

Why Saving is for Suckers - yan
http://articles.moneycentral.msn.com/learn-how-to-invest/why-saving-is-for-suckers.aspx

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Femur
I agree with the math in the article as well as the fact that interest paid on
liquid accounts is rather low. The author suggests that higher interest can be
returned by investing in a domestic stock index.

The author ignores one very important concept faced by individuals: risk. It
would be just plain stupid for most people to keep an emergency fund in the
stock market. At the same time, it would also be stupid for a person to keep
long term investments in a low interest savings account.

It would be a mistake to conflate these two goals while ignoring risk.

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billybob
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.

~~~
kingkongreveng_
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 macro economic conditions and allocate accordingly
between cash, equities, and inflation/currency hedges. The article makes this
point in different words.

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btilly
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.

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kingkongreveng_
[http://econompicdata.blogspot.com/2009/03/inflation-
adjusted...](http://econompicdata.blogspot.com/2009/03/inflation-adjusted-w-
dividend-s-500.html)

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>

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derobert
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%.

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kingkongreveng_
> I'm not sure how you got 8%

Basic algebra?

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chrismear
I was totally expecting this to be something about automatically-persisting
document interfaces.

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fnid
It's not saving that is for suckers, it's savings accounts.

This is link bait. You have to get to the second page to find out he
recommends investing in the stock market when savings accounts and stocks are
two entirely different things and have much different risk/reward ratios and
he doesn't explain the difference.

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frodwith
Right, because the SUCKERS like me who spend far less than they earn and keep
their money in a savings account with the highest interest rate they can find
(at essentially NO risk) were hurt so badly last time the economy crashed.
Right?

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josefresco
Which is better, to live wealthy with high risk or to live poorly with little
risk? Sure you can make out good when the economy crashes (which is rare) but
in the meantime (while things are good) those taking high risks are sure
enjoying themselves. Remember; it's just money, you can always make more, try
to enjoy yourself a little bit while you have it and don't wall yourself off
from the world just to keep what little (or a lot) you may have.

~~~
donw
Having a savings account lets you do some really amazing things, though. I
quit my full-time job as of last Friday (although they retained me as a
consultant for part-time remote work), and will spending the next year or two
(a) focusing on my new company, and (b) traveling.

Having the freedom to make that happen, especially when nearly everybody
around me is burdened by debt, is incredibly valuable. I couldn't do this if I
had spent all my money on 'enjoying' myself all the time.

True, you shouldn't wall yourself off from the world, but at the same time,
spending every penny you earn, when you earn it, is just folly.

~~~
kirubakaran
Congratulations and all the best!

~~~
donw
Thanks!

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martingaler
author of article is kind of an idiot. you too can buy us bonds (the 4% he
refers to) you just are locked in for 30 years. banks give you less yield
because you can get your money out quickly.

what he should say is that the us govt programs to support the market are
really used to prop up bank earnings through the yield curve instead of a
direct recapitalization. an individuals choice not to save does nothing to
"screw the man."

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cynicalkane
What's worse is that point--that banks profit off spreads--doesn't actually do
harm to consumers. It's the long-term lending, short-term borrowing structure
of banks that enables them to offer higher interest rates than the market
short-term interest rates. That's how banks came about: people got higher
interest by pooling their money with money-lenders than they did lending money
themselves. Both the consumers and the bankers capture some surplus. Welcome
to free trade.

You don't have to take my word for it. Compare the rates on short to medium-
term CDs with the rates offered by Treasuries. Both of these have the same
risk to the consumer, but which offer higher interest?

(Some CDs have excessive withdrawal penalties. Go to a bank that doesn't have
this, or use brokered CDs.)

~~~
martingaler
banks traditionally borrow short to lend long. that is how profit and loss
capability is generated. that is the s&l proverbial plan. its built into the
design and is not a flaw. the problem is expecting the taxpayers to bail the
players out when things do not go according to plan and the banks turn out to
stink at their jobs.

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leviathant
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 to paycheck. If financial regulations made saving a little
more attractive, instead of encouraging everyone to channel their money
(borrowed or not) into risky investments - or even investments that seem
stable, but end up being part of some larger fraud - maybe we wouldn't be in
as bad a mess as we've been through.

~~~
sokoloff
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.

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Gormo
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.

~~~
sokoloff
I'm sure there is some need for balance, but from the (smallish) amount I
recall of Macro in college, a small positive savings is the "optimum" for
economic growth without unbounded inflation, etc.

If the savings rate were negative, then availability of credit may be the
overall bounding factor. In the situation the US finds itself currently, I
believe that an increased savings rate will slow or stall the recovery. (That
doesn't mean that I don't think individuals should be prudent and save, which
I continue to do, but rather that I want _OTHER_ people that I don't know or
care about to continue to spend freely, ideally on products my company sells.
:) )

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daltonlp
Summary:

Don't put your money in a bank, they're just profiting from your capital.

Give your money to a broker instead! Then you can "play the game" and not be a
sucker!

From the article:

"Adding sectors and specific regions will increase the complexity of your
portfolio but probably won't add much more in returns, which could well exceed
15% per year after the recent crash in value."

Could well exceed 15%? Holy awesome, that's great! Because you know, right?
You're not just making numbers up?

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gbookman
Maybe the headline should be: "Why Doing Nothing But Saving is for Suckers"

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jrockway
I agree. I fear that many people will read that headline and say, "yeah, banks
suck, I am going to go buy a flat-panel TV".

Then when a crisis strikes, they will default on their loans and I will have
to pay higher taxes and higher interest rates on borrowed money. Wait, the
author is right, saving _is_ for suckers...

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selven
The headline seems a bit misleading - it seems to be in favor of spending all
of your money as soon as you get it - the article's actual point, that it is
better to put your investments in places that do better than 1% per year, is
quite valid.

