Why Saving is for Suckers(articles.moneycentral.msn.com)
articles.moneycentral.msn.com
Why Saving is for Suckers
http://articles.moneycentral.msn.com/learn-how-to-invest/why-saving-is-for-suckers.aspx
42 comments
Right. Putting all your eggs in one basket is for suckers.
Keep some of your eggs in the fridge. They won't hatch many chickens, but they're unlikely to get eaten by foxes, either.
Nothing to see here. Move along.
Keep some of your eggs in the fridge. They won't hatch many chickens, but they're unlikely to get eaten by foxes, either.
Nothing to see here. Move along.
That's not what the article says. It says you have to deliberately move your eggs around according to the business cycle.
A pure cash investing strategy (money market, CD, T-Bill/Bond) now has a track record as good as the US stock market over 30 year periods. Except the much lower volatility of cash makes it superior.
Plowing money into stock indexes is for suckers. To get any decent returns one is forced to analyze macro economic conditions and allocate accordingly between cash, equities, and inflation/currency hedges. The article makes this point in different words.
A pure cash investing strategy (money market, CD, T-Bill/Bond) now has a track record as good as the US stock market over 30 year periods. Except the much lower volatility of cash makes it superior.
Plowing money into stock indexes is for suckers. To get any decent returns one is forced to analyze macro economic conditions and allocate accordingly between cash, equities, and inflation/currency hedges. The article makes this point in different words.
I've seen the claims that a pure cash investing strategy has a track record as good as the US stock market over very long periods of time. I've looked into them. They are wrong.
The basis of the claim is the stock market index. You look at where it was at one time, look at where it was another, then figure out the effective interest rate between them. And lo and behold, at the bottom of the crash that interest rate was not very good!
The problem with this claim is that the indexes just aggregate stock prices. But companies frequently pay dividends. When a company pays a dividend, the stock price drops by the value of the dividend. This money is not lost though, it is returned to the investor for cash and is free to be reinvested.
When you add back the dividends, stocks perform much better than they do when you don't. As an extreme illustration, look at the DOW through the Great Depression. Before the crash the DOW hit a peak of 381.17. It then crashed and did not return to that peak until November 23, 1954. So it looks like you lost money for decades. But the classic How to Buy Stocks looked at how investments would do if you reinvested dividends. That story is very different. Over many decades they could not find a 5 year period in which the stock market lost money, or a 10 year period in which you made less than 7%/year, compounding annually. (The worst period was actually the early 70s.)
Now how realistic is that analysis? If the money is in a tax sheltered retirement plan, very. If the money is not tax sheltered, then you're going to be taxed on your dividends, and your returns are going to suffer. (But you're also going to be taxed on returns in a money only strategy.) Working out the full details is very complex. But no matter how you look at it, there is no lengthy period of time in the USA in the last century in which cash only strategies have been competitive with the stock market. None. And if you find a study that says otherwise, then look at how they computed the numbers. I guarantee that they got that result by ignoring dividends.
Now this is not to say that there isn't a role for cash in your investment strategy. Of course there is. There is real value in limiting volatility, and there are times when it makes sense to adjust how exposed you are to the market.
The basis of the claim is the stock market index. You look at where it was at one time, look at where it was another, then figure out the effective interest rate between them. And lo and behold, at the bottom of the crash that interest rate was not very good!
The problem with this claim is that the indexes just aggregate stock prices. But companies frequently pay dividends. When a company pays a dividend, the stock price drops by the value of the dividend. This money is not lost though, it is returned to the investor for cash and is free to be reinvested.
When you add back the dividends, stocks perform much better than they do when you don't. As an extreme illustration, look at the DOW through the Great Depression. Before the crash the DOW hit a peak of 381.17. It then crashed and did not return to that peak until November 23, 1954. So it looks like you lost money for decades. But the classic How to Buy Stocks looked at how investments would do if you reinvested dividends. That story is very different. Over many decades they could not find a 5 year period in which the stock market lost money, or a 10 year period in which you made less than 7%/year, compounding annually. (The worst period was actually the early 70s.)
Now how realistic is that analysis? If the money is in a tax sheltered retirement plan, very. If the money is not tax sheltered, then you're going to be taxed on your dividends, and your returns are going to suffer. (But you're also going to be taxed on returns in a money only strategy.) Working out the full details is very complex. But no matter how you look at it, there is no lengthy period of time in the USA in the last century in which cash only strategies have been competitive with the stock market. None. And if you find a study that says otherwise, then look at how they computed the numbers. I guarantee that they got that result by ignoring dividends.
