Spending more now? Interesting Asset Allocation Parallel

[FUEGO]

Is anyone spending more money now during the current economic downturn than previously?

I know our family is. We have taken two ridiculously cheap vacations in the last few months, and just booked a week at the beach this summer. These were mainly due to the price being so low, but they are also places and vacations we have wanted to take for a while but haven't due to the expense.

Our cars are getting near the end of their useful lives for our purposes (9 years old), and as a result we may pick up some new cars if the prices get stupid cheap.

My thinking had always been to spend more during a bad economy since deals should be more available. But now I am stuck with the dilemma of what I regard as very cheap investments screaming for my available cash versus less expensive goods and services to consume.

Has anyone given this much thought from an asset allocation/spending perspective? In other words, does anyone save cash in a rainy day fund waiting for an economic downturn to buy large capital goods and services?

This would tend to go against a withdrawal plan such as "spend 4% of the balance of your portfolio each year", since you would be spending more when your overall portfolio was down, and less when your portfolio was up. Has anyone seen any research on this? I am aware of Milevsky et al's work on combining asset allocation decisions with other aspects of one's financial life to better manage various risks throughout life. But I haven't seen anything specific to managing spending to take advantage of lower prices and balancing this with portfolio management and asset allocation decisions.

 

[ziggy29]

If I had confidence my job was extremely secure, or if I had a very secure income stream that I didn't think was threatened by recession, yeah, I'd be loading up on a lot of these good deals for big ticket items, travel deals and work on the house by contractors desperate for work.

I'm seeing some of the cruise deals and hotel packages these days and I want to kick myself for not feeling able to take advantage of them in this economic environment. I feel like I need as much "layoff insurance" in the bank as I can manage right now.

I suppose in the future if I wind up FIREd with a secure income stream, or I wind up with a very secure job, I'd probably plan to do just that. But for now I'm too chicken to do anything that will reduce my savings balance.

 

[Dawg52]

Spending more now?

No. Being more careful. But it's hard to spend less than I have in the past. I read Unclemick's book....'Cheap Old Bastard Guide to a Long and Prosperous Life'.

 

[dex]

Good question -
I will be traveling outside the USA - Europe? Australia? and maybe a cruise for the first time.
Other things I buy on a need basis regardless of the economy.

 

[TromboneAl]

Are things really cheaper now? I'm always skeptical of, for example, "50% off" advertising.

 

[ziggy29]

Are things really cheaper now? I'm always skeptical of, for example, "50% off" advertising.

In some areas it's hype, but in other areas (particularly travel -- stuff like hotels and cruises) some of the deals are bordering on the insane.

 

[Animorph]

Since equities are about 50% off, I'm only looking at buying off-budget discretionary stuff that is more than 50% off. While I have cash from 2007, I want it to last until stocks are at least 30% up from today. Until then, every $1 we spend today looks like $2 to me if I have to sell equities now.

 

[FUEGO]

Are things really cheaper now? I'm always skeptical of, for example, "50% off" advertising.

I'm a skeptic too.

The main things that I have seen cheaper are travel related - hotels, cruises, airline tickets, and the like. I have seen some cars that are on sale, but not the kind that I would end up buying.

I haven't really seen many good retail deals yet. Although I usually don't buy stuff if I don't really need it, travel excepted.

 

[Spanky]

we might be spending more since we have had two vacations recently. Hotels offer good deals, but car rental companies have not significantly reduced rates. We plan to replace our 10 years old Corolla and 20 years old windows (20) in the house.

 

[FUEGO]

Since equities are about 50% off, I'm only looking at buying off-budget discretionary stuff that is more than 50% off. While I have cash from 2007, I want it to last until stocks are at least 30% up from today. Until then, every $1 we spend today looks like $2 to me if I have to sell equities now.

I have the same feelings - ie every dollar that I spend now could have bought me $2 worth of stocks at 2007 peak prices. But I'm still relatively early in the accumulation phase, so it is really just me spending some discretionary income and investing a little less, not actively selling securities at 1/2 off to fund cheaper travel.

I have stuck to my guns and continued to invest regularly every month at the same rate that I have been doing for years now. Saving most of our raises and bonuses, maxing out 401k's and IRA's, saving a lot after tax, etc.

