Monday, June 22, 2015

Seven Years and Counting of Quantitative Easing - Saving Accounts: Why Not?

Investment 101 tells us to stay away from savings accounts: low interest, low return and especially boring.

Savings accounts? Are you crazy? Boo, hiss. These days, savings accounts are only used as joke fodder for late-night comedians. Take the mom who wants to teach her kids the value of prudent financial management, for example:

For little Bobby’s eighth birthday, his mother takes him down to the local credit union to open a savings account. Figuring that all the grownups in his life would pour money into this new savings account to encourage him – without his lifting a finger — Bobby reasons that the offer is hard to beat. So, off to the credit union they go.

At his mother’s prompting, Bobby explains to the banker that he came to open a savings account. The banker gives a knowing glance to the mother and pushes the application form across the desk to Bobby. “Well, sir, this is your account, so you have to fill it out.”

Bobby methodically makes his way through the form, but pauses when he comes to the box that reads: “Name Of Your Former Bank.”

After a minute, he grins as he writes … “Piggy.”

Ba-da-boom! [Cue the clash of cymbals.]

If you’re like millions, you might think that savings accounts have no more use than old-fashioned, lame jokes.

Think again.

I used to stick my nose up at savings accounts too, until about twenty years ago a friend told me he invested in nothing but an old-fashioned savings account. He was a wise man of few words; so when he spoke, everyone listened — including me. Until his death, he lived frugally — but comfortably — on those savings.

My friend’s experience made me look at savings accounts with different eyes. Granted, he did this in the days when they paid interest rates with real numbers before the decimal point. That’s no longer the case, is it? These days the return you get on savings accounts barely moves the needle on the return scale. We often joke that banks use those accounts to challenge their IT people to see how many zeroes they can get into an interest rate, like 0.000001%.

Nevertheless, I still believe savings accounts are a viable part of a successful investment strategy. Why in the world would anybody think that? Well, first of all, there are the old standby arguments you always read when you do a search for something like “the advantages of savings accounts.”

The obvious advantages of savings accounts:

1. Liquidity - With most investments, there is a time delay involved in getting access to your money. But sometimes you need quick access to your funds.

2. Safety - Everyone knows that (in most cases) the Federal Deposit Insurance Corporation (FDIC) guarantees up to $250,000 of your money in a savings account. Now, I know there is a cadre of people out there who believe the sky is about to cave in on us and that that guarantee is worthless; but for the rest of us, that guarantee makes a savings account as safe as anything you are going to get anywhere. And as Warren Buffet often remarks, “Rule #1 in investing is: Don’t lose it. Rule #2 is: See Rule #1.” For safety, it is hard to beat the savings account.

3. No hurdle to start - As Bobby’s story above illustrates, getting started with a savings account is both quick and easy. No minimums, no fuss, no conditions, no nothing — just “git ‘er done” and you’re in business.

The not-so-obvious advantages of savings accounts:

Now, as Tom Selleck used to say in “Magnum, P.I.,” “I know what you’re thinking.” We’ve heard this a million times, and by now those arguments insult our intelligence because they downplay the abysmal returns quantitative easing is causing us to endure. You are just writing this to get another blog out there, or who knows why. Wake us up when you have something real to say. How do I know that? Because I used to think that … until just under 20 years ago.

The hidden advantages of a savings account.

4. You don’t need to know anything - I often hear from readers who explain why they put off investing or (worse) have no plan to invest at all. Close to the top of their list of reasons is ignorance: They don’t know what to do or how to invest. I didn’t either, so I started by simply piling all our spare money into a savings account.

This is the age of the Internet and, if you want to learn, there are many places where you can learn how to invest, for free or for money. However, you don’t need to know anything to get started with a savings account. You can always reinvest what you have deposited there somewhere else, but it is almost impossible to get back what never got put in there in the first place.

5. You don’t need to take any risks - As pointed out above, a savings account is probably the safest starting point for any long-term investment strategy. It is the easiest thing in the world to move money out of a savings account into another investment vehicle when the opportunity presents itself. As an example, if the house next door becomes available and you want to buy it as a rental property, where do you put your funds as you scrape up the down payment? Your savings account would be a good start … if you were faithful and consistent to keep building it.

