How much money should we save? (1 Viewer)

[PhillJones]

Quite frankly, I'm not at all convinced that putting money in the stock market is a good idea. Everybody I know who's tried it has lost a lot of money or at least not made as much than if they'd just put it in the bank. It seems that with alarming regularity the bottom drops out of the whole thing and people loose their life's savings.

What makes me more nervous is that I can't seem to a get a sensible explanation of jut how risky the stock market is. What are the chances that sometime between now and when I'm 60 the stock market will crash and leave me with nothing to live on? Whenever I ask my bank I just get mumblings about 'could fluctuate by 10%' blah blah blah. Which isn't much of quantification of risk if you ask me.

 

[Patrick Sun]

For the risk-averse, slow and steady money market funds, CDs, and even US I-bonds are a good alternative for your portfolio. And it does also depend on your time horizon (how long before you need to start living off your savings/interest) as to which financial instruments you use to save and make money in the long run.

 

[GordonL]

Another piece of advise: once you've maxed out your 401(k) and your IRA contributions, resist the urge to spend the rest on new toys. Instead, think about buying real estate. Since I started working in the late 80's, real estate in the DC area has gone thru 2 up-cycles. The house I'm in has almost tripled since I bought it. My parent's bought their house around 1975 and houses in their neighborhood has gone up more than 10 times what they paid. Friggen amazing! Of course, it depends on what part of the country you live in. You know what they say, location, location, location!

 

[Mort Corey]

The stock market, IMO, is closer to the term speculation vs investment. If you had "bought and held", per the prevailing mantra, from 1950-1980 you would have been pretty close to flat....probably a loser if you factored inflation into the mix. 1980 to today, quite a different story. The "10% over the long haul" could turn into something unexpected...like 30+ years.

There are risks in every part of life. Ya pays yer money and ya takes yer chances. I've done quite well gaming the market, but it's with funds strictly for that purpose that I can afford to lose. My thinking is that products like mutual funds are for those that want someone else to gamble with their money on their behalf. To each his/her own.

Mort

 

[AjayM]

Because it's really an impossible answer to give. As a whole we can really only go by history, which shows that the earnings outweight the crashes (12%'ish per year). But that doesn't mean when you turn 59 that the market won't crash, although that late in the game you shouldn't have that much money invested in the market.

The key to surviving the down turns is not to panic and pull whatever money is left out of the market (this is a HUGE mistake people make).

Andrew

 

[PhillJones]

So how long a period of time is this fabled 12% thing worked out over, does that include the great crash of 1929? Or is it something that's just held true for the last 40 years or so?

 

[AjayM]

See for yourself;



Andrew

 

[GordonL]

Here's a chart that covers 1900-2004:

 

[Dennis Nicholls]

Savings may take many forms. The best investments are those that qualify for long-term capital gains treatment.

If you live in an area with predictable high growth in housing costs, paying more for a mortgage may be a good portion of your overall investment strategy. I bought my crummy little (1,000 square foot) home in 1981 for $109K. Current comps on my block are around $650K. My mortgage precluded maximum savings in a 401K for many years but the appreciation in my house more than compensated for that. My house is now paid off and I have considerable other savings, so (amazingly enough) I find at the age of 52 that I'm a millionaire.

I did this without really scrimping. I'm able to indulge many luxuries. It helps that I'm basically a world-class cheapskate. In HT terms, I bought a used Electrohome Marquee 8501LC projector for $3K and cleaned it up. That sure beats the $30K list price for a new one. I always have nice sportscars because I (1) buy them cheap (2) do all the maintenance myself and (3) keep them for a decade. There is a lifestyle you may adopt called "thrift" which will keep you in good stead, and perhaps is the most valuable of life's lessons.


Rubbish. This is propaganda put out by the "financial planner" lobby.

My house is paid off. And for many years I have lived frugally and saved about 40% of my after-tax income. I'm sure I could live comfortably on about 30-40% of my current income. The 80% rule really applies to dumbkopfs that perpetually live in great debt.



Spend $20 at www.nolo.com and get this book.

 

[Ryan Wishton]

Saving for old age scares the hell out of me. I hope I die, but I can't count on that. I really have no interest in living to be very old anyways.

