Portfolio Diversification 101: Why You Shouldn’t Sleep on Savings Accounts

Savings is the cornerstone of wealth-building. But more often than not, we rush into opening an account without having a concrete plan.

As a result, we tend to mismanage it or fail to recognize the opportunities slipping through our fingers. Worse, economic disturbances can erode its value and even deplete it. 

The best example is 2022-2023 when about 40% of Americans depleted their savings.

As of today, nearly 30% of Americans have savings below $1,000, which can be attributed to the events in the past four years. 

On a lighter note, more people have already realized the importance of financial planning, portfolio diversification, and budgeting. The increased awareness of high-yield accounts is another critical factor, given the APY of 4.50%-5.35%. Also, 51% of Americans intend to invest this FY24. 

This article will discuss portfolio diversification and why you should never sleep on savings accounts. 

Typical Investments To Add to Your Portfolio 

Portfolio diversification revolves around putting money in different securities and assets. That way, your earnings do not rely heavily on a single investment. You can enjoy higher investment returns and manage risk better in the long run. These are the common investment options to include in your portfolio. 

Mutual Funds 

Mutual funds are the typical go-to option for students. This investment vehicle pools assets from shareholders or investors, which will be invested in various asset classes. Investment experts and mutual fund managers manage mutual funds to derive capital gains. 

The only downside is that mutual funds are not always structured to an individual’s risk appetite and goals. So, study the fund first before putting money into it. 

Bonds 

Bonds are low-risk investments that are loans to governmental and corporate borrowers. Investors act as creditors while holding these fixed-income securities, making them similar to I.O.U. or I owe you documents. 

Bonds are secure investments because every loan detail, including the principal amount, interest, and maturity date, is in the document. Large corporations and governments issue bonds to finance projects and business expansions. 

Given all these, bonds are excellent for risk-averse investors. Yet, given the low and fixed interest rates, returns are low. 

Stocks 

Stocks are the most popular choice on this list, given its vast coverage and market capitalization. They are often considered the foundation of investment portfolios for a hundred years as they outperform most investments. 

Stocks are highly reactive to macroeconomic changes and more volatile than bonds. As such, these are mostly for risk-loving investors. 

However, stocks have consistently delivered high returns and stood the test of time. They have always rebounded from one crisis to another. If we trace the seventeen-year performance of the S&P 500 (SPX), prices have skyrocketed. From 2007 to the most recent trading day, the price has risen by 276%, leading to an 11% average annual increase.  

Real Estate 

Given its sensitivity to inflation and interest rates, real estate can also be risky. Even so, we cannot discount how properties have appreciated over time. 

Moreover, a notable property shortage in the US today allows their median prices to remain high and avoid bubbles. 

Certificate of Deposits and Savings Accounts 

These are relatively stable, so fluctuations are limited. Their earnings may vary with the type of savings account. Also, inflation may affect their value in the short run. But their cumulative amount will still increase over time. 

Savings Accounts for Wealth Building 

Understanding savings accounts will help you choose the type that suits your personal and business needs. These are the common types of savings accounts you may open. 

Traditional Savings Accounts 

Traditional savings accounts are common and accessible due to their vast coverage and ATM network capacity. Traditional or brick-and-mortar banks provide these. With nearly 4,000 banks in the US, one can easily open and access them. 

They can also provide personal support 24/7, which can be reassuring for customers. Most importantly, FDIC-insured banks can cover savings of up to $250,000 per depositor and per ownership category. 

However, its convenience comes with high fees and minimum balance requirements. Interest on deposits is also unenticing, averaging at only 0.58%. 

Online Savings Accounts 

Online savings accounts are becoming popular as the development of the digital economy continues. Opening an online savings account can be prudent as more online businesses come online. 

The FDIC insures up to $250,000 in online savings like a traditional savings account. It also offers excellent security, with solid encryption and multi-factor authentication (MFA) for data protection. 

More interestingly, they typically pay higher interest rates and charge lower fees due to their lower staff expenses and the absence of branch buildings. They are more flexible, with an interest comparable to high-yield savings accounts. 

However, customer service is often impersonal, which can be challenging for some. Also, they may have limited ATM networks, so you may incur ATM fees. 

High-Yield Savings Accounts 

High-yield savings accounts are the optimal choice due to their high APYs. These are also accessible and flexible as they can be opened in brick-and-mortar and digital-only banks. With about 5% APY, your deposit of $1,000 can earn $50 after a year and $280 after five years. It can be much higher if the bank compounds interest more frequently. 

On the other hand, some banks charge overdraft fees in addition to monthly fees. Minimum balance requirements may also be higher than in traditional banks. 

But with its perks, high-yield savings accounts should be the go-to option.  

Key Takeaways 

Diversifying your portfolio can multiply wealth and minimize risk. Choosing the ideal savings account is your first step toward financial mastery and effortlessly managing your cash flow. It is valuable today as the economy has yet to fully recover. As such, repeatedly practicing this can lead to financial freedom.