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The Power of Equity Investing - Part 2

The Power of Equity Investing - Part 2

| May 16, 2024

Saving and investing are two fundamental pillars of personal finance, each serving distinct purposes in building wealth and achieving financial goals. While both involve setting aside money for the future, they operate on different principles and offer varying levels of risk and reward.

Saving involves setting aside a portion of income for short-term needs or emergencies. I start each of my client’s financial plans with a short-term component that covers their first couple of years in retirement, but it depends heavily on the client’s personal situation. Savings typically entails depositing money into low-risk accounts such as savings accounts, certificates of deposit (CDs), or money market accounts. Savings are readily accessible and provide a financial safety net for unexpected expenses or sudden changes in circumstances. The primary goal of saving is to preserve capital rather than generate substantial returns.

On the other hand, investing involves putting money into assets with the expectation of generating returns over the long term. And this is where the financial plans I create for my clients start doing the heavy lifting. Unlike saving, investing entails taking on some level of risk in pursuit of higher potential rewards. Common investment vehicles include stocks, bonds, mutual funds, real estate, and exchange-traded funds (ETFs). The goal of investing is to grow wealth over time by capitalizing on the power of compounding returns.

One key difference between saving and investing lies in the level of risk involved. Savings are typically held in low-risk, interest-bearing accounts, offering stability and liquidity but yielding modest returns. In contrast, investments carry varying degrees of risk depending on the asset class and market conditions. While stocks have the potential for high returns, they also come with the risk of volatility and capital loss. Bonds, meanwhile, offer more predictable returns but carry the risk of default.

Another distinction is the time horizon. Saving is generally geared towards short-term goals and immediate needs, such as building an emergency fund, saving for a vacation, or making a down payment on a home. Investments, on the other hand, are suited for long-term objectives like retirement planning, funding education expenses, or achieving financial independence. The longer the investment horizon, the greater the potential for compounding growth to work in favor of the investor.

Moreover, saving and investing serve complementary roles in financial planning. Saving provides liquidity and stability, ensuring that funds are available for short-term needs and emergencies. Investing, meanwhile, offers the opportunity for wealth accumulation and long-term growth, helping individuals build a nest egg for the future.

Next week we will take a closer look at different types of equity investment vehicles in more depth.

Until next time…

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. 

All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in the price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.