From Tom Dyson, founder, Palm Beach Research Group: My dad learned the hard way.
As an investment banker on Wall Street during an economic boom, he’d spent the previous 10 years working harder than he’d ever thought possible… and getting paid more than he’d ever imagined.
So on New Year’s Eve 1999, at 52, he retired. He hung up his suits, threw out his alarm clock, and began composing poetry and oil paintings.
He had several million dollars in “savings.”
But his money wasn’t in “savings” at all. He’d put it all in the stock market… concentrating it in several bank stocks, including Lehman Brothers.
In the crash of 2008, Lehman Brothers folded, and Dad lost almost everything. Most of his life savings vanished.
He had to go back to work… as a piano teacher. If he’d put his millions into true savings vehicles—where there was no risk of loss—he’d probably still be retired.
A big part of that is making sure people know the difference between saving and investing. Most financial planners use the terms synonymously. But that’s inaccurate.
The distinction between saving and investing is one of purpose. The primary purpose of investing is to grow your capital. The primary purpose of saving is to preserve it.
Savings is money earmarked for certain future expenses. An investment is extra money set aside to build wealth… after you’ve taken care of your saving and spending.
Over your investing career, understanding this could mean the difference between financial success and bankruptcy.
These different purposes demand different strategies.
Saving requires a very low degree of risk. Investing allows for some—but not too much—risk.
As an investor, you can put your money into a wide range of stocks—including some you believe will “outperform” the market.
These include the recommendations you get in the Palm Beach Letter’s Performance Portfolio. Or you can buy real estate… fund a private business… trade options… and so on. (PBRG covers all these strategies.)
But remember: Investments will always be subject to loss.
The business you invest in could fail. (Nine out of 10 startups fail.) The stock you invest in could go belly up. The stock market could crash… just like it did in 2008.
Your savings, on the other hand, should be very safe. Trust it to only the sturdiest possible financial vehicles. There should be no risk of losing it.
In fact, I’ll bet many of you reading this have ALL your retirement money invested in vehicles such as 401(k)s and IRAs. Or you may have all your children’s education expenses in Coverdell or 529 plans.
Almost all of these vehicles are in stock market-related investments like mutual funds or stocks. But this money should also be in savings vehicles.
It’s of the reasons I was so drawn to a special type of account—one where my money is totally safe. That’s because this account has no exposure to the stock market. If the Dow crashes 50% tomorrow, my account balance won’t drop a single dime.
With this strategy, there’s virtually no risk of principal loss. Like a bank account, your money will never go down in value.
Many of the companies that administer these accounts have safely grown investors’ savings for over a century without default.