5 ms·

Why Saving is for Suckers

27 points by yan 17y ago

chrismear 17y ago
I was totally expecting this to be something about automatically-persisting document interfaces.
Femur 17y ago
I agree with the math in the article as well as the fact that interest paid on liquid accounts is rather low. The author suggests that higher interest can be returned by investing in a domestic stock index. The author ignores one very important concept faced by individuals: risk. It would be just plain stupid for most people to keep an emergency fund in the stock market. At the same time, it would also be stupid for a person to keep long term investments in a low interest savings account. It would be a mistake to conflate these two goals while ignoring risk.
- kingkongrevenge 17y ago
  A pure cash investing strategy (money market, CD, T-Bill/Bond) now has a track record as good as the US stock market over 30 year periods. Except the much lower volatility of cash makes it superior. Plowing money into stock indexes is for suckers. To get any decent returns one is forced to analyze macro economic conditions and allocate accordingly between cash, equities, and inflation/currency hedges. The article makes this point in different words.
- billybob 17y ago
  Right. Putting all your eggs in one basket is for suckers. Keep some of your eggs in the fridge. They won't hatch many chickens, but they're unlikely to get eaten by foxes, either. Nothing to see here. Move along.
  - kingkongrevenge 17y ago
    That's not what the article says. It says you have to deliberately move your eggs around according to the business cycle.
  - kingkongreveng_ 17y ago
    That's not what the article says. It says you have to deliberately move your eggs around according to the business cycle. A pure cash investing strategy (money market, CD, T-Bill/Bond) now has a track record as good as the US stock market over 30 year periods. Except the much lower volatility of cash makes it superior. Plowing money into stock indexes is for suckers. To get any decent returns one is forced to analyze macro economic conditions and allocate accordingly between cash, equities, and inflation/currency hedges. The article makes this point in different words.
    - gaius 17y ago
      Selling your stock at the top of the market then sitting on cash until the bottom before piling back in is hardly the insight of the century.
      - kingkongreveng_ 17y ago
        You will not get reasonable inflation adjusted returns unless you do this to some extent. You cannot get returns without periodically re-balancing between equities, cash, and commodities, and different currencies. There is no free lunch. You can't plow money into a simple "diversified" portfolio and do OK. Yet inflation forces you to play the game or lose.
        btilly 17y ago
        Do you have evidence for that assertion? Because decades of financial research on the efficient market hypothesis has uncovered evidence that a simple diversified portfolio does very well. A classic incident was a case where a finance professor testified to Congress that if you took all of the stocks, put them on a board, then threw darts to make your selection, with very high likelyhood you'd beat most professional investment funds. (They typically get better returns than the market, but their costs for doing so exceed their advantage, so investor returns come out worse.) One senator couldn't believe this, and so did the experiment with a random selection of stocks listed a decade earlier. He threw the darts, computed the numbers, and his picks beat most professionally managed funds over the same time period! After this was reported he was offered a job on Wall St. You can find the research explained and further details of that incident in A Random Walk Down Wall St.
martingaler 17y ago
author of article is kind of an idiot. you too can buy us bonds (the 4% he refers to) you just are locked in for 30 years. banks give you less yield because you can get your money out quickly. what he should say is that the us govt programs to support the market are really used to prop up bank earnings through the yield curve instead of a direct recapitalization. an individuals choice not to save does nothing to "screw the man."
- cynicalkane 17y ago
  What's worse is that point--that banks profit off spreads--doesn't actually do harm to consumers. It's the long-term lending, short-term borrowing structure of banks that enables them to offer higher interest rates than the market short-term interest rates. That's how banks came about: people got higher interest by pooling their money with money-lenders than they did lending money themselves. Both the consumers and the bankers capture some surplus. Welcome to free trade. You don't have to take my word for it. Compare the rates on short to medium-term CDs with the rates offered by Treasuries. Both of these have the same risk to the consumer, but which offer higher interest? (Some CDs have excessive withdrawal penalties. Go to a bank that doesn't have this, or use brokered CDs.)
  - martingaler 17y ago
    banks traditionally borrow short to lend long. that is how profit and loss capability is generated. that is the s&l proverbial plan. its built into the design and is not a flaw. the problem is expecting the taxpayers to bail the players out when things do not go according to plan and the banks turn out to stink at their jobs.
leviathant 17y ago
