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In praise of saving - NOT investing
Old 12-25-2011, 02:43 PM   #1
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In praise of saving - NOT investing

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
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Old 12-25-2011, 03:08 PM   #2
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Saving excess cash flow instead of investing is fine and good if (a) you have a low risk tolerance AND (b) you don't expect to need the higher returns to meet your long-term financial goals -- and are, in fact, willing to fall slightly behind inflation as well.

So if you have a COLA'd pension that is more than you need to live on, AND you have the health insurance nut cracked, then sure, it's easier to stockpile cash and refuse to play the lottery invest in the stock market. But for the rest of us average folks who aren't in this situation, if we don't take some market risk, we're very unlikely to have enough long-term retirement savings to pull it off because the *real* growth of "cash in the bank" is roughly zero long-term and has been very negative laterly.
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Old 12-25-2011, 04:47 PM   #3
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I LBYM and save....so that I can invest.
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Old 12-25-2011, 05:24 PM   #4
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Drawing pension I live on, and am mostly a saver, now. I put a few hundred in total market index a month, and work part time to fund a Roth which I invest in mutual funds. The bulk goes into CD's and I Bonds. I dont think saving is better than investing, I just know potentially losing 15% would provide more mental anguish than any joy earning a potential 15% would bring. I do have the luxury of playing it safe, which is probably the biggest reason, though.
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Old 12-25-2011, 05:55 PM   #5
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Aren't we confusing investing with speculating? The OP spoke of people who knew nothing of asset allocation and were merely chasing returns. To me that is speculating. To me investing is using asset allocation to "spread the wealth" in large caps, mid caps, small caps, international, emerging markets, real estate, fixed income, cash, etc.

In today's environment when saving is barely one step removed from stuffing your money in the mattress, investing is the prudent long term alternative. For someone with no pension or retiree health care benefits that they don't purchase by themselves, it is the only alternative.

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Old 12-25-2011, 06:28 PM   #6
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I love emerging markets ETFs but not the newts. The trick is to have an asset allocation and buy such bits of the market when they have dropped 25% to 50% (of course the previous year, they went up 100%).

So, looking at what has done well and what has done poorly in 2011, it looks like now is the time to sell some bonds and buy some international small caps and particular small-cap emerging markets such as EWX and VSS.
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Old 12-25-2011, 06:34 PM   #7
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I can think of a couple situations where it could be wise to save instead of to invest.

Otar suggests saving until you have twice your estimated annual retirement withdrawal-- two years' SWR. He makes the point that preserving "seed capital" is more critical than investing it aggressively. What you lose in compounding time you'll make up in developing a tolerance to "behavioral risk". A young investor may be overaggressive during a bull market or too terrified at the depths of a bear market, and may lose so high a percentage of their savings that their loss aversion will traumatize them into staying out of the market for years. But if they save up seed capital, the years it takes them to do so gives them plenty of time to educate themselves on asset allocation and to learn to ignore the daily CNBC Squawk Box volatility.

Big risks early on can have big consequences, but investing early doesn't make much more of a difference than saving early. Otar points out that someone starting with nothing, saving 15% of their income every year, and investing it at 6% will need 70 months before the account value exceeds their annual earnings. An aggressive portfolio earning 10% would achieve the same value in 64 months. Just six months' difference-- over 90% of it due to saving and less than 10% of it due to investing.

So if you're just starting out and vulnerable to loss aversion amplified by market volatility, then maybe it's better to save before you invest.

Second situation: In 1939, Buffett's great-uncle Ernest wrote a letter to his son advising him to keep $1000 cash in a safe-deposit box. Even a low estimate of 3% annual inflation would equate to $8000 cash today, and the inflation calculator at the Bureau of Labor & Standards pegs the amount at over $16,275. Buffett goes on to say that Berkshire will always keep $10B cash (Treasuries) on hand to handle insurance claims and another $10B for short-notice acquisition "opportunities". This is above the cash they're required to keep on hand for the railroad and the utility companies, too.

So who here has anywhere near $8-$16K sitting in their safe deposit boxes? Heck, I don't even have a safe deposit box. My closest approximation to "cash" is a credit card or a HELOC.

My advice to military servicemembers is to save all they can and max out their Thrift Savings Plan & Roth IRA(s) while they're earning a reliable income. If they're planning to get out in a year or less then they can stop investing and stop saving. But then I also advise them to educate themselves about asset allocation & market volatility so that they can tolerate it, or at least ignore it.

