When Saving Trumps Investing

Thread Rating:
  • 0 Vote(s) - 0 Average
  • 1
  • 2
  • 3
  • 4
  • 5
#1
?When Saving Trumps Investing
 
 “It helps to communicate that the client already owes himself the money for the future, and that it’s actually quite a lot. By saving a little bit more today, he’s actually lowering — dramatically — the amount he owes himself for the future.” – Chip Castille
As Warren Buffett closed in on age 60 in 1989, his net worth was $3.8 billlion according to the Forbe’s List. This year, as Buffett approaches his mid-80s, he’s worth $58.5 billion. That means nearly 94% of Buffett’s current net worth was created after his 60th birthday.
I’ll come back to these facts again after we go through a simple example.
Most retirement calculators offer you fairly simple inputs.  You basically enter in the amount you currently have saved, your future saving projections and a return assumption.  Then the calculator spits out a future value based on those assumed inputs.
This isn’t a perfect way to determine exactly how much money you will have saved up by retirement because it’s impossible to precisely map out the future when the markets and your life are in a constant state of flux.  That’s why retirement planning is more about accuracy (in the ballpark) than precision (bulls-eye).
With that in mind, here here are some basic assumptions for a hypothetical young person with a long time horizon ahead of them that you might see in a typical retirement calculator:


[Image: Compound-11.png]


You can see that a steady diet of a double digit savings rate coupled with decent investment returns and a healthy does of compound interest can turn our hypothetical saver into a millionaire by the time they retire.
Looking at these numbers would lead you to believe that your investment returns carry the bulk of the weight, considering almost 80% of your ending balance comes from compounded investment gains.
But breaking out these results by different periods tells us a much different story. Here’s how things look by age 35:


[Image: Compound-2.png]

And again at age 40:


[Image: Compound-3.png]

Ten and Fifteen years in and the amount you save is still the most important factor in this portfolio’s growth.  In fact, it’s not until somewhere

between the ages of 43 and 44 that our retirement saver sees investment gains overtake the amount they have saved over time.
So in this example it takes almost 20 years for investment returns to take over from the amount saved.  And here’s a little secret about the compound interest in these retirement calculations — the majority of the growth comes once a large balance gets built up as you get closer to actual retirement age.  Here’s the growth in the final decade before retirement using my assumptions:

[Image: Compound-4.png]

Remember, in this example this person continues to save right up until retirement, but the performance doesn’t really start to build the balance until there the law of large numbers comes into play.
This is where the Buffett example from the above comes into play. Obviously, it’s a bit of an obnoxious comparison because Buffett is one of the richest people in the world. But this does show that saving money slowly can build upon itself until all of the sudden compound interest explodes.
This is where real wealth comes from.  It takes time and it’s not easy.  It could take decades to see extraordinary results, which is much longer than most people would like.  As life expectancy continues to increase the virtue of patience and an understanding of your time horizon become more important than ever.
A few more lessons from this basic example:
1.   It’s more exciting to focus on milking a few extra basis points of investment returns out of the financial markets, but this shows that the amount you save in the first few decades of your career is much more important for all but the very best investors.
Increasing the % of salary saved in this example from 12% to 15% has nearly the same effect on the ending balance as increasing


1.   investment performance by 1% a year.  Up the amount saved to 20% of salary and it equates to an extra 2% a year in market returns.  Based on decades of academic research, earning more in the markets is much more difficult than saving more money.
2.   Markets don’t give you the same returns year-in and year-out like you see in retirement calculators and this illustration.  Nothing moves in a straight line.  Average market performance is anything but average.  Since you have no control over total market returns or the sequence of those returns (which also plays a huge role in your ending balance at retirement) you must focus your energy on that which is within your control.
3.   That means how much money you save is much more important than most investors assume.  Your initial returns as you start out definitely help plant the seeds, but the greatest investment strategy in the world means nothing if you have no capital to invest in it.
4.   Deconstructing compound interest into different time frames shows the power of sticking with a long-term plan.  It may seem like every tick in the market is going to make or break your portfolio, when in reality the fairly simple action of saving more money can have an enormous impact on the size of your portfolio

UNQUOTE:-

Doesn't it means even in your "De-accumulation" phase, you still have to save more then you spend, if you still want your portfolio to grow?
i think it is only so if someone needs you to leave them a legacy.
 