Now this is not to say that there isn't a role for cash in your investment strategy. Of course there is. There is real value in limiting volatility, and there are times when it makes sense to adjust how exposed you are to the market.
http://econompicdata.blogspot.com/2009/03/inflation-adjusted...
This chart (last one on the page) indicates to me that during the greatest bull market in history, rolling ten year inflation and dividend adjusted returns on the sp500 only rarely touched 8%; usually much less. This excludes transaction costs, I'm sure.
I'd have to look into it more.
http://www.itulip.com/realdow.htm
This chart (last one on the page) indicates to me that during the greatest bull market in history, rolling ten year inflation and dividend adjusted returns on the sp500 only rarely touched 8%; usually much less. This excludes transaction costs, I'm sure.
I'd have to look into it more.
http://www.itulip.com/realdow.htm
First, transaction costs on following an S&P index are tiny.
Second, I'm not sure how you got 8% from a graph showing a 10-year return of around 300%.
Second, I'm not sure how you got 8% from a graph showing a 10-year return of around 300%.
> I'm not sure how you got 8%
Basic algebra?
Basic algebra?
Selling your stock at the top of the market then sitting on cash until the bottom before piling back in is hardly the insight of the century.
You will not get reasonable inflation adjusted returns unless you do this to some extent. You cannot get returns without periodically re-balancing between equities, cash, and commodities, and different currencies.
There is no free lunch. You can't plow money into a simple "diversified" portfolio and do OK. Yet inflation forces you to play the game or lose.
There is no free lunch. You can't plow money into a simple "diversified" portfolio and do OK. Yet inflation forces you to play the game or lose.
Do you have evidence for that assertion? Because decades of financial research on the efficient market hypothesis has uncovered evidence that a simple diversified portfolio does very well.
A classic incident was a case where a finance professor testified to Congress that if you took all of the stocks, put them on a board, then threw darts to make your selection, with very high likelyhood you'd beat most professional investment funds. (They typically get better returns than the market, but their costs for doing so exceed their advantage, so investor returns come out worse.) One senator couldn't believe this, and so did the experiment with a random selection of stocks listed a decade earlier. He threw the darts, computed the numbers, and his picks beat most professionally managed funds over the same time period! After this was reported he was offered a job on Wall St.
You can find the research explained and further details of that incident in A Random Walk Down Wall St.
A classic incident was a case where a finance professor testified to Congress that if you took all of the stocks, put them on a board, then threw darts to make your selection, with very high likelyhood you'd beat most professional investment funds. (They typically get better returns than the market, but their costs for doing so exceed their advantage, so investor returns come out worse.) One senator couldn't believe this, and so did the experiment with a random selection of stocks listed a decade earlier. He threw the darts, computed the numbers, and his picks beat most professionally managed funds over the same time period! After this was reported he was offered a job on Wall St.
You can find the research explained and further details of that incident in A Random Walk Down Wall St.
Thanks for CAPM 101. Alpha is hard to get. No kidding. But nobody here is talking about stock picking. I'm talking about diversifying well outside of equities, as harry browne described in Fail Safe Investing, and slightly overweighting asset classes in accordance with macro conditions.
> a simple diversified portfolio does very well.
It does not, if by simple you mean S&P. A naive equities dominated portfolio does not do well against inflation over any given 30 year period. Please also remember that stock markets did not begin in the "post war era." There's a lot more history.
The efficient market hypothesis is the rallying cry of the lazy. It did not take a genius to a be a little overweight commodities this decade. It did not take a genius to re-weight some out of stocks after parabolic moves up in the late 90s. That's all I'm talking about.
> a simple diversified portfolio does very well.
It does not, if by simple you mean S&P. A naive equities dominated portfolio does not do well against inflation over any given 30 year period. Please also remember that stock markets did not begin in the "post war era." There's a lot more history.
The efficient market hypothesis is the rallying cry of the lazy. It did not take a genius to a be a little overweight commodities this decade. It did not take a genius to re-weight some out of stocks after parabolic moves up in the late 90s. That's all I'm talking about.
I was totally expecting this to be something about automatically-persisting document interfaces.
It's not saving that is for suckers, it's savings accounts.
