, it's completely understandable why millennials as a group don't view stocks as a particularly great investment vehicle. After all, many millennials watched their parents' stock holdings get crushed in the dot-com bubble and the financial crisis, and the short-term volatility of stocks can certainly be scary even when the economy is strong.
However, even if events like those two market crashes continue to occur every decade or so, there's simply no replacement for the long-term compounding power of stocks.
Consider this: Over the past 30 years, the S&P 500 has produced a total return of about 1,850%, or about 10.2% on an annualized basis. And that includes the dot-com crash and the financial crisis.
Based on this rate of return, a $10,000 investment in the stock market 30 years ago would be worth about $185,000 today, which would have handily outpaced inflation. Granted, past performance doesn't guarantee future investment results, and the path upward almost certainly won't be a straight one. However, younger people can and should wait out any short-term volatility, as the stock market has proved itself to be a phenomenal long-term wealth creator time and time again.