Tags: david | frazier | Media | Myths | Investment | Decisions

Media Myths Can Be Harmful to Your Investments

Tuesday, 03 Aug 2010 12:21 PM

Most investors tend to rely on the general financial media to gather important economic and financial information to make decisions about their investment portfolios.

Unfortunately, few investors are aware that much of what is reported by the media is often misleading, backward-looking or erroneous.

A good example of the type of misleading information that is regularly reported by the general media is the so-called personal savings rate, with the U.S. Department of Commerce announcing this morning that Americans supposedly saved 6.5 percent of their incomes during June, after saving 6.3 percent and 6.0 percent, respectively, of their incomes during the previous two months.

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However, the facts, as usual, paint a different picture.

First, let’s review the way in which the Commerce Department computes the so-called savings rate.

Every month, the Commerce Department’s Bureau of Economic Analysis, or BEA, makes an estimate of the aggregate “incomes” received by Americans by summing the monies that “persons” earn from employment, business enterprises structured as sole proprietorships and partnerships, rental properties, and/or investment income; and monies that they receive from government agencies in the form of welfare receipts. (The BEA includes the following in its definition of “persons”: individuals, nonprofit institutions that primarily serve households, private noninsured welfare funds, and private trust funds).

Next, the BEA estimates the level of disposable income by subtracting the monies that the “persons” mentioned above pay to government agencies in the form of taxes and Social Security contributions.

The BEA then estimates personal savings by subtracting the following items from personal income:

• Personal outlays on various types of monthly expenditures made by individuals, partnerships, and nonprofit organizations;

• Interest that those “persons” pay on their outstanding debt;

• Payments made to government agencies in the form of household and business donations, fines paid to federal, state, and local governments, and regulatory fees paid by businesses operating as sole proprietorships and/or partnerships.

In total, the BEA considers personal savings to be the purported savings of individuals (including proprietors and partnerships); nonprofit institutions that primarily serve households; life-insurance carriers; private noninsured welfare funds; private noninsured pension plans; publicly administered government-employee retirement plans; and private trust funds.

After computing what the government refers to as personal savings, the BEA divides that “savings” by its personal income computations to derive a “savings rate.”

As you can see from the above discussion, determining the so-called personal savings rate is rather complex. It’s actually even more complex than the foregoing discussion suggests. For example, the BEA makes adjustments to its estimates of personal incomes, expenditures and savings based on separate estimates of increases in the nation’s population. It then makes further adjustments to those figures due to seasonality factors and it annualizes those figures.

Worst of all, the BEA assumes that “persons” save all of the incomes that remain after making various types of expenditures and paying numerous types of taxes and fees to government agencies. However, recent surveys, as well as statistics concerning household debt payments, suggest quite the contrary.

For example, recent surveys conducted by American Express found that most Americans used the majority, if not all of, their incomes during the past 12 months to pay down debt rather than to save any leftover funds from their incomes.

Recent announcements from the Federal Reserve support that claim, with the Federal Reserve’s Board of Governors’ monthly reports on Consumer Credit stating that Americans aggressively paid down their debt during the past 12 months.

Although those reports suggest that U.S. households will eventually be in much better shape to take on more debt at some point in the future, there’s nothing in those reports to suggest that Americans will increase their spending during the months ahead, especially since they have apparently been saving very little of their incomes.

I therefore urge you to not get too enthusiastic about the purported increases in the U.S. personal savings rate.

Next week, I’ll dispel another common myth and show you how listening to the general financial media can get you in a lot of trouble if you rely on such myths and misleading reports to determine the positioning of your investment portfolio.

About the Author: David Frazier
David Frazier is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes two very successful investment newsletters. Discover more by Clicking Here Now.

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DavidFrazier
Most investors tend to rely on the general financial media to gather important economic and financial information to make decisions about their investment portfolios. Unfortunately, few investors are aware that much of what is reported by the media is often misleading,...
david,frazier,Media,Myths,Investment,Decisions
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2010-21-03
Tuesday, 03 Aug 2010 12:21 PM
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