Don't Be a Victim of Irrational Exuberance Entrepreneurs and business owners must look beyond Wall Street's hype.

By Pamela Yellen

Opinions expressed by Entrepreneur contributors are their own.

Hiroshi Watanabe | Getty Images

Driven by optimism over a massive tax cut, the Dow surged past 26,000 by the middle of January. Yet there are warning signs -- including rising energy prices and inflation driven by higher labor costs -- that this party won't last.

Another warning sign: The savings rate fell to a 10-year low of 3.1 percent in September as Americans spent more money, rather than saving it. That was the weakest savings level since December 2007 when the financial crisis landed with a huge thud, the last rude reminder of our short memories and overconfidence.

Related: Creating the 3-Bucket Cash Reserve System

In November, the personal saving rate -- personal saving as a percentage of disposable personal income -- fell to 2.9 percent according to the Bureau of Economic Analysis.

Small business owners, meanwhile, appear to be overconfident in their ability to save for retirement. As associate editor Lydia Belanger recently pointed out, 62 percent of small-business owners say they feel confident that they're saving enough, but 25 percent say they aren't saving a dime. Almost half are saving less than 10 percent of their income.

Here is why this trend has me -- and many economists -- worried. Personal savings rates below 4 percent occurred before the last two major market crashes. Fueled by a false sense of security over rising stock prices and home values, people plowed money into volatile investments just as the wave began to crest and then crash. The red warning lights were flashing then, and they are again now.

Behavioral economist Richard Thaler has made a career of studying irrational and temptation-driven economic behaviors. Thaler, who won the Nobel Prize in economics in October of 2017, said in a recent interview, "we seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping."

Consider these facts about bull markets.

  • The current bull market is the second longest in modern history. If it manages to last until summer, it will become the longest-running bull market at 9. 5 years.
  • A bull market has never made it to its 10th birthday.
  • Historically, the longer a bull market lasts, the harder and deeper it crashes.

The only bull market since 1950 that's lasted longer than the current one was the dot-com-fueled rally of the 1990s, before it spectacularly flamed out.

When bull markets end, it causes almost unimaginable pain for people. They lose jobs, homes, their life savings and sometimes their marriages. It has taken up to 25 years to recover from a major market crash. It seems as though many people have forgotten the lessons learned in the last two crashes. Each of them wiped out 50 percent or more of the typical investor's hard-earned savings. That's twice just since the year 2000.

Related: 4 Ways to Avoid Crucial Money Mistakes and Save for Retirement

Whether the next market crash or "correction" occurs within weeks or months or years, a lot of people will be caught napping, just as they have been in the past. As a small business owner or entrepreneur, will you be among them?

As a financial investigator who has studied the nation's cycles of boom and bust, I am on a mission to get people to save more of their hard-earned money in secure and liquid assets. This is especially crucial for the small business owners who keep our economy running.

Lack of cash reserves is a recipe for financial stress and insecurity.

The only solution is to save more in assets that aren't subject to market volatility.

In today's environment, the old advice of having a rainy-day fund equal to three to six months of household expenses won't cut it. In the last recession, millions who lost their jobs remained unemployed for over a year, or even two.

To have real financial security, you must have safe and liquid cash reserves equal to two years of household income. By liquid, I mean money you can get your hands on:

  • When you need it
  • For whatever you need
  • Without begging for it or applying for it
  • With no penalties for accessing it and no restrictions
  • Without sustaining a loss

Related: How to Work Toward Retirement From Your Small Business

This short list rules out most financial vehicles. In researching more than 450 financial strategies seeking an alternative to the risk and volatility of stocks and other conventional investments, I found a little-known method that meets the criteria for true liquidity. This strategy involves using a specialized high-cash-value dividend-paying whole life insurance policy.

This method provides guaranteed, predictable growth every year, even when markets are crashing. In fact, it has grown in value every single year for more than 160 years, including during the Great Depression. A key advantage for entrepreneurs and small business owners: it allows you to access your money whenever and for whatever you want, without requiring you to liquidate or sell income-producing assets to get cash.

This year, we face a crossroads. Will we continue to be swept along by the siren song of irrational exuberance? Or will we take solid steps to secure our financial future? It's up to each one of us to decide.

Pamela Yellen

Financial security expert

Pamela Yellen is a financial security expert, a two-time NY Times best-selling author and President of Bank On Yourself. Pamela's latest book is "Rescue Your Retirement: Five Wealth-Killing Traps of 401(k)s, IRAs and Roth Plans – and How to Avoid Them."

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