10/3/2012 5:12 PM ET|
Did the economy kill saving?
Too conservative with savings
This dynamic has been made worse by the steady exodus of regular investors from stocks into bonds over the past year. Credit Suisse economists believe this dynamic is driven by the desire for higher returns (to outgrow inflation in an environment of ultralow interest rates) being beaten out by the desire for safety (given psychological scars from two asset price bubbles and busts in the past 12 years).
In August alone, bond funds gained nearly $32 billion -- the strongest monthly inflow since March 2010 -- while equity funds lost more than $19 billion. This continues a shift out of stocks and into bonds that's been in play since the financial crisis.
Over the past three years, Credit Suisse's Neal Soss believes the behavior of the average investor "suggests a preference for either insured bank deposits, for households seeking maximum security, or bond funds, for those looking to do better than near-zero returns." This preference, in the face of record corporate profits and a 10% year-to-date rise in the Dow, could be a huge mistake. Those investments historically return much less than stocks and, in the case of bank deposits, pay basically nothing these days.
In his words, "American households have already been disappointed by the once-in-a-lifetime house price collapse and the volatile rise in equities since the glory days of the dot-coms. Are they now setting themselves up for an unsatisfying outcome in their rush to fixed income?"
This disappointment could result in the inability to retire comfortably. A combination of lower wealth, inadequate savings, less time to retirement (for aging boomers) and lower return on investments (due to shift to bonds) could be toxic. This dynamic needs to change.
Making the math work
Let's run the numbers, with the assumption that our example wants to retire with a nest egg worth seven times his or her income. And, using the Fed's data, let's use someone with about 20 years to retirement by focusing on families in which the head of the household is between 45 and 54 years old. The median family has a net worth of $117,900 and a pre-tax income of $61,000.
Looking at their wealth holistically (stocks, bonds, and real estate) and assuming different annual pay raises (despite the fact these people in 2010 were making less than in 1989, adjusted for inflation), here is what their savings rate would need to be under different return-on-investment scenarios:
Right now, someone saving 5% to 6% of income a year would need a return on investment of more than 5% annually for the next 20 years. Yet 10-year Treasurys are paying only 1.65%, and investment-grade corporate bonds are paying 3.5%. High-yield corporate bonds, which are more speculative, are paying 4.7%.
The math just doesn't work. People must either take more risks or take more out of their paychecks each month -- or face the consequences when they can't work anymore.
I think the preference should be a combination of higher savings (and yes, forgone consumption) and more portfolio risk by considering a shift back into equities. I'm not talking simple buy-and-hold investing, which hasn't worked since the late 1990s. And I'm not talking day-trading stocks or employing risky strategies using stock options.
In my columns, newsletter and now in my new money-management service, I've been espousing a different way. Making the market's undulations work in your favor by rotating in and out of industry groups and asset classes showing the most strength at any given time. Back in June, for example, it was all about biotech. More recently, precious metals and the related mining stocks got a huge lift.
Right now, unfortunately, nothing is really moving. So I'm recommending cash as we wait for a fresh buy signal.
But new strategies like these, and yes, some fiscal discipline and more savings, are needed to get the retirement math to work again. Until that happens, Americans who should be saving and investing are at risk of paying for their fiscal sins as they enter the twilight of life -- not a happy thought.
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Let's not forget that.
I get a kick out of the mixed messages we get from government:
spend, it's a consumer-driven economy, do your part.
Save, you're not being responsible if you don't save money.
Ok, I'll be happy to do both when and if I ever get enough to be able to do both. But it won't be happening with the costs of everything going up like they are while income is steadily going down.
Save what? Nothing is left over. After year and years of Greenspan Economics (Started with Clinton, kept going with Bush and still going) with credit given out to anyone who asked whether they could afford to or not, you have to start paying for it. It took 20 years to get here it will take a long time to recover.
