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Trend of Falling Savings and Increasing Stock Investing


Americans are feeling confident financially. According to information recently released by the U.S. Dept. of Commerce, Americans are saving at the lowest pace in about a decade. The savings rate fell to 3.1%, the weakest since 2007.

At first glance, that might seem like bad news. Truth is, it might be an indication that consumers are more confident about the economy and more willing to risk their savings in the market. The stock market has reached new highs this year in part due to Americans increasing their investments into stocks and stock funds.

However, Dan Thompson, a financial advisor and author of The Banking Effect, Acquiring wealth through your own Private Banking System in an interview urged caution against investing too heavily in the market.

“Investors forget [about market risks] quickly when things are going well,” Thompson says. This year, the Dow hit 22,000 for the first time. “I’d venture to guess that 2008 is all but a distant memory for those of us who went through it. Up and down cycles tend to repeat about every 10 years or so. We’ve certainly had our ups since 2008 and the question is, is the hammer about to fall?”

Up and down cycles tend to repeat about every 10 years or so. We’ve certainly had our ups since 2008 and the question is, is the hammer about to fall? ‐Dan Thompson

What savers should be focused on is building balance in their portfolios. Taking on too much risk isn’t wise, but taking on too little risk can be just as dangerous.

“There is a saying that goes something like this, ‘the market has an uncanny way of proving the most people wrong.’ Following the crowd very seldom brings favorable results. It might be a good time to hoard some cash and get ready to buy another day - when companies go on sale.”

Who knows too, how this trend in lower savings rate might impact deposit rates. With money flowing into stocks and bonds that means there is likely outflow from bank accounts, and that should be reducing deposit levels at banks which should put pressure on them to raise deposit rates.

First thing’s first

Similarly, Erika Jensen, president of Respire Wealth Management has concerns about the low savings rate.

“I highly encourage my clients to have enough savings to cover at least their deductibles on home or renters' insurance, car insurance, health insurance, and enough to cover at least one large uninsured home repair,” Jensen says. “When it rains it pours.”

She also suggests clients consider their profession and be honest with themselves about whether or not they're happy and feel secure in their workplace. What matters too, is their ability to move quickly into another job. Someone in a high demand profession, such as a healthcare provider, may not have as much trouble as someone in an industry that is more cyclical.

Despite the fact that the unemployment rate is at it lowest point a decade, it’s still smart to be prepared for the worst.

“For people who feel like they need some padding in case of job loss I'd definitely recommend saving beyond the deductibles and one large expense,” she adds. “Once they've done that they'll find they're less involved in the debt yo-yo because they'll have cash to cover major expenses.”

Pay down debts and keep some liquidity

If there's money you could need at any moment, maybe tomorrow or maybe in two years, then that money should be in cash or a short-term CD. It may not be earning anything, but because it’s only needed for short-term expenses, you don’t have to worry about whether or not it will lose value as time goes on.

“If everything a person has saved is in the stock market, that's a bad idea,” says Jensen.

By keeping sufficient funds in liquid or semi-liquid assets, you also avoid having to tap into your long-term investments to cover short-term needs or emergencies.

By keeping sufficient funds in liquid or semi-liquid assets, you also avoid having to tap into your long-term investments to cover short-term needs or emergencies. For example, if you have to dip into your 401(k), you’re not only missing out on returns in the market but you’re also facing stiff early withdrawal penalties and a possible tax hit on top of that. You don't want to have to liquidate stocks to pay to replace an aged roof when the stocks are down significantly.

It’s also important to focus on paying off high-interest debts before you even think about pumping money into the market. If you find yourself without savings but you are paying high interest rates on debt, that is negative interest earned.

Says Jensen: “Think about it like this, paying 21% interest on credit card debt is a guaranteed negative 21% earned, whereas stock market returns vary greatly year by year. Assume an annualized return of 7.2% in stocks. It seems to me that paying off and preventing debt is a no-brainer when you compare the two. Would you rather be debt free because you saved adequately? I would!”

