I get a little impatient with people who say they are “saving” for retirement. If someone is saving, I assume that they’re putting the money in a bank savings account, CD or other insured, interest-bearing account. They may also be buying Treasuries or other high-quality bonds.
These are the only genuinely safe money saving strategies. Note: I know that many people regard gold as a way to save, but given the metal’s decline from a spot-price peak of $1,900 in September 2011 to $1,268 last Monday, I think they’re wrong. Even with the impressive gain in value from gold’s near-term bottom at $1,080 in December, this kind of volatility makes gold a high-risk speculation.
But getting back to real savings plans, there are three ways to evaluate saving strategies and that’s by looking at safety, liquidity and returns.
For safety, there’s nothing like having the full faith and credit of the U.S. government on your side. Treasuries are one of the safest saving strategies in the world. And FDIC-insured deposits in banks are similarly bombproof, as long as you don’t exceed the $250,000 limit per ownership category.
There are all kinds of other bonds for investors to choose from, with municipals and corporates the most popular. And, despite the despicable performance of rating agencies during the Housing Bubble, their assessment of the quality (likelihood of repayment) of these bonds is pretty sound. You can do better in the interest-rate game by taking on more risk, but there really isn’t any way to get higher returns without correspondingly higher risk. Markets are pretty efficient that way.
One thing to keep in mind if you’re thinking about dabbling in high-yield bonds is that low energy prices have put a lot of stress on oil & gas explorers and drillers. Continuing low prices could trigger a wave of defaults in their high-yield bonds and cause banks a ton of pain.
One advantage of a savings account is that you can always withdraw your money. It’s totally liquid, which is nice. The only asset more liquid is the wad of cash you keep in the shoebox in your closet.
Of course, you pay for that liquidity with low rates, but there are situations in life where you need ready access to your assets. Most financial advisors advise having a cash cushion equal to six months salary stashed in an account that you can access at will. (I think I know one person who has actually done that, but I doubt it’s a common occurrence.)
Just keep in mind that the longer you can afford to do without ready access to your money, the higher the rate of return you will earn.
Unfortunately, as things are right now, even if you could give up access for 30 years (by buying a 30-year Treasury, if they hadn’t stopped selling them in 2002), you would still only achieve a yield of 2.7%. And just to crack the 1% level, you have to buy a three-year T-note, which yields 1.1%.
That low rate of return is important, because U.S. inflation for the 12 months ended January 2016 was 1.4%. That’s higher than the 0.7% last year at this time. It’s high enough that it allowed the Federal Reserve Board to start its long-delayed tightening program on interest rates, although follow-up increases are likely off the table for the rest of the year.
So, with interest rates on savings accounts running at, or just a hair over, 1% at a few U.S. banks, while most are still offering around 0.9%, the inflation penalty for having your money in a savings account is about one-half of one percent. That’s how much the buying power of your money will shrink every year if the current interest and inflation rates continue.
Oh, and the shoebox full of money, while it shows up often in crime dramas and stories about people who have been arrested, is one of the worst saving strategies for beating inflation. Not a good choice.
Since there is no absolutely safe, absolutely liquid way to store your money that will keep it’s head above the rising tide of inflation, you are going to have to make some hard choices in your saving strategies.
Rich people try to solve the problem by investing in art, antiques and other scarce and valuable resources. (Pablo Picasso’s painting Les Femmes d’Alger sold for $179 million in 2015. I wasn’t bidding on it.)
But for the rest of us, finding the right balance of safety, liquidity and returns demands that we work a little harder. And the first resort for most of us is stock market investing.
If you ever watch a golf tournament, you know that brokerage houses are heavy advertisers for such events. Investment firms know that older people (mostly guys, let’s face it) are a large part of the audience, and that older guys are the likeliest buyers of investment services, luxury cars and expensive pharmaceuticals.
The big investment houses are willing to spend big bucks to reach that audience because they know they can make big bucks by helping them to handle their assets. There’s one financial firm that advertises everywhere online for potential clients with a net worth of at least $500,000. And they’re not doing charity work. They want management fees, and the higher the net worth of the client, the higher the fees.
As you may have guessed, I have an alternative proposal, and it’s based on the idea that the best person to invest your money is you. When you manage your own money, you have your best interests in mind. You don’t charge yourself fees. And you will get a huge boost in confidence from knowing exactly what your money is doing.
Cabot Investing Advice has been in the business of helping individual investors manage their own stock investments for almost 46 years. Our investment advisories cover the entire spectrum of investing from value to growth and from options to dividends. We give good advice in plain language and when we recommend a stock, we follow up the recommendation by telling you when to buy, when to hold and when to sell. http://www.cabot.net
Your role in the process is crucial. You have to figure out your own risk tolerance and learn the rules of the investing style that follows from that tolerance. You have to pay attention.
If you can do that, Cabot’s investment advisories will become your ally in your investing program. We will teach you what you need to know and help you achieve your goals—and fine-tune your saving strategies.
If that sounds good to you, you can learn more about our various advisories by clicking here.
But I have one more idea.
If the idea of coming to Salem, Massachusetts in a beautiful New England August appeals to you, you should think about attending the fourth annual Cabot Investors Conference. This year’s Conference will be held from August 10 to August 12, and will feature programs on all investing styles, stock picks from Cabot’s analysts (including me) and a chance to learn a year’s worth of market lessons in just three days. Attendees from previous years have raved about the value the Conference delivers, as well as the amount of fun they’ve had talking with analysts and their fellow investors. http://conference.cabot.net
Extra Early-Bird Pricing is still in effect, so you can save a tidy bundle while you learn the ins and outs of the stock market. I hope to see you there.
Tim’s Comment: Simplistic outrage also works when communicating to undereducated disenfranchised voters who are angry at the establishment, as Bernie Sanders and Donald Trump have so clearly demonstrated.
Paul’s Comment: Politicians have always made a living by offering simple answers to complex questions. Nobody wants to listen to a doctoral dissertation during a stump speech. But things can go too far. And they have. I think we just have to hope that some form of sanity will reassert itself.
Chief Analyst, Cabot Emerging Markets Investor