The Inconvenient Truth: Putting Money in Savings is Costing You
I waited way, way too long to invest in any meaningful way. I saved, if anything. I started seriously investing in stocks in… 2020. I’m 41 years old now. I was afraid of screwing up.
This surprises people that know me. My friends describe me as a risk-taker! My parents have called adult-me “impulsive” (years later, I’m still deciding how to respond). Yet my list of missed investment opportunities is frustratingly long.
I work in tech yet missed out on most of Apple & Facebook’s stock growth. I lived in Seattle in the early bitcoin days and didn’t buy. I’ve found that researching what stocks to buy and when to buy is a full-time job, and can be a stressful one, too. So I waited.
I’ve been telling my 7th grade stepson this a lot lately: Your knowledge on something needs to be stronger than your opinion on it. (As you can predict, he loves hearing this from me.)
On occasion, I practice what I preach. And so today I researched ways to better handle my money to “diversify my financial strategy” from what I am currently doing. This led me straight to Twenty Places To Hide Money At Home Besides Under Your Mattress, and wow-the options are varied, yet familiar! Which feels so safe.
Here’s something we all need to understand or be reminded of: Sticking money under a mattress, or “in an envelope taped to the bottom of your cat’s litter box” as the article suggests, or even in a savings account, is literally costing us money.
The American money growth battle: Savings vs. inflation
Wait a minute, I thought putting my money in savings was a smart bet? Here’s the conundrum: The inflation rate is higher than the interest rate on savings accounts, which means money in our bank loses value faster than it gains anything from interest.
Think of it like a bucket versus a pipe: In the bucket, you’re constantly collecting new drops of water, but the base isn’t stable and little holes cause water to leak out. In your attempt to collect water safely, you’re actually losing it.
And what happens with a pipe? It’s strong and fortified, protected from all those tiny leaks we see in the bucket. As more water enters the pipe, pressure builds and we instinctively know that when the faucet is turned on, the water will flow fast and free.
Now, because money in a bank is FDIC-insured, it is safer there than under Lucy’s litter box! Unfortunately, that doesn’t mean it’s well placed.
Now that I’m moving forward, I’ve got a few options.
- Spend those countless hours researching companies and strategies in Barron’s or the Wall Street Journal (c’mon, really, on Reddit and TikTok).
- Invest in either an index fund or an index ETF.
- Pay another person to decide for me.
According to Warren Buffet-and lots of data-most of us need to choose option #2. Even professional investors struggle to outperform an index fund or ETF.
Stocks, Index Funds, and ETFs, oh My!
What is an index fund or ETF? To quote NerdWallet on the topic,
ETFs and index funds both bundle together many individual investments — such as stocks or bonds…
Rather than going out and buying individual shares of Tesla because it’s cool, or Yum! Brands because you love Pepsi (as I guess we all do), an index fund/ETF bundles a bunch of stocks together, and you buy a share of the fund instead of the individual stock.
If you buy a share of “ SPY”, for example, which is an ETF based on the S&P 500 (which itself is a list of 500 of the largest companies in the US), you’re now invested in everything from Amazon to Zoetis.
That’s the main reason to go for an index like SPY: You won’t get mired in decision making, nor much regret. I know that in picking stocks from thousands of big, complex companies, my knowledge really can’t be stronger than my opinion, and an index ETF or fund is based on what’s already working.
And, index funds and ETFs do work. $1 invested in something like SPY in 1970 would be worth $54 by 2007! Money in a savings account would be worth closer to $5 over the same period-and again, with inflation, that $5 buys a little less than the $1 did back in 1970.
Index funds also help shield us from “volatility”, or big swings in the price of stock. Imagine there’s a day where large internet companies like Facebook and Google face lawsuits over user privacy. Their stock price will likely drop a bunch. Meanwhile, a pharmaceutical company announces a successful drug trial. If you only bought Facebook stock and had never even heard of the drug company… Well, you lost money that day. Ugh.
Moreover, if you keep hearing hype about a company, you might invest all of your budget into that company, which is risky when the hard days come. Major ugh.
An index fund shields us from most of this because we effectively own stock in dozens or hundreds of companies. (This is one form of “diversification”.) The ups and downs of individual company stock prices sort of average each other out, and better still, we don’t really see it in our own personal accounts. An investment account that owns stock in SPY just lists SPY. It doesn’t list all 500 companies you own a little piece of. Less is more here.
Risks and Rewards of Investing
Research by Daniel Kahneman, author of Thinking, Fast and Slow, shows that losses are two times as psychologically powerful as gains. (I’ve read it’s even more dramatic than that in other articles.)
So it is natural to avoid investing out of fear, and to get scared if a company we invested in has a bad day and possibly pull our money out of the investment. (And then chastise ourselves for it when the stock goes back up again.)
Index funds and ETFs help shield us from that. Our emotion about investing can pretty easily drown-out our thinking, so this is a buffer against our emotion, and one that works over the long-haul.
Notice above that I said that $1 invested in SPY would be worth $54 by 2007. And in fact, by the end of 2020 it would be worth over $182!
But from 2007 to 2008? That $54 turned into just over $34 during the Great Recession. When the whole market is down, index funds are down. It’s scary as heck if you had saved and invested, say, $100,000. And suddenly that is now worth $63,000.
When that happens, if you can, you should leave your money in (or even invest more, since prices are suddenly cheaper). There’s a saying professional investors have: “T he market always comes back, the only variable is time.”
In other words, stock prices come back and grow stronger… eventually. If you sell while the stock is down, you’ve cemented your losses.
Sometimes, of course, the fear is too great and people sell.
Perhaps more often… people have to sell, because that stock downturn might also mean they’ve lost a job or have other new financial challenges. Sometimes you have to sell and it hurts.
Odo is revolutionizing the way we invest
So what’s the moral of this story? Putting money into savings instead of into the stock market is costing you-but investing always comes with a potential for loss, and that’s scary. At Odo… we are working on something that takes advantage of the strength and growth of the American economy through index ETFs, while also protecting the money you put in.
Bonus: It gives you access to your money like it’s in a savings account.
We want to grow your money almost as much as the stock market can, while providing the safety and peace of mind that FDIC insurance gives.
Odo is also recruiting brands to help reward you for good investing habits and building a technology platform that will help us give you cash back on your spending to help you invest.
If growing money like you would in index ETFs without losing the money you put in sounds good, please consider joining our beta. You can learn more at www.odo.works.
We’re a public benefit corporation and as we get closer to launch, we’ll publish details about how it all works. It’s simple, exciting, and we think can help a lot of people.
It is important to invest and not stick your money under a litter box. Unless you want to put your money under my cat’s litter box. If you do, or want to discuss anything else, please email me at porter@odo.works.
Originally published at https://www.odo.works.
