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Savings accounts offer such low interest rates that inflation could force your money to lose value over time. In response, many people choose to put their money into online investment accounts that can earn significantly higher returns.
Like all types of investments, though, online investment accounts come with risk. Before you decide to invest in an online investment account, you should know the potential risks and rewards.
Theoretically, You Could Lose All of Your Money
Historically, the stock market has helped people make money. Sudden downturns, such as the Great Depression in 1929 and the Great Recession in 2008, could cost you all of your money.
During the Great Recession, the Dow Jones Industrial Average and S&P 500 lost about half of their value. If you had $100,000 invested in those stock market indexes, then you could have lost $50,000 practically overnight.
Theoretically, you could lose even more money than that. A worldwide financial crash could eliminate all of your investments, leaving you with nothing. This is true regardless of whether you invest online or with a traditional brokerage house.
Investing vs. savings
When you put money in a standard savings account, the Federal Deposit Insurance Corporation guarantees that you will retain access to at least $250,000. If you contribute more than $250,000 to a single account, then you could lose money. Otherwise, the government will protect your savings.
Unfortunately, online investment accounts don’t have FDIC protection and may lose value. At best, you may benefit from insurance that protects you from fraud and theft. If your investments tumble, though, you have no recourse.
The downside to savings accounts is that inflation can rob your money of its value.
Algorithms vs. dedicated account managers
When you invest through a traditional brokerage, you get an account manager who will monitor your investments and give you advice. That person can help you avoid serious mistakes that lead to financial ruin.
Online investment accounts may not give you a dedicated account manager. Instead, many of them use software that analyzes markets and helps you decide where to invest your money.
Low Cost vs High Fees
Don’t forget to consider how much investing can cost you. Traditional brokerages charge you fees to manage your investments for you. For example, they will take a cut of every trade you make. Plus, some traditional investment houses employ full-service brokers, who charge a commission to manage your portfolio and make trades. That makes it more likely that they could make unneccessary trades — costing you more in the process.
Robo advisors and online investors, on the other hand, charge far less for their services — .01% instead of 1%, or a tenth of what the traditional firms charge. That means more of your returns stay in your pocket. For example, Ally Invest is known for its low fees.
Putting your money in savings, traditional firms or online investing sites each have their pros and cons. You should make sure to research which factors are most important to you before deciding where to put your money. And remember that when investing, a diversified portfolio can protect you from unmanageable losses.