When we log onto our internet banking app and see a handy sum in the savings account, it gives us a warm fuzzy feeling. Especially when we get that monthly boost of interest on savings. But what many Australians ignore is that the bank interest on savings often pales in comparison to the long-term market performance which leads millions of Aussies to invest their savings in the stock market instead.
The dilemma of how much to invest in the stock market (aka, companies listed on the ASX) versus holding as cash in a savings account has no clear answer. In fact, everyone’s circumstances are different. But both options have their own advantages and disadvantages, and the best choice for an individual depends on their personal financial goals and risk tolerance.
Investing in the stock market
Investing in the stock market can be a great way to grow your money over time. Stocks are a form of ownership in a company, and when a company performs well, the value of its stock increases. This can lead to significant returns for investors. Additionally, the stock market is known for its ability to beat inflation over the long term.
The average return on the Australian share market over the past 20 years can vary depending on the time frame and the indices used to measure it, but it has generally been positive. According to the ASX 200, the benchmark index for the Australian stock market, the average annual return over the past 20 years has been around 5-7%. However, it’s important to note that past performance does not guarantee future results and that the stock market can be volatile.
Prices can fluctuate greatly in a short period of time, and there is always the risk of losing money. This risk can be mitigated through diversification, which involves spreading your investments across multiple stocks, industries, and sectors. Additionally, investing in the stock market requires a certain level of knowledge and understanding of the markets and individual companies.
Learn more about how much money you need to start investing here.
Earning interest on savings through bank products
On the other hand, bank savings products such as savings accounts and term deposits are considered to be low-risk investments. They offer a guaranteed return and are favourable for people who want to save for short-term goals, such as an emergency fund or a down payment on a house.
However, bank savings products typically offer low returns compared to the stock market. Savings accounts and money market accounts typically offer interest rates of less than 1%, while term deposits typically offer slightly higher rates, but still lower than the stock market.
In conclusion, investing in the stock market and bank savings products both have their own advantages and disadvantages. Investing in the stock market can be a great way to grow your money over time, but it also comes with the risk of losing money. Bank savings products are low-risk investments that offer guaranteed returns, but typically offer low returns. The best choice for an individual depends on their personal financial goals and risk tolerance.
The Sentiment – a source of news and opinion shaping public sentiment on ASX-listed companies.
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