Hunh. Another blog post drafted... 500 more words should be about right.
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Old 12-25-2011, 06:42 PM   #8
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I've heard it said that savings is the marijuana of investing. In order to get to the "good stuff" you have to dabble a bit in savings vehicles until you have enough, or know enough, to graduate to mutual funds.

Or, maybe I've been watching Breaking Bad too much.
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Old 12-25-2011, 06:43 PM   #9
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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
Enjoy the egg nog. While waiting for the turkey to roast I'd thought I add a few thoughts.

When I hear these type of complaints, and over the years I have heard a few, I always first ask the person, " have you sold it yet?". Generally the answer is no at which point I remind them that they haven't lost anything until they sell.

The second thing I do is try and educate about the difference between price and value. I typically use an analogy with store sales. "If your favorite food or beverage goes on sale for 1/3 off, does that make you happy or sad." Virtually everybody says happy. I then ask what about the bottle/package you have at home they are worth less? Yes but I can get more at bargain price. I say "well the same thing is true for the mutual fund/etf if the price goes down it represents a better value, so unless you need the money right now you may want to buy more." Now obviously there are important aspects related AA, risk tolerance, yada yada, but in general I agree with Buffett, people have a really perverse reaction to when stocks go down, they want to sell them and when the go up they want to buy them. This is completely opposite how consumers react to everything else when prices goes down.

I think you are dead wrong to be praising savers and criticizing investors. Right now the last the country and to a large extent the world needs is more savings. Consumers are saving money, business are saving a ton of money. The only group spending money is the government and while some of the spending maybe possibly be investing, I think the vast bulk is just spending and not particularly efficient.

What we really need is more people to invest money in order to create new jobs and new economic activity. Given the pitiful low interest rates for saving I don't understand why anybody is doing it.
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Old 12-25-2011, 08:11 PM   #10
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What we really need is more people to invest money in order to create new jobs and new economic activity. Given the pitiful low interest rates for saving I don't understand why anybody is doing it.
It's basic instinct because people are so uncertain about the future. Just like a lot of animals will fatten themselves or hoard enough food before winter arrives since they don't know what kind of harsh weather is ahead. The more pitiful interest rate is set, the more savers are penalized, the more pensioners are squeezed, the less money will be spent, the longer it will take for economy to recover.
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Old 12-25-2011, 08:36 PM   #11
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My Dads Dad lost everything in 1930. He had a 200 acre farm and the terrible times back then got it all. My Dad was born in 1915. He was raised with 12 brothers and sisters. He learned from his Dad not to put all your eggs in one basket and he taught me the same. He made good money in his lifetime and saved it. That is what I have done also. I do not invest, I just save. Some will tell me that is not the thing to do but who are they to tell me anything? I once had a young man come to my home to try and get me to invest in his company. I told him for ever penny I put in I wanted him to put in the same amount. He looked at me crazy and said he did not have that kind of money. I showed him the door.
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Old 12-25-2011, 08:48 PM   #12
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My Dads Dad lost everything in 1930. He had a 200 acre farm and the terrible times back then got it all. My Dad was born in 1915. He was raised with 12 brothers and sisters. He learned from his Dad not to put all your eggs in one basket and he taught me the same. He made good money in his lifetime and saved it. That is what I have done also. I do not invest, I just save. Some will tell me that is not the thing to do but who are they to tell me anything? I once had a young man come to my home to try and get me to invest in his company. I told him for ever penny I put in I wanted him to put in the same amount. He looked at me crazy and said he did not have that kind of money. I showed him the door.
I am more of a saver like you, but for a different reason. I live off my pension and really dont need anything else as long as it pays me each month. The ability for it to continue paying me will ultimately be based on sufficient market returns. If I put my assets all into the market, I have in essence doubled down on the market. I consider myself as diversifying and having insurance against something like that happening by continuing to save part of my pension each month. Maybe I'm being simple minded, but I sleep well at night with this strategy.
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Old 12-25-2011, 09:56 PM   #13
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My Dads Dad lost everything in 1930. He had a 200 acre farm and the terrible times back then got it all. My Dad was born in 1915. He was raised with 12 brothers and sisters. ... He made good money in his lifetime and saved it. That is what I have done also. I do not invest, I just save. Some will tell me that is not the thing to do but who are they to tell me anything?....
Similar family history. I understand and while I would not advise you change anything since things are WORKING for you I would say that this is suboptimal IMHO. Like ecclesiastes 'there is a time to save, a time to spend a time to invest, and maybe even a time to borrow. Getting them right is the hard part. Not borrowing or investing is my Dad's approach and I get it but I have learned there is more to financial life. Its nice to save/invest enough that money works for me not just me working for money.
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Old 12-26-2011, 06:40 AM   #14
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Saving excess cash flow instead of investing is fine and good if (a) you have a low risk tolerance AND (b) you don't expect to need the higher returns to meet your long-term financial goals -- and are, in fact, willing to fall slightly behind inflation as well.