6. You buy time to learn - Ignorance is one of the biggest obstacles holding people back from being determined and consistent investors. Ignorance usually leads to this kind of statement: “If I don’t know what to do, I’m very afraid of losing my money.”

Well, if you start with a savings account, you buy yourself enough time to learn all you can about investing, until you are comfortable that you know what type of investing interests you, and then you can ease into that at your own pace — with the capital you have been saving all along!

7. Positive reinforcement - Nothing succeeds like success, they say. Instead of procrastinating out of fear and ignorance, when you start with your humble savings account, you see progress after a few months. Sure, it’s not a million dollars, but it is more than you started with.

Once we saw our savings account grow, it inspired us to see if we could do even better. It’s hard to put a value on this positive reinforcement, but for us it was invaluable. The biggest mistake people make is not following through with their investment plan. The instant feedback you get on your growing savings account can be a motivator to keep going, if that sort of things has meaning to you.

8. Reality is on your side - Reality? What reality? This reality: No matter what you invest in, for the first five to 10 years, the lion’s share of your nest egg consists of your own contributions.

When you make the decision to get serious about investing, you can take some comfort in the fact that you don’t lose a lot by taking a year or two to learn all you can about investing while you simply stash cash in an old-fashioned savings account. (In fact, you could think of that teeny, little bit of interest you lose as your school fees, which are cheap at the price, all things considered.)

But that doesn’t mean you should wait to open a savings account if you don’t already have one …

… because the biggest key to investing success, as many have pointed out, is simply to get started. And there is no easier and safer way to get started than to open a humble savings account. You don’t need to restrict your investing to savings accounts like my friend; but as a starting point to a successful investing career, savings accounts are hard to beat.

COLLEGE CHRONICLES – The University of California system may add only a few hundred students this fall, President Janet Napolitano says. Los Angeles Times:

THE ECONOMICS OF HEALTHCARE - As they cope with the federal health-care overhaul, the two biggest U.S. health insurers by revenue, UnitedHealth and Anthem, are seeking to buy smaller rivals in a merger scramble aimed at cutting costs. And in an usual partnership that reflects the tough economics of the prescription-drug business, CVS Health is paying $1.9 billion to buy and run Target’s pharmacies and clinics. The 1,660 drugstores inside Target locations will be rebranded CVS/pharmacy. The Obama administration, meanwhile, has been making billions of dollars in payments to insurance companies under the health law without being able to confirm just how much it owes each insurer, according to an inspector general’s report to be released today.

POLITICS 101 - New Q poll of Florida, Ohio, Pennslyvania primaries:

Florida: Jeb Bush 20%, Marco Rubio 18%, Scott Walker 9%, Ben Carson 7%, Mike Huckabee 6%, Rand Paul 5%.

Ohio: John Kasich 19%, Bush 9%, Walker 8%, Huckabee 7%, Paul 7%, Rubio 7%, Carson 6%, Ted Cruz 6%.

Pennsylvania (which is set for late April but considering joining the other two on March 15, 2016): Rubio 12%, Paul 11%, Bush 10%, Carson 10%, Walker 9%, Rick Santorum 7%, Chris Christie 6%, Huckabee 6%, Cruz 5%.

Democrats: Hillary Clinton clears 50 percent in all three states, with Bernie Sanders around 10 percent.

Days until the 2015 election: 134. Days until the 2016 election: 505.

SOCIAL STUDIES - 200 YEARS AGO: Napoleon met his Waterloo, defeated in battle in present-day Belgium on June 18, 1815.

--42 YEARS AGO: the WashPost ran its first story on the Watergate break-in, in the Metro section June 18, 1972:

BIRTHDAYS THIS WEEK – Birthday wishes and thoughts this week to: Erin Brockovich (55),   Olympia Dukakis (84), Beth Elmore ….famous  Green Bay Packer fan, John Elway (55), Pete Hamill (80), Toby Maguire (40), Carly Simon (70),  Brian Wilson (73)

TEN QUESTIONS - Rink Rats is starting a new by-monthly feature entitled "Ten Questions". We ask people of interest to Rink Rats some questions about their life.

