Save is offering something that is different than a typical savings account: we give your deposits the safety of FDIC insurance while we invest the interest or give you debit card rewards in the form of a diversified portfolio of investments, backed by sophisticated strategies and financial technology. The goal is to deliver a stable investment return that is significantly higher than any bank savings account. So how do we do it? How does the Save portfolio strategy work, and what can you expect us to do in managing your money for the optimal balance of risk-management and positive market returns?
Whether you’re an experienced investor or just getting started with learning about the stock market, we believe that sharing more information with you about the Save strategy and the way we manage your investments with attention to risk management and delivering stable returns will give you confidence in keeping your money with us.
Save is using portfolio strategies and similar technology solutions that have already been used for many years by institutional investors, such as pension funds and insurance companies. Indeed, most large institutions that need to achieve steady, stable returns to earn income for their customers have been utilizing these types of strategies and tools. What Save is doing is democratizing these strategies: we are bringing the same types of financial planning and portfolio design methodologies that institutional investors use, along with our advanced financial technologies, to help everyday people earn higher yields on their savings.
We talked with Sid Browne, Ph.D., Chief Investment Officer of Save, about how the Save portfolio strategy works, how our portfolios are designed, and what it means for how we manage your money.
Finding a Better Balance of Risk and Reward
One of the fundamental concepts about investing is the idea of earning a risk premium. Investors are supposed to get rewarded over time for taking on certain economic risks that other folks don’t want to take. Risks don’t always pay off; for example, not every individual stock or exchange traded fund (ETF) always goes up in price. But over the long run, with a disciplined approach and a thoughtful strategy, investors mostly should expect to earn some upside return in exchange for investing in riskier assets.
When investors are risk-averse, or have a shorter time horizon, they often look to the world of fixed income, such as U.S. Treasury bonds or money market/cash equivalents. These are considered “safe” assets, where investors are guaranteed to earn a certain fixed rate of return, but that return (especially in today’s near-zero interest rate environment) might be very low.
The proper risk and reward balance is something that every investor must strike individually. The Save portfolio strategy is focused on this concept: is the upside potential good enough for the risk that you are taking? Save has designed a sophisticated portfolio that is diversified across asset classes(stocks, bonds, cash equivalents, some commodities, some real estate ETFs) and is also diversified across the risk spectrum.
Save does not just “buy and hold” a portfolio for an entire year; we try to be active “risk managers” of your investment dollars. We make ongoing adjustments, backed by advanced financial technology, to make the right moves at the right moments, to put your money into the right blend of assets to minimize your risks and create a steady, stable return relative to the equity market itself.
Our portfolio is not designed to take excessive risks. We are not attempting to earn maximum yields. We are trying to minimize the ups and downs and protect against excessive volatility. We are trying to deliver consistent, steady results. To use a baseball metaphor: sometimes batters try to hit home runs every time, but they also strike out a lot. We are not trying to hit home runs. We are trying to hit consistent singles.
Identifying the Good Risks, “Winners” and “Losers”
There are three components that Save uses in building our portfolio:
- Choose Investments with a Good individual Risk-Reward trade-offs: We don’t just analyze investments based on price, we analyze based on risk and estimate how volatile these investments are likely to be. For example, if you have $100 to invest and are trying to choose among 10 different investments that have a price of $10 each but some of them are likely to lose or gain $5 and some are likely to lose or gain $1, you wouldn’t put $10 into each of the 10 investments but would balance the investments to manage the risks while still capturing some upside. To properly balance those different risks, one needs to invest less in the riskier assets while increasing the investment in the lower risk assets. We do that at Save in a scientific and systematic fashion.
- Buy “Winners,” Avoid “Losers;” Choosing Investments Based on Positive Trends: We have built a filter based on the concept of “Trend Following” into our technology that helps us analyze investments based on how they are trending: are these investments going up or down in price? We try to buy “winners” (investments that are trending upward) and avoid “losers” (investments that are trending down). We want to capture some of that positive momentum and be on board for a rising tide. Based on our analysis, if an investment does not have a positive trend signal, we reduce our investment in it at that time and only increase our investment when we have strong evidence that it has a high probability of gaining positive returns. Our research has shown that reducing the size of losing trades from the portfolio is a key component at increasing the compounding rate, which is the goal of long-term investing.
- “Dial It Up or Down” Based on Volatility: The Save portfolio is also built to manage periods of ongoing market volatility. We are trying to deliver stable, smooth compounding returns to our customers. But, obviously, as anyone who has lived through 2008 and 2020 can tell you, the markets are rarely stable and smooth! We have designed the portfolio to target a particular level of market volatility that we are willing to accept in order to try to earn the appropriate risk premium, and we dial up or dial down the portfolio’s risk exposure based on our overall risk assessment of the general market volatility.
