Is Saving More Important Than Investing?
|October 19, 2011||Posted by Roshawn Watson under Uncategorized|
By: Roshawn Watson
A recent US News article suggests that a) investing is sold as a panaceas to all of our financial ailments and b) that this undermines more important efforts, namely “educating investors on establishing goals and making tough budgeting decisions.” Although the issue is complex, the article made me ask the following question: could we have it entirely backwards – should our efforts center on savings rather than investing?
Saving Is A Lost Art
I want it, and I want it now!
Delayed gratification: two words that few enjoy. In fact, many of us can’t imagine a life without credit. Before you dismiss that notion, consider how many people you know who purchase their cars, pay for tuition, pay large medical bills, and even purchase their homes without ANY debt. All too often, we hear that credit is just how we purchase things while we completely discount the fact that there was life before credit became so abundant.
Let me be clear: Debt is among the most aggressively marketed products in the world.
Thus, it is unsurprising that as a society we tend to a) worship at the altar of the great FICO score and b) have completely disavowed all knowledge of saving. After all, anything less than immediate is far too slow in our culture, or is it? Anyone who offers you debt is NOT giving you a true gift. Along with the debt comes bondage, a nasty little fact that we readily discount all too easily. Moreover, Henry Ford once commented that debt is the lazy man’s method to purchase items. In other words, there can be gain in the struggle, and I’m not just referring to the lessons learned. The process of working through something difficult can actually be more enjoyable than getting what’s you are aiming towards. There’s power in anticipation and focusing all of your available resources on a singular goal: whether it be a car, a flat-screen, a home, or an investment.
Have you deprived yourself of the benefits of the struggle?
There Is More To Investing Than Rate Of Return
One of the reasons learning to plan purchases and budgeting is so important is because the three basic variables that greatly impact the total investment return are:
- Amount Invested – Your contributions
- Time Horizon – How long you hold the investment
- Rate of Return – The percentage by which your money grows
Although these variables are intuitive, I mention them to lay the following foundation: while the financial services industry spends an inordinate amount of time maximizing the return, it may be more meaningful to embrace a more complete approach. Consistent investing over the long term in diversified and solid investment vehicles may ultimately do the masses better than getting an extra half percent. Note, this isn’t to say that a half of percent is trivial, but to emphasize that rate of return is only one part of the puzzle. If you invest in paper assets (i.e., stocks, bonds, ETFs, mutual funds, etc.) over the long term, most of your portfolio will theoretically be growth anyway, provided that you have allocated appropriately for portfolio growth. Since only a fraction of your total portfolio is what you actually put in, adequate time and putting enough starting capital are essential for your portfolio to become sizable. Stated differently, a 30% return on $10 over 5 years is not much.
Most of us Don’t Systematically Invest
That last example emphasizes why financial literacy is so important, which brings me to some very troubling news. However, first let me state the positive. While earlier last decade the savings rate was negative, it has rebounded since 2008-2009 and has been hovering around 5-6% ever since. Retirement assets are up too (10% compared to last year according to CNN Money) and just shy of the all time high in 2007. Anyone making investing a priority should be applauded.
That said, the sad truth is most Americans do not systematically invest, and even when we do invest, many of us are pretty crappy!
Research from a leading human resources firm tracked the financial acumen of the masses. The studies indicated that most Americans don’t know what they are doing (USA Today). Moreover, “the general public tends to play up their investing success(es) while ignoring the lessons of their losses…” According to LaSalle St. Securities, “nine times out of 10, investors’ long-term performance lags behind the market by a wide margin.” (People wonder why I index!)
Some basic considerations for investors are:
- What’s your investment strategy?
- What’s your risk tolerance?
- What’s your exit strategy?
- Are you especially adept to a specific type of investing?
- What’s your time horizon?
- What are the tax implications of different types of investments?
- How will you diversify?
- How often will you rebalance?
- What kind of lifestyle do you want to live when you retire?
- Feel free to add others below in comments
My opinion is that both saving and investing are important. Saving is for the short-term: when one needs his or her money within 5 years or less. Investing is for the long-term. One’s investing efforts are aided by the discipline of saving and budgeting consistently. The original article’s comment about financial services’ overemphasis on the rate of return, almost to the exclusion of anything else, seems valid. Clearly, both savings and investing are generally critical elements to healthy financial plans.
So what do you think: which is more important saving or investing?
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Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.