New Worth, Savings & Investment Choices

[mb]

Some information from an article by Liz Weston on MSN Money follows.

The primary conclusion of a study of factors determining wealth is that savings is the dominant factor which isn't surprising. But I was surprised that other factors had such a small influence.

Apparently it says that if you save you're "golden" no matter what else you do and if not you're in "deep doo doo!"

MB

Two economics professors have already blown a hole through your theories. Steven Venti of Dartmouth and David Wise of Harvard studied the issue of income versus wealth for the National Bureau of Economic Research a few years ago, using Social Security lifetime earnings and net income assessments for 3,992 households whose heads were near retirement age. Among their conclusions:

There’s a huge variation in wealth at every income level. Many low-income families have almost nothing. But the same is true of many high-income families.

Income alone doesn’t explain wealth disparities. Some of the lowest-earning households had managed to accumulate significant wealth.

In fact, income differences explain just 5% of the wealth dispersion the researchers found.

What the researchers called “chance events” -- inheritances, medical bills, marital status, number of children -- explained about 4% of the dispersion.

Investment choices explained about 8% of the variations.
In other words, the vast majority of the differences in wealth had nothing to do with income, chance events or investment choices.

What did explain most of the differences in wealth? Venti and Wise concluded it was this: How much the families chose to save. Those who made it a priority to save built wealth, regardless of their income level, individual circumstances or choice of investments.

 

[sgeeeee]

Yep. You can spend a lot a time arguing about whether CDs are going to be better than I-bonds, fund A will beat the index, you should include 5% commodity and 10% REIT in your allocation, you should pay off your mortgage or not, . . .

But at the end of a career, it mostly comes down to how long your investments have been earning for you. If you control your spending and invest the surplus, you probably will come out okay no matter how you chose to invest.

 

[Craig]

I saw an article in the Wall Street Journal years ago, drawing the same conclusion. In that context, the author pointed out it wasn't what you invested in that was the most significant factor ... it was simply the matter of setting something aside, in any reasonable investment vehicle.

Made a big impression on me, since at the time I was lost as far as how to invest properly ... especially after the 1987 "crash" (which proved to be barely a ripple ...).

 

[Rich_by_the_Bay]

I saw an article in the Wall Street Journal years ago, drawing the same conclusion. In that context, the author pointed out it wasn't what you invested in that was the most significant factor ... it was simply the matter of setting something aside, in any reasonable investment vehicle.

How true.

Then suddenly you retire, and all at once HOW you invest and HOW you withdraw become very critical. As a relatively new "thinker-about-retirement," it only occurred to me within the past 6 months or so that dollar-cost-averaging may not be the best strategy after FIRE. Duh.

Other observation was that a year ago I could have cared less whether one fund or one CD had a yield .3% different from another. Now I realize that those differences, in the withdrawal stage, can matter a lot. It's been a serious learning experience.

 

[Nords]

Apparently it says that if you save you're "golden"... and if not you're in "deep doo doo!"

I love it when the financial journalists use all that high-falutin' technical investing vocabulary...

 

[PortlandDiehard]

When financially unsophisticated people ask me for advice, I generally suggest a Lifecycle fund (target retirement). It really is that easy for most people. It's sad when people choose not to save because they're afraid of having to make investment decisions.

Also, after expenses, taxes, and especially inflation, the "magic power" of compounding just ain't what it's cracked up to be in the lay financial press...

Jon

 

[Cool Dood]

Unless you invested in Beanie Babies........

 

[Cool Dood]

Also, after expenses, taxes, and especially inflation, the "magic power" of compounding just ain't what it's cracked up to be in the lay financial press...

Yeah, I like when they give an example that doesn't include any inflation.... "If you invest $1,000 now, when you retire it will be worth ONE MILLION DOLLARS"..............

(Still, it is pretty much a magic power....)

 

[Zipper]

I beg to differ!

Compounding IS the most important factor.

Dollar cost averaging year in and out, and those early dollars are golden.

 

[yakers]

Also, after expenses, taxes, and especially inflation, the "magic power" of compounding just ain't what it's cracked up to be in the lay financial press...

Jon

Well, technically you're right. The financial press can be misleading to say the least. But the cost of doing nothing is even higher IMHO.

 

[larry]

I think (and most on this site agree) that you do have to start saving early and you do have to make some sacrifices (to varying degrees) to accumulate wealth. Wife and I saved religiously for last 21 years always with ER in the backs of our minds. I also think that owning a small profitable business helps immensely.

