By: Robert Tramont
Have you ever been asked by your advisor if you would prefer to save your money or invest your money? There is a high probability you’ve never been asked that exact question. Most advisors may have told you to have a savings and invest the rest of your money. They may say things like “you need to have 3 – 6 months of living expenses in a savings account”. Although this is good advice (as far as keeping 3 -6 months of living expenses liquid) it leads everyone to believe and assume that a savings account or your “savings” is only for immediate availability of funds. This also gives the impression to those who follow this advice that your savings need to be in low interest bearing accounts because “those are the only types of accounts you can save money in and keep it liquid”. This is a very dangerous assumption. If there is one take away from this article it is this: saving your money or investing your money rarely is defined by the interest rate.
People assume that you have to have your savings in a low interest account and therefore equate savings with low interest. Almost all advisors fall into the aforementioned thought process and advise their clients to have this unsafe strategy as a base. Why is it unsafe? First, we must understand that 3 – 6 months of a physician’s living expenses are statistically higher than 87% of Americans. With that in mind, people who keep a significant amount of their money in a poorly performing account (for this article we will state 1–2% is poor performing) now need a higher return in their other accounts to give them an acceptable overall return in their portfolio. This now creates a sense of urgency to have their “investments” put into riskier assets in order to make up for low interest in a bank savings, Money Market or Certificate of Deposit. If your advisor is not talking about your overall return in your collective portfolio, it may be time to start researching others. Second, inflation will reduce the “savings” you have in a bank account significantly by eroding your purchasing power. Don’t plan on bank savings interest rates increasing dramatically anytime soon. Third, there is a temptation by most people to move some of their “savings” into a riskier “investment” when the stock markets are doing well that month or quarter. The temptation is strong for advisors to comply with this since many benefit financially from the movement of the assets from a bank savings or CD into a commission based or fee based plan.
Can you save money and make stock market equivalent returns without the risks of a market drop? Can you have “safe” money, “liquid” money and outstrip inflation with returns in the same account? Yes… simply stated. “Savings” are guaranteed to not lose the principal (original amount) put in, they are safe from market downturns, considerably liquid, and give returns from 0.5% to as high as 8% or even higher. That was not a typo… it was 8%, not 0.8%…and not in a hyper-inflationary environment. “Investments” are usually in an equity (stock, mutual fund or Real Estate Investment Trust) or a debt instrument (bond). They are all subject to lose some or all of the principal you put in. There are no guarantees. Their returns fluctuate with “the market”, whether it’s the stock market, bond market, real estate market or a combination of all three. Commodities were not previously mentioned and some investors and advisors will swear that Gold is the best now, etc… though there is risk still involved, potentially more, with Commodities.
The current assumption of investors and most advisors is that investments are where the majority of your money should be in order to get higher returns than expected from savings. This model is based on a lack of education and a biased approach. By biased, I am referring to the belief that stocks, bonds, or mutual funds are the only place to receive “good” or acceptable returns. This is risking most of your money to the fluctuations of those markets. If your choice was to have money in savings and investments with your savings making the same or within 1% return of your investments, where would you want to have most of your money? What if your savings were also tax free or tax preferred (lower taxation than most accounts)? What if your savings were protected from lawsuits? All of these can be part of your savings. The question is; is this really how you feel your money should be working for you? Most have answered unequivocally, yes. The next question to your advisor may be “Is my portfolio set up like this?”.