Truth Behind Politics

I ran across an article the other day that was giving some very reasonable and common sense (that apparently isn’t so common any more) advice about spending less and saving more in these tough economic times.

There followed many strings of comments on the topic; some advocating further savings, and some advocating more of a “live for today” mentality.

These are all fine perceptions to have, however there was one post that I just couldn’t get over. Here is the quote:

“The system isn’t set up to reward saving money. Putting some cash in a savings account will get you about 1% interest (which is taxed) while battling 3% inflation. So that’s a minimum a 2% loss from saving money in a savings account. If you invest in mutual funds, stocks, whatever, you open yourself up to a risk of losing even more.

What’s my incentive to save anything but a nominal amount for emergencies?”

There are not many views that make me angry at the person talking or writing, as long as the person talking has the slightest clue as to why they feel that way and they actually use SOME amount of consistency or logic or intelligence.

I apologize if the comment that user made resonated with you all and I am about to offend you, but if it does offend you then maybe you deserve it.

Here was my response:

Are you freaking serious? “[namechangedtoprotecttheinnocent], you just said you were worried about “losing” 2% per year on an inflation adjusted (“real return”) basis. Then you said essentially investing in equities and bonds is “open[ing] yourself up to a risk of losing even more”.

Then you asked what are the merits of essentially saving ANY amount of money (once you have an emergency fund).

Guess you didn’t make it far in math class, lets look at this in simple terms.
1.) Money in Savings Accounts:
-Put $100 in 1 year ago earning 1% interest
-Inflation is 3% (not last year, but we are using your numbers anyways)
-Today the “value” to you has gained 1% in actual “nominal” terms and lost 3% in inflation adjusted terms.
-Your balance would actually be $101, although it would be as if last year you only had $98 instead of $100.
-To make you happy we will say you only now have $98

2.) Money invested:
-Over the previous 20 years, even including this recent market meltdown, a diversified portfolio has returned 8.1% per year on average, with cash instruments only returning around 4.6% per year over the same time period. Remember these returns were over a 20 year period that ended on 12/31/2008 (Source: Blackrock)
-BUT, lets just say we put $100 into the S&P 500 Jan 1, 2008.
-On Dec 31, 2008 we only had $63 because the index had dropped 37%.
-Today you would have $68 (not including dividends paid over the year)
-I want to be fair, so I must deduct your 3% inflation over 1.5 years for a total of 4.5%
-That brings us to around $64.94 left in our investment account. We can all admit we would not want to lose this money, but it has been a very unusual, although cyclical year/recession.

3.) Now we take your GENIUS philosophy of not saving money because “we wouldn’t want to dare lose any money to inflation or by investing it in the stock market” (pretty much sums up your comment.
-Put $100 into “[namechangedtoprotecttheinnocent] intelligent decision fund” one year ago
-This money gets spent each year because he wants to give himself an excuse for being reckless with money and not having self discipline to save.
-Final balance today $0 ….But after we take out inflation of 3%….
-Final balance today in “[namechangedtoprotecttheinnocent] terms” is -$3

RECAP: Would you rather have?
1.) $98
2.) $64.94
3.) -$3 (that’s right, negative three dollars)

?????Hmmmm

It is people like this who actually occasionally show up to the polls and vote, and that is a sad, sad thing.

Either he truly is an idiot, or he is just horribly miserable that he doesn’t have one ounce of self-control or discipline and tries to make excuses for all of his failures and short-comings in life.

The above three options I gave were solely based on that loonatics thought processes, so I thought it might make a little bit more sense to give you a dose of reality. Looking at the second option over that specific time period, yes, your equity investments most likely lost money. However, over the last 20 years (1988-2008), a diversified portfolio returned around 8.1% per year, with large cap value stocks returning 9.1% per year. This is over a 20 year period ending at a horrible time. If we looked at the 20 year period from 1987-2007 the diversified portfolio returned around 10.3% annually, and large cap value stocks grew at 12.8% annually.

So, the person in the quote who mentioned that “you open yourself up to a risk of losing even more” doesn’t really understand anything about how the stock market works in relation to what the topic was. Of course you can lose money year to year, and of course your investments will fluctuate, but in the long run stocks have always outperformed other methods of saving or, in his circumstance, not saving. In fact, investing (in a long position) has NEVER resulted in a worse case than NOT SAVING!

As an example if that $100 (in the example above had been put in a “diversified portfolio” on 12/31/1988 and left alone for 20 years, on 12/31/2008 you would have $474.80. If you had invested the money in “large cap value” stocks you would have $570.81. If you would have put the $100 in Treasury bills/bonds it would have been worth $245.83 at the end of 2008, and if you had followed the crazy-man-strategy and not invested any of it you would have…you guessed it, $0!

This entry was posted on Friday, September 4th, 2009 at 2:57 pm and is filed under Personal Responsibility. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.