• This newsletter follows a 3 Pillars framework each month: grow income, reduce expenses, and save more.  

• Week 4 is up for grabs topic-wise so I usually answer questions submitted by subscribers and clients.

• Send your questions to me at [email protected] and I’m happy to do for you.

To learn more about comprehensive planning or coaching engagements available, checkout my website and schedule a call.

The below question was sent to me via direct message on social media and thought it worth exploring.

We are purchasing a piece of property in the next couple years. Should we just be saving cash or do you recommend investing in index funds while we save? 

When do you need the money?

• If you need money sooner, you should take less risk with your funds.

• If you need money later, you may be able to take more risk with your funds.

  

How are you saving for this goal?

• The amount of money you dedicate to stock market investments when saving for a goal is one way to evaluate your risk being taken.

• Even if you split your funds between stock and bond investments evenly, you could end up losing more than -20% of your funds saved for a goal in one year.

• Anyone who has bought a home before understands how large that -20%+ difference is when you already have saved so hard for a large purchase with many expenses ahead of you.

• A home costing $400,000 needs $80,000 at least so being $16,000 short a down payment before closing and other costs is no small issue.

  

You May Not Have Time To Recover

• When market investments decline, they take time to regain value. Sometimes longer than when you need those funds for your goal.

• Purchasing a property in a couple years would make the amount of this money you put at risk of principal loss to a minimum, I would recommend none.

• It can take years for your account value to recover after a market downturn. Large growth stocks took 13 years to recover after the tech bubble burst in 2000 as one example.

• In the Morningstar report, “How Long Will It Take The Market To Recover?” recovery times averaged 6 years for large stock blend funds as one example.

  

Risk Feels Different in Dollars

• Many investors look at average return rates and say, “Yes, I want the higher rate of return! 10% is better than a 5% rate of return!” until they experience the reality of what both sides of an average return feels like.

• Percentages also don’t communicate much experience vs. dollars.

• You earn dollars. You spend dollars. You gift dollars to your church.

• A % doesn’t land the same way so asking questions about what percentage of loss you can stomach is almost pointless.

• Especially the more you’ve saved, fully understanding what is at stake requires a measurement in dollars, not percentages.

• Below, if you’ve saved 25 years towards a goal, let’s say a second home or investment property and you will need the funds in year 27.

• In year 26, the following happens to your life’s work.

• Funds should have not been invested in year 25 but held in a high yield savings or cash account.

• Does 43% or $445,576 better describe the feeling of loss in the 100/0 portfolio at right?

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