With all the headlines about rising interest rates and inflation, lots of people have suddenly woken up to the idea that they could be getting a far better rate on the cash in their savings account.
In general, this is a great thing. If you can switch from an account earning 0.05% to an account earning 3 or 4%, that’s awesome. Do that.
But it’s also important not to take this idea too far. With the recent bumpy performance in stock markets, and the looming threat of a recession, some people have started to ask, “Why should I put money into the market when I can get a guaranteed, safe rate of return in a high-interest savings account or money market fund?”
In other words, some people have not only switched their cash to a higher interest savings account but are also doing so with their long-term investments.
I’m confident that in time people will regret making this move because they will have missed an opportunity to get into the market when prices are good. They’ll miss the rebound, convince themselves that they should wait for the market to dip again to buy back in, and end up with money sitting on the sidelines for who knows how long.
When the stock market is performing poorly, 3-4% looks great. But when the stock market is booming, it looks terrible.
All that to say, getting a better rate on your bank account is a smart move and a great vehicle for your short-term savings and emergency fund.
But it’s no substitute for the gains you should see in the stock market over the long run.