So if you have a COLA'd pension that is more than you need to live on, AND you have the health insurance nut cracked, then sure, it's easier to stockpile cash and refuse to play the lottery invest in the stock market. But for the rest of us average folks who aren't in this situation, if we don't take some market risk, we're very unlikely to have enough long-term retirement savings to pull it off because the *real* growth of "cash in the bank" is roughly zero long-term and has been very negative laterly.
For me, this is pretty much right on. And, from what I've read on this forum, almost all of us are "average folks" by this definition.

In my personal experience, three factors have been important.

First, knowledge; knowledge of self and knowledge of the market (whichever market you choose). One must know his/her self own risk tolerance. One must also know the market s/he chooses (stocks, bonds, real estate, etc.). And, you MUST choose. Even under the mattress a safe deposit box is a choice; it's a choice to ignore inflation.

Second, risk tolerance. Be honest with yourself about this because, you will pay dearly for any self-deception. Low risk tolerance? Then save but, IMHO, at least do it in something that will approximate inflation. Higher risk tolerance? Choose a more aggressive AA but, choose consciously. And, here's a bit of magic: the more of #1 (knowledge) you have, the more of #2 (risk tolerance) you get. [Sorry if this sounds like a Depends commercial.]

Third, persistence. When the going gets tough..... In my personal experience, this has been a critical factor to being on the verge of FI. I don't think persistence can be overemphasized. Yea, yea, invest when the market/asset is cheap (low P/E, etc), rebalance, etc, etc, etc. But, most important of all, keep investing!. It's amazing how brilliant you will seem after several years, especially to those without enough #1 and #2 in them to have weathered the storm like you did.


PS: REW-there's lots of softballs in here so, swing away.
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Old 12-26-2011, 07:08 AM   #15
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I think you are dead wrong to be praising savers and criticizing investors.
That makes two of us ...

1 Corinthians 13:11
"When I was a child, I talked like a child, I thought like a child, I reasoned like a child. When I became a man, I put childish ways behind me."

Which means saving (over investing) may be fine when you start out, but hopefully you will learn how to invest (not speculate) to multiply your assets, as you become older (and hopefully wiser)..
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Old 12-26-2011, 07:37 AM   #16
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I remind them that they haven't lost anything until they sell.
Is that like Thelma & Louise saying "We haven't crashed (yet) because we're still in mid-air over the canyon"?
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Old 12-26-2011, 07:43 AM   #17
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PS: REW-there's lots of softballs in here so, swing away.
Swing? I'm gonna have to use my shovel first to see if I can find that pony...
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Old 12-26-2011, 08:01 AM   #18
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Right now the last the country and to a large extent the world needs is more savings. Consumers are saving money, business are saving a ton of money. The only group spending money is the government and while some of the spending maybe possibly be investing, I think the vast bulk is just spending and not particularly efficient.

What we really need is more people to invest money in order to create new jobs and new economic activity. Given the pitiful low interest rates for saving I don't understand why anybody is doing it.
Not disagreeing, but unfortunately lots of people who aren't investing, aren't saving either. They are necessarily paying down debt, or their (reduced or non-existent) incomes make both investing or saving both more difficult if possible. That's going to take some time to find an equilibrium.
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Old 12-26-2011, 08:19 AM   #19
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I have tracked my earnings / savings / investment results since 1967 when I was 9 and bought my first CD with paper route money. At 21 I bought my first individual stock, at 25 my first mutual fund (in my 401k), and for the last 18 years have stayed completely in equities.

After just over 5 years of retirement (no pension, health care benefits, inheritances, or stock option windfalls), I have recently spent my last penny of savings - my withdrawals have surpassed my total deposits. From here on out I am living on investment gains. While I have always LBYMed and saved fairly well, my ability to retire has rested on investing in equities and the dividend flow they provide. My best guess at retiring with only CD-type investments would have been about 15 years later, in my early 60s, at a considerably lower income than I have now. The 'risk' of being in the markets was definitely worth it for me.
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Old 12-26-2011, 08:26 AM   #20
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I've heard it said that savings is the marijuana of investing. In order to get to the "good stuff" you have to dabble a bit in savings vehicles until you have enough, or know enough, to graduate to mutual funds.
Heh -- I was thinking it was more because it was the "gateway" toward more powerful forms of wealth accumulation...
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