The World of Safety
Three institutions make up this world of safety: banks, governments, and insurance companies. If you go to a bank and say, “Mr. Banker, I want my money safe, guaranteed, and earning the highest rate of return,” the banker will recommend CDs. The government will offer U.S. Savings bonds, and insurance companies will offer deferred fixed annuities. All three investment vehicles share common characteristics. First, your principal is protected from loss. Second, you earn a fixed rate of interest. And finally, if you want to draw your money out of these accounts before the end of the term, you will pay a penalty/surrender charge for early withdrawal. These options are ultra conservative and very boring. They also provide a low rate of return on your money.
Three institutions make up this world of safety: banks, governments, and insurance companies. If you go to a bank and say, “Mr. Banker, I want my money safe, guaranteed, and earning the highest rate of return,” the banker will recommend CDs. The government will offer U.S. Savings bonds, and insurance companies will offer deferred fixed annuities. All three investment vehicles share common characteristics. First, your principal is protected from loss. Second, you earn a fixed rate of interest. And finally, if you want to draw your money out of these accounts before the end of the term, you will pay a penalty/surrender charge for early withdrawal. These options are ultra conservative and very boring. They also provide a low rate of return on your money.
The World of Growth
Three institutions participate in the growth world: mutual fund companies, brokerage firms, and insurance companies. If you go to a mutual fund company and say, “Mr. Mutual Fund, I want my money to outpace inflation,” a mutual fund company is going to recommend a mutual fund from its company. If you call up Vanguard for example, its advisors will likely recommend a Vanguard index mutual fund.
Brokerage firms will offer a variety of investment tools that are large and growing: stocks, bonds, mutual funds, ETF’s, REITS, limited partnerships, commodities, hedge funds, and the list goes on. Insurance companies will offer variable annuities.
Insurance companies work in both the growth and safe worlds. On the safe side of the equation, they offer fixed annuities and on the growth side variable annuities. A variable annuity is a bunch of mutual funds wrapped inside an annuity contract.
Growth world investments share a couple of characteristics. First, your principal is not guaranteed. Second, you will earn a variable rate of return, and finally, if you really want to take advantage of the world of growth, you need TIME on your side.
When you are investing in the world of potential/growth, you need to understand the historical volatility of the stock market. Look at a chart of the S&P 500 on a daily basis. You see very sharp peaks and valleys. Wild swings in market volatility, on a short-term basis, are expected. If you stand back and look at a chart of the S&P 500 during a fifteen-year time horizon, you will notice the volatility is much less extreme. You’ll see a gradual climb up instead of the peaks and valleys. Ultimately, TIME is the cure to volatility in the stock market. The more time you have on your side, the more volatility your investment portfolio can handle. Remember, too, stocks have never lost money during a fifteen-year period, as measured by the S&P 500.
Earlier in this book, I discussed your time horizon versus the market’s time horizon. If you are seventy-five years old and your life expectancy is eighty-four, you may not have enough time to participate in the world of growth.
The term growth is used interchangeably with the words equity and risk throughout this book.