To say that savings is for suckers is to downplay the role that banks have played in making savings such a bad thing nowadays. Why save your money when you can invest in a mutual fund, right? Then the banks can trade away your money, misspend it, lose it, and get bailed out, while you're left with nothing to show for it. You hear all this noise about companies going bankrupt, people going broke, and living paycheck to paycheck. If financial regulations made saving a little more attractive, instead of encouraging everyone to channel their money (borrowed or not) into risky investments - or even investments that seem stable, but end up being part of some larger fraud - maybe we wouldn't be in as bad a mess as we've been through.
- sokoloff 17y ago
  A dramatically higher savings rate would likely be disastrous for the US economy. That is why financial regulations (I presume you meant to suggest tax policy or other government incentives rather than regulation directly). Why is that? If you double the savings rate, at a high level, money changes hands about half as often across the aggregate economy. Halving the aggregate amount of economic transactions would represent a huge missed opportunity for profits (by individuals and corporations) and taxation (profits for the government). Don't believe me? Imagine a savings rate of 10% (far higher than the US rate; far lower than the 1970s/1980s Japanese rate). Inject $10 into the system by A buying something from B. B now saves $1 of that and spends $9 with C. C now saves $0.90 and spends $8.10, etc, etc. Tracking that until the next spend is under $1, with a 10% savings rate, that $10 turns into $91 of total spending. Making the rate only 11% reduces the spending to $83. 15% is a disastrous $62. 20% is $47 in total spending. 5% is a stimulative $181 and 3% is the taxman's dream of $301.40. While I don't believe that the actual economy is so simply modelled, this "Fiscal multiplier" has more than a grain of truth to it, explains why "small" stimulus programs have a disproportionate effect on the economy (providing the savings rate stays low), and why the government is NOT incented to raise the savings rate substantially, assuming you think their goal is a steadily growing economy.
  - Gormo 17y ago
    But doesn't a higher savings rate infuse money into credit markets? B's $1 in savings is at least $1 available for capital and consumer credit alike, and with fractional reserve rates, even more. Most of the boom that preceded the current bust was fueled by credit expansion - and the bust was largely due to poor risk assessment, not the high availability of credit itself.
frodwith 17y ago
Right, because the SUCKERS like me who spend far less than they earn and keep their money in a savings account with the highest interest rate they can find (at essentially NO risk) were hurt so badly last time the economy crashed. Right?
- josefresco 17y ago
  Which is better, to live wealthy with high risk or to live poorly with little risk? Sure you can make out good when the economy crashes (which is rare) but in the meantime (while things are good) those taking high risks are sure enjoying themselves. Remember; it's just money, you can always make more, try to enjoy yourself a little bit while you have it and don't wall yourself off from the world just to keep what little (or a lot) you may have.
  - donw 17y ago
    Having a savings account lets you do some really amazing things, though. I quit my full-time job as of last Friday (although they retained me as a consultant for part-time remote work), and will spending the next year or two (a) focusing on my new company, and (b) traveling. Having the freedom to make that happen, especially when nearly everybody around me is burdened by debt, is incredibly valuable. I couldn't do this if I had spent all my money on 'enjoying' myself all the time. True, you shouldn't wall yourself off from the world, but at the same time, spending every penny you earn, when you earn it, is just folly.
    - kirubakaran 17y ago
      Congratulations and all the best!
      - donw 17y ago
        Thanks!
  - MikeCapone 17y ago
    Money is freedom. Having money in the bank is freedom. Spending lots of money is the opposite of freedom, at least for me. I'm glad I have small expenses and monthly payments, because I value my financial security and freedom a lot more than shiny gadgets. It might be a cliché, but I'd rather not become a slave to the things I own.
gbookman 17y ago
Maybe the headline should be: "Why Doing Nothing But Saving is for Suckers"
- jrockway 17y ago
  I agree. I fear that many people will read that headline and say, "yeah, banks suck, I am going to go buy a flat-panel TV". Then when a crisis strikes, they will default on their loans and I will have to pay higher taxes and higher interest rates on borrowed money. Wait, the author is right, saving is for suckers...
selven 17y ago
The headline seems a bit misleading - it seems to be in favor of spending all of your money as soon as you get it - the article's actual point, that it is better to put your investments in places that do better than 1% per year, is quite valid.
fnid 17y ago
It's not saving that is for suckers, it's savings accounts. This is link bait. You have to get to the second page to find out he recommends investing in the stock market when savings accounts and stocks are two entirely different things and have much different risk/reward ratios and he doesn't explain the difference.
anonjon 17y ago
"Mind you, there are some bankers who are so lame that they won't make money." that thar is some gud ritin'
daltonlp 17y ago
Summary: Don't put your money in a bank, they're just profiting from your capital. Give your money to a broker instead! Then you can "play the game" and not be a sucker! From the article: "Adding sectors and specific regions will increase the complexity of your portfolio but probably won't add much more in returns, which could well exceed 15% per year after the recent crash in value." Could well exceed 15%? Holy awesome, that's great! Because you know, right? You're not just making numbers up?

