Retail investors are pouring money into financial services, technology and energy stocks, but a new survey suggests the most popular investments could be missing out.
According to a recent survey of 10,000 retail investors by eToro, cash is the most commonly held asset by U.S. retail investors. Approximately 76% of U.S. retail investors hold cash assets, well above the 49% who hold domestic listed stocks and nearly double the 40% who hold domestic bonds.
Brett Kenwell, U.S. investment analyst at eToro, said in a statement that interest rates remaining high for so long could be encouraging more investors to “turn to cash assets in search of guaranteed, risk-free returns.” Higher interest rates create safe investment opportunities such as high-yield savings accounts, certificate of deposit (CD) accounts and Treasury bills, which offer yields of more than 5%. But depending on individual needs, investors with large amounts of cash may be missing out.
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Even the high interest rates currently available on various types of savings accounts and bond investments don’t come close to the 16%+ year-to-date gain (not including dividends) of the S&P 500 Index in 2024. Investors can earn dividends through low-cost exchange-traded funds (ETFs), and while this year has been particularly strong so far, historically the stock market has averaged about 10% annual return.
Pandemic-era uncertainty and fears of a recession may have made many hesitant to invest in the stock market in recent days, but so far those fears have not materialized, and there are signs that there is still room for optimism.
So while some people have been playing it safe and making decent returns on their cash these days (by using tools like CDs and high-yield savings accounts rather than just keeping it in a checking account), the stock market could have made much bigger returns. Plus, you don’t need to be an active day trader or smart stock picker to be successful. ETFs make it easy to make big returns, and they don’t require a lot of extra capital to start investing.
How much of your investment should you hold in cash?
Storing your savings and investments in cash is smart for several reasons, but it should be done carefully.
If you’re trying to calculate how much cash you need, you should consider your more immediate needs as well as your emergency fund. Emergency funds are typically kept in cash for easy access, such as in a high-yield savings account that allows you to withdraw any amount you want at any time without penalty if an emergency occurs. Experts typically recommend keeping three to six months’ worth of basic living expenses in an emergency fund.
Cash is also important if you anticipate expenses within the next 12 months. For example, say you’re planning on taking an extended vacation in eight months. In that case, you’ll want to keep the money somewhere you can quickly access, similar to an emergency fund. In this example, you could invest in three-month Treasury bills or CDs to ensure you get a good return before you need it for the trip.
If you instead invest that money in the stock market and need to use it within a year, you’ll be subject to higher capital gains taxes. Because the stock market is more volatile than cash investments, you also risk having to sell your position at a lower price if you need the cash to pay for something.
Start investing with ETFs
As mentioned above, ETFs are an easy way to capture stock market returns.
ETFs are “a collection of stocks and bonds bundled together into one fund,” Kiplinger contributing writer Will Ashworth explains in an article on how to invest in ETFs: “Unlike mutual funds, ETFs are bought and sold on a stock exchange and can be traded any time the exchange is open, making it possible to get started with ETF investing even if you only have $50 to invest.”
ETFs generally have lower expense ratios than mutual funds. For these reasons, ETFs can be a great choice for beginner investors just getting started in investing or for investors looking to move out of cash and into stocks.
The most popular ETFs include: S&P 500 ETFsuper popular SPDR S&P 500 ETF Trust (SPY) – The largest exchange traded fund on the market. This ETF tracks the Standard & Poor’s 500 index, which is made up of 500 large companies, primarily based in the US, that trade on major US exchanges. By owning this ETF, you essentially own the performance of the S&P 500, so if the S&P 500 rises, so will your investment.
SPY is currently trading at around $550, but you don’t necessarily need that much to get started, as there are plenty of brokerages selling commission-free fractional shares. There are also plenty of ETFs on the market, many with much lower costs. Check out Kiplinger’s “Best ETFs to Buy” for more options.
If you’re looking for the best returns, especially over the long term, stocks have historically been your portfolio of choice. But remember, there are times when you shouldn’t have too much invested, such as when you need the money in the short term for a larger goal or retirement and can’t take the risk of short-term volatility.
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