Gaining Investment Perspective and Mastering the Art of Saving

Remembering Summers Past

There were so many big events competing for our attention over the last year … said nearly every investor, almost every year, ever. 

We’re not making light of this year’s uncertainties. Inflation is real, and needs to be managed; we also can’t rule out the possibility we’ll still see stagflation and/or a recession (although neither has happened yet). Heightened levels of market volatility across stock and bond markets alike may have left you once again wondering whether this time is different. [1]

But it’s also important to remember, we’re inherently biased to pay more attention to recent alarms than long-ago news. In the right context, this form of recency bias makes perfect sense. As we go about our lives, it’s often best to prioritize our most immediate concerns—or else. No wonder we’ve gotten so good at it. 

However, as an investor, if you overemphasize the news that looms the largest, you’re far more likely to damage your investments than do them any favors. You’ll end up chasing hot trends, only to watch them combust or fizzle away. Or you’ll jump out during the downturns, without knowing when to jump back in. 

Yesterday’s News 

How do we defend against recency bias? It can help to place current events in historical context. Do you remember what investors were worrying about a year, several years, or several decades ago? If you experienced some or all of these events first-hand, you might recall how you felt at the time, before we had today’s hindsight to inform our next steps.

• 2023: Silicon Valley Bank collapses after a bank run, marking the second-largest bank failure in U.S. history. [2]
• 2021: The Taliban takes control in Afghanistan, while a “ragtag army” of online traders led by Roaring Kitty storms Wall Street. [3]
• 2020: COVID-19 shuts down economies worldwide. Civil unrest rides high across a gamut of socioeconomic concerns, and a divisive U.S. presidential election looms large. [4]
• 2018: Two U.S. government shutdowns occur—in January and again at year-end, with the latter lasting more than a month. [5]
• 2017: The year-end Tax Cuts and Jobs Act (TCJA) upends U.S. tax codes. [6]
• 2016: The Brexit referendum and U.S. presidential election deliver surprising outcomes. [7]
• 2015: A long-simmering Greek debt crisis erupts. [8]
• 2013: A 16-day U.S. government shutdown occurs in the fall.  [9] 
• 2012: The U.S. narrowly averts plummeting over a fiscal cliff.  [10]
• 2011: For the first time, the U.S. federal government credit rating is downgraded by one of the major rating agencies from AAA to AA+, and the Occupy Wallstreet movement is born.  [11,12]
• 2008: Wall Street broker and former NASDAQ chair Bernie Madoff is arrested for fraud. [13]
• 2007: The Great Recession and global financial crisis begins.  [14]
• 2001: The 9/11 terrorist attacks send global markets reeling. An accounting scandal at Enron culminates in the energy giant’s bankruptcy. [15]  
• 1999: The dot-com bubble bursts; the Y2K bug spurs massive, worldwide computer reprogramming. [16,17]
• 1990: Iraq invades Kuwait. 
• 1980: U.S. inflation peaks at 14.8%; Americans are marching in the streets over the price of groceries. Also, the U.S. Savings and Loan crisis begins, ultimately costing taxpayers an estimated $124 billion. [18,19]
• 1973: An OPEC oil embargo “fueled bedlam in America.” [20] 

Investment Mainstays

These are just a few examples. They don’t include the market’s endless stream of lesser alarms that are easy to dismiss in hindsight but often generated as much real-time storm and fury as the more memorable events. 

The point is, there’s always something going on. And even as global markets persist, we forget or rewrite our memories, until they’re no longer available to inform our current resolve. 

In the face of today’s challenges and tomorrow’s unknowns, we advise looking past recent trends and focusing instead on a handful of investment basics that have stood the test of time. They may seem unremarkable compared to the breaking news. But when has “buy low, sell high,” or “a penny saved is a penny earned” become a bad idea once all the excitement is over?

Next up, we’ll review some of these investment basics, and how they apply to you and your personal wealth. 

First Save, Then Invest

One of the best ways to combat recency bias is by focusing instead on the basics that have served investors well for centuries if not millennia. In this series, we’ll cover five of our favorites: 

1. You can’t invest if you haven’t saved. 
2. Markets are inspired by ingenuity, tempered by diversification. 
3. The price you pay matters. 
4. Patience is a virtue. 
5. Investing is personal.

Today, let’s talk about saving. 

Saving Is a Super Power

Obviously, before you can invest, you have to save. But knowing this is true doesn’t always make it easy to do. Bottom line, saving is a sacrifice. When you set aside money for tomorrow, you don’t get to spend it today. There’s nothing fun about that. 

Saving also isn’t as “exciting” as investing. When you invest, the stakes can be high: Some strike it rich, others suffer calamitous loss, and either makes for great headlines. In contrast, your basic savings account is unremarkable. It’s unlikely to either grow wildly or vanish overnight. 

