Dysfunctional Financial Personality #2: The Mattress Stuffer
13 August 2006We’ve already looked at the Peacock, whose relentless desire to show off keeps him from saving any money. Now let’s take a look at another dysfunctional financial personality who has an entirely different kind of problem: The Mattress Stuffer.
A Mattress Stuffer is someone who is perfectly good at saving money, and in fact is often quite diligent about it. What could be wrong with that? Well, the Mattress Stuffer is putting it in all the wrong places. They’re terrified of risk - and they don’t trust anything but the most conservative of investments. Like people in the aftermath of the Great Depression who hid cash at home to avoid the risks of keeping it in a bank, a Mattress Stuffer shuns stocks in favor of CD’s, bank accounts, or other other rock-solid but low yielding investments. Most Mattress Stuffers don’t have a problem with saving - they probably don’t spend excessively, and they are usually actually pretty diligent about putting money in those bank accounts. What could be wrong with that?
Lots, actually. In their excessive fear of risk, Mattress Stuffers lose out on a lot of money they would have otherwise had. My Grandmother had a classic case of this - after about 30 years of saving regularly on low salaries, she ended up with about $100,000 in the late 1990’s, mostly in CD’s that paid very little interest - a paltry amount of money and nowhere near enough to pay for the care she ended up needing.
Let’s use that to make a hypothetical. Suppose her plan was to save $3,000 a year and put it away in those CD’s, earning 1.5% a year (about what she was getting). Let’s say she did that for 30 years, putting the money away safely each year in a CD - low interest, but virtually no risk. At the end of that 30 years, she ends up with $112,616 - she put in $90,000 of her own money and earned $22,616 in interest over that period. And now she’s got maybe three or four years worth of savings for thirty year’s work.
What if she hadn’t been so conservative? Let’s say she invested in a generic index of the stock market - the Standard and Poor’s 500, and just bought a mutual fund that tries to match the S & P index. I’ve looked around and found various numbers cited for the S & P’s average annual returns since the 1920’s, but they’re all between 10 and 12 percent before inflation. Let’s assume Grandma would earn 10 percent per year on her index fund, on average, and she does the same thing as above - puts in $3,000 a month for 30 years. How much does she end up with now? $493,482! Nearly five times as much as she would have had with the conservative, “safe” investment! Now she’s got enough money to earn about $25,000 a year in bonds, which would give her a decent retirement with social security and drawing down some of the principal each year.
Now, there is really only one solution for a person who thinks they’re a Mattress Stuffer: invest your money in stocks. Not just any stocks, because you’re obviously going to be concerned about risk - get an “index fund,” which is a mutual fund that does not trade stocks actively but instead just invests the money so that it mirrors a major stock market index such as the Dow Jones or the S & P 500. You’re basically investing in the market as a whole, and not in a particular stock. Since WHAT you need to do is easy, I’ll give you the reasons WHY just in case the example above didn’t convince you:
1) The stock market is not risky. This is pure myth. Investing in the stock market as a whole is NOT a risky thing to do - IF you’re investing over a long period. Why do people think the stock market has a lot of risk? Because they hear about crashes causing people to lose all their money. But if those people had just held onto the stock, they wouldn’t have lost anything. Even if you’d bought an index fund just before the 1929 crash, the biggest in history, you would have had your money back and then some if you’d held onto the stock for 15 or 20 more years.
The reason people most often lose money in the stock market is because they try to be clever. They try to ”beat the market” by doing better than the market as a whole - picking riskier stocks like the Internet stocks in the 1990’s. Some stocks are riskier than others - but owning the stock market as a whole means you don’t have much risk at all.
The best advice is to invest in the stock market, and gradually put more and more of your money into bonds as you get within 10 years of when you want to retire. That gives you extra safety as you get to the point where you’re going to have to cash out and aren’t able to wait 15 years for your money anymore.
2) CD’s ARE risky. In fact, you are certain to lose money because they don’t earn more than inflation. If you earn less than 3 percent on your money each year, you are losing money on that investment. That’s because a dollar loses value as each year passes - it’s worth an average of 3 percent less each year. So far from being safe, the CD was actually costing Grandma money each year she had it.
3) If a big stock market crash or economic collapse happens, you’re in trouble anyway. I hate to break it to you if you think your money is safe from financial problems in low return investments - but in a big stock market crash, everyone gets hurt. The Great Depression didn’t just destroy the savings of people with money in stocks. People who had money in banks lost it all when the banks went under. Everyone suffered from the years of financial pain that followed. So why would you give up higher returns on your money when there’s always going to be some risk?
Another way to think about it is this: by the end of 30 years, you have accumulated nearly $500,000 with the stock market approach, vs. $113,000 with the “no-risk” approach. Even if there’s a sudden crash right before your retirement, it would have to wipe out nearly 80% of your money for you to be as bad off as if you hadn’t invested in the stock market. Anything is possible - in the 1929 crash, stocks lost 90 percent of their value between 1929 and 1932. But the point is that for a crash to hurt you more than a slow investment, it would have to be Great Depression-level. And because taking the slower investment results in you having 80 percent less money when you retire, what’s the difference between investing in CD’s and suffering a market crash anyway?
The overall point is: if you’re worried about risking your money, you shouldn’t invest in specific stocks. But a generic index fund is not a big risk. In fact, it’s one of the least risky investments around. Conservative investors should put their money in index funds, not in CD’s.
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2 Responses to “Dysfunctional Financial Personality #2: The Mattress Stuffer”
August 19th, 2006 at 1:01 pm
[...] The Mattress Stuffer, who is terrified of the stock market and ends up with tiny retirement savings by sticking to the most conservative investments possible. [...]
August 19th, 2006 at 10:03 pm
[...] This post is part of a series looking at the worst of the worst of people’s financial personalities. We’ve already discussed the Peacock, who feels the need to spend in order to impress. We’ve also taken a look at the Mattress Stuffer, who is compulsively afraid of risk and the stock market. Then, we looked at the Foot Dragger, who waits until the last minute to save for retirement. Finally, we saw the Emotional Spender, who can’t keep from blowing money to feel good. Today, we’re going to look at a personality you might not think is a bad one to have: The Obsessive Tightwad. [...]