Saving and investing usually have different goals under today's environment. Saving is good for short-term goals such as a holiday and investing is more focused on long-term goals with substantial expenditure involved such as college education or retirement.
What is the difference between saving and investing in technical terms? Saving money is the process of simply storing your cash in a safe place. The best example of that is your bank savings account. Investing is placing your money into investment products or assets with the intent to earn you a return.
Yes, parking your savings into your savings account is safer than investing but did you know that in today’s environment you are still losing money?
How are you losing money by keeping it on your account
This is very simple. In finance, there is something we call “Time Value of Money” and we have a special formula that we apply to estimate how much a dollar will be worth in the future. $1 today is worth more than $1 in the future.
Your dollar depreciates every year if it is not invested to earn a return and in some countries with negative interest rates, your money decreases in value at an even higher rate.
Why does it depreciate? The answer is - because of inflation. Inflation increases the prices of goods and services you can buy with a dollar in the future as opposed to a dollar today.
To understand the value of your dollar in 15 years’ time, we calculate what that dollar would be worth today. With the average inflation rate of 3.5%, your one dollar is worth 59 cents.
This means that in 15 years, if not invested, it will lose almost half its value.
What if you keep your savings in your bank
The highest bank rate you can find today is around 2.5%. In 15 years, your dollar will grow to $1.44 at 2.5% interest rate.
HOWEVER… With the inflation rate at 3.5%, this means your real interest rate is -1% (negative one percent), resulting in the actual worth of your $1 being $0,86.
Low risk investments
Before we go into talking about various low-risk investments available, we would like to point out that risk-free does not exist. Even keeping money in your bank has a risk.
We have seen in the 2008 financial crisis how banks closed all over the world and in other cases people could not take their money out of their accounts. The time-value of money illustration above shows you that you lose over 49% of the value on your savings by simply keeping the money on your account and a loss of 14% even if you are earning 2.5% interest per year in your savings account.
Now, lets look at various low-risk investment options.
10 year US treasury = below 2.05%
10 year Germany Bund = -0.36%
10 year UK Gilt = 0.71%
10 year Australia Bond = 1.32%
10 year Japan Bond = -15%
10 year France = -0.06%
10 year Switzerland = - 0.66%
10 year Portugal = 0.50%
CDs or Certificate of Deposit
This is also a type of a loan. The bank issues a promissory note to pay you at a certain time the money you lent the plus interest rate.
These are generally very short term but involve high costs and low return.
For example, Barclays offers 2.65% over 1 year term.
You have other money market instruments, that offer low risk, short term and are easily available through your bank. Simply call your bank manager and ask what money market products you have available. Just make sure to check the costs involved with purchasing and holding those instruments.
Warren Buffet’s Alternative Optimal Investment Strategy Recommendation
Placing money into investments that earn lower return than the inflation rate, in other words you are minimising your losses as opposed to growing your capital.
Lets look at a more traditional investment - the S&P 500 Index. Why do we choose S&P 500 Index? This is because it is the most diversified stock portfolio that is managed on a regular basis by a panel of experts. The S&P 500 Index has very low costs, earns good returns and it is highly recommended by Warren Buffet. Click here to read about how the S&P 500 Index works.
The $1 in 15 years would grow to $2,00 with an average S&P 500 Index return of 8,5% and inflation of 3,5%. The investment would grow your $1 at a real interest rate of 5%.
Is investing in the stock market as risky as people tend to think? The answer is no. Have a look and see what you think.
During the 2008 market crisis, the S&P 500 Index dropped 38.49%. But in 2009 it went up by 23.45% and in 2010 by 12.78%, erasing all the losses.
Here is the rundown of annual returns over the last 20 years:
2001: - 13.04%
2002: - 23.37%
2019: 18.71% to date
Annual year of return over:
1 year: 10.15%
5 years: 10.58%
10 years: 14.56%
Since 1957: 7.96%
We wrote an article in 2018 (click here to read it) that the S&P 500 Index will most likely reach $3,000 threshold. On the 11thof July 2019, it did.
We believe once it reached the $3,000, it will be a new threshold or price floor. This is based on technical analysis – click here to read about how price floors, also known as the support line, work. As most trading is done by computerised systems and traders who analyse price movements from all angles, this theory may hold up.
There are investment products today such as the S&P 500 Index Regular Savings Plan that allows you to invest into the Index on a regular basis, without having to purchase $3,000 per share. This allows people to put a minimum of $500 every month into a highly diversified portfolio which earns on average 8.5% per year. The plan also provides capital protection on your savings, which means that your savings are protected from decreasing in value.
It is provided by an insurance policy provider and financial company that has established its presence in the international investment world by offering a modernized approach to investing. Over the years, they have become a leader in the industry by continuing their focus on flexible solutions, enhanced opportunities, advanced technologies and customer support.
Interested to find out more about the S&P 500 Index Regular Savings Plan? Contact us for the factsheet.
Alternative Fixed Income Product
Alternatively, if you are looking for a short-term plan that pays you a fixed interest on your savings (similar to treasuries, bonds, banks) and if you are a US citizen who finds it difficult to invest due to stringent regulations for Americans – we can recommend 8.5% Firewood Trade Plan.
This is a 12-month plan that invests directly into a firewood commodity trade. Click here to read more about the company and its operations. The plan provides 8.5% per year is paid out directly to your bank account every quarter and allows you to redeem your savings in just 12 months or leave them in for another term.
Contact us for more information on the 12-months fixed income plan.
In our next article, we will look at different options people have in various countries. Subscribe here to receive the articles and stay informed about retirement planning news and information.
Who is Crewinvest?
Crewinvest are introducing brokers who recommend the best investment, savings and retirement products available. We have no access to your funds and do not charge any management fees. All contracts and funds are directly signed and sent to the providing companies.