This month Ten Questions to Michelle Graves. Michelle is a friend of Rink Rats and has recently graduated with her M.B.A. degree. She, in our opinion, represents what is the best about the Millennial Generation (1982 – 2004); the generation that now out numbers the “baby boom” generation and whose responsibilities are growing daily in managing America and the world.

1). Michelle tell us about yourself; where did you grow up, go to high school, college?

   I grew up in La Verne, went to San Dimas High School, and received my Bachelor's in degree in Psychology from Texas Woman's University in Denton, TX.  Before attending University of La Verne, I went to Cal Lutheran University to pursue my Psy.D. degree, but left after realizing counseling was not the job I saw myself performing every day for the rest of my life. My youth is quite boring as my life revolved around gymnastics and the 6 hours each day I spent at practice.

2). What was your major in undergraduate and graduate study, and why did you select your majors?

    Undergrad: Psychology, Graduate: Business.
I studied psychology in undergrad because I felt a strong tie to the subject and excelled in those classes. However, after actually working as a counselor I realized it was far too emotionally draining. Having parents who own and operate a small business, I felt business was always in my blood and felt "at home" in my business classes at La Verne.

3). You were an athlete growing up, what sport? Are you still participating in that sport?

     Gymnastics, and no I no longer participate. Not only is there no real professional career for gymnasts, but I had 6 surgeries which prevents me from doing basic activities.

4). How has sport added to the quality of your life today? Or not added?

      The sport really gave me so much, it is hard to put into words. I believe I am not afraid of hard work or failure because of my sport. I also feel that it has given me the ability to speak publicly, feel comfortable being judged, and excel in competition.

5). What is your career today? How do you see your career progressing?

   I am currently running the family business and working as a consultant for a small accounting firm. In the future, I would like to continue my studies, earn a Ph.D. in organizational psychology and work as a professor while consulting on the side.

6). How has education added to your life and career as of today?

    My education is the reason I am in the career I am in today. If it was not for the professors at the University of La Verne, I would not be working as a consultant, nor would I have the confidence to be a successful businesswoman.

7). What is your perfect summer vacation?

  My perfect summer vacation would be a two-week long trip to an all-inclusive resort in Bocas del Toro, Panama with my boyfriend :)

8). Who is your favorite musician and why?

   My favorite musician is George Strait because he embodies all that is country music. He is a real cowboy and stays true to his roots given all his fame and fortune.

9). What are you currently reading?

     I am currently reading James Patterson's 2nd Honeymoon, which is super exciting for me because I stopped reading for pleasure while I was in school.

10). Define happiness.

   Happiness is having close relationships with friends and family and a career that allows you to be both financially stable while maintaining a healthy personal life.


Women’s World Cup: 1). Germany, 2). U.S.A., 3). Japan

Season to date (59-24)

MARKET WEEK – Comcast-owned Universal's "Jurassic World" and the Disney-Pixar debut "Inside Out" grabbed the top two spots at the weekend box office, with $102 million and $91 million in domestic ticket sales respectively.

DRIVING THE WEEK – Secretary of State John Kerry and Treasury Secretary Jack Lew participate in the U.S.-China Strategic and Economic Dialogue in Washington ... IOSCO Chairman Medcraft speaks at the National Press Club today at 10 a.m. ... The Senate Banking Committee holds a briefing on its flood insurance review Tuesday at 10 a.m. ... Labor Secretary Thomas Perez speaks at a Brookings retirement event Tuesday at 1:40 p.m. ... FEMA officials testify at a Senate Banking flood insurance hearing Wednesday at 10 a.m. ... House Appropriations marks up a Labor Department spending bill Wednesday at 10:15 a.m. ... New York County District Attorney Cyrus Vance testifies at a House Financial Services Committee terrorism financing hearing Wednesday at 2 p.m. ... House Financial Services holds a hearing on CFPB discrimination allegations Thursday at 10 a.m. ... Senate Banking holds a hearing on the impact of a Greek default Thursday at 1:30 p.m.

Next week: Summer Travel Series, Gardening tips from West Chicago, Illinois and the Jack Ass of the Month.

Until Next Monday, Adios.

Claremont, CA
June 22, 2015



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