Saving vs Investing: How to (Really) Make Compounding Returns Work
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Comments (5)
steven
23 May 2023lovely and insightful piece. Thanks
Monk
26 May 2023well, no, timing can be important, if lazy but risk taking investor got retrenched in 2020 during covid, she would have had much less than diligent saver.
what is the difference between R1,83 million and R1,62 million? a mere R220 000. the difference is greed. But at least saver had peace of mind and contentment, while investor had to worry about the vagaries and fickleness of the markets. The only strong point of the article is the one about fees.
Nico
26 May 2023Strongly disagree with your sentiment: the greatest risk in the long-term is not taking any risk.
Your point on retrenchment in 2020 is not valid – you need to look at the difference between the dotted line and the solid line (i.e. returns on contributions). Investor contributed far less to his investment pool yet earned far more – even if retrenched in 2020, her return on contributions far exceeded Saver’s and she would’ve been far better covered. Your point on a mere R220k difference ignores that Saver contributed more than double what Investor did, yet Investor still earned much more (a return difference of 252% vs 45%).
Taking too little risk over the long-term when setting aside contributions only provides comfort to those that are ignorant of the very real erosion power of inflation – which deposit instruments do not really shield you from.
Being productive with your capital requires taking some risk (sowing seeds, not just storing it) – and if you have the ability to take a longer-term view, being unproductive with capital (i.e. overly risk averse) is the truer risk. This has nothing to do with greed – it is purely a sensible risk / return calculation.
Hendro
26 May 2023Great article Nico!
On the topic of fees, it might be worth doing an analysis on the average fee financial advisers charge on the capital they manage and how much active funds need to outperform the benchmark in order for investors to actually earn alpha returns above the market (break-even point). I’m still a young investor (23 years old) and would love to see whether financial advisers bring alpha to the table when selecting active, discretionary fund managers. Naturally, financial advisers have expertise when it comes to other services such as estate planning but as it pertains to investing hard-earned savings, is it truly efficient having a double layer of fees being charged on your investments?
Nic
29 May 2023I can see both Monk’s and Nico’s points. I guess Monk means that the investor was saving less and spending more money while earning better returns than Saver who supposedly had less fun and lived frugally, oblivious/satisfied to/with the inferior returns on his capital allocated.
When things go south like in 2020 and Monk’s scenario of retrenchment transpires then Investor has less money to rely on. And, if Saver was unfortunate to also be retrenched, he might have better employment prospects compared to Investor after working hard and getting much better raises. All Investor would have more of during unemployment are fond memories of hobbies once enjoyed now that money has dried up for that. All very hypothetical.
Let’s also remember that an important principle for financial planning is to have a STRONG emergency fund to tide over unforeseen circumstances so that you don’t have to dip into investments when times are tough.