> How much money do you have saved your savings account?
That's a very specific question. A person with $5k in their checking account or a person with $100k in a retirement account might still answer that they have no savings.
I'm not meaning to attack anyone personally, I just think this survey is trying to suss out what percentage of Americans are in a position such that an economic downturn would hurt them severely.
I also don't know much at all about finances, so take what I'm saying with a jar of salt.
Also, you are almost 100% wrong about the intention of the article. It's not that they're trying to make some point about people's poor asset allocation, it's just sloppy reporting.
If their actual point was that people had too much money invested, wouldn't the most obvious and actionable advice for the "What to Do If Your Savings Fall Short" section be to sell some shares and transfer the cash into a savings account?
It's on you to prove why your financially unwise viewpoint is correct.
In the meantime, he has a home to live in. Plus, most investment accounts give you easy access for withdrawals (eg. debit cards) or the ability to borrow while transfers or sales settle. I fail to see how it's precarious.
> how would "cash in savings" be equally worthless? Maybe I'm not understanding, but it's pretty difficult to actually lose money in a savings account, that's the whole point.
The cash wouldn't be lost, but it would have reduced purchasing power in a recession. And if inflation is steep, you're actively "losing" money.
It would be "worthless" in the context of long-term investing, because nothing would have long-term worth.
People with cash on hand in 2009 made out like bandits. Cheap stocks, cheap houses, cheap cars. Everything was cheap, cheap, cheap.
Of the (mostly affluent) people I know... none of them possess a traditional savings account. Most use a checking accounts for direct deposit and a brokerage account. There's no reason to have a traditional savings account.
[1] http://www.schwab.com/public/schwab/investing/accounts_produ...
Yes, the FDIC does insure savings accounts, but that's only useful so long as the FDIC exists.
If that happens its probably the financial amagedden anyway.
If the stock market falls by 50% i still have 70% of my portfolio. I'm OK with that.
But for a bond to go to absoulte 0, would take a lot.
Also I'm not sure that small increases in the interest rates would that much of a disaster. We've been in situations with low interest rates before, and increments in the interest rate didn't harm stocks in the long term.
In many ways it's a positive indicator, that goverments see a positive future.
When the fed announced that the interest rates were on hold. Stocks went down.
There is a lot of lose money in the system though from low interest rates.
> Cash on hand or it's invested in stocks, bonds and my home.
That could be $100k on hand in checking, $600k in stocks/bonds, and $200k in home equity, with $0 in a savings account. Asset allocations that don't use savings accounts are not necessarily 'precarious'.
Also, it's worth noting that most financial advisors do not recommend that you keep a significant portion of your assets in savings accounts. Primary reason is that by not being in assets that deliver returns, you are losing money to inflation, even at these low levels of inflation. (Also, you have to save a ton more if you don't let your money multiply.)
"asked whether he invests in stocks, he replied, "Not as much these days. I used to have a lot in equities—about 75%—but over the past three years, I’ve had about 95% in cash and 5% in equities. You’re not getting much from savings these days but earning 0% is better than losing 50%."
Numerous financial experts assert the current valuations within the stock market do not reflect the underlying fundamentals; or, in other words, ZIRP allows for cheap debt in the bond markets which many firms are using to aggressively buy back stock, thereby artificially inflating the market value. Thus, "a correction" is due and his statement is still valid from a conservative investing standpoint.
http://dqydj.net/sp-500-return-calculator/
Picking arbitrary dates to buy a lot of equities and then not selling them isn't market timing; trying to trade repeatedly on the right dates is. That's how you lose all your money.
Nouriel Roubini lost 260% gains + dividends between 2009 and today. So... I wouldn't really count on this guy's advice at all.
I also have $1 in my savings account.
It would have been very rare for one to have -- while trying to be prudent -- constructed a portfolio of assets across checking accounts, equities, bonds, and primary residence that saw anything like a 50% loss from peak to 2008-crisis trough.
Note that the checking account loss was 0%; bonds did not perform as badly as equities; and in the vast majority of the US, residential RE did not fall 50%. Also note that if one did not choose the absolute generational bottom to liquidate the entire portfolio, the actual losses would have been lesser still. In other words, allocating across a diverse set of assets would have protected from the worst of the downside (while letting you participate in the historic run in equities since).
Irrational fear of volatility is going to have a lot of people retiring much later than they would like, with less money than they would like.
This, of course, depends entirely on the individual and their circumstances.
But in general, if your financial advisor suggests going 95% cash for the long haul, you should probably get someone else.
If goverment bonds loose all their value, it means goverments are close to failing.
If real estate is loosing all its value. It means people have no money to buy houses
If all 3 is going on the same time, some serious stuff is going and I'm not sure your goverment backed account is really that secure.
Similarly with house values, if you own your home outright it doesn't matter if the real estate market crashes, you can still live there. But it might make moving less desirable (or not if you can find a good deal somewhere else).
The article is talking about people who find themselves unable to pay for repairing a vehicle after an accident without going into credit card debt. That can start a spiral into insolvency.
