As shared in part one of this two part series,
Many marriages include one spouse who understands the basics of investing and the other who has no idea what is happening. If this sounds like your marriage, we wrote this post for you.
After seeing recent Gallup survey findings about investing I knew I needed to write a post to overcome serious investing myths, such as a third more Americans believe investing in a home is a better investment than the stock market.
This post summarizes the investment types surveyed by Gallup. It includes long term investment performances of each, as well as an explanation of what they are, the advantages, and the disadvantages.
This post provides readers with the facts they need to have informed conversations with their spouses or investment professionals.
The Misinformed Perceptions of Various Types of Investments
I will use the image above as the basis for explaining in plain language each investing option listed, and revealing the actual investing returns over time.
What Gallup survey respondents think and what is true are two different things.
What is true is detailed below.
The Fundamentals: The Stock Market
A stock is a share of ownership in a corporation. Stock picking is dangerous for the novice and even more dangerous for the casual investor who believes they know more than the market.
With that said, investing broadly in the stock market by purchasing low to no-cost index funds is a winning strategy. In our previous post, Comparing Investor Fees: How they are holes in your retirement savings bucket, we wrote about why index funds are so successful.
The S&P 500, comprising 500 of the largest publicly traded companies in the United States, is a popular investment choice for many couples. It offers diversification across multiple sectors, providing a balanced approach to stock market investment. Historically, the S&P 500 has delivered strong returns.
Stock ownership is highly correlated with income. 87% of upper-income Americans with annual household incomes of $100,000 or more own stock. About two-thirds of middle-income Americans, 65%, own stock.
The Advantages of Investing in the S&P 500 Index Fund
Diversification, that is, exposure to a wide range of industries, reduces risk compared to investing in individual stocks. Investing in the S&P 500 index fund does, in an indirect way, to international markets. 30% of revenues generated by the 500 companies that comprise the S&P 500 come from overseas. Although some professionals would argue the prudency of including in your investment portfolio international index fund investments.
Stocks can also be easily bought and sold, providing flexibility and the peace of mind to access cash quickly if necessary.
Historical Performance
As you may recall from the illustration above, over long periods of time, the stock market outperforms all other investments included in the Gallup Survey. Below is an illustration of the stock market (DJIA) since 1914.
Overcoming the Disadvantages of Investing in the S&P 500 Index Fund
The volatility accompanying economic downturns can yield significant portfolio value losses, even with the most sound and diversified investments. These short-term fluctuations might be unsettling if you lose sight of the bigger picture.
Feraud Calixte, J.D. (attorney) and CFP® (Certified Financial Planner) is a Senior Financial Advisor at Modera Wealth Management, LLC. He is also a proud National Association of Personal Financial Advisors (NAPFA) member, where he currently serves as a National Board Member.
I asked Feraud to recommend strategies for couples to manage the short-term turbulence commonly experienced when invested in the stock market. According to Feraud,
Practical strategies to manage short-term turbulence include:
Manage cashflow prudently
Establish an emergency fund – enough savings for 3-6 months of expenses
Prioritize the long term view of your financial plan.
Ideally part of that plan is having a well-developed Investment Policy Statement. This would set parameters for the investment strategy including expected return, asset allocation and time horizon.
All these strategies are put in place, ideally at the outset of the financial planning engagement, to prevent clients from reacting negatively to short-term turbulence. Evidence has consistently shown that investing rewards long-term-focused clients.
The Fundamentals: Baa Corporate Bonds
A bond is a fixed-income instrument and investment product in which individuals lend money to a government or company at a certain interest rate for a period of time. The entity repays the individuals with interest in addition to the bond's original face value.
Baa corporate bonds, rated by credit rating agencies as medium-grade investments, offer a balance between risk and return. These bonds are issued by companies with moderate credit risk, providing higher yields than government bonds but lower risk compared to high-yield bonds. They are typically less volatile than the stock market, making them suitable for conservative investors who are more focused on preserving wealth than building wealth.
Baa Corporate Bonds are not without risk. The issuing company might default on payments, meaning it does not honor the full or any of the promised interest payments to investors. Bond prices can also decline if interest rates rise.
The Fundamentals: Gold
For centuries, gold has been a trusted store of value, often seen as a hedge against inflation and economic uncertainty. You can invest in physical gold, gold ETFs, or mining stocks.
Historically, gold has been a hedge against inflation and provided stability during economic downturns. However, gold does not provide income in the form of interest or dividends, and physical gold requires secure storage and insurance.
The Fundamentals: Real Estate
It is unclear how the Gallup survey defined real estate as an investment. If survey respondents perceived the question to be about their own residential property, they were misinformed. Compared to investing in the stock market, residential real estate is a poor investment.
We wrote about this extensively in our past post, Is a Home an Investment?
If the survey respondents defined real estate investments as rental properties or REITs (Real Estate Investment Trusts), then an argument could be made that these can produce the greatest returns compared to the other investment options in the survey.
Rental properties can provide a steady income stream. Property values can increase over time, and there are potential tax deductions for mortgage interest, property taxes, and depreciation.
However, direct ownership of rental property is not a passive investment. It takes work. Think of it more as a side hustle of ownership. I owned rental property for over fifteen years and helped my parents with their rental properties when I was younger.
Furthermore, real estate is not always easily sold, making it a less liquid investment. The ongoing maintenance and tenant management can be exhausting.
The Fundamentals: Certificates of Deposit (CDs)
Certificates of Deposit (CDs) are low-risk, interest-bearing time deposits banks offer. They provide a fixed interest rate for a specified term, making them a safe investment choice.
CDs FDIC-insured up to $250,000 per depositor, per bank, and offer fixed interest rates with guaranteed returns. They can be a useful wealth preservation instrument.
However, CDs typically offer lower returns than other investments, such as stocks or bonds, and some CDs include penalties for early withdrawal.
The Fundamentals: Crypto
Cryptocurrencies, such as Bitcoin and Ethereum, have gained popularity as alternative investments. They offer high potential returns but come with significant volatility and risk.
To learn more about Crypto, read my previous post, Will Crypto Crash?
The Fundamentals: Savings Accounts
Savings accounts are a fundamental financial tool for couples looking to set aside money for short-term goals and emergencies securely. One of the critical benefits of savings accounts is their safety.
In the United States, deposits in savings accounts are typically insured by the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions. This insurance protects deposits up to $250,000 per depositor per institution.
While savings accounts offer security, their average annual percentage yields (APYs) are generally lower than other investment options. Historically, savings account APYs have ranged from about 0.05% to 1.00%. However, there are some high APY online accounts available today, which is why we partnered with Raisin.
Meet with a Financial Professional
Choosing a financial professional to manage your investments is a significant decision that can significantly impact your financial future as a couple. One of the most critical factors to consider is whether the professional adheres to the fiduciary standard.
A fiduciary is legally required to act in your best interest, providing advice and making decisions prioritizing your financial well-being above their own financial gain.
This contrasts with non-fiduciary advisors, who may recommend products that are suitable but not necessarily the best option for you, often because they earn commissions or fees from those products.
Consider someone who holds a Certified Financial Planner (CFP®) designation, which indicates they have met rigorous education, examination, and experience requirements.
It's also beneficial to choose an advisor with experience working with couples and understanding the unique dynamics of managing finances together. Don't hesitate to ask potential advisors about their fee structures, investment philosophies, and how they tailor their services to fit your specific needs and goals.
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