Savings versus Index Fund

[Benjamin Carver]

Scott Trench states in the conclusion of Chapter 9 that it is "inefficient and dangerous" to attempt high earnings if an investor possesses less than $100,000 ready-to-invest dollars. He goes on to say that it would be wiser to seek material assets to invest in. Makes sense, small investments equal small returns. Me, being a young investor with roughly $15,000 to my name, is saving up toward the purchase of a duplex - my first material investment. I plan on house-hacking, flipping, you name it. But I'm left with the question, is it wise to keep adding my paychecks to an index fund rather than my savings? My focus is on the duplex, not the fund. But the fund could help propel me toward the duplex. I would empty the fund and purchase that asset in time. But with a recession in the near-ish future, it might be smarter to simply save? Not for sure.

[Scott Trench]

Hello! First off, I want to clarify something in case a reader of this post gets confused - here is the text of the book you are referring to: 

"It's inefficient and dangerous to attempt to generate significant investment returns (greater than $10,000 per year) without the personal financial pieces in place."

What I am saying in this part of the book is that investing $1,000 to earn a 10% return is hardly worthwhile - that's $100 over the course of a year. If I invest $1,000 hoping to earn a 1,000% return ($10,000), I'm either likely to be making a highly leveraged or very risky investment. I'd be unwise to expect meaningful investment returns (in terms of dollars, relative to my income or expenses) with little to no net worth, poor credit, and when living paycheck to paycheck, for example.

The point is to invest from a strong financial position - one where you spend less than you earn, accumulate capital, and invest it regularly, in chunks that are meaningful. This will reduce dependence on the investment performing, and allow you to invest optimally for the long run.

Now to answer your question more directly - It sounds like you are taking your accumulated savings and placing them in one of two places: 1) An after-tax brokerage account where you invest the money in index funds and 2) your savings account.

An investor getting started might do this such that they have the chance to earn a return on their investment greater than the meager rates offered by savings account interest yields. 

However, you also risk volatility in your investment. If the market crashes, your down payment is wiped out. For this reason, I think a majority of people opt to keep their down payments in less volatile investments, or in savings or checkings accounts. 

Hope that helps!