When times get tough, you want to
batten down the hatches
and eliminate as much uncertainty as you can. Unfortunately, with
the moves that millions of Americans are making with their money,
the only certain thing is that they're going to end up big
Where the money is
According to the research firm Market Rates Insight, banks have
never seen more money flood into federally insured checking,
savings, money market, and CD accounts. The firm counted an
all-time high of $9.8 trillion held in those accounts, up by about
3.5% in the first half of 2011.
Certainly, there's no shortage of reasons why people are moving
their money into the most secure locations they can find. The
plunge in the stock market
over the past month has reminded investors how risky stocks can be
and has reawakened fears of a repeat of the 2008 financial crisis.
The debt-ceiling debate in July has reduced confidence that the
federal government can solve the economic problems that the country
faces. Moreover, with economic problems
and even red-hot emerging markets starting to face difficult
conditions like high price inflation, investors are running out of
places to hide.
But as comforting as having money in the bank can be, it's not a
viable investing strategy for anyone -- except perhaps those who
are rich enough to live off their money regardless of whether it
earns income or not. For most of us, the problem lies in the fact
that we need our money to grow to keep up with the two biggest
negatives that investors have to deal with: inflation and
The chokehold of the invisible hand
Government statistics suggest that inflation isn't a huge problem.
But lately, we've all seen the impact of inflation creep into our
lives. It has hit
(Nasdaq: SBUX) ,
) , and
) among the many companies that have raised prices to offset higher
costs. It has put apparel retailers
) in the uncomfortable position of either having to eat higher
costs by reducing profit margins or try to hike prices in a lousy
economy. And it's hitting those who need health care, as expensive
medical devices and drugs threaten to disrupt the entire Medicare
system and put health insurance companies -- and the consumers who
pay for insurance policies -- at risk.
Even if your personal inflation rate matches the government's
Consumer Price Index, a historical rate of about 3% means that if
you're getting less than 1% on your money in a bank account -- as
nearly everyone is right now -- then your nest egg is losing
purchasing power day in and day out.
Moreover, taxes can be a big drag on your portfolio. Of course,
if you are getting next to no interest on your bank savings, then
your taxes on that negligible income won't be that high. But taxes
serve as a reminder that you have to earn even more just to keep
from seeing your after-tax purchasing power lose ground.
The big winners from the savings trend
If anything, the trend toward using FDIC-insured bank accounts is a
net positive to deposit-heavy banks.
) reported $866 billion in deposits for its most recent quarter,
(WFC) had $853 billion.
Bank of America
actually topped the $1 trillion mark. All of those institutions
benefit greatly from being able to access so much money from
depositors without having to pay high interest rates.
Don't get me wrong: I'm not saying that you should go put all
the money you have in savings and buy bank stocks with it. But
kind of smarter investment than accepting a fraction of a percent
in interest is a no-brainer -- no matter how much uncertainty there
may be right now.
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