I recently ran across a piece of information from one of my business partners that I work with. It was a really neat graphic that categorized the investment landscape into two broad categories. After reading through it and giving it a bit of thought, I realized how smart it was.
The idea is this: your money should fit into one of two broad categories. Is it destined for investment, or is it destined for saving? Are you a saver or are you an investor? Once you make that distinction, then you can find the right place to keep it.
Investments have volatility. They can gain or lose value in the short term, but the short term is really irrelevant to an investment. It’s put there to play offense. Score points. Accumulate value. Vehicles like stock or bond-based mutual funds. Stocks, bonds, variable annuities, hedge funds, most ETF’s, and many more all offer the potential for long-term wealth accumulation, but they come at a price. That price is short-term volatility. We simply cannot know how much they are going to gain or lose in any particular time period.
Savings have little to no volatility. They also offer some form of principal protection. Checking accounts, savings accounts, CD’s, fixed annuities, and fixed indexed annuities are all unique that they play a form of defense. They offer tremendous principal protection and guarantees* against loss. These guarantees, however, come at a price. Historically, these products have earned less interest than their investment counterparts over the long term.
Not all your assets have to be in the same category. Many times we have money that is there to play defense and other money that’s tagged for offense. There’s also a distinct possibility that you’re more of a saver than an investor or vice versa. Or you’re in a stage of life where your goals have changed from being an investor to more of a saver. That’s common among retirees, as growth becomes less important and preserving your assets becomes more important.
There’s no wrong answer to how you handle your finances. We are all different people. Try to understand what you’re looking for and put your money in the best place for you. Talk to your advisor about your goals and they should work to find vehicles that serve you best.
As always, thank you for your time. This article and many more can be found under the “blog” section of our website: www.paducahfinancialconsultants.com.
*guarantees are based on the claims paying ability of the issuer
No strategy assures success or protects against loss.