Especially since I have really no one to inherit anything from and stokes/heart attacks run in the family. Once my grandmother had her 3rd stroke, there is really nothing left anyways. She is completely looney. All of her "friends" and most of the family ran after the first one and haven't seen her since.

I personally don't want to live on cat food in some dumpy place either. I can't even imagine how much I would need to save. I would guess maybe 3 million by the time I retire which is way far off as far as I know.

Sure, you could save a million dollars. WHich is a nice start. But, in 30 years that won't be worth nearly what it is today. It's better than nothing of course. But, I don't know if it would be enough to last 20-30 years+ 30 years from now.

Plus, we don't know what life expectancy will be by then. Not to mention housing prices are highly insane for people starting out nowadays. Add a family to that and your expenses go up again by a big margin.

Anyways, I just figure I will do the best I can at saving and hope good things come along in the future. Not much else I can do.

I really wouldn't depend on anyone but yourself. I think a lot of people make the mistake thinking someone will be there to help them in old age. Sometimes, you are in for a big awakening.

 

[AjayM]

If you put at least 10%'ish away every year and with a little bit of work on your part, there is no reason why you can't retire "early" and truly have the ability to stop working if you so desire.

Andrew

 

[PhillJones]

GordonL, Thanks for posting that graph.

I'm thinking that confirms my suspicions. Let's say you invested in 1926. When the slump happens in 29, you hold on, just like we're told to. It's not untill 1952 that your money regains it's previous value and starts to climb again. It peaks a few times in between but you certainly don't make any money until the fifties. The mattress is looking rather appealing as an investment strategy.

That's a dramatic worse case scenario but look what happened in the 60s and 70s, twenty years of nearly no growth. That's half to a third of a career. I can imagine people like me being told that based on the last 30 years, yadda, yadda, yadda, and then finding that their lifesavings worth only 5% more than they invested, significantly lower than the rate of inflation.

Just looking at this data, there seems to be two large cycles of growth and stagnency in the second part of that graph which is too short a period, given the timescales of the changes in that graph to make any predictions about long term behaviour. Certainly, the pre-1940s behaviour looks markedly different to the post-1940s behaviour. So that's only 60 years of data.

Even if this pattern continued, it's clear that a 30 year investment strategy is too short a period to ride out market instability. The mantra of 'stay in for the long hall' may apply to banks and countries that endure but is not really something applicable to an individuals comparitively short lifespan.

To make matters worse, an optimistic interpretation, which includes the pattern of the last 60 years continueing, suggets that we're at the start of a 20 year period of stagnancy. It looks like it's the wrong period of history to be working towards retirement via the stock market.

I've tried to address these concerns with several financial advisors, but they look at me like I'm from Mars.

I'm serious about this, I'm not just playing devils advacate, I'm very concerned that what I'm being told by the investment companies and by my relatives is a naive reading of the data.

 

[AjayM]

Perhaps they look at you that way because what you suggest doesn't make any sense? I can find all sorts of "safe" funds that have been yielding good returns for 1 - 5 - 10 - more years.

Past that despite all the "pro" stock market comments in this thread it would be a mistake to invest 100% of savings into the market no matter what your age. Diversity in a portfolio is also a key element. However when you're younger IMHO it's "worth" taking the risk of investing in the markets, say with a 80/20 split between "risky" investments and "solid" investments (say market vs bonds).

It's not difficult to find yourself in a position of financial "freedom" by the time you get into your 50's-60's.
Buy a house - but buy enough house that you're not going to want to keep moving around. Ideally you want to buy a house that you could keep for 30 years until it's paid off. Obviously that's not always possible, but moving every 5 years to something newer/better/whatever is still costing you money.
Live debt free - Nothing wrong with having a little debt here and there. But there is a difference between "easily" manageable debt, and the kind of debt people get into. Buy a car with a car loan, but keep the car for 7-10 years. Toy purchases should be done with cash.
Save money - You don't have to make huge sacrifices, but you need to put some money away every year (10% is a good rule of thumb).

Andrew

 

[PhillJones]

AyayM,

You cheated .

