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Tuesday, July 24, 2012

Investment Vs Saving in a Bank: Which one is "Riskier"?

Last weekend, I was watching a romantic drama show on a TV channel and in one particular scene, the couple were talking about making investments.  The husband talked about how his friend is making over $10,000 per month on top of his regular job salary. He said the friend had requested they invest together. However, the problem, as he narrated, was that the capital required was outlandish (at least according to him). The investment would require each of them contributing a “whopping” $50,000. According to the husband, the prospected investment involved trading stocks. Despite the huge capital involved, the husband was still persuaded this could be a good idea. He therefore proposed that they share their part of this capital with his wife. He is to raise 50% (1/4 of the total amount needed for investment) of their share of the capital and the wife, the other 50%. The suggestion and the insurmountable capital required, astonished the wife and found it hard to support her husband on the idea of investing such large sum of money in stocks. She stood her grounds reasoning that stocks are far risky and are only comparable to gambling in that field.  She said she didn’t have that money and, come rain come sunshine, she wasn’t going to allow her husband to “gamble” with a whole $50,000. At that time, the young couple had a nursery school daughter.
This whole scene puzzled me. What disturbed me the most was the wife’s assertion that stocks were risky and comparison of stocks to gambling. Since the two have a kid, they must finance her needs too.  Therefore, proper investment would be one way of growing their money. At the end of the show, I sort the help of my mum to understand how the average person finance their own needs, for instance, house, kids’ education, car, etc if for them investment is too risky. My mum’s reply shocked me the most – they don’t know how and where to invest and see investment as a risky endeavor. The average person would rather stash cash in their bank’s saving accounts as it is “safer”.
In my view, however, putting your money in the bank is in fact “riskier” than making a prudent investment. Money saved in the bank accounts are often eaten away by inflation. The mean historical inflation rate per annum is around 3%.  It therefore follows that our money stashed in the bank accounts are being eaten away at this rate – 3 % every year.
The reputable investor, Warren Buffett once stated that risk originates from not knowing what we are doing. The risk we are talking about is promoted by the lack of knowledge. So, since most of us do not know that $50,000 today is not equal in worth to $50,000 tomorrow, next month or years later, putting your money in a savings account is not only “riskier” but assure way to devalue your hard-earned cash. It is therefore vital to get investment education through reading books, news and blogs on finance and investment and look for some alternative cautious investment which will enable our money grow. As a matter of fact, investments are not risky at all if you know what you’re doing.

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