My friend’s son’s birthday is coming up next month. She let me know the other day that she and her husband give him a money gift of $1000 on his birthday every year.
Naturally, my response was “Amazing! How are you investing that?” And here's how she answered...
“Well, I feel like investing is such a gamble, so we put it in savings and get a pretty good rate, like 5%”.
OK- here’s the deal- 5% isn’t bad. Putting that money into a high-yield savings account, CD, or bond could be a way to slowly grow that investment without worrying about the volatility rollercoaster that the stock market can take our money on. Because of this, many investors see this as a low-risk (and sometimes NO risk) option. But I’m going to flip that script.
How much are you risking when you opt for the “low-risk”, low-volatility return? (Spoiler alert: it’s a lot!)
If we add time to the equation, everything changes. My friend’s son will be six next month. He has another twelve years before he hits official adulthood. 35ish years until he hits middle-age, and about 55 years until retirement. The point is: he isn’t using this money any time soon. That means, if the money is invested into, say, the stock market, which has a higher volatility than high-yield savings, CDs, or bonds, that money has the potential to see bigger gains and losses over time. And what does historical data tell us? The stock market will gain more than it loses over time, so if we have a lot of time before we need our money, then we have time to ride out the lows of the stock market, and see our money grow much more than it would in a high-yield savings account.
Here’s what I mean:
Based on the average historical return of the S&P 500 at 10%, our six year old would have this much money when he turns 30 if his money was invested in these two options:
HYSA (assume 5% every year, which is generous) - $70,495
S&P 500 (assume 10%) - $181,285
By going with the lower-volatility choice, my friend is risking the loss of $110,800 over 30 years. Is this not a big risk?
Still- she's making solid choices.
I want to be clear: my friend is doing an amazing thing, and I want to highlight some of the things she is really nailing:
👏 She and her husband made a plan to contribute to their son’s savings on a yearly basis.
🎯 They both stuck to the plan and are contributing a healthy chunk of money to his future, every year.
✅ They recognized their risk tolerance and made a choice that honored their comfort level.
🌱 They opted not to let the money sit in their default savings account, earning way less in interest than the amount that money would lose thanks to inflation each year. They made the decision to open a high-yield savings account to earn more interest and beat inflation.
🗣 She’s talking about her money moves! I love this, because how else do we share and receive knowledge about money decisions like this if we don’t talk about it to our networks?!
Now- what could she do even better?
There are always ways we can train our brain and evolve our thinking.
Rather than feeling stuck in a certain money mindset, there are tools we all have that can improve the way we think and feel about money, thereby improving the decisions we make with our money. If you find yourself with a lot of limiting beliefs about money, give these steps a try.
⚠️ Continue to check-in with your risk tolerance
This is an evolving process and honoring your risk tolerance is SO important. For those of us who feel higher levels of fear and anxiety when it comes to money, and investing, it’s SO important to acknowledge that. A lot of those feelings are formed in our early money stories. If you want to know more about money stories, we have a worksheet about them here.
👩💻 Inform your risk with data
We saw the difference in returns of money invested in a high-yield savings account versus the stock market over 30 years (source). Let’s also look at the risk of loss that comes with higher volatility. History tells us that even the biggest declines in the stock market have been followed by a rebound that put investors ahead. Leaning on historical data allows us to make more informed decisions, rather than living in a state of fear, worry, and paralysis.
🗓 Separate your decisions based on need and timeline for your money
Low volatility is great for money we need in a short amount of time. Emergency savings or a known expense that is on the horizon will do great to find its home in a high-yield savings account.
Higher volatility often comes with higher return potential. If we know we have time before we need our money, why not let it grow more?
This is not to say we shouldn’t diversify.
There are many good reasons to have our money distributed in low-volatility, high liquidity vehicles as well as higher-volatility, lower liquidity vehicles all at the same time. Lacking this diversification puts our money at greater risk. And that goes both ways: if we fail to diversify and put ALL of our money in low-return, low-volatility vehicles (like HYSAs), then we’re risking losing out on the returns in higher volatility vehicles, like investments in the stock market.
I hope this serves as a friendly reminder that if you have a large sum of money that has a longer time horizon and is sitting uninvested, you may want to ask yourself why.
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