I chose a period of 30 years to co-incide with a practical length of time over which people invest. Especially if they start work after graduate school and/or want to be financially secure in their 50s. You took a different time point, added ten years to the data subset. We're not looking at a different graph, just different points on the same graph. I'm looking at risk. To evalusate risk you have to look at negative outcomes and access the likelyhood of them coming about, not select data that represents positive scenarios and hope that it works out that way.

You say, diversify the protfolio. Financial advisors also use this expression. I know that it means, at least I think I do, but I don't see how it protects you against a crash or a prolongued period of stagnation. Why would a diversified portfolio grow faster than one that is not. I concede that it reduces risk of serious loss but a selective portfolio would be more likely to result in growth in such times. That is to say, a diversified portfolio is more likely to follow the general market trend as it's more representational, if that trend is stagnation or downward, that's what my money will do.

 

[Evan S]

What market proxy are you using to say this? The S&P 500 returned 10.85% on an annualized basis from 1/1/50 through 12/31/79 so if you think that over a 10% annual return is "flat performance", I'd like to meet YOUR financial planner.

 

[Evan S]

You are the exception, not the rule. I have ZERO debt right now except for my mortgage and I can guarantee you that I couldn't live in retirement at half my salary. Not with the rising costs of healthcare, which is the largest expense for retirees. You may be able to live on 30-40% of your salary now, but a lot of retirees greatly increase their travel expenditures, which offset any reduced mortgage responsibilities. Also what happens if you suffer a health related incident that isn't fully covered by your insurance (if you even have any, of which many retirees are only covered by medicare). Obviously the 80% rule is conservative in nature, but I'd rather have more in retirement than less, that's for sure.

 

[GordonL]

Phil,
A good investment strategy includes making regular investments, not just one time investments. The reason it works is thru the concept of "dollar-cost averaging". When the market is sliding, your investment buys more shares. As the market recovers, you'll have more shares working for you.

For example, let's say you invested $100/month over a 1 year period and the share price for a mutual fund looks like:

M $ #
1 100 1.00
2 95 1.05
3 90 1.11
4 93 1.08
5 90 1.11
6 85 1.18
7 88 1.14
8 92 1.09
9 93 1.08
10 96 1.04
11 99 1.01
12 100 1.00

Column 'M' is the month, column '$' is the share price, and column '#' is the number of shares your $100 bought for that month. If you total up the '#' column at the end of the year, you'd have 12.89 shares. 12.89 shares x $100 = $1289 or a 7.5% gain.

Compare that to the situation where you invested $1200 all in one shot and made no more investments for the year. You start with $1200 and you end with $1200 for a 0% gain. Clearly making regular monthly investments is the way to go.

 

[AjayM]

You're right, but as a whole what is the trend?

Look at the S&P 500;


It hasn't been around as long as the DJIA, but look at it's trend.

Now the NASDAQ;


It has been around for even less of a period of time and it represents the riskiest of the bunch, there are some BIG gains there, and also some BIG losses.

 

[Mort Corey]

Just eyeballing the chart(s). If you factor in an average 4 1/4%+ inflation over that period then it cuts the average close to half....which, to me, is pretty flat. (I also tend to doubt the official USG inflation figures) The Dow and S&P500 are manipulated by adding winners and removing losers all the time so I don't put much stock in those historical averages either.

As an aside, the "balanced portfolio" mantra of stocks and bonds seems to infer that bonds themselves are a low risk safety position. The ONLY bonds that are close to no risk are US Treasury instruments (at least from a liquidity standpoint) Who would have thought five or ten years ago that GM and Ford bonds would be junk status today?

I don't profess to be a financial professional, quite the contrary. I'm just saying that with the information available from numerous sources today, that I have done quite well guiding my resources personally over the last ten years. It's not rocket science, just gambling with better odds than the casino.

Mort

 

[Evan S]

But you do realize that if you invest in an index fund of either one of these stock indexes, your portfolio will experience the same winners and removal of losers throughout time as well? As each index gets reconstituted, so will your portfolio and you will receive the same return as the index. Nobody doubts the presence of inflation, but historical averages say that stocks will outperform inflation by a greater margin than bonds or money markets, albeit with greater volatility. The question is what is your time frame and can you stomach the added short term risk? But longer term, few investments provide better returns than equities.