Cash, stocks balancing and investing

[lmurt]

Hi all,

Currently I have accumulated about $120k in savings that has been sitting in my 'high yield' savings account for the past 6 years. The savings account has been returning somewhere between 0.2-2% interest rate depending on the year.

Recently I was talking to a friend and he pointed out to me that I have actually been LOSING money every year due to inflation. So with current inflation rate of 8%, I'm actually LOSING 6-7.8% of my savings. That has made me wondering whether my approach is wrong...

I don't know anything about stock market trading so I have not been investing in the stock market. My friend told me that instead of parking my money in a savings account, I can just 'park' it in an index fund in the stock market. I was playing around with the numbers on plantadollar and looks like I could have either beat the 0.2-2%/year interest rates or lost money depending on my inputs.

For example putting $1600/month for 6 years could have given me anywhere between 6%-22%/year depending on where I had my money "parked":

MSFT: +22%/year
GOOG: +13%/year
QQQ: +9 %/year
SPY: +6 %/year
VUG: +6 %/year
VTI: +5 %/year
GLD: +4 %/year

This is 8 to 44 times higher than my current savings account return of 0.5%/year!

But at the same time, if I had put half of my savings in the stock market last year, I could have actually LOST 0-18%:

MSFT: -1.7%
GLD: -3.5%
GOOG: -11.4%
SPY: -11.4%
VTI: -14.6%
QQQ: -17.5%
VUG: -19.5%

That's scary!

I keep hearing about recession so I don't know what to do. What should I do going forward? Should I continue to park my savings in a savings account, or should I risk it and park it in the stock market with the hopes that it gives me more returns than my savings in the next 6 years?

 

[yakers]

Wish you had asked this question 6 yeara ago, good time to DCA (Dollar Cost Average) deposits over that time, still a good time to DCA if you are more worried about losses and that will help you invest. Going forward I would invest in a way that works for you , if you do not need the funds for 6 yr=ears it 'should' work out well. (nothing guarenteed, but very likely). Not only missed 6 years of growth, how has that savings acount fared Vs inflation? (doing nothing)

 

[yakers]

And you may be a good candidate for just one of VO/VTI/VT

 

[OldShooter]

Looking in the rear view mirror, coulda, woulda, mighta ... can be very amusing. What you pick can make you rich or abysmally poor. It is also a total waste of time. The only thing that matters is what you choose today and how it fares going forward. Try these:

"If You Can" by William Bernstein https://www.etf.com/docs/IfYouCan.pdf (free 16 page download)

"The Coffee House Investor" by Bill Schultheis https://www.coffeehouseinvestor.com/ (This is Bill's first book; read it before reading his second one.)

"The Bogleheads Guide to Investing" by Taylor Larimore et al https://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Larimore/dp/0470067365

There are many other good books but these are the ones I like for newbies.

And, actually, this may be a good time to move into the stock market. Try VTSAX, seasoned to taste with VGTSX. Never buy individual stocks. Diversification is your friend.

 

[pb4uski]

It sounds like you are a good candidate for i-bonds. They are US savings bonds that pay the rate of inflation. They currently pay 9.62% annual rate. That 9.62% rate is good for the first six months of ownership. The interest rate for the second 6 months of ownership will be declared in November. Who knows what it will be but I'm guessing about 7%. They are designed to keep pace with inflation.

The rub is that you can only buy $10k a year... $20k for a couple. But you can also pre-buy future year allowances and many of us have bought our 2023 and 2024 allowances. If you buy today at 9.62% and future inflation and future interest rates are 0% your 2024 allowance would still pay a minimum of 3.01% for the 19 months of ownership... the same as current 19 month CDs but the actual return will likely be much more than 3.01%. You can also increase your annual allowances by using trusts.

My wife and I have his, her and joint trusts so we can buy up to $50k a year.

Another thing that you could consider are TIPS... Tresury Inflation-Protected Securities. They are similar to i-bonds if held to maturity but operate differently... the par value increases annually for inflation and then interest at a set rate is paid on the par value... but TIPS do not have the annual purchase limitations that i-bonds have.

I-bonds can only be purchased via Treasury Direct. TIPS can be purchased via most brokerage accounts.

Those are the two best ways of getting inflation protection in the fixed income space.

 

[Chuckanut]

Looking in the rear view mirror, coulda, woulda, mighta ... can be very amusing. What you pick can make you rich or abysmally poor. It is also a total waste of time. The only thing that matters is what you choose today and how it fares going forward. Try these:

"If You Can" by William Bernstein https://www.etf.com/docs/IfYouCan.pdf (free 16 page download)

"The Coffee House Investor" by Bill Schultheis https://www.coffeehouseinvestor.com/ (This is Bill's first book; read it before reading his second one.)

"The Bogleheads Guide to Investing" by Taylor Larimore et al https://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Larimore/dp/0470067365

There are many other good books but these are the ones I like for newbies.

And, actually, this may be a good time to move into the stock market. Try VTSAX, seasoned to taste with VGTSX. Never buy individual stocks. Diversification is your friend.

Good stuff mentioned above ^^^^^^^^

Also take a look at Humbedollar.com website. Since you missed the big run-up in prices over the past few years, and this year's run-down in prices, you might as well spend a few months reading the books and Humbledollar. It's a great education, it's free if you use the public library, and you can do the investing part yourself.

