Q

Is it safer to save my money rather than invest it in the stock market?

A

In short, it depends.

Apologies for sounding a tad indecisive, but it really depends. If you are holding onto your money for a very short period of time because you need it to finance the purchase of something, you should park the money in a stable cash equivalent account, like a very short-term bond or a money market account. The obvious upside to an account like this is stability and liquidity — being able to access the money you deposited immediately. The downside with such cash equivalent accounts is that you’ll earn very low returns on your investments, frequently below the rate of inflation, meaning that if you held onto them long enough, you’d actually be losing money since the cost of living would outpace the investment growth.

If you intend to hold onto your money for a longer period — the rule of thumb is that more than five years constitutes a safe time horizon — you should absolutely invest in something that will allow you to enjoy the growth of the stock market since, despite some volatility, it historically rises on an average way above the rate of inflation. If you don’t believe us, look at a chart of the Dow Jones Industrial Average’s last hundred years. Adjusted for inflation, the market has been up on average about 7% per year. You’ll never get those kind of returns stranding your money at the bank.

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