I guess the gas prices going down also provide us with an extra $100 or $150 each month that we didn't have 6-8 months ago, so that goes a long way towards paying for our supercheap vacations.

 

[FUEGO]

We plan to replace our 20 years old windows (20) in the house.

I may have to more strongly consider home improvements soon. I do need new windows, new siding or paint/replace rotten wood, kitchen remodel, etc. I noticed 2x4 prices are off by 1/3 at the local home depot. No clue if that drop in prices in more broad on materials and if the labor costs have dropped yet.

 

[FIREd]

We are are spending less. We cut our spending by 12.5% last year, and will probably cut it again by another 3-5% this year. We use the extra money to invest in the stock market. I would rather buy cheap(er) equities that have a great(er) potential for appreciation than buy depreciating assets, even at a discount. Besides, I still don't find deep discounts yet on many of the things I want to buy.

 

[Grep]

For almost the first time since joining the full-time work-force, I'm short on ready cash and have to budget carefully. So, no, I'm spending less, not more.

Why? It's because I'm in the camp that believes that investments are on sale, and that I should put money into them now rather than into depreciating goods or consumption. So, for example, I'm accelerating pre-tax savings such that my entire salary is going into multiple tax-deferred plans now and for the next 4 months or so.

I'm sure my girlfriends will be understanding when I pinch pennies, won't they?

 

[FUEGO]

I guess I should also put our spending in context. We continue to save around 50% of our gross income, but have loosened the strings just a touch if we see something that would bring value to our lives at an attractive price.

 

[RonBoyd]

Is anyone spending more money now during the current economic downturn than previously?

We are leaving tomorrow for a three week excursion into the Dallas-Fort Worth/Galveston/New Orleans triangle. This is a normal expense and has been planned for a month or so.

However, those Mediterranean cruises for $1,000-$1,500 Balcony cabins INCLUDING airfare are pretty tempting. I have even seen a 28 day Alaska cruise for less than $2,500... wow! 28 days! And these are from big name cruise lines even.

I suspect that I am going to have a very difficult time this year keeping the wallet sealed since I believe the prices are going to drop even further.

What is that Chinese curse, may you live in interesting times? (which I didn't know until now is the English translation of "It's better to be a dog in a peaceful time than be a man in a chaotic period.")

 

[Khan]

Yes, have had frequent visits from the plumbers.

 

[friar1610]

Is anyone spending more money now during the current economic downturn than previously?

I know our family is. We have taken two ridiculously cheap vacations in the last few months, and just booked a week at the beach this summer. These were mainly due to the price being so low, but they are also places and vacations we have wanted to take for a while but haven't due to the expense.

Although we generally live pretty modestly, I personally see this period as a good opportunity for people in our situation.

The situation is this: both retired - a pretty decent military pension and 2 early SS checks each month, inflation adjusted. (5.8% this past year.) A decent portfolio which has lost about 25% during recent troubles, but which we rarely touch, so there's no real loss until we sell. Own home outright, so no danger of foreclosure.

I think this is a time, if not to go overboard, at least to take advantage of things (trips, new TV from places going out of business, etc.) that are "on-sale." We're certainly not going to go buy a BMW, but we may replace aging furniture, electronics, etc. if (an only if) they're a good buy.

I'm realistic enough to know that the value of both my pension and our SS may diminish as the new administration looks for ways to stimulate the economy. And I'm conscious of the fact that, at least for the moment, we're very lucky compared to many others. But during the good times, there are some things priced out of our reach; it makes sense to take advantage of them when they are within our reach.

 

[OAG]

We have already started this past year: 2-New relatively expensive Dell Computers (DT/NB), New HDTV, and a New Digital Camera. This Year (2009) we have a very long vacation planned (8,000 miles about 8 states, and a month or so long). Plan, when we get back to start looking for a new car which we will probably hold off on until 2010. We too have military retired pay, and we both have SS, nest egg is totally in CD's, so no market impact (too old to worry about inflation much). I do not know about lower prices but these are things we WANT to do and can. Regardless, of what happens in the economy I do not think much will change - lived through too many administrations to really worry about it.

