It was bound to happen. After months of speculation, the Federal Reserve lowered its benchmark interest rate by half a percentage point on Sept. 18. This move was long anticipated, and it’s apt to impact consumers.
On the plus side, lower rates on the Fed’s part can lead to less expensive borrowing. Following this cut, everything from credit card balances to mortgages to home equity loans could get a notch cheaper.
On the other hand, the Fed’s rate cut will drive savings account and CD rates downward. So while borrowers stand to benefit, savers lose out.
If you have $1,000 at your disposal, it’s important to put it to work strategically now that the Fed is cutting interest rates. And here’s one potentially lucrative option worth looking at.
Put your money to work in the stock market
You could put $1,000 into a 12-month CD paying 4.50% APY, which is a rate you’re likely to find today. That puts $45 in your pocket after a year. But an even better bet is to invest that money in the stock market.
Over the past 50 years, the stock market has rewarded investors with an average annual 10% return. And that 10% accounts for years when the market was strong as well as years of declines.
If you put $1,000 into a stock portfolio, you may not earn a 10% return your first year. Unlike CDs, stocks don’t guarantee you any specific return.
But if you put that $1,000 into a stock portfolio and let that money grow over 10 years or more, there’s a good chance you’ll snag a 10% return on average as well. And the longer you let your money grow, the higher a total return you stand to walk away with.
In fact, let’s say you put your $1,000 into the stock market this month and leave it alone for 30 years. If your portfolio returns 10% a year, you’re looking at about $17,450. And if you divide $17,450 by 30, you’re gaining an average of about $582 per year. That’s far better than the $45 you might get out of a CD in the coming year.
Make sure you’re comfortable with a long-term investment
Investing in stocks is a great way to grow your wealth over the long term. But before you put any money into stocks, make sure you’re on board with leaving it where it is for 10 years or longer.
Since the stock market can be volatile, you need time to ride out the downturns. If you think you might want access to your $1,000 within a couple of years, then a CD is a better bet than a stock portfolio, even now that rates are lower. That’s because your principal CD deposit is protected as long as your bank is FDIC insured and your balance is not more than $250,000.
But otherwise, you stand to gain a lot by sticking with stocks for the long haul. If you’re willing to sit tight, you might be amazed by your results.
