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Today most workers are expected to invest in the stock market as a matter of prudent retirement planning. Interest bearing savings accounts barely keep pace wit

Today most workers are expected to invest in the stock market as a matter of prudent retirement planning. Interest bearing savings accounts barely keep pace with the government's own inflation statistics.

SketchySeaBeast 5y ago
Yeah, I'd be happy to find out there's another option, but at the moment I'm not aware of one. Real estate possibly, but it comes with a ton of maintenance and taxation obligations that aren't in most retirement plans, and it's all so grossly overpriced it feels like its future is even harder to predict than the market.
- derekp7 5y ago
  My line of logic is that there are two types of investments. The first type is where you buy something that you hope to be able to sell for more down the road. So things like gold and bitcoin come to mind. You buy an ounce of gold today, and it doesn't grow to two ounces several years from now. The other investment is where you buy an asset that gives you an annual return without having to sell off pieces of that asset. So dividend paying stocks, and real estate if you have something on it (farm, building, etc) that gives you a return. The base asset itself can also go up in price if the annual returns are expected to go up over time also. Then there are assets that are in the second category, but you also have to put work into in order to get that return. So things like owning your own business. Real estate can also require some amount of your own sweat, or you can hire that out (which eats into your profits). Or you can buy wood-working equipment, learn to make quality furniture, then convert raw lumber into more expensive finished products. But again you have the upfront investment, consumables, and effort. And the class of dividend-paying assets that you don't have to put any work in have a risk that they quit laying golden eggs at some point (i.e., the goose could catch a virus and die). So in reality, I never know what to invest in that doesn't require constant work, and doesn't require me to break off pieces of it to sell in order to extract value.
  - SketchySeaBeast 5y ago
    And this is why ETF's and index funds have become so pervasive. You can buy a high dividend ETF, set it up to DRIP, and then you have a share in a hundred geese, all of which can somehow combine together to give you another goose on a regular basis.
tomc1985 5y ago
It is hilarious to me that a "high yield" savings account is considered to be ~ 1% APY
- jfengel 5y ago
  When inflation is 2%, that's to be expected. In the 80s I got 5% on savings, but inflation was more like 10%. We've had inflation <2% for a long time, and savings rates have fallen to practically nothing. If inflation rises, you'd expect banks to have to raise rates to attract your money. (Otherwise, you'd spend it now, since it will be worth less in the future.) Inflation has risen a bit in the last few months, though nowhere near the 10% rate we saw in the 80s. As for whether that will continue... I suspect not, but it's really hard to make predictions, especially about the future.
  - thatcat 5y ago
    Asset prices have inflated significantly above a 2% rate.
    - jfengel 5y ago
      Yes. All of the money pumped into the economy has gone into assets. It's not causing consumer inflation, though it's gradually creeping into the housing side of things. Mostly, it caused a big bubble in stocks, and from there spills out into other assets.
- askafriend 5y ago
  I'd much rather throw it into Tesla or Bitcoin and risk a loss than be insulted with 1%.
  - BuyMyBitcoins 5y ago
    I can expect to make more money looking out for coins on the sidewalk than I would in a year with a savings account.
jfengel 5y ago
Interest-bearing savings accounts are never more than inflation. If they did beat inflation for zero risk, then the money supply would increase, and inflation would rise to match. You can think of zero-risk saving accounts as the lowest common denominator of investing[1]. Everything else is more risky, and thus has to offer you a premium to borrow your money. Your savings account is really the bank borrowing your money, and loaning it out to somebody else -- at a rate higher than inflation. They profit from being the middle man in that arrangement, and taking the risk that the loan won't be paid back. The best rates on savings are usually around half of inflation, though you will have to look around for those best rates. [1] Checking accounts are even lower, since the bank knows you could pull your money at any instant, and so it offers even lower rates.
- SilasX 5y ago
  Wait, what? Until the 2000s, savings accounts definitely paid more than inflation, at least pre-tax. I remember getting 6% for much of the 90s. Sadly, this is showing to be really hard to google. The best I could find was 6-month CDs, which track it pretty closely[1] and this article [2] which supports my memory but is vague about which interest rate it's talking about. Edit: Money market yields are also a good proxy, which I found here [3] Edit2: Adding inflation link [4]. Example data points for (money market, inflation) from [3] and [4]: 1985: 7.7, 3.8 1990: 7.8, 6.1 1995: 5.5, 2.5 2000: 5.9, 3.4 [1] https://www.bankrate.com/banking/cds/historical-cd-interest-rates/ https://www.bankrate.com/banking/cds/historical-cd-interest-... [2] https://advisor.visualcapitalist.com/us-interest-rates/ https://advisor.visualcapitalist.com/us-interest-rates/ (scroll down for the table) [3] https://www.infoplease.com/business/economy/money-market-interest-rates-and-mortgage-rates-1980 https://www.infoplease.com/business/economy/money-market-int... [4] https://www.thebalance.com/u-s-inflation-rate-history-by-year-and-forecast-3306093 https://www.thebalance.com/u-s-inflation-rate-history-by-yea...
  - jfengel 5y ago
    I don't remember ever getting interest rates quite that high. I got 5% at times, but the numbers you cite are all well above that. I do think I overstated the case, though. The connection is clearer between interest and mortgage rates. Inflation rates should roughly track mortgage rates, which were often over 10% during the time period you're tracking, until everything crashed after the dotcom boom. I'm not sure what was keeping inflation comparatively low at that time. It shouldn't have been so much lower than the mortgage rates.
mvc 5y ago
Why should you get an inflation busting interest rate if you're not prepared to accept some risk? That would literally be money for nothing.
- nicoburns 5y ago
  I'd argue that index tracker are effectively that. And they shouldn't be allowed for that reason.
  - SketchySeaBeast 5y ago
    Do you not believe that ETF's should exist?
    - nicoburns 5y ago
      I think my belief is closer to: they should exist if people want them to, but the returns (taking into account inflation, taxation, etc) should be negative or very close to zero.
      - SketchySeaBeast 5y ago
        I don't understand. How would you feel if an investor hired someone to manually replicate and maintain a portfolio equivalent S&P 500? Because that's what an ETF that replicated the S&P 500 is doing, complete with management fees, it just works out be cheaper due to volume.
        nicoburns 5y ago
        Exactly the same. I don't feel like investing in companies that are popular with other people (which is what the S&P 500 is) contributes anything to society, so I don't think it should be rewarded.
        SketchySeaBeast 5y ago