This is link bait. You have to get to the second page to find out he recommends investing in the stock market when savings accounts and stocks are two entirely different things and have much different risk/reward ratios and he doesn't explain the difference.
This is link bait. You have to get to the second page to find out he recommends investing in the stock market when savings accounts and stocks are two entirely different things and have much different risk/reward ratios and he doesn't explain the difference.
Right, because the SUCKERS like me who spend far less than they earn and keep their money in a savings account with the highest interest rate they can find (at essentially NO risk) were hurt so badly last time the economy crashed. Right?
Which is better, to live wealthy with high risk or to live poorly with little risk? Sure you can make out good when the economy crashes (which is rare) but in the meantime (while things are good) those taking high risks are sure enjoying themselves. Remember; it's just money, you can always make more, try to enjoy yourself a little bit while you have it and don't wall yourself off from the world just to keep what little (or a lot) you may have.
Having a savings account lets you do some really amazing things, though. I quit my full-time job as of last Friday (although they retained me as a consultant for part-time remote work), and will spending the next year or two (a) focusing on my new company, and (b) traveling.
Having the freedom to make that happen, especially when nearly everybody around me is burdened by debt, is incredibly valuable. I couldn't do this if I had spent all my money on 'enjoying' myself all the time.
True, you shouldn't wall yourself off from the world, but at the same time, spending every penny you earn, when you earn it, is just folly.
Having the freedom to make that happen, especially when nearly everybody around me is burdened by debt, is incredibly valuable. I couldn't do this if I had spent all my money on 'enjoying' myself all the time.
True, you shouldn't wall yourself off from the world, but at the same time, spending every penny you earn, when you earn it, is just folly.
Money is freedom. Having money in the bank is freedom.
Spending lots of money is the opposite of freedom, at least for me. I'm glad I have small expenses and monthly payments, because I value my financial security and freedom a lot more than shiny gadgets.
It might be a cliché, but I'd rather not become a slave to the things I own.
Spending lots of money is the opposite of freedom, at least for me. I'm glad I have small expenses and monthly payments, because I value my financial security and freedom a lot more than shiny gadgets.
It might be a cliché, but I'd rather not become a slave to the things I own.
Exactly. ING Direct has an ad that shows up when you log in that says, "There's no such thing as saver's remorse." So true. If you decide you are not happy with your return on investment of a savings account, you can always move the money somewhere else. Once you've lost all your money buying whatever security Mad Money tells you to buy, you aren't getting it back.
Personally, I have done well with a S&P500 index fund. But I still like to have a big chunk of money immediately available, so if I need the money I can get at it without worrying that today is a "down day".
(People will argue that this is a waste, because inflation outpaces whatever you earn from interest, but this is not entirely true. Other people will enter into similar "money-losing" agreements with me; my rent will cost the same number of dollars every month for 2 years. So while I'm technically losing money, I still have the ability to pay for the same stuff. Compared to actually losing money by buying into whatever fad is popular today, I prefer this one...)
Personally, I have done well with a S&P500 index fund. But I still like to have a big chunk of money immediately available, so if I need the money I can get at it without worrying that today is a "down day".
(People will argue that this is a waste, because inflation outpaces whatever you earn from interest, but this is not entirely true. Other people will enter into similar "money-losing" agreements with me; my rent will cost the same number of dollars every month for 2 years. So while I'm technically losing money, I still have the ability to pay for the same stuff. Compared to actually losing money by buying into whatever fad is popular today, I prefer this one...)
I agree with your sentiment. I also keep quite a bit of money in cash, but these days I'm keeping less so since it seems likely we'll have high inflation in our future, given how much money is being printed. I've moved most of it to gold or silver.
Gold seems to continue to drop in price, even as we print paper money. It's possible that debt is more valuable than yellow-colored metal coins. (Gold does not have a lot more intrinsic value than anything else. If the economy collapses, will people be willing to buy your chunks of metal? Why?)
> Gold seems to continue to drop in price, even as we print paper money.
In the real world it's done the opposite. Golds gone up in value as we've printed more money.
In the real world it's done the opposite. Golds gone up in value as we've printed more money.
If you bought gold right in the middle of the subprime meltdown (early last year), you have lost money today. If you bought stock, you have made money.
> Gold seems to continue to drop in price
Huh? Gold (and commodity metals in general) has been the trade of the decade.
> Gold does not have a lot more intrinsic value than anything else.
