What Investment Option Fits Your Goals?

With bond yields higher, should I switch my stocks to bonds OR should I risk investing in the stock market?

This question has been on the hearts and minds of many families I have talked with over the past few weeks as rates continue to climb.

I know you are seeing and being bombarded with promotional offers for high-yield savings accounts and short-term certificates of deposits.

I want to share with you a case study.

FAMILY BACKGROUND

Couple (42 & 38-years old) – 3 kids – Minivan – Golden Doodle – Needing to Accumulate

The short-term 5% might feel really good in the short term.  After all, the S&P 500 was -18.32% in 2022 and we have an upcoming presidential election in 2024 which will surely be chaotic.

Recommendation:  Keep up to six months worth of expenses plus any money you need for upcoming major purchases in a high-yield savings account.  With any remaining funds, make sure to invest in a low-cost broadly diversified portfolio.  Yes, the ride will be bumpy.  You will lose money in approximately one out of four years (on average).  However, the historical long-term returns are worth the lumpiness. Consider the worst 30-year rolling returns for the S&P 500 were +7.8% per year.

Fun with Math:

If $100,000 grows at 5% for 30 years = $432,194

Let’s say $100,000 grows at 7.8% for 30 years = $951,837

Lastly, $100,000 grows at 10% for 30 years = $1,744,940

Conclusion:

What feels safe today (5% in a savings account), might be the most risky thing you can do to fund your financial independence.

I define risk as the probability that you run out of money during your lifetime or the probability that you cannot fund your most important dreams.

Volatility is the lumpiness of returns.  The differences between the highs and lows.  Just as I wouldn’t recommend a savings account for your long-term investing, I wouldn’t recommend owning stocks when you might need the money in the short term.

Risk and volatility are not the same.

When investing for the long-term, I am unwavering in the power of owning companies.

Cheers, 

Nic

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Disclosure:  All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.