SketchySeaBeast 5y ago

Yeah, I'd be happy to find out there's another option, but at the moment I'm not aware of one. Real estate possibly, but it comes with a ton of maintenance and taxation obligations that aren't in most retirement plans, and it's all so grossly overpriced it feels like its future is even harder to predict than the market.

derekp7 5y ago
My line of logic is that there are two types of investments. The first type is where you buy something that you hope to be able to sell for more down the road. So things like gold and bitcoin come to mind. You buy an ounce of gold today, and it doesn't grow to two ounces several years from now. The other investment is where you buy an asset that gives you an annual return without having to sell off pieces of that asset. So dividend paying stocks, and real estate if you have something on it (farm, building, etc) that gives you a return. The base asset itself can also go up in price if the annual returns are expected to go up over time also. Then there are assets that are in the second category, but you also have to put work into in order to get that return. So things like owning your own business. Real estate can also require some amount of your own sweat, or you can hire that out (which eats into your profits). Or you can buy wood-working equipment, learn to make quality furniture, then convert raw lumber into more expensive finished products. But again you have the upfront investment, consumables, and effort. And the class of dividend-paying assets that you don't have to put any work in have a risk that they quit laying golden eggs at some point (i.e., the goose could catch a virus and die). So in reality, I never know what to invest in that doesn't require constant work, and doesn't require me to break off pieces of it to sell in order to extract value.
- SketchySeaBeast 5y ago
  And this is why ETF's and index funds have become so pervasive. You can buy a high dividend ETF, set it up to DRIP, and then you have a share in a hundred geese, all of which can somehow combine together to give you another goose on a regular basis.