How to strike the right balance

A good rule of thumb is to take your age and subtract it from 100 (or 110, if you’re more tolerant of risk). That number is how much of your assets should be held in the market. The remainder is how much you should keep in low-risk, low-yield places like bonds, CDs, or savings accounts.

Of course, this is just a basic way to determine how to stash your money.

There are some cool quizzes you can take online that will recommend asset allocation for your needs and risk tolerance, like this one from Vanguard.

  |     |   Comment #1
THERE ARE THE USUAL SITES THAT DECRY THE FALL OF SAVINGS,,,,THE CRISIS OF AMERICANS LOWEST IN HISTORY NET WORTH,,,,that americans have no emergency funds for rainy days and years and generations or retirement,,,,OH THE HUMANITY,,,THE CHUTZPAH, THE HUBRIS OF THOSE ALARMISTS THAT ALSO PRAISE THE FEDERAL RESERVE SYSTEM SINCE ITS' WAR ON SAVERS BEGINNING IN JAN 2001 AND WITHOUT ANY HOPE IN SIGHT CONSIDERING THE NEW WALL STREET LAP DOG AS FED HEAD,,,,,,,you either learn a casino game for a return or suck air,,,,BTW,,,,,saul alinsky was no ragged dirty long haired stinky scraggly inked up beatnik, hippie, yippie,,,,but a very dapper mad men styled marketing guy who rephrased the art of war for the young beast hillary,,,,,who really looks like the daughter of saul alinsky when hildabeast was 18, he probably smoked cherry blend in his kaywoodie yellow-bole, while eating at manny's deli in chicago,,,,i'm sure i rubbed shoulders with him back then.
  |     |   Comment #2
Your point is what?
  |     |   Comment #5
... "With money flowing into stocks and bonds that means there is likely outflow from bank accounts, and that should be reducing deposit levels at banks which should put pressure on them to raise deposit rates."
I don't buy that.
If that were true, % rates would have gone up years ago. Furthermore , as thousands of baby boomers are retiring every day they are at different points pulling money out of the market for living expenses.
  |     |   Comment #7
cmt #1
( you either learn a casino game for a return or suck air )
That's a great line Sir.
Look at the stupid behavior of people in the last 6 years. Buying and leasing new cars at a record pace. (What person does that if they are trying to save or build wealth. Stupid ). Student loans, credit card balances. There's almost $4 trillion of stupidity right there. And I could go on and on.
  |     |   Comment #47
on this veterans day 11Nov17,,,,remember all those who castigate OUR COMMANDER IN CHIEF,,,,but quietly love his wealth class and wall street loving ways, like the entire congress and everyone at wall and broad streets,,,,,REMEMBER ALSO THAT 95 PERCENT OF VETERANS FALL INTO THE 95 BOTTOM PERCENT,,,,,yes I will salute our beloved commander in chief for MAKING AMERICA GREAT AGAIN..... FOR THE WALL STREET INVESTOR WEALTH CLASS.... ''HAND SALUTE.''
  |     |   Comment #3
"With money flowing into stocks and bonds that means there is likely outflow from bank accounts, and that should be reducing deposit levels at banks which should put pressure on them to raise deposit rates."

When people trade bonds and stocks between themselves bank deposits do not change in volume - they are just transferred between the people doing the trading. Bank deposits are a function of private (i.e. bank created) money and government created money. When bank loans are repaid a bank deposit is extinguished. When private loans are made by a commercial bank a bank deposit is created. When the fed expands it's balance sheet and reserves are created bank deposits are created. When the fed shrinks it's balance sheet and reserves are destroyed, bank deposits are destroyed.

