In days of yore, “I have CD’s at 3 different banks” was quite the cocktail party boast. I remember thinking my grandmother must hold accounts at every bank in the state when I was a kid. This was a big deal for two reasons.
- It meant you probably had enough money to need to spread it around (for FDIC insurance purposes) at several different banks, and
- You weren’t dumb enough to speculate with your hard-earned cash. Before the start of the massive bull market leading up to the tech bust, stock ownership was still far more concentrated than it is today.
But Those Days Are Long Gone
My how times have changed. Today the above claim would draw varying degrees of admonishment on pretty much any personal finance-centric forum on the internet. Far from being a paragon of money management, holding such a large position in CA$H is considered a massive waste of purchasing power. “You won’t even keep up with inflation,” they’ll say. “Cash is too risky, ” they’ll say.
And they’re right…
Playing Defense Isn’t Good Enough Anymore
But when and why did the most prudent of investing advice of generations past become inaccurate if not outright dangerous for today’s individual investor? It’s because playing defense isn’t enough anymore.
Oh, but it used to be. In the days before fiat currencies and the securitization of everything, simply holding onto your money was usually enough. Inflation was tame and savings accounts paid positive real interest rates. Furthermore, you either had a pension, were a farmer (and hence having no need of retirement income), or were so poor to begin with that you had no hope of bettering your situation and so happily didn’t know what you were missing (and underrated position to be in, I think). Simply put, there were already plenty of risks out there. One didn’t need to add financial risk on top of it all.
The Best (Only) Defense Is A Good Offense
Today’s economy is more uncertain than ever and it’s only going to become more-so going forward. It’s no longer enough not to lose money. Today, you’ve got to earn more money than you lose to inflation, which is nigh impossible without taking significant risks with your portfolio. Not only that, but the days most white-collar workers having a pension are long gone.
Things have gotten so bad that inflation is now most Americans’ #1 retirement risk. Think about that. Not a bear market (which is only a concern to begin with due to the need to take excessive risk because of inflation), not even unexpected medical expenses (there are thankfully government programs to help prevent catastrophe there), but inflation. No matter how much you have, if you don’t invest aggressively enough, you’ll experience a decrease in living standards over time. Think you can keep up with inflation after taxes over the next decade or two without a sizable allocation to stocks? Think again. Not even TIPS can save you unless you’re fortunate enough to hold 100% of your portfolio in a Roth IRA.
Those who retired in the mid 90′s did well. Those who retired in 2001? Not so much. American retirees are unfortunately dependent neither on how hard they work nor even how much they manage to save but instead, their retirements are at the mercy of the vagaries of the market. I hate when people throw around the term, but there’s something decidedly un-American with the way our retirement system works today. Why should workers be forced to rely on some external, non-benevolent entity in order to afford retirement? An American should be able to rely on the fruits of their own hard work to see them through their golden years, not some over-paid banker who can set off a financial panic with a click of a button.
So How Can You Win The Game?
Luck. Buy and hold investing is a great way to build wealth over the long term, but only if you have spare cash to invest and only if you aren’t hit with any financially-catastrophic setbacks. Unfortunately, those necessary pre-conditions are getting more and more difficult to rely on every day. The solution, then, is a combination of effective financial regulation, the restoration of some minimum social safety net (I don’t say minimum lightly: too-generous safety nets are also a problem), and the introduction of some sort of additional forced-savings program, whether built on top of Social Security or not.
But let’s get real — legislation like this is years away, if it ever comes at all. What can you do in the meantime to minimize your risk and maximize your chances of a comfortable retirement?
1.) Cultivate a second source of income (if not a third of fourth) – I pity the fool who relies on a single source of income in today’s economy. Even I, with a desirable degree in the perpetually-hot tech industry, have suffered through a lay-off. Things would have been a lot worse if I didn’t have another source of income, however small. A few hundred extra dollars per month goes a long way in a crisis.
2.) The “3-6 months emergency fund” rule-of-thumb is out-dated – Three to six months is nothing. I recommend holding a full 12 months worth of living expenses in liquid savings instead. Medical emergencies can get expensive, even if you have insurance, and unexpected car repairs can run in the thousands. Until you have a taxable net worth in the six figure range, you should carry a beefy emergency fund. Just in case.
3.) Take calculated career risks – The idea of life-long employment at a single company is dead. Not only that, but the idea that life-long employment is even desirable anymore is laughable. Spending too much time in one job is the surest way to fall behind the competition, and falling behind the competition means your income probably won’t grow fast enough over the long term to beat inflation. And that means you can’t save enough during your peak earning years to secure your retirement. I’m not saying you should jump from job to job every 9 months, but if you find yourself working the same job at the same company for more than 4 or 5 years, ask yourself this: “have I become complacent?” If the answer is yes, pick up a few new skills, brush up your resume, and move up the career ladder. I am as guilty of this as anybody.
4.) Save at least 25% of your income – 10% won’t cut it. Even 15% is borderline. Better to err on the side of safety and save 25%.
Do the above suggestions sound reasonable? Is there no way you could possibly find a way to save 25% of your income and still pay the bills? Your best bet is to get politically active: write your congressman, attend protests, etc. And after you’re done with that, find a way to make more money.
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