Imagine you’re about to embark on high seas adventure.
You’ve got your map laid out and it’s time to chart your course.
Now... to make a decision -- do you stay close to the safety of shore?
Or do you set out for deeper waters with the hope of making better time?
When it comes to investing, the balance between safety and strong returns can feel a lot like
navigating choppy ocean waters.
Right now the stock market is at an all-time-high while most savings accounts are paying less
than inflation.
The destination is clear: to have our money make more money.
But what’s the “best” path to get there?
What kinds of returns should you expect from each option, and how risky are they?
If you don’t know, it’s time to grab your atlas and sextant and start charting a course
to your financial goals!
The ocean of investing is huge.
While we’d love to discuss everything from cryptocurrency to real estate, today we’re
exploring investments that are both popular and easily accessible to the average deck-swab.
Let’s start by looking at the safest, calmest course for your investment journey.
Exhibit A: the savings account.
Safe? Check.
Liquid? Check.
But with the average U.S. savings account only paying .09% interest, it can start to
feel like you left the anchor down.
Some banks offer high-yield savings accounts paying 1-2% or more, but with inflation hovering
around 1.6% it’ll feel like sailing into the wind.
So while this might be a great place to park your rainy-day money, it’s not ideal for
long-term goals.
For a goal a few years out, you could look at a Certificate of Deposit or Series I Savings
Bond.
Savings Bonds currently pay a guaranteed 1.9% interest, and can be bought directly from
the government at treasurydirect.org.
You can start with as little as $25 and save up to $10,000 per year.
But be ye warned that you will be penalized if you withdraw your money before one year
has passed.
Certificates of Deposit or CDs, are issued by a bank or credit union and can pay even
more, between 1 - 3%.
The catch is that there’s a minimum deposit of at least a few thousand dollars and you
can’t touch your money for a fixed period of time between 1 and 5 years.
But as long as the bank or government sticks around, you can expect to get your money back
with the promised interest.
If you’re saving up for a big purchase like the down payment on a house in a few years,
savings bonds or a CD might fit the bill.
Avast me hearties!
It’s time to head out into the open waters of public markets.
That means publicly traded investments that don’t come with guaranteed returns or outcomes.
Make sure you’ve got some life rafts on board!
Unlike savings bonds, Treasury, Municipal and Corporate bond funds are traded on public
exchanges, and since supply and demand affect their value, they have no guaranteed return.
One popular bond- fund with a little of everything has averaged 3.68% annual growth for the last
10 years.
And like a stock fund, returns fluctuate and can even be occasionally negative when bond
prices fall.
Think of bond funds as a middle ground between guaranteed investments and risky ones like
stocks.
Often, they’re available to you right alongside stock funds through a 401k at work or inside
an IRA.
These can be especially useful for people who are older and can’t risk their whole
nest-egg to a stock-market crash.
Or they might be a great fit for if you’re saving for something in a 5-10 year window.
Finally, let’s look way out in deep waters: the stock market.
With 16 major stock exchanges in the world, dozens of industries, and thousands of companies
traded across the globe, it can all be a little overwhelming.
But a highly popular north-star for stock-investing is the S&P 500 Composite Index, which tracks
how the largest 500 corporations in America are doing.
Over the last 90 years, the S&P has averaged a growth of 9.8% per year.
If you wanted your returns to track the S&P, you could just invest in an S&P 500 Index
fund.
Side note: this is why we here at Two Cents use a 7 or 8% growth rate whenever we run
the numbers for long-term investing goals.
We assume a little less than that 90 year average.
With that growth rate, why isn’t everyone hopping on board?
Well, the S&P almost never has a single-year return between 5 and 10%.
It’s only happened twice since 1928!
If you hopped aboard in January 2018 you would’ve lost 6.24% by the end of the year.
One year before you’d be up 19.42%!
2011 it had a 0% return.
And in 2008 it infamously fell 38.49%!
It’s enough to make anyone seasick!
So short-term investing with stocks can leave you high and dry and is not recommended by
most experts.
But if you’re able to weather the storms and stay calm during dives and dips over the
next 10 years or more, they may be just the ticket.
So what’s the best investment?
It depends.
Earning 1-4% on money that needs a safe and steady harbor is perfectly appropriate.
Or if you’re willing to take more risk and invest for the long term, 5-10% is pretty
reasonable for ten years or more.
While it’s possible to do even better than this, odds are that some extra risks or effort
will be expected.
And remember to diversify so no single investment can sink your whole fleet.
Align your investments with the right goal, hoist your sails and you’ll stay afloat,
even when seas get stormy.
And that’s our Two Cents!
Thanks to our patrons for keeping Two Cents financially healthy.
Click the link in the description if you'd like to support us on Patreon.
Any of ye ol’ salts out there have some extra sailin’ advice for landlubbers?
Leave them in the comments section below.
Ar.