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.
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?
