In praise of saving - NOT investing

[steelyman]

Hmmm. I don't think saving and investing are mutually exclusive.

 

[Midpack]

When I think of this more I realize that it isnt just the individuals who drank the mutual fund industry cool aide. All those state government and institutional pension funds are guilty too. Of course the states had issues with raiding and underfunding of the funds. What I'm arguing for is a greater emphasis of prudence and less on growth. Many on here have got that balance right, but we are the "1%" of the saving/investing world. Even with education it generally comes from vested interests who will sell yo on the need for growth and along with that a high fee fund.

In summary:
1. You say too many people are over their heads investing in equity funds, they would be better off saving more and investing in 'mutual fund Kool-Aid' less. And you like cash as an asset, that's fine.
2. And you say "many on here have got that balance right."

What would you like us to do? Maybe we're not your audience?

 

[M Paquette]

Hmmm. I don't think saving and investing are mutually exclusive.

+1

The folks I run across that talk about how risky investing is don't seem to be saving much. I suspect that in the current generation, the argument against investing a part of ones income is used to rationalize the silent "so I might as well just spend it all now" implicit in the behavior I see.

 

[nun]

The folks I run across that talk about how risky investing is don't seem to be saving much.

this is my point! Most people go to one extreme or the other, spending or playing the stock market. Very few see saving as something worthwhile and it certainly isn't promoted by many in the personal finance world. Saving should be promote far more.

 

[Nords]

Is that like Thelma & Louise saying "We haven't crashed (yet) because we're still in mid-air over the canyon"?

Or like the Wall Street financier who jumped out of his window: "So far so good!"

When I am not travelling so much (or when I am finally retired) I plan to find a volunteer opportunity to educate people on financial basics.

The only challenge will be finding an audience willing to sit still long enough to be educated. I wish I had the answer to that one too.

By the way, among all the grumbling about sponsored investment products, let's remember that one of the largest is the federal government's Thrift Savings Plan-- with the lowest expense ratios, too.

 

[brewer12345]

The only challenge will be finding an audience willing to sit still long enough to be educated. I wish I had the answer to that one too.

DW volunteers at an organization helping young single mothers make it by getting them schooled up on job skills, helping them create resumes, teaching them how to behave on a job interview, etc. They will be my first target to teach things like how to read a lease, how to balance a checking account, how to read a loan or credit card agreement and not get skinned, how to shop for a low cost/free checking account.

 

[Nords]

DW volunteers at an organization helping young single mothers make it by getting them schooled up on job skills, helping them create resumes, teaching them how to behave on a job interview, etc. They will be my first target to teach things like how to read a lease, how to balance a checking account, how to read a loan or credit card agreement and not get skinned, how to shop for a low cost/free checking account.

That's an excellent group to work with-- already motivated and ready to listen.

I've noticed that my daughter is all too willing to join in the "have a spending plan & invest the rest" part of the talk, but her eyeballs start to glaze over at the differences between "mutual fund vs ETF" or "global vs international". She just wants to put it away in some sort of suitable asset allocation, let it compound, and go live her life. I doubt we'll be dissecting McMillan's options textbook anytime soon.

At this age, with that temperament, she'll probably do better than my testosterone-poisoned stock-picking days.

 

[nun]

this is my point! Most people go to one extreme or the other, spending or playing the stock market. Very few see saving as something worthwhile and it certainly isn't promoted by many in the personal finance world. Saving should be promote far more.

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[nun]

That's an excellent group to work with-- already motivated and ready to listen.

I've noticed that my daughter is all too willing to join in the "have a spending plan & invest the rest" part of the talk, but her eyeballs start to glaze over at the differences between "mutual fund vs ETF" or "global vs international". She just wants to put it away in some sort of suitable asset allocation, let it compound, and go live her life. I doubt we'll be dissecting McMillan's options textbook anytime soon.

At this age, with that temperament, she'll probably do better than my testosterone-poisoned stock-picking days.

What is wrong with "saving the rest" do we need mutual funds or EFTs, global or international or domestic? Your daughter sounds pretty smart to me, get a plan and save into a stable value account.

 

[ripper1]

Merry Festivus........and now to the airing of grievances.

