Broker Check

Rate of Savings

January 08, 2018

I have written about, devoted whole seminars to and discussed privately with clients, friends and family the importance of saving more money. I believe we have been sold the idea that the rate of return on our investments is more important than our savings rate. This is unfortunate; unfortunate and untrue.

The rate of return we garner on our investment portfolio, over the course of a lifetime, is never a sure thing. Take, for example, the U.S. stock market. Stocks often make up a percentage of people’s investment portfolios.

The U.S. stock market has produced a strong rate of return, when compared to other commonly held asset classes (before taxes at least.) However, it is also subject to severe downturns. I suspect that you have either experienced those downturns, remember them or have read about them. They are not fun to say the least.

If one of these downturns happens to come at the wrong time in our life, the effects could range from inconvenient to downright catastrophic.
To defend against this danger, we are wisely counseled to keep a certain percentage of our assets in fixed income or fixed income like savings vehicles. These assets are intended to be the workhorses of our financial mosaics. They may not be fast or flashy, but they are usually more predictable and consistent.

The overriding notion here is to diversify our holdings, within and among different asset classes. If one or more sectors or industries falls in value, we might have other investments that perform well. We want to avoid having all our eggs in one basket or all our baskets on one truck. This way, metaphorically speaking, if we drop a basket or the truck crashes, we won’t be happy, but we may not break all our eggs.

The desired effect of diversifying our investment portfolios and including fixed income type vehicles is to create a relatively more reliable wealth building engine – our investment portfolio – than if we had relied solely on the stock market.

One of the hopes in following this strategy is to ameliorate the volatility that equities may exhibit at times. Fixed income investments will, I believe, tend to make the return we gain on our overall portfolio less volatile, but they will also make it less likely to outperform the stock market over time. That said, I believe appropriate diversification is a wise investment undertaking.

There are individuals who might take a devil may care approach to creating an investment portfolio. They might treat investing like being in a casino, rolling the dice and hoping they will be one of a few individuals who get lucky. Considering that the so-called experts would be hard pressed to generate consistent positive returns in this manner, it makes me wonder how well lesser mortals might fare. Not very well, I suspect. Hoping to get lucky is not a responsible investment strategy.

So, what does this have to do with rate of return vs. savings rate? I’m glad you asked.

Yes, it makes sense to diversify our portfolios. Yes, it makes sense to adhere to sensible, time honored asset allocations based on our age, circumstances, needs and desires. However, though we may develop a relatively sound investment strategy, the final outcome is not in our hands. What we control are the investments we make. Markets, though, will do what markets do. And they often do not do what we might predict or want.

That said, we have much greater control over our rate of savings. This is something we do not often think about. I suspect investors in general have a better handle on the rate of return they are garnering on their portfolios, year on year, than they have on what their rate of savings is. If you want to work to improve your wealth accumulation plan, start thinking about your rate of savings.

Before you think that I am suggesting draconian cuts to your lifestyle, consider these things:

How many magazines do you subscribe to that you do not really read? 

How many books have you bought that you have never really read? (versus the cost of a library card)

How many clothes are hanging in your closet that you have only used a few times?

How often do you buy or lease a new vehicle, even if the car, truck or SUV you have is objectively in good shape, while still looking good?

Do you own any exercise equipment that sits in your garage or basement and does not get used? Or do you have exercise equipment sitting in another part of your home that works as an expensive clothes hangar?

How much pocket money do you start off with each week? Can you really account for where it goes? I don’t mean down to the penny. However, to what extent do you make impulse purchases – big and small – that add nothing to the quality of your life?

Do you have credit cards that charge annual fees, when you might be able to have cards, from the same institution, that do not charge fees? Do you really make use of the benefits offered on high annual fee credit cards?

Would you consider buying household products that are house brands, instead of name brand products, if they are identical in everything but the name? What might that add up to in a year? How about in ten years?

I could keep going, but I think you get the idea.

We live in a society where marketers have been very good at keeping us on a consumer merry-go-round. What if we stepped off, every once in a while, to gain clarity?

What if we upped our savings rate without materially affecting our standard of living?

What if we saved thousands, perhaps tens of thousands more dollars a year? What would that do to our sense of financial stability and wealth building?

You might want to consider discussing these issues with a financial services professional, to see how you might deploy your savings to build a relatively stronger, more reliable portfolio.

Rate of savings matters. Make a plan. Then take action.

Scott R. McGimpsey January 8th, 2018

This material was prepared by Scott McGimpsey and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources, however, we make no representation as to its completeness or accuracy. Neither Summit Brokerage Services Inc. nor Scott McGimpsey is engaged in rendering legal, accounting, or other professionally services. If such assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any federal, state, or municipal tax penalty. Moreover, a diversified portfolio does not assure a profit or assure protection against loss in a declining market. UNIFIED PLANNING GROUP is an independent firm with securities offered through Summit Brokerage Services Inc., Member FINRA, SIPC