Friday, January 01, 2010

Saving Saves the Day

Happy New Year everyone! I thought this article from the NY Times was well worth sharing: For Savers, It Was Hardly a Lost Decade. As everyone looks back at the '00s, there will be lots of talk about how the stock market came full circle and at least in terms of overall averages, isn't worth any more than it was 10 years ago-- but as Ron Lieber points out, that doesn't have to mean that investing is a lost cause.

If you invested $100,000 on Jan. 1, 2000, in the Vanguard index fund that tracks the Standard & Poor’s 500, you would have ended up with $89,072 by mid-December of 2009. Adjust that for inflation by putting it in January 2000 dollars and you’re left with $69,114.

But that is not how most real people invest. They don’t pour everything they have into just one type of asset and then add nothing to it for 10 years. Instead, they buy stocks of all sorts, and bonds and perhaps other things, too. And many millions of them dutifully add more money regularly, usually into a retirement account that they won’t touch for longer than a decade.

For those people, it was not a lost decade at all. Even those who started with a low six-figure balance could have doubled their money in the last 10 years.

I don't have accurate data going back 10 years, but I'm sure my net worth was less than $50,000 at the beginning of the 2000s. Today, it's somewhere around $400,000. It's certainly not because I'm an investing genius, and it's not because I saved $350,000 in cash. It's because I spread my investments among different kinds of assets, and made sure to save at least some percentage of my income every month with automatic deductions. If you keep your portfolio balanced and regularly add to it with monthly savings, you can weather pretty much any economic storm.


Gord said...

You're absolutely right about saving. I am dismayed when a well respected guy like Kiyosaki blurts out that savers are losers. His point is if you put your money in the bank, the interest won't keep up with inflation. Plus, there has lately been fear of the bank closing and losing your money. Other than that scare tactic, he's got some good stuff.

But if you simply give up and don't save, you'll definitely get left behind. You have no chance. Saving and investing prudently is key to our financial health. Doing nothing is a sure disaster.

dunkelblau said...

I think how you fared this past decade depends on your net worth
to income ratio when it started, and how your income held up.
In your case you started at less than 1x, and your income went up
so the decade was very good. I started at about 8x and income
was flat, so it wasn't too bad (more than doubled). My mother just
cashed out a 10-year variable annuity that returned a few per cent
(so lost due to inflation).

Moral of the story-- regular rebalancing becomes more critical
as you get older! And with all due respect to Ben Stein, don't buy
an investment that either locks you in or charges to rebalance.

Mike said...

Heya Madame. Great blog!

I read that article in the Times when it first came out and sort of dismissed it but since you shared it, I figured that it might be worth giving another try.

Lieber brings an optimistic outlook on this past decade where it is much needed! But somewhere around the time he wrote about "a much more realistic scenario with 50 percent of the money in bonds" didn't sit well with me. I think that most people never ever rebalance their portfolios and probably have a much more aggressive asset allocation and were burned pretty bad this past decade.

Our portfolios may be a lot larger than they were in 2000 because of saving but it's the "could have been's" and the "what if I just invested in.. [fill in the blank]" that hurts! *sigh* It could have been worse, I guess. Haha.

Happy New Years!

Crystal said...

I've had an awesome decade! I've gone from being completely broke in college (2001-2005) to owning a home that will be paid off in 6-8 more years (bought in 2007) and having $50,000 spread out between a 401k (2005-2009), a Roth IRA (2008-2009), a pension plan (2006-2009), and savings (2005-2009). Not bad for an office worker and her teacher husband. :)

Here's to an even better New Year for you and yours!