Investor behavior has become the subject of quite a bit of study the past several years. There even is a name for it-Behavioral Finance. As academic people often do, a whole terminology has been invented to describe the psychology behind the investing decisions of the average investor. The field uses terms like herding, loss aversion and availability bias. I’m not sure the message is getting through. Revealed in J.P. Morgan’s most recent Guide to the Markets the amount of money held in cash accounts is estimated to be more than twelve trillion dollars. That is 70.2% of the money supply as a percentage of nominal GDP. The historical average is 53.9%.
So what does this have to do with the Rule of 72? The Rule of 72 is the formula that tells you how many years it will take to double your money based on the return you are getting. At money market rates, it takes more than 144 years! You can see the calculations yourself at http://moneychimp.com/features/rule72.htm . For many, I suppose, it doesn’t matter. Safety of principal is the most important. If you are investing in cash because you are trying to time the markets, you may be a little late.
All of this is a reason to consider working with a financial advisor because an advisor that takes the time find out what’s important to you and help you make better decisions will make a difference to you and your family over the long term.
There is no affiliation between J.P. Morgan and Moneychimp.com or their affiliates and INVEST.