I was at a party last night and a friend complained that they'd lost 25% on some emerging markets EFT. I asked how it figured in their AA and the answer was basically "what's AA" and "a friend said EMs were the place to be because of the returns". Most people get sucked into chasing returns and it's a loosing game. So I want to praise all those who just SAVE and don't fall for the Wall Street hype and run after returns. We have lost the idea of just putting money aside, we now want big returns as well. Before we go looking for returns we should LBYM and just save! The mutual funds have all convinced us that they are the best place to put out money, but in many circumstances they should be actively avoided because of fees and poor performance.

OK I'm done back to the egg nog

The only thing that works or might work is owning equities long term. Putting money in a bank for other than an emergency money is a losers game.

 

[Hamlet]

Right now pure saving is a losing game. The risk-free rate of return is near zero. Inflation is higher than that.

So you must either take some risk or watch your purchasing power erode.

If the spenders buy tangible things that they will need in the future, then they may actually come out better than the pure savers in this environment (I doubt that there are many spenders actually like this, though).

this is my point! Most people go to one extreme or the other, spending or playing the stock market. Very few see saving as something worthwhile and it certainly isn't promoted by many in the personal finance world. Saving should be promote far more.

 

[growing_older]

So pure savers should consider the Alpha Strategy of John Pugsley? Invest in tangible and useful items in anticipation of goods being a better store of value than financial assets. That may be swinging the pendulum a bit far.

John Pugsley - Wikipedia, the free encyclopedia

 

[nun]

Right now pure saving is a losing game. The risk-free rate of return is near zero. Inflation is higher than that.

So you must either take some risk or watch your purchasing power erode.

If the spenders buy tangible things that they will need in the future, then they may actually come out better than the pure savers in this environment (I doubt that there are many spenders actually like this, though).

I wouldn't advocate just putting money in the bank. I just think people have got their priorities all mixed up. They have been seduced my the financial companies into putting money into the stock market and saving has been taken off the table as a strategy. People should be looking at long term CDs, and paying down debt before they go to mutual funds......The pendulum has swung too far away from the notion of savings as a way to financial freedom and to almost exclusively to individual direct exposure to the bond and stock markets

 

[tightasadrum]

I've noticed that my daughter is all too willing to join in the "have a spending plan & invest the rest" part of the talk, but her eyeballs start to glaze over at the differences between "mutual fund vs ETF" or "global vs international".

Nords,
My daughter, home for Christmas, showed me here 401K options, a list of about 10 funds with two different investment groups and one MM-type fund. I asked her how she decided on the five she picked: highest return. That was it. I asked her what the expenses were in the funds...blank look. After looking at each fund, with simple links shown directly on her 401K company website, we found the expenses for each fund. Most of the funds she was in had an expense ratio north of 3.5% AND, ...wait for it... a 5.5% load, either A, B, or C. Since she is the person that communicates directly with the "financial advisor" for her company, I suggested that she do some one-on-one with this guy about what she and the others were really paying and why. They might get a break of fees, but she sure better find out. It turns out the FA is a son of someone the CEO knows.
Her biggest concern before I looked at it was that the NAV had mostly gone down since she jumped in. I told her at her age, 24, lower NAV was her friend, but expenses were her biggest enemy and to look into it.
I will say that I was pleased that she had made the decision to invest after pulling together her emergency cash fund. Free matching money from employer is immediate growth. Like your daughter, investment research is not high on her priorities list.


To the point of this thread, though, my dad was a child of the depression. I never was able to convince him to invest in the market. All his money was in laddered CD's, real estate and his own business. Oh, he also bought some junk bonds for the yield. Go figure. He just couldn't get past the stock market riches to rags stories that he heard about growing up. But he did invest in himself as a small businessman, and that, along with a lot of LBYM cash saving, gave him the success he wanted and hitting his goal of retiring in his mid-fifties. So saving can get you where you want to be financially, but you have to earn a lot more money during the journey...Tight

 

[clifp]

this is my point! Most people go to one extreme or the other, spending or playing the stock market. Very few see saving as something worthwhile and it certainly isn't promoted by many in the personal finance world. Saving should be promote far more.