tomc1985 5y ago

It is hilarious to me that a "high yield" savings account is considered to be ~ 1% APY

jfengel 5y ago
When inflation is 2%, that's to be expected. In the 80s I got 5% on savings, but inflation was more like 10%. We've had inflation <2% for a long time, and savings rates have fallen to practically nothing. If inflation rises, you'd expect banks to have to raise rates to attract your money. (Otherwise, you'd spend it now, since it will be worth less in the future.) Inflation has risen a bit in the last few months, though nowhere near the 10% rate we saw in the 80s. As for whether that will continue... I suspect not, but it's really hard to make predictions, especially about the future.
- thatcat 5y ago
  Asset prices have inflated significantly above a 2% rate.
  - jfengel 5y ago
    Yes. All of the money pumped into the economy has gone into assets. It's not causing consumer inflation, though it's gradually creeping into the housing side of things. Mostly, it caused a big bubble in stocks, and from there spills out into other assets.
askafriend 5y ago
I'd much rather throw it into Tesla or Bitcoin and risk a loss than be insulted with 1%.
- BuyMyBitcoins 5y ago
  I can expect to make more money looking out for coins on the sidewalk than I would in a year with a savings account.

jfengel 5y ago

Interest-bearing savings accounts are never more than inflation. If they did beat inflation for zero risk, then the money supply would increase, and inflation would rise to match. You can think of zero-risk saving accounts as the lowest common denominator of investing[1]. Everything else is more risky, and thus has to offer you a premium to borrow your money. Your savings account is really the bank borrowing your money, and loaning it out to somebody else -- at a rate higher than inflation. They profit from being the middle man in that arrangement, and taking the risk that the loan won't be paid back. The best rates on savings are usually around half of inflation, though you will have to look around for those best rates. [1] Checking accounts are even lower, since the bank knows you could pull your money at any instant, and so it offers even lower rates.

SilasX 5y ago
Wait, what? Until the 2000s, savings accounts definitely paid more than inflation, at least pre-tax. I remember getting 6% for much of the 90s. Sadly, this is showing to be really hard to google. The best I could find was 6-month CDs, which track it pretty closely[1] and this article [2] which supports my memory but is vague about which interest rate it's talking about. Edit: Money market yields are also a good proxy, which I found here [3] Edit2: Adding inflation link [4]. Example data points for (money market, inflation) from [3] and [4]: 1985: 7.7, 3.8 1990: 7.8, 6.1 1995: 5.5, 2.5 2000: 5.9, 3.4 [1] https://www.bankrate.com/banking/cds/historical-cd-interest-rates/ https://www.bankrate.com/banking/cds/historical-cd-interest-... [2] https://advisor.visualcapitalist.com/us-interest-rates/ https://advisor.visualcapitalist.com/us-interest-rates/ (scroll down for the table) [3] https://www.infoplease.com/business/economy/money-market-interest-rates-and-mortgage-rates-1980 https://www.infoplease.com/business/economy/money-market-int... [4] https://www.thebalance.com/u-s-inflation-rate-history-by-year-and-forecast-3306093 https://www.thebalance.com/u-s-inflation-rate-history-by-yea...
- jfengel 5y ago
  I don't remember ever getting interest rates quite that high. I got 5% at times, but the numbers you cite are all well above that. I do think I overstated the case, though. The connection is clearer between interest and mortgage rates. Inflation rates should roughly track mortgage rates, which were often over 10% during the time period you're tracking, until everything crashed after the dotcom boom. I'm not sure what was keeping inflation comparatively low at that time. It shouldn't have been so much lower than the mortgage rates.

mvc 5y ago

Why should you get an inflation busting interest rate if you're not prepared to accept some risk? That would literally be money for nothing.

nicoburns 5y ago
I'd argue that index tracker are effectively that. And they shouldn't be allowed for that reason.
- SketchySeaBeast 5y ago
  Do you not believe that ETF's should exist?
  - nicoburns 5y ago
    I think my belief is closer to: they should exist if people want them to, but the returns (taking into account inflation, taxation, etc) should be negative or very close to zero.
    - SketchySeaBeast 5y ago
      I don't understand. How would you feel if an investor hired someone to manually replicate and maintain a portfolio equivalent S&P 500? Because that's what an ETF that replicated the S&P 500 is doing, complete with management fees, it just works out be cheaper due to volume.
      - nicoburns 5y ago
        Exactly the same. I don't feel like investing in companies that are popular with other people (which is what the S&P 500 is) contributes anything to society, so I don't think it should be rewarded.
        SketchySeaBeast 5y ago