More is better, right? Just ask Clark Griswald in the popular holiday movie, "National Lampoon's Christmas Vacation." Has there ever been a home with more Christmas lights than the Griswald's? The "more is better" attitude tends to find its way in to everything we do, and the way we manage our money isn't immune. (For more, see Traders: Work Less, Make More Money.)
If you believe the experts, you have to have a retirement account full of complicated investments, another account with stocks and bonds, and a savings account for those unforeseen emergencies. Before you rush to your broker, let's see if the statistics hold up. Are you really making that much more money following the more (action) is better philosophy?
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Mattress vs. Bank
Believe it or not, there are still people, a lot in fact, who keep their money in the form of cash, hidden at home. Some believe that traditional banks are dangerous if they were to go out of business. Aside from the fact that the risk of fire or theft at home is far more likely than losing your money at a bank, there are two main reasons that your money is better off in a bank. (For more, see Are Your Bank Deposits Insured?)
First, consider the interest. Although that December 2010 1% interest rate doesn't seem like much, in the future, it's likely to increase. And even if it didn't, it would still be a better rate than your mattress is giving you. Second, the interest is compounding. Compounding is simply the interest you make on the additional money you made due to interest. The cycle continues over and over and this results in a lot of money over time.
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Mattress vs. Apple
What would have happened if you invested your $5,000 in Apple (Nasdaq:AAPL) back in 1985? Today, your $5,000 would be over $500,000! Of course, very few people would have had the investing prowess to hang in there with a stock for 25 years, but even if you looked at 2010 alone, investing in Apple is a much better rate of return than your mattress.
It's also important to remember that if it were easy to select a winning stock like Apple, everybody would. It's far more likely that you will own a moderate performer. Still, a moderate performer would return an average of 9% (appreciation and dividends) over the past 25 years.
Mattress vs. an Index
When we look at an index, we're talking about a collection of stocks. The most well-known index is the probably the Dow Jones Industrial Average. This is a collection of 30 stocks that is used to represent the performance of the stock market as a whole. In December of 2000, the Dow Jones Industrial Average was at 10,635. In December of 2010, it was at 11,410. Over the course of a decade, this is a gain of 7.29% or less than 1% per year.
In this case, we could say that even the slightest amount of gain is better than the no gain provided by your mattress, but maybe not. In these 10 years, the Dow Jones dropped to as low as 6,600 representing a nearly 40% loss. Once again, unless you were a skilled investor with quite a large tolerance for risk, at some point you probably would have pulled your money out of the stock market and taken some amount of loss. Since the financial meltdown of 2008, many people are still avoiding the investment market in favor of abysmal gains in a savings account. They would rather make less and know that their money is safe. (Learn more in Why The Dow Matters.)
Mattress vs. Gold
Maybe you have never been the stock market or savings account type. Instead, you prefer to have something to show for your riches so you purchase gold, perhaps in the form of a gold bar or some nice looking jewelry. You paid $5,000 for your gold and you purchased it five years ago instead of keeping your money under your mattress.
You know the answer to this one: you're rich! Your $5,000 purchased 10.22 ounces of gold 5 years ago. Today, it's worth $14,480. (For more, check out 8 Reasons To Own Gold.)
The Bottom Line
The big Wall Street banks and the 2008 financial meltdown are enough to convince most people that their mattress is safer. However, when money is left in an investment vehicle for a long period of time, the patient investor will make money. In this case, the mattress is a bad idea.
For the latest financial news, see Water Cooler Finance: FBI Insider-Trading Bust.