Bank deposits are just claims (liabilities) on bank balance sheets. The asset side of banks balance sheets contain loans and reserves held at the Fed.
deplorable 1
  |     |   Comment #4
I don't know if you guys remember this but back before the housing crisis around 2006 the savings rate dipped into negative territory for the first time since the great depression. I was a frequent poster on bankrate.com back then and Greg McBride and I were trying to figure out what was going to happen next. We figured that some foreclosures would happen but not that the stock market would crash like it did. I hope this drop isn't a precursor for another stock drop or negative event. It does seem that a substantial drop in the saving rate can lead to a market crash. The savings rate is not currently negative though and we have a business friendly president so this could just be folks who have missed the rally finally jumping in.
what me worry?
  |     |   Comment #6
if not now when???,,,,,,,,GET IN THE GAME......the water's fine!
deplorable 1
  |     |   Comment #9
I never got out just increased my savings and put more dividends in the bank since 2008. This way I never had to sell at a loss and picked up a few low cost shares to dollar cost average down on the way back up. I use a buy and hold approach and only buy high yield monthly and quarterly paying dividend stocks. Anything else is pure speculation and gambling IMO.
  |     |   Comment #34
this bull has another 6 years left,,,,,,,,,
deplorable 1
  |     |   Comment #8
I frequently find myself moving in a opposite direction from the herd. I have been saving more now since interest rates are starting to rise and have not been adding as much to my stocks as I now feel that many stocks are now overpriced. Instead I have been trying to diversify into various high yield monthly and quarterly paying dividend stocks in different sectors of the market. As I save more in FDIC insured accounts I feel more comfortable taking on higher risk in the market in order to boost overall yield. I don't consider stocks or mutual funds as savings only investments. I feel money set aside for savings should be free from risk and have FDIC/NCUA coverage but that's just my take. I lowered my percentage of investments vs. savings since the 2008 crash from a 80(stocks)20(savings) mix to a current 50/50 mix as this reflects my risk tolerance much better.
  |     |   Comment #21
Deplorable 1, you won't find any push-back from me. Contrarian that I am, I find it ever so much easier to trim my stock positions when the market is hitting all-time highs. I recently convinced my wife to trim her AA to 55/45 (from 60/40) and have myself sold a bit of equities in my Schwab account. At Vanguard, I moved a tad (well, more than a tad) from equities into VBTLX, and rotated more into VBIAX as well Remember the old stock trader's adage: "never let green fade to red". Never be ashamed to take profits too early.

I can understand the frustration of DA readers when they juxtapose the rather lame options in CDs these days with equity gains. After all, one would need to buy and hold a 2.5%  five-year CD for five years to lag this year's S+P return by "only" 3%.

That said, they key is diversification. I take risk on the equity side, knowing full-well everything could go to heck in a hand-basket tomorrow. My anchors are IRA CDs, after-tax CDs, savings accounts, and bond funds. Fixed-income, as it were. As we said in the Navy (yes, I was in the Navy), always have an anchor to windward.
deplorable 1
  |     |   Comment #24
@Bozo: I actually am going to unload some of my old bond funds soon and dump that cash into higher yielding riskier stocks. MORL once again has a 20% yield it will be entering over sold territory very soon as mREIT's are taking a beating right now. I love when people panic sell as it creates a good buying opportunity. The uncertainty with Trump's tax plan is causing unfounded panic in mREIT's IMO. I use my portfolio for high risk as the wife has boring mutual funds in a 403b and a Roth IRA for our safe investments. I know everyone says you can't time the market but I have had good success buying shares when prices are on the low side. Now I just need to learn how to sell shares when they are making a profit. This is really hard to do with dividend paying stocks.
  |     |   Comment #27
Deplorable 1, you have, as they say, an intriguing investment portfolio. Not for the timid, but it works for you, I guess. I was always a bit more cautious. Year one of RMD: cash from Schwab. Years two and three of RMD: cash from the KeyDirect IRA CD. Years four through eight: Patelco's IRA CD. Years nine through eleven, Alliant's IRA CD. Years twelve through fifteen (maybe longer), we're talking about partials from StateFarmBank and PenFed. If all goes according to my long-term plan, I might never need to harvest stocks for RMDs in my lifetime.
deplorable 1
  |     |   Comment #30
Nothing wrong with being cautious where investments are concerned. Back when I was getting 6-7% in FDIC insured savings accounts I didn't even have any investments other than a few small CD's. I find that dividend paying stocks provide a cushion to falling stock prices and thus some added protection against loss. I don't reinvest my dividends automatically either as I prefer to time my buys at low prices which have a secondary effect of increasing the dividend yield. I own quite a few stocks that are now 100% paid for with harvested dividends. To use a gambling term I am now playing with the house money and my original investment is earning FDIC insured interest. Even if I were to lose my whole portfolio I would just be at even money. I used to invest in non dividend paying stocks when I first started out and lost most of it. That lesson is what led me to my current strategy. I take my time and research a stock for a while before I buy as dividends can be slashed when a company has too much debt and can go out of business leaving you with $0.
  |     |   Comment #25
Moving right along, when one hits RMDs, the key is to harvest the low-hanging fruit. For most, this is fixed-income these days. I found a cushion of fifteen's years' worth of RMDs in fixed-income helpful. This allows me to satisfy my RMDs from said "low-hanging-fruit" while letting my equities ride. Should my equities go on a tear, as this year, I just whack off a bit, plop into fixed-income, and replenish the amount I just harvested in RMDs.

