If you could double your savings without actually investing any additional money out of your own pocket, would you do it?
While taking advantage of this money move may seem like a no-brainer, many workers are missing out on the opportunity to supercharge their savings. This investing strategy takes very little time to implement but can have significant long-term effects on your finances.
How your investing strategy affects your savings
The speed at which your investments grow not only depends on how much you're saving, but also the rate of return you're earning. And that depends largely on where, exactly, you're investing your money.
Investing in more conservative investments such as bonds will result in a lower rate of return, usually in the ballpark of 4% to 6% per year. You'll earn higher returns by investing in stocks, and although returns can vary dramatically depending on the individual stock, the S&P 500 itself has experienced an average return of around 10% per year since the index was created.
Many workers avoid investing in stocks, however. In fact, nearly one-quarter of workers are invested primarily in bonds and other conservative investments, according to a survey from the Transamerica Center for Retirement Studies. The survey also found that millennials and Generation Xers were the most likely to invest conservatively, despite the fact that these workers have the most time before retirement -- and the most time to recover from market downturns.
While the stock market will always be subject to volatility, the higher long-term returns can make up for the short-term turbulence. And by tweaking your strategy to start investing more aggressively, you can make your money work harder for you.
Doubling your savings with zero effort
You don't have to invest in the next trillion-dollar company to see substantial investment gains. In fact, simply investing in index funds earning average returns can be enough to potentially double your savings.
The average 401(k) participant contributed around $7,270 to their retirement fund during the 12 months ending in September 2020, according to a survey from Fidelity Investments. That amounts to just over $600 per month.
Say you were investing more conservatively, earning a 5% annual return on your investments. If you were investing $600 per month, you'd have approximately $478,000 saved after 30 years. But if you had been investing more aggressively and earning a modest 8% annual return, you'd have close to $816,000 socked away.
In both cases, you're contributing the same amount of money each month. But by taking a more aggressive investing approach, you could end up with an additional $338,000 in your retirement fund.
When should you invest conservatively?
Investing heavily in stocks can help your savings grow as quickly as possible, but it's important to invest wisely.
As you get closer to retirement age, it's a good idea to adjust your portfolio to be more conservative. That way, if the market crashes just before or shortly after you retire, it won't decimate your savings.
That said, you should still aim to invest at least some money in stocks, even if you're close to retirement. You'll want your savings to continue growing as quickly as possible no matter your age, and if you invest solely in bonds and other conservative investments, you could be selling yourself short.
A good benchmark to keep in mind when deciding on your investment strategy is the rule of 110. This guideline states that the percentage of your portfolio allocated to stocks should be equal to your age subtracted from 110. For example, if you're currently 45 years old, 45 subtracted from 110 is 65. That means you should aim to allocate 65% of your portfolio to stocks and 35% to bonds.
Of course, this guideline is only a suggestion, and your asset allocation will also depend on how much risk you can tolerate. But investing in the stock market isn't as risky as it might seem, and shifting your investments even slightly toward stocks rather than bonds can result in significantly higher returns over time.