For long-term investment horizons it’s important to understand the relationship between risk and return.
If you want to earn a higher return, it’s important to take more risk. The lowest risk is cash, particularly (cash) that is federally insured, such as your savings accounts or certificate of deposit.
Now a slight step up from there are bonds. As you move up the spectrum and take up a little bit more risk, you have the potential for higher returns — things like real estate and the stock market.
Yes, there’s the risk that prices can be volatile. There’s no guarantee what that price is going to be when you want to get that money out, but over long periods of time there’s a much greater likelihood that you will earn a higher return that not only preserves the value of that money, but actually helps you grow your buying power.
This year real estate edged out cash as America’s most preferred investment. Now, this is a step in the right direction because real estate is a much more appropriate long-term investment than cash.
The return to favor of real estate among Americans is more a reflection of where the housing market has been in the last couple of years. We’ve see a rebound in home prices, in particular, that I think have washed away a lot of the memories that people had of the housing crisis.
Americans’ feelings of financial security are still positive. They’ve noted improvement over a year ago, but we didn’t get the same strong readings that we got a month ago, and they have yet to embrace the stock market, despite the outsized returns we’ve seen since 2009.
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