• Money Market Accounts or Stocks?

  • by Nate Nordstrom

Stocks are an extremely popular form of investment around the world. Stocks are essentially companies’ equity that people can purchase. It is like buying a really small piece of a company. There are many reasons so many people find it popular to invest in stocks, typically stocks can generate the highest return for the common person. Many people are fascinated with stocks because they are the perfect example of capitalism, and people can get fixated on their investment thinking it can make them millions. (There is a good chance you will not make millions in the stock market.)

Now, on the other hand, many Americans that do not want to invest their money in stocks and or funds that hold stock, choose money market accounts. Money market accounts are a safer alternative from the risk brought on with stocks. There is limited risk with a limited return. Returns on Money Market Accounts (MMA’s) are not as attractive as stocks, but they are much more stable and safe, which leads many people to store their money in money market accounts.

So now that we have the basic understanding of both accounts let’s look at the numbers. For the average Money Market account, you will make roughly .11%-.26%  in interest a year, according to Bankrate.com, which took a wide range of Money Market accounts and averaged them out into a national average (.11%) and a site average (.26%). The interesting thing is, is if you go on Bankrate’s website, there are a wide variety of rates to choose. Many are even about one per cent. The reason the average is only .26% is due to the overwhelming amount of banks that offer a Money Market account for .1%. So, if you have $1,000.00 in a money market account, you could make anywhere between 10 dollars and a dollar in the first year depending on what works for you and the interest rate you select. To put that in perspective, over the last 80+ years the S&P 500 has generated a return of 9.7% yearly.* So let’s use 8% just in case 9.7% is too generous. 8% of $1,000.00 is going to come out to being $80.00. That is a hefty return compared to the .26% which it is, but there is risk associated which makes the money market more attractive.

A common rule in investing is always buy and hold until you retire. Which is accurate and sound advice, but one thing I do want to put out there is that there is risk involved no matter how long you hold an investment. Let’s use a hypothetical. Say Tom is a novice when it comes to investing his money. He elects to take his broker’s advice and invests in company X. Company X has a ton of potential because it is a small company that could soon hit it big. Tom doesn’t want to miss out on the action, so he invests. Over the next 10 years, Tom’s investment lost him 34%.  Now Tom is in a predicament, should he hang on to the company or should he take his losses. This type of thought brings scares to investors around the world. For that reason, many people choose money market accounts for safety. Those who are more risk-averse choose money market accounts because, after all, it is a safe and smart play. Say John opens up a Money Market account and puts $10,000.00 of his savings in this account. Over a ten-year period, he would make $260 on the initial $10,000 investment.

Overall, it depends on the investor and their preference, but there are significant benefits to both. The soundest way to go about this is to ask yourself what is important to you and what are your goals. Go from there and you will do great!

These are the basic distinctions between the two and depending on your goals either one could be a great option for a career of savings!

*MarketWatch.com. 29 December 2014. http://www.marketwatch.com/story/8-lessons-from-80-years-of-market-history-2014-11-19