Wednesday, May 1, 2013

Why all your money should NOT be in the stock market

If anyone is an advocate of the stock market and its amazing returns, its me. Actually, lets rephrase that, I am a fan of making money in the market.

I have to admit that I was one of those people whom would advise you to put the majority of your savings in investments. I am not a fan of the 1% mediocre interest rates that banks get away with giving us regular folks.

I have to confess, however, that my thoughts on the former have changed.

So, what happened?

While watching one of my favorite shows this weekend (the Suze Orman Show) she answered a question from one of her twitter followers whom stated the following:

...she's been doing very well in the stock market but she wanted to set some money aside for an 8 month emergency fund (something Suze advises everyone should have, and I agree). Well, in order to create an emergency fund, she would have to take out some money out of her investment accounts and allocate it towards a savings account where the money would be 100% safe if anything happened with the market. The issue, however, is that doing that felt like a waste or a 'downgrade' to her---basically, she would be going from 6-7% annual interest on her money to 1%. Hence, she asked Suze her opinion on this.

Most lovers of the stock market profits (including myself) would agree with this lady in her disappointment in having to 'downgrade' and seeing this as "missing out" on profits.

Well, suze brought up an excellent point that completely changed my opinion on this. And this is how she explained it:

Lets think back to 2007 when everything was flourishing and the bull market was strong. Most of us didn't know what was coming and then 2008 came like a tsunami cutting profits by an approximate 40%-50% with no signs of when things would turn around. Now, lets say all your money would have been invested in the market during that time.
 
What would you have done? You would have found yourself 40-50% poorer with no emergency fund and you'd have to make a decision to either cut your looses (aka selling and loosing A LOT of money) or waiting until things turned back around (and we all know how slow this process has been for things to go back to normal).

I have previously stated in the blog that money invested should be discretionary money and I still stand by that. Now I also stand by the fact that emergency funds should not be invested in any way. They should be safe to serve its purpose--- to be tapped in to when there is an emergency without having to worry about what's going on with the stock market.

Bottom line is, we truly never know what the future brings. Thank you Suze for putting this in to prospective for me.
 
Any thoughts?

 

Disclaimer: I was NOT compensated for this post. I am truly a fan of Suze Orman and I found this advise to be very valuable, hence, I wanted to share with my readers.