Example: I was bit guilty whacking off $60,000 in cash from my Schwab account for my 2017 RMD. So, I rotated from equites in Vanguard to fixed-income in an equal amount.
deplorable 1
  |     |   Comment #26
Thankfully I don't have very much in these type of accounts as RMD's require yet another level of planning. I'm not old enough yet to have to worry about them. Have the RMD's pushed you into a higher tax bracket yet or have you been able to avoid that with enough planning ahead. My guess would be the latter.
  |     |   Comment #29
Deplorable 1, when one adds one's spouse's and one's RMD to the tax calculation, it's hard to avoid. The "Catch 22" is the Roth IRA. Pay tax now, or pay tax later.We chose to pay tax later.
deplorable 1
  |     |   Comment #31
Yes I like the Roth IRA for exactly that reason. I'm planning to be in a higher tax bracket at some point though and my situation is most likely a bit different that the average Joe. If I'm in the new 12% tax bracket with Trump's tax plan I'm going to have the wife max out her Roth in high yield dividend paying stocks. Then when we need cash later and we are in a 30-40% tax bracket It's all tax free.
  |     |   Comment #45
The gov’t should tax Roth distributions...just like Soc Sec being taxed...if one is planning on the status quo...good luck!
deplorable 1
  |     |   Comment #46
This is why they put strict limits and income caps on the Roth. Rich folks who make too much money can't get them. No they are not going to tax it on he way out.
  |     |   Comment #44
I think the same way with you (" I feel money set aside for savings should be free from risk and have FDIC/NCUA coverage") except that I did not invest in stock before 2008 crash. I agree with another poster that a lot of stocks are really pure speculation and gambling.
never too late
  |     |   Comment #14
The movement from savings to stocks indicate that people WANT a ROI. If the banks aren't willing then the stock market is. Everone is just getting more educated about investment.
  |     |   Comment #15
It wise to invest with caution with the markets at an all time high.

