UNDER 35? THIS BELIEF WILL KILL YOUR CHANCE OF RETIRING RICH
Here’s the scariest statistic I’ve read in a while: In a 2018 Bankrate survey, 1,001 US participants were asked ‘What is the best way to invest money you wouldn’t need for 10 years or more?’. Some 24% of respondents said cash – and 20 wishful thinkers said Bitcoin. Yikes.
If you’re reading this, you're probably among those who already understand the benefits of investing in growth assets. You’re also probably Australian. Being a US-based survey, we don't know whether Australians have the same cash fetish, or whether it’s something specific about the current American investing climate that’s causing significant pessimism (we’ll let you draw your own conclusions).
However, a second part to the survey is even more alarming, so it’s worth discussing just in case it’s a universal trend. Some 30% of millennials – those born in the 1980s and 90s – said cash was the best long-term investment; more than any other demographic.
A 70-year-old with a preference for cash is understandable – nothing beats cash’s stability in the short term, and someone part-way through retirement can’t afford to lose capital.
Most millennials, on the other hand, won’t need to access their retirement savings for a good 30 years or more. If they maintain this bias towards cash – which currently yields just 2–4% – it will ruin their chances of ever retiring comfortably, let alone retiring rich. Cash is a way to save for short-term spending needs or to provide a cushion for emergencies. But it’s a terrible way to grow your wealth because its value is eroded each year by inflation.
Riskier assets, such as shares and property, tend to provide higher returns over the long term, and your portfolio can handle the short-term volatility if you’re a long way from retirement.
Every 1% counts
A 20-year study by fund manager Vanguard paints the picture. The top-performing asset class over the past 20 years was Australian shares, which averaged an 8.6% return, followed by Australian property at 7.2%.
Bottom of the pile was cash, which averaged 4.5%. The superiority of stocks over cash holds true over much longer periods too, with 4.2% outperformance in the 40 years since 1978.
It doesn’t sound like a big difference, but it adds up over time: let’s say a 25-year-old is saving $5,000 a year and continues to do so until they’re 65. At a 4.5% rate of return (no easy feat in cash accounts today), their investments would reach around $560,000; the same amount put in stocks at 8.6% would be worth more than $1.6 million. In other words, three times as many cocktails and holidays in retirement.
With this as a backdrop, the last thing a young person needs is the belief that cash is a form of investing.
By all means, give yourself a safety net. If you don’t have ready access to cash, you’re more likely to be forced to take on costly debt if you run into trouble, such as the loss of your job. A good rule of thumb is to have at least 4–6 months' worth of living expenses in a high-interest online savings account. But other than that, it’s better to have most, if not all, of your portfolio in high-growth assets like shares and property.