Think of the Save portfolio as being a radio with a dial on it: we can “turn up the volume” or “turn down the volume” based on changing market conditions. We want the portfolio to have a constant level of risk exposure to manage volatility. We don’t want our portfolio to go up and down as wildly as the broader markets, but we do want to capitalize on opportunities in ways that make sense for our investment strategy when the markets are more or less volatile.
In times of greater assessed market risk, we reduce our portfolio’s exposure to the stock market. But, at times of lower risk, when we want to get higher returns and the opportunity is right, we can increase our portfolio’s exposure to the stock market. We are constantly shrinking or expanding our asset allocations, with the goal of keeping our portfolio’s volatility within a constant range. We want to put a bit more money into certain assets at certain times and shift money away from other assets at other times with the goal of generating those smooth, stable returns while managing risks. We can “dial it up” or “dial it down” at any time in a tax-efficient manner.
Adapting to Changing Conditions
As our customers’ fiduciary savings adviser, Save is not “risk seeking.” We intend to generate smooth, steady returns on our customers’ savings. We are not overly ambitious with our growth targets and risk tolerances. And we constantly readjust our positions based on changing market conditions.
We don’t just set up a portfolio on Day 1 of the yearlong investment period and then leave it alone for a year. The portfolio changes dynamically day to day in order to achieve our target exposures and volatility. The portfolio is constantly traded to try to put the right amounts of money into the right investments to keep earning returns and managing risks for our customers during the course of each 1-year investment period.
Some people might say: “Why do I need Save? Why can’t I build my own diversified portfolio, manage it myself, and try to get the same return?”
We believe that our financial technology can deliver something that no individual investor can accomplish for themselves: managing risks in this tightly controlled, disciplined way while generating a smooth, steady return with tax-free rebalances. As an example, since our portfolios rebalance daily, this means we would do 30 trades a day or 7560 trades per customer account per year, at least. This is very hard to accomplish by an individual and there is a likelihood returns may be eroded due to trading costs or other inefficiencies.
Save is giving our customers access to a sophisticated type of risk management and active investment management that is difficult to create or replicate for themselves. Until now, this type of technology has been available for the institutional investor world – such as pensions, or insurance companies. Save is now offering it to individual savers for the first time ever.
Offloading Risks: Guaranteed Deposits, Protection Against Losses
Another component of the Save portfolio strategy is that we completely protect our customers against risk of loss of their initial investment. Even if the markets perform poorly and the portfolio does not deliver a return over the course of an entire year, Save customers are always guaranteed to keep 100% of their cash deposits, which are FDIC-insured to the full limits of the law.
Save customers can withdraw their deposits without penalty at any time during the 1-year investment period, but if you want to earn a return, we ask you to leave your money with us for the full year. Why? Because there is a cost that Save has to pay upfront to purchase your investments. Part of that cost is related to the way that we manage your risks to protect you against losses.
This is another technique from the world of institutional investing that we are making available to individual savers: offloading of risk. We build a portfolio for our customers, and then we purchase a security on that portfolio from our bank partners that tracks the upside of the portfolio on a one-for-one basis We invest only the interest in this security and never touch the initial capital, which is in an FDIC insured account.
What does this mean for your savings? Even if the Save portfolio does not deliver a market return, our customers will always be protected against the risk of loss. Your deposits are always safe and FDIC-insured, and your investments are managed in a way that protects you from any losses no matter what happens in the markets.
In spite of our advanced technology, the Save portfolio strategy is ultimately Old Fashioned tried and true Finance 101: we want to minimize risk in order to maximize the compounding rate, which is the key to building wealth over time. We do it by tilting exposures to investments that have a higher probability of gains while tilting exposures away from investments that have a lower probability. All the while, we do this in a risk-diversified manner, targeting volatility over time(and dialing the portfolio’s exposure up or down as needed) and protecting our customers against losses by transferring risk away from our customers .
Save is transforming the idea of “risk of loss” in investing. When you put your money into a Save Market Savings account or use our Debit Invest Card, you agree to give up the guaranteed (low) interest that you would earn from a conventional bank account, and we transform that interest income into risk capital that can actually be invested to generate a return. But only the interest on your deposits, not your deposits themselves, is ever at risk.
We believe that Save has developed a one-of-a-kind solution that can help savers achieve significant yields on their savings, while enjoying the full safety of FDIC insurance. Save’s portfolio strategy is not about getting rich quick; it’s not about maximizing growth; it’s about delivering smooth, steady returns while managing the customer’s risks while protecting the customer against any possibility of loss.
Ready to join Save? Sign up for your Save account today.