But why are banks getting money for nothing then loaning it out if they do for 6%. That is an easy 6% profit. Why do we get only 0.5% if we try to save? 2-4% profit margin is the historical level. Saving money does not even keep up with inflation. You are losing money saving it. It is time to get someone in the Fed Reserve that knows what they are doing. Someone that know what it takes to earn a living not an idiot sucking on silver spoons.
Yes the economy killed savings. So did the Federal Reserve, and a lame presidential administration.
But debt is doin alright!
where do you find these clowns to write these articles???? "Did the economy kill savings??
ummm...does a bear sh*t in the woods, does the sun come up in the east???? How f**king stupid a question can you come up with????Please pay me what your paying this genius and I'll guarentee you I can come up with better crap than this....
What "killed" savings in America? First, let's be sure that we all agree on what we mean when we say "savings", before we try to actually answer that question: IF we mean "to put money into a bank (or similar), as in a savings-account", then the answer to that question is truly simple: WHY give my money to the bank? They don't pay any interest (OK, 0.1% per-annum IS "interest", but... at that rate, leaving your money in that savings-account will "earn" you about 1.1% over TEN years! So, you put in $100 today, and in 2022 you get back $101.10. wow.). Not to sound mean-spirited regarding those bankers or anything, but what has KILLED "saving" for me is that I can do just about as well if I simply put my money into a sack in my closet (or stuff that mattress, bury it in a can in the yard, etc. etc.). I cannot see WHY I should let the bankers have my money and use it to their advantage - there really is very very LITTLE risk that I'll lose my cash by having it burn up or get stolen from my house. And, if I keep it at home, at least I can play with it and admire it and stuff! Given that they don't wish to pay for that privilege, better me then them!
Putting money into stocks and bonds is NOT, in the narrow definition, "saving". But, in reality, what folks are doing by EITHER putting it into a sack, putting it into the bank, OR putting it into stocks and bonds - investing it - is to FUNCTIONALLY SAVE IT for another day - the difference being whether you have any potential to GROW what you "saved". IF your primary concern is the finite security of today's cash, as versus having enough tomorrow - might just as well put it into a sack! It's really about as safe as if it were in a bank, and you can at least touch it whenever you wish. Of course, putting money into a sack, or into a SAVINGS account at 0.1% per-annum interest are both sure ways to guarantee that you will end up with LESS VALUE "tomorrow. That's right, folks! Inflation continues, and SAVING money means LOSING VALUE!
That, in a nut-shell, is what has KILLED SAVING in America. To save money, in that narrow definition of above, as if it were a gallon of milk or gasoline in a bottle, is to eventually simply lose it. It becomes less valuable into the future. So Americans who have any EXTRA to "save" (and the economy has certainly put paid to that for many!) really should be wary of "saving".
Me? I'll stick to INVESTING my money for my future, in the strong expectation that INVESTING has the best chance of leaving me with MORE VALUE into the future, when I'll need it! SAVING is DEAD, to me!
BO,MO, and Jo need to go. Theyve flipped up everything theyve touched.Youve not done your job, so we MUST let you go.
so the advisor is reccomending equities and trading which of course the retail investor has
no chance of doing successfully because he or she is up against a computerized trading market
which is a losing situation but still the advisor has his money in cash while telling us that cash
in the bank is not the place to be...
I dont know who or what killed savings but Im on an extended pay freeze. My common charges are going up, gas went up, utilities went up, groceries are up (thank god I have no kids). I definitlely am hurting a bit. Not too much but feeling the pinch. I am considering cutting cable, but for the winter months it wont do...i hate being out in the cold and cable keeps me company. My cell phone I could do without. I need electric (heat) and gas (to cook). I dont shop. I dont drive everywhere so I make gas last....my student loan payments arent going away anytime soon. Not much else to cut back on.
Considering renting my place out next year or selling it and paying off student loans. I hate being a slave to bills...either way I'll need a place to stay..LOL!
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