Nothing Brings Down the Savings Rate As Much as a Bull Market

Beyond Buy-and-Hold #80

There?s only one reason why people save money.

Because they think they need to.

Convince someone that he doesn?t need to save, and he won?t. No exceptions.

Guess what a bull market does? It convinces millions and millions of people that they don?t need to save. Stocks were priced at three times fair value at the top of the bubble. That means that those of us with $100,000 in accumulated lifetime wealth for a time believed a Buy-and-Hold fantasy that we possessed $300,000 in accumulated lifetime wealth. And that those of us with $300,000 believed we had $900,000.

Yet there are still people today who question why we are in a financial crisis and what we need to do to get out of it.

The connection between bull markets and savings rates

To persuade millions of people who need to save that they they do not need to save is a bad thing. That?s what Buy-and-Hold did to us. It persuaded us that we didn’t need to save even though we did. It hurt us. It tricked us. It pandered to our most greedy and lazy and self-destructive emotional impulses. It made us the worst that we can possibly be.

I am not somebody who believes in chastising people for not saving. Not because I think the low saving rate is not a problem. Because I don?t think chastising is generally an effective way to get people to do things. I prefer pointing out the great stuff that saving can add to a life — plentiful free time and soul-satisfying work. Tell people the good in saving and they will want to do more of it. Get people to think positive thoughts about saving and they will do more of it.

But the positive thoughts I am thinking of are honest positive thoughts. Saving really does open doors. Telling people they have more in the way of accumulated life savings than they really do possess is for a time perceived as a positive. It?s a message people like to hear. People are happy to buy stuff from people who deliver such messages. But such messages are not truly positive. Lies are not positive messages. They are tricks. They do long-term harm.

Buy-and-Hold kept the savings rate down for many years. People were tricked into saving less than they would have had they known the realities in all the years from 1996 through today. Our life opportunities have been greatly diminished as a result. There is no way for us to get those years back. You only get so many years to finance a retirement. We have lost 16 of them to Buy-and-Hold.

Savings are an integral part of investing

I believe that we need to raise more of these issues with people when we discuss how to invest. How we invest affects all sorts of matters that on the surface have little connection with investing.

How we invest affects whether we lose our jobs. When Buy-and-Hold strategies become popular, we always see a runaway bull market. When we see a runaway bull market, we should know from experience that a runaway bear market is not far off. Runaway bear markets deplete so much wealth that they always cause an economic crisis. Buy-and-Hold has cost millions of people their jobs. Policymakers need to pay far more attention to this problem than they have in the past.

How we invest determines who gets elected President. Presidents who get elected when P/E10 levels are low enjoy rising valuation levels (which enrich voters) during their first terms and are generally reelected. Presidents who get elected when P/E10 levels are high govern through falling valuation levels (which impoverish voters) during their first terms and generally face uphill battles in their reelection campaigns. We should be choosing our leaders because we support their policy positions, not because they happened to be elected at a time when Wall Street was enjoying particular success in its promotional efforts for Get Rich Quick investing schemes.

How we invest determines how people view the free market. The free market generates huge quantities of wealth. But no economy is so strong that it can survive the high wealth destruction effects of Buy-and-Hold investing strategies. Many people have in recent years become disillusioned with our economic system even though, when you subtract the effects of Buy-and-Hold, our economy has been going gangbusters. I look forward to the day when it becomes possible to help middle-class people learn what they need to do in the investing realm to maintain and grow their wealth over the course of their lifetimes.

Encouraging open discussion of the three decades of investment research that Wall Street would prefer us not to learn about would solve all sorts of problems that many think of as unrelated to our investing problems. Much of the wealth we produce with our labor at some point or another ends up invested in stocks. To work so hard trying to solve problems in so many areas of life endeavor while permitting Wall Street to ruthlessly promote Buy-and-Hold investing strategies is a foolish waste of national resources.

Rob Bennett describes the practical implications of the investing theories of Robert Shiller. His bio is here.


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( Photo from Flickr by Helico )

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