Bankrate Survey: Americans Optimistic Despite Serious Investment Mistakes

Friday, 02 Aug 2013 08:53 AM

By Michelle Smith

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Americans are optimistic about the direction of their finances, but, in reality, many are making terrible investment choices, a new Bankrate survey reveals.

Americans' positive feelings about their financial security hit an all-time high in June, according to Bankrate's Financial Security Index. Although it dipped slightly in July, it was still the fifth month that Americans said they were bullish on their finances.

The one area where sentiment weakened was with regard to participants' level of savings. Yet, many prefer slow-growth investment options.

Editor’s Note:
Weird Trick Adds $1,000 to Your Social Security Checks

Participants were asked about the best way to invest money that's not needed for 10 years. The top answer, chosen by about a quarter of the respondents, was cash.

"That scares me," Jerry Webman, chief economist for Oppenheimer Funds, told Bankrate.

"Cash investments right now do not keep pace with the cost of living. If 26 percent of respondents think the best thing they can have their money in is cash, savings accounts and CDs, those people have made a decision to see their purchasing power decline every single day," he added.

Given the current state of interest rates, a $10,000 investment in a money market fund would offer a return of only $110 over a decade, or $11 a year, CNNMoney says a Bankrate calculation shows.

By comparison, the Standard & Poor's 500 has historically offered annual returns of 9 percent, CNNMoney noted.

But stocks didn't even rank second among the survey participants' long-term investment preferences. Instead they chose real estate.

That's another problematic choice, according to Greg McBride, Bankrate's senior analyst.
Real estate is "not only very cash-intensive, but also often illiquid," he told CNNMoney.

And despite the steep declines seen in the precious metals market this year, the survey participants also preferred those hard assets to stocks.

"Gold is a good investment if things go really bad, either politically or if there's runaway inflation," Webman told Bankrate. "People are nervous, fearful, don't have a lot of faith in the financial markets and maybe don't have a lot of faith in the economy, even though they find their own situation is gradually getting better," he said.

But Bankrate warns that fear can have high opportunity costs. Americans have inadequate emergency funds and are increasingly facing shortfalls in retirement savings and funds for their children's education.

McBride admits investing in the stock market can mean enduring short-term volatility, but he says it's still the best place for long-term gains, which Americans need.

"What people are perceiving as a safe investment strategy is actually quite risky for a time horizon of 10 years or more," McBride told CNNMoney.

Americans' conservative mindset could create big problems for individuals and the country as a whole, he warned.

Editor’s Note: Weird Trick Adds $1,000 to Your Social Security Checks

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