Any scenario where the stock market declines by 99% ($100k to $1k) would basically mean the collapse of the entire financial system. I doubt your bank savings account would be very useful in that scenario.
Moreover, I don't think this article is actually talking about people who do save but just choose to save into high-return assets. I save 80-90% of my income, but it all goes into index funds. Does that mean I am not "a saver?"
Not at all. This article is about people who aren't saving because they don't think its necessary or because they can't afford to.
An emergency fund IS NOT an investment. It is insurance; treat it as such.
Why should one have an "emergency fund?" I would genuinely love to hear a good argument for why keeping any cash assets when one has significant liquid investments, as I've never encountered one.
Insurance companies invest their premiums. Why shouldn't I?
> I would genuinely love to hear a good argument for why keeping any cash assets when one has significant liquid investments,
Can you describe an asset (besides US treasuries) that you can be assured of its value in a volatile market? Even money market funds have broken the buck before (~2008).
My point is emphatically not that your stocks will maintain their full value. But even at their lowest, their value will be more than enough to cover any emergency fund. A 50% drop on $100k will still leave you with $50k.
Fortunately, many people have already done this, including Betterment: https://www.betterment.com/resources/personal-finance/safety...
Weighted by the probability of happening, you are better off investing all your money. Period.
Yet if you owned real estate[Land, Houses], they stand exactly as they are. While the numbers in the bank database turn to 0 after the collapse and companies go bankrupt and never recover. If you owned real estate, your money will recover in the very next turn.
Real estate is yet another asset class which should be included in a diversified investment strategy, but my point was that there's no evidence that money should be kept in a bank savings account.
I mean, keeping the money in savings virtually guarantees 'losses' in real terms.
I believe there's a significant risk of deflationary times ahead - the prime rate over the last five years really makes much of that argument for me. It is not a given that keeping the money in a savings account guarantees real losses.
I think 2-3 months direct cash/savings/checking is fine, then move excess cash to CDs or something semi-liquid. You totally CAN get money out of CDs, just sometimes lose your interest. If you have some kind of CD ladder or such going on - you can have a new CD coming out every 1-3 months anyway, which will give you the cushion you need after savings run out.
When interest rates tanked, I moved all of my CD's to money market accounts when the term was up.
What is key is to only open a money market account at an institution with a long term track record of staying above average on rates compared to thier competition. You want to avoid the institutions which constantly raise and (and then lower) thier rates. Bankrate.com is a good way to research these.
Either way you've lost money you could have had. Humans tend to be loss averse though.
In both situations you probably have liquid equivalents at hand
The stock market going down 10%. That's 10% you could have had, if you made the right decision.
Logically its the same. However humans loss averse, which makes one seem worse.
https://www.betterment.com/resources/personal-finance/safety...
That said, I personally have tried to balance dividend (income) paying stocks and short term bonds (6months to 1 year) which feeds into the cash balance, so that covers some of it.
Because I'm built the way I am I've always saved in the context of how long I could live on my savings with the goal of increasing that number until it reached infinity. That first level I call 'Raman level retirement' where you could live forever[1] off your savings if you ate only Ramen, up to the the point where you can live off your savings and keep your current lifestyle (which actually takes less income than most people thing), to actually living a more lavish lifestyle without day to day employment.
[1] Of course you intercept the life expectancy line at some point, and you have to build into your model ever increasing health care costs or a one time lump sum to emigrate somewhere that has a national health plan.
Borrow when you need it, then you have some time to figure out what assets to sell to pay it back.
Granted, do you have any idea what such a scenario might look like? Odds are, it can wait. Even large medical operations if you don't have medical insurance (where I live), simply require a modest deposit before they start the operation or expensive procedure. Though I do think they ask for some sort of proof that you have the money on hand.
But, again, most people here have enough money to pay for private healthcare insurance, or they rely on the free state hospitals.
Car, insured. Medical, insured. Bond payments, predictable.
So, I'm trying to figure out a valid plausible scenario where a large amount of "cash" is required in a very short amount of time. Any ideas?
For funds that you know you will need in the next six months to three years, it is recommended to keep the funds in a liquid and very stable investment.
Personally, I use a California (I live in CA) tax free short term bond fund.
What type of expenses do I keep in this kind of fund? Tax payments I know I already owe (capital gains from an IPO for example), child's college tuition payments, planned major house repairs / remodels, pending car purchases, and as others have mentioned six months of living expenses in case of layoff or other emergencies.
Stock is considered a liquid asset.
Sure, consider that $10k or whatever that you need for a couple months after you lose your job. In an economic downturn, if your stocks/bonds lose half their value, it costs you $20k of pre downturn, investment dollars rather than the $10k of pre-down turn dollars if the money was in a savings account.
That said, its really really important that if you can't save some money every month, and don't accumulate savings year over year (those are importantly different things!) That is a signal that you are living beyond your means, budget down and find ways to reduce your burn rate.
The only reason I still have a savings account is because I expect interest rates to go up again at some point in my lifetime, and, as petty as it is, I didn't want my credit score to take that temporary dip for closing the account.