Related topics: stocks, bonds, gold, investing strategy, Michael Brush
The recession is technically over, but Americans are still running scared. You can tell by the way they're saving and pushing more hard-earned dollars into so-called safe investments.
But here's a scarier thought: What if putting cash into today's popular "safe" investments was actually a risky move?
Regrettably, that just might be the case. Let's run through the checklist of the most popular places to put cash right now and see why.
Instead of stocks, investors are piling their savings into:
- Bonds, which by many accounts are in a bubble.
- Savings accounts that pay interest rates below the 0.9% core inflation rate -- a rate that will rise if the economy picks up (and it will).
- Hard assets such as gold -- which has been setting price records lately, just as it did during the economic crunch of the late 1970s, before prices fell and stayed down for more than 20 years.
Looking for safety in all the wrong places
The backdrop for all this is that stocks and the economy appear to have put in a bottom. Yes, improvements have been marginal lately. But if the recovery kicks back into gear, which many economists expect will happen soon, investors will get hurt by being in all the wrong places.
Michael Brush
Bond prices would fall, hurting anyone who owned bond funds or anyone who didn't plan to hold bonds until they matured. Savings account returns wouldn't keep pace with inflation. Hard assets could turn into hard knocks as the buyers now driving up the assets' prices refocused on stocks.
And, of course, you'd miss at least the start of the next big market rally, the time when prices rise most quickly.
The bottom line: In this environment, saving money (and by that I mean tucking it away instead of putting it to work) can hurt you.
Instead, I'd use free cash to start betting on stocks going up -- by investing in index funds or broad market exchange-traded funds. It also makes sense to buy funds or ETFs that own bank stocks or asset managers such as BlackRock (BLK, news) and Invesco (IVZ, news), which benefit from higher savings rates. This strategy gives you a chance to get ahead of the crowd -- and profit from its fears.
Hard to blame a saver
Mind you, it's hard to fault people for socking away cash. The recession rattled our portfolios. And the stock market has been flat for a decade, with a lot of risk for no return.
"We went through a period where Americans spent more than they made. Now they are saving, deleveraging and in massive fear," says Howard Davidowitz of Davidowitz & Associates, a New York retail sector consulting and investment banking firm.
Mintel, a research and marketing company that tracks consumer psychology, says four factors have left Americans with lasting scars:
- This was the first major recession to get 24/7 cable news coverage. Images of the downturn have been drilled into our brains, believes Susan Menke, a behavioral economist at Mintel.
- Second, this is the first major recession that people under 46 have experienced during their working lives. They're in uncharted waters and may not see the way out.
- Third, for the over 45-crowd, the big loss of wealth as home values and stocks tanked, coupled with job losses, served as a wake-up call that they hadn't saved nearly enough for retirement, Menke says. About 66% of people 45 to 54 in a recent Mintel survey said they "worry more about their retirement than they ever have." About 57% of people overall said the same.
- Fourth, for young adults in their 20s and early 30s, the recession and slow recovery have made it hard to find work. They're moving back in with their parents and "failing to launch."
The result of all this is a tendency to hunker down. The personal savings rate -- defined as after-tax income minus consumption -- has been above 5% since November 2008, a level not seen since August 1998 (except for one month).
A big piece of this comes from people simply paying down debts, not necessarily stashing away more cash. But people are plowing extra money into savings accounts, bonds and gold, and leaving stocks.