27 points by yan 17y ago

I was totally expecting this to be something about automatically-persisting document interfaces.

Femur 17y ago

I agree with the math in the article as well as the fact that interest paid on liquid accounts is rather low. The author suggests that higher interest can be returned by investing in a domestic stock index. The author ignores one very important concept faced by individuals: risk. It would be just plain stupid for most people to keep an emergency fund in the stock market. At the same time, it would also be stupid for a person to keep long term investments in a low interest savings account. It would be a mistake to conflate these two goals while ignoring risk.

kingkongrevenge 17y ago
A pure cash investing strategy (money market, CD, T-Bill/Bond) now has a track record as good as the US stock market over 30 year periods. Except the much lower volatility of cash makes it superior. Plowing money into stock indexes is for suckers. To get any decent returns one is forced to analyze macro economic conditions and allocate accordingly between cash, equities, and inflation/currency hedges. The article makes this point in different words.
billybob 17y ago
Right. Putting all your eggs in one basket is for suckers. Keep some of your eggs in the fridge. They won't hatch many chickens, but they're unlikely to get eaten by foxes, either. Nothing to see here. Move along.
- kingkongrevenge 17y ago
  That's not what the article says. It says you have to deliberately move your eggs around according to the business cycle.
- kingkongreveng_ 17y ago
  That's not what the article says. It says you have to deliberately move your eggs around according to the business cycle. A pure cash investing strategy (money market, CD, T-Bill/Bond) now has a track record as good as the US stock market over 30 year periods. Except the much lower volatility of cash makes it superior. Plowing money into stock indexes is for suckers. To get any decent returns one is forced to analyze macro economic conditions and allocate accordingly between cash, equities, and inflation/currency hedges. The article makes this point in different words.
  - gaius 17y ago
    Selling your stock at the top of the market then sitting on cash until the bottom before piling back in is hardly the insight of the century.
    - kingkongreveng_ 17y ago
      You will not get reasonable inflation adjusted returns unless you do this to some extent. You cannot get returns without periodically re-balancing between equities, cash, and commodities, and different currencies. There is no free lunch. You can't plow money into a simple "diversified" portfolio and do OK. Yet inflation forces you to play the game or lose.
      - btilly 17y ago
        Do you have evidence for that assertion? Because decades of financial research on the efficient market hypothesis has uncovered evidence that a simple diversified portfolio does very well. A classic incident was a case where a finance professor testified to Congress that if you took all of the stocks, put them on a board, then threw darts to make your selection, with very high likelyhood you'd beat most professional investment funds. (They typically get better returns than the market, but their costs for doing so exceed their advantage, so investor returns come out worse.) One senator couldn't believe this, and so did the experiment with a random selection of stocks listed a decade earlier. He threw the darts, computed the numbers, and his picks beat most professionally managed funds over the same time period! After this was reported he was offered a job on Wall St. You can find the research explained and further details of that incident in A Random Walk Down Wall St.

martingaler 17y ago

author of article is kind of an idiot. you too can buy us bonds (the 4% he refers to) you just are locked in for 30 years. banks give you less yield because you can get your money out quickly. what he should say is that the us govt programs to support the market are really used to prop up bank earnings through the yield curve instead of a direct recapitalization. an individuals choice not to save does nothing to "screw the man."

cynicalkane 17y ago
What's worse is that point--that banks profit off spreads--doesn't actually do harm to consumers. It's the long-term lending, short-term borrowing structure of banks that enables them to offer higher interest rates than the market short-term interest rates. That's how banks came about: people got higher interest by pooling their money with money-lenders than they did lending money themselves. Both the consumers and the bankers capture some surplus. Welcome to free trade. You don't have to take my word for it. Compare the rates on short to medium-term CDs with the rates offered by Treasuries. Both of these have the same risk to the consumer, but which offer higher interest? (Some CDs have excessive withdrawal penalties. Go to a bank that doesn't have this, or use brokered CDs.)
- martingaler 17y ago
  banks traditionally borrow short to lend long. that is how profit and loss capability is generated. that is the s&l proverbial plan. its built into the design and is not a flaw. the problem is expecting the taxpayers to bail the players out when things do not go according to plan and the banks turn out to stink at their jobs.

leviathant 17y ago

To say that savings is for suckers is to downplay the role that banks have played in making savings such a bad thing nowadays. Why save your money when you can invest in a mutual fund, right? Then the banks can trade away your money, misspend it, lose it, and get bailed out, while you're left with nothing to show for it. You hear all this noise about companies going bankrupt, people going broke, and living paycheck to paycheck. If financial regulations made saving a little more attractive, instead of encouraging everyone to channel their money (borrowed or not) into risky investments - or even investments that seem stable, but end up being part of some larger fraud - maybe we wouldn't be in as bad a mess as we've been through.

