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Why You Should Be Investing Money, Not Saving It

It may seem obvious to some, but investing money is the only way to build wealth. Savings accounts are where your hard-earned dollar goes to die.

The Danger of Savings Accounts

It used to be that a part of every child’s financial education was the establishment of a bank account. There was a nice, Norman Rockwell-style ceremony when a parent took the kid to the bank and deposited the five bucks or 10 bucks in a savings account and brought home a new bank book. The trouble is, apparently, that some people never grow out of that lesson in thrift. At least that’s the lesson of a new book just published by the CEO of a financial services firm. The book’s lesson is that you won’t get rich if all you do is work hard and save your money. You’ve got to be investing money to get it to grow.

It’s astonishing to think that there are people out there who don’t know that.

I don’t mean to be mean, but the idea that anyone with a good job would just put away retirement money in a bank account is actually laughable. It’s like finding out that there are people who don’t know that you should brush your teeth or that smoking is bad for you.

Investing Money vs. Saving Money

After all, the statistics are pretty compelling. The U.S. Federal Reserve Board has a 2% inflation target for the U.S. economy. That’s how fast they want the economy to grow over time. That’s enough growth to keep unemployment low and support spending and keep corporate revenue growth at healthy levels.

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The U.S. economy hasn’t managed to hit that growth target for a while, which is why interest rates have been so abnormally low for so long.

But if you compare that inflation target—which is about how much you can also expect the cost of living to increase—with the interest rates offered on savings accounts, which is significantly less than 1%, you see that having money in the bank is just an invitation to have your account’s value decrease by about 1% per year. And that’s not going to make anyone rich.

The answer to the “what to do with your money” question is obviously to invest it.

Investing puts your money to work for you and offers the possibility of outpacing inflation and even multiplying it over time. And there are a ton of people out there ready to advise you about where to put it, including the guy who wrote the book.

And his prescription is both sound and popular: build a portfolio of investments in the stock marketusing ETFs to gain exposure to the major indexes and sectors. Spread your risk around, including investing money in other countries, markets or regions. ETFs will keep your expenses low and spreading your money around will reduce risk.

The Right Way to Invest

I have only two objections to this advice, which are 1) the vulnerability it retains to a major market correction like 2000 or 2008. If that kind of big pullback happens just as you’re approaching your retirement, you might have to adjust the size of the Florida condo you’re going to buy and 2) the avoidance of investing money in individual stocks, which offer the potential for higher returns.

It seems to me that a responsible investment strategy should be tailored to your own investment personality, matching your goals with a wider selection of strategies for achieving them. And that strategy should also include a plan for avoiding the extreme drawdowns that bear markets can produce in index-centered portfolios.

If you’d like to know more about a group of advisories that can guide you through the process of finding the investment strategy that’s right for you, you can click here to see how Cabot’s family of 11 spectrum-spanning investment advisories can work for you.

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Paul Goodwin is a news writer for Cabot’s free e-newsletter, Wall Street’s Best Daily.