And there is no short cut to savings and growing your investing portfolio through the time factor.
How old are you now?
How many more years to seeing your 1st million in liquid asset?
Primary residence should not be included.
It's always a liability but you can count on it as an "Emergency Asset" as a last resort (Touch wood).
Hope you enjoy this article but it is really the truth--there is no short cut unless you want to take the risk of landing in "CHANGI HOTEL"
Ha! Ha!
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
Reply
#2
After searching the forum using multiple keywords, I think this is the most suitable thread for my comments.

While surfing the net, an advertistment popped out : https://campaigns.yesbank.in/nriservices/
The Bank is offering a 7.85% p.a. interest rate for the tenure of 12 months 10 days to 12 months 20 days. There are also other rates with various tenures.

A search on India FD rates yield as high as 8+% : https://www.myloancare.in/fixed-deposit/...est-rates/

While I am not familar with India banks, assuming someone(e.g. India citizen & SG PR) places FD in one of the largest India banks with slightly lower rates, I think it wld still easily trump the investing returns of most people, and with minimal risk and research/monitoring effort !   Huh
Reply
#3
(19-08-2019, 08:41 PM)dreamybear Wrote: After searching the forum using multiple keywords, I think this is the most suitable thread for my comments.

While surfing the net, an advertistment popped out : https://campaigns.yesbank.in/nriservices/
The Bank is offering a 7.85% p.a. interest rate for the tenure of 12 months 10 days to 12 months 20 days. There are also other rates with various tenures.

A search on India FD rates yield as high as 8+% : https://www.myloancare.in/fixed-deposit/...est-rates/

While I am not familar with India banks, assuming someone(India citizen) places FD in one of the largest India banks with slightly lower rates, I think it wld still easily trump the investing returns of most people, and with minimal risk and research/monitoring effort !   Huh

I think saving is better than investment, when we screw up in our investment. Is unlikely due to Saving has better returns. As for India case, their currency weakened 60% over 10 years period. Do your Maths.

.

Just my Diary
corylogics.blogspot.com/


Reply
#4
NZD and AUD used to be very popular among Singaporeans, about 10-20 years ago, due to its higher interest rates, and probably perceived safety.

But since most Singaporeans are going to stay in Singapore and spend SGD, it is probably safer to not be overly exposed to a single currency that is not SGD. Unless your back-up/long-term plan is to migrate to that country.
Reply
#5
Years ago during the 1980s, my work took me to LON, SFO, MEL.
I married and had kids during that time. I thought up a plan.
Since I could get to these cities, why not open a savings account and
earn higher interest rates! And I could withdraw local currencies and spend!

I pumped more money into these savings account ( some were fixed desposits ) and
the idea was to create a financial history so that if the kids grew up and wanted
to study in UK, AUS or USA, it would be easier to set up student accounts etc.
Property investment was a possibility too!

It was a great plan till the sterling dropped, USD dropped.. but AUD was resilient.
till it too dropped below SGD.
The interest earned barely balanced out the drop in forex.. in fact, Sterling was a nett loss.

Be very alert to currency movements and socio-political events when investing in countries other
than home country. Have an exit plan ready... a quick and dirty one is better than none.

Smile
Reply
#6
(20-08-2019, 06:01 AM)corydorus Wrote:
(19-08-2019, 08:41 PM)dreamybear Wrote: After searching the forum using multiple keywords, I think this is the most suitable thread for my comments.

While surfing the net, an advertistment popped out : https://campaigns.yesbank.in/nriservices/
The Bank is offering a 7.85% p.a. interest rate for the tenure of 12 months 10 days to 12 months 20 days. There are also other rates with various tenures.

A search on India FD rates yield as high as 8+% : https://www.myloancare.in/fixed-deposit/...est-rates/

While I am not familar with India banks, assuming someone(India citizen) places FD in one of the largest India banks with slightly lower rates, I think it wld still easily trump the investing returns of most people, and with minimal risk and research/monitoring effort !   Huh

I think saving is better than investment, when we screw up in our investment. Is unlikely due to Saving has better returns. As for India case, their currency weakened 60% over 10 years period. Do your Maths.

.


