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August 30, 2005


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If that had been an option the majority of consumers would have opted to spend the $1,000. Most likely the survey population has little savings and would prefer to have the money close at hand. Even I would place it in a high yield savings account until I had a chance to evaluate my options.

There's several good reasons someone would rather put $1,000 in a savings account rather than "The Market"

- Is this their first (only) $1,000? It's hard to put that first chunk in something as risky as "The Market". If your experience was like mine, that first $1,000 saved is truly $1,000 earned. You don't want that principal going anywhere.
- For the more experienced investor, you must realize how hard it is to put $1,000 to good use in "The Market". A single stock purchase is EXTREMELY risky. To buy a portfolio of stocks, you're paying too much in comissions to have any hope of a profit. And yes, there are broad market ETFs, but you're still paying a pretty high cost in terms of comissions. Don't forget that you have to figure in two trades for each investment; a buy and a sell order. At let's say $12 each, you're paying a 2.4% overhead on your investment. And you're still talking about a pretty narrow investment if you're only going to buy one ETF. Would you put your entire 401(k) into midcap growth?
So what are you left with? A "total market" fund, or maybe a market-neutral fund that's going to earn you 5% or so. Today's HYS accounts are about 3.5%, with ZERO risk. At best, you're getting a 1.5% premium for the additional risk; not very enticing.

I think people just remember 2000-2002 too well... I think if you'd ask the $1000 question in 1998, people would be jumping at the bit to put it in the stock market.

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