Saver or Investor…Which One Are You?

Transcript

Do you know how much money you make each month? I’m pretty sure everyone listening can answer “yes” to that question. Now, can you tell me how much you spend every month? My guess is a lot of you listening probably can’t.

If you are serious about pursuing FI, you really do need to get a handle on this number because I’m sure everyone listening understands that the difference between how much you make and how much you spend is what most of us call savings. And while “savings” is certainly an accurate way to describe how much you have left each month, it’s what you do with the money that defines what it is.

Welcome to the first season of Invested Poorly: Sad Tales of FInancial Fails, a short-form podcast designed to help everyday investors make wiser investment decisions by learning what NOT to do with their money. Host Jeff Harrell shares timeless stories from his former life as a financial advisor, about the poor—and irrational—choices he witnessed investors make that disrupted their journey to financial independence, or FI. Your ability to recognize, and avoid, similar mistakes could make all the difference for you along your path to reach FI.

Check out the “Introduction” episode for more background on Jeff, why he created this podcast, and how it can guide you to becoming the hero of your own investing story. Now, on with show.

One of the most common terms used to describe the difference between what you make and what you spend is a “savings rate.” Pretty simple concept to understand if you ask me, so I’m not going to go any further than that. Instead, what I want to discuss is what are you actually doing with the difference, because that is where things get interesting.

If you are on the path to FI, you have to “save” some portion of your income in order to one day live off your assets. It shouldn’t take a rocket scientist to figure out that the higher percentage of your income that you “save,” the faster you will reach FI. However, this very basic concept fails to address the most important component of a “savings rate,” which is:  what do you actually do with the money?

To me, saving money is something you do when you know you have a high probability of using it to cover an expense in the near future. Your definition of “near future” may vary from mine, but the point is that saving is something that should be done with money you know you will need soon and therefore you shouldn’t risk losing even one penny of it.

On the other hand, investing is something that should be done with money that you will not need in the short-term, so you can expose it to higher risk in hopes of higher returns. I hope this fundamental difference between saving and investing is clear, because the story I’m about to tell is an example of someone who just didn’t get it.

He was one of my favorite clients over the years. A young doctor, mid 30s, who loved what he did. Nicest guy you will ever meet. Very philanthropic, and always asked about how my family was doing whenever we chatted. Unfortunately, despite these amazing qualities he had as a person, his inability to understand investing resulted in dismal returns for his accounts.

When I first started working with him, he was no different than most clients. He was very hands-off and trusted me implicitly. But then we went through a bear market together and he watched his accounts decline dramatically. He vowed that he would never let that happen to him again. At some point during the bear market, he decided to sell off all his investments and just sit in cash. Shortly after he made this decision, the bear market ended and stocks began to recover.

As time went on, I was able to slowly talk him into reinvesting in the stock market, but he never got back to having stocks represent the bulk of his investments like before. As the years piled up, he began to see that his lack of investing in stocks was costing him, but because he was always worried about the market crashing, he was more comfortable leaving his investments very conservatively invested. However, he would routinely tell me that, the next time the stock market takes a big dip, he will remember what he learned and start investing more aggressively again.

Fast forward another year or two and we got that big drop in the stock market we’d been waiting for. And then one day, my relationship manager told me he was on the phone. I was excited to speak with him, since we had already discussed what we would do when this happened. Well, you guessed it, instead of calling to say he wanted to start investing more in the stock market, he was calling to say he wanted to take everything out and put it in cash. Now if I’m being honest, I really wasn’t surprised by his decision. All it did for me, was reinforce how emotional investing can be for so many of us.

So back to the story. I remember this conversation like it was yesterday. He thanked me profusely for all the help I had provided him over the years, but he realized that he just wasn’t cut out for investing. He was a doctor and could save a lot of money, so his plan was to just save his way to reaching FI by keeping everything in money market funds. How did I react? I didn’t even try and talk him out of his decision. His track record spoke for itself. I told him I fully understood this decision was in his personal best interest because he had finally identified himself as a saver, not an investor.

I do think it’s worth noting that at this time, money market funds were yielding less than 1%. So, you can see he really just didn’t want to ever lose money again, or to see his accounts decline in value for even a short time period. The most likely outcome of this decision is that he will need to work a number of years longer to reach FI, due to his fear of investing. I remember closing our conversation with a discussion over this and, not surprisingly, he was very comfortable with that trade off. Thus, my advice is, if you see any similarities to this doctor and yourself, you may want to think really hard about whether you are a saver or an investor.

As you can see, understanding the difference between saving and investing is crucial, especially for new investors. In the short-term, investing is risky, since the range of possible outcomes varies widely. This is why any money you might need soon should not be invested. However, it would be downright negligent of me to not point out that even if investing gives you some level of anxiety, over the long-term it can be riskier to only save money instead of investing it.

In episode 4, I’ll discuss stock market volatility versus risk. I highly encourage you to listen to this episode to gain further insight on what I’m talking about. That episode just might cause you to look at the stock market in a whole different light.

I sure hope you enjoyed this episode of Invested Poorly and will be able to take something from it to improve your decision making as you navigate the twists and turns of your personal investing adventure. Be sure to check out my website at AreYouFI.com (that’s A R E Y O U F I dot com) where you can find resources and show notes with the charts and graphs I mention during the episodes. These are like little treasure maps that can help you choose more wisely along your quest to reach FI, or financial independence.

Never forget, in the short-term the stock market is unpredictable, and as my mischievous little nephew likes to say, “things just happen”! So focus on the long-term, by controlling your emotions, simplify your investments, and always… ignore the noise.

I’m your host, Jeff Harrell.  Thanks for listening.

Invested Poorly: Sad Tales of FInancial Fails was created for informational purposes only and should not be relied on for specific tax, legal, or investment advice. You should consider consulting a qualified professional to review your situation before engaging in any transactions. Investing involves risk, including loss of principal and past performance is no guarantee of future results. 

This podcast was produced by Ted Cragg. Learn more about creating podcast mini-series like this by visiting QuickEditPodcasts.com.