Here lately I find myself often reflecting on the current status of our economy, and wondering when and how things will shake out. My 401(k) has been demolished. Family member’s 401(k)s have been demolished, even those in target retirement funds that should have been comprised of more conservative options based on their upcoming target retirement date.
The value of our home has decreased, as it has for our neighbors, and for most around the country. After countless scandals and bailouts, banks are no longer the trusted institutions they once were. Inflationary fears drive investors to the market in an effort to stay ahead of the curve, but are those fears oversold. Can we beat inflation (which is really currency deflation) by refusing to inflate our lifestyles and living frugally? And so I wonder, has everything we’ve been taught to believe about finances just a big lie?
Markets Always Go Up, Given Enough Time
My grandfather is a product of the Depression Era. He lived the ultimate market meltdown, and to this day believes investing in the market is only marginally better than gambling. After all, most of us pick stocks, or a basket of stocks, from companies we know little about. We know nothing of their day-to-day operations, their leadership team, etc. Warren Buffet has made a mint buying what he knows, but what about the rest of us.
Last week I received a revised and updated copy of my all-time favorite personal finance book, Your Money or Your Life. The timing could not have been better. While much of the information is the same, co-author Vicki Robin has gone to great lengths to provide updated statistics, relevant figures for today’s market conditions, and updated stories throughout the book. I am thoroughly enjoying reading the book through again, with more of an open mind than I did the first couple times.
The first time I read through Your Money or Your Life, and hit the section on savings as working capital, I thought it was a preposterous idea to invest in things like U.S. Treasure Bonds and CDs. After all, I was young, and had been taught since I was old enough to spell “stock” that those were the path to building great wealth. Maybe; maybe not.
When the authors of Your Money or Your Life “retired” the yield on 30-year U.S. Treasury Bonds were hovering around 6%. Today they hover around 3%, but are trending up. Still, that is the difference in $1,250 per month and $2,500 per month in interest on a $500,000 portfolio of bonds. That’s pretty significant, and proof that any investment has environmental risks. If I had half a million dollars, and rates were back up to 6%, I could live on $2,500 a month assuming I had no debt (including a mortgage). It’s getting that $500,000 saved that is the hard part.
So, by diligently socking away money in my 401(k) and Roth IRA, only to watch most of my contributions melt away in a matter of months, have I been going about this all wrong? Instead, should we be simply putting money in high-yield savings accounts, bonds, and CDs, and prepare to live off the interest?
I suppose that answer depends on a variety of factors, including our risk tolerance, age, and other individual situations. There are a lot of people sitting on some huge losses, and if we sold now we would realize them, and miss out on a market rebound. I can’t help but wonder how many will get out when and if that rebound occurs and they are made whole again. That type of selling will probably work to stymie a future bull market.
After watching these wild market swings I’m starting to wonder if I really have the stomach for it. Maybe I’ll join those described in Your Money or Your Life, and my grandfather, and devise a very simple plan for financial independence.