You can go any time in history any where in the world and buy a decent suit with an ounce of gold. Gold has always preserved wealth in the long run. Not true of any other asset class. Everybody should be at least a few percent in gold. It's cheap catastrophe insurance.
Huh? Gold (and commodity metals in general) has been the trade of the decade.
> Gold does not have a lot more intrinsic value than anything else.
You can go any time in history any where in the world and buy a decent suit with an ounce of gold. Gold has always preserved wealth in the long run. Not true of any other asset class. Everybody should be at least a few percent in gold. It's cheap catastrophe insurance.
author of article is kind of an idiot. you too can buy us bonds (the 4% he refers to) you just are locked in for 30 years. banks give you less yield because you can get your money out quickly.
what he should say is that the us govt programs to support the market are really used to prop up bank earnings through the yield curve instead of a direct recapitalization. an individuals choice not to save does nothing to "screw the man."
what he should say is that the us govt programs to support the market are really used to prop up bank earnings through the yield curve instead of a direct recapitalization. an individuals choice not to save does nothing to "screw the man."
What's worse is that point--that banks profit off spreads--doesn't actually do harm to consumers. It's the long-term lending, short-term borrowing structure of banks that enables them to offer higher interest rates than the market short-term interest rates. That's how banks came about: people got higher interest by pooling their money with money-lenders than they did lending money themselves. Both the consumers and the bankers capture some surplus. Welcome to free trade.
You don't have to take my word for it. Compare the rates on short to medium-term CDs with the rates offered by Treasuries. Both of these have the same risk to the consumer, but which offer higher interest?
(Some CDs have excessive withdrawal penalties. Go to a bank that doesn't have this, or use brokered CDs.)
You don't have to take my word for it. Compare the rates on short to medium-term CDs with the rates offered by Treasuries. Both of these have the same risk to the consumer, but which offer higher interest?
(Some CDs have excessive withdrawal penalties. Go to a bank that doesn't have this, or use brokered CDs.)
banks traditionally borrow short to lend long. that is how profit and loss capability is generated. that is the s&l proverbial plan. its built into the design and is not a flaw. the problem is expecting the taxpayers to bail the players out when things do not go according to plan and the banks turn out to stink at their jobs.
To say that savings is for suckers is to downplay the role that banks have played in making savings such a bad thing nowadays. Why save your money when you can invest in a mutual fund, right? Then the banks can trade away your money, misspend it, lose it, and get bailed out, while you're left with nothing to show for it.
You hear all this noise about companies going bankrupt, people going broke, and living paycheck to paycheck. If financial regulations made saving a little more attractive, instead of encouraging everyone to channel their money (borrowed or not) into risky investments - or even investments that seem stable, but end up being part of some larger fraud - maybe we wouldn't be in as bad a mess as we've been through.
You hear all this noise about companies going bankrupt, people going broke, and living paycheck to paycheck. If financial regulations made saving a little more attractive, instead of encouraging everyone to channel their money (borrowed or not) into risky investments - or even investments that seem stable, but end up being part of some larger fraud - maybe we wouldn't be in as bad a mess as we've been through.
A dramatically higher savings rate would likely be disastrous for the US economy. That is why financial regulations (I presume you meant to suggest tax policy or other government incentives rather than regulation directly).
Why is that? If you double the savings rate, at a high level, money changes hands about half as often across the aggregate economy. Halving the aggregate amount of economic transactions would represent a huge missed opportunity for profits (by individuals and corporations) and taxation (profits for the government).
Don't believe me? Imagine a savings rate of 10% (far higher than the US rate; far lower than the 1970s/1980s Japanese rate). Inject $10 into the system by A buying something from B. B now saves $1 of that and spends $9 with C. C now saves $0.90 and spends $8.10, etc, etc.
Tracking that until the next spend is under $1, with a 10% savings rate, that $10 turns into $91 of total spending.
Making the rate only 11% reduces the spending to $83.
15% is a disastrous $62.
20% is $47 in total spending.
5% is a stimulative $181 and 3% is the taxman's dream of $301.40.
While I don't believe that the actual economy is so simply modelled, this "Fiscal multiplier" has more than a grain of truth to it, explains why "small" stimulus programs have a disproportionate effect on the economy (providing the savings rate stays low), and why the government is NOT incented to raise the savings rate substantially, assuming you think their goal is a steadily growing economy.