No wonder most people are far more attuned to their investment efforts than their saving strategies. There’s never a lack of analysts covering the latest market news, or experts opining on what to do about it. Whether the coverage is good, bad, or ugly, there’s always plenty of it. 

When was the last time someone reminded you how incredibly powerful it can be to simply keep adding new money to your accounts, no matter what the market is doing? Saving is important throughout your life and an absolute superpower when you or your loved ones are younger, with time on your side. In fact, when we’re in a bear market, as long as you have enough time before you need the money back (a decade or longer), it can be even more compelling to inject new money into your accounts. If you use fresh savings to add to your existing investments, you’re effectively buying in at discounted rates. 

Embrace Your Inertia 

Inertia can be expensive. For example, if you let a streaming service keep charging you long after you’ve stopped using it, that’s wealth-wasting inertia. But you can also use inertia to your advantage, by setting up saving habits and processes on auto-pilot, so they “just happen.” 

The idea is, you’re far more likely to save more effectively once you no longer have to make a choice or take action to shift funds from your spendable coffers to your savings stash. For example, when your company auto-enrolls you in its 401(k) retirement plan, for heaven’s sake, let them. Ditto if they have a formula for automatically increasing the percentage you contribute over time. You can also make a one-time choice to maximize the percentage you’re contributing. After that, inertia will kick in, making it less likely you’ll skip or skimp on saving for the future. 

Self-Service Savings

You can set up similar, inertia-based saving habits by making a pledge to yourself that any “new” money coming your way will receive similar treatment. 

For example, establish a rule that you’ll always set aside 10%, 20%, or whatever works for you, whenever you receive a raise, bonus, or equity compensation from work, a tax refund, a gift or inheritance, Social Security COLA increases, prize or lottery winnings, pocket change you’ve cashed in, proceeds from subscriptions you’ve canceled (despite your inertia), scratch from a yard sale, or any other one-time or ongoing income bumps. 

You can establish a savings account specifically for this purpose, like a bank-based “change jar.” These days, there are even apps to ease the way. For example, in The Wall Street Journal’s, “35 Ways to Jump-Start Your Emergency Savings,” financial advisor Taylor Schulte suggests using a spare change savings app like Acorns to round up all your credit card charges to the nearest dollar and regularly drop the difference into a savings account. “It might only be 25 cents here and there,” Schulte says, “but it can quickly add up over time” (although he suggests making sure excessive app fees don’t defeat the purpose). [21]

The Restorative Powers of Saving

So, have you been watching the markets bouncing up, down, and all around this year, wondering whether the pundits who are predicting doom and gloom are correct? Please remember, there’s not much you can do to prevent market uncertainty. Even if there were, the uncertainty is in part what drives future returns. 

But you can save. You should save. You should keep saving. If you haven’t been, we understand that change is hard. Thanks to our biases, going with the flow usually seems easier, even if we’re dissatisfied with where it’s taking us. 

Turn your biases on their head, by putting them to work for rather than against you. By pairing your saving goals with inertia-based rules and processes, you’re far more likely to succeed. 

Sources: 

1. https://buckinghamstrategicwealth.com/resources/investing/buckingham-weekly-perspectives-august-24-2022
2. https://www.wsj.com/articles/bank-collapse-crisis-timeline-724f6458
3. https://www.wsj.com/articles/keith-gill-drove-the-gamestop-reddit-mania-he-talked-to-the-journal-11611931696
4. https://www.visualcapitalist.com/mapping-civil-unrest-in-the-united-states-2000-2020/
5. https://history.house.gov/Institution/Shutdown/Government-Shutdowns/
6. https://www.congress.gov/bill/115th-congress/house-bill/1/text/eh
7. https://www.investopedia.com/terms/b/brexit.asp
8. https://www.thebalance.com/what-is-the-greece-debt-crisis-3305525
9. https://history.house.gov/Institution/Shutdown/Government-Shutdowns/
10. https://www.forbes.com/sites/rickungar/2012/11/10/the-fiscal-cliff-explained/?sh=2626e0616591
11. https://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrades
12. https://www.visualcapitalist.com/mapping-civil-unrest-in-the-united-states-2000-2020/
13. https://www.biography.com/crime-figure/bernard-madoff
14. https://www.britannica.com/topic/great-recession
15. https://www.history.com/this-day-in-history/enron-files-for-bankruptcy
16. https://www.thebalance.com/what-was-the-dotcom-bubble-5209336
17. https://education.nationalgeographic.org/resource/Y2K-bug
18. https://www.wsj.com/articles/when-americans-took-to-the-streets-over-inflation-11623412801
19. https://www.federalreservehistory.org/essays/savings-and-loan-crisis
20. https://www.washingtonpost.com/history/2021/05/13/gas-shortages-1970s/
21. https://www.wsj.com/articles/35-ways-to-jump-start-your-emergency-savings-11590537591

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This material was prepared by Wendy J. Cook Communications, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.