The following is an article I wrote a little over a year ago. With the impact the investment markets have taken, I thought a repeat of this information may assist many of my readers in determining whether they are ‘savers’ or ‘investors’ and how to manage their assets.
The investment markets are once again shaking out the savers from the investors. Do you know which one you are? If you were to Google ‘saving’ and ‘investing’, the definitions you find may seem similar. Per Wikipedia, saving generally means putting money aside and investing or invest has the basic meaning of an asset held to have some recurring income or capital gains.
In practical terms, savers generally set money aside with the desire to receive a benefit either in the form of an increase in value of their holding or income from the holding. Savers generally do not accept a decline in value very well and often pull their ‘savings’ quickly when this occurs. Savers also often have relatively short time-frames. This does not imply a saver can not leave their money in an account for very long periods of time. In fact many do just that when they purchase certificates of deposit or leave funds in a savings account for years. But, they do react quickly when the expected result fails to occur.
Both of these, CDs and savings accounts, are options that provide income also rarely showing a loss in value, if ever. Individuals accustomed to these options are often shocked by the results in the investment markets, since the markets can and do regularly have losses.
Investors, on the other hand, make purchases that generally require long holding periods in order to reap the rewards. During these periods of time, their holdings may be worth less than the original purchase or producing less than the expected income, and yet they are not sold. In fact, many successful investors often make additional purchases when a holding drops in value. This action lowers their overall cost per share, making the ability to reach a profit in the future easier.
This is not to say any one investment should never be sold and always held until a profit is shown. A quick review of the markets can show any number of investments that should be sold. Twenty-twenty hindsight is always wonderful!
Many of the better investors also have a few of the characteristics of savers as well. If the money is for current use, then purchasing only long-term holdings does not make sense. But, neither does purchasing all short-term investments which does little to provide purchasing power protection for those needing their assets to last ten, twenty, forty years or more.
The question may arise as to whether invest at all since there are so many concerns about the market. For the year ended June 30, 2008, the S&P 500 index is down 14.86%. [As of May 26th, the S&P 500 is down 29.15% since July 1, 2008, and up 20.98% since the 2008 market low on November 20, 2008.] While investors just getting into the market this past year may be questioning their decision, the long-term investor should prevail. The performance for any one year does not imply the returns in the future will be the same. I evaluated the rolling 36 month returns for this index, from January 1970 to June of this year and the worst three year period was from April 2000 until March 2003 where the annual return was a negative 16.09%. The best three year period was from April 1995 until March 1998, resulting in an average annual return of 32.81%. During this time frame, there are 427 rolling three year periods (using whole months), of which only 53 showed a negative return.
Provided you have money set aside in conservative accounts to meet short term needs (1 to 3 years), then the remaining funds can be used to invest for the long-term. Many of the values we see today may prove to be excellent opportunities when looking back one, two, or three years from now. As long as you remember, not only in markets like we are experiencing today but also for advancing markets, the money you place at risk should be long-term investment funds and not funds needed in the near future. Opportunities in the market can usually be found when fear abounds.
For help with managing investments, contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other tools all available for free.