Friday, July 13, 2012

The Trouble With Saving Is...

I've been investing since 2007 and as of yesterday, my net nominal gain on my investments is -3.41%. It's hard out here for an investor. It's really hard. In fact, it's so hard that most people don't invest a significant amount of money, whether it's in stocks, bonds, or even CDs. Most people save in the form of home equity and the interest rate offered on their bank accounts.

2008 was a hell of a year

This is a real shame, because even though I haven't turned a profit on my investments (it actually varies on any given month whether I'm net positive or net negative), I know that investing in equities is the only way to get a decent return on your money in the long run.

Real estate, on average, grows at the rate of inflation. Bank CDs yield about 2% above inflation. Long term Treasury bonds (30 year) offer about 3% above inflation. But over the course of the American stock market's extraordinary run in the 20th century to now, they've averaged almost 5% above inflation.

The only problem is that stock values can fluctuate wildly from year to year. One of the most famous quotes in investing is this: "Anyone who bought stocks in mid-1929 and held onto them saw most of his or her adult life pass by before getting back to even."

That's why it's so hard saving money. One stroke of incredibly bad timing can wipe out a fortune in no time at all. Humans are notoriously short term thinkers, and today's gotta-have-it-now culture and the accompanying technological advances have exacerbated our spending and saving habits for the worse.

That's why this current recession is so brutal. People didn't even save money when times were good. In fact, according to the Bureau of Economic Analysis, the personal savings rate in April of 2005, in the midst of a strong economic recovery and soaring stock market, was just a paltry 1%.

So when times are bad and people have no money, people with money have all the leverage. That's why things feel so unfair and why many politicians are stirring up populist sentiment and class envy. That's why there's so much resentment for corporate America. Companies have to save money for their long term health. Except in very few circumstances, nobody likes helping a corporation when they're going down.

They have money and most Americans don't. And it also explains why this current economic slump feels so bad. In the Great Depression, times were hard for so many Americans because it was the first major economic contraction that happened when most Americans lived in urban areas instead of on farms.

A family living on a farm has a hard life and a mostly penurious lifestyle, but they have a lot of tangible capital: land and farming equipment. A factory worker who lives in the city, at the time, would have a higher standard of living when times were good. But if he lost his job, he has nothing to fall back on.

Well, we all live in the city, or close enough so that it makes no difference. And most Americans have nothing to fall back on when they lose their jobs. When almost half of the population can't raise 2000 dollars in a month, any economic downturn is going to be devastating for them. But when it persists, it just feels so much worse.

 Americans need to learn how to save. Our country would be so much better off if we could all save our income when the times are good so we can weather through the times when they're bad.

1 comment:

  1. not bad at all for your portfolio. The S&P 500 for the same period is -3.9%. Many pros could not beat it. But you did!