As Brewer said that you can't invest without saving. There has been a huge change in American attitudes about saving our saving rate has been roughly 3.5% for the last couple of years. This is a respectable rate although the timing couldn't be worse. In fact Americans are saving twice as much dollars in 2011 as we were 2006. Now some of this is because too many American got themselves deeply in debt and have finally figured out that you can't borrow your way to prosperity. For many others fear, including of retirement is a big driver.

I agree that financial industry has often screwed consumers with fees and such, but the reality is investors have done better than savers even over the last 10 year and way better over 15+ year periods. This is a list of the 25 biggest mutual funds in the US. As you'll notice quite a few of these funds are money markets, there is also a lot of American family stock funds. Now American funds have 5.75% upfront commission and their expense ratio are typical just under 1% (including the 12-b). The interesting thing is that even with these relatively high fees, all of the stock funds in this list have had 10 year performance in the 3-4% (except for the emerging market fund that your friend may have invested in which has 14%! CAGR over the last 10 years) and 15 year performance in the 7-9% range. In contrast savers who stuck their money in MM fund earned 2% a year over the last 10 years and 3% over 15 years.

I'd also argue that it smart and wise for the financial industry to advocate saving+investing over just saving. If I tell a young person that should put $1,000 away today and in 30 years they'll have $3,000, I really have no argument when they counter. "Ya but what will I be able to buy with $3,000 in 30 years a couple of nights on the town somewhere. If I say they should invest $1,000 because in 30 years it is likely to be worth well over $10,000 that is a much more compelling argument for not spending the money today.

You have often used gambling terms when you talk about the market "playing, speculating" etc. Now while I'll be the first admit that a decent size chunk of my money is used to "play" the market, the bulk of my money and vast majority in this forum, and even in IRAs/401Ks in this country is truly being invested.

One of the misconceptions that your friend and I suspect you have is viewing the stocks/etfs as just being little electronic baseball cards, who's price goes up and down seemingly random. These erratic price moves are controlled by a group of Wall St elites. Actually investing in stocks or ETFs gives you a share of the future profits of a company or collection of companies. The emerging etf owned shares of household names like Samsung, and Hyundai as well large number of Chinese banks, telecoms, manufacturers, Brazilian aircraft manufactures and oil companies and 800+ more. Unlike baseball cards, ETFs/stocks have an intrinsic value.

Now while it is maddeningly difficult to set an accurate price for the future earnings of a bunch of companies on any given day and even over a year the market is likely to get it wrong, however over the long term the market is actually awfully efficient. I don't think anyone would argue that profit potential for Chinese, Indian, Korean, Brazil companies is not much brighter now that it is was a decade ago which is why $10K invested in Vanguard Emerging Markets in 2001, is now worth $37K vs $13.4K for the S&P500.

Finally, let me point the difference between how savings vs investing is used in this country. At the risk of grossly oversimplifying American finance, by and large saving (e.g in a CD) is used to fund loans on purchases and consumptions of existing things:, house, car, college education, business inventory. Investing is used to fund new products, new business etc. I like to help fund the latter.

 

[growing_older]

I wouldn't advocate just putting money in the bank. .... People should be looking at long term CDs....

Now I'm just confused about what you are trying to say.

 

[scrabbler1]

Nords,
My daughter, home for Christmas, showed me here 401K options, a list of about 10 funds with two different investment groups and one MM-type fund. I asked her how she decided on the five she picked: highest return. That was it. I asked her what the expenses were in the funds...blank look. After looking at each fund, with simple links shown directly on her 401K company website, we found the expenses for each fund. Most of the funds she was in had an expense ratio north of 3.5% AND, ...wait for it... a 5.5% load, either A, B, or C. Since she is the person that communicates directly with the "financial advisor" for her company, I suggested that she do some one-on-one with this guy about what she and the others were really paying and why. They might get a break of fees, but she sure better find out. It turns out the FA is a son of someone the CEO knows.
Her biggest concern before I looked at it was that the NAV had mostly gone down since she jumped in. I told her at her age, 24, lower NAV was her friend, but expenses were her biggest enemy and to look into it.
I will say that I was pleased that she had made the decision to invest after pulling together her emergency cash fund. Free matching money from employer is immediate growth. Like your daughter, investment research is not high on her priorities list.

