Why Should You Invest?
We believe that the very foundation for why we, or anyone, should invest their money is: To Achieve Their Goals.
Common sense tells us that we should have goals for our money, but so often when we evaluate prospective clients’ portfolios, we see that their goals rarely match how they’ve been allocated.
Evaluating a savings account or investment portfolio should be done through a focus on risk and reward.
For instance, a bank savings account has virtually zero principal risk, but the reward (interest paid) is also very small, especially when you figure in the impact of inflation on your savings. This would be one of the most conservative ways to use your money.
Investopedia defines inflation as, “the rate at which the general level of prices for goods and services is rising”. With inflation, you begin to lose purchasing power of the money you’ve saved, unless the interest being paid or the investment is growing at a greater rate than inflation. If you keep all your money in a savings account, you run the risk of your money not growing quickly enough to provide for your long term goals.
This is why many people put some money into savings to provide for their immediate needs, while also investing to provide for their long term goals (“long term” being more than five years down the road).
So, the question becomes how much money should I save for immediate needs, short term goals, and long term goals? If you have immediate needs over the next month or six months, then a savings account may be the best place for your money, because you are guaranteed to get back the money that you deposited into your account when you need it.
Conversely, when you invest in stocks and bonds, you are not guaranteed to get the money back that you invested. This additional risk brings the expectation that you will likely earn higher investment returns over the long term, however, your account will most likely experience volatility in the short term. Certain risks exist with any type of investment and should be considered carefully before making any investment decisions.
When you have major life goals that you’d like to save for — for example, retirement, a home purchase, etc. — you’ll likely need to save for many years (more than 5 years). Over these long term time horizons, if your investment portfolio is diversified and allocated properly, you should have greater returns than in a savings account, because you’d be taking on greater risk by owning stocks and bonds. This is a good tradeoff, but you need to make sure that you have the appropriate amount of risk for the time in which you’d need to achieve your goals. Too often we see that athletes take on too much risk because they over estimate how much time they have until they need their money for their goals.
Do these principles sound familiar? That is because they are the foundation of how your accounts are set up with AWM.
Off-Season Savings (OS)
Short-Term Investment (ST)
Long-Term Investment (LT)
Retirement Accounts (IRA, Roth IRA, SEP IRA, 401K)
The purpose behind your account structure is to maximize your money across multiple time frames while minimizing the amount of risk through proper diversification.
In our next article, we will dig into what proper diversification is, and how to balance your risk versus reward to put yourself in the best position possible to achieve your goals.