Here's one example of an Indian investment by SGX: https://www.valuebuddies.com/thread-158-...#pid136063

Other examples closer to home would be higher FD rates from the Malaysian/Indonesian markets (>4%) but then again, if one looks at the exchange rates - any arbitrage gains can be easily eroded by adverse FX movements against you. Maybe you might earn the differential in a year or two, but over the longer run, the odds are stacked against making real money as someone real like PorkBelly has mentioned (real case study, real results)
Reply
#7
yes FX risk is a big risk; just like some remarks on MYR deposit rates are higher. Credit risk is also an issue. For example market darling Yes Bank mentioned by Dreamybear as a pop up was in trouble: https://qz.com/india/1623244/why-yes-ban...x-held-up/

The danger is actually Singapore squandering our reserves and prudence. A stronger SGD actually enrich everybody but tragedy of the commons mean few realise it. The reverse is devaluation is a transfer of wealth from populace to exporters. There is generally no free lunch in devaluation.
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward

Think Asset-Business-Structure (ABS)
Reply
#8
(20-08-2019, 12:10 PM)Porkbelly Wrote: Years ago during the 1980s, my work took me to LON, SFO, MEL.
I married and had kids during that time. I thought up a plan.
Since I could get to these cities, why not open a savings account and
earn higher interest rates! And I could withdraw local currencies and spend!

I pumped more money into these savings account ( some were fixed desposits ) and
the idea was to create a financial history so that if the kids grew up and wanted
to study in UK, AUS or USA, it would be easier to set up student accounts etc.
Property investment was a possibility too!

It was a great plan till the sterling dropped, USD dropped.. but AUD was resilient.
till it too dropped below SGD.
The interest earned barely balanced out the drop in forex.. in fact, Sterling was a nett loss.

Be very alert to currency movements and socio-political events when investing in countries other
than home country. Have an exit plan ready... a quick and dirty one is better than none.

Smile
THank you for this sharing. you have highlighted for me that currency losses is a real risk. At the same time, if you have the time to do some hypothetical calcuations, would you have made a net gain if you have put 100% of your overseas currency in the local stock index, i.e. say 20 years ago, all your pounds, you invested in the FTSE 100? and repeating the same for AUD, USD ,etc
Reply
#9
(21-08-2019, 10:07 AM)money Wrote:
(20-08-2019, 12:10 PM)Porkbelly Wrote: Years ago during the 1980s, my work took me to LON, SFO, MEL.
I married and had kids during that time. I thought up a plan.
Since I could get to these cities, why not open a savings account and
earn higher interest rates! And I could withdraw local currencies and spend!

I pumped more money into these savings account ( some were fixed desposits ) and
the idea was to create a financial history so that if the kids grew up and wanted
to study in UK, AUS or USA, it would be easier to set up student accounts etc.
Property investment was a possibility too!

It was a great plan till the sterling dropped, USD dropped.. but AUD was resilient.
till it too dropped below SGD.
The interest earned barely balanced out the drop in forex.. in fact, Sterling was a nett loss.

Be very alert to currency movements and socio-political events when investing in countries other
than home country. Have an exit plan ready... a quick and dirty one is better than none.

Smile
THank you for this sharing. you have highlighted for me that currency losses is a real risk. At the same time, if you have the time to do some hypothetical calcuations, would you have made a net gain if you have put 100% of your overseas currency in the local stock index, i.e. say 20 years ago, all your pounds, you invested in the FTSE 100? and repeating the same for AUD, USD ,etc

My record keeping is messy.
Over the years, much has changed, from interest rates, forex rates and
with Sterling, the regulations for a "non-resident" account holder in the UK.
Each year, a declaration was required otherwise, UK resident interest rates would be applied
to the deposits, which was lower due to tax. I believe the adminstrative part has improved since 2010 (?).

But I do recall that with AUD, I started off with AUD 10,000. with the exchange rate almost at par with SGD
That was sometime in the year 2000. Interest was at 5.56% on a monthly roll. Having the deposit on a monthly
roll over was my exit plan. But with laziness and other life events and also the "insignificant" amount,
I ignored the deposit.

The interest rates stayed above 2% for many years even during the 2008 financial drama, and the forex rates
was hovering above par to SGD. The initial amount of AUD10,000 is now AUD11,790 over 19 years.
The latest forex rate is AUD1 = SGD0.942 ( money changer rates this aftermoon 21 Aug 2019 )
I leave it to you and buddies to do the crunching.

Yes.. the money is still in the bank.
Am I happy with the situation? Yes!
Am I a value investor? No!
Tongue Tongue
Reply
#10
Too bad you didn't invest your USD into sub prime property, it could have doubled.... overall, I still believe you did the right thing to diversify...
Who knows what will happen to SGD tomorrow? not everyday is sunday
Reply


Forum Jump:


Users browsing this thread: 4 Guest(s)