Revisiting the savings vs investment debate

savings, investment

Savings and investments go hand-in-hand. Your investments can grow if you manage to increase your savings. The world is witnessing a pandemic like none other, comparable to the plague in the early 20th century or the two world wars. We are dealing with a medical problem that has turned into a massive social and economic catastrophe for nations.

In such a situation, gold prices have touched a record high. Every time that happens, people wonder if they missed out on the ‘gold rally’. You put your money in gold when everything else is in a state of ‘panic’.

“As the scale of the pandemic—and its potential economic impact—started to emerge, investors sought safe-haven assets,” a quarterly report from the World Gold Council, an industry body said.Diving deeper into the numbers, you figure that there was a sharp 36 per cent jump in demand for gold coins. Typically, wealthy retail investors buy them. In contrast, the wholesale market for gold slumped.

Jewellers and industrial users buy gold in bars. The demand for bars fell 19 per cent. The industry body observes that the jewellery demand dropped 39 per cent over the same quarter last year. It is a record low.

That indicates panic investing by individuals. There is no structural demand surge in gold. A good indicator of the future of gold prices would be the hunger of countries like China and India for the
yellow metal.

The demand for jewellery fell 65 per cent in China and 41 per cent in India during the quarter to March 2020. That indicates that panic buying by affluent investors mostly drive high prices of gold.
While gold acts as a hedge against risks in the markets, it is not an investment.

Your investment has to overcome the annual inflation rate each year to give you any meaningful returns. The inflation rate erodes the value of the money sitting idle in a bank.

Your money has to work for you. It has to lead to productive use of assets. That happens only when you invest in a business. Equity investing is the most efficient way of putting money to work. Buying quality equity assets and holding on to them as long as they make you wealthy. Warren Buffet and many other legendary investors have lived to tell the tale.

Over the history of global financial markets, there have been many up cycles and down cycles. Such movements are needed for old investors to cash out and new investors to enter. However, it does not pan out that way for many individual investors.

Most individuals buy when markets are at a record high and sell when everyone panics at record lows.
Investing through exchange-traded funds or mutual funds is by far an efficient way of investing in equity assets. Timing the market is for those who know about them. For people not into financial markets, it could be severe.

What about other asset classes?

Fixed-income assets are exposed to an interest rate risk. They are not risk-free, as commonly believed. They protect your capital and can keep your savings intact. However, they may not be able to fight inflation over the long-term as equity assets do. Effectively, fixed-income assets are a better way to save money than just keeping them in the bank account. However, they are not the most efficient way of investing as fixed income assets cannot give you a return substantially higher than the inflation rate.

Then, there are various government-sponsored public savings schemes. Just as the name suggests, they are all ‘savings’ schemes. Not any ‘investment’ schemes. Recently, the government decided to stop taking new subscriptions to the 7.75 per cent savings bonds, a scheme launched in 2018.A lot of retirement and savings money went into these bonds. However, the interest rate offered is way over the 10-year government bond yield of around 6 per cent.

When the government provides a higher return than prevailing interest rates, it has to bear an additional burden. All of that is a clear indication of interest rates trending down on various public savings schemes.

Savings ‘and’ Investment

The debate cannot be whether you save or invest. Both have to go hand-in-hand. These are times when one has to save more and spend more. Allocating your savings towards equity assets and staying invested is essential. Buying when equity assets are priced lower, and others are fearful is most profitable. Legendary investors have done that. So can you.

Panic buying drives gold price rise

36% jump in demand for gold coins recorded since the outbreak of the pandemic. However, this price increase has been driven primarily by panic buying from affluent investors and not jewellers

19% decline in demand for wholesale gold, which is traded in the form of bars,  has been recorded in the same period. This indicates that the price increase is not being driven by a structural rise in demand from jewellers

source: newindianexpress

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