sokoloff 17y ago
A dramatically higher savings rate would likely be disastrous for the US economy. That is why financial regulations (I presume you meant to suggest tax policy or other government incentives rather than regulation directly). Why is that? If you double the savings rate, at a high level, money changes hands about half as often across the aggregate economy. Halving the aggregate amount of economic transactions would represent a huge missed opportunity for profits (by individuals and corporations) and taxation (profits for the government). Don't believe me? Imagine a savings rate of 10% (far higher than the US rate; far lower than the 1970s/1980s Japanese rate). Inject $10 into the system by A buying something from B. B now saves $1 of that and spends $9 with C. C now saves $0.90 and spends $8.10, etc, etc. Tracking that until the next spend is under $1, with a 10% savings rate, that $10 turns into $91 of total spending. Making the rate only 11% reduces the spending to $83. 15% is a disastrous $62. 20% is $47 in total spending. 5% is a stimulative $181 and 3% is the taxman's dream of $301.40. While I don't believe that the actual economy is so simply modelled, this "Fiscal multiplier" has more than a grain of truth to it, explains why "small" stimulus programs have a disproportionate effect on the economy (providing the savings rate stays low), and why the government is NOT incented to raise the savings rate substantially, assuming you think their goal is a steadily growing economy.
- Gormo 17y ago
  But doesn't a higher savings rate infuse money into credit markets? B's $1 in savings is at least $1 available for capital and consumer credit alike, and with fractional reserve rates, even more. Most of the boom that preceded the current bust was fueled by credit expansion - and the bust was largely due to poor risk assessment, not the high availability of credit itself.

frodwith 17y ago

Right, because the SUCKERS like me who spend far less than they earn and keep their money in a savings account with the highest interest rate they can find (at essentially NO risk) were hurt so badly last time the economy crashed. Right?

josefresco 17y ago
Which is better, to live wealthy with high risk or to live poorly with little risk? Sure you can make out good when the economy crashes (which is rare) but in the meantime (while things are good) those taking high risks are sure enjoying themselves. Remember; it's just money, you can always make more, try to enjoy yourself a little bit while you have it and don't wall yourself off from the world just to keep what little (or a lot) you may have.
- donw 17y ago
  Having a savings account lets you do some really amazing things, though. I quit my full-time job as of last Friday (although they retained me as a consultant for part-time remote work), and will spending the next year or two (a) focusing on my new company, and (b) traveling. Having the freedom to make that happen, especially when nearly everybody around me is burdened by debt, is incredibly valuable. I couldn't do this if I had spent all my money on 'enjoying' myself all the time. True, you shouldn't wall yourself off from the world, but at the same time, spending every penny you earn, when you earn it, is just folly.
  - kirubakaran 17y ago
    Congratulations and all the best!
    - donw 17y ago
      Thanks!
- MikeCapone 17y ago
  Money is freedom. Having money in the bank is freedom. Spending lots of money is the opposite of freedom, at least for me. I'm glad I have small expenses and monthly payments, because I value my financial security and freedom a lot more than shiny gadgets. It might be a cliché, but I'd rather not become a slave to the things I own.

gbookman 17y ago

Maybe the headline should be: "Why Doing Nothing But Saving is for Suckers"

jrockway 17y ago
I agree. I fear that many people will read that headline and say, "yeah, banks suck, I am going to go buy a flat-panel TV". Then when a crisis strikes, they will default on their loans and I will have to pay higher taxes and higher interest rates on borrowed money. Wait, the author is right, saving is for suckers...

selven 17y ago

The headline seems a bit misleading - it seems to be in favor of spending all of your money as soon as you get it - the article's actual point, that it is better to put your investments in places that do better than 1% per year, is quite valid.

fnid 17y ago

It's not saving that is for suckers, it's savings accounts. This is link bait. You have to get to the second page to find out he recommends investing in the stock market when savings accounts and stocks are two entirely different things and have much different risk/reward ratios and he doesn't explain the difference.

anonjon 17y ago

"Mind you, there are some bankers who are so lame that they won't make money." that thar is some gud ritin'

daltonlp 17y ago

Summary: Don't put your money in a bank, they're just profiting from your capital. Give your money to a broker instead! Then you can "play the game" and not be a sucker! From the article: "Adding sectors and specific regions will increase the complexity of your portfolio but probably won't add much more in returns, which could well exceed 15% per year after the recent crash in value." Could well exceed 15%? Holy awesome, that's great! Because you know, right? You're not just making numbers up?