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Why Saving is for Suckers

articles.moneycentral.msn.com

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Re: Why Saving is for Suckers

#31

Post by ianferrel »

jrockway wrote: post #26
kingkongreveng_ wrote: post #20

Earlier quoted context omitted.

> 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 go…

Past performance is not indicative of future returns.

But it's the best guide we've got.

Re: Why Saving is for Suckers

#32

Post by sokoloff »

leviathant wrote: post #5

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 t…

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.

Re: Why Saving is for Suckers

#33

Post by Gormo »

sokoloff wrote: post #32
leviathant wrote: post #5

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 t…

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 repr…

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.

Re: Why Saving is for Suckers

#34

Post by btilly »

kingkongreveng_ wrote: post #13
billybob wrote: post #7

Earlier quoted context omitted.

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.

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…

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.

Re: Why Saving is for Suckers

#35

Post by btilly »

kingkongreveng_ wrote: post #24
gaius wrote: post #23

Earlier quoted context omitted.

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.

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.

Re: Why Saving is for Suckers

#36

Post by kingkongreveng_ »

btilly wrote: post #34
kingkongreveng_ wrote: post #13

Earlier quoted context omitted.

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…

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 w…

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

Re: Why Saving is for Suckers

#37

Post by kingkongreveng_ »

btilly wrote: post #35
kingkongreveng_ wrote: post #24

Earlier quoted context omitted.

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.

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…

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.

Re: Why Saving is for Suckers

#38

Post by jrockway »

chollida1 wrote: post #29
jrockway wrote: post #17

Earlier quoted context omitted.

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.

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.

Re: Why Saving is for Suckers

#39

Post by derobert »

kingkongreveng_ wrote: post #36
btilly wrote: post #34

Earlier quoted context omitted.

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 w…

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

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%.

Re: Why Saving is for Suckers

#40

Post by derobert »

sokoloff wrote: post #32
leviathant wrote: post #5

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 t…

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 repr…

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.

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