Why is that? If you double the savings rate, at a high level, money changes hands about half as often across the aggregate economy. Halving the aggregate amount of economic transactions would represent a huge missed opportunity for profits (by individuals and corporations) and taxation (profits for the government).
Don't believe me? Imagine a savings rate of 10% (far higher than the US rate; far lower than the 1970s/1980s Japanese rate). Inject $10 into the system by A buying something from B. B now saves $1 of that and spends $9 with C. C now saves $0.90 and spends $8.10, etc, etc.
Tracking that until the next spend is under $1, with a 10% savings rate, that $10 turns into $91 of total spending.
Making the rate only 11% reduces the spending to $83.
15% is a disastrous $62.
20% is $47 in total spending.
5% is a stimulative $181 and 3% is the taxman's dream of $301.40.
While I don't believe that the actual economy is so simply modelled, this "Fiscal multiplier" has more than a grain of truth to it, explains why "small" stimulus programs have a disproportionate effect on the economy (providing the savings rate stays low), and why the government is NOT incented to raise the savings rate substantially, assuming you think their goal is a steadily growing economy.
But doesn't a higher savings rate infuse money into credit markets? B's $1 in savings is at least $1 available for capital and consumer credit alike, and with fractional reserve rates, even more.
Most of the boom that preceded the current bust was fueled by credit expansion - and the bust was largely due to poor risk assessment, not the high availability of credit itself.
Most of the boom that preceded the current bust was fueled by credit expansion - and the bust was largely due to poor risk assessment, not the high availability of credit itself.
I'm sure there is some need for balance, but from the (smallish) amount I recall of Macro in college, a small positive savings is the "optimum" for economic growth without unbounded inflation, etc.
If the savings rate were negative, then availability of credit may be the overall bounding factor. In the situation the US finds itself currently, I believe that an increased savings rate will slow or stall the recovery. (That doesn't mean that I don't think individuals should be prudent and save, which I continue to do, but rather that I want OTHER people that I don't know or care about to continue to spend freely, ideally on products my company sells. :) )
If the savings rate were negative, then availability of credit may be the overall bounding factor. In the situation the US finds itself currently, I believe that an increased savings rate will slow or stall the recovery. (That doesn't mean that I don't think individuals should be prudent and save, which I continue to do, but rather that I want OTHER people that I don't know or care about to continue to spend freely, ideally on products my company sells. :) )
First, money put in a bank savings account is used by the bank to make loans. Its not put in a hole in the ground. Money put into bonds is spent by the issuer. Etc.
Second, even if it did, the effect can be (and will be) counteracted by the Fed putting more money into circulation.
Second, even if it did, the effect can be (and will be) counteracted by the Fed putting more money into circulation.
Summary:
Don't put your money in a bank, they're just profiting from your capital.
Give your money to a broker instead! Then you can "play the game" and not be a sucker!
From the article:
"Adding sectors and specific regions will increase the complexity of your portfolio but probably won't add much more in returns, which could well exceed 15% per year after the recent crash in value."
Could well exceed 15%? Holy awesome, that's great! Because you know, right? You're not just making numbers up?
Don't put your money in a bank, they're just profiting from your capital.
Give your money to a broker instead! Then you can "play the game" and not be a sucker!
From the article:
"Adding sectors and specific regions will increase the complexity of your portfolio but probably won't add much more in returns, which could well exceed 15% per year after the recent crash in value."
Could well exceed 15%? Holy awesome, that's great! Because you know, right? You're not just making numbers up?
Maybe the headline should be: "Why Doing Nothing But Saving is for Suckers"
I agree. I fear that many people will read that headline and say, "yeah, banks suck, I am going to go buy a flat-panel TV".
Then when a crisis strikes, they will default on their loans and I will have to pay higher taxes and higher interest rates on borrowed money. Wait, the author is right, saving is for suckers...
Then when a crisis strikes, they will default on their loans and I will have to pay higher taxes and higher interest rates on borrowed money. Wait, the author is right, saving is for suckers...
The headline seems a bit misleading - it seems to be in favor of spending all of your money as soon as you get it - the article's actual point, that it is better to put your investments in places that do better than 1% per year, is quite valid.
The author ignores one very important concept faced by individuals: risk. It would be just plain stupid for most people to keep an emergency fund in the stock market. At the same time, it would also be stupid for a person to keep long term investments in a low interest savings account.
It would be a mistake to conflate these two goals while ignoring risk.