Drum, your story about your daughter is a little like the one with my ladyfriend. A few months ago, her small medical office was taken over by a large hospital. This is good for her for many reasons, one of them being her larger employer has a 403(b) with a company match. My ladyfriend has some IRAs from previous jobs (two of them are sorta combined) and received about $20k from her old employer's profit-sharing plan she could rollover into the 403(b). But when we checked out the many mutual fund options, I was dismayed at the absurdly high expense ratios, many of them in the 2-3% range, for funds which were not showing very high returns. Now her IRAs are mostly stock oriented so I felt she, age 49, needed to have a bond-oriented fund to act as a counterweight to better balance out her AA. (She was not really aware of the concept of AA so I had to explain it to her.) At least the two best choices, a stable value fund and the PIMCO Total Return bond fund, appeared promising. (I was in the latter for a few years in my former complany's 401(k).) I explained the difference between the two and she selected the PIMCO fund.

She later told me that she had some coworkers asking HER for advice because they were even more clueless about what to do with the profit sharing proceeds they were going to receive (and if they did not do a rollover, would unwittingly cash it out and pay lots of needless taxes, an even worse option). Lucky for her she had me to advise her.

 

[skipro3]

Well, here I am, coming into my final year before retiring and coming out of the closet as a self proclaimed saver. I won't ever put another dime in the stock market. I began saving for my retirement in 1983, putting 10% of my pay every year faithfully in various mutual funds without any help or advice other than free advice on my choices. I put this away through work in a 401K and 457 plan. The company that handles these deposits, Great West, was not allowed to advise any of the employees on what or how to invest. I could find no outside investment business who would advise me either. Best I could find was companies who told me that after I retire and I could transfer my accounts to them they would manage my funds. So, what's a 27 year old supposed to do? I tried and tried to understand the world of finance. Quite frankly, if I could have understood my choices and options and what would be the best ways to invest in the 401K and 457, I most likely would have then been able to find work in this area. But this is not my bag of tea. I'm not interested in how the markets work. I'm interested in electronics and how to make technology work. THAT is what I am good at, not investing. For 20 years I tried to figure out what would be good choices, but instead, I always and consistently made the wrong choices. Eventually, in frustration of loosing my money and having realized I would have done better to put it in a coffee can under my bed than to the thieves I was now perceiving the who investment world, I decided I couldn't go wrong with an S&P500 mutual fund that tracked the S&P500. I was wrong again. Over 3 years I lost more than 30% of my initial investment. Finally sick of it all and down to a dollar amount that would jeopardize my ability to retire at 55, (I planned to retire a few years ago, but a 40% loss on the S&P nixed that dream), I put it all, what remained anyways, into a Wells Fargo fund that was basically a savings account. Over the last 3 years, I've had it grow an average of almost 3%. Compared to the S&P over the last 3 years, I've made the right choice.
People here toss around the term 'risk assessment' For the life of me, what is it you guys do for a living that you could risk loosing your hard earned money in a market governed by a bunch of 25 to 30 year old kids who seem to speculate and panic over every little news story and thereby drive the value of YOUR labor and the dollars you earned into the ground?! At least with a savings account, I am able to control the hemorrhaging of inflation to my money.
I've taken jr. college courses, read books, joined forums even and I find all the acronyms to be just as confusing as if I were reading them for the first time. I'd do better to learn how to count cards and hit the black jack tables in a casino than to try to follow the ins and outs of the stock market. The only thing I can understand is that I am able to realize 2 cents for every dollar I put into my Wells Fargo account for the past year and that no matter what Greece, Italy, Enron, Chevron, WalMart or anyone else might do, they can't steal my money from me if I don't 'invest' it in their companies. I may be way wrong with my thinking, but I see myself as a shill for a big ponzi scheme every time I listen to the financial report on the news or read about it in the papers.
I wish everyone the best of luck with their investments, but for me, without the aid of anyone who's able to advise me since they can't manage my work place 401K/457 accounts, I will leave the investing to you. I'll never be able to understand what it would take to make my own decisions, so at least I'm glad the Wells Fargo Stable Return fund is an option I can trust not to steal me blind or lead me over a cliff like some sort of lemming.

