Monday, November 19, 2012

Saver Or Investor - Which Is Best?

What's the difference between a Saver and an Investor and who is the most successful?
Taking a closer look at this question there is no doubt that there is a close relationship between being a successful investor and a good saver. While many successful investors may 'flaunt' their wealth, the most successful tend to be very astute and conscious of where every dollar is being spent and hence showing all the traits of a successful saver.

A person who is first and foremost just a saver can do very well for him/herself. They find a saving in everything they do and this will eventually create a significant difference to their wealth, irrespective of their income. Generally, savers will be conservative by nature and this will be reflected in their investment style with safe, bank deposits being a favourite.
An investor on the other hand, will seek to create wealth by investing their own funds (and often with borrowed funds) into a variety of assets in the hope of creating wealth. When it pays off, they can be extremely successful, when it fails, it can be disastrous.
It is not unusual to see investors becoming very successful only to fail miserably by overextending their positions with borrowed funds. This has been highlighted in the last few years with share and property markets collapsing sending many a successful investor broke.
How does an investor fail so badly? Debt is normally at the heart of any investor's disaster with greed not far behind. Here is step by step example of how it can fall apart for the investor. ($100 used for easy explanation)
  1. Invest own funds of $100 in an asset (eg shares, property etc). This initially earns a good return Investor starts thinking, "This is easy, I can make more money if I had more money!"
  2. Borrow $100 from the bank, now has $200 invested
  3. Investor gets a little cocky and starts living the extravagant lifestyle
  4. Asset drops in value - "Don't panic, things will come good, just hang in there", the investor says
  5. Asset keeps dropping and now valued at less than 50% of the $200 invested
  6. The bank wants its $100 back - quickly! The bank sells the asset and harasses the investor for the balance i.e. the bank wants all its $100 back.
  7. The investor has to start selling other assets. The investor now has less than zero invested (negative equity) and often a lifestyle of a millionaire that can't be sustained - Game over.
The saver does not take as many risks as the investor and certainly has little interest for an extravagant lifestyle. Hence a more secure future awaits the saver, albeit with limited upside.
So, back to the question, which is best, a saver of an investor? A balance between the two is the logical way to go. By being an over-cautious saver, it can be hard to get ahead particularly in the current 'low' interest rate environment. Investors need to think like a conservative saver and make sure they can always survive a disappointing investment and therefore benefit from the investments that come good.