One of the oddities of a significant bull market—and this one we’re in today qualifies, as the second-longest in modern American history—is that they tend to go on longer than you might expect from the pure market fundamentals. The last leg of a bull market tends to be driven by psychology; people have recently experienced an up market, and so they tend to expect more of the same. They buy at prices they would never consider buying at when the markets have experienced a downturn, driving prices ever higher without regard to the price. As a result, the long tail of the bull market will also see some of the greatest, fastest increases.
You don’t hear much about America’s personal savings rate these days, and the reason may be because the news is discouraging: collectively, the percentage of our income that we save is trending downward again, and may be about to hit record lows. The Federal Reserve Bank of St. Louis tracks the U.S. personal savings rate, going back to the late 1950s, when when people were setting aside a thrifty 11% of what they made. Americans achieved a record 17% savings rate in the mid-1970s (see chart) before a long decline set in. In 2013, the rate briefly spiked again above 10%, but as you can see from the chart, Americans have become less thrifty since then. The most recent data point shows Americans saving just 3.6% of their income.
A recent Wall Street Journal article, citing a study by the Center for Research in Security Prices, tells us something remarkable about the times we are investing in: the number of stocks on the U.S. market has quietly diminished by more than half over the last 20 years. In November 1997, investors could choose from 7,355 U.S. stocks. Today, there are fewer than 3,600.
You receive portfolio performance reports every three months—a form of transparency that financial planning professionals introduced at a time when the typical brokerage statement was impossible to decipher. But it might surprise you to know that most professionals think there is actually little value to any quarterly performance information, other than to reassure you that you actually do own a diversified portfolio of investments. It’s very difficult to know if you’re staying abreast of the market, and for most of us, that’s not really relevant anyway.
One of the strangest investment vehicles ever designed is something called the Bitcoin, which is at once an exciting new technology for managing online transactions and an alternative currency to national currencies like the dollar, yen and euro. Last week, people who owned bitcoins discovered that electronic “coins” worth $1,350 were suddenly worth just under $945. Around the same time, U.S. regulators rejected an effort to create a bitcoin exchange-traded fund (ETF).
Every year, the Morningstar mutual fund tracking organization releases a list of the worst new ETF investments—and generally, these tend to be trendy new offerings that are designed to catch the eye of investors who are responding to yesterday’s headlines rather than their long-term economic future.
The NerdWallet organization recently issued a report which found a few differences between today’s college graduates and those of 20 to 40 years ago. For one thing, they carry a lot more student loan debt: $35,051 on average. That means, again on average, that the new graduates will be paying $4,239 a year for ten years before they can properly start saving. NerdWallet estimates that these higher loan payments could potentially reduce future retirement savings by 32%—an average of $700,000.
In addition, today’s younger generation faces higher rental payments—up 11% since 2012—and having to delay home ownership to a median age 33. This, too, reduces their ability to squirrel away money for the future.
Finally, millennial investors have apparently been powerfully impacted, psychologically, by the Great Recession. NerdWallet found studies showing that younger savers keep an average of 40% of their saved money in checking and savings accounts or CDs. This means they’re missing out on investment returns, which would cost them more than $300,000 in future retirement funds, on average.
Add it all up, and the NerdWallet researchers estimate that today’s college graduate won’t be able to retire at the traditional age 65. On average, they’ll have to wait until age 75 before work (and an income) is optional. The site notes that the graduate would have to save 15% of his/her income a year starting at age 23 to bring retirement back down to age 65—which may not be possible due to higher student loan debt and rent, and won’t be anywhere close to possible with a 40% allocation to cash.
About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years. Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.
Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association.