There are plenty of Australians who still think holding cash is their safest option.
Sure, it's certainly less volatile than putting it to work in the stock market.
It's easier than throwing it in bonds.
And the returns are as good as guaranteed, so you'll never have to worry about how much you'll have in 12 months' time.
But is it really all that safe?
Consider this…
The money you're holding in a bank account or term deposit today is likely accruing somewhere between 2% and 3% in interest per annum.
Commonwealth Bank of Australia (ASX: CBA), for instance, is offering 2.45% per annum on a 12-month term deposit for an amount greater than $50,000 (and less than $2 million).
Citibank is even offering 3.2% for a six-month term which it advertises as being "for big dreams".
Annualised, that's a return of roughly 3.23%, meaning you could turn a $50,000 deposit into $51,625.
At first, that might seem like the easiest $1,625 you ever made, but now consider this…
Right now, inflation is growing at 2.2% per annum, so while you've made 3.23%, or $1,625 on paper, really you're looking at a 1.03% return, or $515 in real money.
Then, you've got to consider the tax impact on that $1,625 as well.
Let's say you have to pay taxes of roughly 20% on that (a conservative tax rate for some adult individuals), and that's another $325 gone.
So, after taxes and inflation are taken into account on that reasonably 'high interest' earning term-deposit, you're left with roughly $190 in real dollars gained.
Obviously, these calculations are rough and shouldn't be relied upon to make proper financial decisions but the implications are clear: cash isn't as 'safe' as you first thought.
Sure, there mightn't be the same level of risk of loss as investing in the sharemarket, but $190 over the course of a year is hardly life changing, either.
By comparison, research shown by Dr Shane Oliver of AMP Limited in early 2014 highlighted that the Australian sharemarket has grown at an average annual rate of 12% per annum since 1900.
Indeed, there will always be a risk of loss on the stock market, but investors are well rewarded for accepting that risk – especially when they're in it for the long run, willing to remain patient through the good times and the bad.
Aside from the higher returns, there's another very compelling reason to invest on the stock market:
Investors can defer paying taxes for as long as they hold their shares.
If they hold the shares for more than 12 months, the capital gains liability is halved!
For just one moment, let's assume the S&P/ASX 200 (ASX: XJO) (the benchmark index that tracks Australia's 200 biggest publicly-traded companies) grows at a more conservative 10% over the next 12 months.
We'll also assume that an investor purchases $50,000 worth of shares and maintains a diversified portfolio, and they also hold their shares for the duration of the period.
Rather than a measly $190 gain, that initial $50,000 will now be worth $55,000, or $54,000 in real-money terms when inflation is accounted for.
Again, these are rough calculations but a $4,000 real money gain is certainly more attractive than the alternative.
Here at The Motley Fool, we're big believers of making regular contributions to our portfolios, and holding onto high-quality companies for the long-haul.
That's where the big money has been made historically, and we believe that trend will hold true well into the future.
With the local sharemarket currently hovering near a seven-month low, now is an excellent time to start buying!
