Wall Street’s remedy for fixing whatever problems that afflict your investment portfolio is simple: “Save more money.”
And if you happen to be among the godforsaken group that always manages to have unsatisfactory investment results, regardless of whether the pesky stock market is up or down, Wall Street’s solution is invariably the same: You need to “save more money!”
In summary, the financial problems you face – however dire they may be – are your own fault. Why? Because you’re probably not saving enough money, you big dummy!
The widespread belief that “saving more money” is the cure-all to people’s financial problems has sold many costly financial plans. It’s also sold a ton of cutely titled books for authors that have made more money from book sales than the stuff they’re preaching about – saving and investing money.
Is “saving more money” really be all and end all cure?
To date, I’ve analyzed and graded over $120 million in Portfolio Report Cards. Virtually all of the portfolios I’ve examined are from individuals who are better than average savers. In other words, they are consistent with their savings habit and they save at least up to what their company’s 401(k) match is and in many cases, more. If they are self-employed, they’ve established a retirement savings plan (PRFDX) and they regularly fund it with at least 10% of their annual income or more.
What’s the problem?
The real reason so many investment portfolios are structurally flawed isn’t because people are bad savers. Nor is it because people are dumb or lack education. The chief problem is that people fail to protect the financial assets they’ve accumulated by implementing a perpetual cushion. For instance, an equity heavy portfolio (SCHB) should perform well during a rising stock market (DVY), but is susceptible to shipwreck during a bear market (SPXS).
Simple as that may be to understand, properly hedging against the adverse possibilities of a bear market isn’t commonly practiced.
In my latest investing podcast, I talk about how being a great saver doesn’t automatically make you a great investor. Stop confusing the two! Moreover, being a great saver in itself will not necessarily help you to reach your financial goals. In fact, good savers that invest the wrong way decrease their odds of long-term success. For example, a great saver that ignores the consequences of risk, taxes, and cost on their investment portfolio’s performance is likely to be disappointed with the results.
In truth, successful investing is all about odds. And you can either increase your odds of success or decrease them by how you invest the money you’ve saved.
There’s a thousand different ways to slice a coconut, who among us has time to try all thousand ways? Similarly, there’s a thousand different techniques to invest the money you’ve saved (FCNTX), but you don’t have the time (or stomach) to experiment with all thousand. That leaves the prudent investor with no choice but to settle on a proven strategy that reduces risk and increases the odds of success.
At ETFguide, I advocate investment portfolios with three simple but essential ingredients: 1) A core, 2) non-core, and 3) margin of safety. (See image above.) Each of these three containers is uniquely differently from the next and is invested in non-overlapping assets. In my online course, Build, Grow, and Protect Your Money: A Step-by-Step Guide, I elaborate on the benefits of each container and how to allocate the right percentage of your portfolio to each group.
In Wall Street’s decrepit mind, financial education begins and ends with yelling “You need to save more money” at the public. In other words, whatever investment shortcomings faced by people is never Wall Street’s fault – but the public’s fault because retail investors aren’t “saving enough money.” This is just another subtle way, among many, of how the wayward financial services industry shirks accountability.
The sum of everything we know about investing is roughly equal to the sum of everything we don’t know. And while that might be an overly-cautious and perhaps self-deprecating appraisal, I’m 100% convinced that an aggressive savings habit coupled with a sound portfolio construction/management strategy is the only right way to invest.
Put another way, saving money is a wonderful thing, but not unless its coupled with an investing approach that builds, grows, and protects people’s money.