 

[RonBoyd]

from places going out of business, etc.)

Worst possible place to try and save.

Just one of many, many articles:

Little secrets of 'out-of-business' sales

"Consumers think this is the time for bargains. That's not true," said George Whalin, president and CEO of Retail Management Consultants.

 

[Alan]

This would tend to go against a withdrawal plan such as "spend 4% of the balance of your portfolio each year", since you would be spending more when your overall portfolio was down, and less when your portfolio was up. Has anyone seen any research on this? I am aware of Milevsky et al's work on combining asset allocation decisions with other aspects of one's financial life to better manage various risks throughout life. But I haven't seen anything specific to managing spending to take advantage of lower prices and balancing this with portfolio management and asset allocation decisions.

I don't see how this goes against the withdrawal plan. Outside of my retirement savings I hold an account that is used to save up for spending on "luxuries" such as a replacement car, vacation etc. There is nothing that says that you have to spend everything you withdraw in the year you withdraw it.

 

[ziggy29]

I don't see how this goes against the withdrawal plan. Outside of my retirement savings I hold an account that is used to save up for spending on "luxuries" such as a replacement car, vacation etc.

Indeed. There's a strong argument to be made, for example, for withdrawing as much as you can from an IRA or 401K in (say) the 15% tax bracket and saving the excess cash flow in another savings account and/or taxable investment account. That could be one source for these occasional splurges.

 

[FUEGO]

I don't see how this goes against the withdrawal plan. Outside of my retirement savings I hold an account that is used to save up for spending on "luxuries" such as a replacement car, vacation etc. There is nothing that says that you have to spend everything you withdraw in the year you withdraw it.

Maybe it is semantics. I had planned to do the "take 4% of my portfolio value each year" approach to retirement spending. However this would mean spending more in good years in the market, when prices would generally be higher, assuming strong correlation between prices of goods and services and prices of securities. Then in really bad market years, when prices are lower, I would have less discretionary funds to spend on the goods and services that have dropped in price.

I guess I could have a "bucket" of unspent money that rolls over year to year and goes unspent. But then I am really changing my asset allocation to slightly more cash.

Not sure if I will employ the full "3 bucket method" or not, but I guess a single extra "income smoothing" bucket will probably be used at a minimum. This "income smoothing" bucket is somewhere that unspent funds from a great year can be held (on paper) to be spent in later years that are not as great.

 

[W2R]

I just looked at my most recent bank statement, and I am spending a little more than in previous years.

Actually I intended to spend more, due to changing circumstances, but last month I used less than half of my planned spending increase.

I am waiting for all the Great Wonderful Retail Deals we are supposed to be getting sometime soon. So far, I haven't seen any deals on things that I wanted that were worth bothering with. Also I am trying to save extra to make up for the $10K given to my daughter in November for her wedding. Still, I bought a few things for myself and I am doing my best to stimulate the economy through a moderate level of retail therapy.

Any stocks that I might buy will have to come from rebalancing, since I don't intend to add to my investment portfolio with this year's income. I will use all that I can save for one time expenses in 2010 - - my first year of ER when I hope to move north.

 

[Alan]

I guess I could have a "bucket" of unspent money that rolls over year to year and goes unspent. But then I am really changing my asset allocation to slightly more cash.

Not sure if I will employ the full "3 bucket method" or not, but I guess a single extra "income smoothing" bucket will probably be used at a minimum. This "income smoothing" bucket is somewhere that unspent funds from a great year can be held (on paper) to be spent in later years that are not as great.

I like to minimize ups and downs and have always been this way. As a kid I watched my mother divvy up my Dad's weekly pay packet each week, putting money into different tin cans for the monthly bills that were to come, putting some aside for the week's shopping, giving some to my Dad for "spending money", and the rest into their savings account for future purchases.

 

[ziggy29]

I am waiting for all the Great Wonderful Retail Deals we are supposed to be getting sometime soon. So far, I haven't seen any deals on things that I wanted that were worth bothering with.

Yeah, the hopes for great retail deals have mostly been overblown.

But if you're in the market for a vacation... these are the best deals I can ever recall seeing, and by a fairly wide margin (adjusted for inflation, obviously).