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Millennials Are Making a Costly Investment Mistake

(Bloomberg) -- Millennials think cash is the best long-term investment. Unsurprisingly, they’re not seeing good returns.

Almost 1 in 3 millennials said cash instruments, such as savings accounts and certificates of deposit, are the best place to invest money they won’t need for the next 10 years. That compares with only 21 percent of older generations—most of whom prefer the stock market—according to research released on Wednesday.

The study was conducted for Bankerate.com by market-research firm GfK SE, which gathered data this month from 1,000 Americans age 18 and older. Millennials were defined as those between the ages of 18 and 37.

So are millennials trying to take advantage of rising interest rates to earn a competitive return? Not quite. The generation has the lowest propensity to be earning interest on their savings. More than 1 in 5 millennials said they’re earning less than 1 percent interest on their savings, while roughly 19 percent of millennials said they’re not earning any interest whatsoever, according to the study. Millennials were also found to be the demographic most likely to not know how much interest they’re earning on their savings. 

Millennials Are Making a Costly Investment Mistake

“The Federal Reserve inflation target is 2 percent, so earning less than the rate of inflation is losing buying power,” said Greg McBride, chief financial analyst at Bankrate.com.

Only 18 percent of all American adults are earning more than 1.5 percent on their savings, at a time when top-yielding national available savings and money-market accounts are yielding interest rates of more than 2 percent. Baby boomers are the generation most likely to earn more than 1.5 percent on their cash.

“Cash is entirely appropriate for your emergency fund,” McBride said. “But when saving for a decade or more, you can afford some short-term risk in exchange for the power of compounding the higher rates of return that come with investments like the stock market.”

Millennials Are Making a Costly Investment Mistake

Why are millennials so hesitant to invest in equities? It’s simple, according to McBride. “This generation was scared out of the stock market during the financial crisis,” he said.

Despite recent job gains and falling unemployment, millennials’ financial outlook is bleak. These young Americans are overburdened by student debt, have put little into savings and retirement plans and are struggling to find affordable homes.

“Millennials need to be invested in stocks, particularly for their retirement account,” McBride said. “Every thousand dollars you put away today could be $15,000 by the time you retire. But that doesn’t happen if you’re hunkering down in a safe-haven investment.”

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