Trying to decide what to do with the money you have can be stressful. There are plenty of people willing to “help” you invest your money, but they rarely agree on how. Just leaving it the bank doesn’t seem right, but neither does losing it all in the market. I have found that dividing my money into two parts reduces the stress and gives me confidence.
Protection vs. Opportunity
There are two very different points-of-view when it comes to investing money. It’s possible to look at money as something to protect for some point in the future. It is also possible to look at it as an opportunity for gain. Both perspectives have benefits, but they require that we invest in different ways.
When we look at money from a protection point of view, we want to make sure that we don’t lose it. Our concern is not about future gains, but about having something at a specific time.
When we look at money from an opportunity point of view, we are willing to wait in order to get a big gain. We’re hoping to use money in order to get significantly more, but we can’t really control the timing of it.
These two points of view, are at odds with one another. Like the old saying goes, you can’t have your cake and eat it too. We can’t protect something and risk it at the same time. When we choose opportunity, we also choose to risk not having our money at a specific point in time.
Many of the professionals in the financial world are more focused on opportunity than they are on protection. It’s good to keep that in mind when you seek help. If your intention is to protect, you probably won’t need professional help. With a little education, you should do just fine on your own.
Insurance vs. Investments
Those who intend to preserve their money are better off thinking about it like they would insurance. That’s because when you preserve, you are saving what you’ve already earned. You’re just making sure that it’s there for you when you need it. A preservation mentality is helpful when you are saving for specific things. Those things might include maintaining or buying a car. Other things include buying a house, paying for college or for paying for retirement. Preservation is good for those things that you already know that you will probably need.
When you want to use your money to take advantage of growth opportunities, insurance doesn’t really make sense. That’s because you’ve accepted the risk that your money won’t necessarily be there at a specific point in time.
Promise vs. Potential
When we make a decision about where we put our money, we need to decide whether we care more about having a promise that our money will be available, or that we have the potential to gain when opportunity arises.
These kinds of financial arrangements are at odds with each other but they both have their place. If there was no potential for gain, there wouldn’t be a way to have something to preserve. If there was no place to save your money, how could you keep what you have gained for a time that you need it?
Determine Your Timing Related Risk Capacity
When I say “timing related risk,” I mean the kind of risk you expose yourself to by not having money when you need to use it. Considering your timing related risk capacity is a good way to decide whether you should preserve or speculate.
If you don’t have any savings at all, then you are at risk whenever something doesn’t go right. You really don’t have any capacity for timing risk. If you have no extra money and your car’s transmission fails, you would immediately be in financial trouble. It’s important to have emergency savings and not having it definitely qualifies a timing related risk.
There are other timing related risks you may have. Retirement is an important one. You can calculate the amount of time that remains before you plan to retire and the amount of money you might need for the rest of your life from that point. These projections expose a risk. If your retirement money isn’t there when you need it, you will probably suffer. Other things have timing related risk too, like buying a house, paying for college or paying for family vacations.
When we think about risk, we need to consider what we would feel like if our money wasn’t there when we need it. If the money you are thinking about isn’t going to be needed for a particular time in the future, then opportunity investing is probably a good idea for you. If you know what the money is intended for, then preservation investing would probably be a better idea.
A Helpful Separation
I have found it helpful to separate my money into two distinct parts. One is the part I intend to preserve as savings. That part includes my emergency savings, the part of my retirement savings that would pay for my basic retirement needs and any other amount of money that I would rather preserve than take risks with. These may include funds I intend to use as an inheritance or a donation.
The other part is for investments that I believe will eventually be profitable. For these investments, I accept that I don’t know when they will be profitable and I am willing wait.
By taking your savings and setting it aside as something you intend to preserve, you don’t have to worry about how much money it makes. As long as it keeps up with inflation, it will still be there for you. The rest you can use to do some investing. That’s the part you may want to have an investment professional help you with. If things don’t go quite as well you expected them to go, you can rest assured that your savings is still intact.
I have a spreadsheet that tracks your TIPS and helps you see your inflation protection in action. Learn more here
Copyright © Troy Taft 2018