Thinking Holistically About Finances To Avoid Bad Habits
Thinking Holistically About Finances To Avoid Bad Habits
Sam Ro·Contributor Sun, September 17, 2023
Stocks ticked lower last week with the S&P 500 shedding 0.2% to close at 4,450.32. The index is now up 15.9% year to date, up 24.4% from its October 12 closing low of 3,577.03, and down 7.2% from its January 3, 2022 record closing high of 4,796.56.
I spent the past week at FutureProof and Excell, two leading industry conferences for financial advisors. I like attending events like these because I inevitably meet people I’d probably never cross paths with under normal circumstances. That means I get exposed to a wide array of views, some of which might affect the way I think about things. One topic that came up in many of my conversations was holistic thinking.
When you think about your financial situation holistically, you realize it isn’t characterized just by the assets you hold in your portfolio, but also the industry in which you work.
For example, you may be a young professional with a little bit of savings conservatively invested in a broadly diversified S&P 500 index fund. But if you work at a VC-backed startup and it’s your only source of income, then you are far more financially exposed to speculative risk than your 401(k) statements might suggest.
Speaking more broadly, it’s always treacherous to consider any piece of data in isolation. In the markets and the economy, there almost isn’t enough context to take into account when considering specific metrics.
The richer you get, the less you need to save
One unsettling metric that often gets misinterpreted and taken out of context is the personal saving rate — the percentage of disposable income that’s saved, not spent — which has been trending below pre-pandemic levels over the past two years.
Does a low saving rate mean households are going broke as they use more of their incomes for spending instead of saving?
The short answer is no. As we’ve discussed repeatedly at TKer, household finances are quite strong. People have money.
In fact, a declining saving rate may be a reflection of household finances getting even stronger.
Renaissance Macro’s Neil Dutta recently reviewed the historical relationship between the personal saving rate and net worth. His findings were a bit counterintuitive.
"From the 1980s to 2000s, there was a pretty neat and clean relationship: as net worth rose relative to income, the household saving rate declined," Dutta observed in a September 8 note. "This made sense as households saw rising asset values as a low risk form of wealth creation. When you are ‘loaded,’ you have less reason to save."
This relationship broke down in the wake of the global financial crisis.
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