Things are looking up with the economy as more economic indicators are turning positive. In the past couple of weeks, we have seen positive signs from unemployment, housing starts, consumer spending, and of course the stock market. But, how can you have a financial recovery?
But, there are a few ways that you can trip yourself up and screw up your own personal financial recovery. It does not have to be that way though. You can avoid these stumbling blocks and continue your own recovery.
Three Ways to Ruin Your Financial Recovery
Not Being in the Stock Market
No matter how much we wish we could, the truth of the matter is that we simply cannot time the stock market. In order to get out at precisely at the right time when stocks are down and back in when they are rising again, investors must correctly time the market twice.
According to a study conducted by Hepburn Capital, if you had managed to miss the 20 best days in the stock market between 1983 and 2003 your returns would have been cut in half. This is just one of many studies that have shown how missing specific days and not invested in the market can have devastating effects on your investment portfolio.
Not Continuing to Save Enough
Studies have shown that American salaries have remained constant for the past eighteen months without a pay raise for workers on average. The real problem comes in when consumer spending is on the rise like it has started to move up recently.
So, where does the money come from in order to increase consumer spending if workers’ salaries are remaining the same? Americans are increasing their spending by reducing the amount of money they are saving. They are not keeping a three to six month fully funded emergency fund in place. Many people’s savings are being used instead.
Participating in Lifestyle Inflation
Like a decrease in the savings rate, there is a real danger of people seeing lifestyle inflation creep back into their lives. Many people were doing well by keeping their lifestyle and costs under control with austerity measures and budgeting during the recent recession.
Lifestyle inflation happens when people receive extra money or income in their budget and do not save that money. Instead, you may spend money by increasing the type of lifestyle that you live. Are you buying a new, bigger, more luxurious car? Are you back to going out to eat more and more? Have you slacked off staying strictly to your family’s monthly written budget?
Things are looking better in the economy, slowly but surely. Like my old high school football coach used to say, “Don’t screw it up”. There are so many ways that the market can trip us up on its own. We should not add to our problem by compounding them with these three ways that we can ruin our own financial recovery.
What about you? Did you ride out the stock market’s ups and downs during the last recession? Or, did you pull your money out of the market?
I agree. Lifestyle hasn’t snuck back in and I thank my kids for keeping me in line. I used to be the guy that would say drinks on me. Those days are LONG gone.
I have money in the stock market but it’s for stocks that I inherited from my uncle and not something I actually invested in. I rarely look at the statements so I have no idea how they are doing. I think they’re worth between $180,000 and $250,000 but I have no intentions of doing anything with them so I just let them ride. These stocks all issue dividends which are automatically reinvested. Donna and I plan on passing these on to our kids at some point in the future.
Lifestyle inflation is one I have to watch out for. We recently paid off our 2006 Accord and figured it was about time to trade in our 2001 Tacoma. Thank goodness I got turned on to Dave Ramsey. That 2001 Tacoma is just fine for the purpose it serves and it will continue to be just fine in the future. The former car payment is going towards our debt snowball.
My concern about generally blind faith in the stock market is that, prior to 1990, nobody (of middle class means) had any access to a reasonably price “index” type fund. Yet since 1990, index funds haven’t done nearly as hot as the hypothetical time before that (most people cite overall stock market growth going back to 1900). The EMH means you can’t beat the market in the long run, but if everybody piles in on indices, it’ll drive all prices up and make the returns (dividend yields and capital growth) lower. And don’t even get me started on the inflationary creep in P/E ratios. Is there anything to be said for targeted dividend investing nowadays?
I’ve been guilty of lifestyle inflation in the past. When I started making more money, suddenly it was time to buy a big tv and go out to nice restaurants more often. It just seems to natural to want to reward yourself when you make more money. Smart people act as if they never received a raise and just invest the extra money they get paid.
How not being in the stock market ruins my financial security? If missing the exact time is what your are hinting at then no, no matter how hard we try we can’t master that. I am safe with my ETFs and MFs.
To me, saving is the most important. Aggressive saving will potentially save you from the other two mistakes.
Lifestyle inflation is a constant battle for me. We’ve also been working on figuring out our lifestyle now that our nest is empty.
The hardest part has been dinner. It is cheaper to pick up food sometimes than to make the same meal ourselves.
Your point about staying invested is spot on. Timing the market is impossible over the long-term. If you miss those precious few rebounding days after a bottom-out your returns will be unimpressive.
When I have a more steady income, and pay off some of my car loan, I’ll be entering the stock market. Though I should probably learn a thing or two about it first.
Lifestyle inflation is tricky, because nobody wants to live like college kids – my boyfriend and I are working hard so that we can have a cozier life, so lifestyle inflation might just come naturally with that.