If I were you I would consider starting very slowly in the stock market by putting in a minimum amount of money ($1000 to $3000) in a total market index fund, and see how you feel as the market goes, Up, Down and Sideways. It's important you understand your emotional reaction to the ups and downs of the stock market. Especially, the downs.

Stuffing $10,000 into an I-bond is also a good idea. Its' the best deal going for money you won't need for at least a year and don't want to put at risk. TIPS are also good, but are a bit more complicated in regards to taxes. See below for a good primer on TIPS.

https://www.fidelity.com/learning-center/trading-investing/tips-and-inflation

Oh, avoid high fee financial advisors and Crypto. Both are very risky, IMHO.

 

[Alex The Great]

I think your question is quite complex but the answer can be simple.
In a savings account, I'd rather keep money required for the next N years to live. Now days, CDs or even I-bonds may also qualify for that purpose as interest rate is raising. What is N depends on your spending and risk tolerance. I personally look for 4-5 years. For others it may be shorter or longer time. All the rest can be invested, again depend on your risk tolerance and the age. Older people tend to buy more bonds, and current environment actually support it.

 

[mrfeh]

I keep hearing about recession so I don't know what to do. What should I do going forward? Should I continue to park my savings in a savings account, or should I risk it and park it in the stock market with the hopes that it gives me more returns than my savings in the next 6 years?

You need to read this:

https://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit

And stop looking at individual stocks.

 

[target2019]

Hi all,

Currently I have accumulated about $120k in savings that has been sitting in my 'high yield' savings account for the past 6 years. The savings account has been returning somewhere between 0.2-2% interest rate depending on the year.

Recently I was talking to a friend and he pointed out to me that I have actually been LOSING money every year due to inflation. So with current inflation rate of 8%, I'm actually LOSING 6-7.8% of my savings. That has made me wondering whether my approach is wrong...

I don't know anything about stock market trading so I have not been investing in the stock market. My friend told me that instead of parking my money in a savings account, I can just 'park' it in an index fund in the stock market. I was playing around with the numbers on plantadollar and looks like I could have either beat the 0.2-2%/year interest rates or lost money depending on my inputs.

For example putting $1600/month for 6 years could have given me anywhere between 6%-22%/year depending on where I had my money "parked":

MSFT: +22%/year
GOOG: +13%/year
QQQ: +9 %/year
SPY: +6 %/year
VUG: +6 %/year
VTI: +5 %/year
GLD: +4 %/year

This is 8 to 44 times higher than my current savings account return of 0.5%/year!

But at the same time, if I had put half of my savings in the stock market last year, I could have actually LOST 0-18%:

MSFT: -1.7%
GLD: -3.5%
GOOG: -11.4%
SPY: -11.4%
VTI: -14.6%
QQQ: -17.5%
VUG: -19.5%

That's scary!

I keep hearing about recession so I don't know what to do. What should I do going forward? Should I continue to park my savings in a savings account, or should I risk it and park it in the stock market with the hopes that it gives me more returns than my savings in the next 6 years?

By your admission you don't know anything about stock market trading.

Going forward you should read a book or two about investing, and develop a plan. Then you execute the plan.

 

[Badger]

By your admission you don't know anything about stock market trading.

Going forward you should read a book or two about investing, and develop a plan. Then you execute the plan.

+1
There should be some reading suggestions (books) for the novice being recommended soon as more members reply. You should find a recommended reading list from NORDS in FAQS.
Also start reading here. After a while you will start to recognize some of the members who offer responsible suggestions. It doesn't have to be difficult with a lot of complex math. Keep reading and asking questions. You will find your way Grasshopper.

Cheers!

 

[aja8888]

+1
There should be some reading suggestions (books) for the novice being recommended soon as more members reply. You should find a recommended reading list from NORDS in FAQS.
Also start reading here. After a while you will start to recognize some of the members who offer responsible suggestions. It doesn't have to be difficult with a lot of complex math. Keep reading and asking questions. You will find your way Grasshopper.

Cheers!

Just about every other post by Old Shooter here is one that has a suggested reading list. Easy to find.

 

[OldShooter]

Just about every other post by Old Shooter here is one that has a suggested reading list.

Yeah, boring for many I know. Sorry. It's just that questions from new investors come along fairly frequently and I really believe that just doing what SGOTI recommends, good though it may be, is not the same as getting a foundation via self-education. It's the old tradeoff between giving someone a fish and teaching them to fish.

 

[aja8888]

Yeah, boring for many I know. Sorry. It's just that questions from new investors come along fairly frequently and I really believe that just doing what SGOTI recommends, good though it may be, is not the same as getting a foundation via self-education. It's the old tradeoff between giving someone a fish and teaching them to fish.

Don't be sorry, it's very helpful.

 

[TheWizard]

OP doesn't tell us his/her age or financial status.
Have you maxed out contributions to your employer 401(k) and to your Roth IRA?

Is OP still employed or retired? If still employed, you should have an emergency fund, so where is that?

Once we cover the basics, we can discuss taxable account investing...

 

[Nords]

You should find a recommended reading list from NORDS in FAQS.

https://www.early-retirement.org/fo...reading-list-with-a-military-twist-46732.html

It’s been 13 years. Everyone should feel free to step in with an update.