investing

Save money, but don't fear the markets

Highlights
  • When people start worrying, the savings rate increases.
  • You'll profit from a contrarian view of investing.
  • "There is far less risk in the market now."

Less than a year ago, American consumers were saving little, if any, of their disposable personal income. But the sagging economy has turned that situation around quickly. Government statistics for December 2008 show a savings rate of 3.6 percent, up from 2.8 percent in November.

The personal savings account rate didn't rise because income rose; income fell, but spending fell more thanks in large part to falling gas prices.

"It's a confidence issue," says economist Ken Mayland of ClearView Economics in Pepper Pike, Ohio. "It's cyclical behavior which we've seen time and time again. When people start worrying about their jobs and family finances, the personal savings rate increases. The personal savings rate is a useful leading indicator for the economy. When the savings rate rises, it's a bad sign for the economy."

“Don't follow the herd; make disciplined decisions.”

Unfortunately, when everyone has the same idea at the same time it can turn a good thing into a negative. As people rein in spending on a massive scale, the workers producing those consumer goods lose their jobs. Mayland says that the main factor driving down consumer spending isn't the 7 percent or 8 percent unemployed, it's the 92 percent that are employed but too scared of what the future may hold to spend their extra cash.

Time to take the plunge

A misstep that consumers may be making now is saving too much in cash and not putting enough into investments that are "on sale" and could provide a very strong return over the next decade.

"That behavior is classical," says Charles Lieberman, chief economist with Advisors Capital Management in Paramus, N.J. "People get comfortable investing when the market goes up a lot and they become fearful when it goes down. They need to regain confidence, and that requires some effort by the current administration to get a stimulus package going and get the credit markets functioning so people are willing to borrow again."

Kurt Rossi, a Certified Financial Planner at Independent Wealth Management in Wall, N.J., says people aren't saving enough even at a savings rate of 3.6 percent, but he advises clients to not let their emotions rule the portfolio.

"You need a sort of contrarian view when investing; that's how you'll profit. Don't follow the herd; make disciplined decisions. Most of my clients are retired or five years away from retirement, but it's my younger clients who are calling and asking if they should stop adding to their 401(k); it's unbelievable."

Mayland says the destruction of more than $7 trillion in wealth has ruined the consumer's appetite for risk and that people will think they can't afford to invest in stocks.

"For goodness sake, this is exactly the time to take that risk. There is far less risk in the market now than there was a (couple years ago.)"

Mayland says that the new American consumer created by this economy won't let the negative savings rate return for a long time.

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