Just about every time the general public jumps into the stock market, the big financial institutions make their move to take profits which drives the market down. Then the average investor panics, sells low, while the big financial institutions buy back. The same cycle happens over and over.
  |     |   Comment #16
I agree. I typically follow the advice of don't try to time the markets, as it is nearly impossible to predict when a contraction will occur, but we are past due for a correction. How large and when it will be is anyone's guess, but my confidence of piling more money into the stock market right now is very low.
  |     |   Comment #23
Chickenfoots (re comment #16), market-timing is a fool's errand, of that we can all agree. That said, taking profits in this market does not always equate to market timing. For example, let's assume one takes profits and uses same to buy a 5-yr CD, with no intention to use the proceeds to buy back in if and when the market corrects. That's just "booking green".
  |     |   Comment #17
At risk of sounding naive, this time may be truly different for those of us thinking the stock market inevitably has to go down again some day. What is different is we now have a central bank that almost certainly would step in and provide support to falling stock prices either directly or indirectly. Even if they actually didn't, the perception is they will. We see that all around the globe. ECB, BOJ, SNB, BoC you name a central bank and they either buy stocks directly or indirectly. We saw it again this weekend when the Saudi market miraculously recovered from a steep sell-off due to orchestrated sovereign buying. Those of us who remember the adage "free markets for free men" can only lament how central banks now "manage" the financial markets.
  |     |   Comment #18
PUT THIS IN YOUR EQUATION,,,,,,,,''''''BREAKING NEWS'''''' NY FED HEAD BILL DUDLEY JUST ANNOUNCED HIS EARLY RETIREMENT WAY WAY EARLY,,,,EFFECTIVE NEXT YEAR,,,,this just gets better and better,,,,,,THE UNHOLY TRINITY,,,FISCHER-YELLEN-DUDLEY,,,,if you can't connect the dots and hear the sirens and see the flashing lights.,,,,,,I KNEW trump would pull a wall street lap dog out of the hat,,,,but DUDLEY is thee most important fed branch president and 3rd most powerful fed official,,,,i guess he wants to spend more time with his family AND GET OFF THE TITANIC 2 before it's too late......what a box of laughs!!!
Hasta la Vista dudley
  |     |   Comment #20
p.s.,,,my research indicates dudley do wrong masterminded ZIRP AND QUANT EASE,,,,such a good boy you are dudley.
James Plakey
  |     |   Comment #19
The stock market is now nothing more than a Ponzi scheme!!!
  |     |   Comment #32
If the central banks buy all the stocks there is no longer a free market. Won't happen. This time is not different, there will be a serious correction, people will be HURT and, this time, it may be worse than you think. The new "machines" controlling trades for the big guys will take your investments down faster than a speeding neutron. By the time 401k allocation periods roll around the losses for many will be heartbreaking.
  |     |   Comment #33
CDinterest (re comment #32), while I agree a correction is long overdue, I don't see a repeat of 2008 on the horizon (but, then, I'm just a Bozo). That said, folks who hopped on the equities bandwagon just recently (i.e., momentum investors) could get a rude shock. I suspect the trick is to set one's "input" (to the market) at a rational allocation, then do a "Rip van Winkle". When the market tanks, you will be buying more stocks at a lower cost. When you are ten years or so from retirement, revisit your asset allocation. Before then, Jack Bogle's sage advice comes to mind: "don't peek".
  |     |   Comment #35
I would argue there already are no free markets. Central banks don't have to buy all the outstanding stock, they just have to make it clear that they have the option to buy stocks and are willing to use it. (They call it "diversifying their assets!" Look at the BOJ. They already own a large percentage of Japanese stock ETFs. The SNB owns some $80 million in Apple stock. And who knows what our central bank has on its balance sheet...S&P futures perhaps. No wonder the market can barely register one down day anymore, let alone a negative month. How is a bear market going to start these conditions.
  |     |   Comment #36
There is more than one way for a bear market to occur. World events can change things in the blink of an eye. The whole world is a powder keg these days, just waiting for a spark.
  |     |   Comment #37
Bogie, bear markets are not always a bad thing. For those still employed and socking away money, a bear market represents a buying opportunity. Funny (but true) story. Back on March 9, 2009, my wife's 401K employer match hit. March 9, 2009, by coincidence, was the bottom of the 2008 - 2009 swoon.
  |     |   Comment #38
As with any bull or bear market, there are always winners and losers.
  |     |   Comment #28
I simply adore confidence. I always look for it :)

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