Savings Vs. Stocks: How Much Money Millennials Lose By Not Investing

A recent study from Bankrate revealed that cash is millennials' preferred long-term investment. While cash is certainly the safest bet in the near-term, historical evidence suggests millennials who stick to this investment strategy over time will be missing out on some major wealth.

By The Numbers

According to Bankrate, 30 percent of millennials prefer cash as their favorite long-term investment. The same survey found that more than half (56 percent) of Americans with savings are earning less than 1.5 percent in annual interest on that cash.

A 25-year-old who invests $5,000 at a 1.5-percent compound interest rate for 30 years will grow that money to $7,815 by the time they reach age 55.

Over the past 90 years, the average annualized return of the S&P 500 index has been 9.6 percent. Using that compounded 9.6-percent return rate, $5,000 invested in stocks would grow to $78,214 over a period of 30 years, producing total wealth roughly 10 times what a cash hoarder would accumulate. 

To reiterate: investing in cash would grow $5,000 to $7,800. Investing in stocks would grow $5,000 to $78,200.

Unfortunately, a 1.5-percent interest rate doesn’t even keep millennial investors in-line with the 2.9-percent inflation the U.S. reported in the most recent quarter. In other words, investors holding cash in the form of U.S. dollars are actually losing value, even in most high-yield savings accounts and CDs.

Not As Risky As You Think

It’s understandable that millennials would be skeptical of the stock market after witnessing firsthand the devastating 50-percent decline in U.S. stocks during the Great Recession in 2008. After all, it was the single most devastating economic crisis in the U.S. since the Great Depression.

Yet it's important to keep perspective. The S&P 500 reached its pre-crisis high of 1,576 in October 2007. It hit its crisis low of 676 in March 2009. By March 2013, the S&P 500 made a new all-time high of 1,569. In other words, even investors who went all-in on stocks right before the worst financial crisis in 80 years didn’t lose a dime — as long as they were patient enough to wait about six years.

Those who held on until this day have earned a roughly 79 percent overall return on their investment in a matter of about 11 years. On an annualized basis, that represents a 5.4-percent annual gain.

Even the most unlucky people who bought at the exact market top are wealthier for having done so. And while many couldn't afford to sit on their hands for six or 11 years and took financial hits during the crisis, the vast majority of millennials aren’t planning on retiring that soon.

Historically Consistent

Sure, the stock market is extremely volatile on a short-term basis. In the longer-term, it’s remarkably consistent. Despite a number of market booms and busts — World War II, the Great Depression, the Great Recession and any number of major economic disruptions — the 30-year rolling annual return of the S&P 500 has always stayed in a range between approximately 8 percent and 15 percent.

Young investors concerned about sky-high stock market prices should take some comfort in the fact that even investors who bought U.S. stocks just prior to the Great Depression in 1929 averaged around an 8-percent annual return on investment over the following 30-year period.

As always, future returns are never a guarantee. But when things seem like they are unraveling in the market, the past can certainly provide some assurance. 

Debt A Top Priority

Before young investors set off to become the next stock market gurus, it’s important to note that paying off high-interest debt should always take priority over investing. Unless an investor can reasonably expect to earn a higher rate of return on investment than the interest rate he or she is paying on debt, not paying off debt will more than offset any market gains.

According to CreditCards.com, the average interest rate on credit card debt is currently about 17 percent, well above the S&P 500’s 9.6-percent average gain.

Related Links:

Study: Millennials Believe Cash Is The Best Long-Term Investment

The True Cost Of Millennials' Debt