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So I often get asked this question by friends and family, “I have a little extra money in the bank but I want to hopefully earn some more than the pitiful amount of interest I get from the bank?”
Interestingly my nephew asked me this exact question just a few days ago, so I am creating this first video for him and thought I would also try my best to share some of my experience with a wider audience than just my friends and family.
Thereby hopefully help improve financial education for anyone seeking it. As the world certainly needs it!
Sadly, this question is not a straightforward question to answer, one answer for everyone, but I hope to answer it as best as I can today!
For example’s sake, let’s assume you have $10,000 in your savings account.
Well done you!
Now…worth adding just for fun, they say in financial planning circles that it is a good idea to keep 6 months of living expenses in cash/liquid (easily accessible) accounts. Yeah sure! How many real everyday people have that much spare cash? Great if you can aim for this, even in a mortgage offsetting account or something, hence why I shared it, but I also realize many people today just cannot get to this level.
Anyway, back to it, the first and most important question is, what is your investment timeframe!? This question will keep coming up in future videos as it is one of the key questions to deciding what to do with your money.
It simply means, when do you need access to that $10,000 or part of it, do you plan on needing that money in a month, 6 months or 5 years?
Because depending on your timeframe for its use it will largely change the answer to the question.
The second most important question, will you freak out if in a month you now only have $9,000 on paper? In other words, what’s your tolerance for fluctuations (otherwise known as volatility in returns) or paper loses?
Unfortunately, investments go both up and down! And rarely in a straight line. So it can be quite an emotional journey.
As compared to buying your own home, investing in stocks or other publicly traded products you can very easily today log in to your portfolio and see the exact price at any given moment.
That makes many people panic when the value goes down, even a slight amount. Sadly yesterday we had one of the worst market days in history. Japan was down 13% in one day. Wow all the news headlines were talking about it. Guess what, today Japan was up 11%. So yeah, markets overreact, even today. The famous efficient market hypothesis is not so efficient.
Nonetheless, this rollercoaster of portfolio value is often the hardest part of the investing process for most to overcome.
Sadly, many just can’t take the stress of seeing money seem to have disappeared. The key to remember, is it has not disappeared. It is just a paper loss. If your plan (investment thesis) has not changed and nothing else material has really changed then stick to the course and forget the daily fluctuations! Perhaps don’t look at it every minute!
Would you do that for the price of your home and then consider selling it if it moved down 5%? No, so don’t do it for other investments. Make careful and thoughtful decisions and then don’t watch them intensely! Easier said than done but this is the voice you need to plant in your head to help you on your journey.
I’ve been investing in the stock market for 30 years and I still have to remind myself. Yesterday was ridiculously excessive so I bought more. Even by the market close that proved to be a wise decision. Who knows what tomorrow will bring. Nothing is certain but you must take some risk to get some reward.
Anyway, that was a bit more than I was planning to share on that point but I think it is a relevant topic that needs to be raised.
So back to the topic at hand. Where do you put a spare $10,000!?
Option 1 – cash or cash-based accounts – so assuming you either have a very low risk tolerance or a short time horizon (<6 months). Better options include high yield savings accounts, money market accounts, term deposits/certificates of deposit (CDs). All of these have no capital downside (meaning you can’t lose money outside of break fees) but various lock up rules etc. So sometimes you can’t access the money for a set term.
Option 2 – Bonds, which are just a silly finance term for loans to governments and companies. So you can be the bank/lender to the government or corporates and get interest on that loan (bond). Government bonds are generally considered the lowest risk (pending the government of course) and corporate bonds are more risky but offer higher interest. So generally the higher the interest the higher the risk but you can actively trade in and out of the position so you have access to your money but they can also go up and down.
Option 3 – the stock market (individual stocks or ETFs) or real estate (clearly with $10k you aren’t buying many residential homes (outside of Italy and other European cities selling derelict homes for a $1) so only listed real estate trusts could be an option. But I did want to mention real estate under option 3 for the major growth assets.
Option 4 – other niche/newer options.
- Peer to peer lending (just like option 2 – bonds, you can now act as the bank for individuals and small businesses via various peer-to-peer lending platforms. It is much higher risk and not for the average investor.
- Robo-Advisors: are algorithmic/automated/AI driven investment managers that create and manage a diversified portfolio for you, tailored to your risk tolerance and goals.
- Cryptocurrencies: are all the rage for some but still truly trying to find their place in the economy. They are digital currencies like Bitcoin and Ethereum and are very volatile and speculative as there isn’t much fundamental basis to support them.
- Precious Metals: like gold, silver, or other precious metals have typically been what many pitch Bitcoin as today, as the safety hedge against inflation and economic uncertainty, but these can also be quite volatile. And considering the incredible expansion in the money supply since the financial crisis (crazy money printing) and gold just didn’t keep up I’m not sure the argument is as strong as it is supposed to be.
So I hope I have created some ideas for you to consider. Perhaps I’ve just overwhelmed you with choices that mostly don’t make sense to you!
So let me try to summarize, more than likely the answer will be different for everyone but a common answer for many is to put part of it, say a quarter or half in one category, option 1 – safe and mostly accessible and the other half or three quarters in option 3 – more growth focused options. Then you can swap around pending your changing needs over time.
In the growth focused option, one of the easiest is to invest in an index-tracking ETF like the SPY which tracks the S&P500 (the biggest major stock market in the world, the US market which includes 500 of the biggest companies in the world). The fees are very low and you can get a good diversified return and also get access to your money pretty easily if needed. Just sell some or all of what you hold and bingo cash again!
As I say, first you need to decide on your timeframe and risk tolerance but most important of all you need to just jump in and do something!
Many people get overwhelmed and freeze and put their head in the sand over these topics. This is the whole reason for me creating this blog and YouTube channel. I want to empower you to not do that. Or at least do that less and less over time as you gain more confidence and knowledge and experience.
It’s totally normal to get overwhelmed and concerned with losing your hard-fought and hard-earned money. It means so much to all of us! Therefore I feel the wisest long-term strategy is for each of us to take some power and control over it ourselves. Which means learn what you can to be able to make the most informed decisions.
Don’t be scared. Nobody can get it right all the time, even the best in the world make bad investment decisions but it does mean doing your best and that involves learning what you can and trying, as that’s all we can do.
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