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Americans Are Banking, Not Investing

Financial advisers and brokers have been telling clients for months that it’s becoming a great time to invest in everything from dividend stocks to a new home. And yet, the latest figures from the government suggest many are still sticking their money in one place: the bank.

In fact, despite the Federal Reserve’s move to continue to discourage bank deposits by keeping interest rates low, America’s savings rate increased to 4% in December, from 3.5% the month before, the Commerce Department reported Monday.  And though personal income grew 0.5% in December,  spending was flat.

“Consumers are hesitant to spend,” says John Lonski, chief economist at Moody’s Analytics.

While the 4% savings rate does include some investments–recent data shows that Americans are largely yanking money out of stock funds and putting it into safer vehicles like bond funds and bank accounts. For instance, investors pulled nearly $29 billion out of equity funds in December while pouring roughly $10 billion into bond funds, according to data the Investment Company Institute released Monday. Meanwhile, monthly bank deposits, which include checking, savings and money-market and CDs, averaged $62 billion in 2011 through September–four times the average of 2010, according to Market Rates Insight, a provider of competitive information and analysis to the banking industry.

The flight to safety persists despite the Federal Reserve’s best efforts to push yields down lower and make saving less rewarding. “The Fed is almost begging individuals to take on more risk,” says Lonski of Moody’s Analytics. “It’s not working.” Many investors are still turned off by the market collapse of 2008 and the volatility that shook stocks last year because of fears over the European debt crisis, he says. What’s more, some consumers are still hesitant to spend their cash because their homes are dropping in value, which causes a blow to their sense of wealth, adds Lonski.

Of course, money needed in the short term should be stashed in the bank, advisers say. Emergency savings and any cash that is needed in the next six months to a year should be kept away from risks that can be incurred in stocks and bonds, says Scott Halliwell, financial planner with USAA. “It’s got to stay liquid. It’s got to stay safe,” says Halliwell.

Still, advisers warn long-term savings can dwindle while sitting in the bank. The average rate on savings accounts is 0.36%, according to MRI and one-year and five-year certificate of deposits have an average yield of 0.33% and 1.57%, respectively. Meanwhile the Fed is expecting annual inflation to range from 1.4% to 1.8% in 2012. Yields have also been sinking on most types of bonds, making it less rewarding for investors to lend money to companies and the government, experts say. Low bond yields also increase the risk that rates can come up and cause bond prices to drop, they say.


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    • I agree 100% with what LaserBeam wrote above. Someone needs to explain how the MF Global situation could even happen. Without ethics and morals the whole system implodes.

    • Banking is a joke. I am cashing. Why let the government know you have it and make a paltry .2-1% BEFORE taxes. To yheck with that. Buy a fireproof safe, some guns and ammo, a little gold and silver and wait for the revolution.

    • do brokers and financial advisors (like realtors) ever say now is a bad to to invest/buy??????

    • Glass-Steagall, or at least the Volcker Rule, would be helpful.

      The bigger problem is MF Global. The brokerage went bankrupt, and its customers were hit with at least $1.2B in losses, even though they supposedly had segregated accounts. The only possible basis for the loss is that the customers had their funds rehypothecated. Everybody, check your brokerage statements– they all seem to allow rehypothecation (i.e., your broker can reinvest and thus risk your holdings under certain conditions).

      Even worse, the WSJ reported that the $1.2B “vaporized”. In this day of computerized record-keeping, what does that even mean? Obviously, the money went somewhere else logically it would just be electronically reconstituted and everybody would be happy. Except, of course, the people who actually have possession of the $1.2B right now.

      Until MF Global is fixed, to the extent that the all of its investors involved are made whole, I don’t see confidence returning to this market. Further, the holes that have been unethically if not unlawfully exercised must be closed. Then investors will see some daylight. Until then– the investment community has reaped what it has sown.

    • Bring back Glass-Steagall legislation…

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