Fortunes aren’t made being conservative. Nobody has gotten rich earning less than 1% on their money. Yet more money has been put into savings accounts than into stock and bond funds, since the market crash of ’08. This may sound like a good thing. At first glance it looks as though people are building up their emergency funds. A great sign of financial responsibility, if it were only true.
The first 11 months of 2011, retail investors put over $900 billion into savings accounts. During the same period only $109 billion was investing into stock and bond funds. Putting money into a mattress is never a good idea, but expecting to reach financial goals earning less than 1% is just as bad.
A look at the chart below shows how extremely different the amounts of money saved and invested have become since the ’08 crash. Which isn’t that surprising really. The fact that the numbers haven’t returned to a more normalized setting after four years should be questioned.
Savings Amount (Blue Line) Vs. Investment Amount (Yellow Line) Since 1960
Maybe I’m jumping the gun on this information and people have listened and acted on the need for a sizable safety net. If that’s true, congratulations for taking another step towards financial responsibility. But what’s the plan once that emergency fund is topped off. Will people finally take on the more risky investing in the market. Or is the view so bad, the stock market option is no longer even considered.
It Begins With Fear
Fear is the number one reason, in my opinion, that is holding people back from investing in the markets. Unfortunately, the crash in ’08 did so much damage to investors views that a large majority took their money and went home. Some will never invest in the markets again. Others are already back, skeptically reinvesting. The rest won’t filter in until the market starts to peak several years down the road.
If this fear continues, it could lead to a very under invested America for several generations. It’s not much different from the psychological impact the crash of ’29 and the Great Depression had on people. The markets were viewed as being only speculative, betting parlors, that are rigged for all but the ultra wealthy. Sounds familiar, right?
Not surprising that the same views persist today after the ’08 crash. It left a psychological depression around the markets by the average investor or what was the average investor. How long will we equate an economic collapse and financial hardship with stock market crashes. By not investing in stocks, it will somehow shield us the next time the economy goes south. Too bad, it doesn’t work that way.
Going into the fourth year after the crash, “the game is rigged” is still heard. Something I don’t believe but it’s easy to understand how someone might believe it as fact. We tend to generalize extremes on topics we fear and don’t understand. It makes it easier to avoid them. But it won’t solve the future financial shortfalls that will face millions of retiring Americans.
The Solution
The keys to investing require consistency, patience and an emotional detachment to our money. The first two can be easily accomplished. It’s that last one that always gets people. How does anyone keep level head after seeing half their investments wiped out? We all handle stress differently, even Warren Buffet admitted that people who can’t handle a 50% decline in a stock, shouldn’t be owning stocks. The same should be said for bonds, mutual funds, and ETFs. If you can’t stand the heat…
This thought doesn’t apply to everyone, of course. So what should the rest of us be doing. My suggestion has always been educate ourselves, get back to consistent investing, and realize that so-called expert predictions of the next Armageddon are more about getting free press than reality.
Basic asset allocation rules push us to invest our age in bonds and the rest into stocks. There will be some money in stocks at every age level. If the asset allocation formula is right, anyone under 100 will have some money in the stock market. Instead of continuing to under utilize their money in money market accounts.
Those people in their 20s and 30s should be taking on the most risk. As we reach our 40s and 50s, we should be taking on a little less risk but it doesn’t mean no risk.
It doesn’t mean we’re done growing that money once we reach retirement age, either. Retirees have to plan for 30-40 years of income and paltry savings account rates don’t cut it. Once we take out taxes and account for inflation we’re losing money.
We should be pushing ourselves to understand how the markets work. Not from the regurgitated half-truths recited as scare tactics by media types purely for ratings. But with a book or three, making our own educated decisions. Worst case scenario we have a better understanding of the markets and how it works, but still leave all that money in a savings account. At least then, an educated (not emotional) decision is being made about our money. Shouldn’t that be our goal as investors?
Really good article, and great points. A lack of investors is a huge problem for us, but I am sure everyone is expecting someone else to take the risk. I am not sure how to overcome that fear, but I think I would need to have a certain amount in emergency savings before I could work on emotionally detaching myself from my money and investing.
That’s why the emotional detachment is so difficult. It will be interesting to see how investor psychology plays out. I just hope it doesn’t stunt a whole generations view on the market and investing.
This is actually an interesting concept. Will there be an increasing number of people who felt burned by stock losses, who decide to play it safe going forward based on fear as a motivator.
I think this makes sense. I recall reading someone talking about pulling out of the market entirely once the credit downgrade happened, fearing a massive loss in value of stocks. I thought it was very, very reactionary and shortsighted view, but the person seemed highly motivated by fear. Well, it turned out to be the wrong move on that person’s part, not surprisingly. However, fear took over for that individual – and a suboptimal investment return probably ensued in the following months.
This was another PF blogger, by the way. Considering that, just imagine how the average non-financially oriented person out there might have the potential to react?
Good post.
Of the data, the most interesting is the 20 something crowd making extremely conservative investments. Not sure if has to do with seeing their own savings or their parents savings take a hit during the crash, but the reaction has been to take on as little risk as possible. Not a good sign from an age group that can handle extra risk from a time perspective and could lead to a big retirement shortfall for the group.
Interesting article and a scary trend to point out. Unfortunately, these will be the same people who work late into their lifetimes, require government assistance, and hog all the jobs from people in younger generations. I think part of the problem is that there is a lot of negative press about stocks, 401ks, and investing in general that leaves the common investor wondering what to do and looking for answers. But hopefully some of our blog posts and carnivals can be helpful in steering them back towards rationalization.
One quick question: Does the “investment” line also contain bonds, or is it strictly traditional savings? I know recently I was considering some movement in my asset allocation towards having more bonds as a defense. I would imagine a lot of people have adapted this strategy recently as well.
The “investment” line includes bonds and there has been a big move out of the stock market into bonds since the crash too. But it doesn’t show that stock to bond movement. Which would be interesting to compare and see the extent of the stock fund exodus. I can understand baby boomers reallocating to preserve their retirement savings, something they should do, but when the 20 and 30 somethings are doing it, there’s some cause for concern. It could put undo pressure on your points about job needs and government assistance down the road. Thanks for sharing.
Wow that’s an eye-opening chart. I’ve been investing regularly every month, no matter what. (Although I have cut back on my Roth to funnel more money toward getting our mortgage paid off.) Still, I’m investing a pretty big amount of my salary regularly.
Sticking to your guns and with regular monthly investments was the way to go. It forced the buy low sentiment even when we didn’t know where the bottom was. Great job on sticking to it.
This is a great thing to point out. While the market is by no means safe in the short term, the fact that most investments are back to (or above) their 2008 levels shows me that the stock market is still worth sticking with.
It’s the short-term view that often clouds our judgement. Not good when our biggest investment goals are long-term.