Friday, July 6, 2012

Saving versus Investing

Saving and Investing are two different things....

As I noted in Real v. Fake Investing, a lot of people obsess about where to invest, not how to invest.   They think the name of the game is finding the secret key - the winner stock - putting down a bet and then winning the lottery when it pays off.

And yes, when I was in my 20's, I thought that, too.   Why?  Because I watched a LOT of television, and that is all they preach on television.  The shouting guy says "buy" and "sell" as if those decisions will make you rich.  And the shouting guy is dead wrong - as his record attests to.   Invest using his advice, and you will be broke.

There is a difference between SAVING and INVESTING, and for most middle-class Americans, the best we can do is to SAVE.

Why is this?  And what is the difference between the two?

Well, SAVING, as the name implies, means putting money aside for a rainy day.  That rainy day could be your retirement, or perhaps an emergency fund.  Or money to buy a car, or fix your roof.   If you set money aside for these inevitable contingencies, you will have it when you need it - as opposed to borrowing it and paying interest, or worse yet, being broke later in life.

As I have noted before, the bulk of the money you end up with in your 401(k) will likely be the money you put in it.  Sad, but true.   So the more you put in, the better off you will be.

True, you might be able to double or triple your money, over time.   In a good market, you might double your money every seven years.   But then you will hit a bad market (as we have) and be lucky to break even for a few years.   Over time, you will do well, of course - provided you SAVE.

INVESTING, as the name implies, is taking a pile of money and using it strategically to make more money.   This requires some knowledge on your part - some smarts - as well as insight.   But most of all, it requires that you are willing to assume some risk - often a lot of it.

If you SAVE money, there usually is little risk.   You put money in an FDIC insured account, or into blue-chip stocks, or government bonds, and other relatively safe investments.   The worst that can happen, usually, is that your gains don't keep up with inflation.

With INVESTING, however, you can lost some or all of your money and end up broke.   You buy a speculative stock, and it gets hammered, you might lose half your investment.   It goes bankrupt, you lose it all.   And in the last few years, this has happened to me,  only with stocks that at one time, would have been considered "blue chip" - such as General Motors.

Over time, of course, you can't afford not to invest at least a little bit.     But what do you invest in?  If you are an average, middle-class American, you have no special insights into the market (and no, what you hear on TeeVee, shared with 300 Million other people, is not a special insight).

You can try stock-picking.  It is not a swell idea.  Why?  Because even if you spend hours researching a stock, there is someone else who spends days, weeks, and years doing it.  There is a guy who does nothing but watch that stock.  You can't beat him.

And my own experience with stock-picking reflects this.   Some of my best "picks" were embarrassing accidents.  Some of my thoughtful choices went bankrupt.  I bought $3000 of General Motors Stock, and it is now gone forever.  I bought $750 of Avis stock, while intoxicated, on a whim, and it soared to $12,000 in value.   I bought stock in a company called Morningside, and it shot up 50%.  Great insight?  Hardly.  I mistook the company for a different one with a similar name.  Duh.

You might as well go to Vegas.   My portfolio of "picked" stocks is doing OK, overall, only because I have diversified it to include corporate bonds, income-producing stocks (that pay dividends) and some blue chips.  It isn't making a lot of money - but it isn't losing any.  Perhaps I am making 5% a year, if that.  I could make more, but can I afford the risk?

So what else is there to do?  Ahhhh.... Mutual Funds!  These were touted to us in the 1980's as the answers to all our prayers.   Really smart guys who know about stocks would take our money an invest it for us.   And in return, they get..... well, some of our money.   How much?   I can't tell you.   No investment adviser, even the ones at Fidelity, can tell me how much they make and where they take the money out.

The fellow at Fidelity - which is one of the better companies - says they don't charge me fees.  But someone is paying for that glass-paneled office and that oak desk.   By August 1, 2012, we are supposed to get statements from our Mutual Fund companies, detailing exactly how much they are making from our money.   I am willing to bet they try to obfuscate this data as much as possible.

Some funds are more egregious that others, of course.  Some take out 5% up front, and it can take you a year or more just to break even.   Others take out fees every year.  Some do both.  It is never clearly explained or understood.

The bottom line, is, though, if your money makes 10% in the market, you are going to get something less than that.

But all that being said, Mutual Funds are, in some regards, the only game in town, particularly if you are investing (or is it saving?) in a 401(k) plan.

Of course, there are other ways to "Invest" - such as in your own business.  I invested in Real Estate back in the 1990's because I felt that at least it was something tangible that I understood and could control.   And knowing the market and property values, as well as how to manage the properties, I did pretty well.

Others, who got into the market late, and who didn't understand the market, values, or management, lost their shirt.   These are the types of "Fake Investors" who just buy whatever is being hyped on television.  And they always lose their shirts.   They buy Facebook stock.  They buy Gold.  They buy Apple - after it has shot up in price.

So what is the answer?  I wish I had one - a sexy answer that was simple and unique and clever, and guaranteed to make you a pile of money over time.  But there isn't one.  There is no Genie or magic lamp.

The best you can do is to SAVE money, and invest some of this in a variety of things, putting no one big chunk into any one thing, unless it is a very, very safe investment.   Warren Buffet can afford to gamble a million dollars - we can't.

And do the research on your investments, or at least try to.   But part of this research is learning about companies and what balance sheets should look like, as well as understanding all those numbers such as P/E ratio and the like.  Quite frankly, most people don't have the capacity to really be able to understand investments and accurately and correctly distinguish between a "good" investment and a "bad" one.

And to some extent, this is why our 401(k) system is ultimately flawed.   By turning us all into investors we are being asked to so something we have no skills at.   And for many people, this will work out horridly.   It is a given that a few folks will put all their money into high-risk investments and likely lose it all and end up destitute.  A few others might "strike it rich" or at least do moderately well, over time.  The bulk of us, if we are lucky, can only hope to do "OK".

And that is assuming that all these people SAVE in the first place - in order to INVEST.   A startling number of Americans have not even bothered to SAVE at all - or have saved very little.   Investing in the wrong stocks or funds is one way to possibly end up broke.  Failing to SAVE, however, guarantees this result.

And perhaps that is the most fundamental difference between SAVING and INVESTING.