Investing Either Too Conservatively or Aggressively Can Get You Into Hot Water
I’ve been doing workshops for many of you and I wanted to share some of the financial changes that people make after I educate them and they can make financial decisions that are in their best interest.
The Risk of Investing Too Conservatively
Some people with long timelines have invested too conservatively. This has risks as well. The risk is that they won’t have enough saved for retirement and will run out of money. Let me use myself as an example. When my boys were babies, I invested in EE savings bonds for their college education. EE savings bonds are guaranteed to double in 20 years and currently are paying 2.5%. I had about a 20 year time horizon before I needed their money for college. Instead of investing $200 a month for 20 years in an EE savings bond, I should have invested in an S&P 500 index 529 college savings fund. The 20 year average of the S&P 500 was 9.752%.
EE saving bond over 20 years at 2.5% = $62,542
S&P 500 over 20 years at 9.752% = $149,177
In both cases I invested $48,200. But the S&P 500 earned me $100,977, while the EE savings bonds earned me $14, 342. Big difference. If you have a long term horizon the S&P 500 is less risky than a savings bond or money market.
The Risk of Investing in Single Stocks Versus the Diversity of the S&P 500
Another risk is investing in a single stock. Let me use my father as an example. He had invested a large amount in IBM. At the time, IBM was a high dividend paying “sure thing” stock. So how does this compare to the S&P 500?
If you put $1,000 into IBM stock 20 years ago, it would today be worth just $2,918. Meanwhile, the same sum socked away in the S&P 500 over the past two decades would be worth $6,653 today.
At least IBM is still in business. Let’s look at some other stock prices that were highly rated in their heyday.
Bed Bath & Beyond
2013: $74.51
2023: $0.23
WeWork
Sept 2022: $141.60
2023: $3.92
GE
2013: $152.27
2023: $98.46
Let’s compare this to the S&P 500 which is made up of the 500 largest US stocks across 11 different sectors and 24 industries.
S&P 500
Price Sept 15 2013: $1,687
Price Sept 15 2023: $4,450.32
While stocks within the S&P 500 may have gone down (like GE) or not gone up much (like IBM), other stocks in the S&P 500 have appreciated a lot (like Apple or Amazon).
Risk Depends on When You Need the Money
It depends on when you need the money to pay for an expense. After realizing my mistake of investing too conservatively when I didn’t need the money for college for 20 years, I started investing in the S&P 500. However, since I had to pay their tuition on a specific date and I knew that in any year the S&P 500 could drop 20-30%, I took out 25% of their money 4 years before I had to pay tuition — 25% each of the 4 years before tuition was due. When they started college, all of the money was in a money market fund (which at the time didn’t earn much interest, but would not lose money).
NOT FINANCIAL ADVICE
The information contained in this article is for informational purposes only and shall not be understood or construed as financial advice. I am not an attorney, accountant, or financial advisor, nor am I holding myself out to be. I do not accept any fees or commissions from anyone or any financial institution.
I’d love any feedback on these articles.