Compounding is a beautiful thing as it paid for my daughters college and wedding and gives them money to start their life. We started when she was born and didn't look back.

Just last week I mentioned to my MIL that one of the reasons we never had cable tv was because ER was more important to us. She nearly spit out a tooth laughing but I explained that many little things compounded gave us a great opportunity for growth of wealth.

I'm happy!

 

[Texas Proud]

Larry,

Yes, lots of people at work will try and give me grief about not having cable... and I just smile.... One said the other day thier cost is about $800 per year... so, if you take that and invest... assume a 5% price increase and a 6% return... you have $44,000 saved in 20 years!!!

So, that cell phone that everybody seems to have with 100,000 minutes a month, the Starbucks every day, the cable TV... just eliminating those three will give you over $130,000 in 20 years.. and $340,000 after 30...

 

[Nords]

Just last week I mentioned to my MIL that one of the reasons we never had cable tv was because ER was more important to us.

I think you should go to great lengths to avoid being known as "Larry the Cable Guy"...

 

[cute fuzzy bunny]

You know, I was going to go there but since that "death to smoochy" comment I made some months back I've been hesitant to poke at usernames...

 

[larry]

I think you should go to great lengths to avoid being known as "Larry the Cable Guy"...

My thoughts about investing when you are young can be summed up as thus, "git 'er done."

And along those same lines comes this, when a friend told me they didn't ever save very much for retirement because they wanted to live like there was no tomorrow and tomorrow came I asked, "where's your sign?"

live long and prosper
V

 

[cute fuzzy bunny]

And to you, prosp long and liver. ^

 

[dusk_to_dawn]

Yes, lots of people at work will try and give me grief about not having cable... and I just smile.... One said the other day thier cost is about $800 per year...

I get "basic" cable. It gives me about 20 channels and costs about 20 bucks versus the 50 to 80 for the expanded value packages. I am the only person I know of in my area that doesn't buy the value package.

 

[larry]

We've never had cable tv for 22 years (I think we're the only ones in the neighborhood without it) and we've never really missed too much. Still use rabbit ears and some of the channels are a bit snowy but it does bring back memories of watching professional wrestling with my gpa in their basement on saturday nights in the early 70's, can you say, "helloooooooooooooo wrestling fans!"

 

[Tadpole]

Well, be happy, all of you are miles in front of me. I still don't see how equity shares "compound". The market goes up and down and the main measure of my holdings remains the same - the number of shares. It is always a direct multiple with cost-per-share to determine the dollar value. What got compounded? If I have $100 that is earning no interest (in my mattress) and that $100 is worth $102 or $98 depending on the value of the dollar relative to the day I saved it, has it also compounded? And yes I know the market, over time, goes up. But my shares don't and, it is possible, even if not probable, that I might end up with about the same or less cost-per-share for those shares.

I guess what is meant by "compounding" is simply that equity shares increase in value at a higher rate over time than in my mattress bank.

 

[yakers]

I guess what is meant by "compounding" is simply that equity shares increase in value at a higher rate over time than in my mattress bank.

Bingo! And, except for the rare occurrence of deflation, the mattress bank loses buying power to inflation.

 

[samclem]

Tadpole,

As you likely know, the actual number of shares can grow in several ways. If you've chosen to reinvest dividends into more stock/mutual fund purchases, then the number of shares in your account will grow. If you own individual stocks, then the shares can split, resulting in more shares (though your account balance, in dollars, will be the same).

If you are in the accumulation phase and aren't reinvesting dividends, then you may not be making much progress relative to inflation

 

[Tadpole]

Tadpole,

As you likely know, the actual number of shares can grow in several ways.  If you've chosen to reinvest dividends into more stock/mutual fund purchases, then the number of shares in your account will grow.  If you own individual stocks, then the shares can split, resulting in more shares (though your account balance, in dollars, will be the same).

If you are in the accumulation phase and aren't reinvesting dividends, then you may not be making much progress relative to inflation

Actually, the only stock I own, I do reinvest the dividends. With my TSP account, the dividends, if present, are not obvious. All I see in the TSP mutual funds is my new money in buys new shares, I don't see any share gains from any other source. The same is true of my CREF Stock. I have had it for years without putting anything in it (old retirement account). The shares are the same as when I left the job. My statement was in reference to something like the CREF Stock account. What should I consider as the rationale of the use of the word compounding?