 

[Midpack]

I am sure everyone here has seen this in some form or another. What the future might bring is unknown.

And it might be instructive to run FIRECALC with a 50:50 equity:bond asset allocation (or the default)
AND
then run the same scenario with a 100% cash allocation. [hold generated income constant, or adjust cash to hold probability of success constant].

The difference in income or probability of success will be markedly different.

In an age when reportedly most people don't/won't have enough to retire with a 60:40 AA, those who can realistically retire with 100% cash equivalents would have to be exceedingly rare.

I hope we're all successful whatever our investing approach.

 

[nun]

Well, here I am, coming into my final year before retiring and coming out of the closet as a self proclaimed saver. I won't ever put another dime in the stock market.


........I wish everyone the best of luck with their investments, but for me, without the aid of anyone who's able to advise me since they can't manage my work place 401K/457 accounts, I will leave the investing to you. I'll never be able to understand what it would take to make my own decisions, so at least I'm glad the Wells Fargo Stable Return fund is an option I can trust not to steal me blind or lead me over a cliff like some sort of lemming.

This is a little extreme, even for me, but I think the sentiments are spot on. I've done well following a conservative Boglehead approach using TIAA Traditional as my savings component and taking profits in good times to pay off the mortgage. My intent in starting this thread was not to recommend a saving only approach, but that it should be a bigger part of most portfolios. I'm glad of my 25 years of 3% or 4% guaranteed return in TIAA Traditional given the volatility I look back on. I'm setting up my retirement so I can live off the TIAA Traditional annuity and social security, giving me the freedom to "play" with the rest of my "investments".

 

[Midpack]

My intent in starting this thread was not to recommend a saving only approach, but that it should be a bigger part of most portfolios.

For example, what range of equity:bond:cash asset allocation are you recommending? From the start of this thread, it's seemed like an answer in search of a question, I've thought some specifics might help your case. If it makes you more comfortable, I'm at 52:39:9, though I expect to reduce my cash position over time.

 

[ERD50]

I am sure everyone here has seen this in some form or another. What the future might bring is unknown.

And it might be instructive to run FIRECALC with a 50:50 equity:bond asset allocation (or the default)
AND
then run the same scenario with a 100% cash allocation. [hold generated income constant, or adjust cash to hold probability of success constant].

The difference in income or probability of success will be markedly different.

In an age when reportedly most people don't/won't have enough to retire with a 60:40 AA, those who can realistically retire with 100% cash equivalents would have to be exceedingly rare.

I hope we're all successful whatever our investing approach.

+1 I don't know how people can say they want to get out of 'risky' stocks after they run and understand those scenarios. Seems the 'riskiest' thing you can do is drop your equity allocation too low.

-ERD50

 

[nun]

For example, what range of equity:bond:cash asset allocation are you recommending? From the start of this thread, it's seemed like an answer in search of a question, I've thought some specifics might help your case. If it makes you more comfortable, I'm at 52:39:9, though I expect to reduce my cash position over time.

I'm not recommending any particular AA, just saying that saving is all too often ignored and a stable value/CD ladder/TIAA-annuity/I-bonds should be the core of a portfolio. After the "six month emergency fund" mantra, saving it is completely left out of the equation. A fixed return component should be higher in everyone's thoughts when it comes to retirement savings.

 

[Spanky]

I'm at 52:39:9, though I expect to reduce my cash position over time.

Is that equity:fixed-income:cash? We plan to reduce our cash position also as it is almost at 40%. Our YTD is pretty anemic because of the high cash position.

 

[Midpack]

I'm not recommending any particular AA, just saying that saving is all too often ignored. After the "six month emergency fund" mantra it is completely left out of the equation. A fixed return component should be higher in everyone's thoughts when it comes to retirement savings.

Fine, if long term history (ie chart above) is any indication that simply means you'll have to work much longer and/or accept much less income each year in retirement. You can quantify with FIRECALC. All part of the risk tolerance decision we each have to come to grips with...